Preliminary results

Categorised Under:
 
The Board of Medical Solutions plc (LSE: MLS), the diagnostics and healthcare
business specialising in histopathology and cytology services and products,
announces its preliminary results for the year ended 31 December 2006 prepared
under International Financial Reporting Standards ('IFRS').

This is the Group's first set of results following the divestment of its Dubai
operations. It now has a strong balance sheet, with £15.2m in cash, and plans
to grow its healthcare and diagnostics business through organic growth from its
existing operations combined with selected acquisitions.

Financial Highlights

  * Revenue from continuing operations up 7% to £6.0 million

  * Gross profit improved to £2.4 million; gross profit margin improved to 40%

  * Operating expenses (excluding restructuring costs) reduced by £0.9 million
to £4.6 million

  * Operating loss from continuing operations reduced by £1.0 million to £2.4
million

  * Loss for the year from continuing operations reduced by £1.3 million to £
2.3 million

  * Net cash of £15.2 million

  * Disposal of Dubai operations completed during the year for gross
consideration of £16.5 million and net cash proceeds of £13.2 million after
transaction costs to date

Operational Highlights

  * Roll out of SurePath(tm) liquid based cytology ('LBC') programme to new and
existing regions; England & Wales LBC target market share raised to 47%

  * LBC UK distribution agreement with TriPath Imaging, Inc. renewed until 31
December 2010

  * New products launched in Diagnostic Pathology and Drug Development Services
divisions including Circulating Tumour Cell ('CTC') analysis

  * Key initiatives in automated cervical cancer screening, a major potential
growth market

  * Completed disposal of Dubai operations; Group refocused on the UK based
operations

  * Continued focus on cost control without detriment to our operational
capability

  * Achieved unconditional CPA accreditation and maintained GLP standards

Post year-end events

  * Changes to Board of Directors - appropriate skills to manage business
through growth and development stage

  * Appointed as the exclusive UK commercial reference laboratory for
CellSearch(tm) CTC enumeration

  * Wales trial for automated cervical cancer screening commenced

Laurie Turnbull, Chairman of Medical Solutions, said:

'There have been dramatic changes across the Group in 2006. During the year the
Board focused on delivering the phased exit from the Dubai operations, this was
successfully completed during November 2006, whilst also dealing with the
turnaround of the UK based operations. There has been a great deal of progress
made in the year and the Group is now in a strong and secure financial
position.

'There has also been significant restructuring at Board level, both during 2006
and the early part of 2007. The Group now has a closely knit team of Directors
and senior management which, the Board is confident, provides the right blend
of skills, experience and expertise to deliver the strategic objectives and
move the business forward financially and operationally.

'The short term objective is to return the Group to profitability and cash
generation. This will be achieved through a combination of organic growth in
our Pathology Services and Cytology divisions and prudent, appropriate
investment in acquisition opportunities.'

Chairman's Statement

Introduction

I am delighted to be making my first annual report to shareholders of Medical
Solutions. The past twelve months have seen significant changes at Medical
Solutions, both in the operations of the Group and in the composition of the
Board of Directors. We achieved our stated aim of a planned phased exit from
our operations in Dubai and the Board remains committed to becoming a
profitable and cash generative business, focused primarily on the UK
diagnostics and pathology markets.

Summary of the results for the year

Continuing operations                             2006         2005   % growth/
                                                                (as (reduction)
                                                 £'000    restated)
                                                              £'000

Revenue                                          6,025        5,655         6.5

Gross profit                                     2,385        2,000        19.3

Operating expenses (excluding                  (4,613)      (5,477)      (15.8)
restructuring costs)

Operating loss                                 (2,413)      (3,441)      (29.9)

Loss before tax                                (2,332)      (3,584)      (34.9)

Year end cash and cash equivalents              15,229        2,313           -

See note 6 for details of the restatement

The continuing operations have made significant progress during the year and
these achievements are set out in detail later in this preliminary
announcement.

Board of Directors

The changes to the Board of Directors saw my appointment as Executive Chairman
during November, with Sir Gareth Roberts stepping down to a non-executive role.

Dr Nick Ash was appointed Managing Director on 1 February 2007, from his former
position of Chief Financial Officer, as part of the planned succession
arrangements following the departure of Dr Neil Johnston.

Sir Gareth Roberts retired from the Board on 1 February 2007 on the grounds of
ill health, after serving as a Director of the Company since 1999. It was with
great sadness that the Company learned of Sir Gareth's death on 6 February
2007.

The revised Board represents a focused and tightly knit team with the necessary
skills, expertise and experience required to ensure that the Group is managed
in an effective manner as it enters a new stage of its development.

Disposals

During November, we completed the disposal of our Dubai operations for gross
consideration of £16.5 million, raising net cash proceeds of £13.2 million
after transaction related costs paid during the year of £0.75 million. The
completion of this disposal now enables the full focus of the Directors and
senior management to be targeted towards our continuing operations.

Staff

Other than the changes at Board level, 2006 was a year of relative stability
with respect to the staff in the UK operations. As the Group now looks forward
to progressing with its short and long term objectives, we have a skilled and
motivated staff who will be instrumental in our achieving those objectives.

Strategy

The Group's strategy remains to grow our healthcare and diagnostics business
through organic growth from our existing operations combined with selected
acquisitions and reinvesting the proceeds from the disposal of our Dubai
operations to broaden our portfolio of product and services.

The Group is now focused on its UK based operations and the development of our
diagnostics and pathology based activities. These include our current core
offerings in pathology and cytology services along with our reference
laboratory and drug development operations.

Through our Pathology Services division we will continue to broaden our
portfolio of tests targeted at the diagnosis and treatment of cancer. In
addition to providing services to other healthcare providers, we have
identified opportunities to provide services directly to medical practitioners,
and their patients, and we will seek to realise a number of these opportunities
during the coming year. We will also continue to explore the opportunities to
expand our pathology service offering through a joint venture arrangement or by
acquisition.

Medical Solutions has been at the forefront of cervical cancer screening in the
UK, supplying liquid based cytology equipment, consumables and technical
support to Hospital Trusts throughout the UK. The next stage of our Cytology
strategy is to accelerate the introduction of automated cytology screening and
we have initiated a number of clinical trials to support this strategy.

We will continue to focus on cost control, reducing these where appropriate,
improving our operational efficiency and investing in key research and
development projects and new technologies.

Fundamental to the Group and the quality of our service offering, is the
recruitment and retention of quality staff. We continue to review our benefits
and rewards package to ensure we attract and retain the best staff.

Prospects

Our largest customer remains the NHS. The coming year will be another
challenging one for the NHS with increasing focus on the operational and
financial performance of Hospital Trusts, however this provides opportunities
for Medical Solutions. Lord Carter's report into NHS Pathology Services in
England, published in August 2006, specifically identified histopathology
services as an area where the private sector could have a greater involvement.

There is increasing demand from the pharmaceutical and biotechnology industries
for providers of support services in drug discovery and development who offer
expertise in the more traditional laboratory discipline of histopathology, in
which Medical Solutions has internationally recognised expertise, as well as in
situ hybridisation and other cutting edge DNA and RNA based techniques. One
element of the Medical Solutions strategy is to identify, and partner with,
providers of the latest diagnostic techniques to broaden the portfolio of
services that we offer to pharmaceutical and biotechnology companies, as well

as developing clinical applications for healthcare providers.

The Directors are confident that the continuing Group will develop and grow in
an effective and controlled manner, delivering value to its shareholders.

Laurie Turnbull

Executive Chairman

27 March 2007


Operating and Financial Review (abbreviated)

Cautionary statement

This Operating and Financial Review contains certain forward-looking statements
with respect to the financial condition, results, operations and businesses of
Medical Solutions plc. These statements and forecasts involve risk and
uncertainty because they relate to events and depend upon circumstances that
will occur in the future. There are a number of factors that could cause actual
results or developments to differ materially from those expressed or implied by
these forward-looking statements. Nothing in this Operating and Financial
Review should be construed as a profit forecast.

Overview

Medical Solutions plc is a diagnostics and healthcare company based in the UK.
During the year, our core activities continue to have been concentrated upon
becoming a leading provider of diagnostic pathology and cytology services and
products, with a refocusing of the business on the UK based operations.

The Pathology Services division, following the disposal of our Dubai based
operations, comprises our Diagnostic Pathology and Drug Development Services
operations in Nottingham, UK. This division provides expert pathology services
to public and private healthcare providers as well as the pharmaceutical and
biotechnology industry. Pathology services are an essential element of clinical
services, making a contribution to the effective detection, diagnosis,
treatment and management of disease, especially chronic disease. Pathology
expertise are also a key element in the drug discovery and development
activities of pharmaceutical and biotechnology companies.

The Pathology Services division also has access to an established bank of
normal and diseased processed human tissue and a UK network of over 60
specialist consultant pathologists. Medical Solutions operates in a highly
competitive market and competes for business against other service based
organisations, often against teams from within the customer itself. Regulatory
accreditation from relevant authorities is considered to be critical in
ensuring the Group can offer its products and services to customers in a
trusted manner.

Our Cytology division distributes and supports the SurePathTM LBC system and
consumables for the preparation and analysis of cervical smear samples.
SurePathTM is one of only two systems approved by the National Institute for
Health and Clinical Excellence ('NICE') for use in England and Wales.

During 2005 the Board set out a plan aimed at securing the financial stability
of the Group. The principal components of this plan included refocusing the
Group's business, reducing the cost base significantly, selling or closing
non-core activities, improving efficiency and strengthening financial controls.
This vision was reinforced at the start of 2006 as the Board continued to focus
on the objectives of profitability and cash generation.

At the half year 2006, the Board was able to report that the Group, including
the Dubai operations, was profitable and cash generative for the 6 months ended
30 June 2006. We also reported that the UK operations, including central
services, continued to be loss making and that the sale of the Dubai operations
would return the Group to a loss making position.

The Group's results for the year ended 31 December 2006 demonstrate that
significant progress has been made in the continuing operations of the Group,
although more remains to be done if Medical Solutions is to realise its
long-term potential. The Board remains committed to the achievement of
profitability and cash generation for the continuing Group through organic
growth of the existing business in combination with selected acquisitions.

Business Segment Performance Review

Pathology Services

Our Pathology Services division generated revenue from continuing operations of
£2.5 million in 2006 compared with £3.2 million in 2005, a decrease of 22%.
However, the significant cost reduction measures taken during both this and the
previous year led to a significantly improved operating performance in 2006
with the division achieving break even (2005: operating loss of £0.6 million).

Diagnostic Pathology

Revenue from our continuing Diagnostic Pathology operation fell by 9% to £2.2
million (2005: £2.4 million) yet this area continued to improve its
profitability generating an operating profit of £0.5 million compared with £0.1
million in 2005.

The continued growth in HER2 testing volumes and a full year's benefit from the
consolidation of operations onto a single site in Nottingham, coupled with the
ongoing strong cost control in other areas, has led to a significantly improved
operating performance for this part of the business. This improved performance
is especially impressive given that the Diagnostic Pathology result for 2005
included an exceptional profit of £387,000 from the sale of certain fixed
assets during that year.

The market drivers for this business remain sound but we have seen to ongoing
change in the dynamics of the NHS requirement for outsourced pathology
services. The shortfall in the number of consultant histopathologists that we
have historically seen in the UK has largely been addressed. This was always
anticipated within the Diagnostic Pathology business model and Medical
Solutions has moved to broaden its portfolio of diagnostic services. However,
whilst there has been a reduction in the demand for histology support due to
capacity constraint in the NHS, there is ongoing pressure from the Department
of Health for the increased involvement of the private sector in the provision
of healthcare. The Review of NHS Pathology Services in England, chaired by Lord
Carter of Coles, published in August 2006, specifically identified
histopathology services as an area where the private sector could have greater
involvement.

We have introduced a number of additional diagnostic and theranostic services
during the year including Circulating Tumour Cell and Circulating Endothelial
Cell ('CEC') enumeration and the Topoisomerase IIa test. We have also begun to
introduce tailored packages of tests aimed at supporting clinicians in their
clinical decision making and helping them achieve the best possible outcome for
the patient. The first of these is targeted at breast cancer and includes the
Medical Solutions Breast Cancer Decision Making Tool.

We are targeting further organic growth from this area of our business during
2007 and aim to introduce a number of new products during the course of the
year. These will be in our core areas of expertise in histopathology and
cytopathology but will be targeted at cancers other than breast cancer. We will
also be exploring opportunities to broaden our pathology offering to include
blood and other fluid pathology. We are exploring a number of models by which
these services will be offered, from investment in in-house capability through
potential joint venture and partnership arrangements to acquisitions.

This broadening and increased depth of our pathology offering, together with
the ongoing control of the cost base for this part of our business, should
provide a sound basis for a further improvement in the profitability of this
area of our business in the short to medium term.

Dubai Diagnostic Pathology - a post script

As we stated during 2006, The Board of Medical Solutions decided to focus on
its UK based business going forward and our plan to exit in a phased manner
from our operations in Dubai was realised during 2006. In November we were
pleased to announce the completion of the sale of our Dubai subsidiaries for
gross consideration of £16.5 million of which £14.0 million was received in
cash.

Drug Development Services

Medical Solutions Drug Development Services offers diagnostic and theranostic
testing services to support drug discovery and development, and assists
pharmaceutical and biotechnology companies in identifying and validating
markers closely linked with response to therapy during clinical trials. We have
particular strengths in high throughput quantitative immunohistochemistry and
in situ hybridisation, as well as sophisticated image analysis and biomarker
determination capabilities.

The sales performance of Drug Development Services was disappointing during the
year, with revenues of £0.3 million compared with £0.8 million in 2005.
However, the restructuring of this part of our business, which was instigated
during 2005, and ongoing focus on the underlying costs continued to realise
benefits during 2006. As a consequence, the operating result for this business
unit improved by £0.2 million from a loss of £0.7 million during 2005 to a loss
of £0.5 million in 2006.

During the year we have focused an increased amount of our sales and marketing
activity on the smaller to medium pharmaceutical and biotechnology companies
with operations located mainly in the UK and Europe, and less on the global
players. The time taken to convert our sales activity to project proposals has
been longer than we expected, however the refocus is beginning to reap rewards
and proposal activity has increased throughout the second half of 2006.

During 2007, we are aiming to return the sales levels from this area of our
business to those achieved during 2005 based on the increased number of ongoing
projects and the general improvement in sales leads, project proposals and
market awareness resulting from the refocusing of our activities during 2006.
The level of incremental revenue needed to achieve profitability remains
challenging but achievable.

Cytology

Cytology has become a genuine success story for Medical Solutions with the
division exceeding our original expectations in respect of market share. The
majority of the revenues continue to be generated from the supply of
SurePath(tm)
LBC services and consumables to the NHS, predominantly in England and Wales.

During the year we continued our LBC roll out programme including to some
previously unannounced regions such as Nottingham, Derby, Hampshire/Isle of
Wight and Thames Valley East. As a result we have raised our market share
expectations to 47%. This is based on an estimated annual requirement of 3.8

million cervical smears in England and Wales generating a market for LBC
products estimated to be worth approximately £10 million per annum.

Revenue improved significantly as a consequence of the ongoing roll out program
and the additional contract wins, increasing to £3.5 million compared with £2.5
million in 2005, an increase of 40%. The Cytology division also improved its
operating result for the year to a profit of £0.7 million from £0.2 million in
2005.

The exclusive UK distribution agreement for the supply of the TriPath Imaging,
Inc. SurePath(tm) LBC equipment and consumables was extended until 31 December
2010.

The SurePath(tm) LBC roll out programme is substantially complete with the
instalment of the final systems planned for early 2007. During 2007 the Board
is aiming for further growth from the Cytology division driven largely by the
achievement of full run rate for the supply of consumables on existing
contracts.

The key opportunities for continued significant growth in Cytology are provided
by extending the use of LBC systems for non-gynaecological applications and by
the use of ProExC(tm) which helps diagnose pre-cancer in persistent borderline
smears; but by far the greatest potential opportunity remains the introduction
of automated cervical screening in the UK. Medical Solutions has continued to
co-sponsor the Health Technology Assessment ('HTA') trial being run in
Manchester but, because of the importance of automated screening, we have also
conducted a separate trial of our own in Arrowe Park, Wirral and a further
trial is being conducted with three hospitals in Wales. We expect the results
of the Wales trial to be published during 2007; the HTA trial is not expected
to conclude until late 2008 or early 2009.

Central resources

Central resources include facilities, key support services, personnel and
related costs and the plc Board costs. Other costs shown centrally include
insurances, legal, professional and advisor fees in addition to investor
relations. Central costs have increased marginally to £3.1 million (2005: £3.0
million, as restated), however this includes restructuring costs of £0.2
million in 2006, whereas in 2005 the restructuring costs of £0.35m were
attributable mainly to Diagnostic Pathology. We will continue to monitor and
control central costs tightly.

Geographic performance

During the year, we have refocused on our operations in the UK. The continuing
operations generated revenues of £6.0 million (2005: £5.7 million), virtually
all of which arose from sales within the UK. The reasons for this growth in
revenue from continuing operations are as described above.

Financial review

Financial performance

Turnover from continuing operations has increased by 7% to £6.0 million (2005:
£5.7 million) mainly driven by the growth in the Cytology business.

However, as a result of the ongoing focus on cost control, cost of sales
decreased to £3.6 million from £3.7 million in 2005. This increase in
efficiency is also due in part to the impact of a full year of consolidation of
the Diagnostic pathology operations into Nottingham, action which was taken
during the second half of 2005. Gross margins have increased to 40% in 2006
from 35% in 2005.

Our laboratory staff are highly qualified, experienced and flexible. This
provides good operational gearing as revenue grows and assists in dealing with
fluctuations in workload. Moreover, the laboratory infrastructure is capable of
handling increased volumes and is then scalable with minimal investment.

Selling and distribution costs of £0.6 million were reduced by £0.2 million
compared with 2005 following more effective use of resources and targeting of
activity.

Administrative expenses, excluding restructuring costs and impairment of
goodwill and development costs, were £3.8 million in 2006 compared with £4.4
million in 2005 (as restated), representing a reduction of 12%. This reduction
is primarily due to savings realised in the area of personnel, including share
based compensation costs, and a full year of property cost savings following
the closure of the Harley Street operations during 2005. Administrative
expenses include the charge of £47,000 (2005: £0.3 million) relating to share
option based compensation charges as required by IFRS 2 Share based payment.

Administrative expenses also include a cost of £0.1 million in respect of a
potential over recovery of VAT (2005: £0.1 million) as detailed in note 6. Her
Majesty's Revenue and Customs ('HMRC') contend that the Company's VAT reclaim
should have been subject to a group partial exemption calculation dating back
to 2003. At 31 December 2006 an accrual of £0.45 million has been made being
the amount estimated to satisfy the claim. Of this amount, £0.1 million has
been charged during the year and £0.1 million reflected as a prior year
adjustment in 2005, with the balance relating to prior years. The income
statement for 2005 has been restated to reflect this (note 6).

Restructuring costs in the year were £0.2 million arising from the compensation
due on the resignation of Mr Charles Green from his position of Chief Executive
Officer in August 2006. Restructuring costs incurred during 2005 were £0.3
million and related mainly to the closure of the Harley Street facility and
other redundancy costs.

Total administrative expenses, including restructuring costs and impairment of
goodwill and development costs, were £4.0 million compared with £4.8 million in
2005, representing a reduction of 16%.

Research and development costs of £0.2 million were consistent with 2005 (£0.2
million).

Operating losses from continuing operations for the year ended 31 December
2006, excluding restructuring costs and profit on sale of fixed assets, were £
2.2 million compared with £3.5 million (as restated) in 2005. This reduction in
operating losses is a testament to the attitude of all of the staff in the
Group who have focused on maintaining our exceptionally high quality of service
whilst driving costs out of the business and increasing operational efficiency.

After taking account of tax and interest, the loss from continuing operations
for the 2006 financial year was £2.3 million compared with a loss of £3.6
million (as restated) in 2005.

Financial position

At 31 December 2006, the Group had net assets of £15.4 million compared with £
16.9 million (as restated) at 31 December 2005. Of the net assets, £15.2
million (31 December 2005: £2.3 million) was represented by cash of which £13.2
million, net of transaction expenses, was realised following the disposal of
the Dubai operations.

In conjunction with the disposal of the Dubai operations, the Company also
settled the deferred consideration of £2.5 million that remained on the
original 2003 acquisition of part of the Dubai operations.

Fixed assets have decreased to £2.3 million at 31 December 2006, from £17.0
million at 31 December 2005. The main driver for this is a reduction in
goodwill of £14.2 million as a result of the disposal of the Dubai operations.

Net current assets increased to £13.3 million from £0.2 million at the end of
2005 and this positive change is largely a result of the disposal of the Dubai
operations in conjunction with strong working capital management and the
reduction in short term borrowings during the year.

The Group has historically been funded primarily through equity although debt
has been raised as and when appropriate for the needs of the business. As at 31
December 2006, the Group's balance sheet included bank and finance lease
obligations of approximately £0.4 million, £0.2 million of which is repayable
within one year and £0.2 million after more than one year but less than three
years.

Cash flows and liquidity

A total of £13.2 million, net of transaction costs, was raised through the
disposal of the Dubai operations which was completed during November 2006. Net
cash used in operating activities (continuing operations) during the year ended
31 December 2006 was £0.9 million compared with net cash used of £2.8 million
in 2005.

Capital expenditure of £0.3 million was incurred during the year (2005: £0.3
million) primarily in relation to additional LBC systems.

Interest received was significant during the second half of year, mainly
arising from the Dubai disposal funds placed on deposit, amounting to £0.2
million compared with £0.1 million during 2005.

Prospects

There have been dramatic changes across the Group in 2006. During the year the
Board focused on delivering the phased exit from the Dubai operations and this
was successfully completed during November 2006, whilst dealing with the
turnaround of the UK based operations. There has been a great deal of progress
made in the year and the Group is now in a strong and secure financial
position.

There has also been significant restructuring at Board level, both during 2006
and the early part of 2007. The Group now has a closely knit team of Directors
and senior management, which the Board are confident provides the right blend
of skills, experience and expertise to deliver the strategic objectives and
move the business forward financially and operationally.

The short term objective is to return the Group to profitability and cash
generation. This will be achieved through a combination of organic growth in
our Pathology Services and Cytology divisions and prudent, appropriate
investment in acquisition opportunities.

The organic revenue growth in Pathology Services will be delivered through both
Diagnostic Pathology and Drug Development Services. Within Diagnostic Pathology
we will continue the introduction of new products and services aimed at
increasing the breadth and depth of our offering targeted at the diagnosis and
prognosis of breast cancer and other cancers. Initially these enhanced services
will be marketed to private healthcare providers. We will also seek to
introduce new technologies and promote additional applications for existing
technologies, for example CTC and CEC analysis. Within Drug Development
Services, we will continue to strengthen our relationships with the smaller to
medium sized pharmaceutical and biotechnology companies and invest in the next
generation of image analysis capability.

Organic revenue growth in Cytology will be delivered mainly through the ongoing
roll out programme of the SurePath(tm) LBC system. In addition to this, we are
targeting opportunities to increase the use of the SurePath(tm) LBC system for
non-gynaecological applications.

The Board is also identifying and targeting appropriate investment and
acquisition opportunities. Any such acquisitions are aimed at expanding our
core pathology expertise into complementary areas. This includes enhancing our
reference laboratory portfolio to offer the latest diagnostic techniques
including DNA and RNA based tests. There is strong demand from the
pharmaceutical and biotechnology sectors for companies that offer a portfolio
that includes protein and DNA and RNA based tests, and there are opportunities
to develop clinical applications for healthcare providers.

Over the medium to long term, the Board remains confident that the
opportunities for growth are strong and we expect the markets for our services
and products to grow significantly. Within Pathology Services we are exploring
opportunities to expand our existing offering, which is largely tissue based,
to include blood and other fluids. This will also enable us to respond to the
anticipated increased demand for pathology services from the primary care arena
and national screening initiatives.

There is also growing demand, from healthcare providers and patients, for
therapeutics which differentially target segments of patient populations in
conjunction with companion diagnostics. Through our enhanced reference
laboratory diagnostic portfolio we will be in a prime position to provide both
the diagnostic techniques required to segment target patient populations and
the ability to offer and develop companion diagnostics.

The introduction of automated cervical cancer screening into the UK presents
the greatest opportunity within Cytology. We will continue to support the HTA
trial in England through to its conclusion and will continue to invest in
automated cytology screening with partners both outside of England and within
private healthcare.

Dr Nick Ash

Managing Director

27 March 2007


Consolidated Income Statement
For the year ended 31 December 2006


                                                           Unaudited
                                                                Year Year ended
                                                               ended         31
                                                                  31   December
                                                            December       2005
                                                                2006        (as
                                                                      restated)

Continuing operations                               Note       £'000      £'000

Revenue from continuing operations                             6,025      5,655

Cost of sales                                                (3,640)    (3,655)

Gross profit                                                   2,385      2,000

Selling and distribution expenses                              (609)      (833)

Administrative expenses:

- normal                                                     (3,837)    (4,373)

- restructuring costs                                          (185)      (347)

- impairment of goodwill and development costs                     -       (64)

Administrative expenses                                      (4,022)    (4,784)

Research and development                                       (167)      (207)

Gain on sale of fixed assets                                       -        383

Operating loss from continuing operations                    (2,413)    (3,441)

Interest receivable                                              186        108

Interest payable and similar charges                           (105)      (251)

Loss before tax from continuing operations                   (2,332)    (3,584)

Taxation                                                           -          -

Loss after tax but before profit from discontinued           (2,332)    (3,584)
operations

Discontinued operations

Profit from discontinued operations                   3          946      1,566

Loss for the year                                            (1,386)    (2,018)

Attributable to:

Equity holders of the parent company                         (1,386)    (2,018)

Loss for the year                                            (1,386)    (2,018)

Basic and diluted loss per ordinary share from        4      (1.14)p    (1.82)p
continuing operations

Basic and diluted total loss per ordinary share       4      (0.68)p    (1.03)p

See note 6 for details of the restatement


Consolidated Statement of Changes in Shareholders' Equity
For the year ended 31 December 2006

                        Attributable to equity holders of the Parent
                                          Company

                                         Merger                Profit
                         Share   Share      and Translation  and loss Minority     Total
                       capital premium    other     reserve   reserve interest    equity
                                       reserves                   (as                (as
                                                            restated)          restated)

                         £'000   £'000    £'000       £'000     £'000    £'000     £'000

Balance at 1 January     4,075  32,284    4,608         117  (24,201)       52  
 16,935
2006 (as restated)

Currency translation         -       -        -       (407)         -      (2)     (409)
adjustments

Net income recognised        -       -        -       (407)         -      (2)     (409)
directly to equity

Realisation of merger        -       -  (2,200)           -     2,200        -         -
reserve

Loss for the year            -       -        -           -   (1,386)       29   (1,357)

Total recognised             -       -  (2,200)       (407)       814       27   (1,766)
income/(expense) for
the year

Employee share option
scheme:

- value of services          -       -        -           -        47        -        47
provided

Disposal of overseas         -       -        -         290         -     (27)       263
subsidiary

Minority interest            -       -        -           -         -     (52)      (52)
settled in cash

Balance at 31 December   4,075  32,284    2,408           -  (23,340)        -    15,427
2006


Consolidated Balance Sheet
As at 31 December 2006

                                                            Unaudited
                                                                As at     As at
                                                                   31        31
                                                             December  December
                                                                 2006      2005
                                                                            (as
                                                                      restated)

                                                                £'000     £'000

Non-current assets

Goodwill                                                          583    14,808

Other intangible assets                                           117       181

Property, plant and equipment                                   1,634     2,041

                                                                2,334    17,030

Current assets

Inventories                                                       533       773

Trade and other receivables                                     1,172     3,212

Financial assets

- cash and cash equivalents                                    15,229     2,313

                                                               16,934     6,298

Current liabilities

Trade and other payables                                        3,473     3,356

Financial liabilities

- borrowings                                                      162       301

Provisions                                                          -     2,443

                                                                3,635     6,100

Net current assets                                             13,299       198

Total assets less current liabilities                          15,633    17,228

Non-current liabilities

Financial liabilities

- borrowings                                                      206       293

                                                                  206       293

Net assets                                                     15,427    16,935

Equity

Issued share capital                                            4,075     4,075

Share premium                                                  32,284    32,284

Other reserves                                                  2,408     4,725

Profit and loss reserve                                      (23,340)  (24,201)

Total equity attributable to equity holders of the             15,427    16,883
parent company

Minority interest                                                   -        52

Total equity                                                   15,427    16,935

See note 6 for details of the restatement


Consolidated Cash Flow Statement
For the year ended 31 December 2006

                                                         Unaudited
                                                        Year ended Year ended
                                                                31         31
                                                          December   December
                                                              2006       2005
                                                                          (as
                                                                    restated)

                                                  Note       £'000      £'000

Cash flows from operating activities (continuing
operations)

Cash used in operations                             5        (841)    (2,719)

Interest paid                                                 (45)       (78)

Net cash used in operating activities (continuing            (886)    (2,797)
operations)

Cash flows from investing activities (continuing
operations)

Purchases of property, plant and equipment                   (255)      (255)

Purchases of intangible assets                                (12)       (30)

Proceeds from sale of property, plant and                        2         29
equipment

Proceeds from sale of intangible assets                          -        405

Proceeds from sale of subsidiary                    3       13,963          -

Payment of transaction costs                                 (748)          -

Cash remaining in disposal group                           (1,623)          -

Interest received                                              180        108

Net cash generated from investing activities                11,507        257
(continuing operations)

Cash flows from financing activities (continuing
operations)

Proceeds from the issue of share capital                         -      6,365

Repayment of borrowings                                      (277)    (2,937)

Payment of transaction costs                                     -      (695)

Finance lease principal repayments                            (37)       (48)

Net cash (used in)/generated from financing                  (314)      2,685
activities (continuing operations)

Net increase in cash and cash equivalents                   10,307        145
(continuing operations)

Cash flows from operating activities
(discontinued operations)

Cash generated from operations                               2,744        655

Net cash generated from operating activities                 2,744        655
(discontinued operations)

Cash flows from investing activities
(discontinued operations)

Acquisition of subsidiaries, net of cash acquired                -      (491)

Purchases of property, plant and equipment                    (83)        (7)

Net cash used in investing activities                         (83)      (498)
(discontinued operations)

Cash flows from financing activities
(discontinued operations)

Payment of accrued minority interest                          (52)          -

Net cash used in financing activities                         (52)          -
(discontinued operations)

Net increase in cash and cash equivalents                    2,609        157
(discontinued operations)

Net increase in cash and cash equivalents                   12,916        302

Cash and cash equivalents at beginning of year               2,313     1,990*

Exchange gains on cash and cash equivalents                      -         21

Cash and cash equivalents at end of year                    15,229      2,313

* including a £2 million restricted cash deposit


Notes to the Consolidated Preliminary Financial Statements
For the year ended 31 December 2006

1. Basis of preparation

From 1 January 2005, Medical Solutions plc has been required to prepare
consolidated financial statements, including comparative data, in accordance
with IFRS as adopted by the European Union. Accordingly, financial information
for the year 2006, and comparative information, has been prepared on this
basis.

The financial information contained in this announcement of preliminary
financial statements does not constitute statutory financial statements within
the meaning of section 240 of the Companies Act 1985. Neither the Directors of
the Company, nor our auditors, have as yet approved the statutory financial
statements for the financial year ended 31 December 2006. These financial
statements are therefore unaudited. The financial statements for the year ended
31 December 2005 have been delivered to the Registrar of Companies. The
auditors reported on those accounts and their report was unqualified and did
not contain a statement under section 237(2) or (3) of the Companies Act 1985.
The statutory accounts for the year ended 31 December 2006 will be delivered to
the Registrar of Companies following the Company's Annual General Meeting.


Notes to the Consolidated Preliminary Financial Statements
For the year ended 31 December 2006

2. Segmental reporting

Primary reporting format - operating divisions

At 31 December 2006, the Group's continuing trading operations were organised
into two main operating divisions:

  * Pathology Services

  * Cytology

Pathology Services comprises the business units of Diagnostic Pathology, Drug
Development Services and prior to disposal, Dubai Diagnostic Pathology.

During 2006 there were immaterial sales between business segments (2005:
immaterial), and where these do occur, are at arm's length pricing. Unallocated
costs represent corporate expenses and common operating costs. Segment assets
include plant and equipment, stocks and debtors. Unallocated assets include
property, central debtors and prepayments and operating cash. Segment
liabilities comprise operating liabilities and exclude borrowings. Capital
expenditure comprises additions to plant and equipment and capitalised
development costs.

Year ended 31 December 2006

                                 Pathology Services

                                          Dubai        Drug

                          Diagnostic Diagnostic Development

                           Pathology  Pathology    Services Cytology Unallocated   Group

                               £'000      £'000       £'000    £'000       £'000   £'000

Continuing operations

Revenue                        2,200                    299    3,526           -   6,025

Segment result                   529                  (516)      658     (3,084) (2,413)

Interest expense                                                           (105)   (105)

Interest income                                                              186     186

Loss before tax                                                          (3,003) (2,332)

Taxation                                                                       -       -

Loss for the year from                                                   (3,003) (2,332)
continuing operations

Discontinued operations

Revenue                                   6,004                                    6,004

Segment result                            2,064                                    2,064

Loss on disposal of                     (1,089)                                  (1,089)
operation

Profit before tax                           975                                      975

Taxation                                      -                                        -

Profit for the year from                    975                                      975
discontinued operations

Profit attributable to                     (29)                                     (29)
minority interests

Net loss attributable to                                                         (1,386)
equity shareholders

Segment assets                 1,021                    382    1,655           -   3,058

Unallocated assets

- property, plant and                                                        611     611
equipment

- debtors and prepayments                                                    370     370

- cash and cash                                                           15,229  15,229
equivalents

Total assets                   1,021                    382    1,655      16,210  19,268

Segment liabilities              139                    303      818           -   1,260

Unallocated liabilities

- corporate borrowings                                                       213     213

- creditors and accruals                                                   2,368   2,368

Total liabilities                139                    303      818       2,581   3,841

Other segment items

Capital expenditure               38                     88      185         115     426
(tangibles)

Capital expenditure                -                     12        -           -      12
(intangibles)

Depreciation                      54                     95      296         203     648

Amortisation of                   53                     23        -           -      76
intangible assets

Other non-cash expenses

- share option scheme              -          -           -        -          47      47

Year ended 31 December 2005

                                Pathology Services

                                 UK      Dubai        Drug
                         Diagnostic Diagnostic Development                          Group
                          Pathology  Pathology    Services Cytology Unallocated       (as
                                                                            (as restated)
                                                                      restated)

                              £'000      £'000       £'000    £'000       £'000     £'000

Continuing operations

Revenue                       2,415                    773    2,467           -     5,655

Segment result                  121                  (740)      183     (3,005)   (3,441)

Interest expense                                                          (251)     (251)

Interest income                                                             108       108

Loss before tax                                                         (3,148)   (3,584)

Taxation                                                                      -         -

Loss for the year from                                                  (3,148)   (3,584)
continuing operations

Discontinued operations

Revenue                                  5,017                                      5,017

Segment result                           1,617                                      1,617

Profit before tax                        1,617                                      1,617

Taxation                                     -                                          -

Profit for the year from                 1,617                                      1,617
discontinued operations

Profit attributable to                    (51)                                       (51)
minority interests

Net loss attributable to                                                          (2,018)
equity shareholders

Segment assets                1,392                    719    1,678           -     3,789

Unallocated assets

- property, plant and                                                       737       737
equipment

- debtors and                                                               322       322
prepayments

- cash and cash                                                           2,081     2,081
equivalents

- discontinued                                                           16,399    16,399
operations

Total assets                  1,392                    719    1,678      19,539    23,328

Segment liabilities             240                    420      603           -     1,263

Unallocated liabilities

- corporate borrowings                                                      490       490

- creditors and accruals                                                  1,801     1,801

- discontinued                                                            2,839     2,839
operations

Total liabilities               240                    420      603       5,130     6,393

Other segment items

Capital expenditure               2                      2      169          89       262
(tangibles)

Capital expenditure               3                     27        -           -        30
(intangibles)

Acquisition of                    -                      -        -       3,761     3,761
subsidiaries

Profit/(loss) on sale of        387                      -        -         (4)       383
fixed assets

Depreciation                    115                     80      254         251       700

Amortisation of                  58                      3        -           -        61
intangible assets

Impairment of intangible         64                      -        -           -        64
assets

Other non-cash expenses

- share option scheme             -                      -        -         304       304

Secondary format - geographical segments

The group manages its business segments on a global basis. The continuing
operations are based in the UK which is the home country of the parent company.

The sales analysis in the table below is based on the location of the customer,
which is not materially different from the location where the order is received
and where the assets are located.

                                      Revenue      Segment          Capital
                                                   assets       expenditure

                                     2006  2005    2006  2005   2006   2005

                                    £'000 £'000   £'000 £'000  £'000  £'000

Continuing operations

UK                                  5,981 5,607  19,268 6,929    355    289

Middle East & Asia                     21     -       -     -      -      -

European (non-UK)                      21    40       -     -      -      -

North America                           2     8       -     -      -      -

Total                               6,025 5,655  19,268 6,929    355    289

3. Discontinued operations

                                                                    2006   2005

                                                                   £'000  £'000

Post tax results from discontinued operations                      2,035  1,566

Loss on disposal of subsidiary net tangible assets:

Proceeds

- cash                                                            13,963

- settlement of deferred consideration                             2,488

Total proceeds                                                    16,451

Tangible fixed assets                                                169

Goodwill                                                          13,925

Current assets (including cash)                                    2,482

Current liabilities                                                (477)

Net assets disposed of                                            16,099

Cumulative exchange loss                                           (290)

Transaction related fees and expenses                            (1,074)

Bonus paid to former Director on disposal                           (77)

Loss on disposal of subsidiary                                   (1,089)

Taxation                                                               -

Loss on disposal after tax                                       (1,089)

Total profit from discontinued activities                            946  1,566

On 7 November 2006, the Group completed the disposal of its Dubai based
subsidiaries Medical Solutions FZ LLC, Dubai Medical Laboratory FZ LLC and
Specialised Clinical Laboratory FZ LLC. These companies comprised the Dubai
Diagnostic Pathology business unit. The disposal generated a loss of £1,089,000
after accounting for certain transaction-related legal and professional costs.

Cash flows from discontinued operations                            2006    2005

                                                                  £'000   £'000

Net cash inflow from operating activities                         2,744     655

Net cash in/(out)flow from investing activities                    (83)   (498)

Net cash outflow from financing activities                         (52)       -

Exchange gain on cash and cash equivalents                            -      21

Total                                                             2,609     178

During 2006, discontinued operations contributed £6,004,000 (2005: £5,017,000)
to revenue and a profit of £2,035,000 (2005: £1,566,000) to pre-tax loss, after
expenses of £3,969,000 (2005: £3,451,000). There was no tax charge as a result
of this transaction. The discontinued operations represented the Dubai
Diagnostic Pathology business segment.

4. Loss per share

The calculation of basic and diluted earnings per share for the year was based
on the loss attributable to ordinary shareholders of £1,386,000 (2005: loss of
£2,018,000 as restated) on 203,765,232 ordinary shares (2005: 196,780,731
ordinary shares) being the weighted average number of ordinary shares in issue.

IAS 33 Earnings per share requires presentation of diluted earnings per share
when a company could be called upon to issue shares that would decrease net
profit or increase net loss per share. Net loss per share in a loss-making
company would only be increased by the exercise of share options, which were
out of the money. Assuming that option holders will not exercise out-of-money
options, no adjustment has been made to the diluted loss per share for
out-of-money share options.

5. Reconciliation of operating cash flows (continuing operations)

                                                         Year ended  Year ended
                                                                 31 31 December
                                                           December        2005
                                                               2006         (as
                                                                      restated)

                                                              £'000       £'000

Loss for the year from continuing operations                (2,332)     (3,584)

Taxation                                                          -           -

Depreciation of tangible fixed assets                           600         642

Recognition of grant income                                    (55)        (67)

Amortisation of capitalised development costs                    76          61

Impairment of capitalised development costs                       -          64

Impairment of tangible fixed assets                               -         140

Profit on sale of property, plant and equipment                 (2)       (383)

Interest payable                                                105         251

Interest receivable                                           (186)       (108)

Share based payments - value of employee service                 47         304

Decrease in inventories                                         146         177

Decrease in trade and other receivables                         522         292

Increase/(decrease) in creditors                                238       (508)

Cash used in continuing operating activities                  (841)     (2,719)

Cash used in the year in continuing operating activities was £841,000
(discontinued operating activities generated £2,744,000). Cash used in the year
ended 31 December 2005 in continuing operating activities was £2,719,000
(discontinued operating activities generated £655,000).

6. Prior year adjustment

Potential over recovery of VAT

Following an inspection during the last quarter of 2006, Her Majesty's Revenue
and Customs ('HMRC') challenged a number of the Company's historic VAT returns,
specifically in relation to the quantum of input VAT the Company had reclaimed.
The extent of the enquiry relates to returns made in the three years between
October 2003 and September 2006.

Over the course of this period Medical Solutions plc had retained the VAT group
registration for which it was the representative member, and included the
subsidiaries Kinetic Imaging Limited and Fairfield Imaging Limited. This group
registration excluded the trading of fellow subsidiaries Pathlore Ltd and
Medical Solutions London Limited, each of which were party to separate
registration status.

Given the nature of the trading and other transactions of Medical Solutions plc
and Pathlore Ltd, which itself was partially exempt over the period in
question, and their respective accounting treatment, the basis of HMRC's
challenge is that Medical Solutions plc's input VAT should not be reclaimed in
full but rather should be subject to a group partial exemption calculation.
Under such a method, the amount of the input tax recoverable is linked in
proportion to trading, with regard to whether the trading was standard rated,
or exempt for VAT purposes.

Accordingly, Medical Solutions is in the process of finalising an agreement
with HMRC to satisfy its claim and has therefore made an accrual, incorporating
interest charges, to the amount anticipated to satisfy the claim. The Company
anticipates reaching agreement and settling any liability during the first half
of 2007.

The additional charge to the income statement and the corresponding incremental
accrual at the end of each period, is as summarised below:

Period                                                                  Accrual
                                                                          £'000

Up to 31 December 2004                                                      170

Year ended 31 December 2005                                                 128

Year ended 31 December 2006                                                 148

Total accrual as at 31 December 2006                                        446

In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors, the financial impact on the respective financial statements of the
above accruals is detailed below.

The opening balance sheet of both the Company and the Group as at 1 January
2005 have been restated to reduce the profit and loss reserve brought forward
by £170,000. For the year ended 31 December 2005, the income statement has been
restated and an additional £128,000 has been charged to administrative expenses
and creditors have been increased by the same value. The cumulative effect is
to restate the opening balance sheet of both the Company and the Group as at 1
January 2006 by a reduction in the profit and loss reserve brought forward by £
298,000 with a corresponding increase in creditors.

There is no impact on the cash flow statement, other than the reconciling
adjustment for the respective movement in creditors in each period and the
charge in the income statement falls under the Unallocated category within the
Segmental Analysis (note 2).

The loss per share for 2005 is increased by 0.07p as a consequence of the
additional charges of £128,000 on 196,780,731 shares, being the weighted
average number of shares in issue during 2005.