SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x                              ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2004.

OR

o                                 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from     to  

MEDICSIGHT, INC.

(Exact Name of Registrant as Specified in its Charter)

011-44-20-7598-4070

(Registrant’s Telephone Number, Including Area Code)

PART I

ITEM 1.BUSINESS.

General

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

We werewas originally incorporated as a Utah corporation in 1977. On December 19, 2000, we entered into an Agreement1977 and Plan of Merger with our wholly owned subsidiary HTTP Technology, Inc., awas re-incorporated in Delaware corporation, and thereby effected a re-incorporation of the company from Utah to Delaware.in 2000. All references in this report to “the Company”, “we” or “us” refer to Medicsight, Inc., and subsidiaries. The Company has two primary business objectives:

•                  To conceive, develop and commercialize innovative medical imaging applications derived from our core technology known as Medicsight CAD.

•                  To establish a global online community for medical imaging professionals (to be known as MedicExchange) with a rich selection of specialist clinical content for registered users combined with a product marketplace where medical imaging vendors can sell their solutions online.

During 2005 the resultant Delaware corporationCompany initiated a plan of disposal of the Lifesyne scanning business which was subsequently sold in November 2005 and subsidiaries, whereits results are reflected as discontinued operations.

During the context concerns events which occurredyear ended December 31, 2005 the Company raised $12,035,000 (net of commission and expenses) by issuing 3,327,000 restricted shares of common stock.

The Company raised a further $3,600,000 (net of commission and expenses) on or afterJanuary 13, 2006 by issuing 1,000,000 restricted shares of common stock and is reflected as common stock subscribed but unissued at December 19, 2000, and to HTTP Technology, Inc.,31, 2005. The Company had received the Utah corporation and subsidiaries, where the context concerns events which occurredfunds prior to the December 19, 2000. 31, 2005 and is reflected as cash held for common stock subscribed but unissued at December 31, 2005.

These private placements were underwritten by Asia IT Capital Investments Limited (“Asia IT”), a related party. Asia IT received commissions of $1,630,000 on the above private placements.

On July 31, 2003,March 17, 2006 the Company reduced its authorized share capital from 100,000,000raised a further $990,000 (net of commission and expenses) by issuing 275,000 restricted shares to 25,000,000 shares. On January 27, 2004,of common stock. Asia IT earned commissions of $110,000 on the Company increased its authorized share capital from 25,000,000 shares to 40,000,000 shares.above private placement.

During the year ended December 31, 2004 the Company raised $23,310,000 (net of commission and expenses) by issuing 8,579,000 restricted shares of common stock. Between January 1, 2005 and March 10, 2005 the Company has issued a further 504,000 shares of stock at $4.00 per share raising a further $1,814,000 (net of commissions). These private placements were underwritten by Asia IT, Investments Limited (“Asia IT”), a related party. Asia IT received commissions of $2,410,000 on the above private placement.

During the year ended December 31, 2003 the Company issued 3,333,333 restricted

The Company’s authorized share capital is 40,000,000 shares of common stock, in a $10,000,000 private placement underwritten by Asia IT.par value $0.001. At March 27, 2006, 37,667,883 shares of common stock had been issued.

Our business is focused on the medical imaging applications derived from our core technology. We have concluded the process of incorporating all research, software development, and management and marketing activities related to our medical imaging initiatives into MS-PLC. In November 2001, assets were transferred from our other subsidiaries to MS-PLC, and the costs incurred on the development of the Medicsight™ system, our state-of-the-art digital disease detection software system comprising MedicColon™, MedicHeart™, MedicLung™, Colon CAR™ and Lung CAR™.

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

We maintain our corporate offices at 46 Berkeley Square, London, W1J 5AT, United Kingdom, telephone +44
+44 (0) 207-598-4070, facsimile: +44 (0) 207-598-4071.

Business Strategy

We are developers of software technology for medical diagnostic applications such as Computer Aided Detection (“CAD”) and Computer Assisted Reader (“CAR”) software products in differing business models.

We have four principal operating subsidiaries: Medicsight PLC (“MS-PLC”), Lifesyne UK Limited (“Lifesyne”), Medicsight U.S.A., Inc (“MS-US”) (previously Lifesyne U.S.A.) and, Medicsight (International) Limited (“MIL”) and Medic Exchange, Inc (“MDX”) (previously known as Medicsight On-line, Inc (“MOL”).

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Lifesyne UK Limited (“Lifesyne”) was sold to an independent third party in November 2005 and is reported as discontinued operations. In addition Medicsight Asset Management Limited (“MAM”) will ceaseceased operations induring the next few months.year.

MS-PLC. Our majority-owned subsidiary, MS-PLC, is currently engaged in efforts to commercialize a state-of-the-art digital expert recognition software system for digital data derived from medical imaging hardware.the groups CAD products (“Medicsight CAD”). At December 31, 2005 and December 31, 2004, the Company owned 70,677,300 ordinary shares in MS-PLC, constituting

81.8% of the outstanding shares. At December 31, 2003 the Company owned 68,677,300 shares in MS-PLC. The increase is due to MS-PLC issuing 2,000,000 shares to the Company on June 30, 2004 to settle debt of $3,240,000 due by MS-PLC to the Company. This transaction resulted in an increase to the minority interest in MS-PLC of $459,000.

Lifesyne UK.   Lifesyne is a wholly owned subsidiary of MS-PLC that was established in September 2002 for the purpose of providing a branded operating entity for the United Kingdom and Ireland markets. Lifesyne operates scanning centers in the United Kingdom. As the Company has decided to focus on the delivery of software, no further development of the Lifesyne strategy is envisaged beyond the Company’s current scanning requirements. We are now focusing Lifesyne on the rapid acquisition of patient scan data necessary to enable our expert software to refine its characterization capabilities.

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

MIL.MIL, a wholly owned subsidiary of MS-PLC, was established to co-ordinate operations outside the United States of America and Europe and is based in Geneva, Switzerland. It has

MDX. MDX, a majority-owned subsidiary, incorporated in Delaware is currently engaged in developing the online business – “MedicExchange” and began operating in January 2006. The Company owns 90% of MDX and 10% is owned by Compile Nominees Limited, a company registered in Gibraltar, who is assisting MDX with the development of the portal.

Lifesyne. Lifesyne was a wholly owned non-core subsidiary of MS-PLC that was established a further office in China.September 2002 to provide scanning services and thereby acquire patient CT scan data necessary to test and validate the Medicsight CAD software. Lifesyne operated one scanning center in Westminster, London. On November 10, 2005, we sold Lifesyne to an independent third party for approximately $450,000. At that time the net assets of Lifesyne totaled approximately $844,000 leading to an impairment loss of approximately $394,000.

Revenues and operating losses for Lifesyne follow:

MAM. MAM is also a wholly owned subsidiary of MS-PLC that was established in September 2002 for the purpose of acquiring fixed assets on behalf of the operating entities in the group. As Lifesyne’s strategy changed MAM’s business was limited so all assets were transferred to MS-PLC or Lifesyne at market value or fully impaired on December 31, 2004. The impairment relating to the assets transferred to Lifesyne in Fiscal 2004 or areis included in the processdiscontinued items above. MAM has ceased trading now that all of being sold to interested third parties. MAM will cease operations in the next few months once allits assets arehave been disposed of.

Medicsight

MedicExchange

MedicExchange is being established to provide medical imaging professionals with a global online community containing a variety of relevant clinical papers, training materials and content. This combined with a multi-vendor online sales channel for diagnostic, treatment and surgery planning solutions will give these professionals access to information and products that they otherwise would have difficulty accessing. We believe that our low cost, on demand, digitally downloadable model is unique in this sector.

MedicExchange will offer medical imaging software company.vendors a single channel through which they can access a large community of medical imaging professionals globally in order to sell and market their product solutions. MedicExchange is scheduled to be available in mid-2006.

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MS-PLC’s technology is applicablescalable to many other disease areas. We have plans to further extend our technologies to new areas of abdominal imaging such as liver during 2006.

The Company’s CAD products include ColonCAD Application Programming Interface (“API”), the first CAD technology available for CT colonography, and LungCAD API. Medicsight CAD software is provided to medical imaging partners as an integrated solution and will also be available online through MedicExchange directly to clinicians.

Product benefits

Medicsight CAD products enable radiologists to read CT scans using a “concurrent-read” approach. Unlike “second-read” software, in which software is used after radiologists complete their primary review, concurrent-read software enables radiologists to review the original, “unfiltered” images side-by-side simultaneously, with a software-enhanced image showing regions of interest.  MS-PLC believes that using CAD in a concurrent-read capacity increases colonic polyp and lung nodule detection efficiency by minimizing the impact on existing radiology workflows while providing valuable additional information to the radiologist.

In terms of clinical practice and therefore market segmentation, our products can be split between diagnostic treatment and screening;

“Diagnostic” products; incidental “disease detection” and “disease tracking”. These products have been designed to be used in symptomatic patients but to detect other diseases and we are already startingincidental to planthose for such potential expansionwhich the investigation was originally requested. Subsequently, these incidentally identified lesions may be tracked so that their progress may be monitored by measurement.

“Screening” products; population screening of asymptomatic patients. CAD CT seeks to provide a cost effective solution to identify certain diseases sufficiently early to make population screening programs more cost effective in the applicationterms of our products.life years saved.

The Company

Market Opportunity

MS-PLC has to date primarily focused on multi slice computed tomography (“CT”)CT scan analysis. In the world today, there are over 120 million scans done a year. Over a third of these are conducted in the U.S and, of that number, around seven million scans are lung scans and approximately one million are heart scans.U.S. These are nearly all diagnostic scans—scans – that is, scans on patients with symptoms. When screening of asymptomatic patients begins (scans of patients without specific symptoms), we expect these figures are expected to increase dramatically. The Company’s technology is equally applicable to magnetic resonance imaging

For colorectal cancer (“MRI”CRC”) and Medicsight has begun research into brain diseases with a leading global institution.alone, the market opportunity can be summarized as follows:

Mission Statement

The Company aims be a leading global supplier of medical imaging analysis software, through5

·       Focusing on developing our core technology

·       Creating a global network of leading medical partners

·       Developing industry best data collection programmes and validation studies

·       Staying ahead of the competition by continuously developing our databases, technology and products

Corporate Strategy Objectives

·       Developing the broadest range of detection and analysis products in CT and MRI technology

·       Working with third parties to develop the necessary distribution channels

·       Developing a strategic presence in Asia

·       Making selective acquisitions/partnerships that broaden

·        Product range/rate of product development

·        Geographic scope

·        The skills base

What differentiates the CompanyCompany.

MS-PLC delivers to the market innovative products that are clinically developed and supported by leading scientists and physicians. We are 100% focused in our field and in delivering our vision, which is to take CAD software beyond detection to diagnosis and patient management. This is a clearly differentiating position from the competition who are more focused on detection only. To make this claim, the Company needs to be able to combine:have:

·•                                          World leading scienceCommercial agreements with key distribution partners that allow the efficient and cost effective delivery of our products to the market

·•                                          World leading medical expertiseOnline distribution model through MedicExchange

·•                                          The largest patientHigh performance CAD for Colon and scanLung

•                                          CE and FDA approvals

•                                          Support from a network that includes some of the leading scientists and physicians

•                                          Access to large clinical databases

•                                          Significant investment in the protection of our intellectual property

How does this evidence itself?

As far as science is concerned, we have had over 30 PhDs

•                                          Contracts signed with TeraRecon, Inc, Viatronix, Inc and software engineers working on developing the core algorithms for the last four years. We believe we have developed more sophisticated tools than others currently available in the market place. The key to reliable detection and to accurate measurement is accurate boundary identificationVital Images, Inc.

•                                          Letters of the suspect lesion. If your software does not distinguish the lesion from the wall tissue, it is self evident that you will not be able to reliably detect or accurately measure; this is where we have focused much of our scientific development.

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

The third area, after science and medical expertise, is data; data is crucial to the training and testing of our products; the more data you have the better your product performance and we have, we believe access to the world’s largest lung and colon scan databases; however, it’s not just quantity of data that counts, our databases include the proven outcomes (cancers) and patient management histories so analysing these will allow us to go beyond basic nodule or polyp detection. As the databases grow and our access to them increases, it will enable the Company to continue to stay ahead of the field in the area of data acquisition and thus improve the development of the Company’s software products—a clearly sustainable point of differentiation.

Product Portfolio

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

Medicsight introducedintent (“LOI”) signed with a number of innovationsother partners including Barco

•                                          National Cancer Centre (“NCC”), Tokyo agreed to the market in 2004:conduct all MS-PLC Japanese Clinical Studies

·•                                          The first approved joint read detection productsBeijing Cancer Institute (“BCI”), Beijing agreed to conduct all MS-PLC Chinese Clinical Studies

·•                                          The first colon detection productRadiological Society of North America (“RSNA”) 2005 – Medicsight multi-partner Integrated CAD launch

·•                                          The first adjustable filter system to allow radiologists to adjust their settings to suite their requirementsRSNA 2005 – Seven peer reviewed papers accepted for presentation

Medicsight was the first company to use the term, Computer Assisted Reader™ or CAR™, a term gaining much industry usage now. CAR signifies “joint-read” software that assists radiologists in detecting and evaluating lesions or nodules found during CT scans of the lung or colon. Unlike current “second-read” software, in which software is employed after radiologists have completed their reviews, joint-read software enables the radiologist to review “unfiltered” images side-by-side and simultaneously with software-enhanced regions of interest. For a radiologist reviewing up to 600 images from a single CT scan, the joint-read capability saves time and aids in the evaluation of nodules.

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

In terms of clinical practice and therefore market segmentation, the products can be split between diagnostic treatment and screening;

Diagnostic; incidental detection and” disease tracking” products.   These are products designed for symptomatic patients to detect disease incidentally (for example when a patient is being scanned for another symptom/disease), and then subsequently track disease progress and monitor treatment effectiveness. The primary applications in this area are Lung nodule tracking and Heart calcium scoring though the Company believes there will be a growing requirement for polyp tracking in the colon as CT colonography becomes more established

“Screening” products•; for population screening of asymptomatic patients.   There is much evidence to demonstrate that the early detection of colon, lung and heart disease leads to an improved life expectancy. CAD CT will provide a cost effective solution in identifying these diseases early enough to significantly alter the economics of population screening programs in these areas.                                          MedicExchange online distribution launches mid-2006

In October 2004, MS-PLC received clearance from the U.S. Food and Drug Administration (“FDA”) for its Colon CAR™ product, an image analysis software tool that is used with CT colonography (“virtual colonoscopy”) to assist radiologists in searching for and measuring potential colorectal polyps. Virtual colonoscopy uses a CT scanner to generate both two-dimensional and three-dimensional views of inside of the colon so is non-invasive, as opposed to the traditional colonoscopy, in which a viewing instrument is physically inserted into the bowel. Colon cancers most often start when malignant cells form within polyps attached to the inner surface of the large bowel. Detection and removal of these polyps can prevent them from becoming cancerous.

Medicsight Colon CAR™ works by using MS-PLC’s CAR technology to deploy a series of filters against image data derived from CT colonographies. These filters highlight spherical areas of the image as small as 5 mm or the size of a small pea, which could be potential polyps. The radiologist is also able to manually highlight any irregularities for closer inspection. Once suspect polyps are found, the software can precisely identify the boundaries and features and show them in 3D with a volume measurement, diameter, shape and location. This allows the radiologist to accurately review and track any growth in the polyps.

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

Lung CAR™ works by deploying a series of filters against the image data derived from CT scans. The software has a number of automatic and manual measurement tools to aid diagnosis, including 3D volume measurement and the ability to review follow up scans and doubling times.

The Company’s heart product, MedicHeart received FDA approval in November 2003. MedicHeart is a software application for annotating MSCT scans of the heart used by radiologists to identify coronary artery calcium (“CAC”). The reason we consider that this software product is superior to other products in its category is due to its extensive segmentation capabilities, which enable the radiologist to accurately extract the CAC boundary and therefore accurately measure it. This means that the radiologist can accurately track CAC growth or regression.

Business Development

In November 2004 MS-PLC announced that it hadhas signed lettersnon–exclusive agreements with TeraRecon, Inc (for the distribution of intent with Agfa-Gevaert N.V.both LungCAD and ColonCAD), Viatronix, Inc (for the distribution of both LungCAD and a commercial agreement withColonCAD) and Vital Images, for globalInc (for the distribution of MS-PLC’s medical imaging software products.Colon CAD). These agreements are the firstpart of their kind for Medicsight and represent a major step forward inthe the Company’s plans to commercialize its advanced imaging technology on a worldwide basis. The intentMS-PLC CAD software is to incorporate MS-PLC’s softwareintegrated into the threepartner companies’ existing product offerings.

TeraRecon has successfully integrated MS-PLC’s ColonCAD and LungCAD software was demonstrated at the exhibitor booths into TeraRecon’s flagship Aquarius family of Agfa, Vital Images, and Viatronix duringmedical imaging. The combined TeraRecon / Medicsight imaging system made its debut in November 2005 at the annual meeting of the Radiological Society of North America (RSNA) that was held at the end of November 2004(“RSNA”) in Chicago, Illinois.

Viatronix has successfully integrated MS-PLC’s ColonCAD and LungCAD software into its V3D ^TM Colon and V3D^TM Explorer software applications. This was shown at the RSNA conference in Chicago in November 2005.

Vital Images will be integratinghas successfully integrated MS-PLC’s Colon CAR™CAD software into its CT colon product InnerviewGI™. The letterColonography application which is part of intentthe Vitrea^TM software package. This was also shown at the November 2005 RSNA conference in Chicago.

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In addition to these signed by Viatronix andpartnerships, MS-PLC includes MS-PLC’s Lung CAR™ and Colon CAR™ software. The letter of intent with Agfa is for all three products.

On the marketing side the Company achieved success in 2004,discussion with a significant number of articlesother major imaging companies in North America and Europe and is looking to have further announcements in the medical press concerning the Companynear future.

In Japan, we expect to finalize agreements for distribution of MS-PLC LungCAD and its products culminating in being voted “Best Industry Newcomer” by AuntMinnie (www.auntminnie.com) at the Radiological Society of North America 2004 conference. These articles can be viewed on our website: www.medicsight.com.

Expanding distribution

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

The companyCompany sees Japan and China in particular, as strategically important; significantimportant in terms of future growth and believes that the extensive business development has already taken place thatand commitment of opening offices in these countries should lead to further opportunities and announcements in these areas in 2006.

Regulatory Process

In order to release new products into a specific market, MS-PLC must gain regulatory approvals for its Medicsight CAD products. In the first halfU.S., the Food and Drug Administration (“FDA”) is the regulatory authority. In Europe, regulatory approval is gained through Conformité Europeène (“CE”) marking. The procedure used and timescales involved differ depending on the region but fundamentally each region requires evidence of the year in those areas.

Expanding product range and range of technologies

Whilst there isproducts being developed under a significant ongoing investment in internal new product development programmes, the company is always seeking to build on its leading position. The market for advanced software applications is still embryonic, its ultimate structure still to be defined; we aim to be one of the leaders and drivers of change and ultimately one of the consolidators in the sector.

Medicsight has stated as part of its corporate objectives that it will expand its operations via acquisition to fill in gaps in technology or product. Duringstrict quality management system. In October 2005 we aim to put this into practice; a number

of interesting targets have been identified already that will enhance our abilities to offer innovative, integrated clinical solutions to our partners. We believe we are in an excellent position to leverage our strong financial base and develop differences betweengained ISO 13485:2003 certification confirming the competition and ourselves in this way. MS-PLC is also reviewing other potential distribution channels including a web-based browser.

International Advisory Board

As the Company’s strategy has evolved, in particular, following the decision to concentrate our efforts on software development andMS-PLC’s compliance with international product distribution, we have acted to align our medical advisory mechanisms to the new circumstances. The Company has therefore set up three International Advisory Boards (“IAB”). The IABs have recruited and will continue to recruit individuals with the relevant expertise to become members and encourage the involvement of the radiologists undertaking beta testingquality standards. All of our products providing dataare designed, built, distributed and supported to this level of quality control.

MS-PLC can follow one of two routes to obtain FDA approval for software developmentits products: a pre-market notification (“510(k)”) or a pre-market assessment (“PMA”). A 510(k) application is submitted when the product is substantially equivalent to an existing legally marketed device. A PMA is required for higher risk products and participatingis the more stringent route which requires scientific evidence to demonstrate that the product is safe and effective for its intended use.

For European CE approvals, a company is required to be regularly audited by an external notified body to demonstrate an effective quality system. If successful, the company may then label its products with CE mark.

Markets such as China and Japan have their own regulatory bodies but these often require companies outside of these markets to show evidence of an existing CE or FDA approval for a product before gaining approval in the local market.

MS-PLC has a significant amount of experience in preparing, submitting and gaining regulatory approvals for its products. In the US, MS-PLC has existing FDA 510(k) approvals for its LungCAR and ColonCAR products and has approvals pending for the recent ColonCAD and LungCAD releases. In Europe, MS-PLC has CE approval for all released products and is regularly audited by an external notified body. MS-PLC is seeking approvals for its ColonCAD and LungCAD products in Japan and China. As each new product is prepared for release, MS-PLC’s internal regulatory team prepares the regulatory documentation for each market in order to allow that product to be marketed and sold.

Because MS-PLC manages the approval process, its business partners can rapidly integrate and release their own products containing Medicsight CAD technology more quickly than if they had to gain all the approvals independently.

We regard our extensive experience in successfully obtaining European and FDA approvals as a valuable asset of the Company. We believe this experience will be useful in our scientific program.

Some members of the original Medical Board have accepted appointmentsefforts to theobtain approval for our products in new IABs. New members will include persons with relevant expertise from the United States, Germany, France, Italy,markets such as China and Japan. The IABs are co-chaired by Dr. John Costello (MS-PLC’s medical director), who reports back to the MS-PLC Board; however, much of the scientific advice and leadership will be provided through a co-chairman, chosen from the IAB members.

Terms of Reference of the International Advisory Board

The IABs will meet twice a year and fulfill the following roles:7

·       Advise on the development and application of Medicsight CT image analysis software in the territories represented.

·       Provide links to users of CT image analysis systems in their respective territories.

·       Assist in investor relations on an international basis.

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

·       Act as advisors in relation to regulatory submissions for the Company’s products.

·       Advise on sources of library data (CT scans) to support training and development of the Company’s software.

Objectives of the International Advisory Board

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

·       Ensure that members have a full understanding of the Medicsight technology and are motivated to participate in its development and application, both locally and internationally.

·       Ensure that the clinical development program is compatible with local clinical practice.

·       Ensure that the clinical development program is compatible with local regulatory guidelines.

·       Obtain insight into local issues with respect to marketing of the Company’s products.

Risk Factors

We cannot assure you that the Company will be successful in commercializing the Medicsight™ system,Medicsight CAD products or the MedicExchange portal, or if such a system isthe products or the portal are commercialized, that its usethey will be profitable to the Company. We face

obstacles in commercializing our core technologythe Medicsight CAD products and the MedicExchange portal and in generating operating revenues such as but not limited to, successful development, testing of and gaining regulatory approval for the technology.detailed below.

The Company does not believe that there is currently any comparable system that is competitive with the Medicsight™ system.Medicsight CAD products. There are computer-aided diagnostic systems that operate in the field, but, in our view, such other systems are overlymore dependent than ours on human resources to carry out the analysis, as noneanalysis. We are not aware of other systems in the field that have the automated capability of the Medicsight™ system.our products.

The Company has had only a limited operating history and no revenues from its continuing operations upon which an evaluation of its prospects can be made. The Company’s prospects must be considered keeping in mind the risks, expenses and difficulties frequently encountered in the establishment of a new business in an ever-changingconstantly changing industry. There can be no assurance that the Company will be able to achieve profitable operations.operations in the foreseeable future or at all.

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

Technical Risks. The Medicsight™Medicsight CAD system may not deliver the levels of accuracy and reliability needed, or the development of such accuracy and reliability may be delayed.

Market Risks. The market for the Medicsight™ systemMedicsight CAD products and MedicExchange may be slower to develop or smaller than estimated or it may be more difficult to build the market than anticipated. The medical community may resist the Medicsight™ systemMedicsight CAD and MedicExchange products or be slower to accept itthem than we expect. Revenues from the Lifesyne™ scanning centersMedicsight CAD and the licensing of the Medicsight™ systemMedicExchange may be delayed or costs may be higher than expected which may result in the Company requiring additional funding.

Regulatory Risks. The Medicsight™Medicsight CAD system is subject to regulatory requirements in both the United States Europe, Japan, China and Europe. Approvalsour other targeted markets. Necessary regulatory approvals may not be obtained or may be delayed ordelayed. We may incur substantial additional cost to the Medicsight™ system.in obtaining regulatory approvals for our products in our targeted markets.

Competitive Risks. There are a number of groups and organizations, such as software companies in the medical imaging field, scanner manufacturers, screening companies and other healthcare providers that may develop a competitive offering to the Medicsight™ system.Medicsight CAD and MedicExchange. In addition these competitors may have significantly greater resources than the Company. We cannot make any assurance that they will not attempt to develop such offerings, that they will not be successful in developing such offerings or that any offerings they do develop will not have a competitive edge over Medicsight CAD and MedicExchange.

Financial Risk. The Company has incurred significant operating losses since inception and has generated no revenues from continuing operations. As a result, the Medicsight™ system.Company has generated negative cash flows from operations and has an accumulated deficit at December 31, 2005. The Company is operating in a developing industry based on new technology and its primary source of funds to date has been through the issuance of securities and borrowed funds. The Company is currently seeking additional funding and is actively developing the technology in order to bring it to market. While the Company is optimistic and believes appropriate actions are being taken, there can be no assurance that management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers.

Corporate Structure. The Company’s corporate structure may make it more difficult or costly to take certain actions. The Company conducts substantially all its business through MS-PLC, a U.K. public company which is 81.8% owned by the Company, and through MS-PLC’s subsidiaries in the United Kingdom and the United States and through MDX, which is 90% owned by the Company. Although the Company and MS-PLC share directors and management, they are required to comply with corporate governance and other laws and

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rules applicable to public companies in the United Kingdom and the United States.  Should the Company propose to take any action, such as a transfer or allocation of assets or liabilities between the Company and MS-PLC, the Company would have to take into consideration the potentially conflicting interests of the Company’s stockholders and the minority stockholders of MS-PLC.  This may deter the Company from taking such actions that might otherwise be in the best interest of the Company or cause the Company to incur additional costs in taking such actions. MS-PLC would not be able to pay dividends or make other distributions of profits or assets to the Company without making pro rata payments or distributions to the minority stockholders of MS-PLC.  Although neither MS-PLC nor the Company has plans to pay dividends or make distributions to its shareholders, the Company’s corporate structure may deter MS-PLC and the Company from doing so in the future. This risk will also apply to MDX as it begins its operations this year as the Company owns 90% of MDX’s equity.

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

Other Risks. The Company’s ability to deliver its software could be hindered by risks such as the loss of key personnel or the patents and trademarks being successfully challenged or credit facilities being reduced or terminated by lenders.

Employees

As of March 21, 2005,27, 2006, the Company and its subsidiaries had 6659 employees, all of whom are full-time employees. Our employees are not part of a union. We believe that we have an excellent relationship with our employees.

Patents and Trademarks

Protection of our proprietary technology and our rights over that technology, from copy or unchallenged and improper use, is essential to our future success. Any challenges to, or disputes concerning, our core technology may result in great expense to us, delays in bringing products to market

and disruption of our focus on our core activities. They may also result in loss of rights over our technology or the right to operate in particular markets due to adverse legal decisions against us.

The Company has filed patent applications in the United Kingdom, the United States, the European Patent Office and under the International Patent Cooperation Treaty (which currently has approximately 70128 member countries) covering the application of our core technology. However, wetechnologies and their applications. We have not as yet been granted any patents. In addition, we are in the process of preparing to filerecently filed new patent applications covering our MedicColon™, MedicHeart™,technology of both Medicsight CAD and MedicLung™ products. WeMedicExchange and intend to continue filing new applications in the future.  Although prior art searches have been carried out, we cannot provide assurance that any or all of these patents will be granted or that they will not be challenged, or that rights granted to us would actually provide us with advantage over our competitors. Prior art searches have taken place, and theThe Company believes that we will not infringe any currentactively reviews third party patents.patents but is not currently aware of any that our products will infringe.

We have filed applications to register “Medicsight”™^TM, “Lifesyne”™ ^“TM  MedicColon”™, “MedicHeart”™“Medicsight Colon Screen”^TM, “MedicLung”™“Medicsight Heart Screen”^TM,  “Medicsight Lung Screen”^TM, “Colon CAR”™, “Lung CAR”™ and, “Computer Assisted Reader” ^™TM and “Medicsight ImageView” ^TM as trademarks in the United Kingdom, the European Community and the United States. These trademarks are essentialimportant to the corporate identity that we are seeking to create in connection with the Medicsight™ system.Medicsight CAD.

Failure to register appropriate patents, copyrights or trademarks in any jurisdiction may impede our ability to create brand awareness in our products, result in expenses in pursuing or our rights with respect to our intellectual property, or result in lost revenues through delays incurred due to intellectual property disputes. Where we may be required to purchase licenses from sellers with prior rights in any country, we cannot assure you that we will be able to do so at a commercially acceptable cost.

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Research and Development

Under United States generally accepted accounting principles, untilcosts incurred in connection with the technology is determineddevelopment of software products that are intended for sale are accounted for in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be feasible,Sold, Leased, or Otherwise Marketed”. Costs incurred prior to technological feasibility being established for the product are expensed as incurred. Technological feasibility is established upon completion of a detailed program design or, in its absence, completion of a working model. Thereafter, all related researchsoftware production costs can be capitalized and development expenditures must be expensed rather than capitalized. Oncesubsequently reported at the softwarelower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Amortization commences when the product is determined as feasible (commercially viable), expenditure may be capitalized. available for general release to customers.

The Company has concluded that capitalizing such expenditureexpenditures on completion of a working model was inappropriate because of the difficulty in allocating costs accurately among the products and versions being developed as technical and development staff are moved from product to product and version to version on a regular basis. Therefore the Company did not incur any material software production costs and therefore has decided to expense all research and development costs. The Company’s research and development costs are comprised of staff and consultancy costs expensed on the Medicsight™Medicsight CAD system.

The Company’s expenditures on research

During 2005, 2004 and development comprise of staff2003 the Company expended $2,363,000, $2,972,000 and consultants employed in the development of the Medicsight™ system. During the twelve months ended December 31, 2004, December 31, 2003 and December 31, 2002, we expended $2,972,000, $2,498,000 and $1,239,000 respectively for research and development expenses for the Medicsight™ system.its products. We cannot predict the amount of additional expenditures that will be necessary prior to achieving commercialization of our products.

Major Customers

In Fiscal 2004 and Fiscal 2003,2005 the Company’s gross revenues from operations were derived solely from the Company’s Lifesyne™discontinued scanning operations. The Company derived its 2002 revenues from software maintenance.

Governmental Regulation

The Medicsight™ system

Medicsight CAD has been designed to analyze digital data from medical scanners, such as CT, MRI and CAT scans, and provides improved analysis to enable the clinician to identify areas of possible abnormality. The Medicsight™ systemMedicsight CAD will be subject to governmental regulation in the United Kingdom, Europe and the United States. We are not currently certain of the level of regulation that will be applied to the Medicsight™ systemMedicsight CAD in any specific jurisdiction. The level of governmental regulation in the

jurisdictions in which we engage, or expect to engage, in business may vary. Any such regulation could delay the commercial introduction of the Medicsight™ systemMedicsight CAD and could significantly increase our costs of operations.

General

Our corporate address is 46 Berkeley Square, London W1J 5AT, United Kingdom. Our telephone number is 011-44-20-7598-4070.
+44-20-7598-4070. Our Internetweb address is http://www.medicsight.com.www.medicsight.com. Information on our website is not deemed to be a part of this Annual Report.

ITEM 2.PROPERTIES.

We maintain our corporate offices at 46 Berkeley Square, London W1J 5AT, United Kingdom. The office is comprised of 9,642 square feet. We do not have a formal, written lease for these offices. Until June 30, 2003, rent was paid quarterly in advance to a property management company, Berkeley Square Ventures Limited, which in turn collects the rent for InternationalYang Cellulose Company Limited (“ICCL”YCCL”) (previously International Cellulose Company Limited), the entity that holds the lease on the property. Subsequent to June 30, 2003, rent has been paid directly to ICCL.YCCL. In November 2001, ICCLYCCL was acquired by Macniven and Cameron Equity Holdings Limited (“M&C”) (previously STG Holdings PLC (“STG”)PLC), a major shareholder of the Company. We have additional satellite offices in Nashville, Tennessee, Japan and China.

We operate one Lifesyne™ scanning center at our flagship center in Westminster, London. The Ravenscourt test center in West London, which is surplus to requirements, has been closed and its assets have been transferred to other companies in our group or are currently for sale to third parties.

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ITEM 3.LEGAL PROCEEDINGS.

The Company is involved with various legal actions and claims arising in the ordinary course of business. Management believes that the outcome of any such litigation and claims will not have a material effect on the Company’s financial position or results of operations.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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ITEM 6.SELECTED FINANCIAL DATA.

The selected financial data set forth below have been derived from the consolidated financial statements of the Company and the related notes thereto. The statement of operations data for the five years ended December 31, 20042005 and the balance sheet data as of December 31, 2005, 2004, 2003, 2002 2001 and 20002001 are derived from the consolidated financial statements of the Company as at December 31, 2005, 2004, 2003, 2002 and 2001 which have been audited by Amper, Politziner & Mattia, P.C., independent registered public accountants (consolidated financial statements as at December 31, 2004, 2003 and 2002 and 2001) and Arthur Andersen, independent auditors (consolidated financial statements as at December 31, 2000).accountants. The following selected financial data should be read in conjunction with the Company’s consolidated financial statements and the related notes thereto and “Management’s Discussion and Analysis and Results of Operations”, which are included elsewhere herein.

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our view, such other systems are more dependent than ours on human resources to carry out the analysis. We are not aware of other systems in the field that have the automated capability of our products.

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

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

Technical Risks. The Medicsight™ systemMedicsight CAD may not deliver the levels of accuracy and reliability needed, or the development of such accuracy and reliability may be delayed.

Market Risks. The market for the Medicsight™ systemMedicsight CAD and MedicExchange may be slower to develop or smaller than estimated or it may be more difficult to build the market than anticipated. The medical community may resist the Medicsight™ systemMedicsight CAD and MedicExchange products or be slower to accept it than we expect. Revenues from the Lifesyne™ scanning centersMedicsight CAD and the licensing of the Medicsight™ systemMedicExchange may be delayed or costs may be higher than expected which may result in the Company requiring additional funding.

Regulatory Risks. The Medicsight™Medicsight CAD system is subject to regulatory requirements in both the United States Europe, Japan, China and Europe. Approvalsour other targeted markets. Necessary regulatory approvals may not be obtained or may be delayed ordelayed. We may incur substantial additional cost to the Medicsight™ system.in obtaining regulatory approvals for our products in our targeted markets.

Competitive Risks. There are a number of groups and organizations, such as software companies in the medical imaging field, scanner manufacturers, screening companies and other healthcare providers whichthat may develop a competitive offering to the Medicsight™ system.Medicsight CAD and MedicExchange. In addition these competitors may have significantly greater resources than the Company. We cannot make any assurance that they will not attempt to develop such offerings, that they will not be successful in developing such offerings or that any offerings they do develop will not have a competitive edge over Medicsight CAD and MedicExchange.

Financial Risk. The Company has incurred significant operating losses since inception and has generated no revenues from continuing operations. As a result, the Medicsight™ system.Company has generated negative cash flows from operations and has an accumulated deficit at December 31, 2005. The Company is operating in a developing industry based on new technology and its primary source of funds to date has been through the issuance of securities and borrowed funds. The Company is currently seeking additional funding and is actively developing the technology in order to bring it to market. While the Company is optimistic and believes appropriate actions are being taken, there can be no assurance that management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers.

Corporate Structure. The Company’s corporate structure may make it more difficult or costly to take certain actions. The Company conducts substantially all its business through MS-PLC, a U.K. public company which is 81.8% owned by the Company, and through MS-PLC’s subsidiaries in the United Kingdom and the United States and through MDX, which is 90% owned by the Company. Although the Company and MS-PLC share directors and management, they are required to comply with corporate governance and other laws and rules applicable to public companies in the United Kingdom and the United States.  Should the Company propose to take any action, such as a transfer or allocation of assets or liabilities between the Company and MS-PLC, the Company would have to take into consideration the potentially conflicting interests of the Company’s stockholders and the minority stockholders of MS-PLC.  This may deter the Company from taking such actions that might otherwise be in the best interest of the Company or cause the Company to incur additional costs in taking such actions. MS-PLC would not be able to pay dividends or make other distributions of profits or assets to the Company without making pro rata payments or distributions to the minority stockholders of MS-PLC.  Although neither MS-PLC nor the Company has plans to pay dividends or make distributions to its shareholders, the Company’s corporate

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structure may deter MS-PLC and the Company from doing so in the future. This risk will also apply to MDX as it begins its operations this year as the Company owns 90% of MDX’s equity.

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

Other Risks. The Company’s ability to deliver its software could be hindered by risks such as the loss of key personnel or the patents and trademarks being successfully challenged or credit facilities being reduced or terminated by lenders.

RESULTS OF OPERATIONS

Fiscal Year Ended December 31, 2005 vs. Fiscal Year Ended December 31, 2004

Research and Development. The Company’s research and development expenses for Fiscal 2005 were $2,363,000 as compared to $2,972,000 for Fiscal 2004. The decrease of $609,000 was due to reduction in the numbers of staff required for the development of the products. The Company’s research and development costs were comprised of staff and consultancy costs expensed on the development of MS-PLC’s software products.

Selling, General and Administrative Expenses. The Company’s selling, general and administrative expenses from continuing operations for Fiscal 2005 were $9,300,000 as compared to $10,578,000 for Fiscal 2004. The decrease of approximately $1,300,000 was due to a number of factors:

•                  Salaries and directors’ and sub-contractors’ compensation declined from $5,009,000 in Fiscal 2004 to $4,595,000 in Fiscal 2005 due to reduction in staff numbers and the reduction of sub-contractors costs (re-structuring of the medical boards).

•                  Rent, rates and service charges declined from $1,623,000 in Fiscal 2004 to $1,418,000 due to the Company requiring less space in 46 Berkeley Square in 2005.

•                  Other savings include travel (due to Company’s review of its requirements in 2005 - $154,000), the cessation of the clinical trial in 2004 and subsequent reduction in medical images costs ($440,000) and a reduction in depreciation following 2004’s impairment review ($348,000).

For Fiscal 2005, the Company did not record an impairment charge from continuing operations. For Fiscal 2004, the Company recorded an impairment to MAM’s property and equipment of $386,000 which relates to the closure of the Ravenscourt centre. This was as a result of the decision to transfer MAM’s assets to MS-PLC and Lifesyne or sell to independent third parties at open market value or fully impair, as its business opportunities were limited due to the change in strategy by Lifesyne.

Impairment Loss on Investments. For Fiscal 2005 there was no impairment charge on investments as compared to Fiscal 2004 where the Company incurred an impairment loss on investments of $70,000 relating to the impairment in the carrying value of Eurindia PLC (“Eurindia”). The Company based this impairment on information provided by Eurindia’s management.

Income Tax Benefit Realized. In Fiscal 2005, MS-PLC received $858,000 relating to a tax credit paid by the United Kingdom taxation authorities under its R&D tax relief scheme for small and medium. The basis for the R&D relief is to encourage the development of new technologies and is only applicable to the research and development of a new technology and not a product.

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Fiscal Year Ended December 31, 2004 vs. Fiscal Year Ended December 31, 2003

Revenues.   For Fiscal 2004 the Company’s gross revenues from operations were $538,000. For Fiscal 2003, the Company’s gross revenues from operations were $276,000. The Company’s revenue in Fiscal 2004 and Fiscal 2003 was derived from the Company’s Lifesyne™ scanning operations. The increase was due to growth in the number of scans undertaken.

Research and Development. The Company’s research and development expenses for Fiscal 2004 were $2,972,000 as compared to $2,498,000 for Fiscal 2003. The Company’s research and development costs

were comprised of staff and consultancy costs expensed on the development of the Medicsight™ system and the lung, colon and heartMedicsight CAD products. The Company expenses all research and development costs. The Company has concluded that capitalizing such expenditureincrease was inappropriate because of the difficulty in assigning costs accuratelydue to the various software products and versions being developed in that technical and development staff are moved from product to product and version to version on a regular basis.Company outsourcing additional resources where required.

Selling, General and Administrative Expenses. The Company’s selling, general and administrative expenses from continuing operations for Fiscal 2004 were $13,261,000$10,578,000 as compared to $10,279,000$8,848,000 for Fiscal 2003. Professional fees, including consulting services, were $879,000 in Fiscal 2004 as compared to $1,116,000 in Fiscal 2003.

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The amount of salaries and directors’ and sub-contractors’ compensation was $7,931,000increased to $5,009,000 in Fiscal 2004 and $6,111,000from $3,579,000 in Fiscal 2003. The amount of the increase is due to increases in staff numbers and sub-contractors (including medical board members and radiologists) as the Company has expanded. Other charges include service charges and rates for property leasing of $522,000 in Fiscal 2004 and $443,000 in Fiscal 2003, and rent of $1,101,000 in Fiscal 2004 and $909,000 in Fiscal 2003. The rent increase was due to a full year of rent due on the Westminster site. In Fiscal 2004 the Company incurred costs of $1,484,000$1,458,000 related to marketing and public relations and $487,000 relating to the clinical trials as compared to $1,299,000 and $492,000, respectively, in Fiscal 2003.

For Fiscal 2004, the Company recorded an impairment to MAM’s property and equipment of $968,000.$386,000 which relates to the closure of the Ravenscourt center. This was as a result of the decision to transfer MAM’s assets to MS-PLC and Lifesyne or sell to independent third parties at open market value or fully impair, as itsMAM’s business opportunities were limited due to the change in strategy by Lifesyne. No impairment charge was recorded in Fiscal 2003.

Depreciation and Amortization Expense.   Depreciation charge in Fiscal 2004 was $779,000 as compared to $631,000 in Fiscal 2003. The increase is principally due to the depreciation of the assets acquired for the Lifesyne™ centers as they became operational.

Impairment Loss on Investments.For Fiscal 2004, the Company incurred an impairment loss on investments of $70,000 relating to the impairment in the carrying value of Eurindia PLC (“Eurindia”).The. The Company based this impairment on information provided by Eurindia’s management.

For Fiscal 2003, the Company incurred an impairment loss on investments of $95,000 relating to the impairments in the carrying value of Eurindia PLC (“Eurindia”) and Strategic Intelligence PLC (“SI-PLC”). Eurindia was impaired by $59,000 based on Eurindia’s management’s assessment of the value of its portfolio at $0.72 per share. The Company fully impaired its investment in SI-PLC of $36,000, as the Company was unable to obtain any information or representations from SI-PLC as to the fair value.

Discontinued operations. Revenues from the Company’s discontinued Lifesyne scanning operations for Fiscal 2004 were $538,000 as compared to $276,000 for Fiscal 2003. The increase was due to growth in the number of scans undertaken.

The Company’s selling, general and administrative expenses from the discontinued Lifesyne’s scanning operations for Fiscal 2004 was $1,527,000 as compared to $1,155,000 for Fiscal 2003.

For Fiscal 2004, the Company recorded impairment of $582,000 against property and equipment related to the discontinued Lifesyne operations. For Fiscal 2003 there was no impairment loss.

Net Loss and Net Loss per Share. Net loss was $15,030,000 for Fiscal 2004 compared to a net loss of $10,096,000 for Fiscal 2003. Net loss per share for Fiscal 2004 was $0.49, based on weighted average shares outstanding of 30,853,734, compared to a net loss per share of $0.45 for Fiscal 2003, and based on weighted average shares outstanding of 22,203,126. The increase in net loss for Fiscal 2004 is principally due increase in staff costs, the effects of an appreciation of 11.6% in the $: £ exchange rate (see note below) and the limited share of the losses attributable to the minority interest.

The loss from continuing operations was $12,885,000 for Fiscal 2004 compared to a loss from continuing operations of $8,941,000 for Fiscal 2003. Loss per share from continuing operations for Fiscal 2004 was $0.42, based on weighted average shares outstanding of 30,853,734, compared to $0.40 for Fiscal 2003, based on weighted average shares outstanding of 22,203,126.

Note As the Company’s operating currency is UK sterling (£) the Resultsits results of Operationsoperations are affected by significant changes in the $: £ rates used to translate the revenues and costs. For Fiscal 2004 the average rate was $1.83: £1.00 and for Fiscal 2003 the rate was $1.64: £1.00, an increase of 11.6%.

Contractual Obligations and Commitments.   As of December 31, 2004, the Company was party to capital lease obligations in the amount of $286,000 for a scanner and $44,000 for motor vehicles. The obligations for the scanner lease require quarterly payments of $24,000, including interest, through March 2008. The obligations for the vehicle lease require monthly payments of $1,700, including interest, through April 2007. The underlying equipment secures both leases.

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Fiscal Year Ended December 31, 2003 vs. Fiscal Year Ended December 31, 2002

Revenues.   For Fiscal 2003 the Company’s gross revenues from operations were $276,000. For Fiscal 2002, the Company’s gross revenues from operations were $82,000. The Company’s revenue in Fiscal 2003 was derived from the Company’s Lifesyne™ scanning operations. The Company’s revenues in Fiscal 2002 were delivered principally from software maintenance. Revenues from software maintenance ceased in Fiscal 2002, as the company that provided these services was sold to an independent third party on October 28, 2002.

During Fiscal 2002 the Company had two customers that represented 98.8% of its revenues. The customers were Commonwealth Secretariat, which accounted for 67.1% of sales, and Texaco Ltd., which accounted for 31.7% of sales.

Research and Development.   The Company’s research and development expenses for Fiscal 2003 were $2,498,000 as compared to $1,239,000 for Fiscal 2002. The Company’s research and development costs were comprised of staff and consultancy costs expensed on the development of the Medicsight™ system. The Company expenses all research and development costs. The Company has concluded that capitalizing such expenditure was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed in that technical and development staff are moved from product to product and version to version on a regular basis.

Selling, General and Administrative Expenses.   The Company’s selling, general and administrative expenses for Fiscal 2003 were $10,279,000 as compared to $10,619,000 for Fiscal 2002. Professional fees, including consulting services, were $1,116,000 in Fiscal 2003 as compared to $1,565,000 in Fiscal 2002. The amount of salaries and directors’ and sub-contractors’ compensation was $6,111,000 in Fiscal 2003 and $3,988,000 in Fiscal 2002. The increase is due to increases in staff numbers and sub-contractors (including medical board members and radiologists) as the Company expands. Other charges include service charges and rates for property leasing of $443,000 in Fiscal 2003 and $422,000 in Fiscal 2002, and rent of $909,000 in Fiscal 2003 and $455,000 in Fiscal 2002. The rent increase was due to the opening of the Westminster site. In Fiscal 2003 the Company incurred costs of $1,299,000 related to marketing and public relations and $492,000 relating to the clinical trials, whereas no such costs were incurred in Fiscal 2002. Amortization of intangibles in Fiscal 2003 was $nil as compared to $4,494,000 in Fiscal 2002.

Depreciation and Amortization Expense.   Effective January 1, 2002, with the adoption of SFAS No. 142, goodwill will no longer be amortized. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 5 years.

During Fiscal 2000, the Company acquired an intangible asset from Nightingale Technologies Limited consisting of technology valued at $22,470,000. Under SFAS No.142, this is considered an intangible asset with a definite life of 5 years. Therefore, the value of the asset is amortized on a straight-line basis over this period. The amortization charge for Fiscal 2003 was $nil as compared to $4,494,000 for Fiscal 2002. During Fiscal 2003 the Company reviewed the value attributable to the technology and concluded that, as there had been no further development of the technology except for the Medicsight™ applications in Fiscal 2002 or Fiscal 2003, the technology should be impaired in full as at December 31, 2002. Therefore, the Company recorded an impairment charge of $13,482,000 in Fiscal 2002.

Depreciation charge in Fiscal 2003 was $631,000 as compared to $165,000 in Fiscal 2002. The increase is principally due to the depreciation of the assets acquired for the Lifesyne™ centers as they became operational.

Impairment of excess of purchase price over net assets acquired.   For Fiscal 2003 and Fiscal 2002, the Company had excess of purchase price over net assets acquired of $11,200,000 and $11,200,000, respectively. The excess of purchase price over net assets acquired in Fiscal 2002 of $11,200,000 was due to the Company acquiring an additional 7,000,000 shares in MS-PLC. As stated above, the Company adopted SFAS No. 142 on January 1, 2002. Under this standard, goodwill will no longer be amortized over its estimated useful life, but instead will be tested for impairment on an annual basis or whenever indicators of impairment arise. The impairment in Fiscal 2002 relates to the goodwill attributable to the acquisition of Insights of $68,178,000 (after the fair value adjustment described in the “Note Regarding Amendment and Restatement” above) in Fiscal 2000. As the business of Insights had been transferred to other group companies in 2001 (MS-PLC) and 2002 (Medicsight Finance Ltd) and Insights sold to an independent third party on December 6, 2002, the Company has concluded that the goodwill attributable to the acquisition of Insights should be impaired in full as at December 31, 2002.

Impairment Loss on Investments.   For Fiscal 2003, the Company incurred an impairment loss on investments of $95,000 relating to the impairments in the carrying value of Eurindia PLC (“Eurindia”) and Strategic Intelligence PLC (“SI-PLC”). Eurindia was impaired by $59,000 based on Eurindia’s management’s assessment of the value of its portfolio at $0.72 per share. The Company fully impaired its investment in SI-PLC ($36,000), as the Company was unable to obtain any information or representations from SI-PLC as to the fair value.

For Fiscal 2002, the Company incurred an impairment loss on investments of $175,000 relating to the impairments in the carrying value of Eurindia and Top Tier, Inc (“Top Tier”). The management of Eurindia recently valued its investment portfolio at $0.83 per share. As a result the Company incurred an impairment of $145,000 on the carrying value of its investment. Based on the financial status of Top Tier, the investment was permanently impaired, and the Company recorded impairment for the entire carrying value, $30,000, of this investment.

Impairment of Vendor Guarantee.   Impairment of a vendor guarantee in the amount of $nil and $6,311,000 for Fiscal 2003 and Fiscal 2002, respectively, relates to an impairment of the guarantee provided by Dr. Alexander Nill as to the fair value of certain assets acquired in the Company’s acquisition of Core Ventures Limited (“Core”) in September 2000. The vendor guarantee represents the fair value of 1,195,000 shares of the Company’s stock belonging to Dr Alexander Nill (the vendor of Core and then a director of the Company), the proceeds of the sale of which were to be remitted to the Company. Subsequently, in Fiscal 2003 the Company received proceeds (net of commission) under the guarantee of $3,689,000 from the sale of those 1,195,000 shares. In Fiscal 2002, the fair value of the guarantee was restated to reflect the funds received under the guarantee (see “Note Regarding Amendment and Restatement” above). The fair value was originally stated at $3,227,000, based on the weighted average price of the stock.

Net Loss and Net Loss per Share.   Net loss was $10,096,000 for Fiscal 2003 compared to a net loss of $98,913,000 (as restated) for Fiscal 2002. Net loss per share for Fiscal 2003 was $0.45, based on weighted average shares outstanding of 22,203,126, compared to a net loss per share of $5.13 (as restated) for Fiscal 2002, and based on weighted average shares outstanding of 19,294,654. The reduction in net loss for Fiscal 2003 is principally due to the impairments recorded in Fiscal 2002 on Goodwill, Intangible Assets and Vendor Guarantee of $87,971,000.

Note   As the operating currency is UK sterling (£) the Results of Operations are affected by significant changes in the $: £ rates used to translate the revenues and costs. For Fiscal 2003 the average rate was $1.64: £1.00 and for Fiscal 2002 the rate was $1.51: £1.00, an increase of 8.6%.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital Information as at December 31:

Net Change in Cash and Cash Equivalents. During Fiscal 2005 the year ended December 31,Company’s cash and cash equivalents increased by $1,973,000. This is primarily the result of proceeds received from shares issued by the Company in excess of net cash used in operating and investing activities and repayments of debt. The Company used net cash of $8,998,000 in continuing operations and used net cash of $1,078,000 in discontinued operations. The Company received net cash of $15,346,000 in financing activities and used $3,388,000 in investing activities.

During Fiscal 2004, the Company’s cash and cash equivalents increased by $4,431,000. This increase was primarily the result of cash flowsproceeds received from shares issued by the Company in excess of the net cash used in operating and investing activities and repayments of debt. The Company used net cash of $15,115,000$13,629,000 in continuing operations and used net cash of $1,486,000 in discontinued operations. The Company received net cash of $20,162,000$20,175,000 in financing activities and used $434,000 in investing activities.

During the year ended December 31, 2003, the Company’s cash and cash equivalents decreased by $933,000 to $845,000. This decrease was primarily the result of cash flows received from shares issued by the Company, MS-PLC and under the vendor guarantee offset by a decrease in short term debt, the net cash used for operations and the purchase of fixed assets. The Company used net cash of $13,149,000 in operations. The Company received net cash of $13,798,000 in financing activities and used $1,293,000 in investing activities.

Net Cash Used in Operations. In Fiscal 2005, the Company’s continuing operations used net cash of $8,998,000. The decrease of $4,631,000 from the amount of net cash used in continuing operations in Fiscal 2004 is mainly due to the reduction of research and development, reductions in SG&A costs, increases in VAT received and realized income tax benefit of $858,000.

In Fiscal 2004 the Company used net cash in continuing operations of $15,115,000.$13,629,000. The increase of $1,966,000 is$1,547,000 from the amount of net cash used in continuing operations in Fiscal 2003 was mainly due to increases in staff and sub-contractors (including medical board members and radiologists).

In Fiscal 2003 the Company had net cash used in operations of $13,149,000. This was a significant increase and is based upon increases in staff, sub-contractors (including medical board members and radiologists) of $2,100,000, increase in rent for the scanning centers of $500,000 as well as costs not previously incurred such as marketing and public relations costs of $1,300,000 and costs incurred that relate to the clinical trials of $500,000. In addition research and development costs have increased from $1,200,000 in Fiscal 2002 to $2,500,000 in Fiscal 2003.

Net Cash Used in Investing Activities. In Fiscal 2005, the Company used $3,388,000 in investing activities. On November 10, 2005 the Company’s majority-owned subsidiary MS-PLC completed the sale of its subsidiary Lifesyne to an independent third party for $443,000. Additionally on May 25, 2005 Medicsight’s indirect subsidiary MAM completed the sale of the CT Lightspeed 16 slice scanner located at the redundant test center at Ravenscourt Hospital in West London for $300,000, net of applicable sales tax, to GE Medical Systems. The Company used funds to purchase $131,000 of additional fixed assets. The Company held $4,000,000 for funds received in December 2005 for common stock subscribed but unissued until January 2006.

In Fiscal 2004, the Company had a net cash outflow from investing activities of $434,000. The Company used the funds to purchase additional fixed assets, the majority of which was required for the clinical trials and presentation or testing our software.

In Fiscal 2003, the Company had a net cash outflow from investing activities of $1,293,000. The Company used the funds to purchase additional fixed assets, the majority of which related to the Lifesyne™ center at Westminster.

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Net Cash Provided by Financing Activities. In Fiscal 2005, the Company had a net cash inflow from financing activities of $15,346,000. The funds received in Fiscal 2005 consisted of $12,035,000 (net of commission and expenses) raised by the sale of the Company’s common stock and $3,600,000 received for common stock subscribed but unissued by the Company less $333,000 used to settle the outstanding capital lease obligation on CT Lightspeed 16 slice scanner by MAM.

In Fiscal 2004, the Company had a net cash inflow from financing activities of $20,162,000.$20,175,000. The funds received in the year ended December 31,Fiscal 2004, comprisedconsisted of $23,310,000 (net of commission and expenses) raised by acommon stock issueissued by the Company. The Company also repaid in full the Asia IT facility ($2,880,000) and the Company’s overdraft facility ($196,000).

In Fiscal 2003, the Company had a net cash inflow from financing activities of $13,798,000. The funds received in the year ended December 31, 2003, comprised $9,063,000 (net of commissions) raised by a stock issue by the Company plus $4,222,000 (net of commissions) received from the private offering of MS-PLC stock. In addition the Company received $3,689,000 from the sale of 1,195,000 shares of stock under the Vendor Guarantee. The Company also repaid in full of the Nightingale loan of $3,250,000 and drew down $356,000 on the Company’s Asia IT line of credit.

Stockholders’ Equity. The Company’s stockholders’ equity at December 31, 2005 was $21,734,000, including an accumulated deficit of $(190,714,000) as compared to $18,465,000 at December 31, 2004, including an accumulated deficit of $(178,498,000). Additional paid-in capital was $208,684,000 and $196,652,000, at December 31, 2005 and December 31, 2004 respectively. The increase in stockholders’ equity was a result of an increase in accumulated deficit of $12,216,000 offset by an increase in additional paid-in capital of $12,032,000 and common stock subscribed but unissued of $3,600,000. The increase in additional paid-in capital resulted from issues of common stock at a premium by the Company in Fiscal 2005.

The Company’s stockholders’ equity at December 31, 2004 was $18,465,000, including an accumulated deficit of $(178,498,000), as compared to $10,489,000 at December 31, 2003, including an accumulated deficit of $(163,468,000). Additional paid-in capital was $196,652,000 and $173,810,000, at December 31, 2004 and December 31, 2003, respectively. The increase in stockholders’ equity was a result of an increase in accumulated deficit of $15,030,000 offset by an increase in additional paid-in capital of $22,842,000. The increase in additional paid-in capital resulted from issues of common stock at a premium by the Company in Fiscal 2004.

The Company’s stockholders’ equity at December 31, 2003 was $10,489,000, including an accumulated deficit of $(163,468,000), as compared to $5,406,000 at December 31, 2002, including an accumulated deficit of $(153,372,000). Additional paid-in capital was $173,810,000 and $162,156,000, at December 31, 2003 and December 31, 2002 respectively. The increase in stockholders’ equity was a result of an increase in accumulated deficit of $10,096,000 offset by a decrease in the vendor guarantee of $3,689,000 and an increase in additional paid-in capital of $11,654,000. The increase in additional paid-in capital resulted from issues of stock at a premium by both the Company and MS-PLC in Fiscal 2003.

Additional Capital. The Company may require additional capital during its fiscal years ending December 31, 20052006 and 20062007 to implement its business strategies, including cash for payment of increased operating expenses such as salaries for additional employees. Such additional capital may be raised through additional public or private equity offerings, as well as borrowings and other resources. Currently, the Company has two available lines of credit.

On December 15, 2000, the Company entered into an unsecured credit facility with Asia IT that provides a $20,000,000 line of credit. Such line of credit originally expired on December 31, 2001, but has been extended until December 31, 2006.June 30, 2007. Interest on advances under the credit facility accrues at 2% above US LIBOR. The Company can draw down on this credit facility for its financing requirements, upon approval by the Company’s Board of Directors and subject to approval by Asia IT (such approval not to be unreasonably withheld). The Company is restricted 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 reduces upon the Company’s sale of any of its investment assets. The amounts drawn and interest charged under this facility are repayable on demand or at the maturity of the facility.

On November 20, 2001, Asia IT entered into a £10,000,000 ($18,000,000) credit facility with MS-PLC. Such facility matures on December 31, 2006June 30, 2007 and is secured by a lien on all assets of Medicsight.MS-PLC. Interest on outstanding amounts accrues at 2% above GBPSterling LIBOR. Pursuant to such credit facility, MS-PLC had covenanted to undertake a public offering of its common shares in an amount not less than £25,000,000 ($45,000,000) not later than March 2002. MS-PLC did not complete such an offering but the facility nevertheless remains in place. The loan is convertible into ordinary shares in MS-PLC on announcement of an Offer to Subscribe, Placing or other public offering of its ordinary shares, at the same price per share as the offering price.

At December 31, 2004,2005, the Company had not drawn down any funds under the $20,000,000 facility with Asia IT, and MS-PLC had not drawn down any funds under its £10,000,000 ($18,000,000) facility with Asia IT. Under these facilities Asia IT, a related party, has deposited $2,500,000 for the benefit of the Company which the Company has not utilized.

During Fiscal, 20042005, the Company raised $23,310,000, net$12,035,000 (net of commissionscommission and expensesexpenses) by issuing 3,327,000 shares of $2,424,000,its common stock in a private placement of restricted stock at $3.00 per share. Since January 1, 2005 theplacement. The Company has issuedraised a further 504,000$3,600,000 (net

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of commission and expenses) on January 13, 2006 by issuing 1,000,000 shares of its common stock in a private placement. The Company received the consideration for the future issue in advance prior to the December 31, 2005. The Company recorded these funds as cash held for common stock subscribed but unissued at $4.00 per share raising a further $1,814,000 (net of commissions). December 31, 2005, and correspondingly recorded the obligation to issue shares as common stock subscribed but unissued at December 31, 2005.

These private placements were underwritten by Asia IT.IT, a related party. Asia IT received commissions of $1,630,000 on the above private placements.

On March 17, 2006 the Company raised a further $990,000 (net of commission and expenses) by issuing 275,000 restricted shares of common stock. Asia IT earned commissions of $110,000 on the above private placement.

During Fiscal 2003 the Company issued a $10,000,000 private placement of 3,333,333 shares underwritten by Asia IT, which generated funds of $9,063,000 after deducting Asia IT’s commission of $937,000 (partly paid by issuing 211,000 shares of Company stock valued at $3.00 per share). In addition Asia IT underwrote a £2,725,000 ($4,670,000) private placement of MS-PLC shares, which generated funds of £2,453,000 ($4,222,000) after deducting Asia IT’s commission of £272,000 ($448,000).

Atyear ended December 31, 2004 the Company owned 70,677,300raised $23,310,000 (net of commission and expenses) by issuing 8,579,000 restricted shares of common stock. These private placements were underwritten by Asia IT, a related party. Asia IT received commissions of $2,410,000 on the above private placement.

The Company’s authorized share capital is 40,000,000 shares in MS-PLC, constituting 81.51% of the outstanding shares.common stock, par value $0.001. At December 31, 2003 the Company owned 68,677,300March 27, 2006, 37,667,883 shares in MS-PLC. The increase is due to MS-PLC issuing 2,000,000 shares to the Company on June 30, 2004 to settle debt of $3,240,000 due from MS-PLC to the Company.common stock had been issued.

To the extent that additional capital is raised through the sale of equity or equity-related securities of the Company or its subsidiaries, the issuance of such securities could result in dilution to the Company’s stockholders. No assurance can be given, however, that the Company will have access to the capital markets in the future, or that financing will be available on acceptable terms to satisfy the Company’s cash requirements to implement its business strategies. If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial conditions could be materially and adversely affected. We may be required to raise substantial additional funds through other means. The products derived from our proprietary software, including the Medicsight™ system,Medicsight CAD, and our online portal, MedicExchange, are expected to account for substantially all of our revenues from operations in the foreseeable future. Our technology has not yet been fully commercialized, and we have not begun to receive any revenues from our commercial operations associated with the software products. We cannot assure our stockholders that our technology and products will be commercialized successfully, or that if so commercialized, that revenues will be sufficient to fund our operations. Management believes it has sufficient cash and available facilities to fund operations for the coming year. If adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish.

Contractual Obligations

As of December 31, 2004,2005, the Company has the following contractual obligations:

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Critical Accounting Policies.

In December 2001 and January 2002, the Securities and Exchange Commission requested that all registrants list their three to five most “critical accounting policies” in the Management’s Discussion and Analyses of Financial Condition and Results of Operations. The Securities and Exchange Commission

indicated a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following accounting policies fit the definition of critical accounting policies.

Revenue Recognition. We expect to earn our revenue primarily from software licenses and related services. Our revenue iswill be recognized in accordance with Statement of Position 97-2 (SOP 97-2), as amended by Statement of Position 98-9. Currently theThe Company’s revenues derivewere derived from its discontinued scanning services operated by Lifesyne™.Lifesyne. Scan revenue is recognized when the service is delivered.

The recognition of revenues from software licenses and related services will require more difficult and complex judgments. The terms of the license contract, such as whether the contract is long-term (over 12 months), or short-term, cancelable or non-cancelable or per scan,and the basis on which the licensee is charged , for example, will affect the recognition of revenues from services, such as up-front fees on installation, activation and up-front license fees, on-going license fees, termination fees and maintenance fees. Where fees are received prior to any service being delivered, the recognition of the fees areis deferred until the related service has been delivered successfully and the revenue can then be recognized. If there aresuccessfully. Recognition of fees that relate to any “milestone”, these are is deferred until the “milestone” has passed, and then the revenue can then be recognized.been achieved.

The Company believes that the accounting estimates related to the recognition of revenue and establishment of reserves for uncollectable amounts in the results of operations is a “critical accounting estimate” because: (1) it requires management to make assumptions about future collections, and (2) the impact of changes in actual performance versus these estimates on the accounts receivable balance reported on our consolidated balance sheets and the results reported in our consolidated statements of operations could be material. Further the Company has no history of uncollectable amounts and therefore must initially look to the estimates for the industry or particular companies that the management feels operate in a similar environment in addition to any current market indicators about general economic conditions that might impact the collectibility of accounts.

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

The Company decidedconcluded that capitalizing such expenditureexpenditures on completion of a working model was inappropriate because of the difficulty in assigning costs accurately to the various software products and versions being developed as technical and development staff are moved from product to product and version to version on a regular basis. Therefore, the Company did not incur any material software production costs and therefore has decided to expense all research and development costs. The Company’s research and development costs are comprised of staff and consultancy costs expensed on the Medicsight™Medicsight CAD system.

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

Calculating the estimated fair value of thean asset involves significant judgments and a variety of assumptions. Judgments that the Company makes concerning the value of its intangible acquiredassets include assessing time

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and cost involved for development, time to market, and risks of regulatory failure or obsolescence, (due to market, environmental or technological advances for example). For calculating fair value based on discounted cash flows, we forecast future operating results and future cash flows, which include long-term forecasts of revenue growth, gross margins and capital expenditures.

An impairment analysis was performed as of December 31, 2005 and 2004 and the Company concluded there was no impairment loss.

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

In connection with the adoption of SFAS No. 142, we performed our initial impairment analysis of goodwill and indefinite-lived intangible assets as of January 1, 2002. The implementation involved the determination of the fair value of each reporting unit, where a reporting unit is defined as an operating segment or one level below. We continue to perform an impairment analysis at least annually.

We determined the fair value of each significant reporting unit based on discounted forecasts of future cash flows. Judgments and assumptions are required in the preparation of the estimated future cash flows, including long-term forecasts of revenue growth, gross margins and capital expenditures.

Recent Accounting Pronouncements.

In January 2003,May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB issued InterpretationStatement No. 46, “Consolidation3”.The standard requires retrospective application to prior periods’ financial statements of Variable Interest Entities” (FIN No. 46), which addresses consolidationa voluntary change in accounting principle unless it is deemed impracticable. The standard states that a change in method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by business enterprises of variable interest entities (“VIEs”). FIN No.46a change in accounting principle.  The standard is applicable immediately for VIEs created after January 31, 2003 and are effective for reporting periods endingaccounting changes and corrections of errors made occurring in fiscal years beginning after December 15, 2003, for VIEs created prior to February 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 to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, public companies that have interests in VIE’s that are commonly referred to as special purpose entities are required to apply the provisions of FIN 46R for periods ending after December 15, 2003. A public company that does not have any interests in special purpose entities but does have a variable interest in a VIE created before February 1, 2003, must apply the provisions of FIN 46R by the end of the first interim or annual reporting period ending after March 14, 2004.2005.  The adoption of FINSFAS No. 46 did154 is not expected to have an effecta material impact on the consolidatedCompany’s financial statements.position or results of operations.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,153,” whichExchanges of Non-monetary Assets, an amendment of APB Opinion No.29”. The standard is a revisionbased on the principle that exchanges of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The compensation cost willnon-monetary assets should be measured based on the fair value of the equity or liability instruments issued.assets exchanged and eliminates the exception under APB Opinion No. 29 for an exchange of similar productive assets and replaces it with an exception for exchanges of non-monetary assets that do not have commercial substance. The Statementstandard is effective as of the beginning of the first interim or annual periodfor non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company cannot determine the impact of SFAS 153 at this time.

In December 2004, the FASB issued SFAS 123 (revised 2004),”Share-Based Payment”. The standard eliminates the disclosure-only election under the prior SFAS 123 and requires the recognition of compensation expense for stock options and other forms of equity compensation based on the fair value of the instruments on the date of grant be expensed over the period service is received. We willintend to adopt SFAS No. 123(R) on October 1, 2005this Statement using the modified prospective method. We have disclosedmethod as of January 1, 2006. The Company estimates that the pro forma impactcharge to the Statement of adopting SFAS No. 123(R) on net income and earnings per shareOperations for the year endedto December 31, 2004 and 2003 in Note 1, which includes all share-based payment transactions to date. We do not yet know the impact that any future share-based payment transactions2006 will have on our financial position or results of operations.be approximately $500,000.

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Interest Rate Risk

The Company’s exposure to market risk associated with changes in interest rates relates to its debt obligations. The Company has the following debt facilities all repayable on demand:

The information required by this Item is included on pages F-1 to F-19F-20 of this Annual Report.

None.

ITEM 9A.Evaluation of Disclosure Controls and Procedures.        CONTROLS AND PROCEDURES.

The Company maintains As required by Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” as of December 31, 2005. This evaluation was carried out under the supervision and with the participation of our management, including our Company’s Chief Executive Officer and Chief Financial Officer. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the Company’sreports it files or submits under the Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including itsthe Company’s Chief Executive Officer and Chief FinancialAccounting Officer, and persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating

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Based upon that evaluation, the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carries out a variety of ongoing procedures, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s management, with the participation of the Chief Executive Officer and Chief FinancialAccounting Officer evaluated the effectiveness ofconcluded that the Company’s disclosure controls and procedures were effective as of December 31, 20042005. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and concludedthere can be no assurance that they were effective atany design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control Over Financial Reporting. As required by Rule 13a-15(d) under the reasonable assurance level asExchange Act, our management, including our Chief Executive Officer and Chief Accounting Officer, also conducted an evaluation of December 31, 2004. There have been no significant changes in the Company’s disclosure controls and proceduresour internal control over financial reporting to determine whether any change occurred during the Company’s most recent fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, such controls.our internal control over financial reporting. Based on that evaluation during the quarter ended December 31, 2005 there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

None.

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