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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                    |
|       |       | **For the quarterly period ended September 30,  2008.**                                            |
|       |       |                                                                                                    |
|       |       | **OR**                                                                                                  |
| ** ** | ** ** | ** **                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from             to**

 

**Commission file number: 0-26886**

 

**MGT CAPITAL INVESTMENTS, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**             | ** ** | **13-4148725**                       |
|--------------------------|------------|--------------------------------------|
| (State of Incorporation) |       | (I.R.S. Employer Identification No.) |

 

**Kensington Centre, 66 Hammersmith Road, London W148UD, UNITED KINGDOM**

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: **011-44-20-7605-1151**

 

Indicate by check whetherthe Registrant (1) has filed all reports to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes     x    No     o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer,non-accelerated filer or a smaller reporting company. See definition of “largeaccelerated filer”, “accelerated filer”, “non-accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act:

 
| Large  Accelerated Filer o | Accelerated filer x | Non-accelerated Filer o | Smaller reporting company o |
|----------------------------|---------------------|-------------------------|-----------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes    o     No    x

 

As of November 10, 2008the registrant had outstanding 32,550,590 shares of common stock, $0.001 parvalue, (excludes 6,349,793 common shares held as treasury stock).

 

 

 

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NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Form 10-Q,including “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Item 2, contains forward-looking statements thatinvolve risks and uncertainties, as well as assumptions that, if they nevermaterialize or prove incorrect, could cause the results of MGT CapitalInvestments, Inc and its consolidated subsidiaries (the “Company”) to differmaterially from those expressed or implied by such forward-looking statements.All statements other than statements of historical fact are statements thatcould be deemed forward-looking statements, including any projections ofrevenue, gross margin, expenses, earnings or losses from operations, synergiesor other financial items; any statements of the plans, strategies andobjectives of management for future operations, including the rate of marketdevelopment and acceptance of medical imaging technology; the execution ofrestructuring plans; any statement concerning developments, performance orindustry rankings relating to products or services; any statements regardingfuture economic conditions or performance; any statements of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties and assumptions referred to above include the performanceof contracts by suppliers, customers and partners; employee management issues;the difficulty of aligning expense levels with revenue changes; and other risksthat are described herein, including but not limited to the specific risksareas discussed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in Item 2 of this report, and that areotherwise described from time to time in the Company’s Securities and ExchangeCommission reports filed after this report. The Company assumes no obligationand does not intend to update these forward-looking statements.

 

The Company’s main operatingcurrency is UK Sterling (£).

 

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**INDEX**

 
| **PART I  — FINANCIAL INFORMATION** |                                                                                                                                          |
|-----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                    | ** **                                                                                                                                    | ** ** |
| Item 1                                        | Condensed Consolidated  Balance Sheets — September 30, 2008 (unaudited) and December 31,  2007                                 | 4 |
|                                          |                                                                                                                                          |   |
|                                          | Condensed  Consolidated Statements of Operations — for the three months ended September   30, 2008 (unaudited) and 2007 (unaudited) | 5 |
|                                          |                                                                                                                                          |   |
|                                          | Condensed  Consolidated Statements of Operations — for the nine months ended  September  30, 2008 (unaudited) and 2007 (unaudited)  | 6 |
|                                          |                                                                                                                                          |   |
|                                          | Condensed  Consolidated Statements of Cash Flows — for the nine months ended  September  30, 2008 (unaudited) and 2007 (unaudited)  | 7 |
|                                          |                                                                                                                                          |   |
|                                          | Notes to Condensed Consolidated Financial Statements                                                                                          | 8 |
|                                          |                                                                                                                                          |   |
| Item 2                                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                   | 18 |
|                                          |                                                                                                                                          |   |
| Item 3                                        | Quantitative  and Qualitative Disclosure About Market Risk                                                                                    | 22 |
|                                          |                                                                                                                                          |   |
| Item 4                                        | Controls &  Procedures                                                                                                               | 23 |
|                                          |                                                                                                                                          |   |
| **PART II — OTHER  INFORMATION**    |                                                                                                                                          |
| ** **                                    | ** **                                                                                                                                    | ** ** |
| Item 1                                        | Legal Proceedings                                                                                                                             | 24 |
|                                          |                                                                                                                                          |   |
| Item 1A                                       | Risk Factors                                                                                                                                  | 24 |
|                                          |                                                                                                                                          |   |
| Item 2                                        | Unregistered  Sale of Equity Securities and Use of Proceeds                                                                                   | 26 |
|                                          |                                                                                                                                          |   |
| Item 3                                        | Defaults  Upon Senior Securities                                                                                                              | 26 |
|                                          |                                                                                                                                          |   |
| Item 4                                        | Submission  of Matters to a Vote of Security Holders                                                                                          | 26 |
|                                          |                                                                                                                                          |   |
| Item 5                                        | Other Information                                                                                                                             | 26 |
|                                          |                                                                                                                                          |   |
| Item 6                                        | Exhibits                                                                                                                                      |   |
|                                          |                                                                                                                                          |   |
| SIGNATURES                                    | 28                                                                                                                                            |

 

All financial amounts are in thousands except share and per share data.

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

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

 
| ** **                                                                                                                                                                                                                                            | ** ** | **September 30  2008** | ** ** | **December 31  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                            | ** ** | **(unaudited)**             | ** ** | **(audited)**              | ** ** |
| **Assets**                                                                                                                                                                                                                                            |       |                        |       |                       |       |
| Current assets:                                                                                                                                                                                                                                       |       |                        |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                                                                             |       | $                           | 50,818     |                       | $          | 92,373 |   |
| Marketable securities                                                                                                                                                                                                                                 |       | 4,429                       |       | 2,219                      |       |
| Accounts receivable                                                                                                                                                                                                                                   |       | 38                          |       | 7                          |       |
| Other receivables – related party                                                                                                                                                                                                                |       | 10                          |       | 16                         |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                             |       | 1,575                       |       | 704                        |       |
| Total current assets                                                                                                                                                                                                                                  |       | 56,870                      |       | 95,319                     |       |
|                                                                                                                                                                                                                                                  |       |                        |       |                       |       |
| Property and equipment, at cost, net                                                                                                                                                                                                                  |       | 964                         |       | 903                        |       |
| Investments, at cost                                                                                                                                                                                                                                  |       | 2,279                       |       | 1,319                      |       |
| Security deposits                                                                                                                                                                                                                                     |       | 266                         |       | 279                        |       |
| Intangible assets, net of accumulated  amortization of $72                                                                                                                                                                                            |       | 324                         |       | —                     |       |
| Goodwill                                                                                                                                                                                                                                              |       | 11,287                      |       | 11,200                     |       |
| Total assets                                                                                                                                                                                                                                          |       | $                           | 71,990     |                       | $          | 109,020 |   |
|                                                                                                                                                                                                                                                  |       |                        |       |                       |       |
| **Liabilities**                                                                                                                                                                                                                                       |       |                        |       |                       |       |
| Current liabilities:                                                                                                                                                                                                                                  |       |                        |       |                       |       |
| Accounts payable                                                                                                                                                                                                                                      |       | $                           | 1,828      |                       | $          | 2,931 |   |
| Accrued expenses                                                                                                                                                                                                                                      |       | 2,337                       |       | 1,469                      |       |
| Capital lease                                                                                                                                                                                                                                         |       | 45                          |       | —                     |       |
| Deferred revenue                                                                                                                                                                                                                                      |       | 42                          |       | 20                         |       |
| Total current liabilities                                                                                                                                                                                                                             |       | 4,252                       |       | 4,420                      |       |
|                                                                                                                                                                                                                                                  |       |                        |       |                       |       |
| **Minority interest**                                                                                                                                                                                                                                 |       | 21,088                      |       | 93,504                     |       |
|                                                                                                                                                                                                                                                  |       |                        |       |                       |       |
| Commitments and contingencies                                                                                                                                                                                                                         |       | —                      |       | —                     |       |
|                                                                                                                                                                                                                                                  |       |                        |       |                       |       |
| **Stockholders’ equity**                                                                                                                                                                                                                         |       |                        |       |                       |       |
| Common stock, $0.001 par value:  September 30, 2008: 75,000,000 shares authorized; 38,900,383 shares  issued and 32,550,590 shares outstanding (December 31, 2007: 75,000,000  shares authorized; 38,900,383 shares issued and outstanding) |       | 39                          |       | 39                         |       |
| Additional paid-income in capital                                                                                                                                                                                                                     |       | 298,182                     |       | 229,428                    |       |
| Accumulated other comprehensive (loss)  income                                                                                                                                                                                                        |       | (2,995                      | )          | 1,078                      |       |
| Accumulated deficit                                                                                                                                                                                                                                   |       | (229,664                    | )          | (219,449                   | )          |
|                                                                                                                                                                                                                                                  |       | 65,562                      |       | 11,096                     |       |
| Treasury stock, at cost, 6,349,793 shares  of common stock                                                                                                                                                                                            |       | (18,912                     | )          | —                     |       |
| Total stockholders’ equity                                                                                                                                                                                                                       |       | 46,650                      |       | 11,096                     |       |
|                                                                                                                                                                                                                                                  |       |                        |       |                       |       |
| Total stockholders’ equity, liabilities and  minority interest                                                                                                                                                                                   |       | $                           | 71,990     |                       | $          | 109,020 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

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

**(unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
|                                                  |       |                                                     |       |   |   |
| Revenues                                              |       | $                                                        | 120        |   | $ | 12 |   |
| Cost of revenue                                       |       | (86                                                      | )          | — |   |
| Gross margin                                          |       | 34                                                       |       | 12 |   |
|                                                  |       |                                                     |       |   |   |
| Operating expenses                                    |       |                                                     |       |   |   |
| Selling, general and administrative  expenses         |       | 4,831                                                    |       | 4,564 |   |
| Research and development cost                         |       | 1,558                                                    |       | 440 |   |
|                                                  |       | 6,389                                                    |       | 5,004 |   |
|                                                  |       |                                                     |       |   |   |
| Operating loss                                        |       | (6,355                                                   | )          | (4,992 | ) |
|                                                  |       |                                                     |       |   |   |
| Interest and other income                             |       | 4,465                                                    |       | 1,500 |   |
|                                                  |       |                                                     |       |   |   |
| Net loss before income taxes and minority  interest   |       | (1,890                                                   | )          | (3,492 | ) |
|                                                  |       |                                                     |       |   |   |
| Income taxes                                          |       | —                                                   |       | (224 | ) |
| Minority interest                                     |       | 590                                                      |       | 1,210 |   |
|                                                  |       |                                                     |       |   |   |
| Net loss                                              |       | $                                                        | (1,300     | ) | $ | (2,506 | ) |
|                                                  |       |                                                     |       |   |   |
| Per share data:                                       |       |                                                     |       |   |   |
|                                                  |       |                                                     |       |   |   |
| Basic and diluted loss per share                      |       | $                                                        | (0.04      | ) | $ | (0.06 | ) |
|                                                  |       |                                                     |       |   |   |
| Weighted average number of common shares  outstanding |       | 32,550,742                                               |       | 38,900,383 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

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

**(unaudited)**

 
| ** **                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                  |       |                                                    |       |   |   |
| Revenues                                              |       | $                                                       | 257        |   | $ | 12 |   |
| Cost of revenue                                       |       | (116                                                    | )          | — |   |
| Gross margin                                          |       | 141                                                     |       | 12 |   |
|                                                  |       |                                                    |       |   |   |
| Operating expenses                                    |       |                                                    |       |   |   |
| Selling, general and administrative  expenses         |       | 18,301                                                  |       | 12,545 |   |
| Research and development cost                         |       | 2,785                                                   |       | 1,576 |   |
|                                                  |       | 21,086                                                  |       | 14,121 |   |
|                                                  |       |                                                    |       |   |   |
| Operating loss                                        |       | (20,945                                                 | )          | (14,109 | ) |
|                                                  |       |                                                    |       |   |   |
| Interest and other income                             |       | 5,610                                                   |       | 2,082 |   |
|                                                  |       |                                                    |       |   |   |
| Net loss before income taxes and minority  interest   |       | (15,335                                                 | )          | (12,027 | ) |
|                                                  |       |                                                    |       |   |   |
| Income taxes                                          |       | —                                                  |       | (224 | ) |
| Minority interest                                     |       | 5,120                                                   |       | 2,444 |   |
|                                                  |       |                                                    |       |   |   |
| Net loss                                              |       | $                                                       | (10,215    | ) | $ | (9,807 | ) |
|                                                  |       |                                                    |       |   |   |
| Per share data:                                       |       |                                                    |       |   |   |
|                                                  |       |                                                    |       |   |   |
| Basic and diluted loss per share                      |       | $                                                       | (0.28      | ) | $ | (0.25 | ) |
|                                                  |       |                                                    |       |   |   |
| Weighted average number of common shares  outstanding |       | 36,712,780                                              |       | 38,900,383 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**MGT CAPITAL INVESTMENTS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

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

**(unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                                         |       |                                                    |       |   |   |
| Cash flows from operating activities                                         |       |                                                    |       |   |   |
| Net loss                                                                     |       | $                                                       | (10,215    | ) | $ | (9,807 | ) |
|                                                                         |       |                                                    |       |   |   |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                                    |       |   |   |
| Loss attributable to minority interest                                       |       | (5,120                                                  | )          | (2,444 | ) |
| Stock based compensation expense                                             |       | 2,622                                                   |       | 916 |   |
| Depreciation                                                                 |       | 363                                                     |       | 268 |   |
| Amortization                                                                 |       | 72                                                      |       | — |   |
| Loss on disposal of fixed assets                                             |       | —                                                  |       | 6 |   |
| (Increase)/decrease in assets                                                |       |                                                    |       |   |   |
| Accounts receivable                                                          |       | (31                                                     | )          | (17 | ) |
| Accounts receivable – related party                                     |       | 6                                                       |       | 24 |   |
| Prepaid expenses and other current assets                                    |       | (769                                                    | )          | (254 | ) |
| Increase/(decrease) in liabilities                                           |       |                                                    |       |   |   |
| Accounts payable                                                             |       | (1,323                                                  | )          | (1,006 | ) |
| Accrued expenses                                                             |       | 868                                                     |       | 1,129 |   |
| Deferred revenue                                                             |       | 22                                                      |       | 8 |   |
| Income tax payable                                                           |       | —                                                  |       | 224 |   |
| Net cash used in operating activities                                        |       | (13,505                                                 | )          | (10,953 | ) |
|                                                                         |       |                                                    |       |   |   |
| Cash flows from investing activities:                                        |       |                                                    |       |   |   |
| Purchase of marketable securities                                            |       | (3,688                                                  | )          | — |   |
| Sale of marketable securities                                                |       | 1,555                                                   |       | 5,141 |   |
| Purchase of cash short-term deposits                                         |       | (1,000                                                  | )          | — |   |
| Redemption of cash short-term deposits                                       |       | 1,000                                                   |       | — |   |
| Purchase of investments at cost                                              |       | (960                                                    | )          | (1,000 | ) |
| Acquisition of Maydeal.com                                                   |       | (220                                                    | )          | — |   |
| Purchase of fixed assets                                                     |       | (424                                                    | )          | (411 | ) |
| Net cash (used in) provided by investing  activities                         |       | (3,737                                                  | )          | 3,730 |   |
|                                                                         |       |                                                    |       |   |   |
| Cash flows from financing activities:                                        |       |                                                    |       |   |   |
| Principal payments under capital lease  obligations                          |       | —                                                  |       | (7 | ) |
| Sale of subsidiary stock                                                     |       | —                                                  |       | 85,618 |   |
| Purchase of treasury stock (net of commissions)                              |       | (18,912                                                 | )          | — |   |
| Purchase of subsidiary company stock                                         |       | (1,251                                                  | )          | — |   |
| Net cash (used in) provided by financing  activities                         |       | (20,163                                                 | )          | 85,611 |   |
|                                                                         |       |                                                    |       |   |   |
| Effects of exchange rates on cash and cash  equivalents                      |       | (4,150                                                  | )          | 1,479 |   |
| Net change in cash and cash equivalents                                      |       | (41,555                                                 | )          | 79,867 |   |
| Cash and cash equivalents, beginning of  period                              |       | 92,373                                                  |       | 19,757 |   |
| Cash and cash equivalents, end of period                                     |       | $                                                       | 50,818     |   | $ | 99,624 |   |
|                                                                         |       |                                                    |       |   |   |
| Supplemental disclosures of cash received                                    |       |                                                    |       |   |   |
| Interest received, including currency gain                                   |       | $                                                       | 5,610      |   | $ | 1,615 |   |
|                                                                         |       |                                                    |       |   |   |
| Non cash transactions                                                        |       |                                                    |       |   |   |
| Capital lease entered into                                                   |       | $                                                       | 45         |   | $ | — |   |
| Increase in payables relating to purchase  of Maydeal                        |       | 220                                                     |       | — |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements

 

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**MGT CAPITAL INVESTMENTS, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

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

**(unaudited)**

 

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

 

The accompanying unauditedcondensed consolidated financial statements of MGT Capital Investments Inc.have been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Qand Rule 10-01 of Regulation S-X. Accordingly, they do not include all ofthe information and notes required by accounting principles generally acceptedin the United States of America. In the opinion of management, all adjustments,consisting only of normal recurring adjustments, have been included. Operatingresults for the three and nine months ended September 30, 2008 are notnecessarily indicative of the results that may be expected for anysubsequent quarter or for the year ending December 31, 2008. Thesecondensed consolidated financial statements should be read in conjunction withthe financial statements and notes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007.  Thecondensed consolidated financial statements include the accounts of the Companyand its majority owned subsidiaries. All intercompany accounts and transactionshave been eliminated.

 

MGT Capital Investments Inc(“MGT”, “we”, “the Company”, “us”) is a technology holding company in theglobal Healthcare Information Technology sector (“HCIT”).  We currentlyhave controlling interests in our two main operating subsidiaries: MedicsightPLC (“Medicsight”) and Medicexchange PLC (“Medicexchange”).

 

·        Medicsight and its wholly ownedsubsidiaries is a medical imaging software development company listed on theAIM market of the London Stock Exchange (ticker symbol MDST) that develops andcommercializes enterprise-wide Computer-Aided Detection (“CAD”) applicationswhich analyze Computer Tomography (“CT”) scans for the early detection andmeasurement of colorectal polyps and lung lesions.  The Company holds 86million shares (55%) of the 155 million shares issued capital of Medicsight.

 

·        Medicexchange and its majorityowned subsidiaries provide medical imaging professionals with a global webportal containing an online sales channel for diagnostic, treatment and surgeryplanning solutions.  This combined with a variety of relevant clinicalpapers, training materials and content gives these professionals access toinformation and products that they otherwise would have difficultyaccessing.  The Company holds 22.5 million shares (73%) of the 30.8million issued share capital of Medicexchange.  Medicexchange’s shares arenot publicly traded.

 

The Company has incurredsignificant operating losses since inception and has just commenced generatingrevenue from operations. As a result, the Company has generated negative cashflows from operations and has an accumulated deficit of $229,664 at September 30,2008. The Company is operating in a developing industry based on new technologyand its primary source of funds to date has been through the issuance ofsecurities. While the Company is optimistic and believes appropriate actionsare being taken, there can be no assurance that management’s efforts will besuccessful or that the products the Company develops and markets will beaccepted by consumers.

 

The Company has reconsideredits initial accounting treatment as it relates to minority interesttransactions.  See footnote 11 forfurther discussion.

 

**2. Summaryof Significant Accounting Policies**

 

**RevenueRecognition**

 

*Medicsight*

 

The Company recognizesrevenue in accordance with American Institute of Certified Public Accountants (“AICPA”)Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended bySOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time totime by the AICPA, and SEC Staff Accounting Bulletin No. 104. The Companyrecognizes revenue when it is realized or realizable and earned. The Companyconsiders revenue realized or realizable and earned when it has persuasiveevidence of an arrangement, the product has been shipped or the services havebeen provided to the customer, the sales price is fixed or determinable, andcollectability is probable.

 

License fee revenue isderived from the licensing of computer software. Maintenance revenue is derivedfrom software maintenance. The Company’s software licenses are generally soldas part of an arrangement that includes maintenance and support.

 

The Company licensessoftware and sells maintenance through visualization solution partners andoriginal equipment manufacturers. The Company receives regular sales reportsdetailing the number of licenses sold by original equipment manufacturers,value-added resellers and independent distributors (collectively, “Resellers”)to end users. The Company generally offers terms that require payment 30 daysfrom invoicing.

 

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Provided the Reseller i)assumes all risk of the purchase, ii) has the ability and obligation to pay regardlessof receiving payment from the end user, and all other revenue recognitioncriteria are met, license revenue from Resellers is recognized upon shipment ofits product to vendors (“sell-in basis”).

 

Additionally:

 

Software — Revenue fromlicense fees is recognized when notification of shipment to the end user hasoccurred, there are no significant Company obligations with regard toimplementation and the Company’s services are not considered essential to thefunctionality of other elements of the arrangement.

 

Services — Revenue frommaintenance and support arrangements is deferred and recognized ratably overthe term of the maintenance and support arrangements.

 

Multiple-ElementArrangements — The Company enters into arrangements with Resellers that includea combination of software products, maintenance and support. For sucharrangements, the Company recognizes revenue using the residual method. TheCompany allocates the total arrangement fee among the various elements of thearrangement based on the fair value of each of the undelivered elementsdetermined by vendor-specific objective evidence. The fair value of maintenanceand support services is established based on renewal rates. In softwarearrangements for which the Company does not have vendor-specific objectiveevidence of fair value for all elements, revenue is deferred until the earlierof when vendor-specific objective evidence is determined for the undeliveredelements (residual method) or when all elements for which the Company does nothave vendor-specific objective evidence of fair value have been delivered.

 

As of September 30,2008 we recorded $8 of deferred revenue relating to support and maintenanceservices, compared with $3 at December 31, 2007.

 

*Medicexchange*

 

We recognize revenue whenthe following revenue recognition criteria are met: persuasive evidence of anarrangement exists, services have been rendered, the selling price is fixed ordeterminable, and collectability is reasonably assured. Deferred revenue isrecorded when payments are received in advance of performing our serviceobligations.

 

As of September 30,2008 we recorded $34 of deferred revenue relating to Medicexchange, comparedwith $17 at December 31, 2007.

 

*Researchand development*

 

Costs incurred in connectionwith the development of software products that are intended for sale areaccounted for in accordance with SFAS No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurredprior to technological feasibility being established for the product areexpensed as incurred.

 

Technological feasibility isestablished upon completion of a detailed program design or, in its absence,completion of a working model. Thereafter, all software production costs can becapitalized and subsequently reported at the lower of un-amortized cost or netrealizable value. Capitalized costs are amortized based on current and futurerevenue for each product with an annual minimum equal to the straight-lineamortization over the remaining estimated economic life of the product.Amortization commences when the product is available for general release tocustomers.

 

The Company concluded thatno such expenditures needed to be capitalized because the Company did not incurany material software production costs and all such costs incurred representresearch and development costs. The Company’s research and development costsare comprised of staff cost, consultancy costs and research and developmentsoftware costs for the Medicsight CAD system.

 

For the nine months ended September 30,2008 and September 30, 2007 the Company expended $2,785 and $1,576respectively, for research and development expenses for Medicsight CAD and itsproducts.

 

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**3. Principal activities**

 

MGT Capital Investments, Inc(“MGT”) is a technology holding company in the global Healthcare InformationTechnology sector (“HCIT”).  We currently have a controlling interest intwo companies: Medicsight and Medicexchange.

 

*Medicsight*

 

Medicsight is a medicalimaging software development company listed on the AIM Market of the LondonStock Exchange (ticker symbol “MDST”) that develops and commercializesenterprise-wide Computer-Aided Detection (“CAD”) applications which analyzeComputer Tomography (“CT”) scans for the early detection and measurement ofcolorectal polyps and lung lesions.

 

MGT holds 86 million (55%)of the 155 million issued share capital of Medicsight as of September 30,2008.  On September 30, 2008, (the third quarter’s last trading day),Medicsight shares closed at a price of £0.41 ($0.74), valuing MGT’s 86 millionshares at $64,064.

 

*Medicexchange*

 

Medicexchange providesmedical imaging professionals with a global web portal containing an onlinesales channel for diagnostic, treatment and surgery planning solutions. This combined with a variety of relevant clinical papers, training materialsand content gives these professionals access to information and products thatthey otherwise would have difficulty accessing.

 

Medical imaging vendors areprovided with a global online channel through which they can access a largecommunity of medical imaging professionals in order to market and sell theirproduct solutions.  The Medicexchange portal was launched in November 2006,and is a leading medical imaging news and product information provider in thefollowing sectors: Breast, Cardiology, Abdominal-Pelvic, Neurology, Thoracicand Musculoskeletal.

 

MGT holds 22.5 millionshares (73%) of the 30.8 million issued share capital of Medicexchange. Medicexchange’s shares are not publicly traded.

 

*Investmentsat Cost*

 

We account for investmentsin non-marketable securities under the cost method of accounting where we ownless than a 20% interest in each of the companies, and we do not havesignificant influence over the entity. We continually review each investment toassess for other-than-temporary decreases in value.

 

In 2000, MGT invested inEurindia PLC (“Eurindia”), a Gibraltar company that invested in IT start-upcompanies.  MGT has a 6% holding in Eurindia and accounts for thisinvestment on a cost basis.  Eurindia has advised us that they intend topay an additional dividend and then liquidate the company late in 2008 or earlyin 2009.

 

In 2007, the Companyinvested $960 in C preference shares of XShares Group LLC, a pre-IPO investmentadvisor that creates, issues and supports exchange traded funds (ETFs) with aparticular healthcare speciality. In the nine month period ended September 30,2008 the Company invested an additional $960 in shares of XShares Group LLCbringing the total invested to $1,920. We account for these investments on acost basis as our total holdings are less than 20%.

 

*Marketablesecurities*

 

Investments in marketablesecurities consisting of HipCricket Inc. and a fund managed by Bank Sarasin &Company Limited as of September 30, were as follows:

 
| ** **                 | ** ** | **Market  Value** | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** |
|----------------------------|------------|-------------------|------------|----------|------------|-----------------------|------------|
|                       |       |              |       |     |       |                  |       |
| At September 30, 2007 |       | $                 | 139        |     | $          | 138                   |       | $ | 1 |   |
| At September 30, 2008 |       | $                 | 4,429      |     | $          | 4,271                 |       | $ | 158 |   |

 

The change in net unrealizedholding gains on available-for-sale securities for the nine months ended September 30,2008 and 2007 was a $77 and $302 increase respectively which was charged toaccumulated other comprehensive income.

 

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**4. Cash andcash equivalents**

 

We invest our cash inshort-term deposits with major banks.  At September 30, 2008 we held$50,818 in cash and cash equivalents.

 

Cash and cash equivalentsconsist of cash and temporary investments with maturities of 90 days or lesswhen purchased.

 

**5. Goodwill**

 
| Balance at December 31, 2007  |   | $  | 11,200 |   |
|------------------------------------|--------|----|--------|--------|
| Purchase of Medicsight shares      |   | 87 |   |
| Balance at September 30, 2008 |   | $  | 11,287 |   |

 

In March and April 2008we purchased a total of 1,000,000 shares in Medicsight for £634 ($1,251). The acquisition of these shares was accounted for under the purchasemethod of accounting. The excess of the acquisition cost over the associatedminority interest of these shares was added to goodwill.

 

**6. Incometaxes**

 

Wehad the following income tax expense:

 
| ** ** | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|       |       |                                                 |       |                                                |       |   |   |   |   |
| Federal    |       | —                                               |       | 224                                                 |       | — |   | 224 |   |
| Total      |       | $                                                    | —     |                                                | $          | 224 |   | $ | — |   | $ | 224 |   |
|            |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

**7. Interestand other income**

 

We had the followinginterest and other income amounts:

 
| ** **                              | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                                                 |       |                                           |       |   |   |   |   |
| Dividend income                         |       | $                                                    | —     |                                           | $          | 227 |   | $ | — |   | $ | 467 |   |
| Interest income                         |       | 646                                                  |       | 1,273                                          |       | 1,791 |   | 1,615 |   |
| Currency gain on short term investments |       | 3,819                                                |       | —                                         |       | 3,819 |   | — |   |
| Total                                   |       | $                                                    | 4,465      |                                           | $          | 1,500 |   | $ | 5,610 |   | $ | 2,082 |   |

 

**8.Comprehensive Income (Loss)**

 

Comprehensive income (loss),as defined by SFAS No. 130, “*ReportingComprehensive Income”*, includes net income (loss) and items definedas other comprehensive income.  SFAS No. 130 requires that itemsdefined as other comprehensive income, such as foreign currency translationadjustments and unrealized gains and losses on certain marketable securities,be separately classified in the financial statements.  Such items arereported in the consolidated statements of stockholders’ equity ascomprehensive income as follows:

 
| ** **                               | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September  30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                             | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                                                 |       |                                                      |       |   |   |   |   |
| Net loss as reported                     |       | $                                                    | (1,300     | )                                                         | $          | (2,506 | ) | $ | (10,215 | ) | $ | (9,807 | ) |
| Unrealized foreign exchange (loss) gain  |       | (4,077                                               | )          | 1,284                                                     |       | (4,150 | ) | 1,581 |   |
| Unrealized gain on marketable securities |       | 178                                                  |       | 16                                                        |       | 77 |   | 302 |   |
| Comprehensive loss                       |       | $                                                    | (5,199     | )                                                         | $          | (1,206 | ) | $ | (14,288 | ) | $ | (7,924 | ) |

 

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**9.****Segmentreporting**

 

Under SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*, operating segments are defined as components ofan enterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker, or decision-makinggroup in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the Chief ExecutiveOfficer and members of senior management.  Our reportable operatingsegments are Medicsight and Medicexchange.

 

The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies.  We evaluate performance of our operating segmentsbased on revenue and operating income (loss).

 

Medicsight listed on the AIMMarket of the London Stock Exchange on June 21, 2007.  AIM listing rules requireMedicsight to publish results under International Financial Reporting Standards(“IFRS”) in UK Sterling (“GBP”).

 

The following is areconciliation between Medicsight’s published financial statements and the USGAAP consolidated results:

 
| ** **                                | ** ** | **Medicsight  PLC** | ** ** | **Medicsight  PLC**       | ** ** | **Medicsight  PLC** | ** ** | **Medicexchange**  | ** ** | **Corporate  and Other** | ** ** | **Total**          | ** ** |
|-------------------------------------------|------------|---------------------|------------|---------------------------|------------|---------------------|------------|--------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **(IFRS)**          | ** ** | **GAAP Adj’ts** | ** ** | **(US GAAP)**  | ** ** | **(US GAAP)** | ** ** | **(US GAAP)**            | ** ** | **(US GAAP)** | ** ** |
|                                      |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| **Nine months September   30, 2008** |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| Net revenue from external customers       |       | $                   | 113        |                      | $          | —              |       | $                  | 113        |                          | $          | 144                |       | $ | — |   | $ | 257 |   |
| Operating loss                            |       | (14,225             | )          | (263                      | )          | (14,488             | )          | (2,970             | )          | (3,487                        | )          | (20,945            | )          |
| Assets                                    |       | $                   | 39,946     |                      | $          | —              |       | $                  | 39,946     |                          | $          | 3,017              |       | $ | 29,027 |   | $ | 71,990 |   |
|                                      |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| **Nine months September   30, 2007** |       |                |       |                      |       |                |       |               |       |                          |       |               |       |
| Net revenue from external customers       |       | $                   | 12         |                      | $          | —              |       | $                  | 12         |                          | $          | —             |       | $ | — |   | $ | 12 |   |
| Operating loss                            |       | (10,872             | )          | 434                       |       | (10,438             | )          | (3,035             | )          | (636                          | )          | (14,109            | )          |
| Assets                                    |       | $                   | 55,524     |                      | $          | —              |       | $                  | 55,524     |                          | $          | 5,266              |       | $ | 54,193 |   | $ | 114,983 |   |

 

The principal GAAPadjustments are the accounting for stock options and cumulative translationadjustments.

 

The main operations andfixed assets of Medicsight and Medicexchange are in the UK.

 

**10.Stock-Based Compensation**

 

We have issued stock optionsfrom MGT and our principal subsidiary companies, Medicsight and Medicexchange.

 

*MGTStock Option Plan*

 

On December 5, 2007 weapproved the 2007 MGT stock option plan and granted options for 1,975,000shares under this plan.  At September 30, 2008 there were 1,975,000options outstanding and none 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 the date of grant.

 

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*MedicsightStock Option Plans*

 

We have eight Stock OptionPlans in Medicsight, whose shares were listed on the AIM Market of the LondonStock Exchange on June 21, 2007.

 

Plan A - on February 26,2003 we approved stock option plan “A” and in the period ended June 30,2003 we granted options for 2,971,000 shares under this plan.  At September 30,2008 there were 376,500 options outstanding, all of which were exercisable.

 

Plan B - on August 15,2005 we approved stock option plan “B” and between July 1, 2003 and March 31,2005 we granted options for 3,420,500 shares under this plan.  At September 30,2008 there were 453,500 options outstanding, all of which were exercisable.

 

Plan C — on August 15,2005 we approved stock option plan “C” and between April 1, 2005 and June 30,2006 we granted options for 515,000 shares under this plan.  Optionsissued under this plan vest in equal one-thirds after employees have beenemployed for 12, 24 and 36 months from date of grant.  At September 30,2008 there were 285,000 options outstanding and 223,333 of the options issuedwere exercisable.

 

Plan D - On July 13,2006 we approved stock option plan “D” and granted options for 1,375,000 sharesunder this plan.  Options under this plan vest in equal one-thirds afteremployees have been employed for 12, 24 and 36 months from the date of grant.At September 30, 2008 there were 825,000 options outstanding and 583,334of the options issued were exercisable.

 

Plan E - on February 22,2007 we approved and granted options for 5,900,000 shares under stock optionplan “E”.  Options under this plan vest in equal one-thirds afteremployees have been employed for 12, 24 and 36 months from the grant date. At September 30,2008 there were 5,567,500 options outstanding and 1,855,833 of the optionsissued were exercisable.

 

Plan F - on May 16,2007 we approved and subsequently granted options for 350,000 shares understock option plan “F”.  Options under this plan vest in equal one-thirdsafter employees have been employed for 12, 24 and 36 months from the grantdate.  At September 30, 2008 there were 350,000 options outstandingand 116,667 of the options issued were exercisable.

 

Plan G - on December 18,2007 we approved and subsequently granted options for 3,025,000 shares understock option plan “G”.  Options under this plan vest in equal one-thirdsafter employees have been employed for 12, 24 and 36 months from the grantdate.  At September 30, 2008 there were 2,987,500 options outstandingand none of the options issued were exercisable.

 

Plan H - on June 2,2008 we approved and subsequently granted options for 750,000 shares understock option plan “H”. Options under this plan vest in equal one thirds afteremployees have been employed for 12, 24 and 36 months from the grantdate.  At September 30, 2008 there were 750,000 options outstandingand none of the options were exercisable.

 

*MedicexchangeStock Option Plans*

 

We have two stock optionplans in Medicexchange whose shares are not publicly traded.

 

Plan A - on July 20,2006 we approved Medicexchange stock option plan “A” and granted options for950,000 shares under this plan.  Options issued under this plan vest inequal one-thirds after employees have been employed for 12, 24 and 36 monthsfrom the date of grant. At September 30, 2008 there were 700,000 optionsoutstanding and 466,666 of the options issued were exercisable.

 

Plan B — on July 26,2007 we approved Medicexchange stock option plan “B” and granted options for300,000 shares under this plan. Options issued under this plan vest equalone-thirds after employees have been employed for 12, 24 and 36 months from thedate of grant.  At September 30, 2008 there were 300,000 optionsoutstanding and 100,000 of the options issued were exercisable.

 

The following assumptionswere used to estimate fair value:

 
| ** **               | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2008**                                  | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|                     |       |                                      |       |                                     |       |   |   |   |   |
| Dividend yield           |       | —                                    |       | 0%                                       |       | 0% |   | 0% |   |
| Expected volatility      |       | —                                    |       | 59.03%                                   |       | 38.77% |   | 59.03% - 60.37% |   |
| Risk-free rate           |       | —                                    |       | 5.75%                                    |       | 5.0% |   | 5.25% - 5.75% |   |
| Expected life of options |       | —                                    |       | 4 years                                  |       | 3 years |   | 3 – 4 years |   |
| Forfeiture rates used    |       | —                                    |       | 0%                                       |       | 0% |   | 0% |   |

 

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The assumptions above arebased on multiple factors including United Kingdom treasury bonds for therisk-free rate at the time of grant, expected future exercising patterns (wecannot base the estimate on the historical exercise patterns as no options havebeen exercised) and the volatility of the MGT stock price.

 

The assumptions used in theBlack-Scholes option valuation model are highly subjective and can materiallyaffect the resulting valuation.

 

The following tablesummarizes stock option activity for the nine months ended September 30,2008 and the year ended December 31, 2007 under all option plans:

 
| ** **                             | ** ** | **Outstanding**            | ** ** | **Exercisable**                             | ** ** |
|----------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding at December 31, 2006  |       | 5,040,000                  |       | £                                      | 0.91       |   | $ | (1.79 | ) | 2,256,200 |   | £ | 1.00 |   | $ | (1.96 | ) |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Granted                                |       | 11,550,000                 |       | £                                      | 0.91       |   | $ | (1.81 | ) |   |   |   |   |   |   |
| Exercised                              |       | —                     |       | —                                      |       |   |   |   |   |   |   |   |   |
| Forfeited                              |       | (1,832,500                 | )          | £                                      | 0.72       |   | $ | (1.43 | ) |   |   |   |   |   |   |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding at December 31, 2007  |       | 14,757,500                 |       | £                                      | 0.86       |   | $ | (1.72 | ) | 2,066,667 |   | £ | 0.72 |   | $ | (1.44 | ) |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Granted                                |       | 750,000                    |       | £                                      | 0.68       |   | $ | (1.36 | ) |   |   |   |   |   |   |
| Exercised                              |       | —                     |       | —                                      |       |   |   |   |   |   |   |   |   |
| Forfeited                              |       | (937,500                   | )          | £                                      | 0.67       |   | $ | (1.34 | ) |   |   |   |   |   |   |
|                                   |       |                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Outstanding at September 30, 2008 |       | 14,570,000                 |       | £                                      | 0.87       |   | $ | (1.74 | ) | 4,175,833 |   | £ | 0.62 |   | $ | (1.23 | ) |

 

The following is a summaryof the status of the stock options outstanding at September 30, 2008:

 
| ** **                             | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**                  | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **Number**                   | ** ** | **Remaining  Contractual Life  (years)** | ** ** | **Average  Exercise Price** | ** ** | **Number** | ** ** | **Average Exercise  price** | ** ** |
|                                   |       |                         |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| MGT Capital Investments Inc. 2007 Plan |       | 1,975,000                    |       | 9.2                                           |       |   |   | $ | 3.69 |   | — |   |   |   | — |   |
| Medicsight Plan A                      |       | 376,500                      |       | 4.8                                           |       | £ | 0.75 |   | $ | (1.36 | ) | 376,500 |   | £ | 0.75 |   | $ | (1.36 | ) |
| Medicsight Plan B                      |       | 453,500                      |       | 6.0                                           |       | £ | 0.75 |   | $ | (1.36 | ) | 453,500 |   | £ | 0.75 |   | $ | (1.36 | ) |
| Medicsight Plan C                      |       | 285,000                      |       | 6.8                                           |       | £ | 0.75 |   | $ | (1.36 | ) | 223,333 |   | £ | 0.75 |   | $ | (1.36 | ) |
| Medicsight Plan D                      |       | 825,000                      |       | 7.8                                           |       | £ | 0.83 |   | $ | (1.50 | ) | 583,334 |   | £ | 0.83 |   | $ | (1.50 | ) |
| Medicsight Plan E                      |       | 5,567,500                    |       | 8.4                                           |       | £ | 0.50 |   | $ | (0.91 | ) | 1,855,833 |   | £ | 0.50 |   | $ | (0.91 | ) |
| Medicsight Plan F                      |       | 350,000                      |       | 8.7                                           |       | £ | 0.75 |   | $ | (1.36 | ) | 116,667 |   | £ | 0.75 |   | $ | (1.36 | ) |
| Medicsight Plan G                      |       | 2,987,500                    |       | 9.2                                           |       | £ | 1.10 |   | $ | (2.00 | ) | — |   | — |   | — |   |
| Medicsight Plan H                      |       | 750,000                      |       | 9.7                                           |       | £ | 0.68 |   | $ | (1.24 | ) | — |   | — |   | — |   |
| Medicexchange Plan A                   |       | 700,000                      |       | 8.0                                           |       | £ | 0.40 |   | $ | (0.73 | ) | 466,666 |   | £ | 0.40 |   | $ | (0.73 | ) |
| Medicexchange Plan B                   |       | 300,000                      |       | 8.8                                           |       | £ | 1.00 |   | $ | (1.82 | ) | 100,000 |   | £ | 1.00 |   | $ | (1.82 | ) |

 

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On February 22, 2007 wemodified the exercise price of 50% of the shares in Medicsight under plans “A”through “C” from £1.00 to £0.50 per share. On February 22, 2007 wemodified the exercise price of 50% of the shares in Medicsight under plan “D”from £1.10 to £0.50 per share. No other terms and conditions of the shareswithin these plans were modified. On March 11, 2008 we modified thevesting terms for 450,000 options in Medicsight plan E, and 150,000 options inMedicexchange plan B for a former employee and allowed these options to betransferred to his estate. In September 2008 we modified the plans of a numberof staff who left the Company’s employment, to extend the period in which theymay exercise their options. The total modification charge for the nine monthsended September 30, 2008 was $391 compared with $148 for the nine monthsended September 30, 2007.

 

We recorded the followingamounts related to share-based expenses in the Statement of Operations for thefollowing periods:

 
| ** **                          | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                                 |       |                                                |       |   |   |   |   |
| Selling, general and administrative |       | $                                                    | 700        |                                                | $          | 133 |   | $ | 2,492 |   | $ | 795 |   |
|                                |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development            |       | 42                                                   |       | 78                                                  |       | 130 |   | 121 |   |
|                                |       |                                                 |       |                                                |       |   |   |   |   |
| Total                               |       | $                                                    | 742        |                                                | $          | 211 |   | $ | 2,622 |   | $ | 916 |   |

 

No compensation costs were capitalized.

 

The aggregate intrinsicvalue for options outstanding and exercisable at September 30, 2008 wasapproximately $2,507. The aggregate intrinsic value for all outstanding optionsis $12,324.

 

A summary of non-vestedoptions at September 30, 2008 and the change during the nine months ended September 30,2008 is presented below:

 
| ** **                            | ** ** | **Number of  Options** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------|------------|
|                                  |       |                        |       |                                                        |       |   |   |
| Non-vested at January 1, 2008    |       | 12,690,833                  |       | £                                                      | 0.41       |   | $ | (0.82 | ) |
| Granted                               |       | 750,000                     |       | £                                                      | 0.21       |   | $ | (0.40 | ) |
| Vested                                |       | (2,740,000                  | )          | £                                                      | 0.30       |   | $ | (0.59 | ) |
| Forfeited                             |       | (381,666                    | )          | £                                                      | 0.31       |   | $ | (0.60 | ) |
| Non-vested at September 30, 2008 |       | 10,319,167                  |       | £                                                      | 0.43       |   | $ | (0.83 | ) |

 

At September 30, 2008,there was $8,570 of total unrecognized compensation cost related to non-vestedshare based compensation arrangements granted under the option plans.  Thecost is expected to be recognized over a weighted average period of 3.2 years.

 

**11.Minority Interest**

 

The Company has minorityinvestors in both Medicsight and Medicexchange as follows:

 
| ** **                                    | ** ** | **Medicsight** | ** ** | **Medicexchange** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|----------------|------------|-------------------|------------|-----------|------------|
|                                          |       |           |       |              |       |      |       |
| Minority Interest at January 1, 2008     |       | $              | 84,851     |              | $          | 8,653     |       | $ | 93,504 |   |
| Purchase of stock in subsidiary               |       | (1,164         | )          | —            |       | (1,164    | )          |
| Less minority share of operating losses       |       | (4,248         | )          | (872              | )          | (5,120    | )          |
| Transfer to APIC                              |       | (58,985        | )          | (7,147            | )          | (66,132   | )          |
| Minority Interest at September 30,  2008 |       | $              | 20,454     |              | $          | 634       |       | $ | 21,088 |   |

 

During thequarter ended September 30, 2008, the Company completed an analysis of itsaccounting for the  sale of subsidiaryshares.  Specifically, in December 2006,Medicsight PLC sold 14.0 million shares for approximately $12,379 net of fees,to unrelated third parties.  Based uponthe Company’s interpretation of SAB No. 51, Topic 5-H no gain or loss wasrecognized since this transaction was part of a broader corporatereorganization, as defined, and therefore this amount was originally recordedas minority interest.

 

During June 2007the Company sold 11.7 million Medicsight shares to a minority investor.  No gain was recognized on the sale and theproceeds were originally apportioned between minority interest and additionalpaid in capital.

 

Also in June 2007Medicsight sold 29.1 million shares in an IPO for approximately $61,019 net offees.  Accordingly, no gain wasrecognized on this sale and the proceeds were originally recorded as minorityinterest.

 

In August 2006,as part of the capitalization of Medicexchange, $9,798 of the capital receivedwas originally recorded as minority interest.

 

The Companyhas reconsidered its initial accounting interpretation of SAB No. 51,Topic 5-H and other accounting guidance with respect to these transactions andhas concluded that the change in the Company’s investment in Medicsight shouldbe reflected as a capital transaction. The change in the Company’s investment in Medicsight as a result of thetwo private placements is approximately $10,104, and $14,820 respectively, andthe change related to the issuance of shares in an IPO is approximately$34,061.  The change related to thecapitalization of Medicexchange is $7,147. Accordingly the Company has reduced minority interest by approximately$66,132 and has increased additional paid in capital by the same amount.

 

Thereclassification from minority interest to additional paid in capital had noeffect on the Company’s assets, liabilities, operating result, earnings pershare or cash flows from operations.

 

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**12.Acquisition of Maydeal.com**

 

On April 3, 2008,through our subsidiary Medicexchange, we acquired Maydeal.com, a Chinese webbusiness that offers an online portal for radiologists in China.  Theacquisition was accounted for under purchase accounting and, accordingly, theassets and liabilities acquired were recorded at their estimated fair values atthe date of acquisition and the results of operations have been included in theconsolidated statement of operations since the day of acquisition.

 

We acquired the trade andassets of Shanghai Shenjie Digital Technology Co. Limited, and the domain name,Maydeal.com.  The total purchase price was $440 of which $220 has beenpaid and the remaining $220 is deferred and will be paid on completion ofdefined milestones.  This $220 is classified in accounts payable on thebalance sheet.  The allocation of thepurchase price is as follows:

 
| Net assets acquired            |   | $   | 44     |   |
|--------------------------------|--------|-----|--------|--------|
| Intangible asset (domain name) |   | 396 |   |
| Total                          |   | $   | 440    |   |

 

We have not recognized anygoodwill on the acquisition, as we estimate that we purchased the assets anddomain name at their fair values.

 

The domain name is subjectto amortization and will be expensed, using the straight-line method, over 36months.  The net assets acquired relate to receivables and someequipment.  We have recognized these assets at their net asset value as webelieve there is no material difference to fair value.

 

**13. RelatedParty Transactions**

 

Tim Paterson-Brown is aNon-executive Director of Accsys Technologies PLC, which has a subsidiarycompany Titan Wood Limited. Titan Wood Limited rents space in 66 HammersmithRoad. In the nine month period ended September 30, 2008 and 2007respectively, $79 and $172 of office related costs were recharged to Titan WoodLimited. At September 30, 2008 there was a balance receivable from TitanWood Limited of $10 of which $10 remains unpaid as of November 10, 2008.This is payable within 30 days under the terms of the invoice.

 

**14.Commitments**

 

*LeaseCommitments and Security Deposit*

 

On August 25, 2006 weexecuted a 10 year agreement with Pirbright Holdings Limited, to lease 8,787square feet of office space at the Kensington Centre, 66 Hammersmith Road,London W14 8UD, UK, and simultaneously vacated our previous corporate office(46 Berkeley Square, London W1J 5AT, UK).

 

Under this new leaseagreement our UK property rent, services and related costs will beapproximately £330 ($675) per annum, paid quarterly in advance.  We havethe right to terminate this agreement on the expiry of the fifth year of thelease.  Our annual rent is subject to upward only review on August 24,2011.

 

We have two 10-monthrent-free periods: the first commencing August 25, 2006; the secondcommencing August 25, 2011.  We have accounted for this lease as anoperating lease and have accounted for the lease rental expenses on astraight-line basis over the period of the lease.

 

The following is a scheduleof the future minimum rental payments required under operating leases that haveinitial or remaining non-cancellable terms in excess of one year:

 
| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2008                                        |       | $          | 191        |   |
| 2009                                        |       | 672        |       |
| 2010                                        |       | 641        |       |
| 2011                                        |       | 227        |       |
| 2012                                        |       | 349        |       |
| 2013                                        |       | 454        |       |
| Later Years                                 |       | 1,090      |       |
| **Total Minimum**                           |       | $          | 3,624      |   |

 

*Other commitments*

 

In July 2008 we enteredinto an agreement with a partner to develop interfaces for our software.  We have committed to pay Euros 1,445 ($2,087)over an expected thirty-six month period. As of September 30, 3008 we have paid Euros 639 ($923).  These payments will be recovered againstfuture royalty payments, should the products be successfullycommercialised.  These payments have beenexpensed to the income statement and classified as research and development.

 

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**15.Repurchase of own stock**

 

In the first quarter of 2008MGT’s Board of Directors authorized the repurchase of up to 6,350,000 shares ofits common stock.  In the following sevenmonths we purchased 6,349,793 shares, which are now classified as treasurystock in equity.  The following tabledetails the transactions.

 
| ** **                                    | ** ** | **Shares purchased** | ** ** | **Average cost** | ** ** | **Shares purchased  under publicly  announced  programs** | ** ** | **Shares that  may yet be  purchased** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|-----------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                          |       |                 |       |                  |       |                                                                |       |                                                  |       |
| February 1 – February 28, 2008 |       | 271,401              |       | $                     | 3.16       |                                                                | 271,401    |                                                  | 6,078,599  |   |
| March 1 – March 31, 2008       |       | 339,500              |       | 3.00                  |       | 339,500                                                             |       | 5,739,099                                             |       |
| April 1 – April 30, 2008       |       | 5,643,759            |       | 2.98                  |       | 293,966                                                             |       | 95,340                                                |       |
| May 1 – May 31, 2008           |       | 50,212               |       | 2.12                  |       | 50,212                                                              |       | 45,128                                                |       |
| June 1 – June 30, 2008         |       | 39,014               |       | 1.91                  |       | 39,014                                                              |       | 6,114                                                 |       |
| July 1 – July 31, 2008         |       | 5,805                |       | 2.05                  |       | 5,805                                                               |       | 309                                                   |       |
| August 1 – August 31, 2008     |       | 102                  |       | 1.83                  |       | 102                                                                 |       | 207                                                   |       |
|                                          |       |                 |       |                  |       |                                                                |       |                                                  |       |
| Total                                         |       | 6,349,793            |       | $                     | 2.98       |                                                                | 1,000,000  |                                                  |       |   |

 

As of September 30,2008, therefore, the company had repurchased a total of 6,349,793 shares at anaverage price of $2.98 per share, for a total of $18,912.  Of the 38,900,383 issued shares of commonstock, 32,550,590 were outstanding as of September 30, 2008.

 

**16.Subsequent events**

 

In October 2008 weincreased our investment in XShares by purchasing a further $1,080 ofstock.  Our total investment is less than20% of the company.

 

**17. RecentAccounting Pronouncements**

 

In September 2006 theFASB issued SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”) which defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. SFAS No. 157 applies to other accounting standards thatrequire or permit fair value measurements. Accordingly, it does not require anynew fair value measurement. SFAS No. 157, as issued, was effective forfinancial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. On February 12, 2008the FASB issued FSP FAS No. 157-2, “Effective Dates of FASB Statement no.157”, which delays the effective date of SFAS No. 157 for fiscal yearsbeginning after November 15, 2008 for all non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis. We do not expectthe adoption of SFAS No. 157 to have a material impact on our financialposition or results of operations.

 

In December 2007, theFASB issued Statement of Financial Accounting Standards No. 141(R) “BusinessCombinations” (SFAS 141(R)). This Statement retains the fundamentalrequirements in Statement of Financial Accounting Standards No. 141 “BusinessCombinations”, that the acquisition method of accounting, previously known asthe purchase method, be used for all business combinations and for an acquirerto be identified for each business combination. SFAS 141(R) establishesprinciples and requirements for how the acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any noncontrolling interest in the acquiree; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. SFAS 141(R) requires contingent considerationto be recognized at its fair value on the acquisition date and, for certainarrangements, changes in fair value to be recognized in earnings untilsettled. SFAS 141(R) also requires acquisition-related transactionand restructuring costs to be expensed rather than treated as part of the costof the acquisition. The provisions for SFAS 141(R) are effective forthe Company beginning January 1, 2009. SFAS 141(R) will be appliedprospectively and early adoption is prohibited. We do not expect the adoptionof SFAS 141(R) to have a material impact on our financial position orresults of operations.

 

In December 2007, theFASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements”, an amendment of ARB No. 51, which will becomeeffective for the Company January 1, 2009, with retroactive adoption ofthe Statement’s presentation and disclosure requirements for existing minorityinterests. This standard will require ownership interests in subsidiaries heldby parties other than the parent to be presented within the equity section ofthe consolidated balance sheet but separate from the parent’s equity. It willalso require the amount of consolidated net income attributable to the parentand the noncontrolling interest to be clearly identified and presented on theface of the consolidated income statement. Certain changes in a parent’sownership interest are to be accounted for as equity transactions and when asubsidiary is deconsolidated, any noncontrolling equity investment in theformer subsidiary is to be initially measured at fair value. We are currentlyevaluating the impact the adoption of SFAS No. 160 will have on ourconsolidated financial position and results of operations.

 

In March 2008, the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities - An Amendment of FASB Statement No. 133” (“SFAS No. 161”),which amends and expands the disclosure requirements of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities”, to require qualitativedisclosure about objectives and strategies in using derivatives, quantitativedisclosures about fair value amounts of gains and losses on derivativeinstruments, and disclosures about the underlying credit-risk-relatedcontingent features in derivative agreements. SFAS No. 161 is intended toimprove financial reporting by requiring transparency about the location andamounts of derivative instruments in an entity’s financial statements; howderivative instruments and related hedged items are accounted for under SFAS No. 133and how derivative instruments and related hedged items affect its financial position,financial performance and cash flows. SFAS No. 161 is effective forfinancial statements issued for fiscal years beginning after November 15,2008. The Company is currently evaluating the potential impact, if any, theadoption of SFAS No. 161 may have on its condensed consolidated financialstatements.

 

          In April 2008, the FASB issued Staff Position FSP142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FSP142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FASB Statement No. 142, “Goodwill and OtherIntangible Assets.” FSP 142-3 is effective for financial

 

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statements issued after December 15,2008. The Company does not expect the adoption of FSP 142-3 to have a materialeffect on its condensed consolidated financial statements.

 

In May 2008 the FASBissued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS No. 162”), which identifies the sources of accountingprinciples and the framework for selecting the principles used in the preparationof financial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles (“GAAP”) in the UnitedStates.  The FASB believes that the GAAP hierarchy should be directed toentities because it is the entity (not its auditor) that is responsible forselecting accounting principles for financial statements that are presented inconformity with GAAP. The Company does not expect the adoption of SFAS No. 162to have a material effect on its condensed consolidated financial statements.

 

In May 2008 the FASBissued FASB Staff Position No. APB 14-1, “Accounting for Convertible DebtInstruments That May Be Settled in Cash upon Conversion (including PartialCash Settlement)” (“APB 14-1”). APB 14-1 requires that issuers of certainconvertible debt instruments that may be settled in cash upon conversion toseparately account for the liability and equity components in a manner thatwill reflect the entity’s nonconvertible debt borrowing rate when interest costis recognized in subsequent periods.  The accounting for these types ofinstruments under APB 14-1 is intended to appropriately reflect the underlyingeconomics by capturing the value of the conversion options as borrowing costs;therefore, recognizing their potential dilutive effects on earnings per share.The effective date of APB 14-1 is for financial statements issued for fiscalyears and interim periods beginning after December 15, 2008 and does notpermit earlier application. However, the transition guidance requiresretrospective application to all periods presented and does not grandfatherexisting instruments.  The Company is currently evaluating the potentialimpact, if any, the adoption of APB 14-1 may have on its condensed consolidatedfinancial statements.

 

In June 2008 the FASBissued FASB Staff Position EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions are Participating Securities” (“EITF03-6-1”). EITF 03-6-1 applies to the calculation of earnings per share forshare-based payment awards with rights to dividends or dividend equivalentsunder Statement No. 128, Earnings Per Share. Unvested share-based paymentawards that contain nonforfeitable rights to dividends or dividend equivalentswill be considered participating securities and will be included in thecomputation of earnings per share pursuant to the two-class method. Theeffective date of EITF 03-6-1 is for financial statements issued for fiscalyears beginning after December 15, 2008, and all interim periods withinthose years. Early adoption is not permitted. Once effective, all prior periodearnings per share data presented will be adjusted retrospectively.  TheCompany is currently evaluating the potential impact, if any, the adoption ofEITF 03-6-1 may have on its condensed consolidated financial statements.

 

On October 10, 2008 theFASB issued FASB Staff Position No. FAS 157-3 “Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active”.  FAS 157-3 clarifies the application of FASBStatement No. 157, Fair Value Measurements , in a market that is notactive and provides an example to illustrate key considerations in determiningthe fair value of a financial asset when the market for that financial asset isnot active.  This FSP was effective uponissuance, including prior periods for which financial statements had not beenissued.  FASB 157-3 did not have amaterial effect on our condensed financial statements.

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

This report containsforward-looking statements made in reliance upon the safe harbor provisions of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended.  These statements may beidentified by the use of words such as “anticipate”, “estimates”, “should”, “expect”,“guidance”, “project”, “intend”, “plan”, “believe” and other words and terms ofsimilar meaning, in connection with any discussion of our financial statements,business, results of operations, liquidity and future operating or financialperformance.  Please also refer to our “Note Regarding Forward LookingStatements” at the front of this Form.

 

MGT is a technology holdingcompany in the global Healthcare Information Technology market.  We havetwo subsidiaries, Medicsight and Medicexchange:

 

Medicsight is a medicalimaging software development company developing enterprise-wide Computer-AidedDetection (CAD) software which analyzes computer tomography (CT) scans for theearly detection and measurement of colorectal polyps and lung lesions.  Medicsight has focused on two of the leading causes of cancer-related death,colorectal cancer (also known as colon or bowel cancer) and lung cancer. There is increasing evidence in management’s view that early detection of coloncancer or lung cancer leads to an improved life expectancy.

 

Medicexchange providesmedical imaging professionals with a global web portal containing an onlinesales channel for diagnostic, treatment and surgery planning solutions. Thiscombined with a variety of relevant news, jobs, clinical papers, trainingmaterials and content gives these professionals access to information andproducts that they otherwise would have difficulty accessing.  Medicalimaging vendors are provided with a global online channel through which theycan access a large community of medical imaging professionals in order tomarket and sell their product solutions.

 

*Medicsight*

 

In February 2008,Medicsight signed a Preliminary Agreement with the System Integration (PACS)division of Toshiba Medical Systems (“Toshiba”) for the resale of MedicReadColon and ColonCAD throughout Japan.  Toshiba is a leading global providerof diagnostic medical imaging systems and comprehensive medical solutionsincluding CT.  Under the Preliminary Agreement, Toshiba will

 

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work with the Company toobtain Ministry of Health, Labor and Welfare (MHLW) regulatory approval inJapan and to jointly conduct market development initiatives.

 

In April 2008  Medicsight signed a Partnership Agreementwith INFINITT Company Limited (“Infinitt”). Infinitt has agreed to integrateMedicsight ColonCAD into its solution for global distribution. As well as beingSouth Korea’s leading PACS supplier, Infinitt also has a growing presence inboth the USA and Japan, with a global network of offices, partners and sales channelrepresentatives in 20 countries.

 

In the nine months ended September 30,2008 Medicsight was granted regulatory approval for MedicRead Colon from theChinese State Food and Drug Administration (SFDA) and the Brazilian NationalHealth Surveillance Agency (ANVISA). In July the Company receivedBrazilian ANVISA regulatory approval for its ColonCAD product.

 

Medicsight has engaged ateam of experts to help prepare the Company’s application to secure US Food andDrug Administration (FDA) clearance. The Company is confident that it willshortly be in a position to file a 510(k) submission for review by theFDA.

 

In May 2008 Medicsightsigned an exclusive CAD Clinical Research Agreement with leading American CTColonography (CTC) radiologists Dr Perry Pickhardt and Dr David Kim of theUniversity of Wisconsin Medical School, USA. In 2004 Dr Pickhardt’s Wisconsingroup was the first to establish a third-party reimbursed CTC colorectal cancerscreening programme. Since then they have both played an instrumental role inbuilding the clinical evidence base that has proven the comparableeffectiveness of CTC for the detection of colorectal neoplasia within anasymptomatic population in relation to optical colonoscopy. Their specialistadvice and experience of CTC practice will enhance the clinical validation ofMedicsight’s ColonCAD products set in the context of the world’s largesthealthcare market.

 

The Medicsight productroadmap continues in line with management expectations.  Medicsight iscontinuing to improve the performance of its ColonCAD product with a newversion planned for 2009.  In addition, the company has initiated thedevelopment of a CO2 insufflation device for CTC(MedicCO2lon) and is exploring new image processing and analysistools for optical colonoscopy. These additions will bolster the existing CTCportfolio.

 

Revenues in the nine monthsended September 30, 2008 were $113, compared to $12 in the nine monthsended September 30, 2007.

 

*Medicexchange*

 

On April 3, 2008,through our subsidiary Medicexchange, we acquired Maydeal.com, a Chinese webbusiness that offers an online portal for radiologists in China.  Theacquisition was accounted for under purchase accounting and, accordingly, theassets and liabilities acquired were recorded at their estimated fair values atthe date of acquisition and the results of operations have been included in theconsolidated statement of operations since the day of acquisition.

 

In September 2008 wemade the decision to focus Medicexchange’s operations in the USA.  Accordingly, staff numbers in London have beenreduced.  There is no significant changeto Medicexchange’s business model.

 

Revenues in the nine monthsended September 30, 2008 were $144, compared to $nil in the nine monthsended September 30, 2007.

 

*MGT*

 

In the first quarter of2008, MGT’s Board of Directors authorized the repurchase of up to 6,350,000shares of its common stock.  At September 30, 2008 the Company hadrepurchased 6,349,793 shares.

 

In March and April 2008,MGT purchased 1,000,000 ordinary shares of its majority-owned subsidiaryMedicsight at an average price of £0.63 ($1.26) per share.  As of September 30,2008 MGT holds 86,000,000 ordinary shares of Medicsight, representing 55% ofthe issued share capital.

 

**General**

 

MGT was originally incorporatedas a Utah corporation in 1977 and was re-incorporated in Delaware in2000.  At September 30, 2008 the Company’s authorized share capitalwas 75,000,000 shares of common stock, par value of $0.001.

 

At September 30, 2008the Company had issued 38,900,383 shares of common stock, of which 32,550,590are outstanding.

 

As of September 30,2008 the Company and its subsidiaries had 100 employees, all of whom arefull-time employees.  Our employees are not part of a union.  Webelieve that we have an excellent relationship with our employees.

 

Our principal executiveoffice is located at Kensington Centre, 66 Hammersmith Road, London W14 8UD,United Kingdom, telephone 011-44-207-605-1151, facsimile 011-44-207-605-1171.

 

Our web address iswww.mgtci.com.  Information on our website is not deemed to be a part ofthis Quarterly Report.

 

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**CriticalAccounting Policies and the Use of Estimates**

 

We believe there have beenno significant changes in our critical accounting policies during the ninemonths ended September 30, 2008 as compared to our previous disclosures inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the fiscal yearended December 31, 2007.

 

The accompanying discussionand analysis of our financial condition and results of operations are basedupon our condensed consolidated financial statements and the relateddisclosures, which have been prepared in accordance with U.S. generallyaccepted accounting principles (GAAP).  The preparation of these condensedconsolidated financial statements requires us to make estimates, assumptionsand judgments that affect the reported amounts in our condensed consolidatedfinancial statements and accompanying notes.  These estimates form thebasis for making judgments about the carrying values of assets andliabilities.  We base our estimates and judgments on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances. Actual results could differ materially from these estimates.

 

We believe the followingpolicies to be the most critical to an understanding of our financial conditionand results of operations because they require us to make estimates,assumptions and judgments about matters that are inherently uncertain.

 

*RevenueRecognition*

 

We follow specific anddetailed guidelines in determining the proper amount of revenue to be recorded;certain judgments, however, affect the application of our revenue recognitionpolicy. Revenue results are difficult to predict, and any delay in recognizingrevenue could cause our operating results to vary significantly from period toperiod.

 

The significant judgmentsfor revenue recognition typically involve determining the exact date whenlicenses are sold to end users and the date from which support and maintenancecommences. In addition, our transactions often consist of multiple elementarrangements, which must be analyzed to determine the fair value of eachelement, the amount of revenue to be recognized initially, and the period andconditions under which deferred revenue should be recognized.  As aresult, if facts and circumstances change that affect our current judgments,our revenue could be materially different in the future.

 

We recognize revenue inaccordance with American Institute of Certified Public Accountants (“AICPA”)Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended bySOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time totime by the AICPA, and SEC Staff Accounting Bulletin No. 104. We recognizerevenue when it is realized or realizable and earned. We consider revenuerealized or realizable and earned when we have persuasive evidence of anarrangement, the product has been provided to the customer, the sales price isfixed or determinable, and collectability is probable.

 

*StockBased Compensation*

 

We have granted employeestock options in MGT and both Medicsight and Medicexchange (our principalsubsidiary companies).  We use the Black-Scholes option pricing model toestimate the fair value of employee stock options.  Calculating the fairvalue of these stock options requires considerable judgment, includingestimating stock price volatility, the amount of options that are expected tobe forfeited and the expected life of the options awards.

 

The value of a stock optionis derived from its potential for appreciation.  The more volatile thestock, the more valuable the option becomes due to the greater possibility ofsignificant changes in stock price.  The expected option term also has asignificant effect on the value of the option.  The longer the term, themore time the option holder has to allow the stock price to increase without acash investment and thus, the more valuable the option.  When establishingan estimate of the expected term, we consider the vesting period for the awardand our estimate of employee’s likely stock option exercises, the expectedvolatility, and a comparison to relevant peer group data.

 

At the time of therespective stock options being granted, the shares underlying the awarded stockoptions were not publicly traded shares in some instances.  We review ourvaluation assumptions at each grant date and, as a result, we are likely to changeour valuation assumptions used to value stock based awards granted in futureperiods. Actual results, and future changes in estimates, may differsubstantially from our current estimates.  As a result, if factors changeand we use different assumptions, our stock-based compensation expense could bematerially different in the future.

 

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**Resultsof Operations**

 

*Revenues*

 

For the nine months ended September 30,2008 and September 30, 2007 our revenues from operations were $257 and$12, resulting from the sale of Medicsight software, Medicexchange advertisingspace and medical products in China.

 

Cost of revenue predominantlyrelates to the cost of medical products sold by our Medicexchangesubsidiary.  For the nine months ended September 30, 2008 and September 30,2007 our cost of revenue was $116 and $nil.

 

*Selling,General and Administrative Expenses*

 

Our selling, general andadministrative expenses were:

 
| ** **                                   | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Selling, general and administrative expenses |       | $                                                    | 4,831      |                                                | $          | 4,564 |   | $ | 18,301 |   | $ | 12,545 |   |
|                                              |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

Our selling, general andadministrative expenses have increased as we expand our internationalcommercial operations.  The significant elements being: (a) anincrease in people related costs on the prior period as both Medicsight andMedicexchange have increased employees in both commercial and operations; (b) anincrease in professional fees as a result of increased audit, investorrelations and corporate finance fees incurred following the Medicsight IPO and (c) anincrease in stock option costs due to the MGT 2007 Plan grant, Plans G and Hgrants in Medicsight and Plan B grant in Medicexchange.

 

*Research and Development*

 
| ** **               | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                     |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development |       | $                                                    | 1,558      |                                                | $          | 440 |   | $ | 2,785 |   | $ | 1,576 |   |
|                          |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

Research and developmentcosts relate to the costs of our operations department, some consultants andvarious associated costs.  Our researchand development costs have increased as we have entered into an agreement witha partner to develop interfaces for our software.  These payments have been expensed to theincome statement and classified as research and development.

 

**Liquidityand Capital Resources**

 

*WorkingCapital Information*

 
| ** **                                       | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                                             |       |                             |       |                            |       |
| Cash, cash equivalents and marketable securities |       | $                                | 55,247     |                            | $          | 94,592 |   |
|                                             |       |                             |       |                            |       |
| Current assets                                   |       | 56,870                           |       | 95,319                          |       |
| Current liabilities                              |       | (4,252                           | )          | (4,420                          | )          |
| Working capital surplus                          |       | $                                | 52,618     |                            | $          | 90,899 |   |
|                                             |       |                             |       |                            |       |
| Ratio of current assets to current liabilities   |       | 13.4                             |       | 21.6                            |       |

 

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As of September 30,2008 we had $50,818 in cash compared to $92,373 at December 31, 2007 and$4,429 in marketable securities compared to $2,219 at December 31, 2007.

 

Net cash used in operatingactivities was $13,505 for the nine months ended September 30, 2008compared to $10,953 for the nine month period ended September 30,2007. This resulted primarily from:

 

a.                our net loss of $10,215 compared with a net loss of $9,807, for the nine monthperiod ended September 30, 2007;

 

b.                adjusted for depreciation, amortization and stock-based compensation expenses(non cash items) of $3,057 compared to $1,184 for the nine month period ended September 30,2007;

 

c.                an overall increase in current assets and liabilities (excluding cash items) of$1,227 in the period ended September 30, 2008 compared to $108 decreasefor the nine-month period ended September 30, 2007; and

 

d.                loss attributable to minority interest of $5,120 the nine-month period September 30,2008 compared to $2,444 for the nine month period ended September 30,2007.

 

Net cash used in investingactivities was $3,737 for the nine months ended September 30, 2008,compared to $3,730 provided in the nine months ended September 30, 2007,consisted primarily of:

 

e.                in the nine months ended September 30, 2008 we received $1,555 from thesale of available for sale marketable securities as compared to receiving$5,141 for the nine-month period ended September 30, 2007;

 

f.                in the nine months ended September 30, 2008 we used $3,688 for thepurchase of available for sale marketable securities as compared to $nil forthe nine-month period ended September 30, 2007;

 

g.                in the nine months ended September 30, 2008 we used $424 in capital expenditureand we used $411 for the nine months ended September 30, 2007;

 

h.                in the nine months ended September 30, 2008 we used $960 for the purchaseof investments that we hold at cost and we used $1,000 for the nine monthsended September 30, 2007; and

 

i.                in the nine months ended September 30, 2008 we used $220 for the purchaseof a Chinese website business.

 

Net cash flows used infinancing activities of $20,163 for the nine-month period ended September 30,2008 compared to $85,611 provided by financing activities for the nine monthsended September 30, 2007. This consisted of the purchase of $1,251 ofMedicsight’s common stock and the purchase of $18,912 of our own stock duringthe period ended September 30, 2008. The nine months ended September 30,2007 consisted of a cash inflow of $85,618 (net of commissions) relating to theIPO of Medicsight and $7 payments due to capital lease obligations.

 

The Company considers thatcurrent cash flows are adequate to cover business operations for the nexttwelve months.

 

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

 

*InterestRate Risk*

 

Our exposure to market raterisk for changes in interest rates relates primarily to our investment portfolio. We place our investments in a mixture of cash depositsand available-for-sale market securities. A decline in interest rate wouldhave an adverse impact on interest income.

 

We do not have any debt andwe do not use derivative financial instruments.

 

*ForeignExchange Risk*

 

We are exposed to foreigncurrency exchange rate fluctuations related to the operation of ourinternational subsidiaries.  Our main operating currency is UK sterling(£).  We also have subsidiary operations in Japan and China who operate intheir local currencies.

 

Our operating costs inFiscal 2007 were predominantly in UK sterling. We do not foresee any change inFiscal 2008 or Fiscal 2009. A ten percent increase or decline in the US dollarexchange rate against UK sterling would have created an increase or decline inour operating costs in the nine months to September 30, 2008 ofapproximately $1,430.

 

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At the end of each reportingperiod, expenses of the subsidiaries are converted into US dollars using theaverage currency rate in effect for the period and assets and liabilities areconverted into US dollars using the exchange rate in effect at the end of theperiod.

 

Additionally, we are exposedto foreign currency exchange rate fluctuations relating to payments we make tovendors and suppliers using foreign currencies.

 

We currently do not hedgeagainst this foreign currency risk.

 

Fluctuations in exchangerates may impact our financial condition and results of operations.

 

**Item4.                     Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) underthe Exchange Act, our management carried out an evaluation of the effectivenessof the design and operation of the Company’s “disclosure controls andprocedures” as of September 30, 2008.  This evaluation was carriedout under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer. As definedin Rules 13a-15(e) and 15d-15(e) under the Exchange Act,disclosure controls and procedures are controls and other procedures of theCompany that are designed to ensure that information required to be disclosedby the Company in the reports it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by the Company inthe reports it files or submits under the Exchange Act is accumulated andcommunicated to the Company’s management, including our Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of September 30,2008.  It should be noted that the design of any system of controls isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions, regardless of how remote.

 

*Changesin Internal Control over Financial Reporting*

 

As required by Rule 13a-15(d) underthe Exchange Act, our management, including our Chief Executive Officer andChief Financial Officer, also conducted an evaluation of our internal controlover financial reporting to determine whether any change occurred during thenine months ended September 30, 2008 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.  Based on that evaluation during the quarter ended September 30,2008 there has been no change in our internal control over financial reportingthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II.  OTHERINFORMATION**

 

**Item1.                           Legal Proceedings**

 

There are currently no pending legal proceedings.

 

**Item1A.                        Risk Factors**

 

Discussion of our businessand operations included in this quarterly report on Form 10-Q should beread together with the risk factors set forth below. They describe variousrisks and uncertainties to which we are or may become subject. These risks anduncertainties, together with other factors described elsewhere in this report,have the potential to affect our business, financial condition, results ofoperations, cash flows, strategies or prospects in a material and adversemanner.  New risks may emerge at any time, and we cannot predict thoserisks or estimate the extent to which they may affect financial performance.Each of the risks described below could adversely impact the value of oursecurities.  These statements, like all statements in this report, speakonly as of the date of this report (unless another date is indicated), and weundertake no obligation to update or revise the statements in light of futuredevelopments.

 

We cannot assure you thatMGT will be successful in commercializing the Medicsight CAD products or theMedicexchange portal, or if the products or the portal are commercialized, thatthey will be profitable to the Company. We face obstacles in commercializingthe Medicsight CAD products and the Medicexchange portal and in generatingoperating revenues as detailed below.

 

MGT has had only a limitedoperating history and no revenues from its continuing operations upon which anevaluation of its prospects can be made. MGT’s prospects must be consideredkeeping in mind the risks, expenses and difficulties frequently encountered inthe establishment of a new business in a constantly changing industry. Therecan be no assurance that MGT will be able to achieve profitable operations inthe foreseeable future or at all.

 

Current economic conditionsmight cause a decline in spending that could affect our business and financialperformance.  This might affect thegrowth in revenue that we expect, as well as the recoverability of assets suchas our marketable securities and the investments that we hold at cost.

 

MGT has identified a numberof specific risk areas that may affect MGT’s operations and results in thefuture:

 

Technical Risks:  TheMedicsight CAD system may not deliver the levels of accuracy and reliabilityneeded, or the development of such accuracy and reliability may be delayed.

 

Market Risk:  Themarket for the Medicsight CAD products and Medicexchange.com may be slower todevelop or smaller than estimated or it may be more difficult to build themarket than anticipated. The medical community may resist the Medicsight CADand Medicexchange products or be slower to accept them than we anticipate.Revenues from Medicsight CAD and Medicexchange.com may be delayed or costs maybe higher than anticipated which may result in the Company requiring additionalfunding.

 

Regulatory Risks: TheMedicsight CAD system is subject to regulatory requirements in the UnitedStates, Europe, Japan, China and our other targeted markets. Necessaryregulatory approvals may not be obtained or may be delayed.  We may incursubstantial additional cost in obtaining regulatory approvals for our productsin our targeted markets.

 

Competitive Risk: There area number of groups and organizations, such as software companies in the medicalimaging field, MDCT scanner manufacturers, screening companies and otherhealthcare providers that may develop a competitive offering to the MedicsightCAD products and Medicexchange.com.  In addition these competitors mayhave significantly greater resources than MGT. 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.com.

 

Financial Risk: MGT hasincurred significant operating losses since inception and has recentlycommenced generating revenues from operations. As a result, MGT has generatednegative cash flows from operations and has an accumulated deficit at September 30,2008. MGT is operating in a developing industry based on new technology and itsprimary source of funds to date has been through the issuance of securities andborrowed funds. While MGT is optimistic and believes appropriate actions arebeing taken, there can be no assurance that management’s efforts will besuccessful or that the products MGT develops and markets will be accepted byconsumers.

 

Corporate Structure: MGT’scorporate structure may make it more difficult or costly to take certainactions. MGT conducts its business through: (a) Medicsight, a UK publiccompany which is 55% owned by the Company, and through Medicsight’ssubsidiaries in the United Kingdom, the United States, Japan and Gibraltar and;(b) the Medicexchange subsidiaries, in which MGT’s holdings range between73% and 100%.  Although MGT, Medicsight and Medicexchange share somedirectors and management, they are required to comply with corporate governanceand other laws and rules applicable to public companies in the UnitedKingdom and the United States.  Should MGT propose to take any action,such as a transfer or allocation of assets or liabilities between MGT and itssubsidiaries, MGT would have to take into

 

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consideration thepotentially conflicting interests of MGT’s stockholders and the minoritystockholders.  This may deter MGT from taking such actions that mightotherwise be in the best interest of MGT or cause MGT to incur additional costsin taking such actions. The subsidiary companies would not be able to paydividends or make other distributions of profits or assets to MGT withoutmaking pro-rata payments or distributions to the respective minoritystockholders.  Although neither the subsidiary companies nor MGT has plansto pay dividends or make distributions to its shareholders, MGT’s corporatestructure may deter its subsidiaries from doing so in the future.

 

The protection of ourintellectual property may be uncertain, and we may face possible claims of others:Although we have received patents and have filed patent applications withrespect to certain aspects of our technology, we generally do not rely onpatent protection with respect to our products and technologies. Instead, werely primarily on a combination of trade secret and copyright law, employee andthird-party nondisclosure agreements and other protective measures to protectintellectual property rights pertaining to our products and technologies. Suchmeasures may not provide meaningful protection of our trade secrets, know-howor other intellectual property in the event of any unauthorized use,misappropriation or disclosure. Others may independently develop similartechnologies or duplicate our technologies. In addition, to the extent that we applyfor any patents, such applications may not result in issued patents or, ifissued, such patents may not be valid or of value. Third parties could, in thefuture, assert infringement or misappropriation claims against us with respectto our current or future products and technologies, or we may need to assertclaims of infringement against third parties. Any infringement ormisappropriation claim by us or against us could place significant strain onour financial resources, divert management’s attention from our business andharm our reputation. The costs of prosecuting or defending an intellectualproperty claim could be substantial and could adversely affect our business,even if we are ultimately successful in prosecuting or defending any such claims.If our products or technologies are found to infringe the rights of a thirdparty, we could be required to pay significant damages or license fees or ceaseproduction, any of which could have a material adverse effect on our business.

 

If we fail to attract andretain qualified personnel, our business would be harmed.  We expect torapidly expand our operations and grow our sales, research and development andadministrative operations. This expansion is expected to place a significantstrain on our management and will require hiring a significant number ofqualified personnel. Accordingly, recruiting and retaining such personnel inthe future will be critical to our success. There is intense competition fromother companies, research and academic institutions, government entities andother organizations for qualified personnel in the areas of our activities. Ifwe fail to identify, attract, retain and motivate these highly skilledpersonnel, we may be unable to continue our marketing and development activities.

 

If we do not effectivelymanage changes in our business, these changes could place a significant strainon our management and operations and, as a result, our business might notsucceed.  Our ability to grow successfully requires an effective planningand management process. The expansion and growth of our business could place asignificant 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: AsMGT’s main operating currency is UK sterling (£) and its financial statementsare reported in US dollars, MGT’s assets and liabilities and its results ofoperations are affected by movements in the $:£ exchange rate.

 

Other Risks: MGT’s abilityto deliver its software could be hindered by risks such as the loss of keypersonnel or the patents and trademarks being successfully challenged or creditfacilities being reduced or terminated by lenders.

 

Liquidity risk:  MGT holds a number of investments held atboth at market value and at cost.  Thereis a risk that we may not be able to swiftly realise these investments at the fairvalue or cost at which they are recorded in our financial statements.

 

Internal Controls: Failureto achieve and maintain effective internal controls in accordance with Section 404of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on ourbusiness and operating results. In addition, as a consequence of such failure,current and potential stockholders could lose confidence in our financialreporting which could have an adverse effect on our stock price. Effectiveinternal controls are necessary for us to prevent reliable financial reportsand effectively prevent fraud. If we cannot provide reliable financial reportsor prevent fraud, we could be subject to regulatory action or other litigationand our operating results could be harmed.

 

Commencing with our fiscalyear ending December 31, 2007, we were required to document and test ourinternal control procedures in order to satisfy the requirements of Section 404of the Sarbanes-Oxley Act of 2002, which requires our management to annuallyassess the effectiveness of our internal controls over financial reporting, andour independent registered public accounting firm to report on theseassessments.

 

If we fail to maintain theadequacy of our internal accounting controls, as such standards are modified,supplemented or amended from time to time, we may not be able to ensure that wecan conclude on an ongoing basis that we have effective internal controls overfinancial reporting in accordance with Section 404. Failure to achieve andmaintain an effective internal control environment could cause us to faceregulatory action and also cause investors to lose confidence in our reportedfinancial information, either of which could have an adverse effect on ourstock price.

 

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**Item2.                           Unregistered Sales of Equity Securities and Use of Proceeds**

 

In the nine months ended September 30, 2008 no shares of commonstock were issued.

 

**Item3.                           Defaults Upon Senior Securities**

 

None.

 

**Item4.                           Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item5.**                           **Other Information**

 

On April 28,2008, the Company received a comment letter from the Securities and ExchangeCommission relating to the Company’s December 31, 2007 filing onForm 10-K to which the Company is in the process of responding.

 

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**Exhibitsand Reports on Form 8-K**

 
| **Exhibits** |   |                                                                                                                            |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                            |
| 31.1         |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer —  filed herewith). |
| 31.2         |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer —  filed herewith). |
| 32.1         |   | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer —  filed herewith). |
| 32.2         |   | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer —  filed herewith). |
|         |   |                                                                                                                            |
| (b)          |   | Reports on Form 8-K                                                                                                        |

 

None

 

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SIGNATURE

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                   |   | MGT Capital Investments, Inc. |
|------------------------|--------|------------------------------------|
|                   |   |                               |
|                   |   |                               |
|                   |   | By:                                | /s/ TIM PATERSON-BROWN |
|                   |   |                               | Tim Paterson-Brown |
|                   |   |                               | Chief Executive Officer |
|                   |   |                               |
|                   |   |                               |
|                   |   | By:                                | /s/ ALLAN ROWLEY |
|                   |   |                               | Allan Rowley |
|                   |   |                               | Chief Financial Officer |
|                   |   |                               |
|                   |   |                               |
| November 10, 2008 |   |                               |

 

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