10-Q

UNITED STATES
SECURITIES 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 March 31, 2009.
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 W14 8UD, 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 whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

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

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

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

As of May 14, 2009 the registrant had outstanding 32,550,590 shares of common stock, $0.001 par value, (excludes 6,349,793 common shares held as treasury stock).

NOTE REGARDING FORWARD LOOKING STATEMENTS

This Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of MGT Capital Investments, Inc. and its consolidated subsidiaries (the “Company”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of revenue, gross margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the rate of market development and acceptance of medical imaging technology; the execution of restructuring plans; any statement concerning developments, performance or industry rankings relating to products or services; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the performance of contracts by suppliers, customers and partners; employee management issues; the difficulty of aligning expense levels with revenue changes; and other risks that are described herein, including but not limited to the specific risks areas discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of this report, and that are otherwise described from time to time in the Company’s Securities and Exchange Commission reports filed after this report. The Company assumes no obligation and does not intend to update these forward-looking statements.

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

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INDEX

PART I — FINANCIAL INFORMATION
Item 1	Condensed Consolidated Balance Sheets — March 31, 2009 (unaudited) and December 31, 2008	4
	Condensed Consolidated Statements of Operations — for the three months ended March 31, 2009 (unaudited) and 2008 (unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income/(Loss) — March 31, 2009 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows — for the three months ended March 31, 2009 (unaudited) and 2008 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosure About Market Risk	29
Item 4	Controls & Procedures	29
PART II — OTHER INFORMATION
Item 1	Legal Proceedings	29
Item 1A	Risk Factors	29
Item 2	Unregistered Sale of Equity Securities and Use of Proceeds	32
Item 3	Defaults Upon Senior Securities	32
Item 4T	Submission of Matters to a Vote of Security Holders	32
Item 5	Other Information	33
Item 6	Exhibits	34
SIGNATURES		35

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

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MGT CAPITAL INVESTMENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31 2009			December 31 2008
	(unaudited)			Revised note 3
Assets
Current assets:
Cash and cash equivalents	$	32,606		$	38,294
Marketable securities	1,120			1,884
Accounts receivable	15			134
Other receivables – related party	88			49
Prepaid expenses and other current assets	694			851
Total current assets	34,523			41,212
Property and equipment, at cost, net	610			706
Intangible assets, net of accumulated amortization of $133 (2008: $100)	266			299
Investments, at cost	776			776
Security deposits	290			301
Goodwill	—			12,157
Total assets	$	36,465		$	55,451
Liabilities
Current liabilities:
Accounts payable	$	1,901		$	2,877
Accrued expenses	1,234			1,386
Deferred revenue	75			77
Total current liabilities	3,210			4,340
Commitments and contingencies
Stockholders’ equity
Common stock, $0.001 par value: 75,000,000 shares authorized; 38,900,383 shares issued and 32,550,590 shares outstanding	39			39
Additional paid in capital	298,721			298,376
Accumulated other comprehensive (loss)	(6,140		)	(4,959		)
Accumulated deficit	(254,780		)	(239,450		)
	37,840			54,006
Treasury stock, at cost, 6,349,793 shares of common stock	(18,912		)	(18,912		)
Total stockholders’ equity	18,928			35,094
Non-controlling interest	14,327			16,017
Total equity	33,255			51,111
Total stockholders’ equity, liabilities and non-controlling interest	$	36,465		$	55,451

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

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MGT CAPITAL INVESTMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

	Three months ended March 31,
	2009			2008
				Revised note 3
Revenues	$	74		$	52
Cost of revenue	2			12
Gross margin	72			40
Operating expenses
Selling, general and administrative expenses	3,687			5,505
Research and development cost	459			595
Impairment of goodwill	12,157			—
	16,303			6,100
Operating loss	(16,231		)	(6,060		)
Interest and other (expense)/income	(695		)	508
Net loss before non-controlling interest	(16,926		)	(5,552		)
Net loss attributable to non-controlling interest	1,596			1,773
Net loss attributable to MGT Capital Investments, Inc.	$	(15,330	)	$	(3,779	)
Per share data:
Basic and diluted loss per share	$	(0.47	)	$	(0.10	)
Weighted average number of common shares outstanding	32,550,590			38,846,986

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

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MGT CAPITAL INVESTMENTS, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME/(LOSS)

Revised note 3

(in thousands)

				Additional		Accumulated									Total			Non-
	Common Stock			Paid-In		Comprehensive			Accumulated			Treasury			Stockholders’			controlling			Total
	Shares	Amount		Capital		Income/(Loss)			Deficit			Stock			Equity			Interest			Equity
BALANCE, DECEMBER 31, 2008	38,900	$	39	$	298,376	$	(4,959	)	$	(239,450	)	$	(18,912	)	$	35,094		$	16,017		$	51,111
Stock-based compensation	—	—		345		—			—			—			345			136			481
COMPREHENSIVE LOSS
Net loss for the period	—	—		—		—			(15,330		)	—			(15,330		)	(1,596		)	(16,926		)
Translation adjustment	—	—		—		(1,181		)	—			—			(1,181		)	(230		)	(1,411		)
Total comprehensive loss	—	—		—		(1,181		)	(15,330		)	—			(16,511		)	(1,826		)	(18,337		)
BALANCE, MARCH 31, 2009	38,900	$	39	$	298,721	$	(6,140	)	$	(254,780	)	$	(18,912	)	$	18,928		$	14,327		$	33,255

The accompanying notes are an integral part of these statements.

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MGT CAPITAL INVESTMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share and per share amounts)

 (unaudited)

	Three Months ended March 31,
	2009			2008
				Revised note 3
Cash flows from operating activities
Net loss attributable to MGT Capital Investments, Inc.	$	(15,330	)	$	(3,779	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss attributable to non-controlling interest	(1,596		)	(1,773		)
Stock-based compensation expense	481			1,091
Depreciation	83			110
Amortization	33			—
Loss on impairment of goodwill	12,157
Loss on impairment of marketable securities deemed other than temporary	764			—
Unrealized currency loss on foreign denominated intercompany transactions	234			—
(Increase)/decrease in assets
Accounts receivable	114			(44		)
Other receivables — related party	(46		)	(33		)
Prepaid expenses and other current assets	(330		)	(169		)
Increase/(decrease) in liabilities
Accounts payable	(1,589		)	(1,230		)
Accrued expenses	(147		)	(16		)
Deferred revenue	(1		)	3
Net cash used in operating activities	(5,173		)	(5,840		)
Cash flows from investing activities:
Cash short-term deposits	—			(2,000		)
Purchase of marketable securities	—			(3,688		)
Sale of marketable securities	—			276
Purchase of fixed assets	(14		)	(269		)
Purchase of common stock in subsidiary (net of commissions)	—			(900		)
Net cash used in investing activities	(14		)	(6,581		)
Cash flows from financing activities:
Purchase of common stock (net of commissions)	—			(1,877		)
Net cash used in financing activities	—			(1,877		)
Effects of exchange rates on cash	(501		)	132
Net change in cash and cash equivalents	(5,688		)	(14,166		)
Cash and cash equivalents, beginning of period	38,294			92,373
Cash and cash equivalents, end of period	$	32,606		$	78,207

The accompanying notes are an integral part of these condensed consolidated financial statements

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MGT CAPITAL INVESTMENTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(unaudited)

1. Organization, basis of presentation and liquidity

The accompanying unaudited condensed consolidated financial statements of MGT Capital Investments, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the year ending December 31, 2009. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated.

MGT Capital Investments, Inc. (“MGT”, “the Company”, “the Group”, “we”, “us”) is a holding company.  We currently have controlling interests in our two main operating subsidiaries: Medicsight plc (“Medicsight”) and Medicexchange Limited (“Medicexchange”).  We also have wholly owned subsidiaries MGT Capital Investments (UK) Limited, MGT Investments (Gibraltar) Limited, Medicexchange Inc., Medicsight Nominees Limited, HTTP Tech Inc. and Medical Vision Systems Inc.

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

·Medicexchange and its majority owned subsidiaries provide medical imaging professionals with a global web portal containing an online sales channel for diagnostic, treatment and surgery planning solutions.  This combined with a variety of relevant clinical papers, training materials and content gives these professionals access to information and products that they otherwise would have difficulty accessing.  The Company holds 22.5 million shares (73%) of the 30.8 million issued share capital of Medicexchange.  Medicexchange’s shares are not publicly traded.

The Company has incurred significant operating losses since inception and has just commenced generating revenue from operations. As a result, the Company has generated negative cash flows from operations and has an accumulated deficit of $254,780 at March 31, 2009. The Company is operating in a developing industry based on new technology and its primary source of funds to date has been through the issuance of securities. While the Company is optimistic and believes appropriate actions are being taken, there can be no assurance that management’s efforts will be successful or that the products the Company develops and markets will be accepted by consumers.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements include the accounts of our Company and our wholly and majority owned subsidiaries. Our main operating subsidiaries are Medicsight and Medicexchange. The functional currencies of our subsidiaries are their local currencies.  All intercompany transactions and balances have been eliminated.  All foreign currency translation gains and losses arising on consolidation were recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation.   Non-controlling interest represents the minority equity investment in any of the MGT Capital Investments, Inc. group of companies, plus the minorities’ share of the net operating result and, in accordance with  Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, as amended, other components of equity relating to the non-controlling interest.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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Cash and cash equivalents

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

Marketable securities

The Company invests some of its cash balances in short-term highly liquid available for sale marketable securities, which are carried in our balance sheet at fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 Accounting for Certain Investments in Debt and Equity Securities, with unrealized gains and losses reported in stockholders’ equity as a component of accumulated other comprehensive income (loss) - unless the Company concludes that unrealized losses represent an other-than-temporary impairment. In that circumstance, such losses would be reflected in the consolidated statements of operations. Realized gains and losses are included in other income. Fair value is based upon quoted market prices for these or similar instruments.

Investments

Investments consists of equity ownership in various corporations where our investment is less than 20% of issued share capital. The Company records these investments at historical cost, subject to any provision for impairment.

Property and equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight line method on the various asset classes over their estimated useful lives, which range from two to five years. Leasehold improvements are depreciated over the term of the lease.

Goodwill

We account for goodwill in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and intangible assets with indefinite lives are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We compare the book value to the market value (market capitalization plus a control premium) for the reporting unit. If the market value exceeds the book value, goodwill is considered not impaired, and thus the second step of the impairment test is not necessary. If our book value exceeds the market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the goodwill with the book value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to the excess. Any loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed.

As of March 31, 2009 Medicsight’s share price had fallen to a level at which book value exceeded market value.  As a consequence, we carried out an impairment review and concluded that the goodwill was fully impaired.  See note 7.

Impairment of long-lived assets and long-lived assets to be disposed of

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

Foreign currency translation

The accounts of the Company’s foreign subsidiaries are maintained using the local currency as the functional currency. For these subsidiaries, assets and liabilities are translated into US dollars at year-end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net gains and losses from foreign currency translation are excluded from operating results and are accumulated as a separate component of stockholders’ equity.

Gains and losses on foreign currency transactions are reflected in selling, general and administrative expenses in the income statement.

Revenue Recognition

Medicsight

The Company recognizes revenue in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the AICPA, and SEC Staff Accounting Bulletin No. 104. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement,

9

the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable, and collectability is probable.

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

The Company licenses software and sells maintenance through visualization solution partners and original equipment manufacturers. The Company receives regular sales reports detailing 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 days from invoicing.

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

Additionally:

Software — revenue from license fees is recognized when notification of shipment to the end user has occurred, there are no significant Company obligations with regard to implementation and the Company’s services are not considered essential to the functionality of other elements of the arrangement.

Services — revenue from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance and support arrangements.

Multiple-element arrangements — the Company enters into arrangements with resellers that include a combination of software products, maintenance and support. For such arrangements, the Company recognizes revenue using the residual method. The Company allocates the total arrangement fee among the various elements of the arrangement based on the fair value of each of the undelivered elements determined by vendor-specific objective evidence. The fair value of maintenance and support services is established based on renewal rates. In software arrangements for which the Company does not have vendor-specific objective evidence of fair value for all elements, revenue is deferred until the earlier of when vendor-specific objective evidence is determined for the undelivered elements (residual method) or when all elements for which the Company does not have vendor-specific objective evidence of fair value have been delivered.

As of March 31, 2009 we recorded $22 of deferred revenue relating to support and maintenance services and $41 relating to deferred license revenue, compared with $20 relating to support and license revenue and $42 relating to deferred license revenue at December 31, 2008.

Medicexchange

We recognize revenue when the following revenue recognition criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. Deferred revenue is recorded when payments are received in advance of performing our service obligations.

As of March 31, 2009 we recorded $12 of deferred revenue relating to Medicexchange, compared with $15 at December 31, 2008.

Research and development

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

Technological feasibility is established upon completion of a detailed program design or, in its absence, completion of a working model. Thereafter, all software production costs can be capitalized and subsequently reported at the lower of un-amortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Amortization commences when the product is available for general release to customers.

The Company concluded that no such expenditures needed to be capitalized because the Company did not incur any material software production costs and all such costs incurred represent research and development costs. The Company’s research and development costs are comprised of staff cost, consultancy costs and research and development software costs for the Medicsight CAD system.

For the three months ended March 31, 2009 and March 31, 2008 the Company expended $459 and $595 respectively, for research and development expenses for Medicsight CAD and its products.

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Fair value of financial instruments

On January 1, 2008 the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities.  In accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” the Company applied SFAS 157 for non-financial assets and non-financial liabilities on January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements.

Income taxes

Effective January 1, 2007 the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  At the adoption date of January 1, 2007 and also as of March 31, 2009, the Company did not have any unrecognized tax benefits. We do not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.  The Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated Statements of Operations.  There was no interest and penalties for the three months ended March 31, 2009 and 2008. Tax years beginning in 2004 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

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

Loss per share

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

The computation of diluted loss per share excludes all options because they are anti-dilutive. For the three months ended March 31, 2009 there were 15,819,168 options excluded with a weighted average exercise price of $1.31 per share.  For the three months ended March 31, 2008 there were 14,420,000 options excluded with a weighted average exercise price of $1.73.

Comprehensive income (loss)

Comprehensive income (loss) as defined by SFAS No. 130, “Reporting Comprehensive Income,” includes net income (loss) and items defined as other comprehensive income (loss). SFAS No. 130 requires that items defined as other comprehensive income (loss), such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities, be separately classified in the financial statements. Such items are reported in the consolidated statements of stockholders’ equity as comprehensive (loss).

Segment reporting

The Company follows the provisions of SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information”. The approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers.  We operate in two segments, Medicsight, a medical imaging company, and Medicexchange web portal for radiologists.

Stock options

The Company follows Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment SFAS 123(R) , which requires that compensation cost relating to share-based payment transactions be recognized as an expense in the financial statements, and that measurement of that cost be based on the estimated fair value of the equity or liability instrument issued.  SFAS No 123(R) also requires that forfeitures be estimated and recorded over the vesting period of the instrument.

Recent accounting pronouncements

On January 1, 2009 the Company adopted the provisions of SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS No. 141R).  SFAS No. 141R significantly changes the accounting for business combinations.  Under SFAS No. 141R, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with only limited exceptions.  SFAS No.141R also includes a substantial number of new disclosure requirements.  In April 2009 the FASB issued FSP FAS 141(R)-1 which amends SFAS No. 141(R) by establishing a model to account for certain pre-acquisition contingencies.  Under the FSP, an

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acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period.  If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria in SFAS No. 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss — an interpretation of FASB Statement No. 5.  SFAS No. 141(R) and FSP FAS 141(R)-1 became effective for us beginning January 1, 2009, and will apply prospectively to business combinations completed on or after that date.

In April 2009 the Financial Accounting Standards Board (“FASB”) issued three Staff Positions (“FSPs”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities.  FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured.  FSP FAS 115-2 and FAS 124-2 establish a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income.  FSP FAS 107-1 and APB 28-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods.  All of these FSPs are effective for us beginning April 1, 2009.  We are assessing the potential impact that the adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 may have on our consolidated financial statements.  FSP FAS 107-1 and APB 28-1 will result in increased disclosures in our interim periods.

3. Non-controlling interest

On January 1, 2009 the Company adopted the provisions of SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51.”  SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest (formerly known as minority interest) in a subsidiary (which may include variable interest entities) and for the deconsolidation of a subsidiary.  Significant changes include: Balance sheet and income statement presentation and expanded disclosures; Accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation; Recognition and measurement of a gain or loss when a subsidiary is deconsolidated.  For balance sheet presentation, non-controlling interests are now recorded within equity and so-called “mezzanine” display is not permitted.  In income statements, the amount of income attributable to the non-controlling interest is not a deduction that impacts net income.  As a result of these requirements, various financial statements ratios have been impacted.  The Statement requires prospective application except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. Proir periods were reclassified to conform to the current period presentation.

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4. Cash and cash equivalents

We invest our cash in short-term deposits with major banks.  At March 31, 2009 we held $32,606 in cash and cash equivalents.

Cash and cash equivalents consist of cash and temporary investments with maturities of 90 days or less when purchased.

Concentrations

The Company maintains its cash and cash equivalents at major financial institutions in Europe.  Cash held in foreign institutions is not insured by the FDIC and amounted to $32,606 as of March 31, 2009 and $38,294 as of December 31, 2008.  The Company periodically evaluates the relative credit standing of financial institutions considered in its cash investment strategy.

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5.  Marketable securities

Investments in marketable securities consisting of HipCricket Inc. and a fund managed by Bank Sarasin & Company Limited as of December 31 were as follows:

	Market value		Cost		Unrealized gains		Transfer to net loss
At December 31, 2008	$	1,884	$	2,985	$	—	$	(1,101	)
At March 31, 2009	$	1,120	$	1,884	$	—	$	(764	)

In the three months ended March 31, 2009 we accounted for all losses in net income as we considered the reductions in value to be other than temporary.

Valuation of investments held at fair value

On January 1, 2008 the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  Effective January 1, 2009 the Company adopted the provisions of SFAS No. 157 related to other nonfinancial assets and liabilities, in accordance with Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157.”

The adoption of SFAS 157 also requires the Company to attribute our investments using the fair value hierarchy defined in the statement. The hierarchy consists of the following three levels with associated definitions:

Level 1 inputs are unadjusted, quoted prices in active markets for identical assets or liabilities

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for identical assets or liabilities in markets that are not active, that is, markets in which there are few transactions.

Level 3 inputs are unobservable inputs that are supported by little or no market activity.  These inputs require significant management judgment and reflect our estimate of assumptions that market participants would use in pricing the asset.

We have valued HipCricket Inc using its closing price on the AIM market of the London Stock Exchange as of March 31, 2009. Due to the low number of market transactions for HipCricket Inc each transaction can potentially and has historically had a significant effect on the share price. It is for this reason we deem these to be a Level 2 input in the fair value hierarchy. However, we still believe that this is the best price at which to determine the current value.

Our investments in other marketable securities relate to holdings in corporate bonds issued by highly rated companies.  We have valued these investments at market prices as of December 31, 2008 and consider these to be Level 1 inputs as these are active markets.

The following table analyzes our investments holdings using the fair value hierarchy.

	Level 1		Level 2	Total
HipCricket Inc	$	—	186	$	186
Other marketable securities	934		—	934
Total	$	934	186	$	1,120

The following table analyzes the losses incurred on the investments during the three months ended March 31, 2009

	Loss on impairment deemed other than temporary		Other realized losses	Total
HipCricket Inc	$	739	—	$	739
Other marketable securities	25		—	25
Total	$	764	—	$	764

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6.Investments at cost

We account for investments in non-marketable securities under the cost method of accounting where we own less than a 20% interest in each of the companies and we do not have significant influence over the entity. We continually review each investment to assess for other-than-temporary decreases in value.

In 2000 MGT invested in Eurindia Limited, (“Eurindia”) a UK company that invested in IT start-up companies.  MGT has a 6% holding in Eurindia and accounts for this investment on a cost basis. During 2007 we received two dividends totaling $423 ($0.72 per share) which we recorded in Other Income.  Eurindia Limited’s management has informed us that they intend to pay a liquidating dividend of between 30 cents and 50 cents per share during the first half of 2009.  In Fiscal 2008 we assumed the dividend to be the lower of these two values and impaired our holding to the value of 30 cents a share.  As of March 31, 2009 we still consider that this approximates the investment’s fair value.  We consider this input to be a Level 3 input under the SFAS 157 fair value hierarchy, which is a significant unobservable input.

In 2007 the Company invested $960 in C preference shares of XShares Group LLC, an investment advisor that creates, issues and supports exchange traded funds with a particular healthcare specialty. In the year ended December 31, 2008 the Company invested an additional $2,040 in shares of XShares Group LLC bringing the total invested to $3,000. We account for these investments on a cost basis as our total holdings are less than 20%. In Fiscal 2008 we reviewed the carrying value of our investment in XShares LLC. XShares LLC was in the process of attempting to raise funds to drive the business forward. As this process had not been completed we impaired this investment to $600.  As of March 31, 2009 we believe that the $600 valuation still approximates fair value.

We estimated this impairment based on management’s review and discussion of the strategy and business plan of XShares LLC and review of draft Fiscal 2008 financial accounts prepared by an independent accountant. These inputs are subject to management’s judgment and we have therefore deemed them to be Level 3 inputs in the fair value hierarchy. The value of our investment has been reduced as previously invested cash has been used to fund business operations and as yet the business is not generating sufficient cash. However, we have reviewed XShares LLC’s business plan and we have adjusted our investment to a level we believe reflects the future market valuation and with no active market we believe this is the best method with which to determine the value of our investment.

The following table presents the changes in Level 3 instruments for the three months ended March 31, 2009.

	January 1, 2009		Purchases	Impairment losses included in earnings	March 31, 2009		Change in impairment losses relating to instruments still held at March 31, 2009
Eurindia Limited	$	176	—	—	$	176	$	—
XShares LLC	600		—	—	600		—
	$	776	—	—	$	776	$	—

7. Goodwill

Balance at December 31, 2008	$	12,157
Impairment of goodwill	(12,157		)
Balance at March 31, 2009	$	—

At December 31, 2008, our goodwill totaled $12.2 million, which was entirely related to our shareholding in Medicsight plc.  We assess the impairment of goodwill of our reporting units annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.  This assessment is based upon an analysis of both the market value and discounted anticipated future cash flow of the reporting unit.

The shares of Medicsight plc are traded on the AIM exchange of the London Stock Exchange.  We consider this to be a Level 1 input in the fair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”, as this is an unadjusted quoted price in an active market.

The estimate of future cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management.  Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, timings of regulatory approvals, economic conditions in the healthcare IT market, changes to our business model or changes in operating performance.

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In addition, estimates of discounted cash flows would involve assumptions on a business with limited revenue history and developing revenue models, which increase the risk of differences between the projected and actual performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results.  We consider these to be Level 3 inputs in the fair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”, as this is an unobservable input with little or no market activity that require significant management judgment.

We conducted our annual impairment test of goodwill as of December 31, 2008 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  As a result of this test we determined that no adjustment to the carrying value of goodwill was required.

In the period between December 31, 2008 and March 31, 2009, the market value of Medicsight plc, as traded on the AIM Market of the London Stock Exchange, declined from $53.0 million to $13.2 million.  Following this decline in value we conducted an impairment test of goodwill as of March 31, 2009 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  Due to the uncertainties involved in using the unobservable inputs to estimate future cash flows, we used market price, Level 1 inputs as the basis of our impairment review.  As a result of this test we determined that the carrying amount of Medicsight plc exceeded its fair value and recorded an impairment loss of $12.2 million during the quarter ended March 31, 2009.

8. Interest and other income/(expense)

We had the following interest and other income amounts:

	Three months ended March 31,
	2009			2008
Loss on marketable securities	$	(764	)	$	—
Interest income	69			508
Total	$	(695	)	$	508

The loss on marketable securities relates to losses considered other than temporary on our holdings in HipCricket and other marketable securities.

9. Comprehensive income (loss)

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

	Three months ended March 31,
	2009			2008
Net loss as reported	$	(16,926	)	$	(5,552	)
Unrealized foreign exchange (loss) gain	(1,411		)	132
Unrealized gain on marketable securities	—			131
Comprehensive loss	$	(18,337	)	$	(5,289	)
Comprehensive loss attributable to non-controlling interest	1,826			1,773
Comprehensive loss attributable to MGT Capital Investments, Inc.	$	(16,511	)	$	(3,516	)

The unrealized foreign exchange loss predominantly relates to the movement, in the three month period ended March 31, 2009, on the difference between Medicsight’s net assets translated at the period end rate and the reserves translated at historical rates.

The total accumulated other comprehensive loss as of March 31, 2009 is the result of foreign currency translation.

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10. Segment reporting

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

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

Medicsight listed on the AIM Market of the London Stock Exchange on June 21, 2007.  AIM listing rules require Medicsight to publish results under International Financial Reporting Standards (“IFRS”) in sterling.

The following is a reconciliation between Medicsight’s published financial statements and the US GAAP 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)
Three months March 31, 2009
Net revenue to external customers	$	61		$	—		$	61		$	13		$	—		$	74
Operating loss	(3,504		)	(30		)	(3,534		)	(263		)	(12,434		)	(16,231		)
Assets	24,329			—			24,329			2,621			9,515			36,465
Three months March 31, 2008
Net revenue to external customers	$	34		$	—		$	34		$	18		$	—		$	52
Operating loss	(4,040		)	13			(4,027		)	(934		)	(1,099		)	(6,060		)
Assets	49,138			—			49,138			3,682			48,065			100,885

The principal GAAP adjustments are the accounting for stock options and cumulative translation adjustments.

The main operations and fixed assets of Medicsight are in the UK while Medicexchange’s are in the US and China.

11. Stock-Based Compensation

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

MGT Stock Option Plan

On December 5, 2007 we approved the 2007 MGT stock option plan and granted options for 1,975,000 shares under this plan.  At March 31, 2009 there were 1,975,000 options outstanding and 658,333 of the options issued were exercisable.  Options issued under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant.

Medicsight Stock Option Plans

We have nine Stock Option Plans in Medicsight, whose shares were listed on the AIM Market of the London Stock Exchange on September 21, 2007.

Plan A - on February 26, 2003 we approved stock option plan “A” and in the three month period ended March 31, 2003 we granted options for 2,971,000 shares under this plan.  At March 31, 2009 there were 231,500 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 March 31, 2009 there were 448,500 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.  Options issued under this plan vest in equal one-thirds after employees have been employed for 12, 24 and

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36 months from date of grant.  At March 31, 2009 there were 268,333 options outstanding and 251,667 of the options issued were exercisable.

Plan D - On July 13, 2006 we approved stock option plan “D” and granted options for 1,375,000 shares under this plan.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant. At March 31, 2009 there were 811,667 options outstanding and 583,334 of the options issued were exercisable.

Plan E - on February 22, 2007 we approved and granted options for 5,900,000 shares under stock option plan “E”.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the grant date. At March 31, 2009 there were 5,449,168 options outstanding and 3,667,500 of the options issued were exercisable.

Plan F - on May 16, 2007 we approved and subsequently granted options for 350,000 shares under stock option plan “F”.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 there were 350,000 options outstanding and 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 under stock option plan “G”.  Options under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 there were 2,950,000 options outstanding and 983,333 the options issued were exercisable.

Plan H - on June 2, 2008 we approved and subsequently granted options for 750,000 shares under stock option plan “H”. Options under this plan vest in equal one thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 there were 750,000 options outstanding and none of the options were exercisable.

Plan I - on December 16, 2008 we approved and subsequently granted options for 1,805,000 shares under stock option plan “I”. Options under this plan vest in equal one thirds after employees have been employed for 12, 24 and 36 months from the grant date.  At March 31, 2009 1,785,000 options were outstanding and none of the options were exercisable.

Medicexchange Stock Option Plans

We have two stock option plans in Medicexchange, whose shares are not publicly traded.

Plan A - on July 20, 2006 we approved Medicexchange stock option plan “A” and granted options for 950,000 shares under this plan.  Options issued under this plan vest in equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant. At March 31, 2009 there were 650,000 options outstanding 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 for 300,000 shares under this plan. Options issued under this plan vest equal one-thirds after employees have been employed for 12, 24 and 36 months from the date of grant.  At March 31, 2009 there were 150,000 options outstanding and 50,000 of the options issued were exercisable.

The assumptions used in the Black-Scholes option valuation model used in the calculation of grant date fair value for the above options are highly subjective and can materially affect the resulting valuation. These assumptions are based on multiple factors including United Kingdom treasury bonds for the risk-free rate at the time of grant, expected future exercising patterns (we cannot base the estimate on the historical exercise patterns as no options have been exercised) and the volatility of the MGT stock price.

The following table summarizes stock option activity for the three months ended March 31, 2009:

	Outstanding							Exercisable
	Number of shares		Weighted- average exercise price					Number of shares	Weighted- average exercise price
Outstanding at December 31, 2008	16,137,500		£	0.91	$	(1.31	)	5,679,166	£	0.98	$	(1.42	)
Granted	—		—		—
Exercised	—		—		—
Forfeited	(318,332	)	0.65		(0.93		)
Outstanding at March 31, 2009	15,819,168		£	0.92	$	(1.31	)	7,457,500	£	0.87	$	(1.23	)

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The following is a summary of the status of the stock options outstanding at March 31, 2009:

	Outstanding options							Exercisable options
		Remaining
	Number	Contractual life (years)	Average exercise price					Number	Average exercise price
MGT Capital Investments, Inc. 2007 Plan	1,975,000	8.7			$	3.69		658,333			$	3.69
Medicsight Plan A	231,500	4.3	£	0.75	$	(1.07	)	231,500	£	0.75	$	(1.07	)
Medicsight Plan B	448,500	5.5	£	0.75	$	(1.07	)	448,500	£	0.75	$	(1.07	)
Medicsight Plan C	268,333	6.3	£	0.75	$	(1.07	)	251,667	£	0.75	$	(1.07	)
Medicsight Plan D	811,667	7.3	£	0.83	$	(1.18	)	583,334	£	0.83	$	(1.18	)
Medicsight Plan E	5,449,168	7.9	£	0.50	$	(0.71	)	3,667,500	£	0.50	$	(0.71	)
Medicsight Plan F	350,000	8.2	£	0.75	$	(1.07	)	116,667	£	0.75	$	(1.07	)
Medicsight Plan G	2,950,000	8.7	£	1.10	$	(2.00	)	983,333	$	1.10	$	(2.00	)
Medicsight Plan H	750,000	9.2	£	0.69	$	(1.56	)	—	—		—
Medicsight Plan I	1,785,000	9.7	£	0.24	$	(0.34	)	—	—		—
Medicexchange Plan A	650,000	7.5	£	0.40	$	(0.57	)	466,666	£	0.40	$	(0.57	)
Medicexchange Plan B	150,000	8.3	£	1.00	$	(1.42	)	50,000	£	1.00	$	(1.42	)

On March 11, 2008 we modified the vesting terms for 450,000 options in Medicsight plan E, and 150,000 options in Medicexchange plan B for a former employee and allowed these options to be transferred to his estate. The total modification charge for the three months ended March 31, 2009 was $37 compared with $333 for the three months ended March 31, 2008.

We recorded the following amounts related to stock-based expenses in the Statement of Operations for the following periods:

	Three months ended March 31,		Three months ended March 31,
	2009		2008
Selling, general and administrative	$	453	$	1,040
Research and development	28		51
Total	$	481	$	1,091

Of the $481 stock-based expense in the quarter, $136 was allocated to non-controlling interest.

No compensation costs were capitalized.

The aggregate intrinsic value for options outstanding and exercisable at March 31, 2009 was $nil. The aggregate intrinsic value for all outstanding options was $nil.

A summary of non-vested options at March 31, 2009 and the change during the three months ended March 31, 2009 is presented below:

	Number of options		Weighted average grant date fair value
Non-vested at January 1, 2009	10,458,334		£	0.35	$	(0.51	)
Granted	—
Vested	(1,841,666	)	0.26		(0.37		)
Forfeited	(255,000	)	0.32		(0.45		)
Non-vested at March 31, 2009	8,361,668		£	0.42	$	(0.60	)

At March 31, 2009 there was $5,036 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the option plans.

Non-vested awards are expected to be recognised over a weighted average period of 1.15 years.

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12. Non-controlling interest

The Company has non-controlling investors in both Medicsight and Medicexchange as follows:

	Medicsight			Medicexchange			Total
Non-controlling interest at January 1, 2009	$	15,036		$	981		$	16,017
Non-controlling share of operating losses	(1,563		)	(33		)	(1,596		)
Non-controlling share of stock-based expense	137			(1		)	136
Non-controlling share of other comprehensive (loss) income	(231		)	1			(230		)
Non-controlling interest at March 31, 2009	$	13,379		$	948		$	14,327

13. Related Party Transactions

Tim Paterson-Brown, our Chief Executive Officer, is a non-executive director of Accsys Technologies plc, which has a subsidiary company Titan Wood Limited. Titan Wood Limited rents space in 66 Hammersmith Road. In the three month period ended March 31, 2009 and 2008 respectively, $88 and $79 of office related costs were recharged to Titan Wood Limited. At March 31, 2009 there was a balance receivable from Titan Wood Limited of $88 of which $28 remains unpaid as of May 13, 2009. This is payable within 30 days under the terms of the invoice.

14. Commitments

Lease Commitments and Security Deposit

On August 25, 2006 we executed a 10-year agreement with Pirbright Holdings Limited, to lease 8,787 square feet of office space at the Kensington Centre, 66 Hammersmith Road, London W14 8UD, UK.  Under this lease agreement our UK property rent, services and related costs are be approximately £330 ($471) per annum, paid quarterly in advance.  We have the right to terminate this agreement on the expiry of the fifth year of the lease.  Our annual rent is subject to upward only review on August 24, 2011.

We have two 10-month rent-free periods: the first commencing August 25, 2006; the second commencing August 25, 2011.  We have accounted for this lease as an operating lease and have accounted for the lease rental expenses on a straight-line basis over the period of the lease.

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

Year Ending December 31,
2009 (remaining nine months)	$	459
2010	612
2011	235
2012	5
2013	1
Later Years	—
Total minimum	$	1,312

Other commitments

In July 2008 we entered into an agreement with a partner to develop interfaces for our software.  We have committed to pay Euros 1,445 ($1,908) over an expected thirty-six month period.  As at March 31, 2009 we have paid Euros 725 ($957).  These payments will be recovered against future royalty payments, should the products be successfully commercialized.  These payments have been expensed to the income statement and classified as research and development.

15. Subsequent Events

On May 14, 2009, the Company executed and delivered a Convertible Promissory Note (the “Note”) in the principal amount of $1,100 with XShares Group, Inc. (“XSG”), a Delaware corporation.  The principal amount includes a fee of $100 payable to the Company.  All of the Note shall be converted into Series B Preferred Stock of XSG (the “Series B Shares”) at the Initial Closing (as defined below).  In the event that an Amended and Restated Certificate of Incorporation designating the rights and preferences of the Series B Shares (the “Certificate”) is not approved by a majority of the stockholders of XSG, then the entire unpaid principal sum of the Note, plus interest thereon, shall be immediately paid to the Company or converted into shares of XSG’s common stock at a price of $0.001 per share at the option of the Company .  A copy of the Note is annexed hereto as Exhibit 10.5.

Simultaneously with executing the Note, the Company entered into a Securities Purchase Agreement (the “SPA”) with XSG, pursuant to which the Company agreed to purchase an aggregate of 73,943,662 Series B Shares at a purchase price of $0.0284 per share.  The SPA contains the standard representations and warranties for a transaction of this type and is subject to the approval by the stockholders of XSG of the Certificate. The Series B Shares are redeemable at the option of XSG, at a price of 1.05 times the original issue price.

It is anticipated that the purchase and sale of the Series B Shares will take place in two closings.

1.    The initial closing of 38,732,394 Series B Shares will occur immediately upon the filing of the Certificate with the Secretary of State of the State of Delaware (the “Initial Closing”). 

2.    The second closing of 35,211,268 Series B Shares will occur upon the later of (i) July 16, 2009 or (ii) five days following the filing of the Certificate.  A copy of the SPA and a form of the Certificate are annexed hereto as Exhibits 10.3 and 10.4, respectively.

During the year ended December 31, 2007, the Company acquired shares valued at $960 in XSG’s predecessor, XShares Group, LLC.   This investment was introduced to the Company by Asia IT (a related party).   In the year ended December 31, 2008, the Company acquired additional shares of XSG valued at $2,040, bringing the total historical investment to $3,000. As of December 31, 2008, this investment was deemed impaired to a value of $600.

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

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

Executive Summary

MGT Capital Investments, Inc. achieved the following results in the first quarter of 2009:

·            Revenue from license and other sales increased 42% to $74 compared to $52 in 2008.

·            Gross margin increased 80% to $72 compared to $40 in 2008.

·            Other operating expenses, excluding the goodwill impairment, decreased 32% to $4,146 compared to $6,100 in 2008.

·            $12,157 of goodwill relating to Medicsight was fully impaired.

·            Net loss increased 305% to $15,330 and resulted in a loss per share of $0.47 compared to a net loss of $3,779 and net loss per share of $0.10 in 2008.  The large increase was due to the impairment of goodwill relating to Medicsight.

While remaining small in value, revenue has increased due to higher sales of sales of Medicsight products and we expect revenue to continue to grow year after year.

Operating costs, excluding the goodwill impairment, have reduced by $1,954 due to a general focus on reducing costs and significantly because of a fall in the value of sterling from $1.99:£1 to $1.42:£1.  On a like for like exchange rate, operating costs for the three months ended March 31, 2008 would have been approximately $4,548.

Our balance sheet remains strong with cash, cash equivalents and marketable securities of $33,726 compared to $40,178 in December, 2008. The movement is mainly attributable to cash used in operating activities ($5,173), cash used in investing activities ($14) and the effects of exchange rates ($501).

Goodwill impairment

At December 31, 2008, our goodwill totaled $12.2 million, which was entirely related to our shareholding in Medicsight plc.  We assess the impairment of goodwill of our reporting units annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.  This assessment is based upon an analysis of both the market value and discounted anticipated future cash flow of the reporting unit.

The shares of Medicsight plc are traded on the AIM Market of the London Stock Exchange.  We consider this to be a Level 1 input in the fair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”, as this is an unadjusted quoted price in an active market.

The estimate of future cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management.  Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, timings of regulatory approvals, economic conditions in the healthcare IT market, changes to our business model or changes in operating performance.

In addition, estimates of discounted cash flows would involve assumptions on a business with limited revenue history and developing revenue models, which increase the risk of differences between the projected and actual performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results.  We consider these to be Level 3 inputs in the fair value hierarchy as defined in SFAS No. 157 “Fair Value Measurements”, as this is an unobservable input with little or no market activity that require significant management judgment.

We conducted our annual impairment test of goodwill as of December 31, 2008 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  As a result of this test we determined that no adjustment to the carrying value of goodwill was required.

In the period between December 31, 2008 and March 31, 2009, the market value of Medicsight plc, as traded on the AIM Market of the London Stock Exchange, declined from $53.0 million to $13.2 million.  Following this decline in value we conducted an impairment test of goodwill as of March 31, 2009 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  Due to the uncertainties involved in using the unobservable inputs to estimate future cash flows, we used market price, Level 1 inputs as the basis of our impairment review.  As

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a result of this test we determined that the carrying amount of Medicsight plc exceeded its fair value and recorded an impairment loss of $12.2 million during the quarter ended March 31, 2009.

Critical accounting policies and estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and the related disclosures, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our condensed consolidated financial statements and accompanying notes. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results could differ from these estimates.

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

Revenue Recognition

Medicsight

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

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

The Company licenses software and sells maintenance through visualization solution partners and original equipment manufacturers. The Company receives regular sales reporting detailing 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 days from invoicing.

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

Additionally:

Software — Revenue from license fees is recognized when notification of shipment to the end user has occurred, there are no significant Company obligations with regard to implementation and the Company’s services are not considered essential to the functionality of other elements of the arrangement.

Services — Revenue from maintenance and support arrangements is deferred and recognized ratably over the term of the maintenance and support arrangements.

Multiple-Element Arrangements — The Company enters into arrangements with Resellers that include a combination of software products, maintenance and support. For such arrangements, the Company recognizes revenue using the residual method. The Company allocates the total arrangement fee among the various elements of the arrangement based on the fair value of each of the undelivered elements determined by vendor-specific objective evidence. The fair value of maintenance and support services is evidence of fair value for all elements, revenue is deferred until the earlier of when vendor-specific objective evidence is determined for the undelivered elements (residual method) or when all elements for which the Company does not have vendor-specific objective evidence of fair value have been delivered.

Medicexchange

We recognize revenue when the following revenue recognition criteria are met:  persuasive evidence of an arrangement exists, services have been rendered, the selling price is fixed or determinable and collectability is reasonable assured.  Deferred revenue is recorded when payments are received in advance of performing our service obligations.

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Goodwill

We account for goodwill in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and intangible assets with indefinite lives are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We compare the book value to the market value (market capitalization plus a control premium) for the reporting unit. If the market value exceeds the book value, goodwill is considered not impaired, and thus the second step of the impairment test is not necessary. If our book value exceeds the market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the goodwill with the book value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to the excess. Any loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is completed.

Equity-based compensation

We recognize compensation expense for all equity-based payments in accordance with SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), we recognize equity-based compensation net of an estimated forfeiture rate and recognize compensation cost only for those shares expected to vest over the requisite service period of the award.

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

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

Research and development

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

The Company concluded that capitalizing such expenditures on completion of a working model was inappropriate because the Company did not incur any material software production costs and therefore has decided to expense all research and development costs. The Company’s research and development costs are comprised of staff, consultancy and other costs expensed on the Medicsight products.

Fair value of financial instruments

On January 1, 2008 the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and financial liabilities.  Applying fair value measurements to our financial instruments requires management’s judgment, especially when using Level 2 and Level 3 inputs as defined in SFAS 157’s fair value hierarchy.

Impairment of long-lived assets and long-lived assets to be disposed of

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

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Calculating the estimated fair value of an asset involves significant judgments and a variety of assumptions. Judgments that the Company makes concerning the value of its intangible assets include assessing time and cost involved for development, time to market, and risks of regulatory failure or obsolescence (due to market, environmental or technological advances for example). For calculating fair value based on discounted cash flows, we forecast future operating results and future cash flows, which include long-term forecasts of revenue growth, gross margins and capital expenditures.

Results of Operations

Three months ended March 31, 2009 vs. March 31, 2008

Revenue and Margin

We have generated revenues of $74 and gross margin of $72 for the three months ended March 31, 2009, compared to $52 and $40 for the three months ended March 31, 2008.  Medicsight increased revenues in the period and Medicexchange’s fell slightly.

Medicsight has sold licenses in Europe where it has regulatory approvals.

Medicexchange generated revenue from advertising sales in China and the USA.

Operating Expenses

Our research and development expense for the three months ended March 31, 2009 was $459 compared to $595 for the three months ended March 31, 2008. Our research and development costs were comprised of staff, staff related consultancy, stock options and product development software costs expensed on the research and development of Medicsight’s products.

Our selling, general and administrative expenses for the three months ended March 31, 2009 were $3,687 compared to $5,505 for three months ended March 31, 2008, with the significant items being:

·A strengthening of the dollar against Sterling has reduced all elements of selling, general and administrative expenses by approximately $1,350 in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.

·People related costs decreased by $283 (11%) due to a reduced head count in Medicexchange, a lower provision for bonus costs and reduced recruitment costs.

·Stock option charges have decreased by $610 (56%) from the first quarter of 2008 due to the effect of modifications made to plans in the first quarter of 2008, pushing up the cost in that period, and the fall in the value of sterling against the dollar.

At the end of the quarter ended March 31, 2009 we implemented a redundancy program in Medicsight to reduce costs.  As a consequence, we expect people related costs to continue to decrease.  Related redundancy costs amounted to $102.

Professional fees in MGT Capital Investments, Inc.’s company only income statement have increased due to costs relating to a strategic review.

Following an impairment review, we fully impaired $12,157 of goodwill relating to Medicsight, compared to a $nil impairment charge in the three months ended March 31, 2008.  As explained in the executive summary, we based our fair value measurements on the market price of Medicsight shares listed on the AIM Market of the London Stock Exchange as of March 31, 2009.

Interest and other income included an expense of $695 in the three months ended March 31, 2009 compared to income of $508 in the same period in the prior year.   The expense related to a $739 impairment of Hipcricket and a $25 impairment of other marketable securities.  This expense was included in net loss as we considered the loss to be other than temporary.  In the same period in the prior year gains made on these marketable securities were included in other comprehensive income. Also included in interest and other income was interest income of $69 compared to $508 in the three months ended March 31, 2008.  The fall was due to lower the lower level of cash held and lower interest rates.

Income Tax

Our effective tax rate for the three months ended March 31, 2009 is 0%.  The difference in the Company’s effective tax rate from the Federal statutory rate is primarily due to a 100% valuation allowance provided for all deferred tax assets.

Net loss and net loss per share

Net loss attributable to equity holders of MGT Capital Investments, Inc. was $15,330 for the three months ended March 31, 2009

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compared to a net loss of $3,779 for the three months ended March 31, 2008. Net loss per share for the three months ended March 31, 2009 was $0.47 (based on weighted average shares outstanding of 32,550,590), compared to $0.10 for the three months ended March 31, 2008 (based on weighted average shares outstanding of 38,846,986).

Operational currency

Our main operating currency is UK sterling.  Its results of operations are affected by changes in the $: £ rates used to translate the operational result. For three months ended March 31, 2009 the average rate was $1.43: £1.00 and for three months ended March 31, 2008 the rate was $1.99:£1.00, a decrease of 28%.

Operating results by business segment

We consider MGT’s business segments to be those of its two operating subsidiaries, Medicsight and Medicexchange.

Medicsight

	Three months ended March 31,
	2009			2008
Revenue	$	61		$	34
Selling, general and administration costs	3,136			3,466
Research and development	459			595
Operating expense	3,595			4,061
Stock-based compensation (included in operating expenses)	310			706
Operating loss	(3,534		)	(4,027		)
Interest and other income	39			312

	March 31, 2009		December 31, 2008
Cash	$	22,348	$	26,624
Net assets	21,597		25,302

Medicsight revenue improved in the three months ended March 31, 2009 due to increased interest in our ColonCAD™ product as it develops traction in the market.  While we have regulatory approval in a number of territories, our revenues have been generated in the EU.  We expect European revenues to continue to improve year after year, but believe that the US and Japanese markets offer a higher revenue opportunities once regulatory approval is granted.  Support and maintenance revenue is currently low, but we intend to build this as a revenue stream.

The fall in the value of sterling against the dollar is the main reason for the decrease in operating costs.

Research and development is made up of staff, staff related consultancy, stock options and product development software costs expensed on the research and development of Medicsight’s products.  These have decreased in three months ended March 31, 2009 due to the fluctuations in currency exchange rates.

In local currency terms, bonus charges fell as we believe that, after the redundancy program in Medicsight, any potential year end performance related bonuses would, in total, be lower than in the previous year.  The stock option charge fell as we made modifications to certain options in the three months ended March 31, 2008 and the charge has not been repeated in the three months ended March 31, 2009.

We are currently streamlining Medicsight’s operations and reducing staff numbers in order to reduce our operating costs and cash flow.  We therefore expect costs in 2009 to be lower due to reduced salary and discretionary expenses.  This headcount reduction is being implemented across multiple departments and all locations.

Interest and other income was generated by returns on the investment of the proceeds from the IPO in June 2007.  Interest income has fallen in the first quarter of 2009 compared to the same period in 2008 as the level of cash invested was lower , combined with lower investment returns due to significantly lower interest rates.  We believe that continuing low interest rates, combined with lower cash balances, will mean a lower level of interest and other income during Fiscal 2009 compared to Fiscal 2008.

Cash and net assets were lower at March 31, 2009 compared to December 31, 2008 because of Medicsight’s net loss and also as sterling fell in value against the US dollar.

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Medicexchange

	Three months ended March 31,
	2009			2008
Revenue from external customers	$	13		$	18
Cost of revenue	2			12
Gross margin	11			6
Operating expenses	(274		)	(940		)
Operating loss	(263		)	(934		)
Stock-based compensation (included in operating expenses)	5			125

	March 31, 2009			December 31, 2008
Cash	$	1,300		$	1,322
Net (liabilities)	(1,698		)	(1,412		)

In the first quarter of 2008 Medicexchange’s revenue was derived from both online and offline sales; in the same period in 2009 we focused on online sales, leading to a lower level of sales but at a higher margin.  The online sales were split between the US and China 60%/40% respectively.  We expect our focus to continue be on online sales.

We have reduced our spend on operations.  In September 2008 we made the decision to scale back our London cost base and increased our emphasis on our New York office as this is closer to our target market.  We have also outsourced some of our website costs to external contracts to reduce our cost.  Salary costs have fallen after a number of London and Beijing-based staff left the business.  Also, all Medicexchange’s Beijing employees have now started to work for Medicsight and are no longer a cost to Medicexchange.  Our China business is now focused solely on the Shanghai-based Maydeal website.

We also use less office space and the lower number of staff has lead to a lower level of ancillary costs.  We have also reduced our discretionary spending, demonstrated by the reduction in all other listed cost categories.

Liquidity and Capital Resources

Working Capital information

	March 31, 2009			December 31, 2008
Working capital summary
Cash, cash equivalents and marketable securities	$	33,726		$	40,178
Current assets	34,523			41,212
Current liabilities	(3,210		)	(4,340		)
Working capital surplus	$	31,313		$	36,872
Ratio of current assets to current liabilities	10.8			9.5

	Three months ended March 31,
	2009			2008
Cash flow summary
Cash (used for) provided by
Operating activities	$	(5,173	)	$	(5,840	)
Investing activities	(14		)	(6,581		)
Financing activities	—			(1,877		)
Effects of exchange rates on cash and cash equivalents	(501		)	132
Net cashflow	$	(5,688	)	$	(14,166	)

Our cash, cash equivalents and marketable securities have reduced during 2009 predominantly because of the cash used in operating activities.  Our net cash used in operating activities differs from net loss because of various non-cash adjustments such as the transfer to non-controlling interest, stock-based compensation and impaired investments and goodwill.  Even though net loss was greater in the three months ended March 31, 2009 compared to the same period in the prior year, cash used in operating activities was lower.  This was due to lower levels of expenditure in the three months ended March 31, 2009, and the fact that net loss included the $12,157 non-cash goodwill impairment charge relating to goodwill.

Our ratio of current assets to current liabilities has remained relatively constant at 10.8.  This is a result of the $32,606 of cash held in the Company.

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Valuation of investments held at fair value

We hold investments in HipCricket Inc. and various marketable securities at fair value.

We have valued HipCricket Inc. using its closing price on the AIM market of the London Stock Exchange as of March 31, 2009. Due to the low number of market transactions for HipCricket Inc. each transaction can potentially and has historically had a significant effect on the share price. It is for this reason we deem these to be a Level 2 input in the fair value hierarchy. However, we still believe that this is the best price at which to determine the current value.

Our investments in other marketable securities relate to holdings in corporate bonds issued by highly rated companies.  We have valued these investments at market prices as of March 31, 2009 and consider these to be Level 1 inputs as these are active markets.

In the three months ended March 31, 2009 Hipcricket was impaired by $739 and other marketable securities by $25. This impairment loss was recognised in net loss.  In the same period in the prior year, $131 of gains on these securities were recognised in other comprehensive income.

Impairment review of investments held at cost

We account for our investments in Eurindia Limited and XShares LLC at cost subject to impairment.

We carried out an impairment review of our holdings in Eurindia Limited as of December 31, 2008.  Eurindia Limited’s management has informed us that they intend to pay a liquidating dividend of between 30 cents and 50 cents per share.  We have assumed the dividend to be the lower of these two values and have impaired our holding to the value of 30 cents per share.  We consider the input to this approximation of fair value to be a Level 3 input under the SFAS 157 fair value hierarchy, which is a significant unobservable input.  As at March 31, 2009 we believe that this still represents fair value for the investment.

We also reviewed the carrying value of our investment in XShares LLC as of December 31, 2008.  XShares LLC was in the process of raising funds to drive the business forward.  As this process had not been completed we have impaired this investment to $600.  As of March 31, 2009 the moves to raise funds are still taking place and we believe that the $600 valuation still approximates fair value.

We estimated this impairment based on management’s review and discussion of the strategy and business plan of X Shares LLC and review of draft Fiscal 2008 financial accounts prepared by an independent accountant. These inputs are subject to management’s judgment and we have therefore deemed them to be Level 3 inputs in the fair value hierarchy. The value of our investment reduced as previously invested cash has been used to fund business operations and as yet the business is not generating sufficient cash. However, we have reviewed XShares LLC’s business plan and we have adjusted our investment to a level we believe reflects the future market valuation and with no active market we believe this is the best method at which to determine the value of our investment.

Investment in Medicsight

Our condensed consolidated financial statements include the results and financial condition of our subsidiary, Medicsight.  Our holding in Medicsight is 86,000,000 shares out of Medicsight’s issued share capital of 155,524,504 shares.

As of March 31, 2009 Medicsight’s share price was £0.06 ($0.09) compared to £0.235 ($0.34), as of December 31, 2008.  This valued Medicsight at £9,331 ($13,264), compared to £20,210 ($29,262) as of December 31, 2008.

As of May 11, 2009 Medicsight’s share price was £0.12 ($0.18) valuing the Company’s investment at £10,105 ($15,294), assuming a $:£ exchange rate of 1.5135.

Risks and uncertainties related to our future capital requirements

To date we have primarily financed our operations through private placements of equity securities.  To the extent that additional capital is raised through the sale of equity or equity-related securities of the Company or its subsidiaries, the issuance of such securities could result in dilution to our stockholders.

No assurance can be given, however, that we will have access to the capital markets in the future, or that financing will be available on acceptable terms to satisfy our cash requirements to implement our business strategies.

If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial conditions could be materially and adversely affected.  We may be required to raise substantial additional funds through other means.

Our technology has not yet been regulated in all target territories and as a result commercial results have been limited and we have not generated significant revenues.  We cannot assure our stockholders that our technology and products will be commercialized successfully, or that if so commercialized, that revenues will be sufficient to fund our operations.

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

Capital commitments

On August 25, 2006 we executed a 10-year agreement with Pirbright Holdings Limited, to lease 8,787 square feet of office space at the Kensington Centre, 66 Hammersmith Road, London W14 8UD, UK.

Under this lease agreement our UK property rent, services and related costs will be approximately £330 ($471) per annum, paid quarterly in advance.  We have the right to terminate this agreement on the expiration of the fifth year of the lease.  Our annual rent is subject to upward only review on August 24, 2011.  We have two 10-month rent-free periods: the first commencing August 25, 2006; the second commencing August 25, 2011.

We have satellite offices in Tokyo (Japan) and Beijing (China) — which are on three and two year rental agreements respectively.

In July 2008 we entered into an agreement with a partner to develop interfaces for our software.  We have committed to pay Euros 1,445 ($1,908) over an expected thirty-six month period.  As at March 31, 2009 we have paid Euros 725 ($957).  These payments will be recovered against future royalty payments, should the products be successfully commercialized.

The following table analyzes our contractual obligations.

	Payments due by period
Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years
Operating lease obligations	$	1,312	$	459	$	847	$	6
Purchase obligations	951		951		—		—
Total	$	2,263	$	1,410	$	847	$	6

Recent accounting pronouncements

On January 1, 2009 we adopted the provisions of SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS No. 141R).  SFAS No. 141R significantly changes the accounting for business combinations.  Under SFAS No. 141R, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with only limited exceptions.  SFAS No.141R also includes a substantial number of new disclosure requirements.  In April 2009, the FASB issued FSP FAS 141(R)-1 which amends SFAS No. 141(R) by establishing a model to account for certain pre-acquisition contingencies.  Under the FSP, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period.  If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria in SFAS No. 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss — an interpretation of FASB Statement No. 5.  SFAS No. 141(R) and FSP FAS 141(R)-1 became effective for us beginning January 1, 2009, and will apply prospectively to business combinations completed on or after that date.

On January 1, 2009 we adopted the provisions of SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51.”  SFAS No. 160 establishes accounting and reporting standards for the non-controlling interest (formerly known as minority interest) in a subsidiary (which may include variable interest entities) and for the deconsolidation of a subsidiary.  Significant changes include: Balance sheet and income statement presentation and expanded disclosures; Accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation; Recognition and measurement of a gain or loss when a subsidiary is deconsolidated.  For balance sheet presentation, non-controlling interests are now recorded within equity and so-called “mezzanine” display is not permitted.  In income statements, the amount of income attributable to the non-controlling interest is not a deduction that impacts net income.  As a result of these requirements, various financial statements ratios have been impacted.  The Statement requires prospective application except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented.

In April 2009 the Financial Accounting Standards Board (“FASB”) issued three Staff Positions (“FSPs”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities.  FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured.  FSP FAS 115-2 and FAS 124-2 establish a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income.  FSP FAS 107-1 and APB 28-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods.  All of these FSPs are effective for us beginning April 1, 2009.  We are assessing the potential impact that the adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 may have on our consolidated financial statements.  FSP FAS 107-1 and APB 28-1 will result in increased disclosures in our interim periods.

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Item 3.                       Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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

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

Foreign Exchange Risk

We are exposed to foreign currency exchange rate fluctuations related to the operation of our international subsidiaries.  Our main operating currency is UK sterling.  We also have subsidiary operations in Japan and China who operate in their local currencies.

Our operating costs in Fiscal 2008 were predominantly in UK sterling; we do not foresee any change in Fiscal 2009 or Fiscal 2010. A ten percent increase or decline in the US dollar exchange rate against all foreign currencies would have created an increase or decline in our operating costs in the three months ended March 31, 2009 of approximately $344.

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

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

We currently do not hedge against this foreign currency risk.

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

Item 4T.                      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report for the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, to be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.                            Legal Proceedings

None.

Item 1A.                         Risk Factors

Discussion of our business and operations included in this quarterly report on Form 10-Q should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.  New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect financial performance. Each of the risks described below could adversely impact the value of our securities.  These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

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We cannot assure you that MGT will be successful in commercializing any of the Group’s products and, in particular, the Medicsight products or the Medicexchange portal, or if any of the products or the portal are commercialized, that they will prove to be profitable for the Company.

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

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

Company specific risks

We may be unable to develop our existing or future technology.

Our Medicsight CAD system may not deliver the levels of accuracy and reliability needed to make it a successful product in the market place.  Additionally, the development of such accuracy and reliability may be indefinitely delayed or may never be achieved.  Failure to develop this or other technology could have an adverse material effect on the Company’s business, financial condition, results of operations and future prospects.

The market for our technology may be slow to develop, if at all.

The market for the Medicsight CAD products and Medicexchange.com may be slower to develop or smaller than estimated or it may be more difficult to build the market than anticipated. The medical community may resist Medicsight CAD and the Medicexchange.com products or be slower to accept them than we anticipate. Revenues from Medicsight CAD and Medicexchange.com may be delayed or costs may be higher than anticipated which may result in the Company requiring additional funding.  If any of these situations were to occur this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

We may be slow to receive required regulatory approvals from respective government regulators, if we receive them at all.

The Medicsight CAD system is subject to regulatory requirements in the United States of America, Europe, Japan, China and our other targeted markets. Necessary regulatory approvals may not be obtained or may be delayed.  We may incur substantial additional cost in obtaining regulatory approvals for our products in our targeted markets.  The failure to obtain these approvals and/or the associated costs could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

The medical imaging market we operate in is highly competitive.

There are a number of groups and organizations, such as software companies in the medical imaging field, MDCT scanner manufacturers, screening companies and other healthcare providers that may develop a competitive offering to the Medicsight CAD products and Medicexchange.com.  In addition, these competitors may have significantly greater resources than MGT. We cannot make any assurance that they will not attempt to develop such offerings, that they will not be successful in developing such offerings or that any offerings they may develop will not have a competitive edge over Medicsight CAD products and Medicexchange.com. Should a superior offering market come to market, this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

We are a developing company with limited revenues from operations.

MGT has incurred significant operating losses since inception and has only recently commenced generating revenues from operations. As a result, MGT has generated negative cash flows from operations and has an accumulated deficit at December 31, 2008. MGT is operating in a developing industry based on new technology and its primary source of funds to date has been through the issuance of securities and borrowed funds. There can be no assurance that management’s efforts will be successful or that the products MGT develops and markets will be accepted by consumers.  If our products are ultimately unsuccessful in the market, this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

Our current corporate structure may place us in an unfavorable market position vis-à-vis our competitors.

MGT’s corporate structure may make it more difficult or costly to take certain actions. MGT conducts its business through: (a) Medicsight, a UK public company which is 55% owned by the Company, and through Medicsight’s subsidiaries in the United Kingdom, the United States, Japan and Gibraltar; and (b) the Medicexchange subsidiaries, in which MGT’s holdings range between 75% and 100%.  Although MGT, Medicsight and Medicexchange share some directors and management, they are required to comply with corporate governance and other laws and rules applicable to public companies in the United Kingdom and the United States.  Should MGT propose to take any action, such as a transfer or allocation of assets or liabilities between MGT and its subsidiaries, MGT would have to take into consideration the potentially conflicting interests of MGT’s stockholders and the non-controlling stockholders.  This may deter MGT from taking such actions that might otherwise be in the best interest of MGT or cause MGT to incur additional costs in taking such actions. The subsidiary companies would not be able to pay dividends or make other distributions of profits or assets to MGT without making pro-rata payments or distributions to the respective non-controlling stockholders.  Although neither the subsidiary companies nor MGT has plans to pay dividends or make distributions

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to its shareholders, MGT’s corporate structure may deter its subsidiaries from doing so in the future.  If at any point we are ultimately unable to resolve any of these conflicts, this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

The protection of our intellectual property may be uncertain, and we may face possible claims of others.

Although we have received patents and have filed patent applications with respect to certain aspects of our technology, we generally do not rely on patent protection with respect to our products and technologies. Instead, we rely primarily on a combination of trade secret and copyright law, employee and third-party non-disclosure agreements and other protective measures to protect intellectual property rights pertaining to our products and technologies. Such measures may not provide meaningful protection of our trade secrets, know-how or other intellectual property in the event of any unauthorized use, misappropriation or disclosure. Others may independently develop similar technologies or duplicate our technologies. In addition, to the extent that we apply for any patents, such applications may not result in issued patents or, if issued, such patents may not be valid or of value. Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products and technologies, or we may need to assert claims of infringement against third parties. Any infringement or misappropriation claim by us or against us could place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. The costs of prosecuting or defending an intellectual property 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 third party, we could be required to pay significant damages or license fees or cease production, any of which could have a material adverse effect on our business.  If a claim is brought against us, or we ultimately prove unsuccessful on the claims on our merits, this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

We may fail to attract and retain qualified personnel.

We expect to rapidly expand our operations and grow our sales, research and development and administrative operations. This expansion is expected to place a significant strain on our management and will require hiring a significant number of qualified personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies, research and academic institutions, government entities and other organizations for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our marketing and development activities, and this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

If we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.

 Our ability to grow successfully requires an effective planning and management process. The expansion and growth of our business could place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

We face risks arising from foreign currency exchange.

As MGT’s main operating currency is UK sterling and its financial statements are reported in US dollars, MGT’s assets and liabilities and its results of operations are affected by movements in the $:£ exchange rate.  Should there be large or unexpected fluctuations in the $:£ exchange rate, this could have a material effect on the Company’s business, financial condition, results of operations and future prospects.  The Company currently does not engage in hedging activities to minimize the effect of adverse movements in the exchange rate.

We may not be able to quickly realize our investments at the value at which we have recorded them.

MGT holds a number of investments held at both at market value and at cost.  There is a risk that we may not be able to swiftly realize these investments at the fair value or cost at which they are recorded in the financial statements.  If we are unable to quickly realize these investments at prices we believe to be fair, this could have a material effect on the Company’s business, financial condition, results of operations and future prospects.

General market risks

We may not be able to access credit.

We face the risk that we may not be able to access credit, either from lenders or suppliers, or have facilities reduced or terminated.  Failure to access credit from any of these sources could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

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Recent global economic trends could adversely affect our business, liquidity and financial results.

Recent global economic conditions, including disruption of financial markets, could adversely affect us, primarily through limiting our access to capital and disrupting our clients’ businesses.  In addition, continuation or worsening of general market conditions in economies important to our businesses may adversely affect our clients’ level of spending and ability to obtain financing, leading to us being unable to generate the levels of sales that we require.  Current and continued disruption of financial markets could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

We may not be able to maintain effective internal controls.

If we fail to maintain the adequacy 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 we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Failure to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors to lose confidence in our reported financial information, either of which could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

Item 2.                            Unregistered Sales of Equity Securities and Use of Proceeds

In the three months ended March 31, 2009 no shares of common stock were issued.

Item 3.                            Defaults Upon Senior Securities

None.

Item 4.                            Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Other Information.

On May 14, 2009, the Company executed and delivered a Convertible Promissory Note (the “Note”) in the principal amount of $1,100 with XShares Group, Inc. (“XSG”), a Delaware corporation.  The principal amount includes a fee of $100 payable to the Company.  All of the Note shall be converted into Series B Preferred Stock of XSG (the “Series B Shares”) at the Initial Closing (as defined below).  In the event that an Amended and Restated Certificate of Incorporation designating the rights and preferences of the Series B Shares (the “Certificate”) is not approved by a majority of the stockholders of XSG, then the entire unpaid principal sum of the Note, plus interest thereon, shall be immediately paid to the Company or converted into shares of XSG’s common stock at a price of $0.001 per share at the option of the Company.  A copy of the Note is annexed hereto as Exhibit 10.5.

Simultaneously with executing the Note, the Company entered into a Securities Purchase Agreement (the “SPA”) with XSG, pursuant to which the Company agreed to purchase an aggregate of 73,943,662 Series B Shares at a purchase price of $0.0284 per share.  The SPA contains the standard representations and warranties for a transaction of this type and is subject to the approval by the stockholders of XSG of the Certificate. The Series B Shares are redeemable at the option of XSG, at a price of 1.05 times the original issue price.

It is anticipated that the purchase and sale of the Series B Shares will take place in two closings.

1.     The initial closing of 38,732,394 Series B Shares will occur immediately upon the filing of the Certificate with the Secretary of State of the State of Delaware (the “Initial Closing”).

2.     The second closing of 35,211,268 Series B Shares will occur upon the later of (i) July 16, 2009 or (ii) five days following the filing of the Certificate.  A copy of the SPA and a form of the Certificate are annexed hereto as Exhibits 10.3 and 10.4, respectively.

During the year ended December 31, 2007, the Company acquired shares valued at $960 in XSG’s predecessor, XShares Group, LLC.   This investment was introduced to the Company by Asia IT (a related party).   In the year ended December 31, 2008, the Company acquired additional shares of XSG valued at $2,040, bringing the total historical investment to $3,000. As of December 31, 2008, this investment was deemed impaired to a value of $600.

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Exhibits

10.3	Securities Purchase Agreement with XShares Group, Inc.
10.4	Second Amended and Restated Certificate of Incorporation of XShares Group, Inc.
10.5	Convertible Promissory Note between XShares Group, Inc. and MGT Capital Investments, Inc.
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).

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SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly 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
May 15, 2009

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EX-10.3

Exhibit 10.3

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT is made as of the 14th day of May, 2009 by and between XShares Group, Inc., a Delaware corporation (the “Company”), and MGT Capital Investments, Inc., a Delaware corporation, (the “Purchaser”).

The parties hereby agree as follows:

1.Purchase and Sale of Note and Preferred Stock.

1.1.Issuance of Convertible Promissory Note.

(a)The Board of Directors has duly approved the issuance of the Convertible Promissory Note (the “Note”), in the original principal amount of $1,100,000, made by the Company in favor of the Purchaser in the form annexed hereto as Exhibit A.

(b)Subject to the terms and conditions of this Agreement, the Purchaser agrees to purchase the Note immediately upon execution of this Agreement, and the Company agrees to execute and deliver the Note to the Purchaser immediately upon receipt from the Purchaser of $1,000,000.

1.2.Sale and Issuance of Series B Preferred Stock.

(a)The Board of Directors has duly adopted and approved and submitted to the shareholders of the Company for their adoption and approval, the Second Amended and Restated Certificate of Incorporation attached to this Agreement as Exhibit B (the “Certificate”).  Upon due approval of the Certificate by the shareholders of the Company, the Company shall file the Certificate with the Secretary of State of the State of Delaware

(b)Subject to the terms and conditions of this Agreement, the Purchaser agrees to purchase at the Closings (as defined below) and the Company agrees to sell and issue to the Purchaser at the Closings that number of shares of Series B Preferred Stock, $.0001 par value per share (the “Series B Preferred Stock”), set forth in Section 1.3(a) below, at a purchase price of $0.0284 per share.  The shares of Series B Preferred Stock issued to the Purchaser pursuant to this Agreement shall be referred to in this Agreement as the “Shares” (and together with the Note, the “Purchased Securities”).

1.3.Closing; Delivery.

(a)Subject to the compliance with the conditions set forth in Section 4 and 5, the initial purchase and sale of 38,732,394 Shares shall take place immediately upon filing of the Certificate with the Secretary of State of the State of Delaware (the “Initial Closing”).

(b)Subject to the compliance with the conditions set forth in Section 4 and 5, the second purchase and sale of 35,211,268 Shares shall take place at the offices of Gersten Savage LLP, 600 Lexington Avenue, New York, New York via the exchange of documents and signatures, at 11:00 a.m, New York time, on the later of (i) July 16, 2009 or (ii) five days following the filing of the Certificate with the Secretary of State of the State of Delaware, or at such other time and place as the Company and the Purchaser mutually agree upon, in writing (the “Subsequent Closing”); provided, however, that the Purchaser, in addition to any other rights of Purchaser set forth herein, shall have no obligation to purchases the Shares pursuant to this Section 1.3(b) unless the Purchaser has determined, in its sole discretion, prior to such investment, that the Company has been operating the Company’s business in accordance with the budget attached hereto as Exhibit C (the “Budget”), which Budget has been

approved by the Company and the Purchaser as of the date of this Agreement  (the Initial Closing and the Subsequent Closing shall be collectively referred to herein as the “Closings.”)

(c)At each Closing, the Company shall deliver to the Purchaser a certificate representing the Shares being purchased by the Purchaser at such Closing against payment of the purchase price therefor by wire transfer to a bank account designated by the Company, by cancellation or conversion of indebtedness of the Company to Purchaser, or by any combination of such methods.  Without limiting the generality of the foregoing, at the Initial Closing, the Purchaser shall deliver the original Note as consideration for the Shares issued at the Initial Closing.

1.4Use of Proceeds.  In accordance with the directions of the Company’s Board of Directors, the Company will use the proceeds from the sale of the Shares as set forth in the Budget.

1.5Defined Terms Used in this Agreement.  In addition to the terms defined above, the following terms used in this Agreement shall be construed to have the meanings set forth or referenced below.

“Affiliate” means, with respect to any specified Person, any Person, directly or indirectly, through one or more intermediaries controlling, controlled by or under common control with such Person.

“Bylaws” means the Bylaws of the Company in the form provided to the Purchaser.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Intellectual Property” means all patents, patent applications, trademarks, trademark applications, service marks, tradenames, copyrights, trade secrets, domain names, mask works, information and proprietary rights and processes, licenses in to and under any of the foregoing, that are owned by the Company or used by the Company in the conduct of the Company’s business as now conducted and as presently proposed to be conducted.

“ETF” means any of the Company’s exchange-traded funds.

“Material Adverse Effect” means any occurrence, state of facts, change, event, effect or circumstance that, individually or in the aggregate, has, or would reasonably be expected to have, a material adverse effect on the assets, liabilities, business, results of operations or financial condition of the Company, including, without limitation, the Company’s insolvency or a force majeure event, other than any occurrence, state of facts, change, event, effect or circumstance to the extent resulting from: (i) the announcement of the execution of this Agreement, or (ii) any change in United States generally accepted accounting principles (“GAAP”) or interpretation thereof after the date hereof or (iii) the execution and performance of or compliance with this Agreement.

“Person” means an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an association, an unincorporated organization, Governmental Authority and any other entity.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Shares” means the shares of Series B Preferred Stock issued at the Initial Closing and at the Subsequent Closing, if any.

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2.Representations and Warranties of the Company.  The Company hereby represents and warrants to each Purchaser that, except as set forth on the Disclosure Schedule attached as Exhibit F to this Agreement, which exceptions shall be deemed to be part of the representations and warranties made hereunder, the following representations are true and complete as of the date hereof, except as otherwise indicated.  The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections and subsections contained in this Section 2, and the disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in this Section 2 only to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.

2.1.Organization, Good Standing, Corporate Power and Qualification.  Each of the Company, the ETFs, and the Company Subsidiaries is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted.  As set forth in Schedule 2.1, each of the Company, the ETFs, and the Company Subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not reasonably be expected to have a Material Adverse Effect.  The Company has heretofore made available to Purchaser accurate and complete copies of the Company’s, each ETFs, and each Company Subsidiaries’ certificate of incorporation, by-laws, operating agreements and the equivalent organizational documents of each of the Company Subsidiaries, each as currently in effect.  None of the Company, any ETF or any Company Subsidiary is in violation of any provision of its respective certificate of incorporation, by-laws or equivalent organizational documents as the case may be.

2.2.Capitalization. The authorized capital of the Company shall consist, immediately prior to the Initial Closing, of:

(i)1,400,000,000 shares of common stock, $0.0001 par value per share (the “Common Stock”), 293,994 shares of which are issued and outstanding.

(ii)672,000,000 shares of preferred stock, $0.0001 par value per share (the “Preferred Stock”) (the Common Stock and the Preferred Stock are collectively referred to as the “Securities”): (i) 172,000,000 of which have been designated Series A Preferred Stock, 162,257,593 shares of which are issued and outstanding; and (ii) 500,000,000 of which have been designated Series B Preferred Stock, none of which is issued or outstanding.  The rights, privileges and preferences of the Preferred Stock are as stated in the Certificate and as provided by the general corporation law of the jurisdiction of the Company’s incorporation.

(b)All of the outstanding securities issued by the Company have been duly authorized, are fully paid and nonassessable and were issued in compliance with all applicable federal and state securities laws.  The Company holds no treasury stock.

(c)Other than (X) the Note and (Y) as otherwise set forth in the Disclosure Schedule or on the capitalization table attached hereto as Exhibit D, there are no (i) outstanding options, warrants, puts, calls, convertible securities, preemptive or similar rights, (ii)  bonds, debentures, notes or other indebtedness having general voting rights or that are convertible or exchangeable into securities having such rights, or (iii) subscriptions or other rights, agreements, arrangements, contracts or commitments of any character, relating to the issued or unissued securities of the Company or any of the

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Company Subsidiaries or obligating the Company or any of the Company Subsidiaries to issue, transfer, deliver or sell or cause to be issued, transferred, delivered, sold or repurchased any options , or other equity interest in, the Company or any of the Company Subsidiaries or securities convertible into or exchangeable for such shares or equity interests, or obligating the Company or any of the Company Subsidiaries to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment for such equity interest.  There are no outstanding obligations of the Company or any of the Company Subsidiaries to repurchase, redeem or otherwise acquire any capital stock of, or other equity interests in, the Company or any of the Company Subsidiaries or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any other entity.

(d)To the Company’s knowledge, there are no stockholders or members agreements, voting trusts or other agreements or understandings with respect to the voting of the Securities or the capital stock or equity interests of any Company Subsidiary.

(e)The Company has agreed to reserve 19,000,000 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to a 2008 Stock Option Plan, as amended (the “Stock Plan”). Of such reserved shares of Common Stock, no shares have been issued pursuant to restricted stock purchase agreements, and no options to purchase shares have been granted to officers, directors, employees and consultants pursuant to the Stock Plan.  The Company has furnished to the Purchaser complete and accurate copies of the proposed Stock Plan and forms of agreements used thereunder.

(f)A true, complete and correct copy of the Company’s capitalization table as of the date hereof is attached hereto as Exhibit D.

2.3.Authorization.  All corporate action required to be taken by the Company’s Board of Directors and stockholders in order to authorize the Company to enter into this Agreement, and to issue the Shares at the Closing and the Common Stock issuable upon conversion of the Shares, has been taken or will be taken prior to the Initial Closing.  All action on the part of the officers of the Company necessary for the execution and delivery of this Agreement, the performance of all obligations of the Company hereunder to be performed as of the Initial Closing, and the issuance and delivery of the Shares has been taken or will be taken prior to the Initial Closing.  This Agreement, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

2.4.Valid Issuance of Purchased Securities.  The Purchased Securities, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under applicable state and federal securities laws and liens or encumbrances created by or imposed by the Purchaser.  Assuming the accuracy of the representations of the Purchaser in Section 3 of this Agreement and subject to the filings described in Section 2.5(ii) below, the Shares will be issued in compliance with all applicable federal and state securities laws.  The Common Stock issuable upon conversion of the Shares has been duly reserved for issuance, and upon issuance in accordance with the terms of the Certificate, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under applicable federal and state securities laws and liens or encumbrances created by or imposed by the Purchaser.  Based in part upon the representations of the Purchaser in Section 3 of this Agreement, and subject to Section 2.5 below, the Common Stock issuable

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upon conversion of the Shares will be issued in compliance with all applicable federal and state securities laws.

2.5.Governmental Consents and Filings.  Assuming the accuracy of the representations made by the Purchaser in Section 3 of this Agreement, no consent, approval, waiver, authorization or permit of, or notice to or declaration or filing with (each, a “Consent”), any nation or government, any state or other political subdivision thereof, any entity, authority or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any governmental or regulatory authority, agency, department, board, commission, administration or instrumentality, any court, tribunal or arbitrator or any self-regulatory organization (each, a “Governmental Authority”), on the part of the Company, ETF or any of the Company Subsidiaries is required to be obtained or made in connection with the execution, delivery or performance by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, other than (i) the filing of the Certificate, which will have been filed as of the Initial Closing, and (ii) filings pursuant to Regulation D of the Securities Act, and applicable state securities laws, which have been made or will be made in a timely manner.

2.6.Litigation.  Except as set forth in the Disclosure Schedule, there is no claim, action, suit, proceeding, arbitration, complaint, charge or, investigation pending or to the knowledge of the Company, threatened against the Company.  The Company is not a party nor is named as subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality.  There is no action, suit, proceeding or investigation by the Company pending or which the Company intends to initiate.  The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened (or any basis therefor known to the Company) involving the current or prior employment of or engagement of any of the Company’s employees or consultants, their services provided in connection with the Company’s business, or any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers.

2.7.Compliance with Other Instruments.  The Company is not in violation or default (i) of any provisions of its Certificate or Bylaws, (ii) of any instrument, judgment, order, writ or decree, (iii) under any note, indenture or mortgage, or (iv) under any lease, agreement, contract or purchase order to which it is a party or by which it is bound or, of any provision of federal or state statute, rule or regulation applicable to the Company, the violation of which would have a Material Adverse Effect.  The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either (i) a default under any such provision, instrument, judgment, order, writ, decree, note, indenture, mortgage, lease, agreement, contract or purchase order or (ii) an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, forfeiture, or nonrenewal of any permit or license applicable to the Company.

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2.8.Agreements; Actions. Except for the Convertible Note and this Agreement, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000, (ii) the license of any patent, copyright, trademark, trade secret or other proprietary right to or from the Company, (iii) the grant of rights to license, market, or sell its products to any other Person that limit the Company’s exclusive right to develop, market or sell its products, or (iv) indemnification by the Company with respect to infringements of proprietary rights.

(b)The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii)  incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $50,000 or in excess of $100,000 in the aggregate, (iii) except as listed on Schedule 2.8(b)(iii), made any loans or advances to any Person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights.

(c)The Company is not a guarantor or indemnitor of any indebtedness of any other Person.

(d)The Company has not engaged in the past twelve (12) months in any discussion with any representative of any Person (other than the Purchaser) regarding (i) a sale or exclusive license of all or substantially all of the Company’s assets, or (ii) any merger, consolidation or other business combination transaction of the Company with or into another Person.

2.9.Certain Transactions.  Except as listed on Schedule 2.9, the Company is not indebted, directly or indirectly, to any of its directors, officers or employees or to their respective spouses or children or to any Affiliate of any of the foregoing, other than in connection with expenses or advances of expenses incurred in the ordinary course of business or employee relocation expenses and for other customary employee benefits made generally available to all employees.  None of the Company’s directors, officers or employees, or any members of their immediate families, or any Affiliate of the foregoing are, directly or indirectly, indebted to the Company.

2.10.Absence of Liens.  The property and assets that the Company owns are free and clear of all mortgages, deeds of trust, liens, loans and encumbrances, except for statutory liens for the payment of current taxes that are not yet delinquent.  With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, except as listed on Schedule 2.10, holds a valid leasehold interest free of any liens, claims or encumbrances other than those of the lessors of such property or assets. With respect to each such Company lease, no lessor, lien, claim, or encumbrance interferes with the Company’s use and quiet enjoyment of such leased property or asset.

2.11.Financial Statements.  The Company has delivered to the Purchaser its audited financial statements (including balance sheet, income statement and statement of cash flows) as of December 31, 2007 and December 31, 2008 and unaudited financial statements for the three-month period ended March 31, 2009 (collectively, the “Financial Statements”).  The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except that the unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles.  The Financial Statements fairly present in all material respects the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject in the case of the unaudited Financial Statements to normal year-end audit adjustments, which are not material. Except as set forth in the Financial Statements, the Company has no liabilities or obligations, contingent or otherwise, other than (i) liabilities incurred in the

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ordinary course of business subsequent to March 31, 2009 and which have been disclosed to the Company in writing (ii) obligations under contracts and commitments incurred in the ordinary course of business and which have been disclosed to the Company in writing and (iii) liabilities and obligations of a type or nature not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in all such cases, individually and in the aggregate would not have a Material Adverse Effect.  The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles.

2.12.Changes.  Since the date of the most recent Financial Statements, other than the Convertible Note, there has not been:

(a)any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not caused, in the aggregate, a Material Adverse Effect;

(b)any damage, destruction or loss, whether or not covered by insurance, that would have a Material Adverse Effect;

(c)any waiver or compromise by the Company of a valuable right or of a material debt (in excess of $10,000) owed to it;

(d)any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and the satisfaction or discharge of which would not have a Material Adverse Effect;

(e)any material change to a material contract or agreement (in excess of $10,000) by which the Company or any of its assets is bound or subject;

(f)any change in any compensation arrangement or agreement with any employee, officer, director or stockholder;

(g)any resignation or termination of employment of any officer, employee, or consultant of the Company;

(h)any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets (in excess of $10,000), except liens for taxes not yet due or payable and liens that arise in the ordinary course of business and do not impair the Company’s ownership or use of such property or assets;

(i)any loans or guarantees made by the Company to or for the benefit of its employees, officers directors or consultants, or any members of their immediate families,;

(j)any declaration, setting aside or payment or other distribution in respect of any of the Company’s capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such stock by the Company;

(k)any sale, assignment or transfer of any Company Intellectual Property that could reasonably be expected to result in a Material Adverse Effect;

(l)receipt of notice that there has been a loss of, or material order cancellation by, any major customer of the Company;

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(m)any other event or condition of any character, other than events affecting the economy or the Company’s industry generally,  that could reasonably be expected to result in a Material Adverse Effect; or

(n)any arrangement or commitment by the Company to do any of the things described in this Section 2.12.

2.13.Tax Returns and Payments.  The Company has timely paid all federal, state, county, local or foreign taxes due and payable.  There are no accrued and unpaid federal, state, county, local or foreign taxes of the Company which are due, whether or not assessed or disputed.  There have been no examinations or audits of any tax returns or reports by any applicable federal, state, local or foreign governmental agency.  The Company has duly and timely filed all federal, state, county, local and foreign tax returns required to have been filed by it and there are in effect no waivers of applicable statutes of limitations with respect to taxes for any year.  The Company has properly withheld and paid all taxes required to have been withheld and paid in connection with any amounts paid or credited to any employee, independent contractor, creditor, stockholder or other third party.

2.14.Insurance.  The Company, each ETF, and each Company Subsidiary is covered by valid and currently effective insurance policies issued in favor of the Company or one or more of the ETFs or Company Subsidiaries that are customary for companies of similar size in the industry and locales in which the Company and the Company Subsidiaries operate.  Schedule 2.14 sets forth a true, correct and complete list of all insurance policies issued in favor of the Company, any ETF, or any Company Subsidiary, or pursuant to which the Company, any ETF, or any Company Subsidiary is a named insured or otherwise a beneficiary, as well as any historic incurrence-based policies still in force.  With respect to each such insurance policy, (i) the policy is in full force and effect and all premiums due thereon have been paid, (ii) neither the Company or any ETF, nor any Company Subsidiary is in any material respect, in breach of or default under, and neither the Company or any ETF, nor any Company Subsidiary have taken any action or failed to take any action which, with notice or the lapse of time or both, would constitute such a breach or default, or permit termination or modification of, any such policy, (iii) to the knowledge of the Company, no insurer on any such policy has been declared insolvent or placed in receivership, conservatorship or liquidation, and no notice of cancellation or termination has been received with respect to any such policy,  and (iv) the Company knows of no reason any such insurance policy would be cancelled or modified in any material respect as a result of the transactions contemplated hereby.

2.15.Regulatory Agreements; Permits.

(a)There are no (A) written agreements, consent agreements, memoranda of understanding, commitment letters, cease and desist orders, or similar undertakings to which the Company, any ETF, or any Company Subsidiary is a party, on the one hand, and any Governmental Authority is a party or addressee, on the other hand, (B ) Orders or directives of or supervisory letters from a Governmental Authority specifically with respect to the Company, any ETF, or any Company Subsidiary, or (C) resolutions or policies or procedures adopted by the Company, any ETF, or any Company Subsidiary at the request of a Governmental Authority, that (1) limit in any  respect the ability of the Company, any ETF, or any of the Company Subsidiaries to conduct its business as currently being conducted or (2) in any manner relate to the ability of the Company, any ETF,  or any of the Company Subsidiaries to pay dividends or otherwise restrict the conduct of business of the Company, any ETF, or any of the Company Subsidiaries in any respect.

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(b)The Company, the ETFs, and the Company Subsidiaries hold all permits, licenses, franchises, grants, authorizations, consents, exceptions, variances, exemptions, orders and other governmental authorizations, certificates, consents and approvals necessary to lawfully conduct their businesses as presently conducted and contemplated to be conducted, and to own, lease and operate their assets and properties (collectively, the “Company Permits”), all of which are in full force and effect, and no suspension or cancellation of any of the Company Permits is pending or, to the knowledge of the Company, threatened,.  Schedule 2.15(a) sets forth each Company Permit.  Each of the Company, the ETFs, and the Company Subsidiaries are not in violation in any material respect of the terms of any Company Permit.

(c)No investigation, review or market conduct examination by any Governmental Authority with respect to the Company, any ETF, or any Company Subsidiary is pending or, to the knowledge of the Company, threatened, nor does the Company have knowledge of any Governmental Authority’s intention to conduct any such investigation or review.

(d)Each of the Company, each ETF, and each Company Subsidiary and each of their respective officers and employees who are required to be registered, licensed or qualified as (A) an investment company, broker-dealer, investment adviser, futures commission merchant or (B) a registered principal, registered representative, investment adviser representative, insurance agent or salesperson with the SEC or any securities or insurance commission or other Governmental Authority are duly registered as such and such registrations are in full force and effect, or are in the process of being registered as such within the time periods required by applicable law, except in each case for any failures to be so registered, licensed or qualified that would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. Each of the Company, each ETF, and each Company Subsidiary and each of their respective officers and employees are in compliance with all applicable federal, state and foreign laws requiring any such registration, licensing or qualification, and are not subject to any liability or disability by reason of the failure to be so registered, licensed or qualified, except as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.

(e)Each of the Company, each ETF, and each Company Subsidiary, and, to the knowledge of the Company, its solicitors, third party administrators, managers, brokers and distributors, have marketed, sold and issued investment products and securities in compliance with all applicable laws governing sales processes and practices, except in each case as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.

(f)Each of the Company, each ETF, and each Company Subsidiary, if and as applicable, has filed all forms, requests for exemptive orders, reports, schedules, statements and other documents (inclusive of any certifications mandated by applicable Law) required to be filed or furnished by the Company with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Securities Act, the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 (the “Investment Company Act”) together with any amendments, restatements or supplements thereto, and will file all such forms, reports, schedules, statements and other documents required to be filed subsequent to the date of this Agreement.  Schedule 2.15(f) lists and the Company has delivered to the MGT copies in the form filed with the SEC of all of the foregoing forms, requests for exemptive orders, reports, schedules, statements and other documents (inclusive of any certifications mandated by applicable Law) and all communications in connection therewith, except to the extent available in full without redaction on any publicly available database (including, without limitation, FINRA or the SEC’s website through EDGAR) for at least two (2) days prior to the date of this Agreement (collectively, the “Company SEC Reports”).

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(g)           The Company SEC Reports (A) were prepared in all material respects in accordance with the requirements of the Securities Act, the Exchange Act, the Investment Advisers Act and the Investment Company Act, as the case may be, and the rules and regulations thereunder and (B) did not at the time they were filed with the SEC (except to the extent that information contained in any Company SEC Report has been revised or superseded by a later filed Company SEC Report) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.  Each director and executive officer of the Company, each ETF, and each Company Subsidiary, if and as applicable, has filed with the SEC on a timely basis all statements required by the applicable Law since the date of the applicable entity’s formation. As used in this Section 2.15(g), the term “file” shall be broadly construed to include any manner in which a document or information is furnished, supplied or otherwise made available to FINRA or the SEC.

(h)           No event or circumstance has occurred or exists with respect to the Company, any ETF, or any Company Subsidiary or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

2.16.          Corporate Documents.  The Certificate and Bylaws of the Company are in the forms attached hereto or previously provided to the Purchaser or its counsel.  The copy of the minute books of the Company provided to the Purchaser contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and accurately reflects in all material respects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes.

2.17           Real Property Holding Corporation.  The Company is not now and has never been a “United States real property holding corporation” as defined in the Code and any applicable regulations promulgated thereunder.  The Company has filed with the Internal Revenue Service all statements, if any, with its United States income tax returns which are required under such regulations.

2.18           Investment Company Act.  The Company is not an “investment company” or a person directly or indirectly “controlled” by or acting on behalf of an “investment company,” in each case within the meaning of the Investment Company Act of 1940, as amended. Each ETF has obtained all required exemptive orders under the Investment Company Act to carry on its business as currently conducted and as proposed to be conducted.

2.19           Disclosure.  The Company has delivered the Budget to the Purchaser certain. There is a reasonable basis for each of the assumptions set forth in the Budget. No representation or warranty of the Company contained in this Agreement, and document delivered to the Purchaser, and no certificate furnished or to be furnished to Purchasers at the Closings contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made.  The Budget was prepared in good faith; however, the Company does not warrant that it will achieve any results projected in the Budget.  It is understood that this representation is qualified by the fact that the Company has not delivered to the Purchaser, and has not been requested to deliver, a private placement or similar memorandum or any written disclosure of the types of information customarily furnished to purchasers of securities other than as specifically set forth in this Agreement.

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2.20Employee Matters.

(a)There are no Actions pending or, to the knowledge of the Company, threatened involving the Company or any of the Company Subsidiaries and any of their employees, managers, consultants or former employees, including any harassment, discrimination, retaliatory act or similar claim.  There has been: (A) no labor union organizing or attempting to organize any employee of the Company or any of the Company Subsidiaries into one or more collective bargaining units; and (B) no labor dispute, strike, work slowdown, work stoppage or lock out or other collective labor action by or with respect to any employees, managers or consultants of the Company or any of the Company Subsidiaries pending or, to the Company’s knowledge, threatened against the Company or any of the Company Subsidiaries.  Neither the Company nor any of the Company Subsidiaries is a party to, or bound by, any collective bargaining agreement or other agreement with any labor organization applicable to the employees, managers or consultants of the Company or any of the Company Subsidiaries and no such agreement is currently being negotiated.

(b)The Company and the Company Subsidiaries (A) are in compliance in all respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment, health and safety and wages and hours, including Laws relating to discrimination, disability, labor relations, hours of work, payment of wages and overtime wages, pay equity, immigration, workers compensation, working conditions, employee scheduling, occupational safety and health, family and medical leave, and employee terminations, and have not received written notice, or to the knowledge of the Company any other form of notice, there is any unfair labor practice charge or complaint against the Company or any of the Company Subsidiaries pending, (B) are not liable for any arrears of wages or any material penalty for failure to comply with any of the foregoing and (C) are not liable for any  payment to any trust or other fund or to any Governmental Authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for employees (other than routine payments to be made in the ordinary course of business and consistent with past practice).  there are no complaints, lawsuits, arbitrations, administrative proceedings, or other Actions pending or, to the knowledge of the Company, threatened against the Company or any Company Subsidiary brought by or on behalf of any applicant for employment, any current or former employee, any person alleging to be a current or former employee, any class of the foregoing, or any Governmental Authority, relating to any such Law or regulation, or alleging breach of any express or implied contract of employment, wrongful termination of employment, or alleging any other discriminatory, wrongful or tortious conduct in connection with the employment relationship.

2.21Environmental Matters.

(a)Neither the Company nor any of the Company Subsidiaries is the subject of any federal, state, local or foreign Order, judgment or claim, and neither the Company nor any of the Company Subsidiaries has received any notice or claim, or entered into any negotiations or agreements with any person, that would impose a liability or obligation under any Environmental Law;

(b)To the knowledge of the Company, the Company and the Company Subsidiaries are in compliance with all applicable Environmental Laws;

(c)Neither the Company nor any of the Company Subsidiaries has manufactured, treated, stored, disposed of, arranged for or permitted the disposal of, generated, handled or released any Hazardous Substance, or owned or operated any property or facility, in a manner that has given or would reasonably be expected to give rise to any liability under all applicable Environmental Laws;

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(d)Each of the Company and the Company Subsidiaries holds and is in compliance with all Company Permits required to conduct its business and operations under all applicable Environmental Laws; and

(e)Neither the Company, any Company Subsidiary nor any of their respective properties are subject to any Order, judgment or written claim asserted or arising under any Environmental Law.

“Environmental Laws” means any Law relating to (a) the protection, preservation or restoration of the environment (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or (b) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as in effect at the date hereof.

“Hazardous Substance” means any substance listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous or as a pollutant or contaminant under any Environmental Law.  Hazardous Substances include any substance to which exposure is regulated by any Governmental Authority or any Environmental Law, including (a) petroleum or any derivative or byproduct thereof, toxic mold, asbestos or asbestos containing material or polychlorinated biphenyls and (b) all substances defined as Hazardous Substances, Oils, Pollutants or Contaminants in the National and Hazardous Substances Contingency Plan, 40 C.F.R. Section 300.5.

2.22Intellectual Property

(a)Schedule 2.2 contains a list of (A) all registered Intellectual Property, Intellectual Property that is the subject of a pending application for registration, and material unregistered Intellectual Property, in each case that is owned by the Company, any ETF, or any of the Company Subsidiaries and (B) all material Intellectual Property, other than Off-the-Shelf Software Agreements, licensed, used or held for use by the Company, any ETF, or any of the Company Subsidiaries in the conduct of its business (“Licensed Intellectual Property”).  Except where failure to own, license or otherwise possess such rights has not had and would not reasonably be expected to result in a Company Material Adverse Effect, each of the Company, the ETFs,  and the Company Subsidiaries has (A) all right, title and interest in and to all Company Intellectual Property, free and clear of all Encumbrances, other than Permitted Encumbrances and (B) all necessary proprietary rights in and to all of its Licensed Intellectual Property, free and clear of all Encumbrances, other than Permitted Encumbrances.  Neither the Company or any ETF, nor any of the Company Subsidiaries has received any notice alleging it has infringed, diluted or misappropriated, or, by conducting its business as proposed, would infringe, dilute or misappropriate, the Intellectual Property rights of any person, and to the knowledge of the Company there is no valid basis for any such allegation.  Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will impair or materially alter the Company’s, any ETF’s, or any Company Subsidiary’s rights to any Company Intellectual Property or Licensed Intellectual Property.  To the knowledge of the Company, there is no unauthorized use, infringement or misappropriation of the Company Intellectual Property or Licensed Intellectual Property by any third party.  All of the rights within the Company Intellectual Property and Licensed Intellectual Property are valid, enforceable and subsisting, and there is no Action pending or, to the Company’s knowledge, threatened which challenges the rights of the Company, any ETF, or any of the Company Subsidiaries in respect of any Company Intellectual Property or Licensed Intellectual Property or the validity, enforceability or effectiveness thereof.  The Company Intellectual Property and the Licensed Intellectual Property constitute all material Intellectual Property used in or necessary for the operation by the

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Company, the ETFs, and the Company Subsidiaries of their respective businesses as currently conducted.  Neither the Company or ETF, nor any of the Company Subsidiaries is in breach or default in any material respect (or would with the giving of notice or lapse of time or both be in such breach or default) under any license to use any of the Licensed Intellectual Property.

(b)For purposes of this Agreement, “Intellectual Property” means (A) United States, international and foreign patents and patent applications, including divisionals, continuations, continuations-in-part, reissues, reexaminations and extensions thereof and counterparts claiming priority therefrom; utility models; invention disclosures; and statutory invention registrations and certificates; (B) United States and foreign registered, pending and unregistered trademarks, service marks, trade dress, logos, trade names, corporate names and other source identifiers, domain names, Internet sites and web pages; and registrations and applications for registration for any of the foregoing, together with all of the goodwill associated therewith; (C) United States and foreign registered and unregistered copyrights, and registrations and applications for registration thereof; rights of publicity; and copyrightable works; (D) all inventions and design rights (whether patentable or unpatentable) and all categories of trade secrets as defined in the Uniform Trade Secrets Act, including business, technical and financial information; and (E) confidential and proprietary information, including know-how. Add rep that IP does not infringe on the rights of any third party.

2.23Books and Records.  All of the books and records of the Company, the ETFs, and the Company Subsidiaries are complete and accurate in all material respects and have been maintained in the ordinary course and in accordance with applicable Laws and standard industry practices with regard to the maintenance of such books and records.  The records, systems, controls, data and information of Company, the ETFs, and the Company Subsidiaries are recorded, stored, maintained and operated under means (including any electronic, mechanical or photographic process, whether computerized or not) that are under the exclusive ownership and direct control of the Company or its accountants (including all means of access thereto and therefrom).

3.Representations and Warranties of the Purchaser.  The Purchaser hereby represents and warrants to the Company, severally and not jointly, that:

3.1Authorization.  All corporate action required to be taken by the Purchaser’s board of directors in order to authorize the Purchaser to enter into this Agreement have been duly taken, and the Purchaser has full power and authority to enter into the this Agreement and consummate the transactions contemplated hereby.  This Agreement, when executed and delivered by the Purchaser, will constitute a valid and legally binding obligation of the Purchaser, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors’ rights generally, and as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

3.2           Purchase Entirely for Own Account.  This Agreement is made with the Purchaser in reliance upon the Purchaser’s representation to the Company, which by the Purchaser’s execution of this Agreement, the Purchaser hereby confirms, that the Shares to be acquired by the Purchaser will be acquired for investment for the Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same.  By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to any

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third Person, with respect to any of the Shares. The Purchaser has not been formed for the specific purpose of acquiring the Shares.

3.3           Disclosure of Information.   The Purchaser has been engaged in discussions with the management of the Company since at least January 1, 2009, and has had an opportunity to discuss the Company’s business, management, financial affairs and the terms and conditions of the offering of the Shares with the Company’s management and has had an opportunity to review the Company’s operations.  In addition, the Purchaser has had extensive involvement in the development of the Budget.  The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Purchaser to rely thereon.

3.4           Restricted Securities.  The Purchaser understands that the Shares have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser’s representations as expressed herein.  The Purchaser understands that the Shares are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available.  The Purchaser acknowledges that the Company has no obligation to register or qualify the Shares, or the Common Stock into which it may be converted, for resale.  The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and on requirements relating to the Company which are outside of the Purchaser’s control, and which the Company is under no obligation and may not be able to satisfy.

3.5           No Public Market. The Purchaser understands that no public market now exists for the Shares, and that the Company has made no assurances that a public market will ever exist for the Shares.

3.6           Legends.  The Purchaser understands that the Shares and any securities issued in respect of or exchange for the Shares, may bear one or all of the following legends:

(a)“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.  NO SUCH TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933 AS AMENDED.”

(b)Any legend required by the securities laws of any state to the extent such laws are applicable to the Shares represented by the certificate so legended.

3.7           Accredited Investor.  The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act.

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4.Conditions to the Purchaser’s Obligations at Closing.  The obligations of the Purchaser to purchase Shares at the Initial Closing or any subsequent Closing are subject to the fulfillment, on or before such Closing, of each of the following conditions, unless otherwise waived:

4.1.Representations and Warranties.  The representations and warranties of the Company contained in Section 2 shall be true and correct in all respects as of such Closing.

4.2.Performance.  The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Company on or before such Closing.

4.3.Officer’s Certificate.  The Chief Executive Officer of the Company shall deliver to the Purchaser at such Closing a certificate (i) certifying resolutions of the Board of Directors of the Company approving this Agreement and the transactions contemplated hereunder, (ii) certifying resolutions of the Company’s stockholders approving the Certificate, (iii) confirming the accuracy of the Company’s representations, warranties and covenants as of the Closing Date and confirming the compliance by the Company with the conditions precedent set forth in this Section 4 as of the Closing Date.

4.4.Qualifications.  All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be obtained and effective as of such Closing.

4.5.Transfer Agent Instructions.  Intentionally omitted.

4.6.Board of Directors.  As of the Initial Closing, the authorized size of the Board shall be seven, and the Board shall be comprised of Joseph L. Schocken, Jeffrey L. Feldman, Robert Ponzetti, Paul Clegg, Gustavo Montero, Governor Tommy Thompson, and Tim Paterson-Brown, as the representative of the Purchaser (the “Series B Director”).

4.7.Certificate.  The Company shall have filed the Certificate with the Secretary of State of Delaware on or prior to the Initial Closing, which shall continue to be in full force and effect as of the Initial Closing and each subsequent Closing.

4.8.Proceedings and Documents.  All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be satisfactory in form and substance to the Purchaser, and the Purchaser (or its counsel) shall have received all such counterpart original and certified or other copies of such documents as reasonably requested.  Such documents may include good standing certificates.

5.Conditions of the Company’s Obligations at Closing.  The obligations of the Company to sell Shares to the Purchaser at the Initial Closing or any subsequent Closing are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived:

5.1Representations and Warranties.  The representations and warranties of the Purchaser contained in Section 3 shall be true and correct in all respects as of such Closing.

5.2Performance.  The Purchaser shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by them on or before such Closing.

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5.3Qualifications.  All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Share pursuant to this Agreement shall be obtained and effective as of the Closing.

5.4Officer’s Certificate.  The Chief Executive Officer of the Purchaser shall deliver to the Company at the Initial Closing a certificate certifying the resolutions of the Board of Directors of the Purchaser approving this Agreement and the transactions contemplated hereunder.

6.Indemnification.

(a)General Indemnity. The Company agrees to indemnify and hold harmless the Purchaser (and its directors, officers, managers, shareholders, affiliates, agents, successors and assigns) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Purchaser as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Company herein.  The Purchaser agrees to indemnify and hold harmless the Company (and its directors, officers, managers, shareholders, affiliates, agents, successors and assigns) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Company as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Purchaser herein.

(b)Indemnification Procedure. Any Party entitled to indemnification under this Section 6 (an “Indemnified Party”) will give written notice to the indemnifying party of any matters giving rise to a claim for indemnification; provided that the failure of any Party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 6 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any action, proceeding or claim is brought against an Indemnified Party in respect of which indemnification is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of the Indemnified Party a conflict of interest between it and the indemnifying party may exist with respect of such action, proceeding or claim, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party. In the event that the indemnifying party advises an Indemnified Party that it will contest such a claim for indemnification hereunder, or fails, within twenty (20) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the Indemnified Party may, at its option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the Indemnified Party’s costs and expenses arising out of the defense, settlement or compromise of any such action, claim or proceeding shall be losses subject to indemnification hereunder. The Indemnified Party shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party which relates to such action or claim. The indemnifying party shall keep the Indemnified Party fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. If the indemnifying party elects to defend any such action or claim, then the Indemnified Party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The indemnifying party shall not be liable for any settlement of any action, claim or proceeding affected without its prior written consent. Notwithstanding anything in this Section 6 to the contrary, the indemnifying party shall not, without the Indemnified Party’s prior written consent, settle or compromise

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any claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the Indemnified Party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such claim. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred, so long as the Indemnified Party irrevocably agrees to refund such moneys if it is ultimately determined by a court of competent jurisdiction that such party was not entitled to indemnification. The indemnity agreements contained herein shall be in addition to (a) any cause of action or similar rights of the Indemnified Party against the indemnifying party or others, and (b) any liabilities the indemnifying party may be subject to pursuant to the law.

7.Post-Closing Covenants.  So long as the Shares are outstanding and held by the Purchaser, the Company covenants that:

(a)It will hold monthly management meetings, which the Series B Director shall be entitled to attend, either in person or by teleconference, and vote.

(b)It will not give pay raises to Company officers, nor pay bonuses, nor issue any stock options nor similar instruments, unless agreed to by the Series B Director, which approval shall not be unreasonably withheld;

(c)It will distribute monthly management accounts no later than the 15th working following the end of the month to which they relate, and such further information and documents as the Purchaser may from time-to-time reasonably request, and shall permit, during normal business hours and upon reasonable request and reasonable notice, the Purchaser or any employees, agents or representatives thereof, for purposes reasonably related to the Purchaser’s interests as a stockholder, to examine and make reasonable copies of and extracts from the records and books of account of, and visit and inspect the properties, assets, operations and business of the Company, any ETF, and any Company Subsidiary, and to discuss the affairs, finances and accounts of the Company, any ETF, and any Company Subsidiary with any of its officers, consultants, directors, and key employees; provided, the Purchaser and its representatives shall keep such information confidential, provided such information may be disclosed (i) to the extent required by applicable law, regulation or legal process, subpoena, civil investigative demand or other similar process, (ii) to the extent reasonably necessary in connection with the enforcement of rights under this Agreement, (iii) to any governmental, judicial or regulatory authority requiring or requesting such information, and (iv) to Purchaser’s directors, officers, employees, agents, managers, consultants, accountants, financial advisers, legal counsel and other professional advisers to the extent necessary;

(d)It will not incur expenses outside of the Budget, unless such expenses are each separately approved by the Series B Director, which approval shall not be unreasonably withheld;

(e)It will promptly notify the Purchaser in writing (a “Rights Notice”) (in no event later than two (2) business days after making or receiving an applicable offer) of the terms and conditions of any proposed offer or sale to, or exchange with (or other type of distribution to) any third party, which the Company intends to effect (a “Subsequent Financing”), of Common Stock or any debt or equity securities convertible, exercisable

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or exchangeable into Common Stock. The Rights Notice shall describe, in reasonable detail, the proposed Subsequent Financing, the names and investment amounts of all investors participating in the Subsequent Financing (if known), the proposed closing date of the Subsequent Financing, which shall be no earlier than ten (10) business days from the date of the Rights Notice, and all of the terms and conditions thereof and proposed definitive documentation to be entered into in connection therewith. The Rights Notice shall provide the Purchaser an option (the “Rights Option”) during the ten (10) business days following delivery of the Rights Notice (the “Option Period”) to inform the Company whether the Purchaser will purchase up to up to $5,500,000 of its pro rata portion of all or a portion of the securities being offered in such Subsequent Financing on the same, absolute terms and conditions as contemplated by such Subsequent Financing.  Delivery of any Rights Notice constitutes a representation and warranty by the Company that there are no other material terms and conditions, arrangements, agreements or otherwise except for those disclosed in the Rights Notice, to provide additional compensation to any party participating in any proposed Subsequent Financing, including, but not limited to, any type of reset or adjustment of a purchase or conversion price or to issue additional securities at any time after the closing date of a Subsequent Financing. If the Company does not receive notice of exercise of the Rights Option from the Purchaser within the Option Period, the Company shall have the right to close the Subsequent Financing on the scheduled closing date with a third party; provided that all of the material terms and conditions of the closing are the same as those provided to the Purchaser in the Rights Notice. If the closing of the proposed Subsequent Financing does not occur that date, any closing of the contemplated Subsequent Financing or any other Subsequent Financing shall be subject to all of the provisions of this Section 7(f), including, without limitation, the delivery of a new Rights Notice; and

(f)Will provide the Series B Director with each of the following documents as and when they are distributed to the Board of Directors:

(a)unaudited quarterly financial statements within fifteen (15) days after the end of the applicable quarter of the first three quarters of the Company’s and the applicable ETF’s fiscal years;

(b)audited financial statements within sixty (60) days after the end of the Company’s and applicable ETF’s fiscal years; and

(c)a monthly operating and cash flow budget within fifteen (15) days after the end of the applicable month (commencing from April 1, 2009) through the later of December 31, 2009, including but not exceeding the use of the current cash balance and an the proceeds from the issuance of the Shares as set forth in the Budget.

8.Miscellaneous.

8.1.Survival of Warranties.  Unless otherwise set forth in this Agreement, the representations and warranties of the Company and the Purchaser contained in or made pursuant to this Agreement shall survive until the running of the applicable statute of limitations and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of the Purchaser or the Company.

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8.2.Successors and Assigns.  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties.  Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

8.3.Governing Law.  This Agreement and any controversy arising out of or relating to this Agreement shall be governed by and construed in accordance with the General Corporation Law of the State of Delaware as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the State New York, without regard to conflict of law principles that would result in the application of any law other than the law of the State of New York.

8.4.Counterparts; Facsimile.  This Agreement may be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

8.5.Titles and Subtitles.  The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

8.6.Notices.  All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or:  (a) personal delivery to the party to be notified, (b), five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (c) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt.  All communications shall be sent to the respective parties at their address as set forth on the signature page, or to such e-mail address, facsimile number or address as subsequently modified by written notice given in accordance with this Section 8.6.

8.7.No Finder’s Fees.  Each party represents that it neither is nor will be obligated for any finder’s fee or commission in connection with this transaction other than as set forth in the Disclosure Schedule.  The Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Purchaser or any of its officers, employees, or representatives is responsible.  The Company agrees to indemnify and hold harmless the Purchaser from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible.

8.8.Fees and Expenses.  The Company shall pay a fee to the Purchaser in an amount equal to $100,000, which amount shall be included within the principal amount of the Note as payment in full of this Company’s obligation under this Section 8.8.

8.9.Attorneys’ Fees.  If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of this Agreement or the Certificate, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

8.10.Amendments and Waivers.  Any term of this Agreement may be amended, terminated or waived only with the written consent of the Company and the Purchaser.  Any amendment

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or waiver effected in accordance with this Section 8.10 shall be binding upon the Purchaser and each transferee of the Shares (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company.

8.11.Severability.  The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.

8.12.Delays or Omissions.  No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.  Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.  All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

8.13.Entire Agreement.  This Agreement (including the Exhibits hereto) and the Certificate constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties are expressly canceled.

8.14.Remedies for Breach of this Agreement.  If the Company is in material breach of its obligations under this Agreement after the Initial Closing, including, without limitation, Section 7, above, or, if the Company is in material breach of any of its obligations under the Note, and such breach or breaches remain(s) uncured for fifteen (15) business days following written notice thereof, then, upon demand by the Purchaser, the Company shall:

(a)Deliver to the Purchaser (free from all and any encumbrances) sufficient shares of Common Stock to provide that the Purchaser holds a majority of the outstanding Common Stock of the Company (exclusive of its current equity holdings of the Common Stock); and

(b)Shall, subject to the Purchaser (or its Affiliate) entering into compensatory agreements with the affected Company personnel, covenants to use its best efforts to (i) make available the services of its then-current officers, management, staff and any contactors to provide assistance with the exploitation of the Company’s proposed business and (ii) provide that such officers, management and employees of the Company not attempt to exploit the Company’s proposed business other than for the benefit of the Company or the Purchaser.

8.15.Dispute Resolution.  The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the federal and state courts located within the geographic boundaries of the United States District Court for the Southern District of New York for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the federal and state courts located within the geographic boundaries of the United States District Court for the Southern District of New York, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in

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any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.  Each party will bear its own costs in respect of any disputes arising under this Agreement.  Each of the parties to this Agreement consents to personal jurisdiction for any equitable action sought in the U.S. District Court for the Southern District of New York or any court of the State of New York having subject matter jurisdiction.

8.16.No Commitment for Additional Financing.  The Company acknowledges and agrees that the Purchaser has not made any representation, undertaking, commitment or agreement to provide or assist the Company in obtaining any financing, investment or other assistance, other than the purchase of the Shares as set forth herein and subject to the conditions set forth herein.  In addition, the Company acknowledges and agrees that (i) no statements, whether written or oral, made by any Purchaser or its representatives on or after the date of this Agreement shall create an obligation, commitment or agreement to provide or assist the Company in obtaining any financing or investment, (ii) the Company shall not rely on any such statement by any Purchaser or its representatives and (iii) an obligation, commitment or agreement to provide or assist the Company in obtaining any financing or investment may only be created by a written agreement, signed by the Purchaser and the Company, setting forth the terms and conditions of such financing or investment and stating that the parties intend for such writing to be a binding obligation or agreement.  The Purchaser shall have the right, in its sole and absolute discretion, to refuse or decline to participate in any other financing of or investment in the Company, and shall have no obligation to assist or cooperate with the Company in obtaining any financing, investment or other assistance.

8.17.Waiver of Conflicts.  Each party to this Agreement acknowledges that Vandeberg Johnson & Gandara, LLP, counsel for the Company, has in the past performed and may continue to perform legal services for Broadmark Capital, LLC (an Affiliate of Joseph L. Schocken) as well as certain of the Company’s existing stockholders in matters unrelated to the transactions described in this Agreement, including the representation of Broadmark Capital, LLC in connection with the management agreement between the Company and Broadmark Capital, LLC.  Accordingly, each party to this Agreement hereby (a) acknowledges that it has had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Vandeberg Johnson & Gandara, LLP’s representation of Broadmark Capital, LLC and the Company’s stockholders in such unrelated matters.  The Purchaser acknowledges and agrees that (a) Vandeberg Johnson & Gandara, LLP representation of the Company is limited to the specific matters with respect to which it has been retained and consulted by the Company, (b) Vandeberg Johnson & Gandara, LLP has not been retained to represent the EFTs or any Company Subsidiary, (c) there may exist other matters which could have a bearing on the Company and/or its Affiliates as to which Vandeberg Johnson & Gandara, LLP has been neither retained nor consulted, (d) Vandeberg Johnson & Gandara, LLP does not undertake to monitor the compliance of the Company or its Affiliates with their respective covenants under this Agreement, nor does Vandeberg Johnson & Gandara, LLP monitor compliance by the Company and/or its Affiliates with applicable laws, unless in each case Vandeberg Johnson & Gandara, LLP has been specifically retained to do so, (e) Vandeberg Johnson & Gandara, LLP does not investigate or verify the accuracy and completeness of information set forth in this Agreement, the Budget, and (f) except for any opinions specifically set forth in a signed opinion letter issued by Vandeberg Johnson & Gandara, LLP, Vandeberg Johnson & Gandara, LLP is not providing any advice, opinion, representation, warranty or other assurance of any kind as to any matter.

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SIGNATURE PAGE TO PURCHASE AGREEMENT

IN WITNESS WHEREOF, the parties have executed this Series B Preferred Stock Purchase Agreement as of the date first written above.

	XSHARES GROUP, INC.
By:	/s/ Jeffrey Feldman
Name:	Jeffrey Feldman, Chief Executive Officer
	XShares Group, Inc.
	420 Lexington Avenue, Suite 2550
	New York, NY 10170
	MGT CAPITAL INVESTMENTS, INC.
By:	/s/ Tim Paterson-Brown
Name:	Tim Paterson-Brown
Title:	Chief Executive Officer
Address:

EX-10.4

Exhibit 10.4

[FORM OF]

SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
XSHARES GROUP, INC.

(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)

XShares Group, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the “General Corporation Law”),

DOES HEREBY CERTIFY:

1.             That the name of this corporation is XShares Group, Inc., and that this corporation was originally incorporated pursuant to the General Corporation Law on August 7, 2008 under the name XShares Group, Inc.

2.             That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of this corporation, declaring said amendment and restatement to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:

RESOLVED, that the Certificate of Incorporation of this corporation be amended and restated in its entirety to read as follows:

FIRST:  The name of this corporation is XShares Group, Inc. (the “Corporation”).

SECOND:  The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle.  The name of its registered agent at such address is The Corporation Trust Company.

THIRD:  The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.

FOURTH:  The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 1,400,000,000 shares of Common Stock, $0.0001 par value per share (“Common Stock”), and (ii) 672,000,000 shares of Preferred Stock, $0.0001 par value per share (“Preferred Stock”).

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.

A.COMMON STOCK

1.             General.  The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth herein.

2.             Voting.  The holders of the Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders (and written actions in lieu of meetings); provided, however, that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to the Certificate of Incorporation that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to the Certificate of Incorporation or pursuant to the General Corporation Law.  There shall be no cumulative voting.  The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by (in addition to any vote of the holders of one or more series of Preferred Stock that may be required by the terms of the Certificate of Incorporation) the affirmative vote of the holders of shares of capital stock of the Corporation representing a majority of the votes represented by all outstanding shares of capital stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law.

B.PREFERRED STOCK

One Hundred Seventy-Two Million (172,000,000) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series A Preferred Stock,” and Five Hundred Million (500,000,000) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series B Preferred Stock” with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. Unless otherwise indicated, references to “Sections” or “Subsections” in this Part B of this Article Fourth refer to sections and subsections of Part B of this Article Fourth.

1.             Dividends.  From and after the date of the issuance of any shares of Series B Preferred Stock, dividends at the rate per annum of $0.00284 per share shall accrue on such shares of Series B Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock) (the “Accruing Dividends”).  Such Accruing Dividends shall be cumulative. Accruing Dividends shall accrue from day to day and shall be declared and paid on November 1st and May 1st of each year during which Series B Preferred Stock remains issued and outstanding.  The Accruing Dividends may be paid in either cash or in additional shares of Series B Preferred Stock, as determined by the Board of Directors.  Except as set forth above with respect to the Series B Preferred Stock, the Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation unless (in addition to the obtaining of any consents required elsewhere in the Certificate of Incorporation) the holders of the Series A Preferred Stock and Series B Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred Stock and Series B Preferred Stock in an amount at least equal to (i) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Series A Preferred Stock or Series B Preferred Stock as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (B) the number of shares of Common Stock issuable upon conversion of a share of Series A Preferred Stock or Series B Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Series A Preferred Stock or Series B Preferred Stock determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (B) multiplying such fraction by an amount equal to the Original Issue Price (as defined below); provided that, if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of Series A Preferred Stock Original Issue Price pursuant to this Section 1 shall be calculated based upon the dividend on the class or series of capital

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stock that would result in the highest Series A Preferred Stock Original Issue Price dividend..  The “Original Issue Price” shall mean $0.30 per share with respect to the Series A Preferred Stock and $0.0284 per share with respect to the Series B Preferred Stock, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock or Series B Preferred Stock, as applicable.

2.             Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales.

2.1           Payments to Holders of Preferred Stock.

2.1.1        Series B Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid in cash out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of securities ranking junior to the Series B Preferred Stock by reason of their ownership thereof (including, without limitation, the Series A Preferred Stock), an amount per share equal to the greater of (i) the Original Issue Price, plus any accrued but unpaid dividends thereon, or (ii)  such amount per share as would have been payable had all shares of Series B Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution or winding up (the amount payable pursuant to this sentence is hereinafter referred to as the “Series B Liquidation Amount”).  If upon any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series B Preferred Stock the full amount to which they shall be entitled under this Subsection 2.1, the holders of shares of Series B Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

2.1.2        Series A Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid in cash out of the assets of the Corporation available for distribution to its stockholders following the payment in full of the Series B Liquidation Amount before any payment shall be made to the holders of securities ranking junior to the Series A Preferred Stock by reason of their ownership thereof, an amount per share equal to the greater of (i) the Original Issue Price, plus any dividends declared but unpaid thereon, or (ii)  such amount per share as would have been payable had all shares of Series A Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution or winding up (the amount payable pursuant to this sentence is hereinafter referred to as the “Series A Liquidation Amount”).  If upon any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled under this Subsection 2.1, after the payment in full of the Series B Liquidation Amount, the holders of shares of Series A Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

2.2           Payments to Holders of Common Stock.  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of shares of Series A Preferred Stock and Series B Preferred Stock, the remaining assets of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Common Stock, pro rata based on the number of shares held by each such holder.

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2.3          Deemed Liquidation Events.

2.3.1        Definition.  Each of the following events shall be considered a “Deemed Liquidation Event”:

(a)           a merger or consolidation in which (i) the Corporation is a constituent party or (ii) a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation (provided that, for the purpose of this Subsection 2.3.1, all shares of Common Stock issuable upon exercise of Options (as defined below) outstanding immediately prior to such merger or consolidation or upon conversion of Convertible Securities (as defined below) outstanding immediately prior to such merger or consolidation shall be deemed to be outstanding immediately prior to such merger or consolidation and, if applicable, converted or exchanged in such merger or consolidation on the same terms as the actual outstanding shares of Common Stock are converted or exchanged); or

(b)           the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation.

2.3.2       Effecting a Deemed Liquidation Event.

(a)           The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(i) unless the agreement or plan of merger or consolidation for such transaction (the “Merger Agreement”) provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2.1 and 2.2.

(b)           In the event of a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(ii) or 2.3.1(b), if the Corporation does not effect a dissolution of the Corporation under the General Corporation Law within 90 days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice to each holder of Series B Preferred Stock no later than the 90th day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause (ii) to require the redemption of such shares of Series B Preferred Stock, and (ii) if the holders of at least sixty-seven percent of the then outstanding shares of Series B Preferred Stock so request in a written instrument delivered to the Corporation not later than 120 days after such Deemed Liquidation Event, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors of the Corporation), together with any other assets of the Corporation available for distribution to its stockholders (the “Available Proceeds”), to the extent legally available therefor, on the 150th day after such Deemed Liquidation Event, to redeem all outstanding shares of Series B Preferred Stock at a price per share equal to 1.05 times the Series B Liquidation Amount.  Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are

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not sufficient to redeem all outstanding shares of Series B Preferred Stock, or if the Corporation does not have sufficient lawfully available funds to effect such redemption, the Corporation shall redeem a pro rata portion of each holder’s shares of Series B Preferred Stock to the fullest extent of such Available Proceeds or such lawfully available funds, based on the respective amounts which would otherwise be payable in respect of the shares to be redeemed if the Available Proceeds or lawfully available funds were sufficient to redeem all such shares, and shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor.  The provisions of Subsections 6.2 through 6.4 shall apply, with such necessary changes in the details thereof as are necessitated by the context, to the redemption of the Series B Preferred Stock pursuant to this Subsection 2.3.2(b).  Prior to the distribution or redemption provided for in this Subsection 2.3.2(b), the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business.

(c)           In the event of a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(ii) or 2.3.1(b), if the Corporation does not effect a dissolution of the Corporation under the General Corporation Law within 90 days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice to each holder of Series A Preferred Stock no later than the 90th day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause (ii) to require the redemption of such shares of Series B Preferred Stock, and (ii) if the holders of at least sixty-seven percent of the then outstanding shares of Series A Preferred Stock so request in a written instrument delivered to the Corporation not later than 120 days after such Deemed Liquidation Event, the Corporation shall use the Available Proceeds remaining after the redemption of the Series B Preferred Stock pursuant to Subsection 2.3.2(b), is applicable, to the extent legally available therefor, on the 150th day after such Deemed Liquidation Event, to redeem all outstanding shares of Series A Preferred Stock at a price per share equal to the Series A Liquidation Amount.  Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the remaining Available Proceeds are not sufficient to redeem all outstanding shares of Series A Preferred Stock, or if the Corporation does not have sufficient lawfully available funds to effect such redemption, the Corporation shall redeem a pro rata portion of each holder’s shares of Series A Preferred Stock to the fullest extent of such remaining Available Proceeds or such lawfully available funds, based on the respective amounts which would otherwise be payable in respect of the shares to be redeemed if the remaining Available Proceeds or lawfully available funds were sufficient to redeem all such shares, and shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor.  The provisions of Subsections 6.2 through 6.4 shall apply, with such necessary changes in the details thereof as are necessitated by the context, to the redemption of the Series A Preferred Stock pursuant to this Subsection 2.3.2(c).  Prior to the distribution or redemption provided for in this Subsection 2.3.2(b), the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business.

2.3.3       Amount Deemed Paid or Distributed.  If the amount deemed paid or distributed under this Subsection 2.3.3 is made in property other than in cash, the value of such distribution shall be the fair market value of such property, determined as follows:

(a)           For securities not subject to investment letters or other similar restrictions on free marketability,

(i)            if traded on a securities exchange or the NASDAQ Stock Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or market over the 30-period ending three days prior to the closing of such transaction;

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(ii)           if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three days prior to the closing of such transaction; or

(iii)          if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors of the Corporation (so long as the Series B Director concurs).

(b)           The method of valuation of securities subject to investment letters or other similar restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate) shall take into account an appropriate discount (as determined in good faith by the Board of Directors of the Corporation (so long as the Series B Director concurs)) from the market value as determined pursuant to clause (a) above so as to reflect the approximate fair market value thereof.

3.            Voting.

3.1          General; Series B Director.

3.1.1        General.  On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series A Preferred Stock and Series B Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Series A Preferred Stock and Series B Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter.  Except as provided by law or by the other provisions of the Certificate of Incorporation, holders of Series A Preferred Stock and Series B Preferred Stock shall vote together with the holders of Common Stock as a single class.

3.1.2        Election of Directors.  The holders of record of the shares of Series B Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation (the “Series B Director”).  The Board of Directors shall be comprised of seven (7) individuals (inclusive of the Series B Director). The Series B Director may be removed without cause by, and only by, the affirmative vote of the holders of Series B Preferred Stock, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders.  If the holders of shares of Series B Preferred Stock fail to elect a director to fill the Series B Director position, then such directorship shall remain vacant until such time as the holders of the Series B Preferred Stock elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the holders of the Series B Preferred Stock, voting exclusively and as a separate class. The holders of record of the shares of Common Stock, and of any other class or series of voting stock (including the Series B Preferred Stock), exclusively and voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation.  At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director.

3.2          Series A Preferred Stock Protective Provisions.  At any time when shares of Series A Preferred Stock are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Certificate of Incorporation) the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class:

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(a)           liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any Deemed Liquidation Event, or consent to any of the foregoing;

(b)           amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws of the Corporation in a manner that adversely affects the powers, preferences or rights of the Series A Preferred Stock;

(c)           create, or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock unless the same ranks junior to the Series A Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends and rights of redemption, or increase the authorized number of shares of Series A Preferred Stock or increase the authorized number of shares of any additional class or series of capital stock unless the same ranks junior to the Series A Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends and rights of redemption;

(d)           (i) reclassify, alter or amend any existing security of the Corporation that is pari passu with the Series A Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to the Series A Preferred Stock in respect of any such right, preference or privilege, or (ii) reclassify, alter or amend any existing security of the Corporation that is junior to the Series A Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to or pari passu with the Series A Preferred Stock in respect of any such right, preference or privilege;

(e)           purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares of capital stock of the Corporation other than (i) redemptions of or dividends or distributions on the Series A Preferred Stock as expressly authorized herein, (ii) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock and or (iii) repurchases of stock from former employees, officers, directors, consultants or other persons who performed services for the Corporation or any subsidiary in connection with the cessation of such employment or service at the lower of the original purchase price or the then-current fair market value thereof;

(f)            increase the number of shares of Common Stock reserved for any of the Company’s equity incentive plans;

(h)           determine the remuneration of directors of the Corporation; or

(i)            increase or decrease the number of directors of the Corporation to more than 5 members, including the Series B Director.

3.3           Series B Preferred Stock Protective Provisions.  At any time when shares of Series B Preferred Stock are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Certificate of Incorporation) the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class:

(a)           liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any Deemed Liquidation Event, or consent to any of the foregoing;

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(b)         amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws of the Corporation in a manner that adversely affects the powers, preferences or rights of the Series B Preferred Stock;

(c)         create, or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock unless (i) the same ranks junior to the Series B Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends and rights of redemption, or increase the authorized number of shares of Series B Preferred Stock or increase the authorized number of shares of any additional class or series of capital stock unless the same ranks junior to the Series B Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends and rights of redemption; or (ii) the proceeds of such security shall be used to redeem all of the outstanding Series B Preferred Stock pursuant to Section 6.1.1 hereof;

(d)           (i) reclassify, alter or amend any existing security of the Corporation that is pari passu with the Series B Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to the Series B Preferred Stock in respect of any such right, preference or privilege, or (ii) reclassify, alter or amend any existing security of the Corporation that is junior to the Series B Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to or pari passu with the Series B Preferred Stock in respect of any such right, preference or privilege;

(e)           purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares of capital stock of the Corporation other than (i) redemptions of or dividends or distributions on the Series B Preferred Stock as expressly authorized herein, (ii) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock and or (iii) repurchases of stock from former employees, officers, directors, consultants or other persons who performed services for the Corporation or any subsidiary in connection with the cessation of such employment or service at the lower of the original purchase price or the then-current fair market value thereof;

(f)            increase the number of shares of Common Stock reserved for any of the Company’s equity incentive plans;

(h)           determine the remuneration of directors of the Corporation;

(i)            increase or decrease the number of directors of the Corporation to more than 5 members, including the Series B Director; or

(j)            create, or authorize the creation of, or issue, or authorize the issuance of any debt security unless the proceeds of such security shall be used to redeem all of the outstanding Series B Preferred Stock pursuant to Section 6.1.1 hereof.

4.            Optional Conversion.  The holders of the Series A Preferred Stock and Series B Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

4.1          Right to Convert.

4.1.1        Conversion Ratio.  Each share of Series A Preferred Stock and Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time,

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and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price (as defined below) in effect at the time of conversion.  The “Conversion Price” shall initially be equal to $0.30 with respect to the Series A Preferred Stock and $0.0284 with respect to the Series B Preferred Stock.  Such initial Conversion Price, and the rate at which shares of Series A Preferred Stock or Series B Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below.

4.1.2        Termination of Conversion Rights. In the event of a notice of redemption of any shares of Series A Preferred Stock or Series B Preferred Stock pursuant to Section 6, the Conversion Rights of the shares designated for redemption shall terminate on the applicable date set forth in Section 6.

4.2          Fractional Shares.  No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock or Series B Preferred Stock.  In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Corporation.  Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock or Series B Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.

4.3          Mechanics of Conversion.

4.3.1        Notice of Conversion.  In order for a holder of Series A Preferred Stock or Series B Preferred Stock, if and as applicable, to voluntarily convert shares of Series A Preferred Stock or Series B Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series A Preferred Stock or Series B Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate), at the office of the transfer agent for the Series A Preferred Stock or Series B Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Series A Preferred Stock or Series B Preferred Stock represented by such certificate or certificates and, if applicable, any event on which such conversion is contingent.  Such notice shall state such holder’s name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued, if permitted.  If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing.  The close of business on the date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of such certificates (or lost certificate affidavit and agreement) and notice shall be the time of conversion (the “Conversion Time”), and the shares of Common Stock issuable upon conversion of the shares represented by such certificate shall be deemed to be outstanding of record as of such date.  The Corporation shall, as soon as practicable after the Conversion Time, (i) issue and deliver to such holder of Series A Preferred Stock or Series B Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion in accordance with the provisions hereof and a certificate for the number (if any) of the shares of Series A Preferred Stock or Series B Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, (ii) pay in cash such amount as provided in Subsection 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and (iii) pay all declared but unpaid dividends on the shares of Series A Preferred Stock or Series B Preferred Stock converted.

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4.3.2        Reservation of Shares.  The Corporation shall at all times when the Series A Preferred Stock or Series B Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Series A Preferred Stock or Series B Preferred Stock, as applicable, such number of its duly authorized shares of Common Stock equal to 120% of the number of shares of Common Stock as shall from time to time be sufficient (i) to effect the conversion of all outstanding Series A Preferred Stock and Series B Preferred Stock and to effect any dividends paid in shares of the Company’s Common Stock and (ii) in the event of any breach by the Corporation under that certain Securities Purchase Agreement (the “Purchase Agreement”) between the Corporation and MGT Capital Investments, Inc. (“MGT”), dated as of May 14, 2009, or that certain Convertible Promissory Note held by MGT (the “Note”), dated May 14, 2009, which breach remains uncured after the running of any cure period, such number of shares of Common Stock sufficient to give MGT fifty (50%) percent of the Corporation’s outstanding shares (exclusive of MGT’s current equity holdings); and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock and Series B Preferred Stock and to effect any dividends paid in shares of the Corporation’s Common Stock and shares of Common Stock issued as a result of the Corporation’s breach of the Purchase Agreement or the Note, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate of Incorporation.  Before taking any action which would cause an adjustment reducing the applicable Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock or Series B Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at such adjusted Conversion Price.

4.3.3        Effect of Conversion.  All shares of Series A Preferred Stock and Series B Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor, to receive payment in lieu of any fraction of a share otherwise issuable upon such conversion as provided in Subsection 4.2 and to receive payment of any dividends declared but unpaid thereon.  Any shares of Series A Preferred Stock or Series B Preferred Stock so converted shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series A Preferred Stock or Series B Preferred Stock accordingly.

1.1.2        No Further Adjustment.  Upon any such conversion, no adjustment to the applicable Conversion Price shall be made for any declared but unpaid dividends on the Series A Preferred Stock or Series B Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.

4.3.4        Taxes.  The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares pursuant to this Section 4.  The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred Stock or Series B Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

4.4           Adjustments to Conversion Price for Diluting Issues.

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4.4.1        Special Definitions.  For purposes of this Article Fourth, the following definitions shall apply:

(a)           “Option” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

(b)           “Original Issue Date” shall mean the date on which the first share of the applicable series of Preferred Stock was issued.

(c)           “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

(d)           “Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Subsection 4.4.3 below, deemed to be issued) by the Corporation after the Original Issue Date, other than (1) the following shares of Common Stock and (2) shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (clauses (1) and (2), collectively, “Exempted Securities”):

(i)shares of Common Stock, Options or Convertible Securities issued as a dividend or distribution on Series A Preferred Stock or Series B Preferred Stock;

(ii)shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Subsection 4.5, 4.6, 4.7 or 4.8; or

(iii)shares of Common Stock or Options issued to employees or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries pursuant to a plan, agreement or arrangement unanimously approved by the Board of Directors of the Corporation (including the Series B Preferred Director).

4.4.2        No Adjustment of Conversion Price.  No adjustment in the Conversion Price shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the holders of at least majority of the then outstanding shares of Series B Preferred Stock, each voting as a separate class, agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.

4.4.3        Deemed Issue of Additional Shares of Common Stock.

(a)           If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of

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the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

(b)           If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4, are revised as a result of an amendment to such terms or if any other adjustment is made pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security.  Notwithstanding the foregoing, no readjustment pursuant to this clause (b) shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the applicable Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the applicable Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.

(c)           If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the issuance of which did not result in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4 (either because the consideration per share (determined pursuant to Subsection 4.4.5) of the Additional Shares of Common Stock subject thereto was equal to or greater than the Conversion Price then in effect, or because such Option or Convertible Security was issued before the Original Issue Date), are revised after the Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Subsection 4.4.3(a)) shall be deemed to have been issued effective upon such increase or decrease becoming effective.

(d)           Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4, the Conversion Price shall be readjusted to such Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.

(e)           If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the Conversion Price provided for in this Subsection 4.4.3 shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (b) and (c) of this Subsection 4.4.3).  If the number of shares of Common Stock

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issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the Conversion Price that would result under the terms of this Subsection 4.4.3 at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Conversion Price that such issuance or amendment took place at the time such calculation can first be made.

4.4.4        Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock.

4.4.4.1     Special Adjustments to Series B Conversion Price in Absence of Qualfied Equity Financing.  Unless a Qualified Equity Financing has occurred, and in the event the Series B Preferred Stock is not previously redeemed pursuant to Subsection 2.3.2 or Section 6, on January 1, 2010, the Series B Conversion Price shall be adjusted to equal $0.001, where “Qualified Equity Financing” means an equity financing by the Corporation in an aggregate sum of at least $5,000,000, upon terms and conditions acceptable to the Corporation’s Board of Directors, which shall include the specific approval of the Series B Director, not to be unreasonably withheld, which financing closes on or before December 31, 2009.

4.4.4.2     Adjustments to Series A Conversion Price and Series B Conversion Price. In addition to the adjustment set forth in Subsection 4.4.4.1, in the event the Corporation shall at any time after the Original Issue Date of the Series B Preferred Stock issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4.4.3), without consideration or for a consideration per share less than the applicable Conversion Price in effect immediately prior to such issue, then

(a)           the Conversion Price of the Series A Preferred Stock shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula:

CP2 = CP1* (A + B) ÷ (A + C).

For purposes of the foregoing formula, the following definitions shall apply:

“CP2”shall mean the Conversion Price for such series of Preferred Stock in effect immediately after such issue of Additional Shares of Common Stock

“CP1”shall mean the Conversion Price for such series of Preferred Stock in effect immediately prior to such issue of Additional Shares of Common Stock;

“A”shall mean the number of shares of Common Stock outstanding immediately prior to such issue of Additional Shares of Common Stock (treating for this purpose as outstanding all shares of Common Stock issuable upon exercise of Options outstanding immediately prior to such issue or upon conversion or exchange of Convertible Securities (including the Series A Preferred Stock and Series B Preferred Stock) outstanding (assuming exercise of any

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outstanding Options therefor) immediately prior to such issue);

“B”shall mean the number of shares of Common Stock that would have been issued if such Additional Shares of Common Stock had been issued at a price per share equal to CP1 (determined by dividing the aggregate consideration received by the Corporation in respect of such issue by CP1); and

“C”shall mean the number of such Additional Shares of Common Stock issued in such transaction; and

(b)           the Conversion Price of the Series B Preferred Stock shall be reduced, concurrently with adjustment to the Series A Preferred Stock Conversion Price, to a price (calculated to the nearest one-hundredth of a cent) in order to maintain the ratio of the number of shares of Series B Preferred Stock to the number of shares of Series A Preferred Stock (each as measured on an as-converted basis) as existed prior to the adjustment to the Series A Preferred Stock Conversion Price.

4.4.5        Determination of Consideration.  For purposes of this Subsection 4.4, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

(a)           Cash and Property:  Such consideration shall:

(i)insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest;

(ii)insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors of the Corporation (with the concurrence of the Series B Preferred Stock Director); and

(iii)in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined in good faith by the Board of Directors of the Corporation.

(b)           Options and Convertible Securities.  The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4.4.3, relating to Options and Convertible Securities, shall be determined by dividing

(i)the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set

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forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by

(ii)the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities.

4.4.6        Multiple Closing Dates.  In the event the Corporation shall issue on more than one date Additional Shares of Common Stock that are a part of one transaction or a series of related transactions and that would result in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4, then, upon the final such issuance, the Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any such subsequent issuances within such period).

4.5           Adjustment for Stock Splits and Combinations.  If the Corporation shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding.  If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding.  Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.

4.6           Adjustment for Certain Dividends and Distributions.  In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction:

(1)the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(2)the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such

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issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

Notwithstanding the foregoing, (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions; and (b) that no such adjustment shall be made if the holders of Series A Preferred Stock or Series B Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series A Preferred Stock and Series B Preferred Stock had been converted into Common Stock on the date of such event.

4.7           Adjustments for Other Dividends and Distributions.  In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Series A Preferred Stock and Series B Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Series A Preferred Stock and Series B Preferred Stock had been converted into Common Stock on the date of such event.

4.8           Adjustment for Merger or Reorganization, etc.  Subject to the provisions of Subsection 2.3, if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not the Series A Preferred Stock or Series B Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Subsections 4.4, 4.6 or 4.7), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Series A Preferred Stock and Series B Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Series A Preferred Stock and Series B Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Corporation) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of the Series A Preferred Stock and Series B Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Series A Preferred Stock and Series B Preferred Stock.

4.9           Certificate as to Adjustments.  Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall, as promptly as reasonably practicable but in any event not later than 10 days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock and Series B Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Series A Preferred Stock or Series B Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based.  The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Series A Preferred Stock or Series B Preferred Stock (but

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in any event not later than 10 days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Conversion Price then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of Series A Preferred Stock or Series B Preferred Stock.

4.10         Notice of Record Date.  In the event:

(a)           the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Series A Preferred Stock or Series B Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or

(b)           of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or

(c)           of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation,

then, and in each such case, the Corporation will send or cause to be sent to the holders of the Series A Preferred Stock or Series B Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the Series A Preferred Stock or Series B Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Series A Preferred Stock, Series B Preferred Stock and the Common Stock.  Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice.

5.             Mandatory Conversion.

5.1           Upon the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least sixty-seven percent of the then outstanding shares of Series B Preferred Stock (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “Mandatory Conversion Time”), (i) all outstanding shares of Series A Preferred Stock and Series B Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate and (ii) such shares may not be reissued by the Corporation.

5.2           Procedural Requirements.  All holders of record of shares of Series A Preferred Stock and Series B Preferred Stock shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Series A Preferred Stock and Series B Preferred Stock pursuant to this Section 5.  Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time.  Upon receipt of such notice, each holder of shares of Series A Preferred Stock and Series B Preferred Stock shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice and shall

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thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5.  At the Mandatory Conversion Time, all outstanding shares of Series A Preferred Stock and Series B Preferred Stock shall be deemed to have been converted into shares of Common Stock, which shall be deemed to be outstanding of record, and all rights with respect to the Series A Preferred Stock and Series B Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate notwithstanding the failure of the holder or holders thereof to surrender the certificates at or prior to such time, except only the rights of the holders thereof, upon surrender of their certificate or certificates (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the last sentence of this Subsection 5.2.  If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing.  As soon as practicable after the Mandatory Conversion Time and the surrender of the certificate or certificates (or lost certificate affidavit and agreement) for Series A Preferred Stock and Series B Preferred Stock, the Corporation shall issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof, together with cash as provided in Subsection 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and the payment of any declared but unpaid dividends on the shares of Series A Preferred Stock and Series B Preferred Stock converted.  Such converted Series A Preferred Stock and Series B Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series A Preferred Stock and Series B Preferred Stock accordingly.

6.             Redemption.

6.1           Redemption.

6.1.1        Shares of Series B Preferred Stock may be redeemed by the Corporation at any time, out of funds lawfully available therefor, at a price per share equal to 1.05 times the Original Issue Price, plus all declared but unpaid dividends thereon, in a single installment payable on the applicable date set forth in the redemption notice.  The Corporation shall send written notice of the mandatory redemption to each holder of record of Series B Preferred Stock not less than 20 days prior to the redemption date, which notice shall state: (x) the date of redemption; (y) that the holder’s right to convert such shares has terminated; and (z) that the holder is to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares of Series B Preferred Stock to be redeemed.  The Series B Preferred Stock may not be converted following the issuance of the redemption notice, unless the Corporation fails to timely pay the redemption price as set forth in the notice.

6.1.2        Shares of Series A Preferred Stock shall be redeemed by the Corporation out of funds lawfully available therefor at a price per share equal to the Original Issue Price, plus all declared but unpaid dividends thereon (the “Redemption Price”), in three annual installments commencing not more than 60 days after receipt by the Corporation at any time on or after July 31, 2013, from the holders of at least sixty-seven percent (67%) of the then outstanding shares of Series A Preferred Stock, of written notice requesting redemption of all shares of Series A Preferred Stock. The date of each such installment shall be referred to as a “Redemption Date”.  On each Redemption Date, the Corporation shall redeem, on a pro rata basis in accordance with the number of shares of Series A Preferred Stock owned by each holder, that number of outstanding shares of Series A Preferred Stock determined by dividing (i) the total number of shares of Series A Preferred Stock outstanding immediately prior to such Redemption Date by (ii) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies).  If the Corporation does not have sufficient

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funds legally available to redeem on any Redemption Date all shares of Series A Preferred Stock to be redeemed on such Redemption Date, the Corporation shall redeem a pro rata portion of each holder’s redeemable shares of such capital stock out of funds legally available therefor, based on the respective amounts which would otherwise be payable in respect of the shares to be redeemed if the legally available funds were sufficient to redeem all such shares, and shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor.

6.2           Redemption Notice.  The Corporation shall send written notice of the mandatory redemption (the “Redemption Notice”) to each holder of record of Series A Preferred Stock not less than 40 days prior to each Redemption Date.  Each Redemption Notice shall state:

(a)           the number of shares of Series A Preferred Stock held by the holder that the Corporation shall redeem on the Redemption Date specified in the Redemption Notice;

(b)           the Redemption Date and the Redemption Price;

(c)           the date upon which the holder’s right to convert such shares terminates (as determined in accordance with Subsection 4.1); and

(d)           that the holder is to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares of Series A Preferred Stock to be redeemed.

6.3           Surrender of Certificates; Payment.  On or before the applicable Redemption Date, each holder of shares of Series A Preferred Stock to be redeemed on such Redemption Date, unless such holder has exercised his, her or its right to convert such shares as provided in Section 4, shall surrender the certificate or certificates representing such shares (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof.  In the event less than all of the shares of Series A Preferred Stock represented by a certificate are redeemed, a new certificate representing the unredeemed shares of Series A Preferred Stock shall promptly be issued to such holder.

6.4           Rights Subsequent to Redemption.  If the Redemption Notice shall have been duly given, and if on the applicable Redemption Date the Redemption Price payable upon redemption of the shares of Series A Preferred Stock to be redeemed on such Redemption Date is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor in a timely manner, then notwithstanding that the certificates evidencing any of the shares of Series A Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to such shares of Series A Preferred Stock shall cease to accrue after such Redemption Date and all rights with respect to such shares shall forthwith after the Redemption Date terminate, except only the right of the holders to receive the Redemption Price without interest upon surrender of their certificate or certificates therefor.

7.             Redeemed or Otherwise Acquired Shares.  Any shares of Series A Preferred Stock or Series B Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred.  Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Series A Preferred Stock or Series B Preferred Stock following redemption.

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8.             Waiver.  Any of the rights, powers, preferences and other terms of the Series A Preferred Stock set forth herein may be waived on behalf of all holders of Series A Preferred Stock by the affirmative written consent or vote of the holders of at least sixty-seven percent of the shares of Series A Preferred Stock then outstanding.  Any of the rights, powers, preferences and other terms of the Series B Preferred Stock set forth herein may be waived on behalf of all holders of Series B Preferred Stock by the affirmative written consent or vote of the holders of at least a majority of the shares of Series B Preferred Stock then outstanding.

9.             Notices.  Any notice required or permitted by the provisions of this Article Fourth to be given to a holder of shares of Series A Preferred Stock or Series B Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the General Corporation Law, and shall be deemed sent upon such mailing or electronic transmission.

SECOND:  The Corporation shall not recognize any transfer of any of the securities issued by the Corporation unless the board of directors has first approved such transfer.  For purposes of this article, “Transfer,” “Transferring,” “Transferred” or words of similar import, mean and include any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or descent, or other transfer or disposition of any kind, including but not limited to transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, except for:  (i) any repurchase of securities by the Corporation; (ii) any Transfer, other than pursuant to divorce decree, dissolution, or property settlement, of Shares to a holder’s spouse, sibling, lineal descendant or ancestor or to a trust established for the benefit of any such individual; (iii) any Transfer of securities on a holder’s death by will or intestacy; (iv) bona fide gifts of up to 10% in the aggregate of the securities held by the transferring holder as of the date hereof or (v) any Transfer of securities by a holder to an affiliate.

THIRD:  Subject to any additional vote required by the Certificate of Incorporation or Bylaws, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation.

FOURTH:  Subject to any additional vote required by the Certificate of Incorporation, the number of directors of the Corporation shall be determined in the manner set forth in the Bylaws of the Corporation.

FIFTH:  Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.

SIXTH:  Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide.  The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.

SEVENTH:  To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.  If the General Corporation Law or any other law of the State of Delaware is amended after approval by the stockholders of this Article Tenth to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended.

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Any repeal or modification of the foregoing provisions of this Article Tenth by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification.

To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Corporation (and any other persons to which General Corporation Law permits the Corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law.  Any amendment, repeal or modification of the foregoing provisions of this Article Tenth shall not adversely affect any right or protection of any director, officer or other agent of the Corporation existing at the time of such amendment, repeal or modification.

ELEVENTH:  The Corporation renounces any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any Excluded Opportunity.  An “Excluded Opportunity” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (i) any director of the Corporation who is not an employee of the Corporation or any of its subsidiaries, or (ii) any holder of Series A Preferred Stock or of Series B Preferred Stock, or any partner, member, director, stockholder, employee or agent of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, “Covered Persons”), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Person’s capacity as a director of the Corporation.

*     *     *

3.             That the foregoing amendment and restatement was approved by the holders of the requisite number of shares of this corporation in accordance with Section 228 of the General Corporation Law.

4.             That this Second Amended and Restated Certificate of Incorporation, which restates and integrates and further amends the provisions of this corporation’s Certificate of Incorporation, has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law.

IN WITNESS WHEREOF, this Second Amended and Restated Certificate of Incorporation has been executed by a duly authorized officer of this corporation on this 14th day of May, 2009.

By:
	Jeffrey L. Feldman, Chief Executive Officer

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EX-10.5

Exhibit 10.5

THESE SECURITIES ARE NOT REGISTERED UNDER STATE OR FEDERAL SECURITIES LAWS, AND MAY NOT BE OFFERED, OR SOLD, PLEDGED (EXCEPT A PLEDGE PURSUANT TO THE TERMS OF WHICH ANY OFFER OR SALE UPON FORECLOSURE WOULD BE MADE IN A MANNER THAT WOULD NOT VIOLATE THE REGISTRATION PROVISIONS OF FEDERAL OR STATE SECURITIES LAWS) OR OTHERWISE DISTRIBUTED FOR VALUE, NOR MAY THESE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE COMPANY, WITHOUT OPINION OF COUNSEL, CONCURRED IN BY COUNSEL FOR THE COMPANY, THAT NO VIOLATION OF SAID REGISTRATION PROVISIONS WOULD RESULT THEREFROM.

CONVERTIBLE PROMISSORY NOTE

$1,100,000.00	May 14, 2009
	New York, New York

For value received of One Million Dollars ($1,000,000), XShares Group, Inc., a Delaware corporation (the “Company”), promises to pay to MGT Capital Investments, Inc. (the “Holder”), the principal sum of One Million One Hundred Thousand Dollars ($1,100,000.00). Interest shall accrue from the date of this Note on the unpaid principal amount at a rate equal to ten percent (10%) per annum, compounded annually.  This Note is being made in conjunction with the execution of that certain Securities Purchase Agreement of even date herewith (the “Purchase Agreement”) in order to provide the Company with access to amounts funded hereunder prior to the Initial Closing (as defined in the Purchase Agreement).  This Note is subject to the following terms and conditions.

1.             Maturity.

(a)           Unless converted as provided in Section 2, this Note will automatically mature and be due and payable on August 1, 2009 (the “Maturity Date”).  Subject to Sections 1(b) and 2 below, interest shall accrue on this Note but shall not be due and payable until the Maturity Date  .

(b)           Notwithstanding the foregoing, the entire unpaid principal sum of this Note, together with accrued and unpaid interest thereon and interest at the rate of eighteen (18%) percent per annum going forward, shall become immediately due and payable upon the insolvency of the Company, the commission of any act of bankruptcy by the Company, the execution by the Company of a general assignment for the benefit of creditors, the filing by or against the Company of a petition in bankruptcy or any petition for relief under the federal bankruptcy act or the continuation of such petition without dismissal for a period of ninety (90) days or more, the appointment of a receiver or trustee to take possession of the property or assets of the Company, the breach of any representations, warranties or covenants under the Purchase Agreement or this Note, or the failure to pay this Note on the Maturity Date.

(c)           This Note may be prepaid in full at any time prior to conversion pursuant to Section 2( below), with or without notice, without penalty or premium.

2.             Conversion.

(a)           Conversion into Series B Preferred Stock.  The entire principal amount of this Note shall be converted into shares of the Company’s Series B Preferred Stock at the Initial Closing.  Accrued interest on this Note shall be converted into Accruing Dividends (as defined in the Company’s Second Amended and Restated Articles of Incorporation attached to the Purchase Agreement (the “Certificate”)) from the date hereof.

(b)           Conversion into Common Stock.  If (i) the Certificate is not approved by a majority of the holders of the Company’s Series A Preferred Stock or a majority of the Common Stock, or (ii) at any time prior to the Initial Closing, there shall be (a) an acquisition of the Company by another entity other than Holder or its affiliates by means of a merger, consolidation, or other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Company’s capital stock such that shareholders of the Company prior to such transaction own, directly or indirectly, less than 50% of the voting power of the surviving entity, or (b) a sale or transfer of all or substantially all of the Company’s assets to any other person other than Holder or its affiliates, then, at the Holder’s option, the entire unpaid principal sum of this Note, and interest thereon, shall be immediately paid to the Holder or converted into shares of the Company’s common stock at a price of $0.001 per share.

(c)           Mechanics and Effect of Conversion.  No fractional shares of the Company’s capital stock will be issued upon conversion of this Note.  In lieu of any fractional share to which the Holder would otherwise be entitled, the Company will pay to the Holder in cash the amount of the unconverted principal and interest balance of this Note that would otherwise be converted into such fractional share.  Upon conversion of this Note pursuant to this Section 2, the Holder shall surrender this Note, duly endorsed, at the principal offices of the Company or any transfer agent of the Company.  At its expense, the Company will, as soon as practicable thereafter, issue and deliver to such Holder, at such principal office, a certificate or certificates for the number of shares to which such Holder is entitled upon such conversion, together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note, including a check payable to the Holder for any cash amounts payable as described herein.  Upon conversion of this Note, the Company will be forever released from all of its obligations and liabilities under this Note with regard to that portion of the principal amount and accrued interest being converted including without limitation the obligation to pay such portion of the principal amount and accrued interest.

3.             Payment.  All payments shall be made in lawful money of the United States of America at such place as the Holder hereof may from time to time designate in writing to the Company.  Payment shall be credited first to the accrued interest then due and payable and the remainder applied to principal.

4.             Transfer; Successors and Assigns.  The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the parties.  Notwithstanding the foregoing, the Holder may not assign, pledge, or otherwise transfer this Note, except for transfers to affiliates.  Subject to the preceding sentence, this Note may be transferred only upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company.  Thereupon, a new note for the same principal amount and interest will be issued to, and registered in the name of, the transferee.  Interest and principal are payable only to the registered holder of this Note.

5.             Governing Law.  This Note and any controversy arising out of or relating to this Note shall be governed by and construed in accordance with the General Corporation Law of the State of Delaware as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the State New York, without regard to conflict of law principles that would result in the application of any law other than the law of the State of New York.

6.             Notices.  All notices and other communications given or made pursuant to this Note shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or:  (a) personal delivery to the party to be notified, (b) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (c) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written

2

verification of receipt.  All communications shall be sent to the respective parties at their address as set forth on the signature page, or to such e-mail address, facsimile number or address as subsequently modified by written notice given in accordance with this Section 6.

7.             Amendments and Waivers.  Any term of this Note may be amended only with the written consent of the Company and the Holder.  Any amendment or waiver effected in accordance with this Section 7 shall be binding upon the Company, the Holder and each transferee of the Note.

8.             Shareholders, Officers and Directors Not Liable.  In no event shall any shareholder, officer or director of the Company be liable for any amounts due or payable pursuant to this Note.

9.             Failure or Indulgence Not Waiver.  No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege, nor shall any waiver by the Holder of any such right or rights on any one occasion be deemed a waiver of the same right or rights on any future occasion.

10.           Action to Collect on Note.  If action is instituted to collect on this Note, the Company promises to pay all costs and expenses, including reasonable attorney’s fees, incurred in connection with such action.

XSHARES GROUP, INC.
By:	/s/ Jeffrey Feldman
	Jeffrey Feldman, Chief Executive Officer

Address: XShares Group, Inc.
420 Lexington Avenue, Suite 2550
New York, NY 10170

ACKNOWLEDGED AND ACCEPTED:

this 14th day of May, 2009,

By: MGT CAPITAL INVESTMENTS, INC.,

	By:	/s/ Tim Paterson-Brown
	Its:	Chief Executive Officer
Address:			MGT Capital Investments, Inc.
			Kensington Centre
			66 Hammersmith Road
			London W14 8UD
			United Kingdom

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SARBANES-OXLEY ACT OF 2002

I, Tim Paterson-Brown, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MGT Capital Investments, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ TIM PATERSON-BROWN
		Tim Paterson-Brown
		Chief Executive Officer
May 15, 2009

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SARBANES-OXLEY ACT OF 2002

I, Allan Rowley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MGT Capital Investments, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ ALLAN ROWLEY
		Allan Rowley
		Chief Financial Officer
May 15, 2009

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I, Tim Paterson-Brown, Chief Executive Officer of MGT Capital Investments, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:

(1)                               the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)                               the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ TIM PATERSON-BROWN
		Tim Paterson-Brown
		Chief Executive Officer
May 15, 2009

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I, Allan Rowley, Chief Financial Officer of MGT Capital Investments, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:

(1)                               the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)                               the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ ALLAN ROWLEY
		Allan Rowley
		Chief Financial Officer
May 15, 2009