| **UNITED STATES**                       |   | **OMB  APPROVAL**                                         |
|-----------------------------------------|--------|-----------------------------------------------------------|
| **SECURITIES AND EXCHANGE  COMMISSION** |   | **OMB  Number 3235-0416**                                 |
| **Washington, D.C. 20549**              |   | **Expires:  April 30, 2003**                         |
|                                    |   | **Estimated  average burden  hours per response: 9708.0** |

 

**FORM 10-Q**

 

|                                                | **(Mark One)**                                                                                                                                                                                                                 |
|-----------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                |                                                                                                                                                                                                                           |
| **ý**                                          | **Quarterly report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                              |
|                                                |                                                                                                                                                                                                                           |
|                                                | **For the quarterly period ended September 30, 2003**                                                                                                                                                                     |
|                                                |                                                                                                                                                                                                                           |
| **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)** |

 

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

** **

**Indicateby check whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act):  Yes **o  No  ý

** **

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**

**PROCEEDINGS 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 of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:  As of March 31,2004: 29,282,431 shares of Common Stock, par value $0.001 per share.

** **

 

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**NOTEREGARDING AMENDMENT AND RESTATEMENT**

** **

During fiscal2003, the Company determined that the fair value of common stock issued in apreviously recorded acquisition was incorrect. In addition, the Company identified certain errors in its previouslyissued financial statements related to impairment of intangibles, goodwill, andthe vendor guarantee.

 

As a result, theCompany has restated its previously issued financial statements for the yearsended December 31, 2002 and 2001. A summary of the significant effects of the restatements is set forthbelow.

 

 
|                                   |   | **December 31,  2002**                       |   | **December 31,  2001** |   |
|----------------------------------------|--------|---------------------------------------------------|--------|-----------------------------|--------|
|                                   |   | **As  Previously  Reported**                      |   | **As  Restated**            |   | **As Previously  Reported** |   | **As  Restated** |   |
|                                   |   | **(Dollars in thousands, except per share data)** |   |
|                                   |   |                                              |   |                        |   |   |   |   |   |
| Consolidated balance sheet data as of: |   |                                              |   |                        |   |   |   |   |   |
| Intangible assets                      |   | $                                                 | 13,482 |                        | $      | — |   | $ | 17,976 |   | $ | 17,976 |   |
| Goodwill                               |   | 100,119                                           |   | 11,200                      |   | 88,919 |   | 68,178 |   |
| Additional paid in capital             |   | 182,897                                           |   | 162,156                     |   | 166,337 |   | 145,596 |   |
| Vendor guarantee                       |   | (3,227                                            | )      | (3,689                      | )      | (10,000 | ) | (10,000 | ) |
| Accumulated deficit                    |   | (72,174                                           | )      | (153,372                    | )      | (54,459 | ) | (54,459 | ) |
| Stockholders’ equity              |   | 107,807                                           |   | 5,406                       |   | 101,853 |   | 81,112 |   |
|                                        |        |                                                   |        |                             |        |  |  |  |  |  |  |  |  |

 
|                                                            |   | **December 31,  2002**  |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|
|                                                            |   | **As  Previously  Reported** |   | **As  Restated** |   |
|                                                            |   |                         |   |   |   |
| Consolidated statements of operations data for the  year ended: |   |                         |   |   |   |
| Impairment of intangibles                                       |   | $                            | — |   | $ | 13,482 |   |
| Impairment of vendor guarantee                                  |   | 6,773                        |   | 6,311 |   |
| Impairment of goodwill                                          |   | —                       |   | 68,178 |   |
| Net loss                                                        |   | (17,715                      | )      | (98,913 | ) |
| Net loss per share - basic and diluted                          |   | $                            | (0.92  | ) | $ | (5.13 | ) |

 

There is no effecton the consolidated statement of operations for the year endedDecember 31, 2001.

 

**December 31,2001**

 

**FairValue attributable to the second tranche of shares issued to NightingaleTechnologies Ltd**

 

The transactionaffected is the fair value attributable to the second tranche of shares issuedto Nightingale Technologies Ltd (“Nightingale”) by Medicsight, PLC (“MS-PLC”)on behalf of Medicsight, Inc (“Company”) as part of the acquisition of HTTPInsights Ltd (“Insights”) in 2000.

 

Upon agreementwith Nightingale, the seller of Insights, and in variance of the conditionsprecedent set forth in the original agreement, the parties agreed on November 22,2001 that the obligation to issue the second tranche of contingentconsideration would be satisfied by the direct issuance of shares in MS-PLC toNightingale. On November 22, 2001, MS-PLC issued 15,000,000 shares toNightingale, and Nightingale accepted such shares in satisfaction of ourobligation under the original purchase agreement. The second tranche was valuedat $21,832,000 based on the share price of the stock being issued by MS-PLC.

 

The Companybelieves that the initial fair value of the second tranche of 15 million sharesat £1.00 ($1.455) per share was incorrect.

 

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At a MS-PLC boardmeeting in November 2001, the directors agreed to settle an outstandingLoan Note payable to the Company by MS-PLC of £3,659,000 ($5,324,000), byissuing 73,868,582 shares at par (£0.05 ($0.07)). At the request of theCompany, MS-PLC issued the stock in two tranches: 58,868,582 shares to theCompany and 15,000,000 shares to Nightingale. At the same time MS-PLC went onto issue a further 1 million shares (par value £0.05 ($0.07) per share) to theCompany at par for a subscription price of £50,000 ($72,750) in cash.Subsequently the directors of MS-PLC have sought and obtained UK LegalCounsel’s Opinion that concludes that the fair value of the shares issued toNightingale in November 2001 was £0.05 ($0.07) per share and not £1.00($1.455) per share. In addition, the directors of the Company engaged anindependent valuer to establish a valuation for the shares issued inNovember 2001 based on US GAAP. This report ascribes a fair value of £0.05 ($0.07) per share. Therevised fair value of the 15 million shares issued is $1,091,000.  The effect of the restatement is to reducegoodwill and additional paid in capital by approximately $20,741,000. Therestatement had no effect on the consolidated statement of operations for theyear ended December 31, 2001.

 

**December 31,2002**

 

**IntangibleAssets**

 

The intangibleasset relates to the technology (the Stochastic Perception Engine) acquiredfrom Insights for $22,470,000 in 2000. During 2003, the Company reviewed the value attributable to thistechnology and concluded that, as there had been no further development of thetechnology except for the MedicsightTM applications and with thesale of Insight in December 2002, the technology should have been fullyimpaired at December 31, 2002. Therefore, the Company has recorded animpairment charge of $13,482,000 at December 31, 2002.

 

**Goodwill**

 

The Company hasfurther evaluated the remaining goodwill of $68,178,000 from the acquisition ofInsights. As the business of Insights had been transferred to other groupcompanies in 2001 (MS-PLC) and 2002 (Medicsight Finance Ltd) and Insights soldto an independent third party during December 2002, the Company hasdetermined that the goodwill attributable to this acquisition should have beenfully impaired at December 31, 2002. Therefore, the Company has recordedan impairment charge of $68,178,000 for the year ended December 31, 2002.

 

**VendorGuarantee**

 

The VendorGuarantee arose from the acquisition of Core Ventures Limited (“Core”) andrelates to an oral agreement between the Company and Dr Nill, that the proceedsof the sale of Dr Nill’s 1,195,000 shares in the Company would be remitted tothe Company under the terms of the Vendor Guarantee. These shares were sold in2003 and the Company received $3,689,000 net of commissions. AtDecember 31, 2001 and December 31, 2002, the fair value attributed tothe Vendor Guarantee was based on the weighted average share price. The Companyhas reviewed the fair value at December 31, 2002 and concluded that itwould more be appropriate and better understood if the fair value atDecember 31, 2002 reflected the funds actually received in 2003 ratherthan show an impairment in Fiscal 2002 of $6,773,000, as reported, and thenhaving to show a reduction in the impairment in Fiscal 2003 of $462,000.Therefore, the impairment in Fiscal 2002 has been revised from $6,773,000 to$6,311,000.

 

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**NOTE REGARDING FORWARD LOOKING STATEMENTS**

** **

This QuarterlyReport on Form 10-Q, including “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in Item 2, containsforward-looking statements that involve risks and uncertainties, as well asassumptions that, if they never materialize or prove incorrect, could cause theresults of Medicsight, Inc and its consolidated subsidiaries (the “Company”) todiffer materially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anyprojections of revenue, gross margin, expenses, earnings or losses fromoperations, synergies or other financial items; any statements of the plans,strategies and objectives of management for future operations, including theexecution of restructuring plans; any statement concerning developments,performance or industry rankings relating to products or services; anystatements regarding future economic conditions or performance; any statementsof expectation or belief; and any statements of assumptions underlying any ofthe foregoing. The risks, uncertainties and assumptions referred to aboveinclude the performance of contracts by suppliers, customers and partners;employee management issues; the difficulty of aligning expense levels withrevenue changes; and other risks that are described herein, including but notlimited to the specific risks areas discussed in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in Item 2 ofthis report, and that are otherwise described from time to time in theCompany’s Securities and Exchange Commission reports filed after this report.Medicsight assumes no obligation and does not intend to update theseforward-looking statements.

 

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

 

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**PART 1**

 

**FINANCIAL INFORMATION**

 

## **Item 1.**                       Financial Statements

## ** **

Medicsight, Inc.and its subsidiaries are 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 September 30, 2003 are attached to this Report, commencing at pageF-1.

 

## **Item 2.**                       Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

## ** **

**BACKGROUND**

 

Our businessobjective is to conceive, develop and commercialize innovative medicalapplications, such as computer-aided detection (“CAD”) of disease, derived fromour core technology through our majority-owned subsidiary, Medicsight PLC(“MS-PLC”).

 

We were originallyincorporated as a Utah corporation in 1977. On December 19, 2000, weentered into an Agreement and Plan of Merger with our wholly owned subsidiaryHTTP Technology, Inc., a Delaware corporation, and thereby effected are-incorporation of the company from Utah to Delaware. All references in thisAnnual Report to  “the Company”, “we” or“us” refer to Medicsight, Inc., the Delaware corporation and subsidiaries, ifthe event occurred on or after December 19, 2000 or to HTTP Technology,Inc., the Utah corporation and subsidiaries, if the event occurred prior toDecember 19, 2000.  OnJuly 31, 2003 the Company reduced its authorized share capital from100,000,000 shares to 25,000,000 shares. On January 27, 2004 the Companyincreased its authorized share capital from 25,000,000 shares to 40,000,000shares.

 

During the quarterended September 30, 2003 the Company issued approximately 2,367,000restricted shares of stock raising $7.1m as part of a $10m private placement.The Company concluded this private placement during the year endedDecember 31, 2003. The Company has undertaken a further $10.5m privateplacement of restricted stock in 2004.

 

InApril 2000, we acquired Radical Technology PLC now known as HTTP SoftwarePLC (“Software”) that provided us with a business dedicated to systemsintegration and software development. In December 2000, we acquired Nightingale Technologies Ltd nowknown as HTTP Insights Ltd (“Insights”), which provided us with proprietarytechnology called a Stochastic Perception Engine (see “Business Strategy”below).  A Stochastic Perception Engineprocesses and classifies unstructured data into meaningful outputs, enabling itto be viewed, interpreted or further manipulated by the user of theapplication. Similar technologies sit at the core of many of today’s majorsoftware applications.  Our StochasticPerception Engine is comprised of four principal modules: cluster analysis,statistical modeling, classification and prediction. At that time thetechnology had the ability to offer unprecedented processing speed, accuracyand comprehensiveness of results when compared to existing data classificationtechnologies. Initially we believed that our Stochastic Perception Engine hadsignificant potential uses in a wide variety of fields, including medical imageanalysis, the design of pharmaceuticals, environmental mapping, handwritingrecognition, robotics and surveillance. Following a review of the Technology inFiscal 2003 the Company has concluded that the non-medical applications are oflimited use as there has been no development of the core technology in thesefields in Fiscal 2002 and Fiscal 2003.

 

We haverestructured our business to focus solely on the medical imaging applicationsderived from our core technology.  Wehave concluded the process of incorporating all research, software development,and management and marketing activities related to our medical imaginginitiatives into MS-PLC. In November 2001 assets were transferred from ourother subsidiaries to MS-PLC and the costs incurred on the development of theMedicsightTM system (our state-of-the-art digital disease detectionsoftware system comprising MedicColonTM, MedicHeartTM,and MedicLungTM) were reimbursed and assigned by way of a

 

5

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loan note fromMS-PLC.  The amount of the loan note toMedicsight, Inc. was £3,659,104, and this loan note was converted into57,868,582 ordinary shares of MS-PLC issued to the Company and 15,000,000ordinary shares of MS-PLC issued to the former parent of Insights inNovember 2001.

 

OnOctober 28, 2002, the Company’s name was changed from HTTP Technology,Inc. to Medicsight, Inc.

 

The Companymaintains its corporate offices at 46 Berkeley Square, London, W1J 5AT, UnitedKingdom, telephone +44-20-7598-4070, facsimile: +44-20-7598-4071, Internetaddress: www.medicsight.com.

 

**BUSINESS STRATEGY**

 

We are developersof software technology for medical diagnostic applications and provide medicaldiagnostic services (Computer Aided Detection – “CAD” applications) in differingbusiness models. 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). HTTPInsights Ltd and HTTP Software PLC, formerly subsidiaries of the Company, weresold to independent third parties during the fourth quarter of 2002.

 

*MS-PLC.* Our majority-owned subsidiary, MS-PLC, is currently engaged incommercializing a state-of-the-art digital expert recognition software systemfor digital data derived from medical imaging hardware. At September 30,2003, the Company owned 67,127,300 ordinary shares in MS-PLC, constituting82.2% of the outstanding shares. At December 31, 2003, the Company acquired1,550,000 shares in MS-PLC to settle debt of $2,482,000 due by MS-PLC to theCompany.

 

MS-PLC undertook aprivate offering outside the United States of an additional 6,131,398 ordinaryshares, which was closed on December 31, 2002. As part of this offering,in December 2002 we acquired a further 1,258,718 shares in MS-PLC for£1,258,718 ($ 2,014,000). On December 23, 2002, we entered into a shareswap with General Nominees and Asia IT Nominees whereby the Company issued1,866,666 shares to General Nominees (1,674,894 shares) and Asia IT Nominees(191,772 shares) in return for 7,000,000 MS-PLC shares held by General Nominees(6,280,852 shares) and Asia IT Nominees (719,148 shares) respectively. In thenine months to September 30, 2003 MS-PLC issued a further 1,695,000 sharesto independent third parties at approximately $1.60 per share.

 

*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 acquire equipment andfund leasehold improvements and development, which in turn will be leased tothe relevant operating entity.

 

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

 

It is now widelyaccepted that the most effective way to achieve early detection of theprincipal 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

 

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radiologists forthe 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 to beachieved because the analysis is semi automated and scanning volumes are notthen constrained by the finite number of radiologists.

 

The step change intechnology that increases the potential of the MedicsightTM system is the 16detector CT scanner. This allows sub-millimeter cross-sectional slices to becaptured with increased speed and reduced radiological dose when compared withtraditional single slice machines. This can provide over 600 images of thechest instead of 30-60 for single slice scanners. The amount of detail nowavailable, while enabling early detection of smaller nodules and areas ofcalcification, increases the time required for analysis by radiologists.Therefore the automation of scan analysis is essential.

 

MS-PLC openedLifesyneTM’s flagship center in Westminster, London in 2003. Due to the Companyconcentrating on the development of the software products it has concluded thatits development of the LifesyneTM Scanning Center concept cannot be rolled outfurther. It represents one potential model, which will be available forlicensees who see a commercial opportunity to package the concept together withour MedicsightTM software. We are now prioritizing LifesyneTM on the rapid acquisition of patientscan data necessary to enable our expert software to hone its characterizationskills.  In this role, we havereappraised our capacity requirements and have decided to focus productdevelopment activity on the flagship center in Westminster, which will act moreas a research institution.  This meansthe center at Ravenscourt is currently surplus to our core requirements and weare seeking a partner to operate the center as a commercial CT scanningbusiness.

 

*Refiningour business strategy*

 

Our aim is tobecome a leading developer of CAD software in medical imaging.  The Company’s strategy is based upon thefollowing 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 network ofmedical specialists, to support product development, clinical trials andcommercial delivery.

•                  Creating a third party distributionnetwork in our top 7 target countries, which account for 88% of worldhealthcare spend.

•                  Identifying local partners to act aslicensees in other countries who have the relevant medical and commercialexperience.

 

*KeyAchievements during 2003*

 

•                  European CE and United States FDA 510(k)approvals were secured for Release One versions of Lung, Heart and Colonproducts.  These facilitate diseasetracking in symptomatic patients.

•                  U.S. operations were established inNashville, Tennessee.

•                  Beta test sites have been set up at StMarks Hospital and London Chest Hospital, London, Vanderbilt University, U.S.A.and CHUV University Hospital, Switzerland.

 

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•                  We have developed a comprehensiveclinical trials program, which will involve 23,000 patients over a period of 4years, at a total cost of more than £5m. Of nine clinical trials in the program, two are already underway and afurther two are close to securing full regulatory approval.

 

*MedicsightProduct Portfolio*

 

Our productscurrently target 3 therapeutic areas, Colon, Lung and Heart.  In terms of clinical practice and thereforemarket segmentation, the products can be split between diagnostic treatment andscreening;

 

*Diagnosticor “Disease tracking” products*; these are products designed for symptomatic patientsto track disease progress and monitor treatment effectiveness. The primaryapplications in this area are Lung nodule tracking and Heart calcium scoringthough the company believes there will be a growing requirement for polyptracking in the colon as CT colonography 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 increased 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

 

*BusinessDevelopment planned for 2004*

 

We have anintegrated business development strategy – we aim to drive sales growth fromproven products (validated by clinical trials), endorsed by InternationalAdvisory Boards, using routes to market (distribution partners), recognized anddemanded by the end users (informed by our marketing efforts).

 

*ClinicalTrials*

 

The company isinvesting significantly in clinical trials designed to provide data to bothtrain and validate our software.  Theexpect the first of these trials to be completed shortly and from the thirdquarter of 2004, we hope to support publication of our trial data in a seriesof peer reviewed journals.  Thereafter,there will be a regular flow of papers to endorse our products in leadingindustry publications.

 

*Distribution*

 

The diagnosticproducts have immediate markets globally; the market potential for our Lungnodule tracker product has been estimated at around $300m in the United Statesalone. We intend to launch in the US in the second quarter of 2004, targetingleading institutions directly at first to develop key opinion leader supportfor a subsequent national roll out via third party channels.  We have distribution routes into thehospitals involved in both the ACRIN and the ELCAP studies – the two leadinglung trials in the US – and have already secured our first product sale intoone of these institutions.

 

We commencedbuilding relationships with third party distributors at the end of 2003 andalready we have established strong levels of interest amongst both picturearchivers (“PACS”) software companies and CT hardware manufacturers. Our aim isto have distribution coverage throughout North America and Europe by the end of2004.

 

Within the MiddleEast and Asia, we aim to establish country or region licensees and are inactive negotiations, which should lead to a minimum of 3 licenses beingestablished this year.

 

Our target is tohave CE approval of our first CAD products before the end of the year; theseproducts will automatically drop into the distribution structure created above.

 

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*Marketing*

 

A full marketingprogram commences in the second quarter of 2004 to support the distribution andsale of our products, including advertising, direct mail, exhibitions and anintegrated PR plan.  Our aim is to have80% awareness within our core customer base – the radiology community acrossour key target markets - by the end of 2004.

 

*Milestonesfor 2004*

 

•                  Strategic partnerships to be signed withleading hospitals in the United States, United Kingdom, Far East in the firsthalf of 2004.

•                  Commercial launch of disease trackingproducts in United States, United Kingdom, Middle East and Far East in thesecond quarter of 2004.

•                  Commercial launch of first CAD product.

•                  Completion of first clinical trials.

•                  Establishment of International AdvisoryBoards comprising world experts in each therapeutic area.

•                  Product development partnership to besigned with leading MRI research institute.

•                  Distribution partnerships to beestablished in top 7 countries.

•                  License agreements to be signed coveringa minimum of 3 other countries.

 

*International Advisory Board*

 

The Companyestablished a Medical Board to guide the early development of the Company’ssoftware for the pre-symptomatic detection of lung cancer, bowel cancer andcoronary heart disease.  The MedicalBoard advised on and monitored product development, clinical targets andscanning operations and formed an important link with medical scientists andclinicians. Chaired by Dr. John Costello, the Medical Board comprised:

 

•                  Sir Christopher Paine

•                  Dr. John Karani

•                  Dr. Mary Roddie

•                  Dr. Jamshid Dehmeshki

•                  Mr. Paul Samuel

 

The Medical Boardreported to MS-PLC’s Board through Dr Costello. Three specialist advisoryboards supported the Medical Board with responsibility for the lung, colon andheart products.

 

As the Company’sstrategy evolved, in particular, following the decision to concentrate ourefforts on software development and international product distribution, we haveacted to align our medical advisory mechanisms to the new circumstances.  The Company has therefore set up threeInternational Advisory Boards (“IAB”). The IABs will recruit individuals with the relevant expertise to becomemembers and encourage the involvement of the radiologists undertaking betatesting of our products, providing data for software development andparticipating in our scientific program.

 

Some members ofthe original Medical Board have accepted appointments to the new IABs. Mewmembers will include persons with relevant expertise from the United States,Germany, France, Italy, and Japan.  TheIABs are co-chaired by Dr. Costello, who reports back to the MS-PLC Board;however, much of the scientific advice and leadership will be provided througha co-chairman, chosen from the IAB members.

 

*Terms ofReference of the International Advisory Board*

 

The IABs will meettwice a year and fulfill the following roles:

 

•                  Advise on the development and applicationof Medicsight CT image analysis software in the territories represented.

 

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

•                  Assist in investor relations on aninternational basis.

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

•                  Act as advisors in relation to regulatorysubmissions for the Company’s products.

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

 

*Objectives of the InternationalAdvisory Board*

 

The objectives ofthe meetings may be varied from time-to-time, as agreed with MS-PLC, but willinclude 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.

 

We cannot assureyou that the Company will be successful in commercializing the MedicsightTMsystem, or if such system is commercialized, that its use will be profitable tothe Company. We face obstacles in commercializing our core technology and ingenerating operating revenues such as, but not limited to, successfuldevelopment, testing of and gaining regulatory approval for the technology.

 

The Company doesnot believe that there is currently any comparable system that is competitivewith the MedicsightTM system. There are computer-aided diagnostic systems thatwork in the field, but, in our view, such existing systems are overly dependenton human resources to carry out the analysis, as none have the capability ofthe MedicsightTM system.

 

The Company hashad only a limited operating history upon which an evaluation of its prospectscan be made. The Company’s prospects must be considered keeping in mind therisks, expenses and difficulties frequently encountered in the establishment ofa new business in an ever-changing industry. There can be no assurance that theCompany will be able to achieve profitable operations.

 

The Company hasidentified a number of other specific risk areas that may affect the Company’soperations and results in the future:

 

*Technical Risks.* The MedicsightTM system may not deliver the levels of accuracy andreliability needed, or the development of such accuracy and reliability may bedelayed.

 

*Market Risks.* The market for the MedicsightTM system may be slower to develop orsmaller than estimated or it may be more difficult to build the market thananticipated. The medical community may resist the MedicsightTM system or beslower to accept it than we expect. Revenues from the LifesyneTM scanningcenters and the licensing of the MedicsightTM system may be delayed or costs maybe higher than expected which may result in the Company requiring additionalfunding.

 

*Regulatory Risks.* The MedicsightTM system is subject to regulatory requirements in both theUnited States and Europe. Approval may be delayed or incur additional cost tothe MedicsightTM system.

 

*Competitive Risks.*There are a number of groups andorganizations, such as software companies in the medical imaging field, scannermanufacturers, screening companies and other healthcare providers, that have aninterest in developing a competitive offering to the MedicsightTMsystem.  In addition these competitorsmay have significantly greater resources than the Company. We cannot make anyassurance that they will not attempt to develop such offerings, that they willnot be successful in developing such offerings or that any offerings they dodevelop will not have a competitive edge versus the MedicsightTMsystem.

 

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*OtherRisks.*TheCompany’s ability to deliver the software could be hindered by such risks asthe loss of key personnel, the patents being successfully challenged or creditfacilities reduced or called in.

 

**RESULTS OF OPERATIONS**

 

***Adjustments toquarter ended March 31, 2003 and the quarter and six months endedJune 30, 2003.***

 

*Research and Development*. During the first six months of Fiscal 2003, in accordance with Statementof 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 costscapitalised comprise staff, consultants, regulatory and clinical trial costsspecific to the three products.

 

Subsequently theCompany decided 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 are comprised of staff and consultancycosts expensed on the MedicsightTM system. The regulatory and clinical trialcharges are expensed in “Selling, general and administrative charges”.

 

*Depreciation and AmortizationExpense.* During Fiscal 2000, the Company acquired an intangibleasset from the former parent of Insights consisting of technology valued at$22,470,000. Under SFAS No.142, this is considered an intangible asset with adefinite life of 5 years. Therefore the value of the asset was amortized on astraight-line basis over this period*.*

 

The Companyevaluates the carrying value of long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. The Company’s assessment for impairment of anasset involves estimating the undiscounted cash flows expected to result fromuse of the asset and its eventual disposition. An impairment loss recognized ismeasured as the amount by which the carrying amount of the asset exceeds thefair value of the asset.  During thethird quarter of 2003 the Company reviewed the carrying value of the coretechnology acquired from Insights and decided that the core technology shouldbe fully impaired.  This was based onthe view that there were no further software applications apart from themedical imaging applications currently being developed that could be derivedfrom the core technology. The Company further decided that the impairmentshould be recorded as at December 31, 2002.

 

*Impairmentof Vendor Guarantee.*The Vendor Guarantee arose from the acquisition of Core VenturesLimited (“Core”) and relates to an oral agreement between the Company and DrNill, that the proceeds of the sale of Dr Nill’s stock of 1,195,000 shares inthe Company would be remitted to the Company under the terms of the Guarantee.During Fiscal 2003 the stock was subsequently sold and the Company received$3,689,000 net of commissions. At December 31 2001 and December 31,2002 the fair value attributed to the Vendor Guarantee was based on theweighted average share price discounted for the illiquidity of the stock. TheCompany has reviewed the fair value at December 31, 2002 and concludedthat it would be more appropriate and better understood if the fair value atDecember 31, 2002 reflected the funds received in Fiscal 2003 rather thanshow an impairment in Fiscal 2002 of $6,773,000 as reported and then having toshow a reduction in the impairment in Fiscal 2003 of £462,000. Therefore theimpairment in Fiscal 2002 has been revised from $6,773,000 to $$6,311,000 andthere is no impairment adjustment in Fiscal 2003.

 

Revised resultsfor the quarter ended March 31, 2003 and quarter and six months endedJune 30, 2003:

 

11

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|                                         |   | **Three Months  Ended  March 31, 2003** |       | **Three Months****  Ended  June 30, 2003** |       | **Six Months  Ended  June 30, 2003** |   |
|----------------------------------------------|--------|----------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------|--------|
|                                         |   | **(unaudited)**                              |       | **(unaudited)**                                      |       | **(unaudited)**                           |   |
|                                         |   | **$’000**                               | ** ** | **$’000**                                       | ** ** | **$’000**                            |   |
|                                         |   |                                         |       |                                                 |       |                                      |   |
| Net income as reported:                      |   | $                                            | (2,678     | )                                                    | $          | (2,446                                    | )      | $ | (5,124 | ) |
|                                         |   |                                         |       |                                                 |       |                                      |   |
| Selling, general & admin  as reported    |   | (2,976                                       | )          | (3,593                                               | )          | (6,569                                    | )      |
| Reversal in amortization of intangible asset |   | 1,123                                        |       | 1,124                                                |       | 2,247                                     |   |
| Regulatory and clinical trial charges        |   | (76                                          | )          | (189                                                 | )          | (265                                      | )      |
| Revised selling, general  & admin        |   | (1,929                                       | )          | (2,658                                               | )          | (4,587                                    | )      |
|                                         |   |                                         |       |                                                 |       |                                      |   |
| Research and development  cost               |   | (469                                         | )          | (515                                                 | )          | (984                                      | )      |
| Reversal in impairment  reduction            |   | —                                       |       | (697                                                 | )          | (697                                      | )      |
|                                         |   |                                         |       |                                                 |       |                                      |   |
| Revised net income                           |   | $                                            | (2,100     | )                                                    | $          | (2,723                                    | )      | $ | (4,823 | ) |
|                                         |   |                                         |       |                                                 |       |                                      |   |
| Reported earnings per common  share          |   |                                         |       |                                                 |       |                                      |   |
| Basic and diluted                            |   | (0.12                                        | )          | (0.12                                                | )          | (0.24                                     | )      |
| Revised earnings per common  share           |   |                                         |       |                                                 |       |                                      |   |
| Basic and diluted                            |   | (0.10                                        | )          | (0.12                                                | )          | (0.22                                     | )      |

 

*Revenues.* For the nine months endedSeptember 30, 2003 and the nine months ended September 30, 2002, theCompany’s gross revenues from operations were $142,000 and $79,000,respectively.  For the quarter endedSeptember 30, 2003 and the quarter ended September 30, 2002, theCompany’s gross revenues from operations were $88,000 and $42,000,respectively.  The Company’s revenue inthe nine months and quarter ended September 30, 2003 was derived from theCompany’s LifesyneTM scanning operations. The Company’s revenue in the ninemonths and quarter ended September 30, 2002 was derived from the Company’sconsulting activities provided by Software.

 

*Research and Development*. The Company’s research and development expenses for the nine monthsended September 30, 2003 were $1,500,000 as compared to $862,000 for thenine months ended September 30, 2002 respectively. The Company’s researchand development expenses for the quarter ended September 30, 2003 were$516,000 as compared to $307,000 for the quarter ended September 30, 2002respectively.

 

*Selling, General and AdministrativeExpenses.*  The Company’s selling, general andadministrative expenses for the nine months and quarter endedSeptember 30, 2003, were $7,192,000 and $2,353,000 respectively ascompared to $7,856,000 and $2,879,000 for the nine months and quarter endedSeptember 30, 2002.

 

Professional fees,including consulting services, were $877,000 and $309,000 for the nine monthsand quarter ended September 30, 2003 respectively as compared to$1,097,000 and $428,000 respectively for the nine months and quarter endedSeptember 30, 2002. Also included in the nine months and quarter endedSeptember 30, 2003 were salaries and directors’ compensation (includingsub-contractors) of $3,940,000 and $1,110,000, service charges and rates forproperty leasing of $373,000 and $106,000, and rent of $460,000 and $144,000respectively.  The primary component ofthe decreased selling, general and administrative expenses for the nine monthsand quarter ended September 30, 2003 was a decrease in amortization ofintangibles from $3,370,000 and $1,123,000 respectively for the nine months andquarter ended September 30, 2002 to $nil and $nil respectively for thenine months and quarter ended September 30, 2003. This was set off by anincrease in staff cost (including directors and sub-contractors) of $1,717,000and $248,000 respectively and marketing costs of $600,000 and $262,000respectively as the Company initiated its various marketing strategies.  Staff cost (including directors andsub-contractors) amounted to $2,223,000 and $862,000 respectively in the ninemonths and quarter ended September 30, 2002 and no marketing costs wereincurred in the nine months and quarter ended September 30, 2002.

 

12

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*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. The Company evaluates the carrying valueof long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. TheCompany’s assessed that the intangible’s carrying value at December 31,2002 was negligible and the intangible was fully impaired inDecember 2002.

 

*Impairment of excess of purchaseprice over net assets acquired. *For the nine months and quarters endedSeptember 30, 2003 and September 30, 2002, the Company had excess ofpurchase price over net assets acquired of $11,200,000 and $79,378,000respectively. As stated above, the Company adopted SFAS No. 142 on January 1,2002. Under this standard, goodwill will no longer be amortized over itsestimated useful life, but instead will be tested for impairment on an annualbasis or whenever indicators of impairment arise. The Company completed itsannual impairment tests as of January 1, 2003 and no impairment wasrecorded. Prior to January 1, 2002, goodwill was tested for impairment ina manner consistent with property, plant and equipment and intangible assetswith a definite life.

 

*Impairment Loss of Investment.*For the nine months and quarter endedSeptember 30, 2003, the Company incurred an impairment loss on investmentsof $95,000 relating to the impairments in the carrying value of Eurindia PLC(“Eurindia”) and Strategic Intelligence PLC (“SI-PLC”). Eurindia was impairedby $59,000 based on Eurindia’s management’s assessment of the value of itsportfolio at $0.72 per share. Additionally the Company fully impaired itsinvestment in SI-PLC ($36,000), as the Company was unable to obtain anyinformation on or representations from SI-PLC as to the fair value.

 

For the ninemonths and quarter ended September 30, 2002, the Company incurred animpairment loss on investments of $30,000 related to the impairment in thecarrying value of one of the Company’s minority investments, Top Tier, Inc. Basedon the financial status of Top Tier, Inc, the investment was permanentlyimpaired, and the Company has recorded an impairment for the entire carryingvalue of this investment.

 

*Impairment of Vendor Guarantee* In the nine months and quarter endedSeptember 30, 2003 the Company did not record any adjustment to theimpairment of the guarantee as it had been fully impaired in Fiscal 2002 (seenote on adjustments above). An impairment of a vendor guarantee in the amountof $5,900,000 in the nine months ended September 30, 2002 and a reductionin the impairment of the guarantee of $820,000 in the quarter endedSeptember 30, 2002. These adjustments relate to the guarantee provided byDr. Alexander Nill as to the fair value of certain assets acquired under the Company’sacquisition of Core Ventures Limited (“Core”) in September 2000. Thevendor guarantee represents the fair value of Dr Nill’s stock in the Company,the proceeds of the sale of which are to be remitted to the Company. In thenine months ended September 30, 2003 the Company received proceeds underthe guarantee of $2,827,000 from the sale of 775,000 shares. These funds wereused to reduce Medicsight, Inc’s $20m facility with Asia IT and fund theCompany’s operations. The vendor guarantee represents the fair value of theremaining 420,000 shares at September 30, 2003 and 1,195,000 shares atSeptember 30, 2002, net of fees.

 

*Net Loss and Net Loss per Share.* Net loss was $7,139,000 and $2,015,000 for the nine months and quarterended September 30, 2003 respectively compared to a net loss of$13,396,000 and $1,847,000 respectively for the nine months and quarter endedSeptember 30, 2002.  Net loss pershare for the nine months and quarter ended September 30, 2003 was $0.33and $0.08 respectively, based on weighted average shares outstanding of21,680,820 and 22,709,538 respectively, compared to a net loss per share of$0.69 and $0.10 respectively for the nine months and quarter endedSeptember 30, 2002, based on weighted average shares outstanding of 19,289,462and 19,289,570.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Working Capital.* At September 30, 2003, the Company had $3,997,000 in currentassets. Cash and cash equivalents amounted to $2,909,000. Current liabilitieswere $8,792,000 at September 30, 2003. At December 31, 2002, the Company had $2,284,000 in current assetsand cash and cash equivalents amounted to $1,778,000.  Current liabilities were $8,977,000 at December 31, 2002.Working capital deficit at September 30, 2003 was  $(4,795,000), as compared to $(6,693,000) atDecember 31, 2002.  The

 

13

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ratio of currentassets to current liabilities was 0.45 to 1.0 at September 30, 2003 ascompared to 0.25 to 1.0 at December 31, 2002. The increase is primarily dueto the increase in cash and cash equivalents, prepayments and recoverable salestax.

 

*Net Increase in Cash and CashEquivalents.*  During the nine months endedSeptember 30, 2003, the Company’s cash and cash equivalents increased by$1,131,000. This increase was primarily the result of cash flows received fromshares issued by the Company and MS-PLC and cash received under the vendorguarantee exceeded by net cash used in operating and investing activities andrepayments of debt as Asia IT’s significant cash balances held on behalf ofMS-PLC at December 31, 2002 were drawn on. The Company used net cash of$9,122,000 in operations. The Company received net cash of $11,744,000 infinancing activities and used  $1,230,000in investing activities.

 

*Net Cash Used in Operations.* The use of cash in operations of $9,122,000 in the nine months ended September 30, 2003, wasattributable to the Company’s relatively minimal revenues at the same time thatthe Company incurred significant operating costs. These significant costsincluded professional fees, salaries and director compensation, marketing costsand service charges associated with rental property and rent. The Company usedcash in operations in the nine months ended September 30, 2002 of  $4,599,000.

 

*Net Cash Used in InvestingActivities.*  In the nine months ended September 30,2003, the Company had a net cash outflow from investing activities of$1,230,000. The Company used these funds to purchase additional fixed assets.In the nine months ended September 30, 2002, the Company had a net cashoutflow from investing activities of $51,000. The Company used the funds topurchase additional fixed assets.

 

*Net Cash Provided by FinancingActivities.*  In the nine months ended September 30,2003, the Company had a net cash inflow from financing activities of$11,744,000. The funds received in the nine months ended September 30,2003, comprised of $7,100,000 from the Company’s $10,000,000 private offering,$2,696,000 received from the private offering of Medicsight stock, $2,827,000received under the vendor guarantee and $481,000 repaid to our debt facilitieswith Asia IT. For the nine months ended September 30, 2002, the Companyhad a net cash inflow from financing activities of $6,637,000. The fundsreceived comprised of $5,836,000 received from the private offering ofMedicsight stock and $820,000 received under our debt facilities with Asia IT.

 

*Stockholders’ Equity.* The Company’s stockholders’ equity atSeptember 30, 2003 was $10,209,000, including an accumulated deficit of$(160,511,000), as compared to $5,406,000 at December 31, 2002, includingan accumulated deficit of $(153,372,000). Additional paid-in capital was$171,549,000 and $162,156,000, at September 30, 2003 and December 31,2002 respectively. The reduction in stockholders’ equity was a result of anincrease in accumulated deficit of $7,139,000 offset by an increase inadditional paid-in capital of $9,393,000 resulting from the placement of boththe Company’s and Medicsight’s stock.

 

*Additional Capital.*  TheCompany will require additional capital during its fiscal year endingDecember 31, 2003 to implement its business strategies, including cash for(i) payment of increased operating expenses such as salaries foradditional employees; and (ii) further implementation of those businessstrategies. Such additional capital may be raised through additional public orprivate financing, as well as borrowings and other resources. Currently, theCompany 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.

 

14

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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 announcement ofan Offer to Subscribe, Placing or other public offering of its ordinary shares,at the same price per share as the offering price. Due to the private offeringbeing undertaken by MS-PLC, the loan is currently convertible.

 

AtSeptember 30, 2003, the Company had drawn down  $884,000 under the $20,000,000 facility with Asia IT, and MS-PLChad drawn down $1,966,000 under its £10,000,000 ($16,000,000) facility withAsia IT.

 

During the ninemonths ended September 30, 2003 the Company received $2,827,000 for thesale of 775,000 shares as per the oral agreement reached with Dr Nill under thevendor guarantee. These funds were used to reduce Asia IT’s facility with theCompany.

 

To the extent thatadditional capital is raised through the sale of equity or equity-relatedsecurities of the Company or its subsidiaries, the issuance of such securitiescould result in dilution to the Company’s stockholders. No assurance can begiven, however, that the Company will have access to the capital markets in thefuture, or that financing will be available on acceptable terms to satisfy theCompany’s cash requirements to implement its business strategies. If we areunable to access the capital markets or obtain acceptable financing, ourresults of operations and financial conditions could be materially andadversely affected.  We may be requiredto raise substantial additional funds through other means.  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.*In December 2001 andJanuary 2002, the Securities and Exchange Commission requested that allregistrants list their three to five most “critical accounting policies” in theManagement’s Discussion and Analyses of Financial Condition and Results ofOperations. The Securities and Exchange Commission indicated a “criticalaccounting policy” is one which is both important to the portrayal of thecompany’s financial condition and results and requires management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain. Webelieve that the following accounting policies fit the definition of criticalaccounting policies.

 

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

 

The recognition ofrevenues from software licenses and related services will require moredifficult and complex judgments. The terms of the license contract, long-term(over 12 months), short-term, cancelable, non-cancelable or per scan forexample will affect the recognition of revenues from services such as up-frontfees as installation, activation and up-front license fees, on-going licensefees, termination fees and maintenance fees. Where fees are received prior toany service being delivered the fees are deferred until the related service hasbeen delivered successfully and the revenue can then be recognized. Again ifthere are fees that relate to any “milestone” agreements these are deferreduntil the “milestone” has passed and then the revenue can be recognized.

 

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The Companybelieves that the accounting estimates related to the recognition of revenueand establishment of reserves for uncollectible amounts in the results ofoperations 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.

 

*Researchand Development.***Costs incurred in connection with thedevelopment of software products that are intended for sale are accounted forin accordance with Statement of Financial Accounting Standards No. 86,“Accounting for the Costs of Computer Software to be Sold, Leased, or OtherwiseMarketed”. Costs incurred prior to technological feasibility being establishedfor the product are expensed as incurred. Technological feasibility isestablished upon completion of a detail program design or, in its absence,completion of a working model. Thereafter, all software production costs arecapitalized and subsequently reported at the lower of unamortized cost or netrealizable value. Capitalized costs are amortized based on current and futurerevenue for each product with an annual minimum equal to the straight-lineamortization over the remaining estimated economic life of the product.Amortization commences when the product is available for general release tocustomers.

 

The Company decidedthat capitalizing such expenditure was inappropriate because of the difficultyin assigning costs accurately to the various software products and versionsbeing developed as technical and development staff are moved from product toproduct and version to version on a regular basis. Therefore the Company hasdecided to expense all research and development costs. The Company’s researchand development costs are comprised of staff and consultancy costs expensed onthe MedicsightTM system.

 

*Impairmentof Long-lived Assets and Long-lived Assets To Be Disposed of*. The Company evaluates the carryingvalue of long-lived assets for impairment whenever events or changes incircumstances 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.

 

Calculating theestimated fair value of the asset involves significant judgments and a varietyof assumptions. Judgments that the Company makes concerning the intangibleacquired include assessing time and cost involved for development, time tomarket, 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.

 

*Impairmentof Excess of Purchase Price Over Net Assets Acquired.***TheCompany adopted SFAS No. 142 on January 1, 2002.  Under this standard, goodwill will no longer be amortized overits estimated useful life, but will be tested for impairment on an annual basisand whenever indicators of impairment arise. Under the provisions of SFAS No. 142, any impairment loss identifiedupon adoption of this standard is recognized as a cumulative effect of a changein accounting principle. Any impairment loss incurred subsequent to the initialadoption of SFAS No 142 is recorded as a charge to current period earnings.

 

In connection withthe adoption of SFAS No. 142, we performed our initial impairment analysisof goodwill and indefinite-lived intangible assets as of January 1, 2002.The implementation involved the determination of the fair value of eachreporting unit, where a reporting unit is defined as an operating segment orone level below.

 

 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.

 

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*RecentAccounting 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 Company does not expect FIN No. 46 to have an effect on theconsolidated financial statements.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.” SFAS No. 150 specifies thatfreestanding financial instruments within its scope constitute obligations ofthe issuer and that, therefore, the issuer must classify them as liabilities.Such freestanding financial instruments include mandatory redeemable financialinstruments, obligations to repurchase the issuer’s equity shares bytransferring assets, and certain obligations to issue a variable number ofshares. SFAS No. 150 is effective immediately for all financial instrumentsentered into or modified after May 31, 2003. For all other instruments, SFASNo. 150 is effective at the beginning of the third quarter of 2003. The Companyhas determined that the statement will not have a material impact on theconsolidated financial position, results of operations and cash flows of theCompany.

 

*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                 |   | $         | 453    |                  | $      | 90                          |   | $             | 189    |   | $ | 174 |   | $ | — |   |
| Operating Lease Obligations               |   | 2,325     |   | 488                   |   | 1,013                       |   | 762           |   | 62 |   |
| Total                                     |   | $         | 2,778  |                  | $      | 578                         |   | $             | 1,202  |   | $ | 936 |   | $ | 62 |   |

 

## **Item 3.**                       Quantitative and Qualitative DisclosuresAbout Market Risk

## ** **

**Interest Rate Risk**

 

The Company’sexposure to market risk associated with changes in interest rates relates toits debt obligations. The Company has the following debt facilities allrepayable on demand:

 
| **Debt Holder**                 |   | **Facility** |       | **Draw Down** |   | **Interest  rate** |   | **At  September 30** |   |
|---------------------------------|--------|--------------|------------|---------------|--------|--------------------|--------|---------------------------|--------|
|                            |   |         |       |          |   |               |   |                      |   |
| Nightingale Technologies Ltd    |   | $            | 10,000,000 |          | $      | 2,250,000          |   | Nil                       |   | 0.00 | % |
|                            |   |         |       |          |   |               |   |                      |   |
| Asia IT Capital Investments Ltd |   | $            | 20,000,000 |          | $      | 884,000            |   | US  Libor + 2%            |   | 3.29 | % |
|                            |   |         |       |          |   |               |   |                      |   |
| Asia IT Capital Investments Ltd |   | $            | 16,000,000 |          | $      | 1,966,000          |   | GBP  Libor + 2%           |   | 4.03 | % |

 

A hypothetical 100basis point increase in interest rates would increase interest cost byapproximately $21,000 per annum assuming no further draw downs or repaymentsare made.

 

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**Foreign Exchange Risk**

 

The Company’sexposure to market risk associated with changes in exchange rates relate to itsdebt facility with Nightingale Technologies Ltd. This US$2.25m facility istranslated into British Pounds as Medicsight Finance Ltd (“Finance”) accountsfor its transactions in British Pounds and is therefore exposed to fluctuationsbetween British Pounds and U.S. Dollar rates. A hypothetical 100 basis pointadverse movement ($1.50 to $1.49 to £1.00) would increase the principal to repaidby  $16,000.

 

The Company holdslimited cash balances in British Pounds so any adverse movements in theexchange rates are considered immaterial.

 

**Item4.****                      ****Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

We maintaincontrols and procedures designed to ensure that information required to bedisclosed in this report is recorded, processed, accumulated and communicatedto our management, including our chief executive officer and our chieffinancial officer, to allow timely decisions regarding the required disclosure.Management necessarily applied its judgment in assessing the costs and benefitsof such controls and procedures, which, by their nature, can provide onlyreasonable assurance regarding management’s control objectives. AtJune 30, 2003, 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.

 

*Changes inInternal Controls*

 

During the quarterended September 30, 2003 the Company made no significant changes in ourinternal 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.

 

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# **PART II**

# ** **

## **Item 1.**                       Legal Proceedings

## ** **

### There are currently nopending legal proceedings.

###  

## **Item 2.**                       Changes in Securities and Use of Proceeds

## ** **

### (a)                                  None.

###  

### (b)                                 None.

###  

### (c)                                  None.

###  

### (d)                                 Not applicable.

###  

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

## ** **

### None.

###  

## **Item 4.**                       Submission of Matters to a Vote ofSecurity Holders

## ** **

### On July 31, 2003, anamendment to the Certificate of Incorporation, reducing the number of sharesthe Company is authorized to issue from 100,000,000 shares to 25,000,000 shareswas approved by a majority of the shareholders of the Company.

###  

## **Item 5.**                       Other Information

## ** **

### None.

###  

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

## ** **

| (a)    |   | Exhibits                                                                                                                                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                      |
| 3      |   | Composite Certificate of Incorporation, as amended  and currently in effect (incorporated by reference to Exhibit 3 to the  Company’s Report on Form 8-K filed August 5, 2003). |
|   |   |                                                                                                                                                                                      |
| 31.1   |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith).                                                                 |
|   |   |                                                                                                                                                                                      |
| 31.2   |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith).                                                                 |
|   |   |                                                                                                                                                                                      |
| 32.1   |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Chief Executive Officer - filed herewith).                                                                 |
|   |   |                                                                                                                                                                                      |
| 32.2   |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Chief Financial Officer - filed herewith).                                                                 |
|   |   |                                                                                                                                                                                      |
| (b)    |   | Reports on Form 8-K                                                                                                                                                                       |

###  

### On August 5, 2003,the Company filed a Current Report on Form 8-K announcing an amendment to itsCertificate of Incorporation reducing the number of shares the Company isauthorized to issue from 100,000,000 shares to 25,000,000 shares.

 

19

----

 

On November 14, 2003, as amended onDecember 23, 2003, the Company filed a Current Report on Form 8-Kannouncing the resignation of BDO Stoy Hayward as the Company’s auditors onNovember 7, 2003.

 

On November 21, 2003 the Company filed a CurrentReport on Form 8-K announcing that the Company engaged the firm of Amper,Politziner & Mattia, P. C. as the Company’s independent accountants.

 

On January 13, 2004 the Company filed a CurrentReport on Form 8-K announcing that the Company has concluded that a restatementof a previously recorded transaction is required.

 

On January 30, 2004, the Company filed a CurrentReport on Form 8-K announcing an amendment to its Certificate of Incorporationincreasing the number of shares the Company is authorized to issue from25,000,000 shares to 40,000,000 shares.

 

20

----

**MEDICSIGHT, INC. AND SUBSIDIARIES**

 

**INDEX TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)AS OF AND FOR THE THREE AND NINE MONTHS ENDEDSEPTEMBER 30, 2003**

 
| Condensed  Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and December  31, 2002 (Restated)(Audited)                                                |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                  |   |
| Condensed Consolidated Statements  of Operations for the Three Months Ended September 30, 2003 (Unaudited) and  the Three Months Ended September 30, 2002 (Unaudited) |   |
|                                                                                                                                                                  |   |
| Condensed Consolidated Statements of  Operations for the Nine Months Ended September 30, 2003 (Unaudited) and the  Nine Months Ended September 30, 2002 (Unaudited)   |   |
|                                                                                                                                                                  |   |
| Condensed  Consolidated Statement of Cash Flows for the Nine Months Ended September 30,  2003 (Unaudited) and the Nine Months Ended September 30, 2002 (Unaudited)    |   |
|                                                                                                                                                                  |   |
| Notes to  Condensed Consolidated Financial Statements                                                                                                                 |   |

 

F-1

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In $ thousands)**

 
|                                                                                                                                  |   | **September 30, 2003**

**(unaudited)** |   | **December 31, 2002  (audited)  Restated - Note 3** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                                                                                  |   |                                    |   |                                                |   |
| ASSETS                                                                                                                                |   |                                    |   |                                                |   |
| CURRENT  ASSETS:                                                                                                                      |   |                                    |   |                                                |   |
| Cash and cash  equivalents                                                                                                            |   | $                                       | 2,909  |                                                | $      | 1,778 |   |
| Accounts  receivable                                                                                                                  |   | 106                                     |   | 1                                                   |   |
| Other  receivables                                                                                                                    |   | 64                                      |   | 1                                                   |   |
| Prepaid  expenses                                                                                                                     |   | 317                                     |   | 222                                                 |   |
| Sales tax  receivable                                                                                                                 |   | 601                                     |   | 282                                                 |   |
| Total current  assets                                                                                                                 |   | 3,997                                   |   | 2,284                                               |   |
|                                                                                                                                  |   |                                    |   |                                                |   |
| PROPERTY AND  EQUIPMENT, at cost, net of accumulated depreciation of $803 and $480,  respectively                                     |   | 3,262                                   |   | 1,416                                               |   |
|                                                                                                                                  |   |                                    |   |                                                |   |
| INVESTMENTS,  at cost                                                                                                                 |   | 429                                     |   | 525                                                 |   |
|                                                                                                                                  |   |                                    |   |                                                |   |
| SECURITY  DEPOSITS                                                                                                                    |   | 789                                     |   | 5                                                   |   |
|                                                                                                                                  |   |                                    |   |                                                |   |
| EXCESS OF  PURCHASE PRICE OVER NET ASSETS ACQUIRED                                                                                    |   | 11,200                                  |   | 11,200                                              |   |
|                                                                                                                                  |   |                                    |   |                                                |   |
| Total assets                                                                                                                          |   | $                                       | 19,677 |                                                | $      | 15,430 |   |
|                                                                                                                                  |   |                                    |   |                                                |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                             |   |                                    |   |                                                |   |
| CURRENT  LIABILITIES:                                                                                                                 |   |                                    |   |                                                |   |
| Accounts  payable                                                                                                                     |   | $                                       | 2,632  |                                                | $      | 2,468 |   |
| Accrued expenses                                                                                                                      |   | 819                                     |   | 704                                                 |   |
| Accrued  professional expenses                                                                                                        |   | 122                                     |   | 191                                                 |   |
| Bank overdraft                                                                                                                        |   | 29                                      |   | —                                              |   |
| Line of credit  – related party                                                                                                  |   | 2,850                                   |   | 2,332                                               |   |
| Current  portion of obligations under capital leases                                                                                  |   | 90                                      |   | 32                                                  |   |
| Short-term  debt                                                                                                                      |   | 2,250                                   |   | 3,250                                               |   |
| Total current  liabilities                                                                                                            |   | 8,792                                   |   | 8,977                                               |   |
| CAPITAL LEASE                                                                                                                         |   | 363                                     |   | 42                                                  |   |
| Total  liabilities                                                                                                                    |   | $                                       | 9,155  |                                                | $      | 9,019 |   |
|                                                                                                                                  |   |                                    |   |                                                |   |
| STOCKHOLDERS’  EQUITY:                                                                                                           |   |                                    |   |                                                |   |
| Common stock,  $0.001 par value, 25,000,000 shares authorized, 21,155,189 and 21,154,874  shares issued and outstanding, respectively |   | 24                                      |   | 21                                                  |   |
| Additional  paid-in capital                                                                                                           |   | 171,549                                 |   | 162,156                                             |   |
| Vendor  guarantee                                                                                                                     |   | (861                                    | )      | (3,689                                              | )      |
| Cumulative  foreign currency translation adjustment                                                                                   |   | 8                                       |   | 290                                                 |   |
| Accumulated  deficit                                                                                                                  |   | (160,511                                | )      | (153,372                                            | )      |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                                      |   | 10,209                                  |   | 5,406                                               |   |
| Minority  interest                                                                                                                    |   | 313                                     |   | 1,005                                               |   |
|                                                                                                                                  |   | 10,522                                  |   | 6,411                                               |   |
| Total  liabilities and stockholders’ equity                                                                                      |   | $                                       | 19,677 |                                                | $      | 15,430 |   |

 

The accompanying notes are an integral partof these condensed statements.

 

F-2

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

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

 
|                                                   |   | **Three Months Ended  September 30, 2003  (unaudited)** |   | **Three Months Ended  September 30, 2002  (unaudited)** |   |
|--------------------------------------------------------|--------|---------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                   |   |                                                    |   |                                                    |   |
| REVENUES                                               |   | $                                                       | 88     |                                                    | $      | 42 |   |
|                                                   |   |                                                    |   |                                                    |   |
| EXPENSES:                                              |   |                                                    |   |                                                    |   |
| Selling,  general and administrative charges           |   | 2,353                                                   |   | 2,879                                                   |   |
| Research and  development cost                         |   | 516                                                     |   | 307                                                     |   |
| Impairment of  investment                              |   | 95                                                      |   | —                                                  |   |
| Impairment of  vendor guarantee                        |   | —                                                  |   | (820                                                    | )      |
|                                                   |   | 2,964                                                   |   | 2,366                                                   |   |
|                                                   |   |                                                    |   |                                                    |   |
| Operating loss                                         |   | (2,876                                                  | )      | (2,324                                                  | )      |
|                                                   |   |                                                    |   |                                                    |   |
| OTHER INCOME:                                          |   |                                                    |   |                                                    |   |
| Interest and  other income                             |   | 8                                                       |   | —                                                  |   |
|                                                   |   |                                                    |   |                                                    |   |
| Net Loss  before minority interest                     |   | (2,868                                                  | )      | (2,355                                                  | )      |
|                                                   |   |                                                    |   |                                                    |   |
| MINORITY  INTEREST                                     |   | 853                                                     |   | 477                                                     |   |
|                                                   |   |                                                    |   |                                                    |   |
| Net loss                                               |   | $                                                       | (2,015 | )                                                       | $      | (1,847 | ) |
|                                                   |   |                                                    |   |                                                    |   |
| PER SHARE  DATA:                                       |   |                                                    |   |                                                    |   |
| Basic and  diluted loss per share                      |   | $                                                       | (0.08  | )                                                       | $      | (0.10 | ) |
|                                                   |   |                                                    |   |                                                    |   |
| Weighted  average number of common  shares outstanding |   | 22,709,538                                              |   | 19,289,570                                              |   |

** **

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

 

F-3

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

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

** **
|                                                   |   | **Nine Months****Ended  September 30, 2003  (unaudited)** |   | **Nine Months   Ended  Sptember 30, 2002  (unaudited)** |   |
|--------------------------------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                   |   |                                                      |   |                                                    |   |
| REVENUES                                               |   | $                                                         | 142    |                                                    | $      | 79 |   |
|                                                   |   |                                                      |   |                                                    |   |
| EXPENSES:                                              |   |                                                      |   |                                                    |   |
| Selling,  general and administrative charges           |   | 7,192                                                     |   | 7,856                                                   |   |
| Research and  development cost                         |   | 1,500                                                     |   | 862                                                     |   |
| Impairment of  investment                              |   | 95                                                        |   | 30                                                      |   |
| Impairment of  vendor guarantee                        |   | —                                                    |   | 5,900                                                   |   |
|                                                   |   | 8,787                                                     |   | 14,648                                                  |   |
|                                                   |   |                                                      |   |                                                    |   |
| Operating loss                                         |   | (8,645                                                    | )      | (14,569                                                 | )      |
|                                                   |   |                                                      |   |                                                    |   |
| OTHER INCOME:                                          |   |                                                      |   |                                                    |   |
| Interest and  other income                             |   | 8                                                         |   | 3                                                       |   |
|                                                   |   |                                                      |   |                                                    |   |
| Net Loss  before minority interest                     |   | (8,637                                                    | )      | (14,566                                                 | )      |
|                                                   |   |                                                      |   |                                                    |   |
| MINORITY  INTEREST                                     |   | 1,498                                                     |   | 1,170                                                   |   |
|                                                   |   |                                                      |   |                                                    |   |
| Net loss                                               |   | $                                                         | (7,139 | )                                                       | $      | (13,396 | ) |
|                                                   |   |                                                      |   |                                                    |   |
| PER SHARE  DATA:                                       |   |                                                      |   |                                                    |   |
| Basic and  diluted loss per share                      |   | $                                                         | (0.33  | )                                                       | $      | (0.69 | ) |
|                                                   |   |                                                      |   |                                                    |   |
| Weighted  average number of common  shares outstanding |   | 21,680,820                                                |   | 19,289,462                                              |   |

** **

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

 

F-4

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

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

 
|                                                                         |   | **Nine Months Ended  September 30, 2003  (unaudited)** |   | **Nine Months Ended  September 30, 2002  (unaudited)** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                         |   |                                                   |   |                                                   |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                       |   |                                                   |   |                                                   |   |
| Net loss                                                                     |   | $                                                      | (7,139 | )                                                      | $      | (13,396 | ) |
| Adjustments to  reconcile net loss to net cash  used in operating activities |   |                                                   |   |                                                   |   |
| Depreciation                                                                 |   | 420                                                    |   | 173                                                    |   |
| Amortization  of intangible assets                                           |   | —                                                 |   | 3,370                                                  |   |
| Impairment of  investment                                                    |   | 96                                                     |   | 30                                                     |   |
| Impairment of  vendor guarantee                                              |   | —                                                 |   | 5,900                                                  |   |
| Minority  interest in net earnings of subsidiary                             |   | (1,498                                                 | )      | (1,170                                                 | )      |
| (Increase)/decrease in assets                                                |   |                                                   |   |                                                   |   |
| Accounts  receivable                                                         |   | (105                                                   | )      | 93                                                     |   |
| Prepaid  expenses and other current assets                                   |   | (157                                                   | )      | 61                                                     |   |
| Sales tax  receivable                                                        |   | (319                                                   | )      | (47                                                    | )      |
| Security  deposits                                                           |   | (743                                                   | )      | 21                                                     |   |
| Increase/(decrease) in liabilities                                           |   |                                                   |   |                                                   |   |
| Accounts  payable                                                            |   | 252                                                    |   | 13                                                     |   |
| Accrued  expenses                                                            |   | 140                                                    |   | 395                                                    |   |
| Accrued  professional expenses                                               |   | (69                                                    | )      | (42                                                    | )      |
| Net cash used  in operating activities                                       |   | (9,122                                                 | )      | (4,599                                                 | )      |
|                                                                         |   |                                                   |   |                                                   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                       |   |                                                   |   |                                                   |   |
| Purchase of  fixed assets                                                    |   | (1,230                                                 | )      | (51                                                    | )      |
| Net cash used  in investing activities                                       |   | (1,230                                                 | )      | (51                                                    | )      |
|                                                                         |   |                                                   |   |                                                   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                       |   |                                                   |   |                                                   |   |
| Repayments on  capitalized lease                                             |   | (427                                                   | )      | (19                                                    | )      |
| Increase of  bank overdraft                                                  |   | 29                                                     |   | —                                                 |   |
| Increase/(decrease)  of debt                                                 |   | (481                                                   | )      | 820                                                    |   |
| Shares issued  for cash                                                      |   | 7,100                                                  |   | —                                                 |   |
| Shares in  Medicsight issued for cash                                        |   | 2,696                                                  |   | 5,836                                                  |   |
| Funds received  under vendor guarantee                                       |   | 2,827                                                  |   | —                                                 |   |
| Net cash  provided by financing activities                                   |   | 11,744                                                 |   | 6,637                                                  |   |
|                                                                         |   |                                                   |   |                                                   |   |
| Effects of  exchange rates on cash and cash equivalent                       |   | (261                                                   | )      | 12                                                     |   |
|                                                                         |   |                                                   |   |                                                   |   |
| NET CHANGE IN  CASH & CASH EQUIVALENTS                                   |   | 1,131                                                  |   | 1,999                                                  |   |
|                                                                         |   |                                                   |   |                                                   |   |
| CASH & CASH  EQUIVALENTS, BEGINNING OF PERIOD                            |   | 1,778                                                  |   | 203                                                    |   |
|                                                                         |   |                                                   |   |                                                   |   |
| CASH &  CASH EQUIVALENTS, END OF PERIOD                                  |   | $                                                      | 2,909  |                                                   | $      | 2,202 |   |
|                                                                         |   |                                                   |   |                                                   |   |
| NON CASH FINANCING ACTIVITIES                                                |   |                                                   |   |                                                   |   |
| Capital lease obligations for equipment                                      |   | 841                                                    |   | 74                                                     |   |

** **

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

 

F-5

----

 

**MEDICSIGHT, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL**STATEMENTS

** **

*(1)*                               Formationand Business of the Company

* *

Medicsight, Inc. (formerly HTTP Technology, Inc.) andits subsidiaries are collectively referred to in this Report as the“Company”.  Our business objective is toconceive, develop and commercialize innovative medical applications derivedfrom our core technology through our majority-owned subsidiary, Medicsight PLC(“MS-PLC”).

 

We were originally incorporated as a Utah corporationin 1977. On December 19, 2000, we entered into an Agreement and Plan of Mergerwith our wholly-owned subsidiary HTTP Technology, Inc., a Delaware corporation,and thereby effected a re-incorporation of the company from Utah to Delaware.All references in this Annual Report to “the Company”, “we” or “us” refer to Medicsight, Inc., the Delawarecorporation and subsidiaries, if the event occurred on or after December 19,2000 or to HTTP Technology, Inc., the Utah corporation and subsidiaries, if theevent occurred prior to December 19, 2000.

 

In April 2000, we acquired Radical Technology PLC, nowknown as HTTP Software PLC (“Software”), which provided us with a businessdedicated to systems integration and software development.  In December 2000, we acquired NightingaleTechnologies Ltd, now known as HTTP Insights Ltd (“Insights”), which providedus with proprietary technology called a Stochastic Perception Engine. AStochastic Perception Engine processes and classifies unstructured data intomeaningful outputs, enabling it to be viewed, interpreted or furthermanipulated by the user of the application. Similar technologies sit at thecore of many of today’s major software applications.  Our Stochastic Perception Engine is comprised of four principalmodules: cluster analysis, statistical modeling, classification and prediction.At that time the technology had the ability to offer unprecedented processingspeed, accuracy and comprehensiveness of results when compared to existing dataclassification technologies. Initially we believed that our StochasticPerception Engine had significant potential uses in a wide variety of fields,including medical image analysis, the design of pharmaceuticals, environmentalmapping, handwriting recognition, robotics and surveillance. Following a reviewof the Technology in Fiscal 2003 the Company has concluded that the non-medicalapplications are of limited use as there has been no development of the coretechnology in these fields in Fiscal 2002 and Fiscal 2003.

 

We have restructured our business to focus solely onthe medical imaging applications derived from our core technology.  We have concluded the process ofincorporating all research, software development, and management and marketingactivities related to our medical imaging initiatives into MS-PLC. In November2001 assets were transferred from our other subsidiaries to MS-PLC and thecosts incurred on the development of the MedicsightTM system (ourstate-of-the-art digital disease detection software system comprisingMedicColonTM, MedicHeartTM, and MedicLungTM)were reimbursed and assigned by way of a loan note from MS-PLC.  The amount of the loan note to Medicsight,Inc. was £3,659,104, and this loan note was converted into 57,868,582 ordinaryshares of MS-PLC issued to the Company and 15,000,000 ordinary shares of MS-PLCissued to the former parent of Insights in November 2001.

 

F-6

----

 

*(2)*                               Basisof Presentation

* *

The accompanying unaudited consolidated financialstatements of the Company have been prepared pursuant to the rules of theSecurities and Exchange Commission (the “SEC”). Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Stateshave been condensed or omitted pursuant to such rules and regulations. Theseunaudited consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the Fiscal years ended December 31,2003, 2002 (restated), 2001 (restated), filed on April 8, 2004. In the opinionof management, the accompanying unaudited consolidated financial statementsreflect all adjustments, which are of a normal recurring nature, necessary fora fair presentation of the results for the periods presented. All significantinter-company transactions have been eliminated in consolidation.

 

The results of operations presented for the ninemonths ended September 30, 2003, are not necessarily indicative of the resultsto be expected for any other interim period or any future fiscal year.

 

The Company has incurred significant operating lossessince inception.  As a result, theCompany has generated negative cash flows from operations, and has anaccumulated deficit at September 30, 2003. The Company operating in a developing industry based on new technologyand its primary source of funds to date has been through the issuance ofsecurities and borrowed funds.  TheCompany is currently seeking additional funding are actively developing thetechnology in order to bring it to market. While the Company is optimistic and believes appropriate actions arebeing taken, there can be no assurance, however, that management’s efforts willbe successful or that the product it markets will be accepted by consumers.

 

*(3)*                               Restatementof financial statements

* *

During fiscal 2003, the Company determined that thefair value of common stock issued in a previously recorded acquisition wasincorrect.  In addition, the Companyidentified certain errors in its previously issued financial statements relatedto impairment of intangibles, goodwill, and the vendor guarantee.

 

As a result, the Company has restated its previouslyissued financial statements for the years ended December 31, 2002 and2001.  A summary of the significanteffects of the restatements is set forth below.

 

F-7

----

 
|                                   |   | **December  31, 2002**                             |   | **December  31, 2001** |   |
|----------------------------------------|--------|----------------------------------------------------|--------|------------------------|--------|
|                                   |   | **As  Previously  Reported**                       |   | **As  Restated**       |   | **As  Previously  Reported** |   | **As  Restated** |   |
|                                   |   | **(Dollars  in thousands, except per share data)** |   |
| Consolidated balance sheet data as of: |   |                                               |   |                   |   |   |   |   |   |
| Intangible assets                      |   | $                                                  | 13,482 |                   | $      | — |   | $ | 17,976 |   | $ | 17,976 |   |
| Goodwill                               |   | 100,119                                            |   | 11,200                 |   | 88,919 |   | 68,178 |   |
| Additional paid in capital             |   | 182,897                                            |   | 162,156                |   | 166,337 |   | 145,596 |   |
| Vendor guarantee                       |   | (3,227                                             | )      | (3,689                 | )      | (10,000 | ) | (10,000 | ) |
| Accumulated deficit                    |   | (72,174                                            | )      | (153,372               | )      | (54,459 | ) | (54,459 | ) |
| Stockholders’ equity              |   | 107,807                                            |   | 5,406                  |   | 101,853 |   | 81,112 |   |
|                                   |   |                                               |   |                   |   |   |   |   |   |
|                                   |   | **December  31, 2002**                             |   |                   |   |
|                                   |   | **As  Previously  Reported**                       |   | **As  Restated**       |   |   |   |   |   |
| Consolidated statements of operations  |   |                                               |   |                   |   |   |   |   |   |
| data for the year ended:               |   |                                               |   |                   |   |   |   |   |   |
| Impairment of intangibles              |   | $                                                  | — |                   | $      | 13,482 |   |   |   |   |   |
| Impairment of vendor guarantee         |   | 6,773                                              |   | 6,311                  |   |   |   |   |   |
| Impairment of goodwill                 |   | —                                             |   | 68,178                 |   |   |   |   |   |
| Net loss                               |   | (17,715                                            | )      | (98,913                | )      |   |   |   |   |
| Net loss per share - basic and diluted |   | $                                                  | (0.92  | )                      | $      | (5.13 | ) |   |   |   |   |
|                                        |        |                                                    |        |                        |        |  |  |  |  |  |  |  |  |

 

There is no effect on the consolidated statement ofoperations for the year ended December 31, 2001.

 

**December 31, 2001**

 

**Fair Value attributable to the secondtranche of shares issued to Nightingale Technologies Ltd**

 

The transaction affected is the fair valueattributable to the second tranche of shares issued to Nightingale TechnologiesLtd (“Nightingale”) by Medicsight, PLC (“MS-PLC”) on behalf of Medicsight, Inc(“Company”) as part of the acquisition of HTTP Insights Ltd (“Insights”) in2000.

 

Upon agreement with Nightingale, the seller ofInsights, and in variance of the conditions precedent set forth in the originalagreement, the parties agreed on November 22, 2001 that the obligation to issuethe second tranche of contingent consideration would be satisfied by the directissuance of shares in MS-PLC to Nightingale. On November 22, 2001, MS-PLCissued 15,000,000 shares to Nightingale, and Nightingale accepted such sharesin satisfaction of our obligation under the original purchase agreement. Thesecond tranche was valued at $21,832,000 based on the share price of the stockbeing issued by MS-PLC.

 

The Company believes that the initial fair value ofthe second tranche of 15 million shares at £1.00 ($1.455) per share wasincorrect.

 

At a MS-PLC board meeting in November 2001, thedirectors agreed to settle an outstanding Loan Note payable to the Company byMS-PLC of £3,659,000 ($5,324,000), by issuing 73,868,582 shares at par (£0.05($0.07)). At the request of the Company, MS-PLC issued the stock in twotranches: 58,868,582 shares to the Company and 15,000,000 shares toNightingale. At the same time MS-PLC went on to issue a further 1 millionshares (par value £0.05 ($0.07) per share) to the Company at par for a subscriptionprice of £50,000 ($72,750) in cash. Subsequently the directors of MS-PLC havesought and obtained UK Legal Counsel’s Opinion that concludes that the fairvalue of the shares issued to Nightingale in November

 

F-8

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2001 was £0.05 ($0.07) per share and not £1.00($1.455) per share. In addition, the directors of the Company engaged anindependent valuer to establish a valuation for the shares issued in November2001 based on US GAAP.  This report ascribesa fair value of £0.05 ($0.07) per share. The revised fair value of the 15million shares issued is $1,091,000. The effect of the restatement is to reduce goodwill and additional paidin capital by approximately $20,741,000. The restatement had no effect on theconsolidated statement of operations for the year ended December 31, 2001.

 

**December 31, 2002**

 

**Intangible Assets**

 

The intangible asset relates to the technology (theStochastic Perception Engine) acquired from Insights for $22,470,000 in2000.  During 2003, the Company reviewedthe value attributable to this technology and concluded that, as there had beenno further development of the technology except for the MedicsightTMapplications and with the sale of Insight in December 2002, the technologyshould have been fully impaired at December 31, 2002. Therefore, the Companyhas recorded an impairment charge of $13,482,000 at December 31, 2002.

 

**Goodwill**

 

The Company has further evaluated the remaininggoodwill of $68,178,000 from the acquisition of Insights. As the business ofInsights had been transferred to other group companies in 2001 (MS-PLC) and2002 (Medicsight Finance Ltd) and Insights sold to an independent third partyduring December 2002, the Company has determined that the goodwill attributableto this acquisition should have been fully impaired at December 31, 2002.Therefore, the Company has recorded an impairment charge of $68,178,000 for theyear ended December 31, 2002.

 

**Vendor Guarantee**

 

The Vendor Guarantee arose from the acquisition ofCore Ventures Limited (“Core”) and relates to an oral agreement between theCompany and Dr Nill, that the proceeds of the sale of Dr Nill’s 1,195,000shares in the Company would be remitted to the Company under the terms of theVendor Guarantee. These shares were sold in 2003 and the Company received$3,689,000 net of commissions. At December 31, 2001 and December 31, 2002, thefair value attributed to the Vendor Guarantee was based on the weighted averageshare price. The Company has reviewed the fair value at December 31, 2002 andconcluded that it would more be appropriate and better understood if the fairvalue at December 31, 2002 reflected the funds actually received in 2003 ratherthan show an impairment in Fiscal 2002 of $6,773,000, as reported, and thenhaving to show a reduction in the impairment in Fiscal 2003 of $462,000.Therefore, the impairment in Fiscal 2002 has been revised from $6,773,000 to$6,311,000.

 

*(4)*                               Linesof Credit

* *

On December 15, 2000, the Company entered into anunsecured credit facility with Asia IT, which provides a $20,000,000 line ofcredit. Such line of credit originally expired on December 31, 2001, but hasbeen extended until June 30, 2005. Interest on advances under the creditfacility accrues at 2% above US LIBOR. The Company can draw down on this creditfacility for its financing requirements, upon approval by the Company’s Boardof Directors and subject to approval by Asia IT (such approval not to beunreasonably withheld). The Company is restricted from borrowing funds,directly or indirectly, other than through the credit facility with Asia IT,without the consent of Asia IT. The availability of the credit facility wouldbe reduced upon the Company’s sale of any of its investment assets. The amountsdrawn and interest charged under this facility are repayable on demand or atthe maturity of the facility.

 

F-9

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On November 20, 2001, MS-PLC entered into a£10,000,000 ($16,000,000) credit facility with Asia IT.  Such facility matures in November 2005 andis secured by a lien on all assets of Medicsight.  Interest on outstanding amounts accrues at 2% above GBPLIBOR.  Pursuant to such credit facility,MS-PLC had covenanted to undertake a public offering of its ordinary shares inan amount not less than £25,000,000 not later than March 2002.  MS-PLC did not complete such an offering butthe facility nevertheless remains in place. The loan is convertible intoordinary shares in MS-PLC on announcement of an Offer to Subscribe, Placing orother public offering of its ordinary shares, at the same price per share asthe offering price. Due to the private offering being undertaken by MS-PLC, theloan is currently convertible.

 

At September 30, 2003, the Company had drawn down $884,000under the $20,000,000 facility with Asia IT, and MS-PLC had drawn down$1,966,000 under its £10,000,000 ($16,000,000) facility with Asia IT.

 

In addition during the nine months ended September 30,2003 the Company received $2,827,000 for the sale of 775,000 shares as per theoral agreement reached with Dr Nill under the vendor guarantee. These fundswere used to reduce Asia IT’s facility with the Company.

 

F-10

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*(5)*                               Short-termDebt

* *

The Company acquired Insights in December 2000.  At the time of such acquisition, Insightshad outstanding $6,006,000 of long-term debt. This debt was part of the original loan of $10,000,000 that Insightsowed to its parent company relating to the acquisition of patent applicationsfor its Stochastic Perception Engine technology.  The loan did bear interest at 2% above US LIBOR and is unsecured.All interest on the loan was forgiven prior to the principal being transferredto Medicsight Finance Ltd (“Finance”) on December 6, 2002. The principal of theloan does not mature until December 6, 2004 and is interest free.  As of September 30, 2003 and December 31,2002, the balance of this loan was $2,250,000 and $3,250,000 respectively. The debtwas fully repaid by December 31, 2003. The terms of the loan note include aprovision whereby the lender can require repayment of the principal by givingtwo months notice of demand. No notice has been given as of September 30, 2003and management does not expect the notice to be given.

 

*(6)*                               Stockholders’Equity

* *

On December 30, 2002, the Company effected a 1-for-3reverse split (the “Split”) of its Common Stock.  As such, all share and per share information in the accompanyingfinancial statements have been restated to reflect the Split. On July 31, 2003the Company reduced its authorized share capital from 100,000,000 shares to25,000,000 shares. On January 27, 2004 the Company increased its authorizedshare capital from 25,000,000 shares to 40,000,000 shares.

 

During the quarter ended September 30, 2003 theCompany issued approximately 2,367,000 restricted shares of stock raising $7.1mas part of a $10m private placement. The Company concluded this privateplacement during the year ended December 31, 2003. The Company has undertaken afurther $10.5m private placement of restricted stock in 2004.

 

*(7)*                               Accountingfor Stock Based Compensation

* *

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

 

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

 

F-11

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|                                           |   | **Three Months  Ended  September 30,  2003** |   | **Nine Months  Ended  September 30,  2003** |   |
|------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                           |   | **(unaudited)**                              |   | **(unaudited)**                             |   |
|                                           |   | **$’000**                               |   | **$’000**                              |   |
| Net income as reported:                        |   | (1,946                                       | )      | (6,072                                      | )      |
|                                           |   |                                         |   |                                        |   |
| Fair value method of stock  based compensation |   | (22                                          | )      | (44                                         | )      |
|                                           |   |                                         |   |                                        |   |
| Proforma net income                            |   | (1,968                                       | )      | (6,116                                      | )      |
|                                           |   |                                         |   |                                        |   |
| Reported earnings per common  share            |   |                                         |   |                                        |   |
| Basic and diluted                              |   | (0.08                                        | )      | (0.28                                       | )      |
| Proforma earnings per common  share            |   |                                         |   |                                        |   |
| Basic and diluted                              |   | (0.08                                        | )      | (0.28                                       | )      |

 

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

 

*(8)*                               Goodwilland Other Intangible Assets

* *

Goodwill

 

The Company adopted SFAS No. 142 effective January 1,2002. Under this standard, goodwill will no longer be amortized over itsestimated useful life, but will be tested for impairment on an annual basis andwhenever indicators of impairment arise. The Company completed its impairmenttests as of January 1, 2003 and fully impaired the goodwill of $68,178,000associated with the acquisition of Insights in 2000.

 

The Goodwill of $11,200,000 acquired in 2002 arosefrom the fair value attributable to the share swap with General Nominees andAsia IT Nominees whereby the Company issued 1,866,666 shares to GeneralNominees (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.

 

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

 

Other Intangible Assets

 

During Fiscal 2000, the Company acquired an intangibleasset from the former parent of Insights consisting of technology valued at$22,470,000. Under SFAS No.142, this is considered an intangible asset with adefinite life of 5 years. Therefore the value of the asset was amortized on astraight-line basis over this period*.*

 

The Company evaluates the carrying value of long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. The Company’sassessment for impairment of an asset involves estimating the undiscounted cashflows expected to result from use of the asset and its eventual disposition. Animpairment loss recognized is measured as the amount by which the carrying amountof the asset exceeds the fair value of the asset.  During the last quarter of 2003 the Company reviewed the carryingvalue of the core technology acquired from Insights and decided that the coretechnology should be fully impaired. This was based on the view that there were no further softwareapplications apart from the medical imaging applications currently beingdeveloped that could be derived from the core technology. The Company furtherdecided that the impairment should be recorded as at December 31, 2002.

 

F-12

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*(9)*                               OtherAssets – Software Development Costs

* *

During the first six months of Fiscal 2003, inaccordance with Statement of Financial Accounting Standards (FAS) 86, *Accountingfor the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed*,the Company 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, theCompany capitalized costs of $1,249,000 in the six months ended June 30, 2003under FAS 86. These costs capitalised comprise staff, consultants, regulatoryand clinical trial costs specific to the three products.

 

Subsequently the Company decided that this accountingtreatment was inappropriate because of the difficulty in assigning costsaccurately to the various software products and versions being developed astechnical and development staff are moved from product to product and versionto version on a regular basis. The Company has decided to expend all researchand development costs in 2003. The Company’s research and development costs arecomprised of staff and consultancy costs expensed on the MedicsightTM system.The regulatory and clinical trial charges are expensed in “Selling, general andadministrative charges”.

 

*(10)*                        SecurityDeposits

* *

As MS-PLC occupies approximately 95% of 46 BerkeleySquare it acquired the security deposit on the offices for cash from InternationalCellulose Company Ltd in February 2003. The value of the security deposit is£470,000 ($781,000) and is interest-bearing.

 

*(11)*                        LeaseCommitments

* *

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

 

| **For the year ending  December 31,** |   | **Property  Leases** |   | **Total**        |   |
|---------------------------------------|--------|----------------------|--------|------------------|--------|
|                                  |   | **($’000)**     |   | **($’000)** |   |
| 2003                                  |   | 488                  |   | 488              |   |
| 2004                                  |   | 504                  |   | 504              |   |
| 2005                                  |   | 509                  |   | 509              |   |
| 2006                                  |   | 509                  |   | 509              |   |
| 2007 and thereafter                   |   | 315                  |   | 315              |   |

 

*(12)*                        MajorCustomers

* *

The Company’s revenue in the nine months endedSeptember 30, 2003 was derived from the Company’s LifesyneTM scanningoperations. During the nine months September 30, 2002, the Company had twocustomers who represented a significant proportion of its revenues. Thecustomers were Commonwealth Secretariat, which accounted for approximately 43%and Texaco Ltd., which accounted for approximately 57%.  These revenues were derived from Software’sconsulting and support services.

 

*(13)*                        ComprehensiveIncome

* *

As of September 30, 2003 and for the nine months andquarter then ended, comprehensive income is comprised of a net loss fromoperations and the net effect of foreign currency translation adjustments. Thiscomprised a net loss of $7,139,000 and $2,015,000 and foreign currencytranslation adjustments of $282,000 and $(106,000), resulting in comprehensiveloss of  $7,421,000 and $1,909,000,respectively.

 

F-13

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*(14)        RecentAccounting Pronouncements*

 

In January 2003, the FASB issued Interpretation No.46, “Consolidation of Variable Interest Entities” (FIN No. 46), which addressesconsolidation by business enterprises of variable interest entities(“VIEs”).   FIN No.46 is applicableimmediately for VIEs created after January 31, 2003 and are effective forreporting periods ending after December 15, 2003, for VIEs created prior toFebruary 1, 2003. In December 2003, the FASB published a revision to FIN 46(“FIN 46R”) to clarify some of the provisions of the interpretation and todefer the effective date of implementation for certain entities. Under theguidance of FIN 46R, public companies that have interests in VIE’s that arecommonly referred to as special purpose entities are required to applythe provisionsof FIN 46R for periods ending after December 15*,*2003. A public companythat does not have any interests in special purpose entities but does have avariable interest 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 Company does not expect FIN No. 46 tohave an effect on the consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity.” SFAS No. 150 specifies that freestanding financial instruments withinits scope constitute obligations of the issuer and that, therefore, the issuermust classify them as liabilities. Such freestanding financial instrumentsinclude mandatory redeemable financial instruments, obligations to repurchasethe issuer’s equity shares by transferring assets, and certain obligations toissue a variable number of shares. SFAS No. 150 is effective immediately forall financial instruments entered into or modified after May 31, 2003. For allother instruments, SFAS No. 150 is effective at the beginning of the thirdquarter of 2003. The Company has determined that the statement will not have amaterial impact on the consolidated financial position, results of operationsand cash flows of the Company.

 

F-14

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**SIGNATURE**

** **

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

 

 
|          | MEDICSIGHT, INC. |
|---------------|------------------|
|          |             |
|          |             |
|          | By:              | /s/ STEPHEN FORSYTH |   |
|          |             | Stephen Forsyth |
|          |             | Chief Executive Officer |
|          |             |
|          |             |
|          | By:              | /s/ PAUL GOTHARD |   |
|          |             | Paul Gothard |
|          |             | Chief Financial Officer |
|          |             |   |
|          |             |   |
| April 8, 2004 |             |   |

 

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