**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM10-K**

**FORANNUAL AND TRANSITION REPORTS PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**(Mark One)**

**x****                             ****ANNUAL REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended: December 31, 2006.**

**OR**

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

**For the transition periodfrom                  to                  **

**MGTCAPITAL INVESTMENTS,INC.**(formerly Medicsight, Inc.)

(Exact Name of Registrant as Specified in its Charter)

| **Delaware** |                                                              | **0-26886** |                      | **13-4148725** |                                  |
|--------------|-------------------------------------------------------------------|-------------|---------------------------|----------------|---------------------------------------|
|         | (State or Other  Jurisdiction   of Incorporation or Organization) |        | (Commission  File Number) |           | (I.R.S. Employer  Identification No.) |
|              |                                                                   |             |                           |                |                                       |  |  |  |  |  |

 

| **Kensington  Centre, 66 Hammersmith Road, London W14 8UD, United Kingdom** |
|-----------------------------------------------------------------------------|
| (Address of Principal  Executive Offices)                                   |   | (Zip Code) |

 

| **011-44-207-605-7950** |                                                       |
|-------------------------|------------------------------------------------------------|
|                    | (Registrant’s Telephone  Number, Including Area Code) |
|                         |                                                            |  |

 

Securities registered under section 12(b) of theExchange Act: **Not applicable**

Securities registeredunder section 12(g) of the Exchange Act: **Commonstock, par value $0.001 per share**

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.     Yes   o         No  x

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the Act.     Yes   o         No  x

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required tofile), and (2) has been subject to such filing requirements for the past 90days.     Yes   x            No  o

Indicate by check mark if disclosure of delinquentfilers is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.    x

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer.

Large Accelerated Filer o                  Accelerated filer o              Non-accelerated Filer x

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Act).     Yes   o         No  x

As of June 30, 2006, the last day of the registrant’smost recently completed second fiscal quarter, the aggregate market value ofthe registrant’s common stock held by non-affiliates of the registrant was $9,372,361.The common stock is the registrant’s only class of stock.

As of March 28, 2007 the number of shares of commonstock, par value $0.001 per share, of MGT Capital Investments, Inc. issued andoutstanding was 38,900,383.

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K, including “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7, contains forward-looking statements that involve risks anduncertainties, as well as assumptions that, if they never materialize or proveincorrect, could cause the results of MGT Capital Investments, Inc and itsconsolidated subsidiaries (the “Company”) to differ materially from thoseexpressed or implied by such forward-looking statements. All statements otherthan statements of historical fact are statements that could be deemedforward-looking statements, including any projections of revenue, gross margin,expenses, earnings or losses from operations, synergies or other financialitems; any statements of the plans, strategies and objectives of management forfuture operations, including the rate of market development and acceptance ofmedical imaging technology; the execution of restructuring plans; any statementconcerning developments, performance or industry rankings relating to productsor services; any statements regarding future economic conditions orperformance; any statements of expectation or belief; and any statements ofassumptions underlying any of the foregoing. The risks, uncertainties andassumptions referred to above include the performance of contracts bysuppliers, customers and partners; employee management issues; the difficultyof aligning expense levels with revenue changes; and other risks that are describedherein, including but not limited to the specific risks areas discussed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 of this report, and that are otherwise described from time to timein the Company’s Securities and Exchange Commission reports filed after thisreport. The Company assumes no obligation and does not intend to update theseforward-looking statements.

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

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# **PART I**

## **ITEM 1.****                  BUSINESS**

**OurBusiness**

MGT Capital Investments, Inc. (formerly Medicsight,Inc.) and its subsidiaries (“MGT”, “the Company”, “we” or “us”) is aninvestment company with two direct subsidiaries that focus solely on thedynamic and consolidating Healthcare Information Technology sector (HCIT). TheCompany has developed medical imaging software applications and from this, weare developing the new Medicexchange.com business. Our three primary businessobjectives are:

·      To conceive, develop andcommercialize innovative medical imaging applications derived from our coretechnology known as Medicsight CAD through Medicsight PLC (“Medicsight”);

·      To establish a global onlinecommunity for medical imaging professionals known as Medicexchange.com with arich selection of specialist clinical content for registered users combinedwith a product marketplace where medical imaging vendors can sell theirsolutions online through Medicexchange PLC (“Medicexchange”);

·      To continue to invest in the rapidlygrowing HCIT Sector.

***Medicsight***

Since its inception, Medicsight has become one of theworld’s leading developers of enterprise-wide Computer-Aided Detection (CAD)software which analyses Computer Tomography (CT) scans for the early detectionand measurement of lesions.

Medicsight has focused on two of the leading causes ofdeath, colorectal cancer (also known as colon or bowel cancer) and lungcancer.  There is increasing evidencethat early detection leads to an improved life expectancy.

We believe that Medicsight’s Colon CAD and Lung CADproducts (ColonCARTM,ColonCAD, LungCARTM and LungCAD) have the potential to make asignificant positive impact in the early detection and management of disease.

*Colon Cancer*

World Health Organisation data shows that colon cancercauses 655,000 deaths each year. If detected early enough, 90 per cent of casescan be 100 per cent curable. Colon cancer is one of the most prevalent cancersin western countries, and is likely to grow faster in developing countrieswhose populations are consuming more and more of a western style diet.

Many westerncountries operate colon cancer screening programs, and computer tomographycolonography (which is an examination of the large colon using CT x-rays, oftenabbreviated to CTC, and also known as virtual colonoscopy) is ideally suitedfor population screening of asymptomatic adults.

Comparedwith optical colonoscopy (which is an examination of the large colon and thedistal part of the small bowel with a fibre optic camera), CTC screening is:

a.     less invasive;

b.     less time consuming;

c.     less costly;

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d.     and can be at least aseffective

astraditional optical colonoscopy procedures.

CTC screening is becoming increasingly available in aroutine clinical setting, particularly for symptomatic or screening of highrisk patients.

*Lung Cancer*

Lung cancer is the most common and deadliest of allcancers.  Worldwide 1.3 million cases oflung cancer are diagnosed each year, and the disease accounts for 17.1 per centof all global cancer deaths.

The link between smoking and lung cancer has long beenaccepted.  However, clinical research hasshown that if detected early and treated, there is more than an 85 per centchance of a ten year survival rate from lung cancer.

As smoking increases dramatically in Asia, it ispredicted that the number of cases of lung cancer diagnosed each year in Asiawill dramatically increase over the next decade.

*Medicsight’s Product Development Focus*

Developing technology that is used alongside MultiDetector Computer Tomography (MDCT) scanners that enables the early detectionof colon and lung cancers has been the core focus of the Company’s productdevelopment because MDCT Scanning is clinically recognised as a reliable,non-invasive examination for the detection of colon and lung cancer.

They are trusteddiagnostic devices and procedures are quick, non-invasive and safe. However,interpretation and analysis of CT scan data is labour intensive and can besubject to human error.

The most crucial requirements in cancer detection anddiagnosis are:

a.     the ability to detectpotential abnormalities at an early stage; and

b.     the ability to monitor anygrowths accurately over time.

Medicsight’s Colon CAD and Lung CAD products cansubstantially help radiologists in these requirements.

The CAD products can be applied to both asymptomaticscreening populations (i.e. a person with no existing obvious symptoms), andfor diagnostic interpretation of symptomatic patients (i.e. a person withobvious symptoms).

In a screening scenario providing population screening of high riskasymptomatic patients, CAD CT seeks to provide a cost effective solutionby identifying certain diseases sufficiently early in the life of the disease,to be more cost effective in terms of life years saved and the resource costsof disease management.

The application of CAD to aid detection and diagnosisin symptomatic patients supports diagnostic decision-making and treatmentplanning through the identification and measurement tracking of lesions.

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ClinicalValidation

*Colon CAD*

Medicsight’s Colon CAD research has focused on theaccurate identification of colon polyps. A recent clinical research studyshowed the Medicsight ColonCARTM system to have superior detectioncharacteristics when compared with three experienced (human) readers and oursoftware performance has been peer reviewed and commended in a majority of thetop internationally recognized medical journals.

*Lung CAD*

Medicsight’s Lung CADresearch has focused on both the detection of lung lesions (nodules andcancers) and the accuracy of the CAD in automatically measuring lesions.  Accurate measurement is crucial for thecorrect diagnosis and management of lung lesions. Accurate measurement oflesions allows their growth to be tracked over time.  Growth rate helps radiologists both todiagnose the nature of disease and to assess the response of disease totreatment.

*Clinical Sites*

Ever since early development, Medicsight’s Colon andLung CAD products have been in use in leading healthcare institutions withinEurope and the United States, and more recently in Asia, for research and earlyclinical user assessment.

Our Colon CAD products have been used in:

University CollegeHospital, London,St. Mark’s Hospital, London,University of Wisconsin Hospital,University of Rome, Latina, Italy

The National Cancer Centre, Tokyo

Our Lung CAD products have been used in:

The London Chest Hospital,The Royal Brompton Hospital,Cornell Medical Center, New York

Vanderbilt MedicalCenter, Tennessee

The University HealthNetwork, Toronto, Canada

The University of NavarraMedical Center, Pamplona, Spain

The National CancerCentre, Tokyo

 

These results havebeen crucial in developing Medicsight’s CAD products to meet the absoluterequirements of clinical end users, and in driving the use of CAD in routineclinical practice.  To facilitate thiscollaborative programme, during 2006 Medicsight held international MedicalAdvisory Board meetings with key luminaries and practitioners in the fields ofCT Colonography and lung disease. Medical Advisory Board meetings took place inEurope, North America and Japan, drawing together international expertise andunderstanding of the current and future clinical requirements and vision forCAD and medical image analysis software.

The use ofMedicsight’s products in clinical practice has seen the recent introduction ofMedicsight ColonCAD into the SIGGAR1 Trial in the UK.  SIGGAR1 is the largest multi-centre trial ofits kind in the UK to date and compares CT Colonography, optical colonoscopyand barium enema via a randomised controlled clinical trial.  Medicsight ColonCAD has also been introducedinto the STIC Trial in France, a similar programme investigating the medicaland economic health benefits of CT colonography.  In mid 2007, the first CTC colorectal cancerscreening programme in Japan will commence and a key feature of this programmewill be the use of Medicsight’s ColonCAD.

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Having gained regulatory clearance, Medicsight’sproducts have become available for use in routine clinical practice.

The Company continues to work with internationallyrespected medical professionals who are experts in the fields of the colon andthe lung.

These relationships include:

Colon CAD Products

Prof. Steve Halligan andDr. Stuart Taylor at University College Hospital, London

Dr. David Burling at St.Mark’s Hospital, London

Dr. Ning Wu at theChinese Cancer Institute, Beijing

Dr. Gen Iinuma at theNational Cancer Centre, Tokyo

Dr. Perry Pickhardt at the University of WisconsinMedical Center, Madison, Wisconsin

Lung CAD Products

Dr. Steve Ellis at theLondon Chest Hospital

Dr. Simon Padley at theRoyal Brompton Hospital

Dr. Heidi Roberts at theUniversity Health Network, Toronto, Canada

Dr. Ryutaro Kakinuma at the National Cancer Centre,Tokyo

In a growingcommitment to clinician education programmes, Medicsight has also supported theEuropean Society of Gastrointestinal and Abdominal Radiology (ESGAR) throughactive participation in ESGAR’s series of international CT Colonographyworkshops.  Workshops are targeted andboth novices and those currently undertaking CTC practice and give attendeesthe opportunity to experience Medicsight ColonCAD with hands-on training usingmultiple Medicsight partner software systems. Further educational involvement has come through Medicsight’s directsupport of two Harvard Medical School, Department of Continuing MedicalEducation Virtual Colonoscopy courses in the United States.  Course delegates receive dedicated tutorialslead by CTC luminaries Drs. Matt Barish and Michael Zalis of Harvard MedicalSchool, and training on Viatronix software systems incorporating MedicsightColonCAD.

RegulatoryEnvironment

In order to release new products into a specificmarket, the Company must gain local regulatory approvals for its CAD products.

In the USA, the Food and Drug Administration (FDA) isthe regulatory authority. In Europe, regulatory approval is gained throughConformité Europeène (CE) marking. Other markets such as China (SFDA – StateFood & Drug Administration); Japan (MHLW – Ministry of Health, Labour andWelfare); Australia (TGA – Therapeutic Goods Administration); South Korea (KFDA– Korea Food & Drugs Administration); and Canada (CMDCAS – Canadian MedicalDevice Conformity Assessment System) have their own regulatory bodies but theseoften require companies outside of these markets to show evidence of anexisting CE or FDA approval for a product before gaining approval in the localmarket.

The Medicsight team has a significant amount ofexperience in preparing, submitting and gaining regulatory approvals.

*European (CE) Approval*

The Company’s ColonCAD and LungCAD products areapproved.

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*USA (FDA) Clearance*

The Company’s CAR products (which are earlier releasesof the ColonCAD and LungCAD products) are FDA cleared.

The Company is in the process of completing the FDA’sclearance procedures to have the ColonCAD and LungCAD products cleared for theUSA market.

*Canada (CMDCAS) Approval*

The Company has an ISO13485 certification from aCMDCAS accredited registrar which enables the Company to apply for MedicalDevice Licenses in Canada.

The Company received Medical Device Licenses forColonCAD and LungCAD in January 2007.

*Asia (China, Japan, Australia and Korea)*

The Company expects applications to be submitted toreceive approvals for both ColonCAD and LungCAD in each of these markets during2007.

Medicsight’sGrowth Strategy

The strategic objective over the next 1-3 years is togrow sales, make significant profits and to increase shareholder value.  During this period, strategic merger andacquisition opportunities will be actively sought.

This is intended to be achieved by:

a.             Signing newdistribution agreements for ColonCAD and LungCAD.

b.             Aggressively drivingthe use and distribution of the existing ColonCAD and LungCAD products (officeshave been established in both Japan and China specifically for this purpose).

c.             Generating additionalrevenue opportunities through the online per click model.

d.             Continuing to investin improved clinical awareness and validation.

e.             Working withgovernments, international health organisations and medical institutions topromote the benefits of early disease detection and to publicise the potentialfor population screening programmes to reduce premature deaths from diseasesthat can be curable if detected early in the disease process.

f.              Actively promote CADthrough support of accredited training programs.

g.             To introduceadditional products into the Company’s portfolio by a combination of internalresearch and development and acquisitions.

The Company has signed a number of non-exclusive agreementsfor the distribution of its products with the following partners:

a.     TeraRecon Inc – which hassuccessfully integrated ColonCADTM and LungCADTM into its Aquarius family of medical imagingapplications;

b.     Viatronix Inc – ColonCADTM and LungCADTM havebeen successfully integrated into their V3DTM Colon software;

c.     Vital Images Inc – ColonCADTM has been successfully integrated into its CTcolonography application which is part of the Vitrea software package;

d.     3mensio Medical Imaging BV –which has integrated LungCADTM in the 3viseon range of products.

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Medicsight is also in discussion with a number ofother major imaging companies and expects to finalise distribution agreementsin Japan and Europe over the coming months.

Competition**

The Company’s competitors can be divided into twocategories:

a.     MDCTscanner manufacturers such as GE, Hitachi, Philips, Siemens and Toshiba;

b.     IndependentCAD software providers.

The Company is notaware of any MDCT manufacturers who have a colon CAD product although Siemenshas a CAD-like Colon product.  OnlySiemens has a commercially available lung CAD product although GE has aCAD-like lung product.

In the CAD vendor market, there are a number of small,independent software providers, which include:

a.             iMED (Italy) – havedeveloped a Colon CAD product that is CE certified but not FDA approved;

b.             Median Technology(France) – have developed a Colon CAD product and a Lung CAD (CAD-lung) – bothhave CE approval but not FDA approval;

c.             QI (QuantitativeImaging) (USA) – have developed a Colon CAD product that is integrated onlywith the Viatronix platform.  This CADapplication is not FDA approved;

d.             R2 (USA) – havedeveloped a Lung CAD product, that is FDA approved.

An extensive external analysis of peer reviewedclinical research on each of the above Colon CAD applications has proven thatMedicsight’s Colon CAD products demonstrated increased positive impact onReader Performance in the detection of Colon polyps, when compared with theavailable published data from the commercially available Colon CAD applicationsof the above listed companies.

At this time, the Company has not commissioned asimilar competitive analysis of the Lung CAD applications.

***Medicexchange***

Medicexchange provides medical imaging professionalswith a global web portal containing an online sales channel for diagnostic,treatment and surgery planning solutions. This combined with a variety ofrelevant clinical papers, training materials and content gives these professionalsaccess to information and products that they otherwise would have difficultyaccessing.

Medical imaging vendors are provided with a globalonline channel through which they can access a large community of medicalimaging professionals in order to market and sell their product solutions.

Medicexchange was launched at the Radiological Societyof North America (RSNA) conference in Chicago in November 2006.

The Medicexchange portal covers the following imagingspecialty areas: Breast, Cardiology, Abdominal-Pelvic, Thoracic andMusculoskeletal. Other areas such as Neurology will be added later.

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Medicexchange has offices in the UK, USA and China.

**Benefits for Medical ImagingVendors**

Medicexchange provides vendors the opportunity to sellMedical Imaging products directly to radiologists in an efficient and low-costmanner (including web-based downloads).

Medicexchange offers traditional pricing plans inaddition to flexible “per use” pricing. This decreases the financial purchasingrisk and setup times for radiologists by giving them an attractive pricingmodel via an online channel.

Marketing and promotional activities are also providedfor vendors such as email campaigns, online marketing, print advertising ande-newsletters.

Medical imaging vendors can list their products onMedicexchange without any upfront fees and pay on a per-sale commission basis.

With a local Chinese infrastructure, access to a largeChinese dealer network and a dedicated Chinese language version of theMedicexchange website, Medicexchange is also able to offer vendors a route forentering and selling within China.

Medicexchange is also able to offer assistance withtaking vendors through regulatory clearance such as CE (Europe), FDA (USA) andSFDA (China).

**Benefits for Radiologists**

Medicexchange adds value for radiologists bydelivering a centralized meeting place for clinical information, products andcollaboration.

Medicexchange intends to offer the widest selection ofmedical imaging products online, all in one place. These products can beevaluated and purchased directly from the web site.

Medicexchange offers a number of ways for radiologiststo purchase products including credit/debit card, pro form invoicing andpayments on account. For some products, Medicexchange also plans to offerflexible “per use” pricing to allow the radiologist to pay based on aper-patient or per-study basis. Medicexchange also offers many products on atrial basis to allow radiologists to evaluate products before they purchase.

Radiologists are also offered a free first linecustomer support service when they register with Medicexchange.

**Market Opportunity**

Radiologists expect the frequency of computedtomography (“CT”) procedures to grow by over 35% over the next five years(source: Frost & Sullivan research). Traditional original equipmentmanufacturers (“OEM”) typically control the access to these applications andcharge high per unit price points (typically $50,000 to $200,000). These highprice points create long sales cycles. The “per use” pricing model removes thisobstacle to purchase. Online product purchasing and downloads create aflexible, on demand usage model.

Radiologists state a preference for the concept of a “peruse” pricing model and web-based downloadable tools. Over 80% would consider adedicated internet portal for their area of specialty a useful service (source:Frost & Sullivan research).

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**What differentiates the company?**

By creating strong relationships with our 3rd partypartner vendors Medicexchange intends to develop the clinical information andcontacts, provide products and product demonstrations, training and supportthat will result in Medicexchange achieving its aim to be the leading globalportal for clinical vendors and professionals.

Medicexchange aims to provide essential information,training and collaborative tools to attract customers, enable them to use thedemonstration applications, purchase the applications and retain them as repeatusers.

The Medicexchange portal is a global distributionportal (initially focused in the U.S., Europe and Asia).

With offices in Europe, USA and China, Medicexchangeis able to a global service whilst also providing local expertise withinspecific markets as required.

**Recent achievements**

-       Exclusive sponsor of theAuntMinnie software center

-       Exclusive agreement withChinese Journal of Radiology

-       Week on week growth sincelaunch with many thousands of unique visitors to Medicexchange.com each week

-       Many agreements signed withMedical Imaging vendors to list their products on Medicexchange.com

-       Agreements signed withChinese dealer network giving access to 80% of Tier 1 and Tier 2 hospitals inChinese urban centers

-       Over 50 providers nowsupplying the Medicexchange site with updated news and articles

**Employees**

As of December 31, 2006, the Company and itssubsidiaries had 53 employees, all of whom are full-time employees.  Our employees are not part of a union.  We believe that we have an excellentrelationship with our employees.

**Patents and Trademarks**

Protection of our proprietary technology and ourrights over that technology, from copy or unchallenged and improper use, isessential to our future success. Any challenges to, or disputes concerning, ourcore technology may result in great expense to us, delays in bringing productsto market and disruption of our focus on our core activities. They may alsoresult in loss of rights over our technology or the right to operate inparticular markets due to adverse legal decisions against us.

The Company has filed patent applications in the UnitedKingdom, the United States, the European Patent Office, Japan, South Korea,Australia, Canada, and under the International Patent Cooperation Treaty (whichcurrently has 128 member countries) covering our core technologies and theirapplications. We have recently filed new patent applications coveringtechnology of both Medicsight CAD and Medicexchange and intend to continuefiling new applications in the future.  Two patents have been granted inthe US covering aspects of Medicsight CAD technology.  Although prior art searches have been carriedout, we cannot provide assurance that any or all of the pending patents will begranted or that they will not be challenged, or that rights granted to us willactually provide us with advantage over our competitors. The Company activelyreviews third party patents and is not currently aware of any that our productswill infringe.

We have filed applications to register “Medicsight”TM, “Medicsight Colon Screen”TM, “Medicsight Heart Screen”TM,  “Medicsight Lung Screen”TM, “Medicsight Colon CAR” TM, “Medicsight Lung CAR” TM, “Medicsight Computer Assisted Reader” TM, “Medicsight See More, SaveMore” TM, “Lung CAR”TM,“Medicsight ImageView”, “MedicRead”, and “MedicView” as trademarks in theUnited Kingdom, the European Community and the United 

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States, and in a number of other countries.  These trademarks are important to thecorporate identity in connection with Medicsight CAD.

Failure to register appropriate patents, copyrights ortrademarks in any jurisdiction may impede our ability to create brand awarenessin our products, result in expenses in pursuing our rights with respect to ourintellectual property, or result in lost revenues due to intellectual propertydisputes. Where we may be required to purchase licenses from sellers with priorrights in any country, we cannot assure you that we will be able to do so at acommercially acceptable cost.

**Research and Development**

Under United States generally accepted accountingprinciples, costs incurred in connection with the development of softwareproducts that are intended for sale are accounted for in accordance withStatement of Financial Accounting Standards No. 86, “Accounting for the Costsof Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurredprior to technological feasibility being established for the product areexpensed as incurred. Technological feasibility is established upon completionof a detailed program design or, in its absence, completion of a working model.Thereafter, all software production costs can be capitalized and subsequentlyreported at the lower of unamortized cost or net realizable value. Capitalizedcosts are amortized based on current and future revenue for each product withan annual minimum equal to the straight-line amortization over the remainingestimated economic life of the product. Amortization commences when the productis available for general release to customers.

The Company concluded that capitalizing suchexpenditures on completion of a working model was inappropriate because theCompany did not incur any material software production costs and therefore hasdecided to expense all research and development costs. The Company’s researchand development costs are comprised of staff and consultancy costs expensed onthe Medicsight products.

During 2006, 2005 and 2004 the Company expended$2,870,000, $2,363,000 and $2,972,000 respectively for research and developmentexpenses for its products. We cannot predict the amount of additionalexpenditures that will be necessary prior to achieving commercialization of ourproducts.

**General**

MGT was originally incorporated as a Utah corporationin 1977 and was re-incorporated in Delaware in 2000. At December 31, 2006 theCompany’s authorized share capital was 40,000,000 shares of common stock, parvalue of $0.001.

In January 2007 the Company increased its authorizedshare capital from 40,000,000 shares to 75,000,000 shares of common stock, parvalue $0.001 and changed its name from Medicsight, Inc. to MGT CapitalInvestments, Inc. At March 28, 2007, 38,900,383 shares of common stock had beenissued.

Our principal executive office is located atKensington Centre, 66 Hammersmith Road, London W14 8UD, United Kingdom,telephone 011-44-207-605-7950, facsimile 011-44-207-605-7951.

Our web address is www.mgtci.com. Information on our websiteis not deemed to be a part of this Annual Report.

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**ITEM 1A.****           RISK FACTORS**

Discussion of our business and operations included inthis annual report on Form 10-K should be read together with the risk factorsset forth below. They describe various risks and uncertainties to which we areor may become subject. These risks and uncertainties, together with otherfactors described elsewhere in this report, have the potential to affect ourbusiness, financial condition, results of operations, cash flows, strategies orprospects in a material and adverse manner.  New risks may emerge at anytime, and we cannot predict those risks or estimate the extent to which theymay affect financial performance. Each of the risks described below couldadversely impact the value of our securities.  These statements, like allstatements in this report, speak only as of the date of this report (unlessanother date is indicated), and we undertake no obligation to update or revisethe statements in light of future developments.

We cannot assure you that the Company will besuccessful in commercializing the Medicsight CAD products or the Medicexchangeportal, or if the products or the portal are commercialized, that they will beprofitable to the Company. We face obstacles in commercializing the MedicsightCAD products and the Medicexchange portal and in generating operating revenuesas detailed below.

The Company does not believe that there is currentlyany comparable system that is competitive with the Medicsight CAD products. Thereare computer-aided diagnostic systems that operate in the field, but, inour view, such other systems are more dependent than ours on human resources tocarry out the analysis.  We are not awareof other systems in the field that have the automated capability of ourproducts.

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

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

*Technical Risks.*

The Medicsight CAD system may not deliver the levelsof accuracy and reliability needed, or the development of such accuracy andreliability may be delayed.

*Market Risks*

The market for the Medicsight CAD products andMedicexchange may be slower to develop or smaller than estimated or it may bemore difficult to build the market than anticipated. The medical community mayresist the Medicsight CAD and Medicexchange products or be slower to acceptthem than we expect. Revenues from Medicsight CAD and Medicexchange may bedelayed or costs may be higher than expected which may result in the Companyrequiring additional funding.

*Regulatory Risks.*

The Medicsight CAD system is subject to regulatoryrequirements in the United States Europe, Japan, China and our other targetedmarkets. Necessary regulatory approvals may not be obtained or may bedelayed.  We may incur substantialadditional cost in obtaining regulatory approvals for our products in ourtargeted markets.

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*Competitive Risks*

There are a number of groups and organizations, suchas software companies in the medical imaging field, MDCT scanner manufacturers,screening companies and other healthcare providers that may develop acompetitive offering to the Medicsight CAD products and Medicexchange.  In addition these competitors may havesignificantly greater resources than the Company. We cannot make any assurancethat they will not attempt to develop such offerings, that they will not besuccessful in developing such offerings or that any offerings they do developwill not have a competitive edge over Medicsight CAD products andMedicexchange.

*Financial Risk*

The Company has incurred significant operating lossessince inception and has generated no revenues from continuing operations. As aresult, the Company has generated negative cash flows from operations and hasan accumulated deficit at December 31, 2006. The Company is operating in adeveloping industry based on new technology and its primary source of funds todate has been through the issuance of securities and borrowed funds. While theCompany is optimistic and believes appropriate actions are being taken, therecan be no assurance that management’s efforts will be successful or that theproducts the Company develops and markets will be accepted by consumers.

*CorporateStructure.*

The Company’s corporatestructure may make it more difficult or costly to take certain actions. TheCompany conducts its business through: (a) Medicsight PLC, a U.K. publiccompany which is 77% owned by the Company, and through Medicsight PLC’ssubsidiaries in the United Kingdom, the United States, Japan and Gibraltar and;(b) through the Medicexchange subsidiaries, which the Company holdings rangebetween 75% and 90%. Although the Company and Medicsight PLC andMedicexchange PLC share some directors and management, they are required tocomply with corporate governance and other laws and rules applicableto public companies in the United Kingdom and the United States.  Shouldthe Company propose to take any action, such as a transfer or allocation ofassets or liabilities between the Company its subsidiaries, the Company wouldhave to take into consideration the potentially conflicting interests of theCompany’s stockholders and the minority stockholders.  This may deter theCompany from taking such actions that might otherwise be in the best interestof the Company or cause the Company to incur additional costs in taking suchactions. The subsidiary companies would not be able to pay dividends or makeother distributions of profits or assets to the Company without making prorata payments or distributions to the respective minoritystockholders.  Although neither the subsidiary companies nor theCompany has plans to pay dividends or make distributions to its shareholders,the Company’s corporate structure may deter its subsidiaries from doing so inthe future.

*The protection of our intellectualproperty may be uncertain, and we may face possible claims of others.*

Although we have received patents and have filedpatent applications with respect to certain aspects of our technology, wegenerally do not rely on patent protection with respect to our products andtechnologies. Instead, we rely primarily on a combination of trade secret andcopyright law, employee and third-party nondisclosure agreements and otherprotective measures to protect intellectual property rights pertaining to ourproducts and technologies. Such measures may not provide meaningful protectionof our trade secrets, know-how or other intellectual property in the event ofany unauthorized use, misappropriation or disclosure. Others may independentlydevelop similar technologies or duplicate our technologies. In addition, to theextent that we apply for any patents, such applications may not result inissued patents or, if issued, such patents may not be valid or of value. Thirdparties could, in the future, assert infringement or misappropriation claimsagainst us with respect to our current or future products and technologies, orwe may need to assert claims of infringement against third parties. Anyinfringement or misappropriation claim by us or against us could placesignificant strain on our financial resources, divert management’s attentionfrom our business and harm our reputation. The costs of prosecuting or defendingan intellectual property claim could be substantial and could adversely affectour business, even if we are ultimately successful in prosecuting or defendingany such claims. If our products or technologies are found to infringe therights of a third party, we could be required to pay significant damages orlicense fees or cease production, any of which could have a material adverseeffect on our business.

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*If we fail to attract and retainqualified personnel, our business would be harmed.*

We expect to rapidly expand our operations and growour sales, research and development and administrative operations. Thisexpansion is expected to place a significant strain on our management and willrequire hiring a significant number of qualified personnel. Accordingly,recruiting and retaining such personnel in the future will be critical to oursuccess. There is intense competition from other companies, research andacademic institutions, government entities and other organizations forqualified personnel in the areas of our activities. If we fail to identify,attract, retain and motivate these highly skilled personnel, we may be unableto continue our marketing and development activities.

*If we do not effectively managechanges in our business, these changes could place a significant strain on ourmanagement and operations and, as a result, our business might not succeed.*

Our ability to grow successfully requires an effectiveplanning and management process. The expansion and growth of our business couldplace a significant strain on our management systems, infrastructure and otherresources. To manage our growth successfully, we must continue to improve andexpand our systems and infrastructure in a timely and efficient manner. Ourcontrols, systems, procedures and resources may not be adequate to support achanging and growing company. If our management fails to respond effectively tochanges and growth in our business, including acquisitions, such failure couldhave a material adverse effect on our business.

*Foreign Exchange Risks*

As the Company’s main operating currency is UKsterling (£) and its financial statements are reported in US Dollars, theCompany’s assets and liabilities and its results of operations are affected bymovements in the $:£ exchange rate.

*Other Risks*

The Company’s ability to deliver its software could behindered by risks such as the loss of key personnel or the patents andtrademarks being successfully challenged or credit facilities being reduced orterminated by lenders.

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**ITEM 1B.****               UNRESOLVED STAFFCOMMENTS**

None.

## **ITEM 2.****                  PROPERTIES**

Our principal executive office is located atKensington Centre, 66 Hammersmith Road, London W14 8UD, United Kingdom where weoccupy 8,787 square feet under a lease that expires on August 25, 2016.  We vacated our previous office ( 46 BerkeleySquare, London W1J 5AT, United Kingdom) in August 2006.  We have additional satellite offices in NewYork, Japan and China.

## **ITEM 3.****                  LEGALPROCEEDINGS**

The Company is not engaged in any legal proceedings atthis time.

## **ITEM 4.****                  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

In December 2006, the Company submitted two matters tothe vote of security holders:

a.     toincrease the authorized share capital from 40,000,000 shares; and

b.     tochange the name of the Company from Medicsight, Inc.

The current authorized share capital is 75,000,000shares and the Company’s new name is MGT Capital Investments, Inc.

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# **PART II**

## **ITEM 5.****                  MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

**Market Information**

The shares of our common stock have been quoted on theAmerican Stock Exchange (www.amex.com) since December 19, 2005. The commonstock is trading under the symbol “MGT”.

Prior to December 19, 2005 the Company’s common stockwas quoted on the OTC-Bulletin Board, maintained by the National Association ofSecurities Dealers, Inc under the symbol “MSHT”

The following table sets forth the range of high andlow bid information for the Company’s common stock for each quarter within thelast two fiscal years:
|                                               | ** ** | **Bid Quotations ($)** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| **Period**                                    | ** ** | **High**                         | ** ** | **Low** | ** ** |
|                                          |       |                             |       |   |   |
| **As  quoted on the American Stock Exchange** |       |                             |       |   |   |
| 2007                                          |       |                             |       |   |   |
| January 1 to  March 28                        |       | 4.14                             |       | 3.30 |   |
|                                          |       |                             |       |   |   |
| 2006                                          |       |                             |       |   |   |
| Fourth Quarter                                |       | 4.60                             |       | 2.80 |   |
| Third Quarter                                 |       | 4.65                             |       | 3.90 |   |
| Second Quarter                                |       | 5.25                             |       | 4.42 |   |
| First Quarter                                 |       | 5.50                             |       | 4.60 |   |
|                                          |       |                             |       |   |   |
| 2005                                          |       |                             |       |   |   |
| December 19 to  December 31                   |       | 5.00                             |       | 4.95 |   |
|                                          |       |                             |       |   |   |
| **As  quoted on the OTC-Bulletin Board**      |       |                             |       |   |   |
| 2005                                          |       |                             |       |   |   |
| October 1 to  December 18                     |       | 5.25                             |       | 4.80 |   |
| Third Quarter                                 |       | 5.10                             |       | 4.60 |   |
| Second Quarter                                |       | 5.50                             |       | 4.44 |   |
| First Quarter                                 |       | 5.15                             |       | 4.35 |   |

 

These over-the-counter market quotations reflectinter-dealer prices, without retail mark-up, markdown or commission and may notnecessarily represent actual transactions.

As of March 28, 2007, therewere 872 holders of record of the Company’s common stock.

**Dividends**

The Company has never declared or paid cash dividendson the common stock. The Company currently intends to retain earnings, if any,to support its growth strategy and does not anticipate paying cash dividends inthe 

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foreseeable future. Payment of future dividends, ifany, will be at the discretion of the Company’s Board of Directors after takinginto account various factors, including the Company’s financial condition,operating results, current and anticipated cash needs and plans for expansion.

**Recent Sales ofUnregistered Securities**

In Fiscal 2006, the Company issued 2,507,500restricted shares of our Common Stock at $4.00 per share to a number ofinstitutional investors and private individuals as a private placement raising$10,030,000 (gross before commissions).

The shares of Common Stock were issued withoutregistration in reliance upon the exemption provided by Section 4(2) of theSecurities Act of 1933.

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## **ITEM 6.****                  SELECTEDFINANCIAL DATA.**

All figures in thousands, except per share data:
|                                                   | ** ** | **2006 (1)** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Operating revenues –  continuing operations  |       | $                 | —     |     | $          | —   |       | $        | —     |     | $          | — |   | $ | — |   |
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Loss from continuing  operations                  |       | (14,935           | )          | (10,738  | )          | (12,885  | )          | (8,941   | )          | (98,844  | )          |
| Loss from discontinued  operations                |       | —            |       | (1,478   | )          | (2,145   | )          | (1,155   | )          | (69      | )          |
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Net loss                                          |       | (14,935           | )          | (12,216  | )          | (15,030  | )          | (10,096  | )          | (98,913  | )          |
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Loss per share from  continuing operations        |       | (0.39             | )          | (0.31    | )          | (0.42    | )          | (0.40    | )          | (5.12    | )          |
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Dividends declared per  common share ($)          |       | —            |       | —   |       | —   |       | —   |       | —   |       |
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Total Assets                                      |       | 38,469            |       | 24,486   |       | 21,041   |       | 17,649   |       | 15,430   |       |
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Long term obligations                             |       | —            |       | 6        |       | 223      |       | 306      |       | 42       |       |
|                                              |       |              |       |     |       |     |       |     |       |     |       |
| Cash, cash equivalents  and marketable securities |       | 24,735            |       | 11,249   |       | 5,276    |       | 845      |       | 1,778    |       |
| Current assets                                    |       | 25,306            |       | 11,867   |       | 6,515    |       | 2,144    |       | 2,284    |       |
| Current liabilities                               |       | (3,378            | )          | (2,746   | )          | (2,353   | )          | (6,540   | )          | (8,977   | )          |
| Working capital surplus (deficit)                 |       | $                 | 21,928     |     | $          | 9,121    |       | $        | 4,162      |     | $          | (4,396 | ) | $ | (6,693 | ) |

 

 

(1)   Includes equity-based compensation of$440,000 for fiscal 2006 and $nil for all other years.

## **ITEM 7.****                            MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

**Criticalaccounting policies and estimates**

Our discussion andanalysis of financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thenotes to the consolidated financial statements contained in this Annual Reportdescribe our significant accounting policies used in the preparation of theconsolidated financial statements. The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting periods. Actual results could differ fromthose estimates. We continually evaluate our critical accounting policies andestimates.

We believe thecritical accounting policies listed below reflect significant judgments,estimates and assumptions used in the preparation of our consolidated financialstatements.

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*Goodwill*

We account for goodwill in accordance with theprovisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite livesare reviewed for impairment annually or more frequently if events or changes incircumstances indicate that the asset might be impaired. The first step of thegoodwill impairment test, used to identify potential impairment, compares thefair value of a reporting unit with its carrying amount, including goodwill. Weoperate as one reporting unit and therefore compare the book value to themarket value (market capitalization plus a control premium). If the marketvalue exceeds the book value, goodwill is considered not impaired, and thus thesecond step of the impairment test is not necessary. If our book value exceedsthe market value, the second step of the goodwill impairment test is performedto measure the amount of impairment loss, if any. The second step of thegoodwill impairment test, used to measure the amount of impairment loss,compares the implied fair value of the goodwill with the book value of thegoodwill. If the carrying value of the goodwill exceeds the implied fair valueof the goodwill, an impairment loss would be recognized in an amount equal tothe excess. Any loss recognized cannot exceed the carrying amount of goodwill.After a goodwill impairment loss is recognized, the adjusted carrying amount ofgoodwill is its new accounting basis. Subsequent reversal of a previouslyrecognized goodwill impairment loss is prohibited once the measurement of thatloss is completed. We completed the annual goodwill impairment assessment as ofDecember 31, 2006, in which no impairment was identified. Goodwill was $11,200,000as of December 31, 2006.

*Equity-based compensation*

Effective January 1, 2006, we adopted the fairvalue recognition provisions of SFAS No. 123(R), using the modified prospectivetransition method, and therefore have not restated prior periods’ results.Under this method, we recognize compensation expense for all equity-basedpayments granted on or after January 1, 2006 and prior to but not yetvested as of January 1, 2006 in accordance with SFAS No. 123(R). Under thefair value recognition provisions of SFAS No. 123(R), we recognize equity-basedcompensation net of an estimated forfeiture rate and recognize compensationcost only for those shares expected to vest over the requisite service periodof the award. Prior to SFAS No.123(R) adoption, we accounted for equity-basedpayments under Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees”, and accordingly did not recognize equity-basedcompensation related to these options, as the exercise price equaled the fairmarket value of the common stock on the date of grant.

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option valuation model. TheBlack-Scholes option valuation model requires the development of assumptionsthat are input into the model. These assumptions are the expected stockvolatility, the risk-free interest rate, the option’s expected life and thedividend yield on the underlying stock. Expected volatility is calculated basedon the historical volatility of our common stock over the expected option lifeand other appropriate factors. Risk-free interest rates are calculated based oncontinuously compounded risk-free rates for the appropriate term. The dividendyield is assumed to be zero as we have never paid or declared any cashdividends on our common stock and do not intend to pay dividends on our commonstock in the foreseeable future. The expected forfeiture rate is estimatedbased on historical experience.

Determining the appropriate fair value model andcalculating the fair value of equity-based payment awards require the input ofthe subjective assumptions described above. The assumptions used in calculatingthe fair value of equity-based payment awards represent management’s bestestimates, which involve inherent uncertainties and the application ofmanagement judgment. As a result, if factors change and we use differentassumptions, our equity-based compensation expense could be materiallydifferent in the future. In addition, we are required to estimate the expectedforfeiture rate and recognize expense only for those shares expected to vest.If our actual forfeiture rate is materially different from our estimate, theequity-based compensation expense could be significantly different from what wehave recorded in the current period.

*Revenue Recognition*

We expect to earn our revenue primarily from softwarelicenses and related services. Our revenue will be recognized in accordancewith Statement of Position 97-2 (SOP 97-2), as amended by Statementof Position 98-9. 

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The Company’s revenues were derived from itsdiscontinued scanning services operated by Lifesyne. Scan revenue is recognizedwhen the service is delivered.

The recognition of revenues from software licenses andrelated services will require difficult and complex judgments. The terms of thelicense contract, such as whether the contract is long-term (over 12 months) orshort-term, cancelable or non-cancelable and the basis on which the licensee ischarged , 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 arereceived prior to any service being delivered, the recognition of the fees isdeferred until the related service has been delivered successfully. Recognitionof fees that relate to any “milestone” is deferred until the “milestone” hasbeen achieved.

The Company believes that the accounting estimatesrelated to the recognition of revenue and establishment of reserves foruncollectable amounts in the results of operations is a “critical accountingestimate” because: (1) it requires management to make assumptions aboutfuture collections, and (2) the impact of changes in actual performanceversus these estimates on the accounts receivable balance reported on ourconsolidated balance sheets and the results reported in our consolidatedstatements of operations could be material. Further the Company has no historyof uncollectable amounts and therefore must initially look to the estimates forthe industry or particular companies that the management feels operate in asimilar environment in addition to any current market indicators about generaleconomic conditions that might impact the collectibility of accounts.

*Research and Development*

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

The Company concluded that capitalizing suchexpenditures on completion of a working model was inappropriate because theCompany did not incur any material software production costs and therefore hasdecided to expense all research and development costs. The Company’s researchand development costs are comprised of staff and consultancy costs expensed onthe Medicsight products.

*Impairment of Long-lived Assets and Long-livedAssets To Be Disposed of*

The Company evaluates the carrying value of long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. The Company’sassessment for impairment of an asset involves estimating the undiscounted cashflows expected to result from use of the asset and its eventual disposition. Animpairment loss recognized is measured as the amount by which the carryingamount of the asset exceeds the fair value of the asset.

Calculating the estimated fair value of an asset involvessignificant judgments and a variety of assumptions. Judgments that the Companymakes concerning the value of its intangible assets include assessing time andcost involved for development, time to market, and risks of regulatory failureor obsolescence, (due to market, environmental or technological advances forexample). For calculating fair value based on discounted cash flows, weforecast future operating results and future cash flows, which includelong-term forecasts of revenue growth, gross margins and capital expenditures.

An impairment analysis was performed as of December31, 2006 and 2005 and the Company concluded there was no impairment loss.

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**We are exposed to foreign currencyexchange rate fluctuations related to the operation of our internationalsubsidiaries.  Our main operatingcurrency is UK sterling(£).We also have subsidiary operations in Japan andChina who operate  in their localcurrencies.**

**RESULTSOF OPERATIONS**

**Fiscal Year EndedDecember 31, 2006 vs. Fiscal Year Ended December 31, 2005**

*Research and Development*

The Company’s research and development expenses forFiscal 2006 were $2,870,000 as compared to $2,363,000 for Fiscal 2005. TheCompany’s research and development costs were comprised of staff, staffrelated, consultancy, stock options, and product development software costsexpensed on the research and development of Medicsights PLCs’s products.

*Selling, General and AdministrativeExpenses*

The Company’s selling, general and administrativeexpenses from continuing operations for Fiscal 2006 were $12,842,000 ascompared to $9,300,000 for Fiscal 2005, the significant items being (inthousands):
| ** **                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                 |       |     |       |     |       |
| Salaries and  directors’ compensation (including payroll taxes) |       | $        | 3,938      |     | $          | 3,884 |   |
| Contractors and  consultants                                         |       | 687      |       | 266      |       |
| People costs                                                         |       | 4,625    |       | 4,150    |       |
| Stock options                                                        |       | 403      |       | —   |       |
| Professional  fees                                                   |       | 1,087    |       | 507      |       |
| Property rent  and rates                                             |       | 1,165    |       | 892      |       |
| Travel                                                               |       | 565      |       | 458      |       |
| Software and  related                                                |       | 450      |       | 72       |       |
| Marketing,  conferences and public relations                         |       | 2,384    |       | 1,569    |       |
| Recruitment fees                                                     |       | 273      |       | 118      |       |
|                                                                      |            |          |            |          |            |  |  |

Points to note are:

·      People related costsincreased by $475,000 (11%) as we expanded our operations in Medicsight andMedicexchange in Japan and China respectively. Recruitment fees also increased year on year as a result.

·      Professional fees increased$580,000 (114%) due to international expansion and increased work on commercialagreements.

·      Software and relatedincreased $378,000 (525%) as we expensed the initial website build costs andongoing hosting fees of medicexchange.com

·      Marketing, conferences andpublic relations increased $815,000 (52%) as a result of supporting ourMedicsight partners, promoting our international presence and building theMedicexchange business and brand.

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*Income TaxBenefit Realized*

InFiscal 2005, Medicsight PLC received a tax credit of $858,000 from the UnitedKingdom taxation authorities under its Research & Development tax reliefscheme for small and medium sized enterprises. The tax credit relates toexpenditures incurred between November 2001 and December 2003. The Company hasnot accrued for any subsequent tax credits as it has determined that thecompletion date (under rules of the scheme) of the new technology occurred atthe end of Fiscal 2003.

*Net Loss andNet Loss per Share*

Net loss was $14,935,000 for Fiscal 2006 compared to anet loss of $12,216,000 for Fiscal 2005. Net loss per share for Fiscal 2006 was$0.39 (based on weighted average shares outstanding of 38,092,965), compared to$0.36 for Fiscal 2005 (based on weighted average shares outstanding of34,224,023).  The increase net loss forFiscal 2006 is principally due to the increase in selling, general andadministrative costs and reduction in realized income tax benefit.

*Operational currency*

The Company’s mainoperating currency is UK sterling (£).  Itsresults of operations are affected by changes in the $: £ rates used totranslate the operational result. For Fiscal 2006, the average rate was$1.85:£1.00 and for Fiscal 2005 the rate was $1.80:£1.00, an increase of 2.8%.

*Contractual Obligations and Commitments*

The Company’s corporate offices are at the KensingtonCentre, 66 Hammersmith Road, London W14 4UD, UK.  This property is leased on a 10 yearagreement with a right to terminate on the expiry of the fifth year of thelease.  The Company has offices in NewYork,  Tokyo (Japan) and Beijing (China)with notice periods of between one and three months to cancel.  Our minimum annual lease commitments underthese arrangements are (in thousands):
| Year Ending | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|
| 2007             | ** ** | $          | 480        | ** ** |
| 2008             |       | 649        |       |
| 2009             |       | 475        |       |
| 2010             |       | 448        |       |
| 2011             |       | 178        |       |
| Later Years      |       | 1,865      |       |
| Total            |       | $          | 4,095      |   |

 

As of December 31, 2006, the Company was party to acapital lease obligation in the amount of $7,000 for motor vehicles. Theobligation for the vehicle lease requires monthly payments of $1,700, includinginterest, through April 2007. The underlying vehicles secure the lease.

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

*Research and Development*

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

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*Selling, General and AdministrativeExpenses*

The Company’s selling, general and administrativeexpenses from continuing operations for Fiscal 2005 were $9,300,000 as comparedto $10,578,000 for Fiscal 2004. The decrease of approximately $1,300,000 wasdue to a number of factors:

·      Salaries and directors’ andsub-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 reductionof sub-contractors costs (re-structuring of the medical boards).

·      Rent, rates and servicecharges declined from $1,623,000 in Fiscal 2004 to $1,418,000 due to theCompany 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 cessationof 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 animpairment charge from continuing operations. For Fiscal 2004, the Company recorded animpairment to Medicsight Asset Management’s property and equipment of $386,000 whichrelates to the closure of the Ravenscourt centre. This was as a result of thedecision to transfer Medicsight Asset Management’s assets to Medicsight PLC andLifesyne or sell to independent third parties at open market value or fullyimpair, as its business opportunities were limited due to the change instrategy by Lifesyne.

*Impairment Loss on Investments*

For Fiscal 2005 there was no impairment charge oninvestments as compared to Fiscal 2004 where the Company incurred an impairmentloss on investments of $70,000 relating to the impairment in the carrying valueof Eurindia PLC (“Eurindia”). The Company based this impairment on informationprovided by Eurindia’s management.

*Income TaxBenefit Realized*

InFiscal 2005, Medicsight PLC received $858,000 relating to a tax credit paid bythe United Kingdom taxation authorities under its R&D tax relief scheme forsmall and medium businesses. The basis for the R&D relief is to encouragethe development of new technologies and is only applicable to the research anddevelopment of a new technology and not a product.

Thetax credit relates to expenditures incurred between November 2001 and December2003. The Company did not accrue for any potential tax credit for Fiscal 2004as it has determined that the completion date of the new technology occurred atthe end of Fiscal 2003.

*Discontinued operations*

The revenue from the Company’s discontinued Lifesyne’sscanning operations for Fiscal 2005 was $427,000 as compared to $538,000 forFiscal 2004. The reduction was due mainly to the 10 month trading period inFiscal 2005.

The selling, general and administrative expenses fromthe Company’s discontinued Lifesyne’s scanning operations for Fiscal 2005 was$1,511,000 as compared to $2,101,000 for Fiscal 2004. The reduction was mainlydue to a reduction in staff and the 10 month trading period in Fiscal 2005.

For Fiscal 2005, the Company recorded impairment of$394,000 against property and equipment related to the discontinued Lifesyneoperations. For Fiscal 2004, the Company recorded impairment of $582,000against property and equipment related to the discontinued Lifesyne operations.

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*Operational currency*

As the Company’s operatingcurrency is UK sterling (£) its results of operations are affected by changesin the $: £ rates used to translate the revenues and costs. For Fiscal 2005 theaverage rate was $1.80: £1.00 and for Fiscal 2004 the rate was $1.83: £1.00, adecrease of 1.7%.

*Contractual Obligations and Commitments*

As of December 31, 2005, the Company was party to acapital lease obligation in the amount of $25,000 for motor vehicles. Theobligation for the vehicle lease requires monthly payments of $1,700, includinginterest, through April 2007. The underlying vehicles secure the lease.

On May 25, 2005, the Company’s discontinued Lifesyneoperations settled the outstanding capital lease obligation for its scannerwhich was subsequently sold. The outstanding capital lease obligation was$286,000 as of December 31, 2004.

**LIQUIDITYAND CAPITAL RESOURCES**

Working Capital information as at December 31 (inthousands unless stated):
|                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |     |       |
| Cash, Cash  Equivalents and Marketable Securities |       | $        | 24,735     |     | $          | 11,249   |       | $ | 5,276 |   |
| Current Assets                                    |       | 25,306   |       | 11,867   |       | 6,515    |       |
| Current  Liabilities                              |       | (3,378   | )          | (2,746   | )          | (2,353   | )          |
| Working Capital  Surplus                          |       | $        | 21,928     |     | $          | 9,121    |       | $ | 4,162 |   |
| Ratio of Current Assets  to Current Liabilities   |       | 7.5      |       | 4.3      |       | 2.8      |       |

*        Net change in Cash, Cash Equivalentsand Marketable Securities*

As of  December 31, 2006 we had $19,757,000 incash and cash equivalents (compared to $7,249,000 at December 31, 2005) and$24,735,000 in cash, cash equivalents, marketable securities and cash forcommon stock subscribed but unissued, compared to $11,249,000 at December 31,2005.

Net cash used in operating activities was $13,990,000for the year ended December 31, 2006 ($8,998,000 for the year ended December31, 2005).  This resulted primarily from:

a.     ournet loss of $14,935,000 ($10,738,000 for Fiscal 2005), after Minority Interestof $477,000 (nil in Fiscal 2005);

b.     adjustedfor depreciation and stock-based compensation expenses (non cash items) of$718,000 ($237,000 for Fiscal 2005);

c.     losseson disposal of fixed assets were $13,000 in the year ended December 31, 2006compared to $219,000 in the year ended December 31, 2005;

d.     anoverall net reduction in the movement on current assets (excluding cash itemsand marketable securities) and current liabilities of $691,000 in the yearended December 31, 2006 (compared to $1,284,0000 in Fiscal 2005) – primarilydue to the payment of commissions to Asia IT Capital 

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Investments Limited (a related party) and the timingof payments in the year ended December 31, 2006;

e.     $nilimpact of the losses of the Lifesyne (discontinued) business activities in theyear ended December 31, 2006 versus a $1,478,000 loss from Lifesyne activitiesin the year ended December 31, 2005.

Net cash used in investing activities of $1,255,000 inthe year ended December 31, 2006 (compared to $3,388,000 for the year endedDecember 31, 2005), which consisted primarily of:

a.     a$4,000,000 decrease in cash held for common stock subscribed but unissued;

b.     acash outflow of $4,533,000 for the purchase of available for sale marketablesecurities in the year ended December 31, 2006;

c.     acash outflow of $722,000 in the year ended December 31, 2006 from the purchaseof fixed assets. In the year ended December 31, 2005 we had a net $169,000 cashinflow from the sale of fixed assets;

Net cash flows from financing activities were$27,586,000 for the year ended December 31, 2006 (compared to $15,346,000December 31, 2005), consisting mainly of:

a.     $27,604,000net proceeds from the sale of our common stock in MGT Capital Investments Inc(formerly Medicsight Inc), Medicsight PLC and Medicexchange PLC – being$31,204,000 of total new money received in the year ended December 31, 2006 -less the $3,600,000 net movement of monies received for common stock subscribedbut unissued.  For the year ended December 31, 2005 we received $12,035,000net new money plus $3,600,000 of monies received from common stock subscribedbut unissued at December 31, 2005.

b.     Areduction in our principal payments under our capital lease obligations – inthe year ended December 31, 2006 we paid $18,000 compared to $289,000 paid inthe year ended December 31, 2005.

In the nine months ended December 31, 2006 we had $nilcash flows from the discontinued Lifesyne activities. In the nine months endedDecember 31, 2005 we had cash outflows of $1,122,000 from Lifesyne activities.

*Additional capital fundingrequirements*

To date we have primarily financed our operationsthrough private placements of equity securities. At December 31, 2006 we hadissued 38,900,383 of our 40,000,000 authorized share capital.  We have also raised finance through the saleof the common stock of our principal subsidiaries – Medicsight PLC andMedicexchange PLC.

In addition to the above, we still have the two linesof credit facilities (together totaling $38 million) available from Asia ITCapital Investments Limited (a related party).  We do not anticipatehaving to use any part of these credit lines.

*Risks and Uncertainties Related toOur Future Capital Requirements*

To the extent that additional capital is raisedthrough the sale of equity or equity-related securities of the Company or itssubsidiaries, the issuance of such securities could result in dilution to theCompany’s stockholders.

No assurance can be given, however, that we will haveaccess to the capital markets in the future, or that financing will beavailable on acceptable terms to satisfy the Company’s cash requirements toimplement its business strategies.

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If we are unable to access the capital markets orobtain acceptable financing, our results of operations and financial conditionscould be materially and adversely affected.  We may be required to raisesubstantial additional funds through other means.

Our technology has not yet been fully commercializedand we have not begun to receive any significant revenues from commercial operations. We cannot assure our stockholders that our technology and products will becommercialized successfully, or that if so commercialized, that revenues willbe sufficient to fund our operations.

If adequate funds are not available to us, we may be requiredto curtail operations significantly or to obtain funds through entering intoarrangements with collaborative partners or others that may require us torelinquish rights to certain of our technologies or products that we would nototherwise relinquish.

**Recent Accounting Pronouncements.**

In June 2006, the FASBissued FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretationof FASB Statement No. 109 (“FIN 48”) which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48prescribes a recognition threshold and measurement criteria for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN No. 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition and defines the criteria that must be metfor the benefits of a tax position to be recognized. The cumulative effect ofthe change in accounting principle must be recorded as an adjustment to openingretained earnings. The Company has completed its initial evaluation of theimpact of the January 1, 2007 adoption of FIN No. 48 and determined that suchadoption is not expected to have a material impact on its financial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),which defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. SFAS No. 157 applies to otheraccounting standards that require or permit fair value measurements.Accordingly, it does not require any new fair value measurement. SFAS No. 157will be effective for the Company on January 1, 2008. The Company iscurrently evaluating the impact the adoption of SFAS No. 157 will have on itsfinancial position and results of operations.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS No. 159”), which permits entities tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value.SFAS No. 159 will be effective for the Company on January 1, 2008.The Company is currently evaluating the impact the adoption of SFAS No.159 willhave on its financial position and results of operations.

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin “SAB” 108regarding the process of quantifying financial statement misstatements. Theprovisions of this statement will be effective for the year ended December 31,2006. The impact on the financial statements for 2006 is immaterial.

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**ITEM 7A****             QUANTATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

*Interest Rate Risk*

Ourexposure to market rate risk for changes in interest rates relates primarily toour investment portfolio. We place our investments in a mixture of (a) cashdeposits on either overnight or 30 day rates; (b) highly liquid blue chipavailable-for-sale market securities. A decline in interest rate would have anadvserse impact on interest income.

We donot have any debt and we do not use derivative financial instruments.

The Company has the following debt facilities allrepayable on demand:
| **Debt Holder**             | ** ** | **Facility** | ** ** | **Draw Down** | ** ** | **Interest rate** | ** ** | **At December 31, 2006** | ** ** |
|----------------------------------|------------|--------------|------------|--------------------|------------|------------------------|------------|-----------------------------------------|------------|
|                             |       |         |       |               |       |                   |       |                                    |       |
| Asia IT Capital  Investments Ltd |       | $            | 20,000,000 |               | $          | 0                      |       | US LIBOR + 2                            | %          | 7.34 | % |
|                             |       |         |       |               |       |                   |       |                                    |       |
| Asia IT Capital  Investments Ltd |       | $            | 19,600,000 |               | $          | 0                      |       | Sterling LIBOR + 2                      | %          | 7.28 | % |

Sincethe Company has not drawn down funds under either facility, a hypothetical 100basis point increase in interest rates would not increase the Company’sinterest costs, assuming no draw downs are made which the Company does notanticipate having to use.

*Foreign Currency Risk*

We areexposed to foreign currency exchange rate fluctuations related to the operationof our international subsidiaries.  Ourmain operating currency is UK sterling (£). We also have subsidiary operations in Japan and China who operate intheir local currencies.

At theend of each reporting period, expenses of the subsidiaries are converted intoU.S. dollars using the average currency rate in effect for the period andassets and liabilities are converted into U.S. dollars using either historicalrates or the exchange rate in effect at the end of the period.

Additionally,we are exposed to foreign currency exchange rate fluctuations relating topayments we make to vendors and suppliers using foreign currencies.

Wecurrently do not hedge against this foreign currency risk.

Fluctuationsin exchange rates may impact our financial condition and results of operations.

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## **ITEM 8.****                  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

The information requiredby this Item is included on pages F-1 to F-26 of this Annual Report.

## **ITEM 9.****                            CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

None.

**ITEM 9A**.            **CONTROLS AND PROCEDURES.**

**Evaluation of Disclosure Controls andProcedures**

As required by Rule 13a–15(b) under the Exchange Act,our management carried out an evaluation of the effectiveness of the design andoperation of the Company’s “disclosure controls and procedures” as of December31, 2006. This evaluation was carried out under the supervision and with theparticipation of our management, including our Company’s Chief ExecutiveOfficer 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 andother procedures of the Company that are designed to ensure that informationrequired to be disclosed by the Company in the reports it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms. Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed by the Company in the reports it files or submits under the ExchangeAct is accumulated and communicated to the Company’s management, including theCompany’s Chief Executive Officer and Chief Accounting Officer, as appropriate,to allow timely decisions regarding required disclosure.

Based upon that evaluation, the Company’s ChiefExecutive Officer and Chief Accounting Officer concluded that the Company’sdisclosure controls and procedures were effective as of December 31, 2006. Itshould be noted that the design of any system of controls is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

**Changes in Internal Control OverFinancial Reporting**

As required by Rule 13a–15(d) under the Exchange Act,our management, including our Chief Executive Officer and Chief FinancialOfficer, also conducted an evaluation of our internal control over financialreporting to determine whether any change occurred during the quarter endedDecember 31, 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting. Based on thatevaluation during the quarter ended December 31, 2006 there has been no changein our internal control over financial reporting that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

**ITEM 9B.**            **OTHER INFORMATION.**

None.

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## **ITEM 10.****               DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT.**

The following table sets forth the current officersand directors of MGT Capital Investments, Inc (formerly Medicsight, Inc):
| **Name**                | ** ** | **Age** | ** ** | **Position**                                       | ** ** |
|-------------------------|------------|---------|------------|----------------------------------------------------|------------|
|                    |       |    |       |                                               |       |
| Stephen Forsyth         |       | 56      |       | Chairman  and Director                             |       |
| Tim  Paterson-Brown     |       | 46      |       | Chief  Executive Officer and Director              |       |
| Allan Rowley            |       | 38      |       | Chief  Financial Officer and Director              |       |
| Neal Wyman              |       | 54      |       | Independent  Director and Audit Committee Chairman |       |
| L. Peter  Fielding M.D. |       | 67      |       | Independent  Director and Audit Committee Member   |       |
| Peter Venton OBE        |       | 65      |       | Independent  Director and Audit Committee Member   |       |
| Sir Christopher  Paine  |       | 72      |       | Independent  Director                              |       |
| Dr Allan Miller         |       | 71      |       | Independent Director                               |       |

 

Directors are elected in accordance with the Company’sby-laws to serve until the next annual stockholders meeting and until theirsuccessors are elected in their stead. The Company does not currently paycompensation to directors for services in that capacity. Officers are appointedby the Board of Directors and hold office until their successors are chosen andqualified, until their death or until they resign or have been removed fromoffice. All corporate officers serve at the discretion of the Board ofDirectors. There are no family relationships between any director or executiveofficer and any other director or executive officer of the Company.

*Stephen Forsyth***joined the Company in December 2003 as Chairman and ChiefExecutive Officer. He stood down as Chief Executive Officer in September 2004.Previously he was Chairman and Chief Executive of Leisure Investments PLC, apublicly quoted company registered in England and Wales between 1976 and 1989.He subsequently assisted the Phoenix Trust Company Limited between 1990 and1999 with its various operations and investments. In January 1999, heestablished The International Cotton Company, in which he has been theprincipal financier of a number of new technology orientated companies fromtheir inception, including Accsys Technologies PLC, Titan Wood Limited andMedicsight PLC.  The International CottonCompany changed its name to International Capital Corporation PLC in 2003.Stephen remains the Chairman of this investment holding company.  Stephen is a founding Trustee of theMedicsight Foundation (renamed “The Foundation for the Early Detection ofDisease”), a United Kingdom registered charity, which is concerned with therelief of human suffering and poverty and the promotion of health andeducation.

*Tim Paterson-Brown*joined the Company inDecember 2003 as Director and was appointed Chief Executive Officer inSeptember 2004. Tim qualified as a Chartered Surveyor with Strutt and Parker in1984 following degrees at London University and Magdalene College, Cambridge.In 1987 Tim joined Leisure Investments PLC. He subsequently worked closely with Stephen Forsyth for the PhoenixTrust Company Limited between 1990 and 1999 assisting with its variousoperations and investments. In 1999, he joined The International Cotton Companyas a Director. The International Cotton Company has been the principalfinancier of a number of new technology orientated companies from theirinception, including Accsys Technologies PLC (of which Tim is a non-executiveDirector), Titan Wood Limited and Medicsight PLC.  The International Cotton Company changed itsname to International Capital Corporation PLC in 2003. Tim is also a foundingTrustee of the Medicsight Foundation (renamed “The Foundation for the EarlyDetection of Disease”), a United Kingdom registered charity, which is concernedwith the relief of human suffering and poverty and the promotion of health andeducation.

*Allan Rowley* joined the Company in April 2006 asFinance Director of both Medicsight plc and Medicexchange.com and was appointedChief Financial Officer in August 2006. Prior to joining, Allan served in a corporate development role atComMedica Limited, a United Kingdom based medical software company specializingin Picture Archiving & Communication System (“PACS”) software. In this rolehe worked on financing and acquisition opportunities and on commercialproposals with the sales and finance group. Before joining ComMedica, Allan wasrevenue controller and a director of European Finance at Bea Systems, aNASDAQ-listed 

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US-based software company.  Allan hasseveral years of experience in public accounting in the United Kingdom andUnited States with Arthur Andersen and Ernst & Young, respectively. He is amember of the Institute of Chartered Accountants in England and Wales and holdsa Master of Philosophy and a Bachelor of Science degree from AberystwythUniversity College of Wales

*Neal Wyman* trained as a CharteredAccountant with Coopers and Lybrand before moving to KPMG where he worked inthe Far East. He moved into the recruitment industry in London specializing infinancial services, gaining experience with a diverse range of clients. Heentered executive search in 1981, initially specializing in the financialservices industry before broadening into general appointments and professionalservices. He now focuses on general management, finance and non-executiveappointments in both private and quoted companies, with particular focus onventure capital. He is a graduate of the London School of Economics. Neal wasappointed an independent director of the Company and a member of the AuditCommittee in November 2004.

*L. Peter Fielding*, M.D. is anexperienced physician who provides consulting services to healthcare andacademic organizations, in addition to his departmental and institutionalresponsibilities at WellSpan Surgical Associates. His clients in the past fiveyears have included, in the U.S.A. National Cancer Institute; American JointCommittee on Cancer; Taiko Post University – Connecticut; Purely Cotton Inc. –Seattle; Musculoskeletal Systems Inc. - Pittsburgh; University of ConnecticutMedical School. , and, in the U.K.: Imperial College for Science, Technologyand Medicine and the Association of Surgeons in the United Kingdom and Ireland.  Dr Fielding specializes in healthcarestrategic planning, organizational structure and operational issues. He hasparticipated in the organization and development of the Pain Relief Center;Hyperbaric Medicine and Advanced Wound Care Center; Clinical Weight ReductionCenter; York Hospital Human Motion Institute and the Molecular Biology ResearchLaboratory. Peter was appointed an independent director of the Company and amember of the Audit Committee in July 2005.

*Peter Venton, OBE* has over 30years’ experience in the computing and telecommunications industry and holdsseveral patents in the sector. He is a former Chief Executive of Plessey Radarand of GEC-Marconi Prime Contracts. Peter currently serves as the TechnicalAudit Chairman for the Defence Evaluation & Research Agency and joined theBoard of MS- PLC as an independent director in November 2001. Peter wasappointed an independent director of the Company and a member of the AuditCommittee in November 2004.

*Sir Christopher Paine*wasthe President of the British Medical Association until 2001. He is currentlythe chairman of the Medical AdvisoryBoard of the International Hospitals Group, chairman of Royal Society ofMedicine Support Services Ltd and a trustee of the London Clinic.  He was Medical Director of the Advisory Committeeon Distinction Awards for the National Health Service until the end of 1999 andhas been President of the Royal College of Radiologists and The Royal Societyof Medicine. Sir Christopher is a Medical Oncologist. He was a consultantclinical oncologist from 1970 at the Churchill Hospital in Oxford.  He also served as director of clinicalstudies at the medical school. He was district general manager of the OxfordHealth Authority from 1984-88. In addition, he has served on the Animal WelfareCouncil and Imperial Cancer Research Fund. Sir Christopher was appointed anindependent director of the Company in November 2004.

*Dr Allan Miller* qualified in medicine at StBartholomew’s Hospital Medical School, London in 1961. In 1965 Allan wasadmitted to the Royal College of Physicians. After spending eight years ingeneral practice he joined, Hoffman La Roche where he held the positions ofHead of Clinical Cardiovascular Research Worldwide, Head of DermatologicalResearch Worldwide and Head of Clinical Research UK.  Allan spent 14 years as Medical Director for NappPharmaceuticals Ltd and four years as European Medical Research Director of thePurdue Pharma, Mundipharma, Napp group based in Cambridge, England.  Allan is a Member of the British Medical Association and aFellow of the Royal Society of Medicine. Allan was appointed an independentdirector of the Company in December 2002.

***Section 16(a) BeneficialOwnership Reporting Compliance***

Under the securities laws of the United States, theCompany’s directors, its executive officers, and any persons holding more thanten percent of the Company’s common stock are required to report their initialownership of the 

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Company’s common stock and any subsequent changes inthat ownership to the Securities and Exchange Commission (the “Commission”).Specific due dates for these reports have been established and the Company isrequired to disclose any failure to file by these dates. The Company can reportthat there were no delinquent filings to report in Fiscal 2006.

**Audit Committee Financial Expert**

The Company’s Board of Directors has determined thatPeter Venton, an independent director, is the audit committee financial expert,as defined in Regulation S-K promulgated under the Securities and Exchange Actof 1934, serving on its audit committee.

**Code of Ethics**

The Company adopted a Code of Ethics that applies tothe Company’s principal executive officer, principal financial officer andprincipal accounting officer or controller, or persons performing similarfunctions on or after November 25, 2004. The Company’s Code of Ethics wasapproved by the Audit Committee on November 26, 2004.

Copies of the Company’s Code of Ethics can beobtained, without charge by writing to the Company Secretary at MGT CapitalInvestments, Inc, Kensington Centre, 66 Hammersmith Road, London W14 8UD,United Kingdom.

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## **ITEM 11.****               EXECUTIVECOMPENSATION.**

**Compensation Discussion and Analysis**

*Goalsof our compensation program*

We provide a compensationpackage for our executive officers we refer to as our “named executiveofficers” that we believe is designed to fairly compensate them and to enhanceshareholder value. We have disclosed the compensation package for our namedexecutive officers in the summary compensation table and related tables below.We have structured our compensation packages to motivate our named officers toachieve the Company’s business objectives and to align their interests with theinterests of our shareholders. Specifically, our compensation program isdesigned to achieve the following objectives:
| · | Attract and retain excellent executives who are  appropriate for the Company’s needs;                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| · | Motivate and reward executives whose knowledge,  skills and performance are critical to the Company’s success;                            |
|   |
| · | Motive the executives to increase shareholder value  for both the Company and it’s subsidiary operations through the use of  options; and |
|   |
| · | Tie compensation to corporate and individual  performance.                                                                                     |

 

We use various elementsof compensation to reward specific types of performance. Our employmentagreements for each for our named executive officers determine the salary ofeach officer, which provides the basic level of compensation for performing thejob expected of them. We use cash bonus awards as an incentive that provides atimely reward for attainment  ofexemplary corporate and individual performance in a particular period. We usestock options to provide a long term incentive, which adds value tocompensation packages if the value of our common stock rises and aligns theinterest of our executives with those of shareholders. 

*Elementsof our compensation program*

Our total compensationpackage for named executive officers consists of the following components:salary, bonus and options. Each element of compensation is considered separately and we do not generally take intoaccount amounts realized from prior compensation in establishing other elementsof compensation . Our goal is to provide a total compensation package that webelieve our named officers and our shareholders will view as fair andequitable. We consider the pay of each named executive officer relative to eachother named executive officer so that the total compensation program isconsistent for our executives. This is not a mechanical process, and our  board of directors has used its judgment andexperience and works with our Chief Executive Officer to determine the appropriate mix of compensation foreach individual. 

*Salary —*Each named executive officer’s employment agreementdetermines his salary which varies with the scope of his responsibilities.  These agreements provide for an annual basesalary of $222,000 for Tim Paterson-Brown, $185,000 for Allan Rowley, $220,000for David Sumner (CEO of Medicsight PLC) and $220,000 for Adam Boyse (CEO ofMedicexchange PLC). We believe that the annual salary must be competitive withthe market with respect to the skills and experience that are necessary to meetthe requirements of the named executive officers position with us. 

*Bonus —*The employment agreement in effect for each named executiveofficer provides for the possibility of a cash performance bonus as determinedby our board of directors based upon the attainment of performance goalsconveyed to the officer. The board of directors has the discretion to increasethe cash performance bonus for any year. Historically bonuses have been asignificant part of our named officer compensation.

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*Options*— Options to the named executive officers may be granted from the Company andor its subsidiaries.  We have stockoption plans in both our subsidiary companies — Medicsight PLC andMedicexchange PLC.  Neither of thesesubsidiary companies has any of its stock listed on any stock exchange at thistime. On March 20, 2003 (50,000) and September 9, 2004 (50,000), Medicsight PLCawarded options to purchase shares to David Sumner.  On June 30, 2005 (100,000) and July 13, 2006(150,000) Medicsight PLC awarded options to purchase shares to Adam Boyse.  On July 13, 2006 options to purchase 250,000shares in Medicsight PLC were awarded to Allan Rowley.  On July 20, 2006 options to purchase sharesin Medicexchange PLC were awarded to Tim Paterson  Brown (150,000), Allan Rowley (150,000), AdamBoyse (150,000) and David Sumner (150,000). The options vest in equal one-thirds on each of the first threeanniversaries from the date of grant. The options will expire ten years afterthe grant date and will be exercisable at a price per share equal to the fairmarket value on the date of grant. 

We award options to alignthe interests of our executives with the interest of our shareholders by havingthe realizable value depend on an increase in our stock price. We believe thiswill motivate our officers to return value to our shareholders through futureappreciation of our stock price. The options provide a long term incentive becausethey vest over a period of time (typically three years) and remain outstandingfor ten years, encouraging executives to focus energies on long term corporateperformance. The vesting requirements are designed to encourage retention ofour officers. 

*Perquisitesand other personal benefits* — we do not provide any of ourexecutive officers with perquisites or other personal benefits, in excess of$10,000.

*Retirementbenefits* — our named officers do not participate in anydeferred benefit retirement plans such as a pension plan. We do not have anydeferred compensation program. 

*PerformanceAwards*

Our named executiveofficers are entitled to cash bonuses, as determined by our board of directors,based upon the attainment of employment goals conveyed to that executive. 

*OurCompensation process*

We do not have acompensation committee. Our board of directors decides compensation for ournamed officers.  The board of directorsincludes five non executive independent directors being Neal Wyman, L. PeterFielding, Peter Venton, Sir Christopher Paine and  Dr Allan Miller. Tim Paterson-Brown, our CEO,recommends to the board the compensation levels for each of the other namedexecutive officers.  The board ofdirectors generally follows these recommendations. The board of directorsseparately determines the CEO’s compensation.

We do not formallybenchmark our compensation against any peer group. However we informallyconsider competitive market practices with respect to the salaries and totalcompensation of our named executive officers. We review the market practices byreviewing publically available information of other companies in the HealthcareInformation Technology sector and our geographical areas. However while wereview such market information, it is only one factor we considered inestablishing compensation, and we did not make use of any formula incorporatingsuch data. 

Generally in determiningwhether to increase or decrease compensation to our named officers, we takeinto account any changes, of which we are aware, in the market pay levels, theperformance of the executive officer, any increase or decrease inresponsibilities and roles of the executive officer, the business needs for theexecutive officer, the transferability of managerial skills to anotheremployer, the relevance of the executives officers experience to otherpotential employers and the readiness of the executive officer to assume a moresignificant role within the organization. 

*Changein Control*

We do not have anyspecial compensation for our named officers in the event of a of change ofcontrol of the Company.

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*Stockownership guidelines*

We have not implementedany stock ownership requirements for the named officers. We have issued stockoptions to our named officers which we believe allows management to own equityin the company and accordingly align their interest with those of other shareholders.  

**Summary Compensation Table**

The followingtable summarizes Fiscal Year 2006, 2005 and 2004 compensation for services inall capacities of the Company’s named executive officers.
| Name and Principal Position_ | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Option   Awards (6)** | ** ** | **All Other   Compensation** | ** ** | **Total   Compensation** | ** ** |
|---------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|-----------------------------------|------------|----------------------------------------|------------|-------------------------------|------------|
|                                        |       |     |       |       |       |      |       |                              |       |                                   |       |                          |       |
| Stephen Forsyth                             |       | 2006     |       | —     |       | —    |       | —                            |       | $                                      | —     |                          | $          | — |   |
| Chairman and CEO (2)                        |       | 2005     |       | —     |       | —    |       | —                            |       | $                                      | —     |                          | $          | — |   |
|                                             |       | 2004     |       | —     |       | —    |       | —                            |       | $                                      | —     |                          | $          | — |   |
|                                        |       |     |       |       |       |      |       |                              |       |                                   |       |                          |       |
| Tim Paterson-Brown, CEO (1)                 |       | 2006     |       | $          | 222,100    |      | $          | 11,100                            |       | $                                      | 7,000      |                          | $          | — |   | $ | 240,200 |   |
|                                             |       | 2005     |       | $          | 216,696    |      | $          | 16,252                            |       | -                                      |       | $                             | —     |   | $ | 232,948 |   |
|                                             |       | 2004     |       | $          | 26,600     |      | —     |                              | -          |                                   | $          | —                        |       | $ | 26,600 |   |
|                                        |       |     |       |       |       |      |       |                              |       |                                   |       |                          |       |
| Allan Rowley, CFO (5)                       |       | 2006     |       | $          | 77,100     |      | $          | 6,000                             |       | $                                      | 38,000     |                          | $          | — |   | $ | 121,100 |   |
|                                        |       |     |       |       |       |      |       |                              |       |                                   |       |                          |       |
| Glyn Thomas, CFO (4)                        |       | 2006     |       | $          | 40,000     |      | —     |                              | -          |                                   | $          | —                        |       | $ | 40,000 |   |
|                                        |       |     |       |       |       |      |       |                              |       |                                   |       |                          |       |
| Paul Gothard, CFO (3)                       |       | 2006     |       | $          | 119,000    |      | —     |                              | $          | 48,000                                 |       | $                             | —     |   | $ | 167,000 |   |
|                                             |       | 2005     |       | $          | 162,522    |      | $          | 12,189                            |       | -                                      |       | $                             | —     |   | $ | 174,711 |   |
|                                             |       | 2004     |       | $          | 157,380    |      | —     |                              | -          |                                   | $          | —                        |       | $ | 157,380 |   |
|                                        |       |     |       |       |       |      |       |                              |       |                                   |       |                          |       |
| David Sumner, CEO Medicsight  PLC           |       | 2006     |       | $          | 178,000    |      | $          | 27,000                            |       | $                                      | 11,000     |                          | $          | — |   | $ | 216,000 |   |
|                                             |       |     |       |       |       |      |       |                              |       |                                   |       |                          |       |
| Adam Boyse, CEO Medicsight  PLC             |       | 2006     |       | $          | 211,200    |      | $          | 11,100                            |       | $                                      | 48,000     |                          | $          | — |   | $ | 270,300 |   |

 
| (1)    | Tim  Paterson-Brown was appointed Chief Executive Officer on September 21, 2004.                                                                                                                |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| (2)    | Stephen Forsyth  was appointed the Company's Chairman and Chief Executive Officer effective  December 8, 2003. Stephen Forsyth resigned as Chief Executive Officer on  September 21, 2004. |
|   |
| (3)    | Paul Gothard  resigned as the Company’s Chief Financial Officer effective March 31, 2006.                                                                                                  |
|   |
| (4)    | Glyn Thomas was  appointed Chief Financial Officer on an interim basis. Glyn was appointed on  April 3, 2006 and resigned on August 4, 2006.                                                    |
|   |
| (5)    | Allan Rowley was  appointed Chief Financial Officer on August 4, 2006.                                                                                                                          |
|   |
| (6)    | This column  discloses the dollar amount recognized for financial reporting purposes with  respect to fiscal year 2006 in accordance with FAS 123(R).                                           |

 

**Outstanding Equity Awards at Fiscal Year-End**

 
| Name               | ** ** | **Number of securities underlying  unexercised options unexercisable** | ** ** | **Option Exercise   Price** | ** ** | **Option Expiry   Date** | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
|               |       |                                                                                            |       |                                  |       |                               |       |
| Tim Paterson-Brown |       | 150,000                                                                                         |       | £0.40 ($0.78)                    |       | July  20, 2016                     |       |
|               |       |                                                                                            |       |                                  |       |                               |       |
| Allan Rowley       |       | 150,000                                                                                         |       | £0.40 ($0.78)                    |       | July  20, 2016                     |       |
|                    |       | 250,000                                                                                         |       | £1.10 ($2.15)                    |       | July  13, 2016                     |       |
|               |       |                                                                                            |       |                                  |       |                               |       |
| David Sumner       |       | 150,000                                                                                         |       | £0.40 ($0.78)                    |       | July  20, 2016                     |       |
|               |       |                                                                                            |       |                                  |       |                               |       |
| Adam Boyse         |       |  67,000                                                                                    |       | £1.00 ($1.95)                    |       | June  30, 2015                     |       |
|                    |       | 150,000                                                                                         |       | £1.10 ($2.15)                    |       | July  13, 2016                     |       |
|                    |       | 150,000                                                                                         |       | £0.40 ($0.78)                    |       | July  20, 2016                     |       |

 

33

----

 

**Grants of Plan-Based Awards**

* *
| Name               | ** ** | **Grant Date**    | ** ** | **Number of   Options (1)** | ** ** | **Option Exercise   Price** | ** ** | **Grant Date Fair   Value (2)** | ** ** |
|--------------------|------------|------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------|------------|
|               |       |                   |       |                                       |       |                                  |       |                                                |       |   |   |
| Tim Paterson-Brown |       | July  20, 2006         |       | 150,000                                    |       | £0.40 ($0.78)                    |       |                                                | $          | 59,000 |   |   |
|               |       |                   |       |                                       |       |                                  |       |                                                |       |   |   |
| Allan Rowley       |       | July  20, 2006         |       | 150,000                                    |       | £0.40 ($0.78)                    |       |                                                | $          | 59,000 |   |   |
|                    |       | July  13, 2006         |       | 250,000                                    |       | £1.10 ($2.15)                    |       |                                                | $          | 270,000 |   |   |
|               |       |                   |       |                                       |       |                                  |       |                                                |       |   |   |
| David Sumner       |       | March  20, 2003 (*)    |       |  50,000                               |       | £1.00 ($1.95)                    |       |                                                | $          | 37,000 |   |   |
|                    |       | September  9, 2004 (*) |       | 50,000                                     |       | £1.00 ($1.95)                    |       |                                                | $          | 37,000 |   |   |
|                    |       | July  20, 2006         |       | 150,000                                    |       | £0.40 ($0.78)                    |       |                                                | $          | 59,000 |   |   |
|               |       |                   |       |                                       |       |                                  |       |                                                |       |   |   |
| Adam Boyse         |       | June  30, 2005         |       | 100,000                                    |       | £1.00 ($1.95)                    |       |                                                | $          | 91,650 |   |   |
|                    |       | July  13, 2006         |       | 150,000                                    |       | £1.10 ($2.15)                    |       |                                                | $          | 162,000 |   |   |
|                    |       | July  20, 2006         |       | 150,000                                    |       | £0.40 ($0.78)                    |       |                                                | $          | 59,000 |   |   |

 
| (1)    | One-third of options vest on each of the first,  second and third anniversaries of the grant date, except for the items marked  (*) which were fully vested at December 31, 2006. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                              |
| (2)    | Grant date fair value was computed in accordance  with FAS 123(R). We estimated the fair value for the stock options using the  Black-Scholes option pricing model.               |

 

**Discussion of SummaryCompensation and Grant of Plan Based Award Tables.**

 

*Employment agreements*

Pursuant to their employment agreements, Tim Paterson-Brown and AllanRowley received an annual salary of $222,000 and $ 185,000 respectively, plus abonus each year as determined by our board of directors based on attainment ofperformance goals conveyed to the employee. Both Tim-Paterson and Allan Rowley are on three months notice periods.

*Potential Payments on Termination or Change in Control*

The Company may immediately terminate the employment of any namedofficer for gross misconduct.  There areno provisions for payments or termination in the event of a change in controlof the Company.

**InsiderParticipation**

The Company does not have a compensation committee.  Compensation decisions are made by the Boardof Directors of the Company.  Each of TimPaterson-Brown, the Company's chief executive officer, and Allan Rowley, theCompany's chief financial officer, is a member of the Company's Board ofDirectors.  Tim Paterson-Brown recommendscompensation levels for each of our named officers other than himself.  These recommendations are generally followedby the Board.  Tim Paterson-Brown doesnot participate in Board deliberations of his compensation.  Allan Rowley does not participate in Boarddeliberations of his compensation or that of Tim Paterson-Brown.

**Report**

The Board of Directors of the Company has reviewed and discussed theCompany's Compensation Discussion and Analysis with management.  Based on the review and discussions, thoseDirectors have approved the inclusion of the Compensation Discussion andAnalysis in our annual report on Form 10-K.

*Directors*

StephenForsyth

TimPaterson-Brown

AllanRowley

NealWyman

L.Peter Fielding

PeterVenton

SirChristopher Paine

Dr Allan Miller

34

----

 

**Director Compensation**

 
| **Name**              | ** ** | **Fees Earned or  Paid in Cash (1)** | ** ** | **Option   Awards (2)** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|-----------------------|------------|---------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|-----------|------------|
| Stephen Forsyth       |       | $                                                             | -          |                              | $          | -                                |       | $         | -          |   | $ | - |   |
| Tim Paterson-Brown    |       | $                                                             | 233,200    |                              | $          | 7,000                            |       | $         | -          |   | $ | 240,200 |   |
| Allan Rowley          |       | $                                                             | 83,100     |                              | $          | 38,000                           |       | $         | -          |   | $ | 121,100 |   |
| Glyn Thomas (2)       |       | $                                                             | 40,000     |                              | $          | -                                |       | $         | -          |   | $ | 40,000 |   |
| Paul Gothard (1)      |       | $                                                             | 119,000    |                              | $          | 48,000                           |       | $         | -          |   | $ | 167,000 |   |
| Neal Wyman            |       | $                                                             | 15,000     |                              | $          | -                                |       | $         | -          |   | $ | 15,000 |   |
| L. Peter Fielding     |       | $                                                             | 15,000     |                              | $          | -                                |       | $         | -          |   | $ | 15,000 |   |
| Peter Venton          |       | $                                                             | 15,000     |                              | $          | -                                |       | $         | -          |   | $ | 15,000 |   |
| Sir Christopher Paine |       | $                                                             | 8,500      |                              | $          | -                                |       | $         | -          |   | $ | 8,500 |   |
| Dr Allan Miller       |       | $                                                             | 8,500      |                              | $          | -                                |       | $         | -          |   | $ | 8,500 |   |
|                  |       |                                                          |       |                              |       |                             |       |      |       |

 
| (1)    | Paul Gothard resigned as the Company’s Chief  Financial Officer effective March 31, 2006.                                               |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| (2)    | Glyn Thomas was appointed Chief Financial Officer on  an interim basis. Glyn was appointed on April 3, 2006 and resigned on August  4, 2006. |

 

All the directors will be reimbursed for their out-of-pocket expensesincurred in connection with the performance of board duties. 

 
| (1)    | Includes retainer fees and board meeting fees  accrued for 2006 which will be paid in 2007                                                            |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| (2)    | This column  discloses the dollar amount recognized for financial reporting purposes with  respect to fiscal year 2006 in accordance with FAS 123(R). |

 

35

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**ITEM 12     SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

The following table sets forth certain informationregarding beneficial ownership of the Company’s common stock as of March 28,2007:

·      each person known by the Company to be thebeneficial owner of more than 5% of the outstanding common stock;

·      each person serving as a director or executiveofficer of the Company; and

·      all executive officers and directors ofthe Company as a group.

Beneficial ownership is determined in accordance withthe rules of the Securities and Exchange Commission. In general, a person whohas voting power and/or investment power with respect to securities is treatedas a beneficial owner of those securities. For purposes of this table, sharessubject to outstanding warrants and options exercisable within 60 days of thedate of this Annual Report are considered as beneficially owned by the personholding such securities. To our knowledge, except as set forth in this table,the persons named in this table have sole voting and investment power withrespect to the shares shown. Except as otherwise indicated, the address of eachof the directors, executive officers and 5% shareholders in this table is asfollows: MGT Capital Investments, Inc, Kensington Centre, 66 Hammersmith Road,London W14 8UD, United Kingdom.

Percentage beneficiallyowned is based upon 38,900,383 shares of common stock issued and outstanding asof March 28, 2007.
| **Name and address of Beneficial Owner**                                       | ** ** | **Number of Shares  Beneficially Owned** | ** ** | **Percentage of Common  Equity Beneficially Owned** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                                                                    |       |                                                    |       |                                                                    |       |
| **5%  Beneficial Owners**                                                                               | ** ** | ** **                                              | ** ** | ** **                                                              | ** ** |
| ** **                                                                                              | ** ** | ** **                                              | ** ** | ** **                                                              | ** ** |
| Macniven and Cameron Equity Holdings Limited (1)  46 Berkeley Square   London, United Kingdom   W1J 5AT |       | 10,673,642                                              |       | 27.4                                                                    | %          |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| General Mediterranean Holding SA   Center Financier   29 Avenue de la Porte Neuve   L-2227 Luxembourg   |       | 2,600,000                                               |       | 6.7                                                                     | %          |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| **Directors  and Officers (3)**                                                                         | ** ** | ** **                                              | ** ** | ** **                                                              | ** ** |
| ** **                                                                                              | ** ** | ** **                                              | ** ** | ** **                                                              | ** ** |
| Stephen Forsyth                                                                                         |       | —                                                  |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| Tim  Paterson-Brown (2)                                                                                 |       | 250,000                                                 |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| Allan Rowley                                                                                            |       | —                                                  |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| Neal Wyman                                                                                              |       | —                                                  |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| L. Peter  Fielding                                                                                      |       | —                                                  |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| Peter Venton                                                                                            |       | 16,666                                                  |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| Sir Christopher  Paine                                                                                  |       | 2,200                                                   |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| Dr Allan Miller                                                                                         |       | —                                                  |       | *                                                                       |       |
|                                                                                                    |       |                                                    |       |                                                                    |       |
| Total Officers  and Directors as a Group (9 persons)                                                    |       | 268,866                                                 |       | *                                                                       |       |

 

----

(1)   International CapitalCorporation PLC, Suite 2B, Centre Plaza, Main Street, Gibraltar, which owns95.8% of the outstanding share capital of Macniven and Cameron Equity HoldingsLimited (previously STG Holdings PLC). Additionally Stephen Forsyth is theDirector of Macniven and Cameron Equity Interests Limited.

(2)   Tim Paterson-Brown is a discretionarybeneficiary of the Trust that owns the company that owns the majorityshareholding in Macniven and Cameron Equity Holdings Limited.  Under the beneficiary arrangement, TimPaterson-Brown has no ability to exercise or influence any of the voting rightsof the MGT Capital Investments, Inc (formerly Medicsight, Inc) shares owned byMacniven and Cameron Equity Holdings Limited

(3)   Addresses for these directorsand officers are care of the Company at Kensington Centre, 66 Hammersmith Road,London W14 8UD, United Kingdom.

* Less than 1%.

36

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## **ITEM 13.****               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

*Asia IT Capital Investments Ltd (a related party)*

On December 29, 2000, the Company acquired all of theissued and outstanding shares of HTTP Insights Limited (“Insights”). Asia ITCapital Investments Limited (“Asia IT”) was a shareholder in Insights as wellas the Company at the time of the acquisition, and has provided a creditfacility for up to $20,000,000. The credit facility expired on December 31,2001, but has been extended to December 31, 2007. All advances under the creditfacility accrue interest at 2% above US LIBOR. The Company is restricted fromborrowing funds, directly or indirectly, other than through the creditfacility, without the consent of Asia IT.

On November 20,2001, Asia IT entered into a £10,000,000 ($19,600,000) credit facility withMedicsight PLC.  Such facility ceases onDecember 31, 2007 and is secured by a lien on all of the assets of MedicsightPLC.  Interest on outstanding amountsaccrues at 2% above Sterling LIBOR. Pursuant to such credit facility, Medicsight PLC had covenanted toundertake a public offering of its ordinary shares in an amount not less than £25,000,000not later than March 2002.  MedicsightPLC did not complete such an offering and the facility nevertheless remains inplace.

In addition, a director of Asia IT is a brother of TimPaterson-Brown, a director of the Company since December 2003 and its chiefexecutive officer since September 2004 and a director of Medicsight PLC sinceSeptember 5, 2003. In addition to the loan facilities made available by Asia ITto the Company and Medicsight PLC, Asia IT received commissions on sharesissued under private placements in both Fiscal 2006 and Fiscal 2005.

During Fiscal 2006 the Company used Asia IT to raise agross amount of $34,096,000. Asia IT earned commissions of $3,404,000 which waspartly settled by issuing 275,326 shares valued at £1.00 ($1.88) inMedicexchange PLC.

During Fiscal 2005 the Company raised $12,035,000, netof commissions and expenses, in a private placement of restricted common stockat $4.00 per share. Asia IT received commissions of $1,230,000.

During Fiscal 2004 the Company raised $23,310,000, netof commissions and expenses, in a private placement of restricted common stockat $3.00 per share. Asia IT received commissions of $2,410,000, which waspartly settled by issuing 420,000 shares of common stock of the Company to AsiaIT valued at $3.00 per share.

During the year ended December 31, 2006 , the Companyplaced monies on deposit with Asia IT. These monies earn interest at an annualrate of 5%. The funds are on call at any time. At December 31, 2006 the balanceof monies on deposit with Asia IT was $5,993,000 which included $116,000 ofinterest income earned in the year ended December 31, 2006.

*Purchase of Shares*

In the year ended December 31, 2006, Allan Rowley (ourChief Financial Officer) purchased 15,000 ordinary shares in Medicexchange PLCfor £15,000, which was received in full.

*Director Independence*

Our Board has undertaken a review of directorindependence.  Based on that review, ourBoard affirmatively determined that all of the Directors are independent underthe standards set forth in the relevant American Stock Exchange and SEC rulesand regulations, with the exception of Tim Paterson-Brown and Allan Rowley.  Mr. Paterson-Brown and Mr. Rowley cannotbe deemed independent because they serve as the Company's chief executiveofficer and chief financial officer, respectively.

37

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**PARTIV**

## **ITEM 14.****               PRINCIPALACCOUNTANT FEES AND SERVICES.**

| *Audit Fees.*          | Fees billed by our principal accountant amounted to  $96,000 in Fiscal 2006 and $87,000 in Fiscal 2005.                  |
|------------------------|--------------------------------------------------------------------------------------------------------------------------|
| * *               |                                                                                                                     |
| *Audit  Related Fees.* | Fees billed by our principal accountant amounted to  $0 in Fiscal 2006 and $0 in Fiscal 2005.                            |
| * *               |                                                                                                                     |
| *Tax  Fees.*           | Fees billed by our principal accountant amounted to  $0 in Fiscal 2006 and $0 in Fiscal 2005.                            |
| * *               |                                                                                                                     |
| *All  Other Fees.*     | Fees billed by our principal accountant amounted to  $0 in Fiscal 2006 and $0 in Fiscal 2005 concerning various matters. |

The Company’s audit committee has approved the Company’saudit fees.

As of November 25, 2004, the audit committee isdirectly responsible for the appointment, compensation, retention and oversightof the work of any independent auditor engaged (including resolution ofdisagreements between management and the auditor regarding financial reporting)for the purpose of preparing or issuing an audit report or performing otheraudit, review or attest services for the Company.  Each such firm shall report directly to theCompany’s audit committee.  The auditcommittee also is responsible for overseeing the accounting and financialreporting processes of the Company and the audits of the financial statementsof the Company.

38

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## **ITEM 15.****               EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K.**

**Financial Statements**

The financial statements of the Company for the fiscalyears covered by this Annual Report are located on pages F-1 to F-26 of thisAnnual Report.

### **Exhibits**

| Exhibit No. | ** ** | **Description**                                                                                                                    |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                               |
| 2.1         |       | Articles of Merger of Medicsight, Inc., a Utah  corporation (1)                                                                    |
| 2.2         |       | Certificate of Merger of Medicsight, Inc., a  Delaware corporation (1)                                                             |
| 2.3         |       | Offering Document to acquire shares of Radical  Technology PLC. (2)                                                                |
| 3.1         |       | Certificate of Incorporation of Medicsight, Inc. and  amendments thereto (1)                                                       |
| 3.2         |       | By-Laws of Medicsight, Inc. (1)                                                                                                    |
| 4.1         |       | Loan Note issued by HTTP Insights, Ltd. to  Nightingale Technologies Ltd. (5)                                                      |
| 10.1        |       | Share Sale Agreement between Nightingale  Technologies Limited and Medicsight, Inc. (3)                                            |
| 10.2        |       | Letter Agreement between Asia IT Capital  Investments, Ltd. and Medicsight, Inc. (4)                                               |
| 10.2        |       | Letter Agreement between Asia IT Capital  Investments, Ltd. and Medicsight PLC (5)                                                 |
| 21.1        |       | Subsidiaries (filed herewith at page E-1).                                                                                         |
| 31.1        |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Chief Executive Officer (filed herewith at page  E-2). |
| 31.2        |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Chief Financial Officer (filed herewith at page  E-3). |
| 32.1        |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 of Chief Executive Officer (filed herewith at page  E-4). |
| 32.2        |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 of Chief Financial Officer (filed herewith at page  E-5). |

 

----

(1)           Incorporated herein by reference to theCompany’s Current Report on Form 8-K filed on January 19, 2007.

(2)           Incorporated herein by reference to theCompany’s Current Report on Form 8-K filed on May 23, 2000.

(3)           Incorporated herein by reference to theCompany’s Current Report on Form 8-K filed March 7, 2001.

(4)           Incorporated herein by reference to theCompany’s Registration Statement on Form SB-2, filed December 26, 2001.

(5)           Incorporated herein by reference to theCompany’s Annual Report on Form 10-KSB, filed April 19, 2002.

### **Reports on Form 8-K**

None.

39

----

**SIGNATURES**

In accordance with Section 13 or 15(d) of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                |     |    MEDICSIGHT,  INC. |
|----------------|----------|-------------------------------------|
| March 28, 2007 |     |                                |   |   |
|           |     | By:                                 | /s/ TIM PATERSON-BROWN |
|           | * * | * *                            | *Chief Executive Officer (Principal Executive  Officer)* |
| March 28, 2007 |     |                                |   |
|           |     | By:                                 | /s/ ALLAN ROWLEY |
|           | * * | * *                            | *Chief Financial Officer (Principal Financial  Officer)* |

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| **Signature**             | ** ** | **Title**  | ** ** | **Date**   |
|---------------------------|------------|------------|------------|------------|
| ** **                | ** ** | ** ** | ** ** | ** ** |
| /s/ STEPHEN FORSYTH       |       |       | Director   |       | March 28, 2007 |
| Stephen Forsyth           |       |       |       |       |
|                      |       |       |       |       |
| /s/ TIM PATERSON-BROWN    |       |       | Director   |       | March 28, 2007 |
| Tim Paterson-Brown        |       |       |       |       |
|                      |       |       |       |       |
| /s/ ALLAN ROWLEY          |       |       | Director   |       | March 28, 2007 |
| Allan Rowley              |       |       |       |       |
|                      |       |       |       |       |
| /s/ NEAL WYMAN            |       |       | Director   |       | March 28, 2007 |
| Neal Wyman                |       |       |       |       |
|                      |       |       |       |       |
| /s/ L. PETER FIELDING     |       |       | Director   |       | March 28, 2007 |
| L. Peter Fielding         |       |       |       |       |
|                      |       |       |       |       |
| /s/ PETER VENTON          |       |       | Director   |       | March 28, 2007 |
| Peter Venton              |       |       |       |       |
|                      |       |       |       |       |
| /s/ SIR CHRISTOPHER PAINE |       |       | Director   |       | March 28, 2007 |
| Sir Christopher Paine     |       |       |       |       |
|                      |       |       |       |       |
| /s/ ALLAN MILLER          |       |       | Director   |       | March 28, 2007 |
| Allan Miller              |       |       |       |       |
|                           |            |            |            |            |  |  |  |

 

40

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**MGT CAPITAL INVESTMENTS,INC. (FORMERLY MEDICSIGHT, INC.) AND SUBSIDIARIES**

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS**
| Report of Independent  Registered Public Accounting Firm                                                                                                                          |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                              |   |   |
| Consolidated  Balance Sheets as of December 31, 2006 and December 31, 2005                                                                                                        |   |   |
|                                                                                                                                                                              |   |   |
| Consolidated  Statements of Operations for the years ended December 31, 2006, December 31,  2005 and December 31, 2004                                                            |   |   |
|                                                                                                                                                                              |   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity and Comprehensive Income/(Loss)  for the years ended December 31, 2006, December 31, 2005 and December 31,  2004 |   |   |
|                                                                                                                                                                              |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2006, December 31,  2005 and December 31, 2004                                                            |   |   |
|                                                                                                                                                                              |   |   |
| Notes  to the Consolidated Financial Statements                                                                                                                                   |   |   |

 

F-1

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders

MGT Capital Investments,Inc. and Subsidiaries

We have audited theaccompanying consolidated balance sheets of MGT Capital Investments, Inc., formerlyMedicsight, Inc. and Subsidiaries as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity andcomprehensive loss, and cash flows for each of the three years in the periodended December 31, 2006.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Medicsight, Inc. andSubsidiaries as of December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2006, in conformity with accounting principles generally acceptedin the United States of America.

As discussed in Note 2 tothe accompanying consolidated financial statements, the Company changed itsmethod of accounting for stock-based compensation upon the adoption ofStatement of Financial Accounting Standard No. 123(R), “Share-Based Payment.”

In connection with ouraudits of the financial statements referred to above, we audited Schedule II —Valuation and Qualifying Accounts.  Inour opinion, the financial schedule, when considered in relation to thefinancial statements taken as a whole, presents fairly, in all materialrespects, the information stated therein.
| /s/ Amper, Politziner &  Mattia P.C. |   |
|------------------------------------------|--------|
|                                     |   |
| March 28, 2007                           |   |
| Edison, New  Jersey                      |   |

 

F-2

----

**MGTCAPITAL INVESTMENTS, INC. (FORMERLY MEDICSIGHT, INC.) AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2006 AND DECEMBER31, 2005**

($in thousands, except share and per share amounts)

 
| ** **                                                                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                              |       |     |       |     |       |
|                                                                                                                                |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                                     |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                          |       | $        | 19,757     |     | $          | 7,249 |   |
| Cash held for  common stock subscribed but unissued                                                                                 |       | —   |       | 4,000    |       |
| Marketable  securities                                                                                                              |       | 4,978    |       | —   |       |
| Other  receivables                                                                                                                  |       | 123      |       | 344      |       |
| Prepaid expenses                                                                                                                    |       | 115      |       | 213      |       |
| Value-Added Tax  receivable                                                                                                         |       | 333      |       | 61       |       |
| Total current assets                                                                                                                |       | 25,306   |       | 11,867   |       |
|                                                                                                                                |       |     |       |     |       |
| PROPERTY AND  EQUIPMENT, at cost, net of accumulated depreciation of $768 and $1,542                                                |       | 683      |       | 252      |       |
|                                                                                                                                |       |     |       |     |       |
| INVESTMENTS, at  cost                                                                                                               |       | 359      |       | 359      |       |
|                                                                                                                                |       |     |       |     |       |
| SECURITY  DEPOSITS                                                                                                                  |       | 921      |       | 808      |       |
|                                                                                                                                |       |     |       |     |       |
| EXCESS OF  PURCHASE PRICE OVER NET ASSETS ACQUIRED                                                                                  |       | 11,200   |       | 11,200   |       |
|                                                                                                                                |       |     |       |     |       |
| Total assets                                                                                                                        |       | 38,469   |       | $        | 24,486     |   |
|                                                                                                                                |       |     |       |     |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                          |       |     |       |     |       |
|                                                                                                                                |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                               |       |     |       |     |       |
| Accounts payable                                                                                                                    |       | $        | 1,986      |     | $          | 1,172 |   |
| Accounts payable  — related party                                                                                              |       | —   |       | 1,151    |       |
| Accrued expenses                                                                                                                    |       | 1,385    |       | 404      |       |
| Current portion  of obligations under capital leases                                                                                |       | 7        |       | 19       |       |
| Total current liabilities                                                                                                           |       | 3,378    |       | 2,746    |       |
|                                                                                                                                |       |     |       |     |       |
| Obligations  under capital leases, net of current portion                                                                           |       | —   |       | 6        |       |
| Total liabilities                                                                                                                   |       | 3,378    |       | 2,752    |       |
|                                                                                                                                |       |     |       |     |       |
| MINORITY  INTEREST                                                                                                                  |       | 21,710   |       | —   |       |
|                                                                                                                                |       |     |       |     |       |
| Commitments and  contingencies                                                                                                      |       |     |       |     |       |
|                                                                                                                                |       |     |       |     |       |
| STOCKHOLDERS’  EQUITY:                                                                                                         |       |     |       |     |       |
| Common stock,  $0.001 par value, 40,000,000 shares authorized 38,900,383 and 36,392,883 shares  issued and outstanding respectively |       | 39       |       | 36       |       |
| Additional  paid-in capital                                                                                                         |       | 218,138  |       | 208,684  |       |
| Common stock  subscribed but unissued, net                                                                                          |       | —   |       | 3,600    |       |
| Accumulated  comprehensive income                                                                                                   |       | 853      |       | 128      |       |
| Accumulated  deficit                                                                                                                |       | (205,649 | )          | (190,714 | )          |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                                    |       | 13,381   |       | 21,734   |       |
|                                                                                                                                |       |     |       |     |       |
| Total liabilities and  stockholders’ equity and minority interest                                                              |       | $        | 38,469     |     | $          | 24,486 |   |

 

The accompanying notesare an integral part of these statements.

F-3

----

**MGTCAPITAL INVESTMENTS, INC. (FORMERLY MEDICSIGHT, INC) AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31,2006, DECEMBER 31, 2005, AND DECEMBER 31, 2004**

($in thousands, except share and per share amounts)

 
| ** **                                                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                      |       |       |       |       |       |       |       |
| REVENUES                                                                        |       | $          | —     |       | $          | —     |       | $ | — |   |
|                                                                            |       |       |       |       |       |       |       |
| EXPENSES:                                                                       |       |       |       |       |       |       |       |
| Selling, general  and administrative                                            |       | 12,842     |       | 9,300      |       | 10,578     |       |
| Research and  development cost                                                  |       | 2,870      |       | 2,363      |       | 2,972      |       |
| Impairment of  investments                                                      |       | —     |       | —     |       | 70         |       |
|                                                                            |       | 15,712     |       | 11,663     |       | 13,620     |       |
|                                                                            |       |       |       |       |       |       |       |
| Operating loss                                                                  |       | (15,712    | )          | (11,663    | )          | (13,620    | )          |
|                                                                            |       |       |       |       |       |       |       |
| OTHER  INCOME/(EXPENSE)                                                         |       |       |       |       |       |       |       |
| Interest and  other income                                                      |       | 300        |       | 67         |       | 130        |       |
| Loss before  Income tax benefit , Minority interest and Discontinued operations |       | (15,412    | )          | (11,596    | )          | (13,490    | )          |
|                                                                            |       |       |       |       |       |       |       |
| Income tax  benefit                                                             |       | —     |       | 858        |       | —     |       |
| Loss before  Minority interest and Discontinued operations                      |       | (15,412    | )          | (10,738    | )          | (13,490    | )          |
|                                                                            |       |       |       |       |       |       |       |
| Minority  interest                                                              |       | 477        |       | —     |       | 605        |       |
| Loss from  continuing operations                                                |       | (14,935    | )          | (10,738    | )          | (12,885    | )          |
|                                                                            |       |       |       |       |       |       |       |
| Discontinued  operations:                                                       |       |       |       |       |       |       |       |
| Loss from impairment of assets                                                  |       | —     |       | (394       | )          | (582       | )          |
| Loss from operations of Lifesyne                                                |       | —     |       | (1,084     | )          | (1,563     | )          |
|                                                                            |       |       |       |       |       |       |       |
| Net loss                                                                        |       | $          | (14,935    | )          | $          | (12,216    | )          | $ | (15,030 | ) |
|                                                                            |       |       |       |       |       |       |       |
| PER SHARE DATA:                                                                 |       |       |       |       |       |       |       |
| Net loss from  continuing activities                                            |       | $          | (0.39      | )          | $          | (0.31      | )          | $ | (0.42 | ) |
| Net loss from  discontinued activities                                          |       | —     |       | (0.05      | )          | (0.07      | )          |
|                                                                            |       |       |       |       |       |       |       |
| Basic and  diluted loss per share                                               |       | $          | (0.39      | )          | $          | (0.36      | )          | $ | (0.49 | ) |
|                                                                            |       |       |       |       |       |       |       |
| Weighted average number  of common shares outstanding                           |       | 38,092,965 |       | 34,224,023 |       | 30,853,734 |       |

 

The accompanyingnotes are an integral part of these statements.

F-4

----

**MGTCAPITAL INVESTMENTS, INC. (FORMERLY MEDICSIGHT, INC) AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME/(LOSS)**

**FOR THEYEARS ENDED DECEMBER 31, 2004 TO DECEMBER 31, 2006**

**(inthousands)**
| ** **                                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | ** **        | ** ** | ** **             | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Shares**        | ** ** | **Accumulated**   | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                                               | ** ** | **Common stock** | ** ** | **Paid-In** | ** ** | **to be** | ** ** | **Comprehensive** | ** ** | **Accumulated**   | ** ** | **Stockholders’** | ** ** |
| ** **                                                                               | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Issued**        | ** ** | **Income (Loss)** | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| BALANCE, JANUARY 1, 2004                                                                 |       | 24,488                |       | $           | 24         |           | $          | 173,810           |       | $                 | —     |                   | $          | 123        |       | $ | (163,468 | ) | $ | 10,489 |   |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Common stock issued (net of commissions)                                                 |       | 8,578                 |       | 9           |       | 23,301         |       | —            |       | —            |       | —                 |       | 23,310     |       |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Minority Interest of Medicsight PLC shares issued to the Company in  debt capitalisation |       | —                |       | —      |       | (459           | )          | —            |       | —            |       | —                 |       | (459       | )          |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| COMPREHENSIVE LOSS                                                                       |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Net loss for the year                                                                    |       | —                |       | —      |       | —         |       | —            |       | —            |       | (15,030                | )          | (15,030    | )          |
| Translation adjustment                                                                   |       | —                |       | —      |       | —         |       | —            |       | 155               |       | —                 |       | 155        |       |
| Total comprehensive loss                                                                 |       | —                |       | —      |       | —         |       | —            |       | 155               |       | (15,030                | )          | (14,875    | )          |
| BALANCE, DECEMBER 31, 2004                                                               |       | 33,066                |       | 33          |       | 196,652        |       | —            |       | 278               |       | (178,498               | )          | 18,465     |       |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Common stock issued (net of commissions)                                                 |       | 3,327                 |       | 3           |       | 12,032         |       | —            |       | —            |       | —                 |       | 12,035     |       |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Common stock to be issued (net of commissions)                                           |       | —                |       | —      |       | —         |       | 3,600             |       | —            |       | —                 |       | 3,600      |       |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| COMPREHENSIVE LOSS                                                                       |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
|  Net loss for the year                                                              |       | —                |       | —      |       | —         |       | —            |       | —            |       | (12,216                | )          | (12,216    | )          |
|  Translation adjustment                                                             |       | —                |       | —      |       | —         |       | —            |       | (150              | )          | —                 |       | (150       | )          |
|  Total comprehensive loss                                                           |       | —                |       | —      |       | —         |       | —            |       | (150              | )          | (12,216                | )          | (12,366    | )          |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| BALANCE, DECEMBER 31, 2005                                                               |       | 36,393                |       | $           | 36         |           | $          | 208,684           |       | $                 | 3,600      |                   | $          | 128        |       | $ | (190,714 | ) | $ | 21,734 |   |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Common stock issued (net of commissions)                                                 |       | 2,507                 |       | 3           |       | 9,014          |       | —            |       | —            |       | —                 |       | 9,017      |       |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Common stock issued (net of commissions)                                                 |       | —                |       | —      |       | —         |       | (3,600            | )          | —            |       | —                 |       | (3,600     | )          |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| Stock- based compensation                                                                |       | —                |       | —      |       | 440            |       | —            |       | —            |       | —                 |       | 440        |       |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| COMPREHENSIVE LOSS                                                                       |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
|  Net loss for the year                                                              |       | —                |       | —      |       | —         |       | —            |       | —            |       | (14,935                | )          | (14,935    | )          |
|  Translation adjustment                                                             |       | —                |       | —      |       | —         |       | —            |       | 280               |       | —                 |       | 280        |       |
|  Unrealised gain on marketable  securities                                          |       | —                |       | —      |       | —         |       | —            |       | 445               |       | —                 |       | 445        |       |
|  Total comprehensive loss                                                           |       | —                |       | —      |       | —         |       | —            |       | 725               |       | (14,935                | )          | (14,210    | )          |
|                                                                                     |       |                  |       |        |       |           |       |              |       |              |       |                   |       |       |       |
| BALANCE, DECEMBER 31, 2006                                                               |       | 38,900                |       | $           | 39         |           | $          | 218,138           |       | $                 | —     |                   | $          | 853        |       | $ | (205,649 | ) | $ | 13,381 |   |

 

The accompanyingnotes to the consolidated financial statements are an integral part of thesestatements.

F-5

----

**MGTCAPITAL INVESTMENTS, INC. (FORMERLY MEDICSIGHT, INC) AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOW FOR THE YEARS ENDED**

**DECEMBER 31, 2006, DECEMBER 31,2005, AND DECEMBER 31, 2004**

($thousands)

 
| ** **                                                                  | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                      |       |                        |       |                        |       |                        |       |
| Net loss                                                                    |       | $                           | (14,935    | )                           | $          | (12,216                     | )          | $ | (15,030 | ) |
| Loss from discontinued operations                                           |       | —                      |       | 1,478                       |       | 2,145                       |       |
|                                                                        |       | (14,935                     | )          | (10,738                     | )          | (12,885                     | )          |
|                                                                        |       |                        |       |                        |       |                        |       |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                        |       |                        |       |                        |       |
| Stock- based compensation expense                                           |       | 440                         |       | —                      |       | —                      |       |
| Minority interest in net losses of subsidiary                               |       | (477                        | )          | —                      |       | (605                        | )          |
| Depreciation                                                                |       | 278                         |       | 237                         |       | 764                         |       |
| Impairment of investment                                                    |       | —                      |       | —                      |       | 70                          |       |
| Impairment of property and equipment                                        |       | —                      |       | —                      |       | 386                         |       |
| Loss on disposal of fixed assets                                            |       | 13                          |       | 219                         |       | —                      |       |
| (Increase)/decrease  in assets                                              |       |                        |       |                        |       |                        |       |
| Accounts receivable                                                         |       | —                      |       | (34                         | )          | (2                          | )          |
| Prepaid expenses and other receivables                                      |       | 319                         |       | (235                        | )          | 151                         |       |
| VAT receivable                                                              |       | (272                        | )          | 584                         |       | (83                         | )          |
| Increase in minority’s interest in Medicsight PLC                      |       | —                      |       | —                      |       | (459                        | )          |
| Increase/(decrease)  in liabilities                                         |       |                        |       |                        |       |                        |       |
| Accounts payable                                                            |       | 814                         |       | 124                         |       | (1,100                      | )          |
| Accounts payable – related party                                       |       | (1,151                      | )          | 1,151                       |       | —                      |       |
| Accrued expenses                                                            |       | 981                         |       | (306                        | )          | 134                         |       |
| Net cash used in operating activities                                       |       | (13,990                     | )          | (8,998                      | )          | (13,629                     | )          |
|                                                                        |       |                        |       |                        |       |                        |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                      |       |                        |       |                        |       |                        |       |
| Cash held for  common stock subscribed but unissued                         |       | 4,000                       |       | (4,000                      | )          | —                      |       |
| Purchase of  marketable securities                                          |       | (4,533                      | )          | —                      |       | —                      |       |
| Proceeds from  sale of fixed assets                                         |       | —                      |       | 300                         |       | —                      |       |
| Purchase of property  and equipment                                         |       | (722                        | )          | (131                        | )          | (434                        | )          |
| Proceeds from  sale of Lifesyne                                             |       | —                      |       | 443                         |       | —                      |       |
| Net cash (used in)/provided by investing activities                         |       | (1,255                      | )          | (3,388                      | )          | (434                        | )          |
|                                                                        |       |                        |       |                        |       |                        |       |
|                                                                        |       |                        |       |                        |       |                        |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                      |       |                        |       |                        |       |                        |       |
| Principal  payments under capital lease obligations                         |       | (18                         | )          | (289                        | )          | (59                         | )          |
| (Decrease)/increase  in bank overdraft                                      |       | —                      |       | —                      |       | (196                        | )          |
| (Decrease)/increase  in line of credit – related party                 |       | —                      |       | —                      |       | (2,880                      | )          |
| Proceeds from  sale of common stock (net of commissions)                    |       | 31,204                      |       | 12,035                      |       | 23,310                      |       |
| Proceeds from  sale of common stock to be issued (net of commissions)       |       | (3,600                      | )          | 3,600                       |       | —                      |       |
| Net cash provided by financing activities                                   |       | 27,586                      |       | 15,346                      |       | 20,175                      |       |
|                                                                        |       |                        |       |                        |       |                        |       |
| Cash flows of  discontinued operations                                      |       |                        |       |                        |       |                        |       |
| Net cash used in operating activities                                       |       | —                      |       | (1,078                      | )          | (1,486                      | )          |
| Net cash used in investing activities                                       |       | —                      |       | —                      |       | —                      |       |
| Net cash used in financing activities                                       |       | —                      |       | (44                         | )          | (13                         | )          |
|                                                                        |       | —                      |       | (1,122                      | )          | (1,499                      | )          |
|                                                                        |       |                        |       |                        |       |                        |       |
| Effects of  exchange rates on cash and cash equivalents                     |       | 167                         |       | 135                         |       | (182                        | )          |
|                                                                        |       |                        |       |                        |       |                        |       |
| NET CHANGE IN  CASH & CASH EQUIVALENTS                                  |       | 12,508                      |       | 1,973                       |       | 4,431                       |       |
|                                                                        |       |                        |       |                        |       |                        |       |
| CASH & CASH  EQUIVALENTS, BEGINNING OF YEAR                             |       | 7,249                       |       | 5,276                       |       | 845                         |       |
|                                                                        |       |                        |       |                        |       |                        |       |
| CASH & CASH  EQUIVALENTS, END OF YEAR                                   |       | $                           | 19,757     |                        | $          | 7,249                       |       | $ | 5,276 |   |
|                                                                        |       |                        |       |                        |       |                        |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH PAID                                      |       |                        |       |                        |       |                        |       |
| Interest                                                                    |       | $                           | 2          |                        | $          | 5                           |       | $ | 41 |   |

 

The accompanyingnotes are an integral part of these statements.

F-6

----

**MGT CAPITAL INVESTMENTS,INC. (FORMERLY MEDICSIGHT, INC) AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

#### **1.****              Organization,basis of presentation and liquidity**

MGT Capital Investments, Inc. (formerly Medicsight,Inc.), (along with its subsidiaries, the “Company”) is the successorconsolidated entity formed by the reverse acquisition on December 22, 1999 byFairfax Equity Limited (“Fairfax”) (now Medicsight Finance Limited) of InternetHoldings, Inc. a publicly–held company originally incorporated in Utah in 1977under the name Trolley Enterprises, Inc. Fairfax, which was treated as theaccounting acquirer in the transaction, was incorporated in the United Kingdomon October 18, 1999. Prior to its reverse acquisition by Fairfax, control ofthe former Internet Holdings, Inc., as well as its corporate name, had changeda number of times.  All prior operationshad previously been discontinued and all related claims and counterclaims weresettled, the last of which settlements occurred in November 1999.

The Company has three primary business objectives:

·                  To conceive,develop and commercialize innovative medical imaging applications derived fromour core technology known as Medicsight CAD through Medicsight PLC (“Medicsight”);

·                  To establish aglobal online community for medical imaging professionals known asMedicexchange.com with a rich selection of specialist clinical content forregistered users combined with a product marketplace where medical imagingvendors can sell their solutions online through Medicexchange PLC (“Medicexchange”).

·                  To continue toinvest in the rapidly growing HGIT Sector.

During 2005 the Company initiated a plan of disposalof the Lifesyne business and was subsequently sold in November 2005 and itsresults are reflected as discontinued operations.

The Company has incurred significant operating lossessince inception and has generated no revenues from continuing operations. As aresult, the Company has generated negative cash flows from operations and hasan accumulated deficit of $205,649,000 at December 31, 2006. The Company isoperating in a developing industry based on new technology and its primarysource of funds to date has been through the issuance of securities andborrowed funds. The Company is currently seeking additional funding and isactively developing the technology in order to bring it to market. While theCompany is optimistic and believes appropriate actions are being taken, therecan be no assurance that management’s efforts will be successful or that theproducts the Company develops and markets will be accepted by consumers.

F-7

----

#### **2.****              Summary ofsignificant accounting policies:**

*Principles of Consolidation*

The financial statements include the accounts of ourcompany and our majority owned subsidiaries. Our main operating subsidiariesare Medicsight PLC and Medicexchange PLC, both based in London (UK). Thefunctional currencies of our subsidiaries are their local currencies.  Allintercompany transactions and balances have been eliminated.  All foreigncurrency translation gains and losses arising on consolidation were recorded instockholders’ equity as a component of accumulated other comprehensive income(loss) in accordance with Statement of Financial Accounting StandardsNo. 52, *Foreign Currency Translation.*  Minority Interest represents the minority equity investment in any ofthe MGT Capital Investments, Inc, (formerly Medicsight Inc.) group ofcompanies, plus the minorities share of the net operating result.

*Use of Estimates*

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates.

*Fair value of financial instruments*

The Company’s financialinstruments consist primarily of cash, cash equivalents and marketablesecurities, for which the current carrying amounts approximate fair marketvalues.

*Cash and cash equiv*alents

The Company considers investments with originalmaturities of three months or less to be cash equivalents.

*Marketable Securities*

The Company invests some of its cash balances in short-term highly liquid availablefor sale marketable securities, which are carried in our balance sheet at fairvalue in accordance with Statement of Financial Accounting Standards No. 115 *Accounting for Certain Investments in Debt and EquitySecurities,* with unrealized gains and losses reported instockholders’ equity as a component of accumulated other comprehensive income(loss) - unless the Company concludes that unrealized losses represent another-than-temporary impairment. In that circumstance, such losses would bereflected in the consolidated statements of operations. Realized gains andlosses are included in interest income. Fair value is based upon quoted marketprices for these or similar instruments.

*Investments*

Investments consist of equity ownership in variouscorporations. The Company records these investments at historical cost, subjectto any provision for impairment.

*Property and equipment*

Property and equipment are stated at cost.Depreciation is calculated on the various asset classes over their estimateduseful lives, which range from two to five years. Leasehold improvements aredepreciated over the term of the lease.

*Excess of purchase price over netassets acquired*

Excess of purchase price over net assets acquired (“goodwill”)represents the excess of acquisition purchase price over the fair value of thenet assets acquired. Inaccordance with SFAS No. 142 “Goodwill and Other Intangible Assets”goodwill will be tested for impairment on an annual basis or wheneverindicators of impairment 

F-8

----

arise. An impairment analysis was performed as ofDecember 31, 2006 and 2005 and the Company concluded there was no impairmentloss.

For Fiscal 2006 and Fiscal 2005, the Company hadexcess of purchase price over net assets acquired of $11,200,000.

*Impairment of long-lived assets andlong-lived assets to be disposed of*

The Company evaluates the carrying value of long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. The Company’sassessment for impairment of an asset involves estimating the undiscounted cashflows expected to result from use of the asset and its eventual disposition. Animpairment loss recognized is measured as the amount by which the carryingamount of the asset exceeds the fair value of the asset.

*Foreign currency translation*

The accounts of the Company’s foreign subsidiaries aremaintained using the local currency as the functional currency. For thesesubsidiaries, assets and liabilities are translated into US dollars at year-endexchange rates, and income and expense accounts are translated at averagemonthly exchange rates. Net gains and losses from foreign currency translationare excluded from operating results and are accumulated as a separate componentof stockholders’ equity.

Gains and losses on foreign currency transactions arereflected in current operating results.

*Revenue recognition*

* *Revenue will be recognizedas services are performed, in accordance with the terms of the contractualarrangement, where persuasive evidence of an arrangement exists, the fee isfixed and determinable and collection is reasonably assured.

The Company’s revenues were derived from the Company’sdiscontinued Lifesyne scanning.

*Research and development*

Costs incurred in connection with the development ofsoftware products that are intended for sale are accounted for in accordancewith SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed”. Costs incurred prior to technologicalfeasibility being established for the product are expensed as incurred.

Technological feasibility is established uponcompletion of a detailed program design or, in its absence, completion of aworking model. Thereafter, all software production costs can be capitalized andsubsequently reported at the lower of un-amortized cost or net realizablevalue. Capitalized costs are amortized based on current and future revenue foreach product with an annual minimum equal to the straight-line amortizationover the remaining estimated economic life of the product. Amortizationcommences when the product is available for general release to customers.

The Company concluded that no such expenditures neededto be capitalized because the Company did not incur any material softwareproduction costs and all such costs incurred represent research and developmentcosts. The Company’s research and development costs are comprised of staffcost, consultancy costs and expensed research and development software costsexpensed on the Medicsight CAD system.

During the twelve months ended December 31, 2006,December 31, 2005 and December 31, 2004, the Company expended $2,870,000,$2,363,000, and $2,972,000, respectively, for research and development expensesfor Medicsight CAD and its products. We cannot predict the amount of additionalexpenditures that will be necessary prior to achieving commercialization of ourproducts.

F-9

----

*Income taxes*

Deferred taxes are computed based on the tax liabilityor benefit in future years of the reversal of temporary differences in therecognition of income or deduction of expenses between financial and taxreporting purposes. The net difference, if any, between the provision for taxesand taxes currently payable is reflected in the balance sheet as deferredtaxes. Deferred tax assets and/or liabilities, if any, are classified ascurrent and non-current based on the classification of the related asset orliability for financial reporting purposes, or based on the expected reversaldate for deferred taxes that are not related to an asset or liability.Valuation allowances are recorded to reduce deferred tax assets to that amountwhich is more likely than not to be realized.

*Loss per share*

Basic loss per share is calculated by dividing netloss attributable to the ordinary shareholders by the weighted average numberof common shares outstanding during the period. Diluted loss per share iscalculated by dividing the net loss attributable to the ordinary shareholdersby the sum of the weighted average number of common shares outstanding and thediluted potential ordinary shares.

The computation ofdiluted loss per share excludes all options because they are antidilutive. Forthe year ended December 31, 2006 there were 5,040,000 options excluded with anaverage exercise price of $1.79. For the year ended December 31, 2005, therewere 4,146,200 excluded options outstanding with a weighted average exerciseprice of $1.96 per share. For the year ended December 31, 2004, there were 1,975,250excluded options outstanding with a weighted average exercise price of $1.96per share.

*Comprehensive loss*

Comprehensive income as defined by SFAS No. 130, “ReportingComprehensive Income,” includes net income and items defined as othercomprehensive income. SFAS No. 130 requires that items defined as othercomprehensive income, such as foreign currency translation adjustments andunrealized gains and losses on certain marketable securities, be separatelyclassified in the financial statements. Such items are reported in theconsolidated statements of stockholders’ equity as comprehensive income.

*Segment reporting*

The Company follows the provisions of SFAS No. 131, “DisclosureAbout Segments of an Enterprise and Related Information”. The approachdesignates the internal organization that is used by management for makingoperating decisions and assessing performance as the source of the Company’sreportable segments. SFAS No. 131 also requires disclosures about products andservices, geographic areas and major customers.

*Stock options*

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised), *Share-Based Payment SFAS 123(R)*, whichrequires that compensation cost relating to share-based payment transaction berecognized as an expense in the financial statements, and that measurement ofthat cost be based on the estimated fair value of the equity or liabilityinstrument issued.  Under SFAS No.123(R), the pro-forma disclosures previously permitted under SFAS No. 123,Accounting for Stock-Based Compensation (“SFAS No. 123”) are no longer analternative to financial statement recognition. SFAS No 123(R) also requiresthat forfeitures be estimated and recorded over the vesting period of theinstrument.

F-10

----

 Prior toJanuary 1, 2006, as permitted by SFAS No. 123, the Company accounted forshare-based payments to employees using the intrinsic value method under therecognition and measurement principles of Accounts Principles Board Opinion No.25, Accounting for Stock Issued to Employees (“APB No. 25”), and relatedinterpretations. Under this method, compensation cost is measured as the amountby which the market price of the underlying stock exceed the exercise price ofthe stock option at the date at which both the number of options granted andthe exercise price are known.  Aspreviously permitted by SFAS No. 123, the Company had elected to apply theintrinsic-value-based method of accounting under APB No. 25 described above,and adopted only the disclosure requirements of SFAS No 123 which were similarin most respects to SFAS No. 123(R), with the exception of option forfeitures,which, under SFAS No. 123, had been accounted for as they occurred.

The Company has adopted SFAS No 123(R) using the modifiedprospective method which requires that share-based expense recognized includes:(a) share-based expense for all awards granted prior to, but not yet vested, asof the adoption date; and (b) share-based expense for all award grantedsubsequent to the adoption date.  Sincethe modified prospective method is being used, there is no cumulative effectadjustment upon the adoption of SFAS No 123(R), and the Company’s December 31,2005 financial statement do not reflect any restated amounts.

The Company uses the same valuation methodologies andassumptions in estimating the fair value of the options under both SFAS No123(R) and the pro forma disclosures under SFAS No. 123.

Had share-based expense for the Company’s stock optionplans been determined based on a calculated fair value using the Black-Scholesmodel at the grant date, the Company’s net loss would have been impacted asfollows for the year ended December 31, 2005 (in thousands):

 

| Net loss as reported                                                   |   | $    | (12,216 | ) |
|------------------------------------------------------------------------|--------|------|---------|---|
| Stock-based  compensation determined under the fair value based method |   | (645 | )       |
| Net loss, pro  forma                                                   |   | $    | (12,861 | ) |

The pro forma effect of applying SFAS No 123(R) maynot be representative of the effect on reported net income in future yearsbecause options over several years and varying amounts may be made each year.

*Recent accounting pronouncements*

In June 2006, the FASBissued FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretationof FASB Statement No. 109 (“FIN 48”) which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48prescribes a recognition threshold and measurement criteria for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN No. 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition and defines the criteria that must be met for thebenefits of a tax position to be recognized. The cumulative effect of thechange in accounting principle must be recorded as an adjustment to openingretained earnings. The Company has completed its initial evaluation of theimpact of the January 1, 2007 adoption of FIN No. 48 and determined that suchadoption is not expected to have a material impact on its financial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),which defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. SFAS No. 157 applies to otheraccounting standards that require or permit fair value measurements. Accordingly,it does not require any new fair value measurement. SFAS No. 157 will beeffective for the Company on January 1, 2008. The Company is currentlyevaluating the impact the adoption of SFAS No. 157 will have on its financialposition and results of operations.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS No. 159”), which permits entities tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value.SFAS No. 159 will be effective for the Company on January 1, 2008.The Company is currently evaluating the impact the adoption of SFAS No.159 willhave on its financial position and results of operations.

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin “SAB” 108regarding the process of quantifying financial statement misstatements. Theprovisions of this statement will be effective for the year ended December 31,2006. The impact on the financial statements for 2006 is immaterial.

#### **3.****              DiscontinuedActivities (Lifesyne)**

During the third quarter of 2005 a plan was initiatedfor the disposal of the Lifesyne business. In accordance with SFAS No. 144 “Accounting for Impairment or disposal of Long-Lived Assets”Lifesyne has been accounted for as a discontinued operation.  Accordingly, our financial statements havebeen restated to reflect the Lifesyne Segment as a discontinued operation inour consolidated statements of operations and cash flows for all periodspresented.  Statement of operationsinformation presented in the notes to consolidated financial statements hasbeen restated to reflect continuing operations for all periods presented.

F-11

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On November 10, 2005 Lifesyne was sold to anindependent third party for approximately $450,000. On August 18, 2005,Medicsight PLC entered into an option agreement with the purchaser to acquireLifesyne for a non-refundable deposit of approximately $90,000 as the purchaserneeded further time to arrange the financing for the acquisition. This depositconstituted part of the sale proceeds on completion of the acquisition. At thattime the net assets of Lifesyne totaled approximately $844,000 leading to an impairmentloss of approximately $394,000.

For Fiscal 2004, the Company recorded impairment of$582,000 against property and equipment related to the discontinued Lifesyneoperations.

Revenues and operating losses for Lifesyne for yearsended December 31 (in thousands):
|                                | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                       |       | $          | —     |       | $          | 427        |       | $ | 538 |   |
| Operating  losses              |       | $          | —     |       | $          | 1,084      |       | $ | 1,563 |   |
| Loss from impairment of assets |       | $          | —     |       | $          | 394        |       | $ | 582 |   |

 

#### **4.****              Marketable Securities**

In the year endedDecember 31,2006 the Company invested in marketable securities, which atDecember 31, 2006 were as follows ( in thousands):
|                               | ** ** | **Amortized   Cost** | ** ** | **Gross   Unrealized   Gains** | ** ** | **Gross   Unrealized   Losses** | ** ** | **Fair Value** | ** ** | **Carrying   Amount** | ** ** |
|-------------------------------|------------|---------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|----------------------------|------------|
| ** **                    | ** ** | ** **                | ** ** | ** **                               | ** ** | ** **                                | ** ** | ** **          | ** ** | ** **                 | ** ** |
| Available  for sale           |       |                      |       |                                     |       |                                      |       |                |       |                       |       |
| Marketable  equity securities |       | $                         | 4,533      |                                     | $          | 445                                       |       | $                   | —     |                       | $          | 4,978 |   | $ | 4,978 |   |
| Trading                       |       |                      |       |                                     |       |                                      |       | $                   | 4,978      |                       | $          | 4,978 |   |
|                               |            |                           |            |                                          |            |                                           |            |                     |            |                            |            |  |  |  |  |  |

 

The Company did notinvest in any marketable securities for the years ended December 31, 2005 or2004.

The increase in netunrealized holding gains on available for-sale securities in the amount of$455,000 was charged to stockholders’ equity for the years ended December 31,2006.

#### **5.****              Investments**

The Company accounts for its investments innon-marketable securities under the cost method of accounting as it owns lessthan a 20% interest in each of the companies and does not have significantinfluence over the entities. The Company reviews each investment continually toassess for other-than-temporary decreases in value in its investments. TheCompany reviews all available financial and non-financial data in assessing theextent of any impairment.

At December 31, 2006 and 2005, the Company held a 6%(588,236 shares) investment in Eurindia PLC. The carrying value of this investment was $359,000 at December 31, 2006and 2005.  A valuation report fromSeptember 2006 identified that the Company’s investment was worth$841,000.  We have not recognized any ofthis gain.  In February 2007, we receiveda dividend of $206,000 from Eurindia PLC.

#### **6.****              Property andequipment**

Property and equipment consist of the following as ofDecember 31 (in thousands):

F-12

----

 
|                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Computer hardware and  software |       | $        | 1,053      |     | $          | 848 |   |
| Leasehold improvements          |       | 187      |       | —   |       |
| Furniture and fixtures          |       | 137      |       | 881      |       |
| Motor vehicles                  |       | 74       |       | 65       |       |
|                            |       |     |       |     |       |
|                            |       | 1,451    |       | 1,794    |       |
| Less: Accumulated  depreciation |       | (768     | )          | (1,542   | )          |
|                            |       | $        | 683        |     | $          | 252 |   |

 

#### **7.****              Line of Credit –related party**

On December 15, 2000, the Company entered into anunsecured credit facility with Asia IT Capital Investments Limited (“Asia IT”),a related party – see Note 15, which provides a $20,000,000 line of credit.Such line of credit originally expired on December 31, 2001, but has beenextended until December 31, 2007. Interest on advances under the creditfacility accrues at 2% above US LIBOR. At December 31, 2006 US LIBOR was5.3%. The Company can draw down on this credit facility for its financingrequirements, upon approval by the Company’s Board of Directors and subject toapproval by Asia IT (such approval not to be unreasonably withheld). TheCompany is restricted from borrowing funds, directly or indirectly, other thanthrough the credit facility with Asia IT, without the consent of Asia IT. Theavailability of the credit facility reduces upon the Company’s sale of any ofits investment assets.

On November 20, 2001, Asia IT entered into a £10,000,000 ($19,600,000)credit facility with Medicsight PLC. Such facility ceases on December 31, 2007 and is secured by a lien onall of the assets of Medicsight PLC. Interest on outstanding amounts accrues at 2% above Sterling LIBOR.  Pursuant to such credit facility, MedicsightPLC had covenanted to undertake a public offering of its ordinary shares in anamount not less than £25,000,000not later than March 2002.  MedicsightPLC did not complete such an offering and the facility nevertheless remains inplace.

At the years ended December 31, 2006 and 2005 theCompany had no drawings under the $20,000,000 facility with Asia IT, andMedicsight PLC had no drawings under its £10,000,000 ($19,600,000) facility withAsia IT.

#### **8.****              Accrued expenses**

Accrued expenses consists of the following amounts atDecember 31 (in thousands):
|                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |
| Audit, tax and legal                                      |       | $        | 233        |     | $          | 123 |   |
| Suppliers with deferred  payment terms (not yet invoiced) |       | 528      |       | —   |       |
| Rent, rates and  property related                         |       | 479      |       | —   |       |
| Other                                                     |       | 145      |       | 281      |       |
|                                                      |       |     |       |     |       |
| Total Accruals                                            |       | $        | 1,385      |     | $          | 404 |   |

 

#### **9.****              Capital leases**

The assets under capital leases, which are included inproperty and equipment, are as follows (in thousands):

F-13

----

 
|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Motor vehicles                 |       | $        | 74         |     | $          | 65 |   |
| Less: Accumulated depreciation |       | (54      | )          | (35      | )          |
|                           |       | $        | 20         |     | $          | 30 |   |

 

The following is a schedule by year of future minimumlease payments under capital leases, together with the present value of the netminimum lease payments, as of December 31, 2006 (in thousands):
| Total minimum lease payments                 |   | $  | 8      |   |
|----------------------------------------------|--------|----|--------|--------|
| Less amount  representing interest           |   | (1 | )      |
| Present value of net  minimum lease payments |   | 7  |   |
| Less current maturities                      |   | (7 | )      |
| Long-term maturities                         |   | $  | — |   |

Interest was charged at rate of 8.69%.

#### **10.****       Stockholders’ Equity andMinority Interest**

During the year ended December 31, 2006 we raised$10,030,000 (gross before commissions) by issuing 2,507,500 restricted sharesof our common stock.  We incurred commission of $1,003,000 to Asia ITCapital Investments Limited (a related party) raising a net amount of$9,027,000.

During the yearended December 31, 2005 we raised $12,035,000 (net of commission and expenses)by issuing 3,327,000 restricted shares of common stock in a private placement.

*Medicexchange PLC*

On July 10, 2006 we incorporated Medicexchange PLCwith a 10% (approximately $10,000) minority shareholder.  We subsequently raised £5,508,000($10,314,000) (gross before commissions) by issuing 5,507,511 ordinary sharesof Medicexchange PLC.  We paid commissionof £275,000 ($516,000) and issued 275,326 ordinary shares to Asia IT CapitalInvestments Limited (a related party), raising a net cash amount of £5,232,000($9,798,000).  At December 31, 2006 theCompany owned 22,500,000 ordinary shares in Medicexchange PLC, constituting73.1% of the outstanding shares.

*Medicsight PLC*

During the year ended December 31, 2006 we raised£7,000,000 ($13,752,000) (gross before commissions) by issuing 14,000,000ordinary shares of Medicsight PLC (one of our UK subsidiary companies).  We paid commission of £700,000 ($1,367,000)to Asia IT Capital Investments Limited (a related party) and we paid legal feesof $6,000, raising a net cash amount of £6,297,000 ($12,379,000).  At December 31, 2006 the Company owned96,677,300 ordinary shares in Medicsight PLC, constituting 76.5% of theoutstanding shares.

*Minority Interest*

The Company has minority investors in both Medicexchangeand Medicsight PLC as follows (in thousands):

F-14

----

 
| ** **                                      | ** ** | **Medicexchange** | ** ** | **Medicsight** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|----------------|------------|-----------|------------|
|                                            |       |              |       |           |       |      |       |
| Minority Interest at  January 1, 2006           |       | $                 | —     |           | $          | —    |       | $ | — |   |
| Medicexchange PLC -  incorporation              |       | 10                |       | —         |       | 10        |       |
| Additional funding in  2006                     |       | 9,798             |       | 12,379         |       | 22,177    |       |
| Total minority  equity investment               |       | 9,808             |       | 12,379         |       | 22,187    |       |
| Less – minority  share of operating losses |       | (457              | )          | (20            | )          | (477      | )          |
| Minority Interest at December 31, 2006          |       | $                 | 9,351      |           | $          | 12,359    |       | $ | 21,710 |   |

 

#### **11.****       Comprehensive losses**

Comprehensivelosses for the years ended December 31, 2006 and 2005 are as follows (inthousands):
|                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |     |       |
| Net loss as  reported                     |       | $        | (14,935    | )        | $          | (12,216  | )          | $ | (15,030 | ) |
| Unrealized  foreign exchange gain (loss)  |       | 280      |       | (150     | )          | 155      |       |
| Unrealized gain  on marketable securities |       | 445      |       | —   |       |     |       |
| Comprehensive loss                        |       | $        | (14,210    | )        | $          | (12,366  | )          | $ | (14,875 | ) |

 

The accumulated balancesrelated to each component of other comprehensive losses were as follows ( inthousands):

|                                 | ** ** | **Foreign   Currency   Translation** | ** ** | **Unrealized   Gain (Loss) on   Investments** | ** ** | **Accumulated   Other   Comprehensive   Loss** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Balance at December 31, 2004    |       | $                                              | 278        |                                                              | $          | —                                                        |       | $ | 278 |   |
| Other comprehensive gain (loss) |       | (150                                           | )          | —                                                            |       | (150                                                          | )          |
| Balance at December 31, 2005    |       | 128                                            |       | —                                                            |       | 128                                                           |       |
| Other comprehensive gain (loss) |       | 280                                            |       | 445                                                               |       | 725                                                           |       |
| Balance at December 31, 2006    |       | $                                              | 408        |                                                              | $          | 445                                                           |       | $ | 853 |   |

 

#### **12.****       Stock option plans**

We have four Stock Option Plans in Medicsight PLC (oneof our UK subsidiary companies).  The shares in this company are notpublicly traded.

*Plan A*

On February 26, 2003 we approved stock option plan “A”  and in the period ended June 30, 2005 grantedoptions for 2,971,000 shares to employees. At December 31, 2006 there were922,000 options outstanding and 100% of the options issued were exercisable.

*Plan B*

Between July 1, 2003 and March 31, 2005 we grantedoptions for 3,420,500 shares under stock option plan “B”. Subsequently onAugust 15, 2005, we approved the stock option plan “B”. At December 31, 2006there were 1,443,000 options outstanding and 1,279,000 of the options issuedwere exercisable.

F-15

----

*Plan C*

Between April 1, 2005 and June 30, 2006 we grantedoptions for 515,000 shares under the stock option plan “C”. On August 15, 2005,we approved stock option plan “C”. At December 31, 2006 there were 345,000options outstanding and 53,334 of the options issued were exercisable. Options issued under this plan vest in equal one-thirds after employees havebeen employed for 12, 24 and 36 months from date of grant.

*Plan D*

On July 13, 2006 we approved stock option plan “D” andgranted options for 1,375,000 shares under this plan.  At December 31, 2006 there were 1,375,000options outstanding and none of the options issued were exercisable.  Options under this plan vest in equalone-thirds after employees have been employed for 12, 24 and 36 months from thedate of grant.

We have one Stock Option Plan in Medicexchange PLC(one of our UK subsidiary companies). The shares in this company are not publicly traded.

*Plan A*

On July 13, 2006 we approved Medicexchange PLC stockoption plan “A” and granted options for 950,000 shares under this plan.  At December 31, 2006 there were 950,000options outstanding and none of the options issued were exercisable.  Options issued under this plan vest in equalone-thirds after employees have been employed for 12, 24 and 36 months from thedate of grant.

The following weighted average assumptions were usedto estimate the fair value of stock options granted in the years ended December31.
|                                                 | ** ** | **2006** | ** **   | **2005** | ** ** |
|-------------------------------------------------|------------|----------|--------------|----------|------------|
| Dividend yield                                  |       | nil      |         | nil      |       |
| Expected volatility                             |       | 60.0     | %            | 65.0     | %          |
| Risk-free interest rate                         |       | 4.75     | %            | 1 year   |       |
| Expect life of options                          |       | 4 years  |         | 1 year   |       |
| Weighted average  fair value of options granted |       | £   | 0.41 ($0.81) |     | £     | 0.47 ($0.92) |   |
|                                                 |            |          |              |          |            |  |  |

 

 

F-16

----

The assumptions aboveare based on multiple factors including 10 year United Kingdom treasury bondsfor the risk-free rate at the time of grant, expected future exercisingpatterns (we cannot base the estimate on the historical exercise patterns as nooptions have been exercised) and the volatility of the Company’s own stockprice.

The assumptions used in the Black-Scholesoption valuation model are highly subjective, and can materially affect theresulting valuation.

The following table summarizes stock option activityfor three years ended December 31, 2006, 2005 and 2004 under all option plans:
| ** **                             | ** ** | **Outstanding**                | ** ** | **Exercisable**                             | ** **   |
|----------------------------------------|------------|--------------------------------|------------|---------------------------------------------|--------------|
| ** **                             | ** ** | **Number of Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** **   | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|                                   |       |                           |       |                                        |         |   |   |   |   |
| Outstanding at  December 31, 2004 |       | 1,975,250                      |       | £                                      | 1.00 ($1.96) |   | 1,094,250 |   | £ | 1.00 ($1.96) |   |
|                                   |       |                           |       |                                        |         |   |   |   |   |
| Granted                                |       | 3,630,500                      |       | £                                      | 1.00 ($1.96) |   |   |   |   |   |
| Exercised                              |       | -                              |       | £                                      | 1.00 ($1.96) |   |   |   |   |   |
| Forfeited                              |       | (1,459,550                     | )          | £                                      | 1.00 ($1.96) |   |   |   |   |   |
|                                   |       |                           |       |                                        |         |   |   |   |   |
| Outstanding at  December 31, 2005 |       | 4,146,200                      |       | £                                      | 1.00 ($1.96) |   | 3,362,850 |   | £ | 1.00 ($1.96) |   |
|                                   |       |                           |       |                                        |         |   |   |   |   |
| Granted                                |       | 2,610,000                      |       | £                                      | 1.05 ($2.06) |   |   |   |   |   |
| Exercised                              |       | -                              |       | -                                           |         |   |   |   |   |
| Forfeited                              |       | (1,716,200                     | )          | £                                      | 1.00 ($1.96) |   |   |   |   |   |
|                                   |       |                           |       |                                        |         |   |   |   |   |
| Outstanding at December 31, 2006  |       | 5,040,000                      |       | £                                      | 0.91 ($1.79) |   | 2,256,200 |   | £ | 1.00 ($1.96) |   |

The following is a summary of the status of the stockoption outstanding at December 31, 2006:
| ** **           | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**       | ** ** |
|----------------------|------------|------------------------------|------------|------------------------------------|------------|
| ** **           | ** ** | **Number**                   | ** ** | **Contractual Life  (years)** | ** ** | **Exercise Price** | ** ** | **Number** | ** ** | **Exercise price** | ** ** |
|                 |       |                         |       |                               |       |   |   |   |   |   |   |
| Medicsight Plan A    |       | 922,000                      |       | 6.3                                |       | £ | 1.00 ($1.96) |   | 922,000 |   | £ | 1.00 ($1.96) |   |
| Medicsight Plan B    |       | 1,443,000                    |       | 7.7                                |       | £ | 1.00 ($1.96) |   | 1,279,200 |   | £ | 1.00 ($1.96) |   |
| Medicsight Plan C    |       | 350,000                      |       | 8.4                                |       | £ | 1.00 ($1.96) |   | 55,000 |   | £ | 1.00 ($1.96) |   |
| Medicsight Plan D    |       | 1,375,000                    |       | 9.5                                |       | £ | 1.10 ($2.16) |   | — |   | £ | 1.10 ($2.16) |   |
| Medicexchange Plan A |       | 950,000                      |       | 9.5                                |       | £ | 0.40 ($0.78) |   | — |   | £ | 0.40 ($0.78) |   |

The Company has recorded the following amounts relatedto its share-based expenses in the accompanying Statement of Operations in theyear ended December 31, 2006:
|                                      | ** ** | **2006** | ** ** |
|--------------------------------------|------------|----------|------------|
|                                 |       |     |       |
| Selling, general and  administrative |       | $        | 405        |   |
| Research and  development            |       | 35       |       |
| Total                                |       | $        | 440        |   |

No compensation costs were capitalized.

The aggregate intrinsic value for options outstandingand exercisable at December 31, 2006 was approximately $4,420,000.

The average grant date fair value of options was £0.41($0.81) and £0.47 ($0.92) for options granted during the years ended December31, 2006 and December 31, 2005 respectively.

A summary of nonvested options at December 31, 2006and change during the year ended December 31, 2006 is presented below:
|                                        | ** ** | **Options** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** **   |
|----------------------------------------|------------|-------------|------------|-------------------------------------------------------------|--------------|
|                                   |       |        |       |                                                        |         |
| Nonvested options at  January 1, 2006  |       | 783,350     |       | £                                                      | 0.41 ($0.81) |   |
| Granted                                |       | 2,610,000   |       | £                                                      | 0.41 ($0.81) |   |
| Vested                                 |       | (444,550    | )          | £                                                      | 0.39 ($0.77) |   |
| Forfeited                              |       | (165,000    | )          | £                                                      | 0.47 ($0.92) |   |
| Nonvested options at December 31, 2006 |       | 2,783,800   |       | £                                                      | 0.41 ($0.81) |   |

As of December 31, 2006 there was $2,125,000 of totalunrecognized compensation cost related to nonvested share based compensationarrangement granted under the option plans. That cost is expected to berecognized over a weighted average period of 3.7 years.

 

F-17

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#### **13.****       Income Taxes**

The income tax provision is summarized as follows forthe years ended December 31 (in thousands):

|                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                              |       |     |       |     |       |     |       |
| Federal                              |       | $        | 0          |     | $          | 0        |       | $ | 0 |   |
| State and local                      |       | 0        |       | 0        |       | 0        |       |
| Foreign                              |       | 0        |       | 0        |       | 0        |       |
| Deferred                             |       | 0        |       | 0        |       | 0        |       |
|                                 |       |     |       |     |       |     |       |
| Total income tax provision (benefit) |       | $        | 0          |     | $          | 0        |       | $ | 0 |   |

 

Significant components of deferred tax assets were asfollows as of December 31 (in thousands):
| Deferred Tax Assets            | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Tax loss carry-forward                   |       | $        | 19,460     |     | $          | 16,460 |   |
| Capital loss carry  forward              |       | 45,230   |       | 45,230   |       |
| Property and plant  depreciation methods |       | 35       |       | 35       |       |
| Total                                    |       | 64,725   |       | 61,725   |       |
| Valuation Allowance                      |       | (64,725  | )          | (61,725  | )          |
| Net deferred tax asset                   |       | $        | —     |     | $          | — |   |

 

The Company has net operating loss carry-forwards forUnited States tax purposes to offset future taxable income of $4,794,000expiring through 2018. As it is not more likely than not that the resultingdeferred tax benefits will be realized, a full valuation allowance has beenrecognized for such deferred tax assets. The utilization of net operating losscarry forwards may be significantly limited under the Internal Revenue Code asa result of ownership changes due to the Company’s stock and other equityofferings.

Under United Kingdom taxation, Medicsight PLC has$63,342,000 of net operating loss carry-forwards to offset future taxableincome. As it is not more likely than not that the resulting deferred taxbenefits will be realized, a full valuation allowance has been recognized forsuch deferred tax assets.

The provision for income tax differs from the amountcomputed by applying the statutory federal income tax rate to income before theprovision for income taxes. The sources and tax effects of the differences areas follows for the year ended December 31:

F-18

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|                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Income taxes at the  federal statutory rates |       | (35)     | %          | (35)     | %          | (35)     | %          |
| Change in valuation  allowance               |       | 1        |       | 1        |       | 1        |       |
| Foreign operations                           |       | 34       |       | 34       |       | 34       |       |
| Effective rate of income tax                 |       | 0        | %          | 0        | %          | 0        | %          |

 

The Company has net capital losses to be carriedforward of $129,229,000 to offset against future capital gains expiring inyears 2007 through 2009.

Thereceipt of $858,000 relates to a tax credit paid by the United Kingdom taxationauthorities in the second quarter of Fiscal 2005 under its R&D tax reliefscheme for small and medium enterprises to Medicsight PLC. The basis for theR&D relief is to encourage the development of new technologies and is onlyapplicable to the research and development of a new technology and not aproduct.

Thereceipt represented the tax credit received for expenditures incurred betweenNovember 2001 and December 2003. The Company did not accrue for any potentialtax credit for Fiscal 2004 as it has determined that the completion date of thenew technology occurred at the end of Fiscal 2003 and therefore no applicationfor Fiscal 2004 will be made.

#### **14.****       Operating leases,commitments and security deposit**

OnAugust 25, 2006 we executed a 10 year agreement with Pirbright HoldingsLimited, to lease 8,787 square feet of office space at the Kensington Centre,66 Hammersmith Road, London W14 8UD, UK, and simultaneously vacated ourprevious corporate office (46 Berkeley Square, London W1J 5AT, United Kingdom).

Underthis new lease agreement our UK property rent, services and related costs willbe approximately £330,000 ($647,000) per annum, paid quarterly inadvance.  We have the right to terminate this agreement on the expiry ofthe fifth year of the lease.  Our annual rent is subject to upward onlyreview on August 24, 2011.

Wehave two 10-month rent-free periods: the first commencing August 25, 2006; thesecond commencing August 25, 2011.  We have accounted for this lease as anOperating Lease, and have accounted for the lease rental expenses on a straightline basis over the period of the lease.  We had a balance of $131,000 ofdeferred rent included in accrued expenses at December 31, 2006.

Wehave satellite offices in New York, Tokyo (Japan) and Beijing (China) — all ofwhich are on 2 year rental agreements. At December 31, 2006 we have paid in total $68,000 in deposit for theseoffice rentals.

Thefollowing is a schedule of the future minimum rental payments required underoperating leases that have initial or remaining non cancellable terms in excessof one year (in thousands):
| Year Ending | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|
| 2007             |       | 480        |       |
| 2008             |       | 649        |       |
| 2009             |       | 475        |       |
| 2010             |       | 448        |       |
| 2011             |       | 178        |       |
| Later Years      |       | 1,865      |       |
| Total            |       | $          | 4,095      |   |
|                  |            |            |            |  |

 

F-19

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Total rent expense was $1,056,000, $969,000 and$1,101,000 for the years ended December 31, 2006, 2005 and 2004 respectively.

#### **15.****       Segmental reporting**

                Under SFAS no. 131, Disclosuresabout segments of an Enterprise and Related Information, operating segments aredefined as components of an enterprise about which separate financialinformation is available that is evaluated regularly by the chief operating decision maker, or decisionmaking group in deciding how to  allocateresources and in assessing performance. Our chief operating decision makinggroup is composed of the chief executive officer and members of seniormanagement. The Company’s reportable operating segments are Medicsight andMedicexchange.

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies. Weevaluate  performance of our operatingsegments based on revenue and operating income (loss). Segments information for2006, 2005 and 2004 are as follows (in thousands):
| ** **                                    | ** ** | **Medicsight** | ** ** | **Medicexchange** | ** ** | **Corporate and   Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|----------------|------------|-------------------|------------|-------------------------------------|------------|-----------|------------|
|  2006                                    |       |           |       |              |       |                                |       |      |       |
|                                          |       |           |       |              |       |                                |       |      |       |
| Net revenue to external  customers            |       | $              | —     |              | $          | —                              |       | $         | —     |   | $ | — |   |
| Operating income (loss)                       |       | (9,517         | )          | (5,657            | )          | (538                                | )          | (15,712   | )          |
| Depreciation and  amortization                |       | 251            |       | 27                |       | —                              |       | 278       |       |
| Stock based  compensation                     |       | 440            |       | —            |       | —                              |       | 440       |       |
| Assets                                        |       | 13,495         |       | 7,366             |       | 17,607                              |       | 38,469    |       |
| Expenditure for  property plant and equipment |       | $              | 192        |              | $          | 456                                 |       | $         | 74         |   | $ | 722 |   |
|                                          |       |           |       |              |       |                                |       |      |       |
|  2005                                    |       |           |       |              |       |                                |       |      |       |
|                                          |       |           |       |              |       |                                |       |      |       |
| Net revenue to external  customers            |       | $              | —     |              | $          | —                              |       | $         | —     |   | $ | — |   |
| Operating income (loss)                       |       | (11,426        | )          | —            |       | (237                                | )          | (11,663   | )          |
| Depreciation and amortization                 |       | 431            |       | —            |       | —                              |       | 431       |       |
| Stock based  compensation                     |       | —         |       | —            |       | —                              |       | —    |       |
| Assets                                        |       | 8,777          |       | —            |       | 15,709                              |       | 24,486    |       |
| Expenditure for  property plant and equipment |       | $              | 131        |              | $          | —                              |       | $         | —     |   | $ | 131 |   |
|                                          |       |           |       |              |       |                                |       |      |       |
| 2004                                          |       |           |       |              |       |                                |       |      |       |
|                                          |       |           |       |              |       |                                |       |      |       |
| Net revenue to external  customers            |       | $              | —     |              | $          | —                              |       | $         | —     |   | $ | — |   |
| Operating income (loss)                       |       | (16,528        | )          | —            |       | 925                                 |       | (15,603   | )          |
| Depreciation and  amortization                |       | 779            |       | —            |       | —                              |       | 779       |       |
| Stock based  compensation                     |       | —         |       | —            |       | —                              |       | —    |       |
| Assets                                        |       | 9,613          |       | —            |       | 14,812                              |       | 20,355    |       |
| Expenditure for  property plant and equipment |       | $              | 434        |              | $          | —                              |       | $         | —     |   | $ | 434 |   |
|                                          |       |           |       |              |       |                                |       |      |       |

 

The Company’s mainoperations and fixed assets are in the UK.

F-20

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#### **16.****       Concentrations**

The Company maintains its cash and cash equivalents atmajor financial institutions in the United Kingdom.  Cash held in foreign institutions amounted to$19,757,000 and $6,933,000 at December 31, 2006 and 2005, respectively.  The Company periodically evaluates therelative credit standing of financial institutions considered in its cashinvestment strategy.

#### **17.****       Related PartyTransactions**

*Asia IT Capital Investments Ltd (a related party)*

On December 29, 2000, the Company acquired all of theissued and outstanding shares of HTTP Insights Limited (“Insights”). Asia ITCapital Investments Limited (“Asia IT”) was a shareholder in Insights as wellas the Company at the time of the acquisition, and has provided a creditfacility for up to $20,000,000. The credit facility expired on December 31,2001, but has been extended to December 31, 2007. All advances under the creditfacility accrue interest at 2% above US LIBOR. The Company is restricted fromborrowing funds, directly or indirectly, other than through the creditfacility, without the consent of Asia IT.

On November 20, 2001, Asia IT entered into a £10,000,000 ($19,600,000)credit facility with Medicsight PLC.  Suchfacility ceases on December 31, 2007 and is secured by a lien on all of theassets of Medicsight PLC.  Interest onoutstanding amounts accrues at 2% above Sterling LIBOR.  Pursuant to such credit facility, MedicsightPLC had covenanted to undertake a public offering of its ordinary shares in anamount not less than £25,000,000not later than March 2002.  MedicsightPLC did not complete such an offering and the facility nevertheless remains inplace.

In addition, a director of Asia IT is a brother of TimPaterson Brown, a director of the Company since December 2003 and its chiefexecutive officer since September 2004 and a director of Medicsight PLC sinceSeptember 5, 2003. In addition to the loan facilities made available by Asia ITto the Company and Medicsight PLC, Asia IT received commissions on sharesissued under private placements in both Fiscal 2006 and Fiscal 2005.

During Fiscal 2006 the Company used Asia IT to raise agross amount of $34,096,000. Asia IT earned commissions of $3,404,000 which waspartly settled by issuing 275,326 shares valued at £1.00 ($1.88) inMedicexchange PLC.

During Fiscal 2005 the Company raised $12,035,000, netof commissions and expenses, in a private placement of restricted common stockat $4.00 per share. Asia IT received commissions of $1,230,000.

During Fiscal 2004 the Company raised $23,310,000, netof commissions and expenses, in a private placement of restricted common stockat $3.00 per share. Asia IT received commissions of $2,410,000, which waspartly settled by issuing 420,000 shares of common stock of the Company to AsiaIT valued at $3.00 per share.

During the year ended December 31, 2006 , the Companyplaced monies on deposit with Asia IT. These monies earn interest at an annualrate of 5%. The funds are on call at any time. At December 31, 2006 the balanceof monies on deposit with Asia IT was $5,993,000 which included $116,000 ofinterest income earned in the year ended December 31, 2006.

*Purchase of Shares*

In theyear ended December 31, 2006, Allan Rowley (our Chief Financial Officer)purchased 15,000 ordinary shares in Medicexchange PLC for £15,000, which wasreceived in full.

F-21

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#### **18.****       Quarterly Financial Data (unaudited)**

The tables below summarize the Company’s unauditedquarterly operating results for Fiscal 2006 and 2005. Discontinued operationsrelate to Lifesyne activites (in thousands, except per share data):

THREE MONTHS ENDED
| ** **                        | ** **     | **March 31, 2006** | ** ** | **June 30, 2006** | ** ** | **September 30, 2006** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------|----------------|------------------------------|------------|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Revenues                          | - continuing   |                         | $          | —                      |       | $                                | —     |                            | $          | — |   | $ | — |   |
|                              | - discontinued |                         | —     |                        | —     |                             | —     |                            | —     |   |
|                              |           |                         |       |                        |       |                             |       |                            |       |   |
| Loss                              | - continuing   |                         | (3,030     | )                           | (4,001     | )                                | (3,907     | )                               | (3,997     | ) |
| Loss                              | - discontinued |                         | —     |                        | —     |                             | —     |                            | —     |   |
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Net loss                          |           | $                            | (3,030     | )                           | $          | (4,001                           | )          | $                               | (3,097     | ) | $ | (3,997 | ) |
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Basic and diluted loss  per share |           |                         |       |                        |       |                             |       |                            |       |
| Continuing operations             |           | (0.08                        | )          | (0.11                       | )          | (0.10                            | )          | (0.10                           | )          |
| Discontinued operations           |           | (0.00                        | )          | (0.00                       | )          | (0.00                            | )          | (0.00                           | )          |
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Net loss                          |           | $                            | (0.08      | )                           | $          | (0.11                            | )          | $                               | (0.10      | ) | $ | (0.10 | ) |

 

THREE MONTHS ENDED
| ** **                        | ** **     | **March 31, 2005** | ** ** | **June 30, 2005** | ** ** | **September 30, 2005** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|----------------|------------------------------|------------|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Revenues                          | - continuing   |                         | $          | —                      |       | $                                | —     |                            | $          | — |   | $ | — |   |
|                              | - discontinued |                         | 151        |                        | 131        |                             | 113        |                            | 32         |   |
|                              |           |                         |       |                        |       |                             |       |                            |       |   |
| Loss                              | - continuing   |                         | (2,848     | )                           | (1,999     | )                                | (2,968     | )                               | (2,923     | ) |
| Loss                              | - discontinued |                         | (246       | )                           | (365       | )                                | (684       | )                               | (183       | ) |
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Net loss                          |           | $                            | (3,094     | )                           | $          | (2,364                           | )          | $                               | (3,652     | ) | $ | (3,106 | ) |
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Basic and diluted loss  per share |           |                         |       |                        |       |                             |       |                            |       |
| Continuing operations             |           | (0.09                        | )          | (0.06                       | )          | (0.09                            | )          | (0.08                           | )          |
| Discontinued operations           |           | (0.00                        | )          | (0.01                       | )          | (0.02                            | )          | (0.01                           | )          |
|                              |           |                         |       |                        |       |                             |       |                            |       |
| Net loss                          |           | $                            | (0.09      | )                           | $          | (0.07                            | )          | $                               | (0.11      | ) | $ | (0.09 | ) |

 

F-22

----

#### **ScheduleII**

**MGTCapital Investments, Inc. (Formerly Medicsight, Inc.)**

Valuation and QualifyingAccounts

($000’s)

|                                                     | ** ** | **Balance at** | ** ** | ** **    | ** ** | ** **     | ** ** | ** **                | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|---------------|------------|----------------|------------|---------------------------|------------|
| ** **                                          | ** ** | **Beginning**       | ** ** | ** **    | ** ** | ** **     | ** ** | **Balance at**       | ** ** |
| **Deferred Tax Valuation Allowance** | ** ** | **of year**    | ** ** | **Additions** | ** ** | **Write-offs** | ** ** | **end of year** | ** ** |
|                                                |       |                |       |          |       |           |       |                      |       |
| 2004                                                |       | 46,346              |       | 13,149        |       | —         |       | 59,495                    |       |
| 2005                                                |       | 59,495              |       | 2,230         |       | —         |       | 61,725                    |       |
| 2006                                                |       | 61,725              |       | 3,000         |       | —         |       | 64,725                    |       |

 

The deferred tax valuation allowance applies to bothoperating loss carry-forwards and capital losses incurred by the Company.

F-23

----