UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.20549







FORM
10-K/A


(Amendment
No. 1)





(Mark
One)





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





For the
fiscal year ended March 31, 2009


or





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number   00-10039





MANDALAY
MEDIA, INC.


(Exact
name of Registrant as Specified in Its Charter)





Delaware
              22-2267658(State or other jurisdiction of incorporation or organization)
              (I.R.S. Employer Identification No.)2121 Avenue of the Stars, Suite 2550, Los Angeles, CA
              90067(Address
      of principal executive offices)
              (Zip
      Code)





(310)
601-2500


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act: None




Securities
registered under Section 12(g) of the Exchange Act:




Common Stock, Par Value
$0.0001 Per Share


(Title of
Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o     No  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes  o       No  x




Indicate
by check mark whether the registrant : (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [o]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of a “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.   (Check
One)





 ̈ Large Accelerated
      Filer
             ̈ Accelerated
      Filer ̈ Non-accelerated
      Filer (do not check if smaller reporting company)
            x Smaller Reporting
      Company





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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold on the OTC Bulletin Board on September 30, 2008 was
$77,878,678.




Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
Yes  x     No  o




As of
July 14, 2009, the Issuer had 39,653,125 shares of its common stock,
$0.0001 par value per share, outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE


None.







EXPLANATORY
NOTE





This
Amendment No. 1 on Form 10-K/A (this “Amendment”) is filed by Mandalay Media,
Inc. (the “Registrant”) to amend the Registrant’s Annual Report on Form 10-K for
the fiscal year ended March 31, 2009, as originally filed with the Securities
and Exchange Commission (the “Commission”) on July 14, 2009 (the “Form
10-K”).  The purpose of this Amendment is to add the audited financial
statements for the period from April 1, 2007 through February 12, 2008 of
Twistbox Entertainment, Inc., the Registrant’s wholly-owned subsidiary and to
amend and restate Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations to include discussion related to the audited
financial statements for the period from April 1, 2007 through February 12,
2008 per request of the Commission in a letter to the Registrant dated July
15, 2009. The Registrant is also amending and restating Item 5 Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities to correct information that was inadvertently set
forth in the Table captioned Equity Compensation Plan Information
that should have been included in a footnote. No other material
changes were made to the Form 10-K.









ITEM
      5.
              MARKET FOR
      REGISTRANT’S COMMON EQUTY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
  Market
Information
  As of
July 10, 2009, the closing price of our common stock was $0.55.
  Our
common stock is quoted on the OTC Bulletin Board under the symbol “MNDL.OB.” Any
investor who purchases our common stock is not likely to find any liquid trading
market for our common stock and there can be no assurance that any liquid
trading market will develop.
  The
following table reflects the high and low closing quotations of our common stock
for periods indicated. The quotations reflect last sale closing price on a daily
basis and reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
  2
  High
                      
                      
                      LowYear
      Ended March 31, 2009First
      quarter
                      
                      $
                      6.00
                      
                      
                      $
                      2.00Second
      quarter
                      
                      $
                      2.90
                      
                      
                      $
                      1.50Third
      quarter
                      
                      $
                      2.39
                      
                      
                      $
                      0.60Fourth
      quarter
                      
                      $
                      1.75
                      
                      
                      $
                      0.51Three
      Months Ended March 31, 2008*First
      quarter
                      
                      $
                      6.50
                      
                      
                      $
                      2.40Year
      Ended December 31, 2007First
      quarter
                      
                      $
                      2.50
                      
                      
                      $
                      1.75Second
      quarter
                      
                      $
                      3.00
                      
                      
                      $
                      1.90Third
      quarter
                      
                      $
                      4.00
                      
                      
                      $
                      2.25Fourth
      quarter
                      
                      $
                      4.50
                      
                      
                      $
                      2.30
 
 * We
changed our fiscal year end to March 31, effective March 31,
2008.
 There has
never been a public trading market for any of our securities other than our
common stock.
  Holders
  As of
July 14, 2009, there were 528 holders of record of our common stock. There
were also an undetermined number of holders who hold their stock in nominee or
“street” name.
  Dividends
  We have
not declared cash dividends on our common stock since our inception and we do
not anticipate paying any cash dividends in the foreseeable future.
  Equity
Compensation Plan Information
  The
following table sets forth information concerning our equity compensation plans
as of March 31, 2009.
  Plan Category
                  
                  Number of securities to
                    be issued upon exercise
                    of outstanding options,
                    warrants and rights
                    (a)
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding options,
                    warrants and rights
                    (b)
                  
                  
                  Number of securities
                    remaining available for
                    future issuance under
                    equity compensation plans
                    (excluding securities
                    reflected in column (a))
                    (c)Equity
      compensation plans approved by security holders
                  
                  
                  3,000,000
                  
                  
                  $
                  3.86
                  
                  
                  
                  0Equity
      compensation plans not approved by security holders
                  
                  
                  1,683,333
                  
                  
                  
                  2.68
                  
                  
                  
                  1,377,970Total
                  
                  
                  4,683,333
                  
                  
                  $
                  3.44
                  
                  
                  
                  1,377,970
  The table
above does not include to purchase an aggregated of 2,227,017 shares of the
Company’s common stock pursuant to the Twistbox 2006 Stock Incentive Plan, at a
weight average exercise price of $0.64, which were assumed by the Company in
connection with the merger.
  Unregistered
Sales of Equity Securities
 None.
  3
  Issuer
Purchases of Equity Securities
 
 Period
                        
                        (a) Total Number of
                          Shares (or Units)
                          Purchased
                        
                        
                        (b) Average Price Paid
                          per Share (or Unit)
                        
                        
                        (c)
                          Total Number of
                          Shares (or Units)
                          Purchased as Part of
                          Publicly Announced
                          Plans or Programs
                        
                        
                        (d)
                          Maximum Number
                          (or Approximate
                          Dollar Value) of
                          Shares (or Units)
                          that May Yet Be
                          Purchased Under
                          the Plans or
                          ProgramsJanuary
      1, 2009- January 31, 2009
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -February
      1, 2009- February 28, 2009
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -March
      1, 2009- March 31, 2009
                        
                        62,011(1
                        )
                        
                        $
                        0.88
                        
                        
                        
                        -
                        
                        
                        
                        -
  (1) These
shares were repurchased by the Company in satisfaction of tax liability pursuant
to Rule 16b-3 of the Exchange Act.




4




ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  The
following discussion should be read in conjunction with, and is qualified in its
entirety by, the Financial Statements and the Notes thereto included in this
report. This discussion contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Annual Report on Form
10-K/A, the words “anticipate,” “believe,” “estimate,” “expect” and similar
expressions, as they relate to our management or us, are intended to identify
such forward-looking statements. Our actual results, performance or achievements
could differ materially from those expressed in, or implied by, these
forward-looking statements as a result of a variety of factors including those
set forth under “Risk Factors” beginning on page 8 and elsewhere in this filing.
Historical operating results are not necessarily indicative of the trends in
operating results for any future period.
  Unless
the context otherwise indicates, the use of the terms “we,” “our” “us” or the
“Company” refer to the business and operations of Mandalay Media, Inc.
(“Mandalay”) through its operating and wholly-owned subsidiaries, Twistbox
Entertainment, Inc. (“Twistbox”) and AMV Holding Limited, a United Kingdom
private limited company (“AMV”).
  Historical
Operations of Mandalay Media, Inc.
  Mandalay
was originally incorporated in the State of Delaware on November 6, 1998 under
the name eB2B Commerce, Inc. On April 27, 2000, Mandalay merged into DynamicWeb
Enterprises Inc., a New Jersey corporation, and changed its name to eB2B
Commerce, Inc. On April 13, 2005, Mandalay changed its name to Mediavest, Inc.
On November 7, 2007, through a merger, the Company reincorporated
in the State of Delaware under the name Mandalay Media, Inc.
  On
October 27, 2004, and as amended on December 17, 2004, Mandalay filed a plan for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New York (the “Plan
of Reorganization”). Under the Plan of Reorganization, as completed on January
26, 2005: (1) Mandalay’s net operating assets and liabilities were transferred
to the holders of the secured notes in satisfaction of the principal and accrued
interest thereon; (2) $400,000 were transferred to a liquidation trust and used
to pay administrative costs and certain preferred creditors; (3) $100,000 were
retained by Mandalay to fund the expenses of remaining public; (4) 3.5% of the
new common stock of Mandalay (140,000 shares) was issued to the holders of
record of Mandalay’s preferred stock in settlement of their liquidation
preferences; (5) 3.5% of the new common stock of Mandalay (140,000 shares) was
issued to common stockholders of record as of January 26, 2005 in exchange for
all of the outstanding shares of the common stock of the company; and (6) 93% of
the new common stock of Mandalay (3,720,000 shares) was issued to the sponsor of
the Plan of Reorganization in exchange for $500,000 in cash. Through January 26,
2005, Mandalay and its subsidiaries were engaged in providing
business-to-business transaction management services designed to simplify
trading between buyers and suppliers.
  Prior to
February 12, 2008, Mandalay was a public shell company with no operations, and
controlled by its significant stockholder, Trinad Capital Master Fund,
L.P.
  SUMMARY
OF THE MERGER
  Mandalay
entered into an Agreement and Plan of Merger on December 31, 2007, as
subsequently amended by the Amendment to Agreement and Plan of Merger dated
February 12, 2008 (the “Merger Agreement”), with Twistbox Acquisition, Inc. (a
Delaware corporation and a wholly-owned subsidiary of Mandalay (“Merger Sub”),
Twistbox Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark Captial,
L.P., as representatives of the stockholders of Twistbox, pursuant to which
Merger Sub would merge with and into Twistbox, with Twistbox as the surviving
corporation (the “Merger”). The Merger was completed on February 12,
2008.
   5
 
 Pursuant
to the Merger Agreement, upon the completion of the Merger, each outstanding
share of Twistbox common stock, $0.001 par value per share, on a fully-converted
basis, with the conversion on a one-for-one basis of all issued and outstanding
shares of the Series A Convertible Preferred Stock of Twistbox and the Series B
Convertible Preferred Stock of Twistbox, each $0.01 par value per share (the
“Twistbox Preferred Stock”), converted automatically into and became
exchangeable for Mandalay common stock in accordance with certain exchange
ratios set forth in the Merger Agreement. In addition, by virtue of the Merger,
each outstanding Twistbox option to purchase Twistbox common stock issued
pursuant to the Twistbox 2006 Stock Incentive Plan was assumed by Mandalay,
subject to the same terms and conditions as were applicable under such plan
immediately prior to the Merger, except that (a) the number of shares of
Mandalay common stock issuable upon exercise of each Twistbox option was
determined by multiplying the number of shares of Twistbox common stock that
were subject to such Twistbox option immediately prior to the Merger by 0.72967
(the “Option Conversion Ratio”), rounded down to the nearest whole number; and
(b) the per share exercise price for the shares of Mandalay common stock
issuable upon exercise of each Twistbox option was determined by dividing the
per share exercise price of Twistbox common stock subject to such Twistbox
option, as in effect prior to the Merger, by the Option Conversion Ratio,
subject to any adjustments required by the Internal Revenue Code. As part of the
Merger, Mandalay also assumed all unvested Twistbox options. The merger
consideration consisted of an aggregate of up to 12,325,000 shares of Mandalay
common stock, which included the conversion of all shares of Twistbox capital
stock and the reservation of 2,144,700 shares of Mandalay common stock required
for assumption of the vested Twistbox options. Mandalay reserved an additional
318,772 shares of Mandalay common stock required for the assumption of the
unvested Twistbox options. All warrants to purchase shares of Twistbox
common stock outstanding at the time of the Merger were terminated on or before
the effective time of the Merger.
  Upon the
completion of the Merger, all shares of the Twistbox capital stock were no
longer outstanding and were automatically canceled and ceased to exist, and each
holder of a certificate representing any such shares ceased to have any rights
with respect thereto, except the right to receive the applicable merger
consideration. Additionally, each share of the Twistbox capital stock held by
Twistbox or owned by Merger Sub, Mandalay or any subsidiary of Twistbox or
Mandalay immediately prior to the Merger, was canceled and extinguished as of
the completion of the Merger without any conversion or payment in respect
thereof. Each share of common stock, $0.001 par value per share, of Merger Sub
issued and outstanding immediately prior to the Merger was converted upon
completion of the Merger into one validly issued, fully paid and non-assessable
share of common stock, $0.001 par value per share, of the surviving
corporation.
 
 As part
of the Merger, Mandalay agreed to guarantee up to $8,250,000 of
Twistbox’s outstanding debt to ValueAct SmallCap Master Fund L.P.
(“ValueAct”), with certain amendments. On July 30, 2007,
Twistbox had entered into a Securities Purchase Agreement by and among
Twistbox, the Subsidiary Guarantors (as defined therein) and
ValueAct, pursuant to which ValueAct purchased a note in the
amount of $16,500,000 (the “ValueAct Note”) and a warrant which entitled
ValueAct to purchase from Twistbox up to a total of 2,401,747 shares of
Twistbox’s common stock (the “Warrant”).  Twistbox and
ValueAct had also entered into a Guarantee and Security Agreement by
and among Twistbox, each of the subsidiaries of Twistbox, the Investors, as
defined therein, and ValueAct, as collateral agent, pursuant to which the
parties agreed that the ValueAct Note would be secured by substantially all of
the assets of Twistbox and its subsidiaries. In connection with the
Merger, the Warrant was terminated and we issued two warrants in
place thereof to ValueAct to purchase shares of our common stock. One of
such warrants entitles ValueAct to purchase up to a total of 1,092,622 shares
of our common stock at an exercise price of $7.55 per share. The other
warrant entitles ValueAct to purchase up to a total of 1,092,621 shares
of our common stock at an initial exercise price of $5.00 per share,
which, if not exercised in full by February 12, 2009, will be permanently
increased to an exercise price of $7.55 per share.  Both warrants
expire on July 30, 2011. The terms of the warrants were subsequently modified on
October 23, 2008, as set forth below. We also entered into a Guaranty with
ValueAct whereby Mandalay agreed to guarantee Twistbox’s payment to ValueAct of
up to $8,250,000 of principal under the Note in accordance with the terms,
conditions and limitations contained in the ValueAct Note. The financial
covenants of the ValueAct Note were also amended,  pursuant to which
Twistbox is required maintain a cash balance of not less than
$2,500,000 at all times and Mandalay is required to maintain
a cash balance of not less than $4,000,000 at all times. These covenants were
subsequently amended as set forth below.
  6
 
 SUMMARY
OF THE AMV ACQUISITION
 
 On
October 23, 2008, Mandalay consummated the acquisition of 100% of the issued and
outstanding share capital of AMV Holding Limited, a United Kingdom private
limited company (“AMV”) and 80% of the issued and outstanding share capital of
Fierce Media Limited, United Kingdom private limited company (collectively the
“Shares”).  The acquisition of AMV is referred to herein as the “AMV
Acquisition”. The aggregate purchase price (subject to adjustments as provided
in the stock purchase agreement) for the Shares consisted of (i) $5,375,000 in
cash; (ii) 4,500,000 shares of common stock, par value $0.0001 per share; (iii)
a secured promissory note in the aggregate principal amount of $5,375,000 (the
“AMV Note”); and (iv) additional earn-out amounts, if any, based on certain
targeted earnings as set forth in the stock purchase agreement.
 
 The
AMV Note matures on January 30, 2010, and bears interest at an initial rate
of 5% per annum, subject to adjustment as provided therein. In the event
Mandalay completes an equity financing which results in gross proceeds of over
$6,000,000, Mandalay will prepay a portion of the Note in an amount equal to
one-third of the excess of the gross proceeds of such financing over $6,000,000.
In addition, if within nine months of the issuance date of the
AMV  Note, Mandalay completes a financing that results in gross
proceeds of over $15,000,000, then Mandalay shall prepay the entire principal
amount then outstanding under the AMV Note, plus accrued interest. If within
nine months of the issuance date of the AMV Note, the aggregate principal
sum then outstanding under the AMV Note plus accrued interest thereon has not
been prepaid, then on and after such date, interest shall accrue on the unpaid
principal balance of the AMV Note at a rate of 7% per annum.
 
 In
addition, also on October 23, 2008, in connection with the AMV Acquisition,
Mandalay, Twistbox and ValueAct  entered into a Second Amendment to the
ValueAct Note, which among other things, provides for a payment in kind election
at the option of Twistbox, modifies the financial covenants set forth in
the ValueAct Note to require that Mandalay and Twistbox maintain certain
minimum combined cash balances and provides for certain covenants with respect
to the indebtedness of Mandalay and its subsidiaries.  Also on October 23,
2008, AMV granted to ValueAct a security interest in its assets to secure
the obligations under the ValueAct Note. In addition, Mandalay and ValueAct
entered into an allonge to each of those certain warrants issued to ValueAct in
connection with the Merger, which, among other things, amended the exercise
price of each of the warrants to $4.00 per share.
 
 On
October 23, 2008, Mandalay entered into a Securities Purchase Agreement with
certain investors identified therein (the “Investors”), pursuant to which
Mandalay agreed to sell to the Investors in a private offering an aggregate
of 1,685,394 shares of Common Stock and warrants to purchase 842,697 shares of
common stock for gross proceeds to Mandalay of $4,500,000. The warrants have a
five year term and an exercise price of $2.67 per share. The funds were held in
an escrow account pursuant to an Escrow Agreement, dated October 23, 2008 and
were released to Mandalay on or about November 8, 2008.
 
 The
Merger and the AMV Acquisition both included the issuance of common stock as all
or part of the consideration. Based on the trading price of the common stock as
of the acquisition dates, the total consideration was approximately $67.5
million for the Merger and approximately $22.2 million for the AMV Acquisition.
Subsequent to the Merger and the AMV Acquisition, the average trading price of
the Common Stock has decreased significantly. If the decrease in trading price
is deemed to “not be temporary in nature”, management expects that an impairment
of goodwill and other long lived intangible assets could occur by year end.
Other factors affecting management’s estimate of impairment include the current
profitability and expected future cash flows from the acquired
business.
 
 Overview
  From
February 12, 2008 to October 23, 2008, our operations were those of our
wholly-owned subsidiary, Twistbox. Twistbox is a global publisher and
distributor of branded entertainment content, including images, video, TV
programming and games, for Third Generation (3G) mobile networks. Twistbox
publishes and distributes its content in over 40 countries representing more
than one billion subscribers. Operating since 2003, Twistbox has developed an
intellectual property portfolio unique to its target demographic (18 to 35 year
old) that includes worldwide exclusive (or territory exclusive) mobile rights to
global brands and content from leading film, television and lifestyle content
publishing companies. Twistbox has built a proprietary mobile publishing
platform that includes: tools that automate handset portability for the
distribution of images and video; a mobile games development suite that
automates the porting of mobile games and applications to over 1,500 handsets;
and a content standards and ratings system globally adopted by major wireless
carriers to assist with the responsible deployment of age-verified content.
Twistbox has leveraged its brand portfolio and platform to secure “direct”
distribution agreements with the largest mobile operators in the world,
including, among others, AT&T, Hutchison 3G, O2, MTS, Orange, T-Mobile,
Telefonica, Verizon and Vodafone. Twistbox has experienced annual revenue growth
in excess of 50% over the past two years and expects to become one of the
leading players in the rapidly-growing, multibillion-dollar mobile entertainment
market.
  7
  Twistbox
maintains a worldwide distribution agreement with Vodafone. Through this
relationship, Twistbox serves as Vodafone’s exclusive supplier of late night
content, a portion of which is age-verified. Additionally, Twistbox is one of
the select few content aggregators for Vodafone. Twistbox aggregates content
from leading entertainment companies and manages distribution of this content to
Vodafone. Additionally, Twistbox maintains distribution agreements with other
leading mobile network operators throughout the North American, European, and
Asia-Pacific regions that include Verizon, Virgin Mobile, T-Mobile, Telefonica,
Hutchison 3G, Three, O2 and Orange.
  Twistbox’s
intellectual property encompasses over 75 worldwide exclusive or territory
exclusive content licensing agreements that cover all of its key content genres
including lifestyle, glamour, and celebrity news and gossip for U.S. Hispanic
and Latin American markets, poker news and information, late night entertainment
and casual games.
  Twistbox
currently has content live on more than 100 network operators in 40 countries.
Through these relationships, Twistbox can currently reach over one billion
mobile subscribers worldwide. Its existing content portfolio includes 300 WAP
sites, 250 games and 66 mobile TV channels.
  In
addition to its content publishing business, Twistbox operates a rapidly growing
suite of premium short message service (Premium SMS) services that include text
and video chat and web2mobile marketing services of video, images and games that
are promoted through on-line, magazine and TV affiliates. The Premium SMS
infrastructure essentially allows end consumers of Twistbox content to pay for
their content purchases directly from their mobile phone bills.
  Twistbox’s
end-users are the highly-mobile, digitally-aware 18 to 35 year old demographic.
This group is a major consumer of digital entertainment services and commands
significant amounts of disposable income. In addition, this group is very
focused on consumer lifestyle brands and is much sought after by
advertisers.
 
 Beginning
October 23, 2008, our operations included those of our wholly-owned subsidiary,
AMV Holding Limited (“AMV”).  AMV is a mobile media and marketing
company delivering games and lifestyle content directly to consumers in the
United Kingdom, Australia, South Africa and various other European countries.
AMV markets its well established branded services including Bling, Phonebarand GameZonethrough a unique
Customer Relationship Management (CRM) platform that drives revenue through
mobile internet, print and television advertising.
 
 AMV’s
direct-to-consumer “off-deck” distribution channels allow us to market AMV’s
products and services directly to end-users using a suite a premium short
message service (Premium SMS) codes.  The use of Premium SMS codes
allows end-users to pay for AMV products and services directly from their mobile
phone bills via a third party billing aggregator versus through the wireless
carrier’s billing infrastructure with which the end-user has his/her mobile
service.  Through this channel, AMV is not reliant upon the wireless
carrier’s “on-deck” portal for discovery and billing thereby giving AMV greater
flexibility to reach the end-user.  AMV’s strategy is to expand its
international distribution footprint using a defined set of criteria:
identifying territories that provide ease of access to market; established
mobile billing capabilities; a receptive market and audience to mobile content;
and the potential to establish long-term, profitable market
share.  AMV currently markets it products and services in the
following territories: the United Kingdom, Ireland, Australia, South Africa, The
Netherlands, Finland, Sweden, Austria, Switzerland and the Czech
Republic.  Launched in 2004, it is headquartered in the United
Kingdom.  In 2007, it was recognized as the United Kingdom’s fourth
fastest growing technology company by the Micosoft Tech Track
100.  AMV is comprised of three primary lines of business: (i) mobile
content services, such as wallpapers, animations, video, games and ringtones;
(ii) mobile interactive and community services such as text dating and adult
oriented text chatting; and (iii) voice interactive services such as virtual
chat, live infotainment services (e.g., horoscopes and psychic readings) and
adult oriented voice services.
  8
 
 AMV
develops its own consumer brands by extensively marketing its products and
services through a variety of media including traditional print, television,
internet and mobile internet advertising.   It is also expanding
its internet advertising activities through web affiliates, search and targeted
landing pages.  AMV also has established partnerships with several web
application protocol (WAP) advertising affiliates.  As carriers begin
to open their portals for advertising distribution, WAP advertising is becoming
a significant distribution channel for AMV advertising.  AMV is well
positioned to take advantage of the internet advertising inventory through the
use of mobile search and its WAP affiliate relationships.  AMV has
established such relationships with Google, Yahoo, Admob, Admoda, 4 thScreen,
AdInfuse, and many others.  Google has recently confirmed that AMV is
one of its 10 largest mobile internet advertisers – globally.
 
 All AMV
advertising is produced in-house using a team of highly skilled creative graphic
designers.  AMV is one of the largest print advertisers in the United
Kingdom and South Africa, and is considered a significant advertiser in several
other markets.  AMV has historically spent a significant amount of its
working capital on advertising and intends to continue do so in the foreseeable
future.
 
 AMV
offers a complete suite of mobile entertainment products and
services.  In addition to its three primary lines of business, AMV has
significant experience in WAP site management — from content sourcing through
design, marketing and distribution.  AMV maintains a mobile internet
portal of over 200 different sites which are refreshed regularly and AMV is one
of the largest direct-to-consumer marketers of Java-based games through its Game
Zone and Games Demon brands.  AMV has secured a catalog of more than
2000 Java-based games.   AMV’s end-users are the highly-mobile,
digitally-aware 18 to 35 year old demographic. This group is a major consumer of
digital entertainment services and commands significant amounts of disposable
income.
  9
 
 RESULTS
OF OPERATIONS
    Successor
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              PredecessorYear ended
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              Year ended
                                                                                                                                                                              
                                                                                                                                                                              3 months ended
                                                                                                                                                                              
                                                                                                                                                                              3 months ended
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              Period April 1, 2007-March 31,
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              December 31,
                                                                                                                                                                              
                                                                                                                                                                              March 31,
                                                                                                                                                                              
                                                                                                                                                                              March 31,
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              February 12,2009
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2007
                                                                                                                                                                              
                                                                                                                                                                              2008
                                                                                                                                                                              
                                                                                                                                                                              2007
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2008(unaudited)Revenues
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              31,256
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              3,208
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              12,282Cost
      of revenues
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              11,150
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (153
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              5,517Gross
      profit
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              20,106
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,361
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              6,765SG&A
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              26,555
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,521
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,304
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (264
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              14,591Amortization
      of intangible assets
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              628
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              72
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              119Restructuring
      charges
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -Impairment
      of goodwill and intangible assets
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              31,784
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -Operating
      income (loss)
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (38,861
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (2,521
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              (15
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              264
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (7,945
                                                                                                                                                                              )Interest
      expense, net
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (2,161
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              317
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (213
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (859
                                                                                                                                                                              )Other
      expenses
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (542
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (54
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (23
                                                                                                                                                                              )(Loss)
      / income before income taxes
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (41,564
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (2,204
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              (282
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              264
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (8,827
                                                                                                                                                                              )Income
      (taxes) / benefit
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              111
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (16
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (56
                                                                                                                                                                              )(Loss)
      / income from continuing operations
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (41,453
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (2,204
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              (298
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              264
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (8,883
                                                                                                                                                                              )(Loss)
      from discontinued operations, net of taxes
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (147
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -Net
      (loss) / income
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (41,600
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (2,204
                                                                                                                                                                              )
                                                                                                                                                                              $
                                                                                                                                                                              (298
                                                                                                                                                                              )
                                                                                                                                                                              $
                                                                                                                                                                              264
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (8,883
                                                                                                                                                                              )Basic
      and Diluted net loss per common share:Continuing
      operations
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (1.14
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.12
                                                                                                                                                                              )
                                                                                                                                                                              $
                                                                                                                                                                              (0.01
                                                                                                                                                                              )
                                                                                                                                                                              $
                                                                                                                                                                              0.02
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (1.14
                                                                                                                                                                              )Discontinued
      operations
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.00
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              -Net
      loss
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (1.15
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.12
                                                                                                                                                                              )
                                                                                                                                                                              $
                                                                                                                                                                              (0.01
                                                                                                                                                                              )
                                                                                                                                                                              $
                                                                                                                                                                              0.02
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (1.14
                                                                                                                                                                              )Basic
      and Diluted weighted average shares outstanding
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              36,264
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              18,997
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              21,628
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              16,730
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              7,786
 
 Comparison of the Year Ended March 31, 2009
(Successor) and the Period April 1, 2007 – February 12, 2008 (Predecessor)
 
 The
following compares the successor period, Year Ended March 31, 2009 to the
predecessor period April 1, 2007 – February 12, 2008.
 
 Revenues
 
 Successor
                                    
                                    
                                    PredecessorYear Ended
                                    
                                    
                                    Period April 1, 2007-March 31,
                                    
                                    
                                    February 12,2009
                                    
                                    
                                    2008(In
      thousands)Revenues
      by type:Games
                                    
                                    $
                                    5,736
                                    
                                    
                                    $
                                    3,246Other
      content
                                    
                                    
                                    25,520
                                    
                                    
                                    
                                    9,036Total
                                    
                                    $
                                    31,256
                                    
                                    
                                    $
                                    12,282
 Games
revenue includes both licensed and internally developed games for use on mobile
phones. The growth in games revenue largely reflects incremental revenue related
to the rollout of the Play for Prizes platform, additional games development
projects in both the US and Germany, and revenue related to the management of
carrier platforms in Europe. Other content includes a broad range of primarily
licensed product delivered in the form of WAP, Video, Wallpaper and Mobile TV.
The increase in other content revenues is primarily due to the inclusion of
revenues from AMV Holding which was acquired in the third quarter of fiscal
2009, the expansion of direct to consumer business in the US, and incremental
revenue related to the management of advertising platforms for
carriers.
 
 10
  Cost of Revenues
 
 Successor
                                        
                                        
                                        PredecessorYear Ended
                                        
                                        
                                        Period April 1, 2007-March 31,
                                        
                                        
                                        February 12,2009
                                        
                                        
                                        2008(In
      thousands)Cost
      of Revenues:License
      Fees
                                        
                                        $
                                        7,387
                                        
                                        
                                        $
                                        5,491Other
      direct cost of revenues
                                        
                                        
                                        3,763
                                        
                                        
                                        
                                        26Total
      Cost of Revenues
                                        
                                        $
                                        11,150
                                        
                                        
                                        $
                                        5,517Revenues
                                        
                                        $
                                        31,256
                                        
                                        
                                        $
                                        12,282Gross
      Margin
                                        
                                        
                                        64.3
                                        %
                                        
                                        
                                        55.1
                                        %
 
 License
fees represents costs payable to content providers for use of their intellectual
property in products sold. The increase in expenses is proportionate to the
increase in the related revenue. Other direct cost of revenues in the current
period includes costs to deliver products, and amortization of the intangibles
identified as part of the purchase price accounting and attributed to cost of
revenues. The increase in other direct costs is largely attributable to AMV cost
of revenues. The increase in margin is the result of the addition of higher
margin revenue streams, particularly platform management and licensing, and also
a change in mix towards non-branded and lower royalty-cost revenue with higher
margins.
 
 Operating Expenses
 
 Successor
                                      
                                      
                                      PredecessorYear Ended
                                      
                                      
                                      Period April 1, 2007-March 31,
                                      
                                      
                                      February 12,2009
                                      
                                      
                                      2008(In
      thousands)Product
      Development Expenses
                                      
                                      $
                                      6,981
                                      
                                      
                                      $
                                      6,897Sales
      and Marketing Expenses
                                      
                                      
                                      9,236
                                      
                                      
                                      
                                      3,905General
      and Administrative Expenses
                                      
                                      
                                      10,338
                                      
                                      
                                      
                                      3,789Amortization
      of Intangible Assets
                                      
                                      
                                      628
                                      
                                      
                                      
                                      119Impairment
      of goodwill and intangible assets
                                      
                                      
                                      31,784
                                      
                                      
                                      
                                      -
 Product
Development expenses include the costs to develop, edit and make content ready
for consumption on a mobile phone.
 
 Sales and
Marketing Expenses represent the costs of sales and marketing personnel, and
advertising and marketing campaigns – advertising has increased significantly
with the AMV Acquisition in October 2008 due to the “direct to consumer” nature
of that business, with a significant element of direct marketing required to
stimulate revenues. In addition, a significant portion of AMV’s employee base is
classified as sales and marketing employees.
 
 General
and administrative expenses represent management and support personnel costs in
both Mandalay Media and Twistbox, and related expenses, as well as professional
and consulting costs incurred, and other costs such as stock based compensation,
depreciation and bad debt expenses.  The increase in expense is the
result of stock option expense of $2.8 million, and additional legal and
management expenses at the holding company level.
  11
 
 Amortization
of intangibles for the successor in the year ended March 31, 2009 represents
amortization of the intangibles identified as part of the purchase price
accounting related to the Twistbox and AMV acquisitions and attributed to
operating expenses. Amortization expenses for the predecessor in the priod April
1, 2007 to February 12,  2008 represents the amortization of
predecessor intangible assets related to prior acquisitions by
Twistbox.
 
 Impairment of goodwill and intangible assets represents the write
down in value of goodwill and intangible assets associated with the acquisitions
of Twistbox and AMV. The consideration in the Twistbox acquisitions was entirely
stock-based, while the AMV Acquisition was substantially stock-based, and both
acquisitions generated significant goodwill since they were not capital
intensive companies.  Subsequent to the acquisitions, the Company
experienced a significant and continued decline in the market value of its
common stock, which resulted in the Company’s market capitalization falling
below its net book value. The Company performed its annual impairment review for
goodwill and intangible assets in the fourth quarter of fiscal 2009. As a result
of the assessment, the Company determined that its net book value exceeded the
implied fair value; therefore, the Company recorded an impairment charge of
$27,844 to write down goodwill and $3,940 to write down intangibles assets. The
intangible asset impaired was the valuation associated with the Twistbox
trademark/tradename.
  Other Expenses
  Successor
                                
                                
                                PredecessorYear Ended
                                
                                
                                Period April 1, 2007-March 31,
                                
                                
                                February 12,2009
                                
                                
                                2008(In
      thousands)Interest
      and other income/(expense)
                                
                                $
                                (2,703
                                )
                                
                                $
                                (882
                                )Loss
      from discontinued operations, net of taxes
                                
                                $
                                (147
                                )
                                
                                $
                                -
 Interest
and other income/(expense) includes interest income on invested funds, interest
expense related to the ValueAct Note, foreign exchange transaction gains and
losses, and depreciation expense. The higher expense relates to higher interest
expense under the ValueAct Note which was initiated in July 2007, and foreign
exchange losses incurred in the successor period due to adverse fluctuations
during the year in the value of the Euro and the British pound against the US
dollar, versus gains in the predecessor period.
 
 
 Liquidity and Capital
Resources
 
 Successor
                                
                                
                                PredecessorYear Ended
                                
                                
                                Period April 1, 2007-March 31,
                                
                                
                                February 12,2009
                                
                                
                                2008(In thousands)Consolidated
      Statement of Cash Flows Data:Capital
      expenditures
                                
                                
                                (219
                                )
                                
                                
                                (307
                                )Cash
      flows used in operating activities
                                
                                
                                (5,360
                                )
                                
                                
                                (11,296
                                )Cash
      flows (used in)/ provided by investing activities
                                
                                
                                (3,773
                                )
                                
                                
                                100Cash
      flows (used in)/ provided by financing activities
                                
                                
                                4,300
                                
                                
                                
                                17,463
 Cash
flows in the periods presented were impacted by ongoing operating losses and the
acquisition of the two subsidiaries.
  12
 
 Twistbox
has incurred losses and negative cash flows since inception. The primary sources
of liquidity have historically been issuance of common and preferred stock, and
in the case of Twistbox, borrowings under credit facilities. In the future, we
anticipate that our primary sources of liquidity will be cash generated by our
operating activities.
 
 Operating
Activities
 
 In the
year ended March 31, 2009, we used $5.4 million of net cash in operating
activities. This primarily related to the net loss of $41.4 million, and
decreases in accounts payable and other liabilities amounting to $4.6 million,
an increase in prepaid expenses of $0.3 million, offset by the non cash
impairment of goodwill of $31.8 million, non cash stock based compensation and
depreciation and amortization included in the net loss of $3.1 million and $1.5
million respectively, as well as a decrease in accounts receivable of $4.5
million.
 
 In the
period April 1, 2007 – February 12, 2008, the predecessor used $11.3 million of
net cash in operating activities. This primarily related to the net loss of $8.9
million, and decreases on accrued license fees and other liabilities of $2.6
million and increases in accounts receivable and prepaid assets, offset by
non-cash items included in the net loss related to stock compensation and
depreciation and amortization.
  Investing
Activities
 
 In the
year ended March 31, 2009, a net $3.8 million was used in investing activities -
$6.9 million in cash consideration and transaction costs related to the AMV
Acquisition, $0.2 in equipment purchases, offset by $3.4 million of cash in the
acquired subsidiary. The predecessor used $0.3 million in investing activities,
primarily related to capital investments.
 
 Financing
Activities
 
 Proceeds
from issuing common stock represented $4.3 million in the year ended March 31,
2009. For the predecessor, $17.5 was provided by financing activities,
consisting of $3 million from the sale of B-1 preferred stock, $16.5 million
proceeds from the ValueAct Note, offset by $2 million repayment of debt in the
period.
 
 The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles, which
contemplates the continuation of the Company as a going concern.  The
Company’s operating subsidiary, Twistbox, has sustained substantial operating
losses since commencement of operations.  In addition, the Company has
incurred negative cash flows from operating activities and the majority of the
Company’s assets are intangible assets and goodwill.
 
 As of
March 31, 2009, the Company had approximately $5.9 million of cash, and the
Company is seeking to restructure its debt, in particular debt which becomes
payable within 12 months.  The Company’s cash requirements will be
dependent on that restructuring, as well as actions taken to improve cashflow.
As a result, we may require additional cash resources due to changed business
conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If these sources are insufficient to
satisfy our cash requirements, we may seek to sell additional debt securities or
additional equity securities or to obtain a credit facility. The sale of
convertible debt securities or additional equity securities could result in
additional dilution to our stockholders. The incurrence of increased
indebtedness would result in additional debt service obligations and could
result in additional operating and financial covenants that would restrict our
operations. In addition, there can be no assurance that any additional financing
will be available on acceptable terms, if at all.
 
 Debt
obligations include interest payments under the ValueAct Note, payable at the
end of the term, in January 2010. As described above, the ValueAct Note was
amended during fiscal 2009 such that the Company may elect to add interest to
the principal, with the full amount payable at the end of the term. The
Company’s operating lease obligations include noncancelable operating leases for
the Company’s office facilities in several locations, expiring in various years
through 2010. Twistbox has entered into license agreements with various owners
of brands and other intellectual property so that we could develop and publish
branded products for mobile handsets. Pursuant to some of these agreements, we
are required to pay minimum royalties over the term of the agreements regardless
of actual sales.
  13
 Comparison
of the Three Months Ended March 31, 2008 and 2007
  Three Months Ended
                              March 31,2008
                            
                            
                            2007(In thousands)Revenues:
                            
                            $
                            3,208
                            
                            
                            $
                            -Cost
      of revenues
                            
                            
                            (153
                            )
                            
                            
                            -SG&A
                            
                            
                            3,304
                            
                            
                            
                            (264
                            )Amortization
      of intangible assets
                            
                            
                            72
                            
                            
                            
                            -Interest
      and other expense
                            
                            
                            267
                            
                            
                            
                            -
 
 Prior to
the acquisition of Twistbox, Mandalay Media was a public shell company with no
operations, and as a result the only activity in the three months ended March
31, 2007 represents expenses incurred in developing the company.
 
 Revenues
in 2008 related to the post-acquisition revenues of Twistbox, which was acquired
during the period. Cost of revenues in 2008 related to the post-acquisition
revenues of Twistbox, which was acquired during the period. This includes
license fees, representing costs payable to content providers for use of their
intellectual property in products sold. Cost of revenues was a negative amount
in this period due to an adjustment to impairment of guarantees, related to the
reassessment of the impairment reserve for guarantees payable under content
provider contracts. The partial reversal was largely the result of a major
content provider contract which was renegotiated during the period.
 
 SG&A
includes General and Administrative expenses, Product Development and Sales and
Marketing Expenses. General and Administrative expenses consisted primarily of
consulting and professional fees, accounting and legal expenses and employee
related expenses including stock based compensation. G&A Expenses increased
in 2007 over 2006, primarily the result of employing executive management for
the company, a significant increase in legal and other professional fees, and
the addition of Twistbox expenses subsequent to the merger. Product Development
and Sales and Marketing Expenses represent the operating expenses of Twistbox
post-acquisition.
 
 Amortization
of Intangibles represents amortization of the intangibles identified as part of
the purchase price accounting and attributed to operating expenses.
 
 Interest
and other income (expense) includes interest income on invested funds, interest
expense related the Twistbox’s senior secured note, foreign exchange transaction
gains and losses, and depreciation expense.
  14
  Off-Balance Sheet
Arrangements
  We do not
have any relationships with unconsolidated entities or financial partners, such
as entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. In
addition, we do not have any undisclosed borrowings or debt, and we have not
entered into any synthetic leases. We are, therefore, not materially exposed to
any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
 
 Stock Sales and
Liquidity
  On August
3, 2006, we increased our authorized shares of common stock from 19,000,000 to
100,000,000 and authorized and effectuated a 2.5 to 1 stock split of our common
stock to increase our outstanding shares from 4,000,000 to 10,000,000. All share
and per share amounts have been retroactively adjusted to reflect the effect of
the stock split.
  On
September 14, 2006, we sold 2,800,000 units; on October 12, 2006, we sold
3,400,000 units; and on December 26, 2006, we sold 530,000 units. Each unit
sold, at a price per unit of $1.00, consisted of one share of our common stock
and one warrant to purchase one share of our common stock. We realized net
proceeds of $6,057,000 after the costs of the offering. The warrants have an
exercise price of $2.00 per share and expire as follows: 2,800,000 warrants
expired in September 2008, 3,400,000 warrants expired in October 2008, and
530,000 warrants expired in December 2008.
  On
October 12, 2006, we entered into a Series A Convertible Preferred Stock
Purchase Agreement with Trinad Management, LLC (“Trinad Management”). Pursuant
to the terms of the agreement, Trinad Management purchased 100,000 shares of our
Series A Convertible Preferred Stock, par value $ 0.0001 per share (“Series A
Preferred Stock”), for an aggregate purchase price of $100,000. Series A
Preferred stockholders are entitled to convert, at their option, all or any
shares of the Series A Preferred Stock into the number of fully paid and
non-assessable shares of common stock equal to the number obtained by dividing
the original purchase price of such Series A Preferred Stock, plus the amount of
any accumulated but unpaid dividends as of the conversion date, by the original
purchase price (subject to certain adjustments) in effect at the close of
business on the conversion date. The fair value of the 100,000 shares of our
common stock underlying the Series A Convertible Preferred Stock was $1.425 per
share at the date of grant. Since the value was $0.425 lower than the fair value
of our common stock on October 12, 2006, the $42,500 intrinsic value of the
conversion option resulted in the reduction of stockholders’ equity for
the recognition of a preferred stock dividend and an increase to additional
paid-in capital.
  On July
24, 2007, we entered into a Subscription Agreement with certain investors,
pursuant to which such investors agreed to subscribe for an aggregate of
5,000,000 shares of our common stock. Each share of common stock was sold
at the price of $0.50, for an aggregate purchase price of
$2,500,000.
 
 In
September, October and December 2007, warrants to purchase 625,000 shares of
common stock were exercised in a cashless exchange for 239,000 shares of the
Company’s common stock based on the average closing price of the Company’s
common stock for the five days prior to the exercise date.
  On
November 7, 2007, we entered into non-qualified stock option agreements with
certain of our directors and officers pursuant to our 2007 Employee, Director
and Consultant Stock Plan, as amended (the “Plan”), whereby we issued options to
purchase an aggregate of 1,500,000 shares of our common stock. The directors and
officers included James Lefkowitz, President of the Company, Robert Zangrillo, a
former director of the Company, and Bruce Stein, a former director of the
Company and our former Chief Executive Officer as of March 7, 2008, each of whom
was granted an option to purchase 500,000 shares in connection with services
provided to the Company. The options have a ten-year term and are exercisable at
a price of $2.65 per share. On November 14, 2007, we entered into a
non-qualified stock option agreement with Richard Spitz, a director of the
Company, whereby we issued an option to purchase 100,000 shares of its common
stock.  The options granted to Mr. Spitz have a ten-year term and are
exercisable at a price of $2.50 per share. The options for Messrs. Zangrillo,
Stein and Spitz become exercisable over a two-year period, with one-third of the
options granted vesting immediately upon grant, an additional one-third vesting
on the first anniversary thereafter and the remaining one-third on the second
anniversary thereafter. The options for Mr. Lefkowitz also become exercisable
over a two-year period, with one-third of the options granted vesting
immediately upon grant, an additional one-third vesting on June 28, 2008 and the
remainder vesting on June 28, 2009. The options were granted pursuant to the
exemption from registration permitted under Rule 506 of Regulation D of the
Securities Act of 1933, as amended (the “Securities Act”).
  15
 
 On
January 2, 2008, we granted Mr. Stein additional options to purchase 50,000
shares of our common stock. The options have a ten-year term and are exercisable
at a price of $4.65 per share. One-third of the options granted were immediately
exercisable upon grant, an additional one-third will vest on November 7, 2008
and the remaining one-third will vest on November 7, 2009. The options were
granted pursuant to the exemption from registration permitted under Rule 506 of
Regulation D of the Securities Act.
  As
described above, pursuant to the Merger, we issued 10,180,292 shares of
Mandalay common stock as part of the merger consideration in connection with the
Merger. Such issuance was made pursuant to the exemption from registration
permitted under Section 4(2) of the Securities Act.
  In
addition, also in connection with the Merger, on February 12, 2008, we entered
into non-qualified stock option agreements with certain of our directors and
officers under the Plan whereby we issued options to purchase an aggregate of
1,700,000 shares of our common stock to Ian Aaron, Chief Executive Officer of
Twistbox and a director of the Company, Russell Burke, Chief Financial Officer
of Twistbox and the Company, David Mandell, Executive Vice-President, General
Counsel and Corporate Secretary of Twistbox and Patrick Dodd, Senior Vice of
Worldwide Sales and Marketing of Twistbox, each of whom received an option to
purchase 600,000 shares, 350,000 shares, 450,000 shares and 300,000 shares,
respectively, of our common stock. The options have a ten-year term and are
exercisable at a price of $4.75 per share. The options become exercisable over a
two-year period, with one-third of the options granted vesting immediately upon
grant, an additional one-third vesting on the first anniversary of the date of
grant, and the remaining one-third on the second anniversary of the date of
grant. The options were granted pursuant to the exemption from registration
permitted under Rule 506 of Regulation D of the Securities Act.
  On March
7, 2008, the Company granted Mr. Stein options to purchase an aggregate of
1,001,864 shares of common stock, pursuant to the 2007 Plan, in connection with
an amendment to his employment agreement. The options have a ten-year term and
are exercisable at a price of $4.25 per share. The options vest as follows:
options to purchase 233,830 shares will vest on March 7, 2009, options to
purchase 233,830 shares will vest on March 7, 2010 and Options to purchase the
remaining 534,204 shares will vest on March 7, 2011. The options were granted
pursuant to the exemption from registration permitted under Rule 506 of
Regulation D of the Securities Act.
 
 On April
9, 2008 a former director of the Company exercised warrants to purchase 50,000
shares of common stock in a cashless exchange for 25,000 shares of the Company’s
common stock.
  In April
and June 2008, warrants to purchase 350,000 shares of common stock were
exercised in a cashless exchange for 217,000 shares of the Company’s common
stock based on the average closing price of the Company’s common stock for the
five days prior to the exercise date.
 
 On June
18, 2008, the Company granted non-qualified stock options to purchase 1,500,000
shares of common stock of the Company to four directors under the Plan. The
options have a ten year term and are exercisable at a price of $2.75 per share,
with one-third of the options granted vesting immediately upon grant, one-third
vesting on the first anniversary of the date of grant and the remaining
one-third vesting on the second anniversary of the date of grant.
 
 On
September 29, 2008, the Company granted non-qualified stock options to purchase
350,000 shares of common stock of the Company to two directors under the Plan.
The options have a ten year term and are exercisable at a price of $2.40 per
share, with one-third of the options granted vesting immediately upon grant,
one-third vesting on the first anniversary of the date of grant and the
remaining one-third vesting on the second anniversary of the date of
grant.
  16
 
 As
described above, pursuant to the AMV Acquisition, on October 23, 2008, we
entered into a Securities Purchase Agreement with certain investors identified
therein, pursuant to which Mandalay agreed to sell to the Investors in a
private offering an aggregate of 1,685,394 shares of common stock and warrants
to purchase 842,697 shares of common stock for gross proceeds to the Company of
$4,500,000. The warrants have a five year term and an exercise price of $2.67
per share. The funds were held in an escrow account pursuant to an Escrow
Agreement, dated October 23, 2008 and were released to Mandalay on or about
November 8, 2008.
 
 Also as
described above, in connection with the AMV Acquisition, on October 23, 2008,
Mandalay and ValueAct entered into an allonge to each of those certain warrants
issued to ValueAct in connection with the Merger, which, among other things,
amended the exercise price of each of the warrants to $4.00 per
share.
 
 In
October 2008, warrants to purchase 2,300,000 shares of common stock were
exercised in a cashless exchange for 286,000 shares of the Company’s common
stock based on the average closing price of the Company’s common stock for the
five days prior to the exercise date.
 
 On March
16, 2009, certain executive officers of Mandalay, including, among others, Mr.
Lefkowitz, Mr. Burke and Mr. Aaron and other senior employees (the "Executives")
agreed to reduce their salaries for a period of one year, with the exception of
Mr. Aaron who agreed to reduce his salary from August 8, 2008 through February
12, 2010, in exchange for the issuance of shares (the “Shares”) of the Company's
common stock. The Board of Directors approved the issuance of the Shares
pursuant to the Plan at a purchase price of $0.0001 per share in connection with
such salary reductions. The Board of Directors authorized the issuance of an
aggregate of 938,697 Shares as of the date each such Executive agrees to the
salary reduction (the “Grant Date”). In connection therewith, on March 16, 2009,
the Board of Directors granted Mr. Lefkowitz 37,500 Shares, Mr. Burke 48,000
Shares and Mr. Aaron 504,218 Shares. The Shares granted to Mr. Lefkowitz
and Mr. Burke and 350,360 of the Shares granted to Mr. Aaron are
subject to forfeiture to the Company if such Executive terminates his position
with the Company prior to one year from the Grant Date, and such Shares become
fully vested one year from the Grant Date or upon the occurrence of a
change-in-control of the Company. The remainder of Mr. Aaron's shares were fully
vested on the Grant Date. All such Shares granted to the Executives may not be
sold or transferred for a period of one year from the Grant Date.
 
 Revenues
  The
discussion herein regarding our future operations pertain to the results and
operations of Twistbox and AMV. Twistbox has historically generated and
expects to continue to generate the vast majority of its revenues from mobile
phone carriers that market and distribute its content. These carriers generally
charge a one-time purchase fee or a monthly subscription fee on their
subscribers’ phone bills when the subscribers download Twistbox’s games to their
mobile phones. The carriers perform the billing and collection functions and
generally remit to Twistbox a contractual percentage of their collected fee for
each game. Twistbox recognizes as revenues the percentage of the fees due to it
from the carrier. End users may also initiate the purchase of Twistbox’s games
through various Internet portal sites or through other delivery mechanisms, with
carriers or third parties being responsible for billing, collecting and
remitting to Twistbox a portion of their fees. To date, Twistbox’s international
revenues have been much more significant than its domestic
revenues.
 
 AMV
operates a direct-to-consumer marketing model for distribution of its mobile
content portfolio, ranging from Java Games to Videos. AMV’s revenue model relies
on its efficient and effective management of marketing distribution channels
such as print advertising, mobile internet advertising (i.e., WAP affiliates,
Google Mobile, Yahoo, etc.), web advertising and traditional television
advertising.  It also utilizes its proprietary CRM platform for
sending promotions to its existing customer database. AMV relies on the margin
it generates from this marketing activity for the majority of its revenues.
Revenues are also derived from on-going billing relationships with consumers,
primarily via content subscription services.  In its interactive
division, revenues are derived from consumers’ usage of mobile chat, flirt and
dating services, through mobile-based billing aggregators.  Revenues
are generated from billing of consumers through mobile network charging, which
is typically via the use of Premium SMS, or WAP-based billing (e.g.,
Pay-For-It).
   17
 
 We
believe that improving quality and greater availability of 2.5 and 3G handsets
is in turn encouraging consumer awareness and demand for high quality content on
their mobile devices. At the same time, carriers and branded content owners are
focusing on a small group of publishers that have the ability to provide
high-quality mobile content consistently and port it rapidly and
cost-effectively to a wide variety of handsets. Additionally, branded content
owners are seeking publishers that have the ability to distribute content
globally through relationships with most or all of the major carriers. We
believe Twistbox has created the requisite development and porting technology
and has achieved the scale to operate at this level. We also believe that
leveraging carrier and content owner relationships will allow us to grow our
revenues without corresponding percentage growth in our infrastructure and
operating costs. Our revenue growth rate will depend significantly on continued
growth in the mobile content market and our ability to leverage our distribution
and content relationships, as well as to continue to expand. Our ability to
attain profitability will be affected by the extent to which we must incur
additional expenses to expand our sales, marketing, development, and general and
administrative capabilities to grow our business. The largest component of our
expenses is personnel costs. Personnel costs consist of salaries, benefits and
incentive compensation, including bonuses and stock-based compensation, for our
employees. Our operating expenses will continue to grow in absolute dollars,
assuming our revenues continue to grow. As a percentage of revenues, we expect
these expenses to decrease.
  Many new
mobile handset models are released in the fourth calendar quarter to coincide
with the holiday shopping season. Because many end users download our content
soon after they purchase new handsets, we may experience seasonal sales
increases based on this key holiday selling period. However, due to the time
between handset purchases and content purchases, much of this holiday impact may
occur in our March quarter. For a variety of reasons, we may experience seasonal
sales decreases during the summer, particularly in Europe, which is
predominantly reflected in our September quarter. In addition to these possible
seasonal patterns, our revenues may be impacted by new or changed carrier deals,
and by changes in the manner that our major carrier partners market our content
on their deck. Initial spikes in revenues as a result of successful launches or
campaigns may create further aberrations in our revenue patterns.
 
 Cost of
Revenues
  Twistbox’s
cost of revenues historically, and our cost of revenues going forward, consists
primarily of royalties that we pay to content owners from which we license
brands and other intellectual property. In addition, certain other direct costs
such as quality assurance (“QA”) and use of short codes are included in cost of
revenues. Our cost of revenues also includes noncash expenses—amortization of
certain acquired intangible assets, and any impairment of guarantees. We
generally do not pay advance royalties to licensors. Where we acquire rights in
perpetuity or for a specific time period without revenue share or additional
fees, we record the payments made to content owners as prepaid royalties on our
balance sheet when payment is made to the licensor. We recognize royalties in
cost of revenues based upon the revenues derived from the relevant game
multiplied by the applicable royalty rate. If applicable, we will record an
impairment of prepaid royalties or accrue for future guaranteed royalties that
are in excess of anticipated recoupment. At each balance sheet date, we perform
a detailed review of prepaid royalties and guarantees that considers multiple
factors, including forecasted demand, anticipated share for specific content
providers, development and launch plans, and current and anticipated sales
levels. We expense the costs for development of our content prior to
technological feasibility as we incur them throughout the development process,
and we include these costs in product development expenses.
  AMV’s
cost of revenues consist of  license fees paid to content owners for
use of their intellectual property, and the costs of distributing content via
the mobile networks, which may be significant.
   18
 
 Gross
Margin
  Our gross
margin going forward will be determined principally by the mix of content that
we deliver, and the costs of distribution. Our games based on licensed
intellectual property require us to pay royalties to the licensor and the
royalty rates in our licenses vary significantly. Our own in-house developed
games, which are based on our own intellectual property, require no royalty
payments to licensors. For late night business, branded content requires royalty
payment to the licensors, generally on a revenue share basis, while for acquired
content we amortize the cost against revenues, and this will generally result in
a lower cost associated with it. There are multiple internal and external
factors that affect the mix of revenues between games and late night content,
and among licensed, developed and acquired content within those categories,
including the overall number of licensed games and developed games available for
sale during a particular period, the extent of our and our carriers’ marketing
efforts for each type of content, and the deck placement of content on our
carriers’ mobile handsets. We believe the success of any individual game during
a particular period is affected by the recognizability of the title, its
quality, its marketing and media exposure, its overall acceptance by end users
and the availability of competitive games. In the case of Play for Prizes games,
this is further impacted by its suitability to “tournament” play and the prizes
available. For other content, we believe that success is driven by the carrier’s
deck placement, the rating of the content, by quality and by brand recognition.
If our product mix shifts more to licensed games or games with higher royalty
rates, our gross margin would decline. For other content as we increase scale,
we believe that we will have the opportunity to move the mix towards higher
margin acquired product. Our gross margin is also affected by direct costs such
as charges for mobile phone short codes, and QA, and by periodic charges for
impairment of intangible assets and of prepaid royalties and guarantees. These
charges can cause gross margin variations, particularly from quarter to
quarter.
  Operating
Expenses
  Our
operating expenses going forward will primarily include product development
expenses, sales and marketing expenses and general and administrative expenses.
Our product development expenses consist primarily of salaries and benefits for
employees working on creating, developing, editing, programming, porting,
quality assurance, carrier certification and deployment of our content, on
technologies related to interoperating with our various mobile phone carriers
and on our internal platforms, payments to third parties for developing our
content, and allocated facilities costs. We devote substantial resources to the
development, supporting technologies, porting and quality assurance of our
content. We believe that developing games internally through our own development
studios allows us to increase operating margins, leverage the technology we have
developed and better control game delivery. Games development may encompass
development of a game from concept through deployment or adaptation or
rebranding of an existing game. For acquired content, typically we will receive
content from our licensors which must be edited for mobile phone users, combined
with other appropriate content, and packaged for end consumers. The process is
made more complex by the need to deliver content on multiple carriers platforms
and across a large number of different handsets.
  Sales and Marketing.   Sales and marketing expenses historically, and our
sales and marketing expenses going forward, will consist primarily of salaries,
benefits and incentive compensation for sales, business development, project
management and marketing personnel, expenses for advertising, trade shows,
public relations and other promotional and marketing activities, expenses for
general business development activities, travel and entertainment expenses and
allocated facilities costs. We expect sales and marketing expenses to increase
in absolute terms with the growth of our business and as we further promote our
content and expand our carrier network.
 
 General and Administrative.  Our general and administrative expenses historically, and
going forward, will consist primarily of salaries and benefits for general and
administrative personnel, consulting fees, legal, accounting and other
professional fees, information technology costs and allocated facilities costs.
We expect that general and administrative expenses will increase in absolute
terms as we hire additional personnel and incur costs related to the anticipated
growth of our business and our operation as a public company. We also expect
that these expenses will increase because of the additional costs to comply with
the Sarbanes-Oxley Act and related regulation, our efforts to expand our
international operations and, in the near term, additional accounting costs
related to our operation as a public company.
  Amortization of Intangible Assets. We will record amortization of acquired intangible assets that are
directly related to revenue-generating activities as part of our cost of
revenues and amortization of the remaining acquired intangible assets, such as
customer lists and platform, as part of our operating expenses. We will record
intangible assets on our balance sheet based upon their fair value at the time
they are acquired. We will determine the fair value of the intangible assets
using a contribution approach. We will amortize the amortizable intangible
assets using the straight-line method over their estimated useful lives of three
to five years.
  19
 
 Estimates and
Assumptions
  The
preparation of our 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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
  Income
Taxes
  We
provide for deferred income taxes using the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and the tax
effect of net operating loss carry-forwards. A valuation allowance has been
provided as it is more likely than not that the deferred assets will not be
realized.
  Recent Accounting
Pronouncements
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). This statement clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS No. 157 is not
expected to have a material effect on our consolidated results of
operations or financial condition.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities, including an amendment of FASB Statement No.
115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified
election dates, to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value.
Unrealized gains and losses shall be reported on items for which the fair value
option has been elected in earnings at each subsequent reporting date. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157 “Fair Value Measurements”. We are currently assessing
the impact that SFAS No. 159 will have on our financial
statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”), which is an amendment of
Accounting Research Bulletin (“ARB”) No. 51.  This statement clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, we do not expect the
adoption of SFAS No. 160 to have a significant impact on our results of
operations or financial position.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141).  This statement replaces FASB Statement
No. 141, “Business Combinations.” This statement retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting (which
SFAS No. 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. This
statement defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control. This statement requires an acquirer
to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
statement. This statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We do not expect the
adoption of SFAS No. 160 to have a significant impact on our results of
operations or financial position.
  20
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB No. 133,” (“SFAS
161”). SFAS 161 is intended to improve transparency in financial reporting by
requiring enhanced disclosures of an entity’s derivative instruments and hedging
activities and their effects on the entity’s financial position, financial
performance, and cash flows. SFAS 161 applies to all derivative instruments
within the scope of SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (“SFAS 133”). SFAS 161 also applies to non-derivative
hedging instruments and all hedged items designated and qualifying under SFAS
133. SFAS 161 is effective prospectively for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. SFAS 161 encourages, but does not require,
comparative disclosures for periods prior to its initial adoption. The Company
does not expect the adoption of SFAS 161 to have a significant impact on its
results of operations or financial position.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets”.  This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008.  Early adoption is
prohibited.  The impact of the adoption of FSP FAS 142-3 on the
Company’s results of operations and financial position will depend on the nature
and extent of business combinations that it completes, if any, in or after
fiscal 2010.
  Other
recently issued accounting pronouncements are not expected to have a significant
impact on the company’s results of operations or financial
position.
  21




ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a)


(1)The following documents are filed
as part of this Annual Report on Form 10-K.









31.1
                    Certification
      of Ray Schaaf, Principal Executive Officer, pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*31.2
                    Certification
      of Russell Burke, Principal Financial Officer, pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002. *32.1
                    Certification
      of Ray Schaaf, Principal Executive Officer, pursuant to 18 U.S.C. Section
      1350. *32.1
                    Certification
      of Russell Burke, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350.
*


* Filed
herewith


22




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Mandalay
      Media, Inc.Dated: December
      3, 2009By:
                /s/
      Ray SchaafRay
      Schaaf
                  President
                  (Principal
      Executive Officer)




Pursuant
to the requirements of the Exchange Act, this Report has been signed below by
the following persons in the capacities and on the dates indicated.





Signatures
                                                            
                                                            Title
                                                            
                                                            Date/s/
      Robert S. Ellin
                                                            
                                                            Co-
      Chairman of the Board
                                                            
                                                            December
      3, 2009Robert
      S. Ellin/s/
      Peter Guber
                                                            
                                                            Co-Chairman
      of the Board
                                                            
                                                            December
      3, 2009Peter
      Guber/s/
      Ray Schaaf
                                                            
                                                            President,
      Director
                                                            
                                                            December
      3, 2009Ray
      Schaaf
                                                            
                                                            (Principal
      Executive Officer)/s/
      Russell Burke
                                                            
                                                            Chief
      Financial Officer
                                                            
                                                            December
      3, 2009Russell
      Burke
                                                            
                                                            (Principal
      Financial Officer)/s/
      Paul Schaeffer
                                                            
                                                            Director
                                                            
                                                            December
      3, 2009Paul
      Schaeffer/s/
      Richard Spitz
                                                            
                                                            Director
                                                            
                                                            December
      3, 2009Richard
      SpitzDirector
                                                            
                                                            December
      3, 2009Adi
      McAbian/s/
      Keith McCurdy
                                                            
                                                            Director
                                                            
                                                            December
      3, 2009Keith
      McCurdy




23


Page(s)Reports
      of Independent Registered Public Accounting Firms
                      
                      1-2Consolidated
      Balance Sheets for the Successor as of March 31, 2009 and March 31,
      2008
                      
                      3Consolidated
      Statements of Operations for the Successor for the year ended March 31,
      2009,  year ended December 31, 2007, three months ended March
      31, 2008 and 2007; and Predecessor’s period from April 1, 2007 through
      February 12, 2008
                      
                      4Consolidated
      Statements of the Successor’s Stockholders’ Equity and Comprehensive Loss
      for  the year ended March 31, 2009
                      
                      5Consolidated
      Statements of Cash Flows for the Successor’s year ended March 31, 2009,
      the year ended December 31, 2008, the three months ended March 31, 2008
      and 2007, and  the Predecessor’s period from April 1, 2007
      through February 12, 2008
                      
                      6Notes
      to Consolidated Financial Statements
                      
                      7-35
 
 
 Report of
Independent Registered Public Accounting Firm
 
 Twistbox
Entertainment, Inc. and Subsidiaries
 Los
Angeles, California
 
 We have
audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the period April 1, 2007 through
February 12, 2008 of Twistbox Entertainment, Inc. and
Subsidiaries.   These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of the Company's operations and its cash flows
for the period April 1, 2007 through February 12, 2008, in conformity with U.S.
generally accepted accounting principles.
 
 /s/Crowe Horwath LLP.Crowe
      Horwath LLP.Sherman
      Oaks, CaliforniaNovember 30,
      2009
  
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors
  Mandalay
Media, Inc. (Formerly Mediavest, Inc.)
  We have
audited the accompanying statements of operations, stockholders’ equity and cash
flows of Mandalay Media, Inc. (formerly Mediavest, Inc.) for the year ended
December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects the results of Mandalay Media, Inc.’s operations and cash
flows for the year ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
  /s/
      Raich Ende Malter & Co. LLPRaich
      Ende Malter & Co. LLPNew
      York, New YorkApril
      11, 2008
 
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors
 Mandalay
Media, Inc. and Subsidiaries
 Los
Angeles, California
 
 We have
audited the accompanying consolidated balance sheet of  Mandalay
Media, Inc. and Subsidiaries  (the “Company”) as of March 31, 2008 and
the related consolidated statements of operations, stockholders’ equity and cash
flows for the three months then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Mandalay Media, Inc. and
Subsidiaries as of March 31, 2008, and the results of its operations and its
cash flows for the three months then ended in conformity with accounting
principles generally accepted in the United States of America.
  /s/
GROBSTEIN, HORWATH & COMPANY LLP
 
 Sherman
Oaks, California
 July 8,
2008
 
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors
 Mandalay
Media, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheet of Mandalay Media, Inc. and
Subsidiaries (collectively,  the “Company”) as of March 31, 2009, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended . These consolidated financial statements are
the responsibility of the Company's management.  Our responsibility is
to express an opinion on these financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
2009, and the results of its operations and its cash flows for the year ended
March 31, 2009, in conformity with generally accepted accounting principles in
the United States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in
Note 3 to the consolidated financial statements, certain factors give rise
to substantial doubt about the Company's ability to continue as a going
concern.  Management's plans in regard to these matters are also
described in Note 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 We were
not engaged to examine management's assessment of the effectiveness of the
Company’s internal control over financial reporting as of March 31, 2009,
included in the Form 10-K annual report and, accordingly, we do not express an
opinion thereon.
 
 SingerLewak
LLP
 
 Los
Angeles, California
 July 14,
2009
 
  Mandalay
      Media, Inc. and Subsidiaries
                    3Consolidated
      Balance Sheets
 (In
thousands, except share amounts)
 
 SuccessorMarch
      31,
                                                      
                                                      
                                                      March
      31,2009
                                                      
                                                      
                                                      2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                                                      
                                                      $
                                                      5,927
                                                      
                                                      
                                                      $
                                                      10,936Accounts
      receivable, net of allowances of $174 and $168
respectively
                                                      
                                                      
                                                      10,745
                                                      
                                                      
                                                      
                                                      6,162Prepaid
      expenses and other current assets
                                                      
                                                      
                                                      1,334
                                                      
                                                      
                                                      
                                                      531Total
      current assets
                                                      
                                                      
                                                      18,006
                                                      
                                                      
                                                      
                                                      17,629Property
      and equipment, net
                                                      
                                                      
                                                      1,230
                                                      
                                                      
                                                      
                                                      1,037Other
      long-term assets
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      301Intangible
      assets, net
                                                      
                                                      
                                                      16,121
                                                      
                                                      
                                                      
                                                      19,780Goodwill
                                                      
                                                      
                                                      55,833
                                                      
                                                      
                                                      
                                                      61,377TOTAL
      ASSETS
                                                      
                                                      $
                                                      91,190
                                                      
                                                      
                                                      $
                                                      100,124LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                                                      
                                                      $
                                                      9,557
                                                      
                                                      
                                                      $
                                                      2,399Accrued
      license fees
                                                      
                                                      
                                                      2,795
                                                      
                                                      
                                                      
                                                      3,833Accrued
      compensation
                                                      
                                                      
                                                      592
                                                      
                                                      
                                                      
                                                      688Current
      portion of long term debt
                                                      
                                                      
                                                      23,296
                                                      
                                                      
                                                      
                                                      248Other
      current liabilities
                                                      
                                                      
                                                      5,899
                                                      
                                                      
                                                      
                                                      2,087Total
      current liabilities
                                                      
                                                      
                                                      42,139
                                                      
                                                      
                                                      
                                                      9,255Accrued
      license fees, long term portion
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,337Long
      term debt, net of current portion
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      16,483Other
      long-term liabilities
                                                      
                                                      
                                                      27
                                                      
                                                      
                                                      
                                                      -Total
      liabilities
                                                      
                                                      $
                                                      42,166
                                                      
                                                      
                                                      
                                                      27,075Commitments
      and contingencies (Note 14)Stockholders'
      equityPreferred
      stockSeries
      A Convertible Preferred Stock at $0.0001 par value; 100,000 shares
      authorized, issued and outstanding (liquidation preference of
      $1,000,000)
                                                      
                                                      
                                                      100
                                                      
                                                      
                                                      
                                                      100Common
      stock, $0.0001 par value: 100,000,000 shares authorized;39,653,125
      issued and outstanding at March 31, 2009;32,149,089
      issued and outstanding at March 31, 2008;
                                                      
                                                      
                                                      4
                                                      
                                                      
                                                      
                                                      3Additional
      paid-in capital
                                                      
                                                      
                                                      93,918
                                                      
                                                      
                                                      
                                                      76,154Accumulated
      other comprehensive income/(loss)
                                                      
                                                      
                                                      (129
                                                      )
                                                      
                                                      
                                                      61Accumulated
      deficit
                                                      
                                                      
                                                      (44,869
                                                      )
                                                      
                                                      
                                                      (3,269
                                                      )Total
      stockholders' equity
                                                      
                                                      
                                                      49,024
                                                      
                                                      
                                                      
                                                      73,049TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                      
                                                      $
                                                      91,190
                                                      
                                                      
                                                      $
                                                      100,124
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  
  Mandalay
      Media, Inc. and Subsidiaries
                  4Consolidated
      Statement of Operations
 (In
thousands, except per share amounts)
 
 Successor
                                      
                                      
                                      PredecessorYear
      Ended March
                                        31,
                                        2009
                                      
                                      
                                      Year
      Ended
                                        December
                                        31,
      2007
                                      
                                      
                                      3
      Months Ended
                                        March
      31,
                                        2008
                                      
                                      
                                      3
      Months Ended
                                        March
      31,
                                        2007
                                      
                                      
                                      Period
      From
                                        April
      1, 2007 Through
                                        February
      12, 2008(unaudited)Net
      Revenues
                                      
                                      $
                                      31,256
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      3,208
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      12,282Cost
      of revenuesLicense
      fees
                                      
                                      
                                      7,387
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,539
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,491Adjustment
      to impairment of guarantees
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,745
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Other
      direct cost of revenues
                                      
                                      
                                      3,763
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      53
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      26Total
      cost of revenues
                                      
                                      
                                      11,150
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (153
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,517Gross
      profit
                                      
                                      
                                      20,106
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,361
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,765Operating
      expensesProduct
      development
                                      
                                      
                                      6,981
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      946
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,897Sales
      and marketing
                                      
                                      
                                      9,236
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      891
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,905General
      and administrative
                                      
                                      
                                      10,338
                                      
                                      
                                      
                                      2,521
                                      
                                      
                                      
                                      1,467
                                      
                                      
                                      
                                      (264
                                      )
                                      
                                      
                                      3,789Amortization
      of intangible assets
                                      
                                      
                                      628
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      72
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      119Impairment
      of goodwill and intangible assets
                                      
                                      
                                      31,784
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Total
      operating expenses
                                      
                                      
                                      58,967
                                      
                                      
                                      
                                      2,521
                                      
                                      
                                      
                                      3,376
                                      
                                      
                                      
                                      (264
                                      )
                                      
                                      
                                      14,710(loss)
      / income from continuing operations
                                      
                                      
                                      (38,861
                                      )
                                      
                                      
                                      (2,521
                                      )
                                      
                                      
                                      (15
                                      )
                                      
                                      
                                      264
                                      
                                      
                                      
                                      (7,945
                                      )Interest
      and other income/(expense)Interest
      income
                                      
                                      
                                      141
                                      
                                      
                                      
                                      317
                                      
                                      
                                      
                                      97
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      214Interest
      (expense)
                                      
                                      
                                      (2,302
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (310
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,073
                                      )Foreign
      exchange transaction gain (loss)
                                      
                                      
                                      (471
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      170Other
      (expense)
                                      
                                      
                                      (71
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (56
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (193
                                      )Interest
      and other income/(expense)
                                      
                                      
                                      (2,703
                                      )
                                      
                                      
                                      317
                                      
                                      
                                      
                                      (267
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (882
                                      )Net
      (loss) / income from continuing operations before income
    taxes
                                      
                                      
                                      (41,564
                                      )
                                      
                                      
                                      (2,204
                                      )
                                      
                                      
                                      (282
                                      )
                                      
                                      
                                      264
                                      
                                      
                                      
                                      (8,827
                                      )Income
      tax benefit / (provision)
                                      
                                      
                                      111
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (16
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (56
                                      )Net
      (loss) / income from continuing operations net of taxes
                                      
                                      
                                      (41,453
                                      )
                                      
                                      
                                      (2,204
                                      )
                                      
                                      
                                      (298
                                      )
                                      
                                      
                                      264
                                      
                                      
                                      
                                      (8,883
                                      )Discontinued
      operations, net of taxes:Loss
      from discontinued operations, net of taxes
                                      
                                      
                                      (147
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Net
      (loss) / income
                                      
                                      $
                                      (41,600
                                      )
                                      
                                      $
                                      (2,204
                                      )
                                      
                                      $
                                      (298
                                      )
                                      
                                      $
                                      264
                                      
                                      
                                      $
                                      (8,883
                                      )Comprehensive
      (loss) / income
                                      
                                      $
                                      (41,790
                                      )
                                      
                                      $
                                      (2,204
                                      )
                                      
                                      $
                                      (237
                                      )
                                      
                                      $
                                      264
                                      
                                      
                                      $
                                      (8,762
                                      )Basic
      and Diluted net loss per common shareContinuing
      operations
                                      
                                      $
                                      (1.14
                                      )
                                      
                                      $
                                      (0.12
                                      )
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      0.02
                                      
                                      
                                      $
                                      (1.14
                                      )Discontinued
      operations
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -Net
      (loss) / income
                                      
                                      $
                                      (1.15
                                      )
                                      
                                      $
                                      (0.12
                                      )
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      0.02
                                      
                                      
                                      $
                                      (1.14
                                      )Weighted
      average common shares outstanding, basic and diluted
                                      
                                      
                                      36,264
                                      
                                      
                                      
                                      18,997
                                      
                                      
                                      
                                      21,628
                                      
                                      
                                      
                                      16,730
                                      
                                      
                                      
                                      7,786
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  
  Mandalay
      Media, Inc. and Subsidiaries
                    5Consolidated
      Statements of Stockholders’ Equity
 (In
thousands)
 Year
Ended March 31, 2009; Three Months Ended March 31, 2008 and Year Ended December
31, 2007
  AccumulatedAdditional
                                                                          
                                                                          
                                                                          Other
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          TotalCommon Stock
                                                                          
                                                                          
                                                                          Preferred Stock
                                                                          
                                                                          
                                                                          Paid-In
                                                                          
                                                                          
                                                                          Comprehensive
                                                                          
                                                                          
                                                                          Accumulated
                                                                          
                                                                          
                                                                          Stockholders'
                                                                          
                                                                          
                                                                          ComprehensiveSuccessor
                                                                          
                                                                          Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          Capital
                                                                          
                                                                          
                                                                          Income/(Loss)
                                                                          
                                                                          
                                                                          Deficit
                                                                          
                                                                          
                                                                          Equity
                                                                          
                                                                          
                                                                          LossBalance
      at December 31, 2006
                                                                          
                                                                          
                                                                          16,730,000
                                                                          
                                                                          
                                                                          $
                                                                          2
                                                                          
                                                                          
                                                                          
                                                                          100,000
                                                                          
                                                                          
                                                                          $
                                                                          100
                                                                          
                                                                          
                                                                          $
                                                                          6,309
                                                                          
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          (767
                                                                          )
                                                                          
                                                                          $
                                                                          5,644Net
      Loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (2,204
                                                                          )
                                                                          
                                                                          
                                                                          (2,204
                                                                          )
                                                                          
                                                                          
                                                                          (2,204
                                                                          )Issuance
      of common stock (net of offering costs of $27)
                                                                          
                                                                          
                                                                          5,000,000
                                                                          
                                                                          
                                                                          
                                                                          1
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,472
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,473Cashless
      exercise of warrants
                                                                          
                                                                          
                                                                          238,797
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (0
                                                                          )
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          -Deferred
      stock-based compensation
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1,036
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1,036Comprehensive
      loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          (2,204
                                                                          )Balance
      at December 31, 2007
                                                                          
                                                                          
                                                                          21,968,797
                                                                          
                                                                          
                                                                          $
                                                                          3
                                                                          
                                                                          
                                                                          
                                                                          100,000
                                                                          
                                                                          
                                                                          $
                                                                          100
                                                                          
                                                                          
                                                                          $
                                                                          9,817
                                                                          
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          (2,971
                                                                          )
                                                                          
                                                                          $
                                                                          6,949Net
      Loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (298
                                                                          )
                                                                          
                                                                          
                                                                          (298
                                                                          )
                                                                          
                                                                          
                                                                          (298
                                                                          )Issuance
      of common stock in connection with the merger
                                                                          
                                                                          
                                                                          10,180,292
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          48,356
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          48,356Assumption
      of employee stock options in connection with the merger
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          11,019
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          11,019Issuance
      of new employee stock options in connection with the
merger
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3,938
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3,938Issuance
      of warrants to lender in connection with the merger
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,711
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,711Foreign
      currency translation gain/(loss)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          61
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          61
                                                                          
                                                                          
                                                                          
                                                                          61Deferred
      stock-based compensation
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          313
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          313Comprehensive
      loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          (237
                                                                          )Balance
      at March 31, 2008
                                                                          
                                                                          
                                                                          32,149,089
                                                                          
                                                                          
                                                                          $
                                                                          3
                                                                          
                                                                          
                                                                          
                                                                          100,000
                                                                          
                                                                          
                                                                          $
                                                                          100
                                                                          
                                                                          
                                                                          $
                                                                          76,154
                                                                          
                                                                          
                                                                          $
                                                                          61
                                                                          
                                                                          
                                                                          $
                                                                          (3,269
                                                                          )
                                                                          
                                                                          $
                                                                          73,049Net
      Loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (41,600
                                                                          )
                                                                          
                                                                          
                                                                          (41,600
                                                                          )
                                                                          
                                                                          
                                                                          (41,600
                                                                          )Issuance
      of common stock in satisfaction of payable
                                                                          
                                                                          
                                                                          70,000
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          179
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          179Issuance
      of common stock on cashless exercise of warrants
                                                                          
                                                                          
                                                                          565,188
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          0Issuance
      of common stock related to acquisition
                                                                          
                                                                          
                                                                          4,499,997
                                                                          
                                                                          
                                                                          
                                                                          1
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          9,899
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          9,900Adjustment
      in valuation of warrants  in connection with the
      acquisition
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          377
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          377Issuance
      of common stock net of issuance costs
                                                                          
                                                                          
                                                                          1,685,394
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          4,354
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          4,354Issuance
      of common stock as part of compensation
                                                                          
                                                                          
                                                                          683,457
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          155
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          155Foreign
      currency translation gain/(loss)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (190
                                                                          )
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (190
                                                                          )
                                                                          
                                                                          
                                                                          (190
                                                                          )Deferred
      stock-based compensation
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,800
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,800Comprehensive
      loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          (41,790
                                                                          )Balance
      at March 31, 2009
                                                                          
                                                                          
                                                                          39,653,125
                                                                          
                                                                          
                                                                          $
                                                                          4
                                                                          
                                                                          
                                                                          
                                                                          100,000
                                                                          
                                                                          
                                                                          $
                                                                          100
                                                                          
                                                                          
                                                                          $
                                                                          93,918
                                                                          
                                                                          
                                                                          $
                                                                          (129
                                                                          )
                                                                          
                                                                          $
                                                                          (44,869
                                                                          )
                                                                          
                                                                          $
                                                                          49,024AccumulatedAdditional
                                                                          
                                                                          
                                                                          Other
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          TotalCommon
      Stock
                                                                          
                                                                          
                                                                          Preferred
      Stock
                                                                          
                                                                          
                                                                          Paid-In
                                                                          
                                                                          
                                                                          Comprehensive
                                                                          
                                                                          
                                                                          Accumulated
                                                                          
                                                                          
                                                                          Stockholders'
                                                                          
                                                                          
                                                                          ComprehensivePredecessor
                                                                          
                                                                          Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          Shares
                                                                          
                                                                          
                                                                          Amount
                                                                          
                                                                          
                                                                          Capital
                                                                          
                                                                          
                                                                          Income/(Loss)
                                                                          
                                                                          
                                                                          Deficit
                                                                          
                                                                          
                                                                          Equity
      (Deficit)
                                                                          
                                                                          
                                                                          LossBalance,
      March 31, 2007
                                                                          
                                                                          
                                                                          7,785,716
                                                                          
                                                                          
                                                                          
                                                                          8
                                                                          
                                                                          
                                                                          
                                                                          3,092,649
                                                                          
                                                                          
                                                                          
                                                                          32
                                                                          
                                                                          
                                                                          
                                                                          13,267
                                                                          
                                                                          
                                                                          
                                                                          17
                                                                          
                                                                          
                                                                          
                                                                          (18,893
                                                                          )
                                                                          
                                                                          
                                                                          (5,569
                                                                          )Issuance
      of preferred stock series B-1
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          436,680
                                                                          
                                                                          
                                                                          
                                                                          4
                                                                          
                                                                          
                                                                          
                                                                          2,996
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          3,000Deferred
      stock-based compensation
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          422
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          422Conversion
      of warrants in connection with debt financing
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          20
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          20Foreign
      currency translation gain (loss)
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          121
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          121
                                                                          
                                                                          
                                                                          
                                                                          121Net
      loss
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (8,883
                                                                          )
                                                                          
                                                                          
                                                                          (8,883
                                                                          )
                                                                          
                                                                          
                                                                          (8,883
                                                                          )Comprehensive
      loss
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          (8,762
                                                                          )Balance,
      February 12, 2008
                                                                          
                                                                          
                                                                          7,785,716
                                                                          
                                                                          
                                                                          $
                                                                          8
                                                                          
                                                                          
                                                                          
                                                                          3,529,329
                                                                          
                                                                          
                                                                          $
                                                                          36
                                                                          
                                                                          
                                                                          $
                                                                          16,705
                                                                          
                                                                          
                                                                          $
                                                                          138
                                                                          
                                                                          
                                                                          $
                                                                          (27,776
                                                                          )
                                                                          
                                                                          $
                                                                          (10,889
                                                                          )
 The
accompanying notes are an integral part of these consolidated financial
statements
 
 
 Mandalay
      Media, Inc. and Subsidiaries
                    6Consolidated
      Statements of Cash Flows
 (In
thousands)
 
 Successor
                            
                            
                            PredecessorYear Ended
                              March 31,
                              2009
                            
                            
                            Year Ended
                              December
                              31, 2007
                            
                            
                            3 Months
                              Ended
                              March 31,
                              2008
                            
                            
                            3 Months
                              Ended
                              March 31,
                              2007
                            
                            
                            Period From
                              April 1, 2007 Through
                              February 12, 2008(unaudited)Cash
      flows from operating activitiesNet
      loss
                            
                            $
                            (41,600
                            )
                            
                            $
                            (2,204
                            )
                            
                            $
                            (298
                            )
                            
                            $
                            (264
                            )
                            
                            $
                            (8,883
                            )Less:
      Loss from discontinued operations, net of taxes
                            
                            
                            (147
                            )Net
      loss from continuing operations, net of taxes
                            
                            
                            (41,453
                            )
                            
                            
                            (2,204
                            )
                            
                            
                            (298
                            )
                            
                            
                            (264
                            )
                            
                            
                            (8,883
                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                            
                            
                            1,518
                            
                            
                            
                            -
                            
                            
                            
                            253
                            
                            
                            
                            -
                            
                            
                            
                            390Allowance
      for doubtful accounts
                            
                            
                            6
                            
                            
                            
                            -
                            
                            
                            
                            168
                            
                            
                            
                            -
                            
                            
                            
                            22Stock-based
      compensation
                            
                            
                            2,955
                            
                            
                            
                            1,036
                            
                            
                            
                            313
                            
                            
                            
                            -
                            
                            
                            
                            422Impairment
      of goodwill and intangibles
                            
                            
                            31,784
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -(Increase)
      / decrease in assets:Accounts
      receivable
                            
                            
                            4,489
                            
                            
                            
                            -
                            
                            
                            
                            (1,364
                            )
                            
                            
                            -
                            
                            
                            
                            (112
                            )Prepaid
      expenses and other
                            
                            
                            (312
                            )
                            
                            
                            -
                            
                            
                            
                            (222
                            )
                            
                            
                            -
                            
                            
                            
                            (663
                            )Increase
      / (decrease) in liabilities:Accounts
      payable
                            
                            
                            (3,280
                            )
                            
                            
                            349
                            
                            
                            
                            352
                            
                            
                            
                            (61
                            )
                            
                            
                            451Accrued
      license fees
                            
                            
                            (1,039
                            )
                            
                            
                            -
                            
                            
                            
                            (2,043
                            )
                            
                            
                            -
                            
                            
                            
                            (2,469
                            )Accrued
      compensation
                            
                            
                            (96
                            )
                            
                            
                            -
                            
                            
                            
                            (128
                            )
                            
                            
                            -
                            
                            
                            
                            122Other
      liabilities
                            
                            
                            68
                            
                            
                            
                            -
                            
                            
                            
                            487
                            
                            
                            
                            -
                            
                            
                            
                            (215
                            )Other
      asset
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (361
                            )Net
      cash used in operating activities
                            
                            
                            (5,360
                            )
                            
                            
                            (819
                            )
                            
                            
                            (2,482
                            )
                            
                            
                            (325
                            )
                            
                            
                            (11,296
                            )Cash
      flows from investing activitiesPurchase
      of property and equipment
                            
                            
                            (219
                            )
                            
                            
                            -
                            
                            
                            
                            (103
                            )
                            
                            
                            -
                            
                            
                            
                            (307
                            )Transaction
      costs
                            
                            
                            (802
                            )
                            
                            
                            (141
                            )
                            
                            
                            (424
                            )
                            
                            
                            -
                            
                            
                            
                            -Cash
      used in acquisition of subsidiary
                            
                            
                            (6,132
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Cash
      acquired with acquisition of subsidiary
                            
                            
                            3,380
                            
                            
                            
                            -
                            
                            
                            
                            6,679
                            
                            
                            
                            -
                            
                            
                            
                            -Proceeds
      from notes receivable
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            106Proceeds
      from related party advance
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            20Purchase
      of intangible asset
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (26
                            )Net
      cash (used in) provided by investing activities
                            
                            
                            (3,773
                            )
                            
                            
                            (141
                            )
                            
                            
                            6,152
                            
                            
                            
                            -
                            
                            
                            
                            (207
                            )Cash
      flows from financing activitiesProceeds
      from the sale of common stock (net of issuance costs of
    $146)
                            
                            
                            4,354
                            
                            
                            
                            2,473
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Instalment
      payments related to prior acquisition
                            
                            
                            (54
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Proceeds
      from the issuance of debt, net of costs
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            16,480Repayment
      of debt
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,017
                            )Proceeds
      from the sale of Series B-1 preferred stock
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,000Net
      cash provided by financing activities
                            
                            
                            4,300
                            
                            
                            
                            2,473
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            17,463Effect
      of exchange rate changes on cash and cash equivalents
                            
                            
                            (176
                            )
                            
                            
                            -
                            
                            
                            
                            11
                            
                            
                            
                            -
                            
                            
                            
                            88Net
      increase/(decrease) in cash and cash equivalents
                            
                            
                            (5,009
                            )
                            
                            
                            1,513
                            
                            
                            
                            3,681
                            
                            
                            
                            (325
                            )
                            
                            
                            6,048Cash
      and cash equivalents, beginning of period
                            
                            
                            10,936
                            
                            
                            
                            5,742
                            
                            
                            
                            7,255
                            
                            
                            
                            5,742
                            
                            
                            
                            631Cash
      and cash equivalents, end of period
                            
                            $
                            5,927
                            
                            
                            $
                            7,255
                            
                            
                            $
                            10,936
                            
                            
                            $
                            5,417
                            
                            
                            $
                            6,679Supplemental
      disclosure of cash flow information:Interest
      paid
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,073Taxes
      paid
                            
                            
                            561
                            
                            
                            
                            -
                            
                            
                            
                            16
                            
                            
                            
                            -
                            
                            
                            
                            61Noncash
      investing and financing activities:Acquisition
      of subsidiary
                            
                            
                            16,047
                            
                            
                            
                            -
                            
                            
                            
                            66,025
                            
                            
                            
                            -
                            
                            
                            
                            -
 
 The
accompanying notes are an integral part of these consolidated financial
statements
 Mandalay
      Media, Inc. and Subsidiaries
                      7Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
  1.
                  Organization
 
 Mandalay
Media, Inc. (the “Company”), formerly Mediavest, Inc., was originally
incorporated in the state of Delaware on November 6, 1998 under the name eB2B
Commerce, Inc. On April 27, 2000, it merged into DynamicWeb Enterprises Inc., a
New Jersey corporation, the surviving company, and changed its name to eB2B
Commerce, Inc. On April 13, 2005, the Company changed its name to Mediavest,
Inc. Through January 26, 2005, the Company and its former subsidiaries were
engaged in providing business-to-business transaction management services
designed to simplify trading between buyers and suppliers. The Company was
inactive from January 26, 2005 until its merger with Twistbox Entertainment,
Inc., February 12, 2008 (Note 6).  On September 14, 2007, the Company
was re-incorporated in the state of Delaware as Mandalay Media,
Inc.
 
 On
November 7, 2007, Mediavest merged into its wholly-owned, newly formed
subsidiary, Mandalay, with Mandalay as the surviving corporation. Mandalay
issued: (1) one new share of common stock in exchange for each share of
Mediavest’s outstanding common stock and (2) one new share of preferred
stock in exchange for each share of Mediavest’s outstanding preferred stock
as of November 7, 2007. Mandalay’s preferred and common stock had the same
status and par value as the respective stock of Mediavest and Mandalay acceded
to all the rights, acquired all the assets and assumed all of the liabilities of
Mediavest.
 
 On
February 12, 2008, the Company completed a merger (the “Merger”) with Twistbox
Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding capital
stock of Twistbox for 10,180 shares of common stock of the Company. In
connection with the Merger, the Company assumed all the outstanding options
under Twistbox’s Stock Incentive Plan by the issuance of options to purchase
2,463 shares of common stock of the Company, including 2,145 vested and 319
unvested options.
 
 After the
Merger, Twistbox became a wholly-owned subsidiary of the Company, and the
company’s only active subsidiary at that time.  Twistbox Entertainment
Inc. (formerly known as The WAAT Corporation) is incorporated in the State of
Delaware.
 
 Twistbox
is considered the Predecessor entity and therefore, the accompanying
consolidated statements of operations, stockholders’ equity and cash flows are
presented for two periods: Predecessor and Successor, which relate to the period
preceding the February 12, 2008 transaction and the period succeeding that date,
respectively. The Company refers to the operations of Mandalay Media, Inc. and
subsidiaries for both the Predecessor and Successor periods.
 
 Twistbox
is a global publisher and distributor of branded entertainment content,
including images, video, TV programming and games, for Third Generation (3G)
mobile networks.  Twistbox publishes and distributes its content in a
number of countries.  Since operations began in 2003, Twistbox has
developed an intellectual property portfolio that includes mobile rights to
global brands and content from leading film, television and lifestyle content
publishing companies. Twistbox has built a proprietary mobile publishing
platform that includes: tools that automate handset portability for the
distribution of images and video; a mobile games development suite that
automates the porting of mobile games and applications to multiple handsets; and
a content standards and ratings system globally adopted by major wireless
carriers to assist with the responsible deployment of age-verified
content.  Twistbox has distribution agreements with many of the
largest mobile operators in the world. Twistbox is headquartered in the Los
Angeles area and has offices in Europe and South America that provide local
sales and marketing support for both mobile operators and third party
distribution in their respective regions.
  
  Mandalay
      Media, Inc. and Subsidiaries
                      8Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
 On
October 23, 2008 the Company completed an acquisition of 100% of the issued and
outstanding share capital of AMV Holding Limited, a United Kingdom private
limited company (“AMV”), and 80% of the issued and outstanding share capital of
Fierce Media Ltd (“Fierce”).
 
 In
consideration for the shares, and subject to adjustment as set forth in the
Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a)
$5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid shares of Common
Stock (the “Stock Consideration”); (c) a secured promissory note in the
aggregate original principal amount of $5,375 (the “Note”); and (d) additional
earn-out amounts, if any, if the Acquired Companies achieve certain targeted
earnings for each of the periods from October 1, 2008 to March 31, 2009, April
1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as
determined in accordance with the Agreement. The Purchase Price was subject to
certain adjustments based on the working capital of AMV, to be determined
initially within 75 days of the closing, and subsequently within 60 days
following June 30, 2009. Any such adjustment of the Purchase Price will be made
first by means of an adjustment to the principal sum due under the Note, as set
forth in the Agreement. An initial adjustment of $443 was made subsequent to
closing, and has been added to the Note. The initial period earn-out has been
recognized in the current period and has been added to the amount of
consideration for the acquisition, as described in Note 6.
 
 AMV is a
leading mobile media and marketing company delivering games and lifestyle
content directly to consumers in the United Kingdom, Australia, South Africa and
various other European countries. AMV markets its well established branded
services through a unique Customer Relationship Management (CRM) platform that
drives revenue through mobile internet, print and TV advertising. AMV is
headquartered in Marlow, outside of London in the United Kingdom.
 
 2.
                    Summary
      of Significant Accounting
Policies
 
 Basis
of Presentation
 The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”) for
annual financial statements.  The financial statements, in the opinion
of management, include all adjustments necessary for a fair statement of the
results of operations, financial position and cash flows for each period
presented. The financial statements for the period ended March 31, 2008 and as
at March 31, 2008 represent the results of the Company prior to the merger
described in Note 6, and consolidated results subsequent to the merger; and the
consolidated position of the group at the end of the period.
  Principles
of Consolidation
 The
consolidated financial statements include the accounts of the Company and our
wholly-owned subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation.
 
 Revenue
Recognition
 The
Company’s revenues are derived primarily by licensing material and software in
the form of products (Image Galleries, Wallpapers, video, WAP Site access,
Mobile TV) and mobile games. License arrangements with the end user can be on a
perpetual or subscription basis.
  
  Mandalay
      Media, Inc. and Subsidiaries
                      9Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
 A
perpetual license gives an end user the right to use the product, image or game
on the registered handset on a perpetual basis. A subscription license gives an
end user the right to use the product, image or game on the registered handset
for a limited period of time, ranging from a few days to as long as one
month.
 
 The
Company either markets and distributes its products directly to consumers, or
distributes products through mobile telecommunications service providers
(carriers), in which case the carrier markets the product, images or games to
end users. License fees for perpetual and subscription licenses are usually
billed upon download of the product, image or game by the end user. In the case
of subscriber licenses, many subscriber agreements provide for automatic renewal
until the subscriber opts-out, while others provide opt-in renewal. In either
case, subsequent billings for subscription licenses are generally billed
monthly. The Company applies the provisions of Statement of Position 97-2, Software Revenue Recognition,
as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions, to all transactions.
 
 Revenues
are recognized from the Company’s products, images and games when persuasive
evidence of an arrangement exists, the product, image or game has been
delivered, the fee is fixed or determinable, and the collection of the resulting
receivable is probable. For both perpetual and subscription licenses, management
considers a signed license agreement to be evidence of an arrangement with a
carrier and a “clickwrap” agreement to be evidence of an arrangement with an end
user. For these licenses, the Company defines delivery as the download of the
product, image or game by the end user.
 
 The
Company estimates revenues from carriers in the current period when reasonable
estimates of these amounts can be made. Most carriers only provide detailed
sales transaction data on a one to two month lag. Estimated revenue is treated
as unbilled receivables until the detailed reporting is received and the
revenues can be billed. Some carriers provide reliable interim preliminary
reporting and others report sales data within a reasonable time frame following
the end of each month, both of which allow the Company to make reasonable
estimates of revenues and therefore to recognize revenues during the reporting
period when the end user licenses the product, image or game. Determination of
the appropriate amount of revenue recognized involves judgments and estimates
that the Company believes are reasonable, but it is possible that actual results
may differ from the Company’s estimates. The Company’s estimates for revenues
include consideration of factors such as preliminary sales data,
carrier-specific historical sales trends, volume of activity on company
monitored sites, seasonality, time elapsed from launch of services or product
lines, the age of games and the expected impact of newly launched games,
successful introduction of new handsets, growth of 3G subscribers by carrier,
promotions during the period and economic trends. When the Company receives the
final carrier reports, to the extent not received within a reasonable time frame
following the end of each month, the Company records any differences between
estimated revenues and actual revenues in the reporting period when the Company
determines the actual amounts. Revenues earned from certain carriers may not be
reasonably estimated. If the Company is unable to reasonably estimate the amount
of revenues to be recognized in the current period, the Company recognizes
revenues upon the receipt of a carrier revenue report and when the Company’s
portion of licensed revenues are fixed or determinable and collection is
probable. To monitor the reliability of the Company’s estimates, management,
where possible, reviews the revenues by country by carrier and by product line
on a regular basis to identify unusual trends such as differential adoption
rates by carriers or the introduction of new handsets. If the Company deems a
carrier not to be creditworthy, the Company defers all revenues from the
arrangement until the Company receives payment and all other revenue recognition
criteria have been met.
  
  Mandalay
      Media, Inc. and Subsidiaries
                  10Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
  In
accordance with Emerging Issues Task Force, or EITF Issue No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, the Company recognizes as revenues the
amount the carrier reports as payable upon the sale of the Company’s products,
images or games. The Company has evaluated its carrier agreements and has
determined that it is not the principal when selling its products, images or
games through carriers. Key indicators that it evaluated to reach this
determination include:
 •
                    wireless
      subscribers directly contract with the carriers, which have most of the
      service interaction
      and are generally viewed as the primary obligor by the
      subscribers;
 •
                  carriers
      generally have significant control over the types of content that they
      offer to their subscribers;
 •
                  carriers
      are directly responsible for billing and collecting fees from their
      subscribers, including the resolution of billing
  disputes;
 •
                  carriers
      generally pay the Company a fixed percentage of their revenues or a fixed
      fee for each
      game;
 •
                  carriers
      generally must approve the price of the Company’s content in advance of
      their sale to subscribers, and the Company’s more significant carriers
      generally have the ability to set the ultimate price charged to their
      subscribers; and
 •
                  The
      Company has limited risks, including no inventory risk and limited credit
      risk
 
 For
direct to consumer business, revenue is earned by delivering a product or
service directly to the end user of that product or service. In those cases the
Company records as revenue the amount billed to that end user and recognizes the
revenue when persuasive evidence of an arrangement exists, the product, image or
game has been delivered, the fee is fixed or determinable, and the collection of
the resulting receivable is probable.
 
 Net
Income (Loss) per Common Share
 Basic
income (loss) per common share is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per share is
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding for the period plus
dilutive common stock equivalents, using the treasury stock method. Potentially
dilutive shares from stock options and warrants and the conversion of the Series
A preferred stock for the year ended March 31, 2009, the three months ended
March 31, 2008 and the year ended December 31, 2007 consisted of 2,478;
4,415 and 1,592 shares, respectively, and were not included in the computation
of diluted loss per share as they were anti-dilutive in each
period.
 
 Comprehensive
Income/(Loss)
 Comprehensive
income/(loss) consists of two components, net income/(loss) and other
comprehensive income/(loss). Other comprehensive income/(loss) refers to gains
and losses that under generally accepted accounting principles are recorded as
an element of stockholders’ equity but are excluded from net income/(loss). The
Company’s other comprehensive income/(loss) currently includes only foreign
currency translation adjustments.
 
 Cash
and Cash Equivalents
 The
Company considers all highly liquid short-term investments purchased with a
maturity of three months or less to be cash equivalents.
 
 Mandalay
      Media, Inc. and Subsidiaries
                    11Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
 Content
Provider Licenses
 
 Content
Provider License Fees and Minimum Guarantees
 The
Company’s royalty expenses consist of fees that it pays to branded content
owners for the use of
their intellectual property in the development of the Company’s games and other
content, and other expenses directly incurred in earning revenue. Royalty-based
obligations are either accrued as incurred and subsequently paid, or in the case
of longer term content acquisitions, paid in advance and capitalized on the
balance sheet as prepaid royalties. These royalty-based obligations are expensed
to cost of revenues either at the applicable contractual rate related to that
revenue or over the estimated life of the prepaid royalties. Advanced license
payments that are not recoupable against future royalties are capitalized and
amortized over the lesser of the estimated life of the branded title or the term
of the license agreement.
 
 The
Company’s contracts with some licensors include minimum guaranteed royalty
payments, which are payable regardless of the ultimate volume of sales to end
users. Each quarter, the Company evaluates the realization of its royalties as
well as any unrecognized guarantees not yet paid to determine amounts that it
deems unlikely to be realized through product sales. The Company uses estimates
of revenues, and share of the relevant licensor to evaluate the future
realization of future royalties and guarantees. This evaluation considers
multiple factors, including the term of the agreement, forecasted demand,
product life cycle status, product development plans, and current and
anticipated sales levels, as well as other qualitative factors. To the extent
that this evaluation indicates that the remaining future guaranteed royalty
payments are not recoverable, the Company records an impairment charge to cost
of revenues and a liability in the period that impairment is
indicated.
 
 Content
Acquired
 Amounts
paid to third party content providers as part of an agreement to make content
available to the Company for a term or in perpetuity, without a revenue share,
have been capitalized and are included in the balance sheet as prepaid
expenses.  These balances will be expensed over the estimated life of
the material acquired.
 
 Software
Development Costs
 The
Company applies the principles of Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed(“SFAS No. 86”). SFAS
No. 86 requires that software development costs incurred in conjunction with
product development be charged to research and development expense until
technological feasibility is established. Thereafter, until the product is
released for sale, software development costs must be capitalized and reported
at the lower of unamortized cost or net realizable value of the related
product.
 
 The
Company has adopted the “tested working model” approach to establishing
technological feasibility for its products and games. Under this approach, the
Company does not consider a product or game in development to have passed the
technological feasibility milestone until the Company has completed a model of
the product or game that contains essentially all the functionality and features
of the final game and has tested the model to ensure that it works as expected.
To date, the Company has not incurred significant costs between the
establishment of technological feasibility and the release of a product or game
for sale; thus, the Company has expensed all software development costs as
incurred. The Company considers the following factors in determining whether
costs can be capitalized: the emerging nature of the mobile market; the gradual
evolution of the wireless carrier platforms and mobile phones for which it
develops products and games; the lack of pre-orders or sales history for its
products and games; the uncertainty regarding a product’s or game’s
revenue-generating potential; its lack of control over the carrier distribution
channel resulting in uncertainty as to when, if ever, a product or game will be
available for sale; and its historical practice of canceling products and games
at any stage of the development process.
  
  Mandalay
      Media, Inc. and Subsidiaries
                  12Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
  Product
Development Costs
 The
Company charges costs related to research, design and development of products to product
development expense as incurred. The types of costs included in product
development expenses include salaries, contractor fees and allocated facilities
costs.
 
 Advertising
Expenses
 The
Company expenses the production costs of advertising, including direct response
advertising, the first time the advertising takes place. Direct response
advertising is expensed immediately since there is a very limited ongoing
return. Advertising expense for the Successor was $4,874; $226, $0, and $0 for
the year ended March 31, 2009, the three months ended March 31, 2008 and 2007,
and the year ended December 31, 2007, respectively. Advertising expense for the
Predecessor was $347 for the period from April 1, 2007 through February 12,
2008.  Advertising costs are expensed as incurred.
 
 Restructuring
 The
Company accounts for costs associated with employee terminations and other exit
activities in accordance with Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities. The
Company records employee termination benefits as an operating expense when it
communicates the benefit arrangement to the employee and it requires no
significant future services, other than a minimum retention period, from the
employee to earn the termination benefits.
 
 Fair
Value of Financial Instruments
 For
certain of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other current
liabilities, the carrying amounts approximate their fair value due to their
relatively short maturity. Based on the borrowing rates available to the Company
for loans with similar terms, the carrying value of borrowings outstanding
approximates their fair value.
 
 Foreign Currency
Translation.
 The
Company uses the United States dollar for financial reporting
purposes.  Assets and liabilities of foreign operations are translated
using current rates of exchange prevailing at the balance sheet date. Equity
accounts have been translated at their historical exchange rates when the
capital transaction occurred.  Statement of Operations amounts are
translated at average rates in effect for the reporting period. The foreign
currency translation adjustment (loss) for the Successor was ($190) for the year
ended March 31, 2009; $61 and $0 for the three months ended March 31, 2008 and
2007, and $0 in the year ended December 31, 2007.  The foreign
currency translation adjustment (loss) for the Predecessor was $121 for the
period from April 1, 2007 through February 12, 2008.  The foreign
currency translation adjustment (loss) has been reported as a component of
comprehensive loss in the consolidated statement of stockholders’ equity and
comprehensive loss. Translation gains or losses are shown as a separate
component of accumulated deficit. Other comprehensive income / (loss) amounted
to ($190) in the year ended March 31, 2009; $61 in the three months ended March
31, 2008 and $0 in the year ended December 31, 2007.
  
  Mandalay
      Media, Inc. and Subsidiaries
                  13Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
  Concentrations
of Credit Risk.
 Financial
instruments which potentially subject us to concentration of credit risk consist
principally of cash and cash equivalents, and accounts receivable. We have
placed cash and cash equivalents with a single high credit-quality institution.
As of March 31, 2008, we did not have any long-term marketable securities. The
Company’s sales are made either directly to consumers, with the billings
performed by and the receivable due from industry aggregators; or directly to
the large national Mobile Phone Operators in the countries that we operate. We
have a significant level of business and resulting significant accounts
receivable balance with one operator and therefore have a high concentration of
credit risk with that operator. We perform ongoing credit evaluations of our
customers and maintain an allowance for potential credit losses. As of March 31,
2009, our two largest customers represented approximately 19% and 13% of our
gross accounts receivable outstanding.  These customers accounted for
5% and 19%, respectively, of our gross sales in the year ended March 31,
2009.  At March 31, 2008 our largest customer represented
approximately 36% of our gross accounts receivable outstanding; and this
customer accounted for 48% of our gross sales in the three months ended March
31, 2008.
 
 Property
and Equipment
 Property
and equipment is stated at cost.  Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of the
related assets. Estimated useful lives are 8 to 10 years for leasehold
improvements and 5 years for other assets.
 
 Goodwill
and Indefinite Life Intangible Assets
 Goodwill
represents the excess of cost over fair value of net assets of businesses
acquired. In accordance with Statement of Financial Accounting Standards
No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets”, the value
assigned to goodwill and indefinite lived intangible assets, including
trademarks and tradenames, is not amortized to expense, but rather they are
evaluated at least on an annual basis to determine if there are potential
impairments. If the fair value of the reporting unit is less than its carrying
value, an impairment loss is recorded to the extent that the implied fair value
of the reporting unit goodwill is less than the carrying value. If the fair
value of an indefinite lived intangible (such as trademarks and trade names) is
less than its carrying amount, an impairment loss is recorded. Fair value is
determined based on discounted cash flows, market multiples or appraised values,
as appropriate. Discounted cash flow analysis requires assumptions about the
timing and amount of future cash inflows and outflows, risk, the cost of
capital, and terminal values. Each of these factors can significantly affect the
value of the intangible asset. The estimates of future cash flows, based on
reasonable and supportable assumptions and projections, require management’s
judgment. Any changes in key assumptions about the Company’s businesses and
their prospects, or changes in market conditions, could result in an impairment
charge. Some of the more significant estimates and assumptions inherent in the
intangible asset valuation process include: the timing and amount of projected
future cash flows; the discount rate selected to measure the risks inherent in
the future cash flows; and the assessment of the asset’s life cycle and the
competitive trends impacting the asset, including consideration of any
technical, legal or regulatory trends.
 
 The
Company has determined that there was an impairment of goodwill and indefinite
lived intangibles, in combination, amounting to $31,784, as a result of
completing its annual impairment analysis as of March 31, 2009. In
performing the related valuation analysis the Company used various valuation
methodologies including probability weighted discounted cash flows, comparable
transaction analysis, and market capitalization and comparable company multiple
comparison. The impairment is detailed in Note 7 below.
  
  Mandalay
      Media, Inc. and Subsidiaries
                  14Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
 Impairment
of Long-Lived Assets and Finite Life Intangibles
 
 Long-lived
assets, including purchased intangible assets with finite lives are amortized
using the straight-line method over their useful lives ranging from three to ten
years and are reviewed for impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
 
 Intangible
assets subject to amortization primarily consist of customer lists, license
agreements and software that have been acquired.  The intangible asset
values assigned to the identified assets for each acquisition were generally
determined based upon the expected discounted aggregate cash flows to be derived
over the estimated useful life. The method of amortizing the intangible asset
values are based upon the Company’s historical experience.  The
Company reviews the recoverability of its finite-lived intangible assets for
recoverability whenever events or circumstances indicated that the carrying
amount of an asset may not be recoverable. Recoverability is assessed by
comparison to associated undiscounted cash flows. The Company determined that
there were no impairments during the year ended March 31, 2009.
 
 Income
Taxes
 The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes”(“SFAS No. 109”), which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in its financial statements or tax returns. Under SFAS No. 109, the
Company determines deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities along with net operating losses, if it is more likely than not the
tax benefits will be realized using the enacted tax rates in effect for the year
in which it expects the differences to reverse.  To the extent a
deferred tax asset cannot be recognized, a valuation allowance is established if
necessary.
 
 We
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—An Interpretation of FASB Statement 109” (“FIN 48”)
on January 1, 2008. FIN 48 did not impact the Company’s financial position or
results of operations at the date of adoption. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes”. FIN 48 prescribes that a company
should use a more-likely-than-not recognition threshold based on the technical
merits of the tax position taken. Tax positions that meet the
“more-likely-than-not” recognition threshold should be measured as the largest
amount of the tax benefits, determined on a cumulative probability basis, which
is more likely than not to be realized upon ultimate settlement in the financial
statements. We recognize interest and penalties related to income tax matters as
a component of the provision for income taxes. We do not currently anticipate
that the total amount of unrecognized tax benefits will significantly change
within the next 12 months.
  
  Mandalay
      Media, Inc. and Subsidiaries
                  15Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
 Stock-based Compensation.
 We have
applied SFAS No. 123(R) “Share-Based Payment” (“FAS 123R”) and accordingly, we
record stock-based compensation expense for all of our stock-based
awards.
 
 Under FAS
123R, we estimate the fair value of stock options granted using the
Black-Scholes option pricing model. The fair value for awards that are expected
to vest is then amortized on a straight-line basis over the requisite service
period of the award, which is generally the option vesting term. The amount of
expense recognized represents the expense associated with the stock options we
expect to ultimately vest based upon an estimated rate of forfeitures; this rate
of forfeitures is updated as necessary and any adjustments needed to recognize
the fair value of options that actually vest or are forfeited are
recorded.
 
 The
Black-Scholes option pricing model, used to estimate the fair value of an award,
requires the input of subjective assumptions, including the expected volatility
of our common stock and an option’s expected life. As a result, the financial
statements include amounts that are based upon our best estimates and judgments
relating to the expenses recognized for stock-based compensation.
 
 Preferred
Stock
 The
Company applies the guidance enumerated in SFAS No. 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity,” and EITF Topic D-98, “Classification and Measurement of Redeemable
Securities,” when determining the classification and measurement of preferred
stock. Preferred shares subject to mandatory redemption (if any) are classified
as liability instruments and are measured at fair value in accordance with
SFAS 150. The Company does not have any preferred shares subject to
mandatory redemption. All other issuances of preferred stock are subject to the
classification and measurement principles of EITF Topic D-98. Accordingly, the
Company classifies conditionally redeemable preferred shares (if any), which
includes preferred shares that feature redemption rights that are either within
the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within the Company’s control, as temporary equity.
At all other times, the Company classifies its preferred shares in stockholders’
equity.
 
 Use
of Estimates
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent asset and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the period. Actual results could
differ from those estimates. The most significant estimates relate to revenues
for periods not yet reported by Carriers, liabilities recorded for future
minimum guarantee payments under content licenses, accounts receivable
allowances, stock-based compensation expense, the application of purchase
accounting, the carrying value and recoverability of long-lived assets,
including goodwill, amortizable intangibles, the realizability of deferred tax
assets, and the fair value of equity instruments.
 
 Recent
Accounting Pronouncements
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”, which is an amendment of
Accounting Research Bulletin (“ARB”) No. 51.  This statement clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  The adoption of SFAS 160 did not have a
significant impact on the Company’s Consolidated Financial
Statements.
  
  Mandalay
      Media, Inc. and Subsidiaries
                  16Notes
      to Consolidated Financial Statements(all numbers in thousands except per share
      amounts)
  In
December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business
Combinations.”  This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non controlling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. In April 2009, the FASB issued FSP FAS 141(R)-1, which amends
the initial recognition and measurement, subsequent measurement and accounting,
and disclosure of assets and liabilities arising from contingencies in a
business combination. The impact of the adoption of SFAS No. 141(R) and FSP FAS
141(R)-1 on the Company’s results of operations and financial position will
depend on the nature and extent of business combinations that it completes, if
any, in or after fiscal 2010; however, it is expected to change the Company’s
accounting treatment for any business combinations completed after this
statement becomes effective.
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB No. 133,” (“SFAS
161”). SFAS 161 is intended to improve transparency in financial reporting by
requiring enhanced disclosures of an entity’s derivative instruments and hedging
activities and their effects on the entity’s financial position, financial
performance, and cash flows. SFAS 161 applies to all derivative instruments
within the scope of SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (“SFAS 133”). SFAS 161 also applies to non-derivative
hedging instruments and all hedged items designated and qualifying under SFAS
133. SFAS 161 is effective prospectively for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. SFAS 161 encourages, but does not require,
comparative disclosures for periods prior to its initial adoption. The Company
does not expect the adoption of SFAS 161 to have a significant impact on its
results of operations or financial position.
  In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets”.  This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008.  Early adoption is
prohibited.  The impact of the adoption of FSP FAS 142-3 on the
Company’s results of operations and financial position will depend on the nature
and extent of business combinations that it completes, if any, in or after
fiscal 2010.
 Mandalay
      Media, Inc. and Subsidiaries
                17
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 3. Liquidity
  The
accompanying consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern.  One of the Company’s operating
subsidiaries, Twistbox, has sustained substantial operating losses since
commencement of operations.  The Company has also incurred negative cash
flows from operating activities and the majority of the Company’s assets are
intangible assets and goodwill, which have been subject to impairment in the
current year.
  In
addition, Twistbox has a significant amount of debt, in the form of a Secured
Note, as detailed in Note 8, which becomes due within twelve months. The Company
has guaranteed 50% of this debt, and the group is subject to covenants including
a covenant to maintain a minimum cash balances of $4 million. The company was
not in breach of any covenants at March 31, 2009. There is a significant risk
that the minimum cash balance covenant will be breached as the result of paying
out the earn-out payment associated with the acquisition of AMV as more fully
described in Note 6. We have initiated discussions with the holder of the
Secured Note regarding a waiver for the covenant.
  In view
of these matters, realization of a major portion of the assets in the
accompanying consolidated balance sheet is dependent upon continued operations
of the Company, which is in turn dependent on the Company restructuring its
financing arrangements, obtaining additional financing, and/or reaching
accommodations with the holder of the Secured Note, and reaching a positive cash
flow position while maintaining adequate liquidity.
  The
Company has undertaken a number of specific steps to achieve positive cashflow
in the future.  These actions include the acquisition consummated in the
current year along with the economic cost associated with the integration, and
debt restructuring and equity placements which occurred at the same time as the
acquisition. The Company has taken further action to reduce its ongoing
operating cost base, and has been in discussions with the holder of the Secured
Note and with unsecured creditors regarding restructuring of commitments. Other
actions include continued increases in revenues by introducing new products and
revenue streams, reductions in the cost of revenues, continued expansion into
new territories, reviewing additional financing options, and accretive
acquisitions. Management believes that actions undertaken as a whole provide the
opportunity for the Company to continue as a going concern, although this will
be highly dependent on the ability to restructure our financing
arrangements.
  4. Balance
Sheet Components
  Accounts
Receivable
  March
      31,
                            
                            
                            March
      31,2009
                            
                            
                            2008Accounts
      receivable
                            
                            $
                            10,919
                            
                            
                            $
                            6,330Less:
      allowance for doubtful accounts
                            
                            
                            (174
                            )
                            
                            
                            (168
                            )$
                            10,745
                            
                            
                            $
                            6,162
  Accounts
receivable includes amounts billed and unbilled as of the respective balance
sheet dates. Unbilled receivables were $5,269 at March 31, 2009 and $983 at
March 31, 2008.  During the year ended March 31, 2009, $6 was provided
for and $0 was written off against the allowance for the Successor. During the
three months ended March 31, 2008 and 2007, $0 was provided for and $0 was
written off against the allowance for the Successor.  During the
period from April 1, 2007 through February 12, 2008, $22 was provided for and $0
was written off against the allowance for the Predecessor.
 
 
 
 Mandalay
      Media, Inc. and Subsidiaries
                18
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  Property
and Equipment
  March
      31,
                                  
                                  
                                  March
      31,2009
                                  
                                  
                                  2008Equipment
                                  
                                  $
                                  1,192
                                  
                                  
                                  $
                                  654Equipment
      subject to capitalized lease
                                  
                                  
                                  -
                                  
                                  
                                  
                                  71Furniture
      & fixtures
                                  
                                  
                                  386
                                  
                                  
                                  
                                  228Leasehold
      improvements
                                  
                                  
                                  140
                                  
                                  
                                  
                                  1401,718
                                  
                                  
                                  
                                  1,093Accumulated
      depreciation
                                  
                                  
                                  (488
                                  )
                                  
                                  
                                  (56
                                  )$
                                  1,230
                                  
                                  
                                  $
                                  1,037
  Depreciation
expense for the Successor’s year ended March 31, 2009 was $431; for the three
months ended March 31, 2008 and 2007 was $56 and $0, respectively; and for the
year ended December 31, 2007 was $0. Depreciation expense for the Predecessor’s
period from April 1, 2007 through February 12, 2008 was
$271.  Depreciation expense is included in other expenses in the
Consolidated Statements of Operations.
  5. Description
of Stock Plans
  On
September 27, 2007, the stockholders of the Company adopted the 2007 Employee,
Director and Consultant Stock Plan (the “Plan”). Under the Plan, the Company may
grant up to 3,000 shares or equivalents of common stock of the Company as
incentive stock options (ISO), non-qualified options (NQO), stock grants or
stock-based awards to employees, directors or consultants, except that ISO’s
shall only be issued to employees. Generally, ISO’s and NQO’s shall be issued at
prices not less than fair market value at the date of issuance, as defined, and
for terms ranging up to ten years, as defined. All other terms of grants shall
be determined by the board of directors of the Company, subject to the
Plan.
  On
February 12, 2008, the Company amended the Plan to increase the number of shares
of our common stock that may be issued under the Plan to 7,000 shares and on
March 7, 2008, amended the Plan to increase the maximum number of shares of
the Company's common stock with respect to which stock rights may be granted in
any fiscal year to 1,100 shares. All other terms of the Plan remain in full
force and effect.
 
 The
following table summarizes options granted for the periods or as of the dates
indicated:
 
 
 
 Mandalay
      Media, Inc. and Subsidiaries
                19
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  Number
      of
                        
                        
                        Weighted
      AverageShares
                        
                        
                        Exercise
      PriceOutstanding
      at December 31, 2006
                        
                        
                        -
                        
                        
                        
                        -Granted
                        
                        
                        1,600
                        
                        
                        $
                        2.64Canceled
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at December 31, 2007
                        
                        
                        1,600
                        
                        
                        $
                        2.64Granted
                        
                        
                        2,752
                        
                        
                        $
                        4.57Transferred
      in from Twistbox
                        
                        
                        2,462
                        
                        
                        $
                        0.64Canceled
                        
                        
                        (12
                        )
                        
                        $
                        0.81Outstanding
      at March 31, 2008
                        
                        
                        6,802
                        
                        
                        $
                        2.70Granted
                        
                        
                        1,860
                        
                        
                        $
                        2.67Canceled
                        
                        
                        (1,702
                        )
                        
                        $
                        0.48Exercised
                        
                        
                        -
                        
                        
                        $
                        0.48Outstanding
      at March 31, 2009
                        
                        
                        6,960
                        
                        
                        $
                        2.52Exercisable
      at March 31, 2009
                        
                        
                        5,426
                        
                        
                        $
                        2.29
 
 The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions:
 
 Options GrantedYear ended
                          
                          
                          
                          
                          
                          Options tranferredMarch31,2009
                          
                          
                          OptionsGranted
                          
                          
                          fromTwistboxExpected
      life (years)
                          
                          
                          6
                          
                          
                          4
      to 6
                          
                          
                          3
      to 7Risk-free
      interest rate
                          
                          3.90%
      to 3.92
                          %
                          
                          2.7%
      to 3.89
                          %
                          
                          2.03%
      to 5.03
                          %Expected
      volatility
                          
                          49.73%
      to 54.33
                          %
                          
                          70%
      to 75.2
                          %
                          
                          70%
      to 75
                          %Expected
      dividend yield
                          
                          
                          0
                          %
                          
                          
                          0
                          %
                          
                          
                          0
                          %
 
 The
exercise price for options outstanding at March 31, 2009 was as
follows:
 
 OptionsoutstandingWeightedAverage
                        
                        
                        
                        
                        
                        WeightedRemaining
                        
                        
                        Number
                        
                        
                        Average
                        
                        
                        AggregateRange of
                        
                        
                        Contractual Life
                        
                        
                        Outsanding
                        
                        
                        Exercise
                        
                        
                        IntrinsicExercisePrice
                        
                        
                        (Years)
                        
                        
                        March31,2009
                        
                        
                        Price
                        
                        
                        Value$0
      - $1.00
                        
                        
                        
                        7.33
                        
                        
                        
                        2,277
                        
                        
                        $
                        0.64
                        
                        
                        $
                        618,093$2.00
      - $3.00
                        
                        
                        
                        8.99
                        
                        
                        
                        2,950
                        
                        
                        $
                        2.67
                        
                        
                        $
                        -$4.00
      - $5.00
                        
                        
                        
                        8.88
                        
                        
                        
                        1,733
                        
                        
                        $
                        4.75
                        
                        
                        $
                        -8.42
                        
                        
                        
                        6,960
                        
                        
                        $
                        2.52
                        
                        
                        $
                        618,093
 
 
 
 Mandalay
      Media, Inc. and Subsidiaries
                20
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  The
exercise price for options exercisable at March 31, 2009 was as
follows:
 
 OptionsExercisableWeightedAverage
                        
                        
                        
                        
                        
                        WeightedRemaining
                        
                        
                        Options
                        
                        
                        Average
                        
                        
                        AggregateRange of
                        
                        
                        Contractual Life
                        
                        
                        Exercisable
                        
                        
                        Exercise
                        
                        
                        IntrinsicExercisePrice
                        
                        
                        (Years)
                        
                        
                        March31,2009
                        
                        
                        Price
                        
                        
                        Value$0
      - $1.00
                        
                        
                        
                        7.31
                        
                        
                        
                        2,174
                        
                        
                        $
                        0.63
                        
                        
                        $
                        603,476$2.00
      - $3.00
                        
                        
                        
                        8.94
                        
                        
                        
                        2,098
                        
                        
                        $
                        2.66
                        
                        
                        $
                        -$4.00
      - $5.00
                        
                        
                        
                        8.88
                        
                        
                        
                        1,154
                        
                        
                        $
                        4.75
                        
                        
                        $
                        -8.27
                        
                        
                        
                        5,426
                        
                        
                        $
                        2.29
                        
                        
                        
                        603,476
 
 During
the year, the Company approved the issuance of an aggregate of 938,697 shares of
common stock pursuant to the Company’s 2007 Employee, Director and Consultant
Stock Plan at a purchase price of $0.0001 per share to certain executives of the
Company and subsidiary in connection with agreed salary reductions.
 
 A summary
of the status of the Company’s nonvested shares as of March 31, 2009, and
changes during the year ended March 31, 2009 is presented below:
 
 Weighted AverageGrant DateNonvested shares
                      
                      Shares (000s)
                      
                      
                      Fair ValueNonvested
      at March 31, 2008
                      
                      
                      -
                      
                      
                      $
                      -Granted
                      
                      
                      745,468
                      
                      
                      $
                      0.85Vested
                      
                      
                      246,702
                      
                      
                      $
                      0.85Nonvested
      at March 31, 2009
                      
                      
                      498,767
                      
                      
                      $
                      0.85Forfeited
                      
                      
                      (62,011
                      )
                      
                      $
                      0.88
 
 As of
March 31, 2009, there was $424 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a period of 11.5 months. The
total fair value of shares vested during the year ended March 31, 2009, was
$210.
 
 Stock-based
compensation expense for the Successor was $3,169 for the year ended March 31,
2009; $313 and $0 for the three months ended March 31, 2008 and 2007; and $1,036
for the year ended December 31, 2007.  Stock option expense for the
Predecessor was $422 for the period April 1, 2007 through February 12,
2008.  Stock option expense is included primarily in general and
administrative expense.
 
 
 
 Mandalay
      Media, Inc. and Subsidiaries
                21
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 6. Acquisitions/Purchase
Price Accounting
  Twistbox
Entertainment, Inc. and related entities
 
 On
February 12, 2008, the Company completed an acquisition of Twistbox
Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding capital
stock of Twistbox for 10,180 shares of common stock of the Company and the
Company’s assumption of all the outstanding options of Twistbox’s 2006 Stock
Incentive Plan by the issuance of options to purchase 2,463 shares of common
stock of the Company, including 2,145 vested and 318 unvested options. After the
Merger, Twistbox became a wholly-owned subsidiary of the Company.
  Twistbox
is a global publisher and distributor of branded entertainment content,
including images, video, TV programming and games, for Third Generation (3G)
mobile networks. It publishes and distributes its content globally and has
developed an intellectual property portfolio unique to its target demographic
that includes worldwide mobile rights to global brands and content from leading
film, television and lifestyle content publishing companies. Twistbox has built
a proprietary mobile publishing platform and has leveraged its brand portfolio
and platform to secure “direct” distribution agreements with the largest mobile
operators in the world. These factors contributed to a purchase price in excess
of the fair value of net tangible and intangible assets acquired, and, as a
result, the Company recorded goodwill in connection with this
transaction.
  In
connection with the Merger, the Company guaranteed up to $8,250 of principal
under an existing note of Twistbox in accordance with the terms, conditions and
limitations contained in the note. In connection with the guaranty, the Company
issued the lender two warrants, one to purchase 1,093 and the other to purchase
1,093 shares of common stock of the Company, exercisable at $7.55 per share, and
at $5.00 per share, (increasing to $7.55 per share, if not exercised in full by
February 12, 2009), respectively, through July 30, 2011. The warrants have been
included as part of the purchase consideration and have been valued using the
Black Scholes method, using the stock price at the merger date of $4.75 per
share discounted for certain restrictions, a volatility of 70%, and the exercise
price and the expected time to vest for each group. These warrants were
subsequently amended as described in Note 8.
  The
purchase consideration was determined to be $67,479, consisting of $66,025
attributed to the common stock and options exchanged and warrants issued, and
$1,454 in transaction costs.  During the year, a further $59 of
transaction costs were recognized, with the result that the purchase
consideration was increased to $67,538, with an equivalent increase in Goodwill.
The options and warrants were valued using the Black Scholes method, using the
stock price at the merger date of $4.75 per share, a volatility of 70%, and in
the case of options the exercise price and the expected time to vest for each
group. Under the purchase method of accounting, the Company allocated the total
purchase price of $67,538 to the net tangible and intangible assets acquired and
liabilities assumed based upon their respective estimated fair values as of the
acquisition date as follows:
 
 
 
 Mandalay
      Media, Inc. and Subsidiaries
                22
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 Cash
                      
                      $
                      6,679Accounts
      receivable
                      
                      
                      4,966Prepaid
      expenses and other current assets
                      
                      
                      1,138Property
      and equipment
                      
                      
                      1,062Other
      long-term assets
                      
                      
                      361Accounts
      Payable, accrued license fees and accruals
                      
                      
                      (6,882
                      )Other
      current liabilities
                      
                      
                      (814
                      )Accrued
      license fees, long term portion
                      
                      
                      (2,796
                      )Long
      term debt
                      
                      
                      (16,483
                      )Identified
      Intangibles
                      
                      
                      19,905Merger
      related restructuring reserves
                      
                      
                      (1,034
                      )Goodwill
                      
                      
                      61,436$
                      67,538
  The
Merger related restructuring reserves were subsequently reduced by $215,
increasing net assets acquired and consequentially reducing goodwill by that
amount. As a result, Goodwill recognized in the above transaction amounted to
$61,221. Goodwill in relation to the acquisition of Twistbox is not expected to
be deductible for income tax purposes. Merger related restructuring reserves
include reserves for employee severance and for office relocation.
 
 AMV
Holding Limited group
 
 On
October 23, 2008, the Company completed an acquisition of 100% of AMV Holding
Limited, a United Kingdom private limited company (“AMV”) and 80% of Fierce
Media Limited. The acquisition was effective on October 1, 2008.
 
 Subject to adjustment as set forth in the Stock Purchase
Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a)
$5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid and
non-assessable shares of Common Stock (the “Stock Consideration”); (c) a secured
promissory note in the aggregate original principal amount of $5,375 (the
“Note”); and (d) additional earn-out amounts, if any, if the Acquired Companies
achieve certain targeted earnings for each of the periods from October 1, 2008
to March 31, 2009, April 1, 2009 to March 31, 2010, and April 1, 2010 to
September 30, 2010, as determined in accordance with the Stock Purchase
Agreement. The Purchase Price is subject to certain adjustments based on the
working capital of AMV, to be determined initially within 75 days of the
closing, and subsequently within 60 days following June 30, 2009. Any such
adjustment of the Purchase Price will be made first by means of an adjustment to
the principal sum due under the Note, as set forth in the Stock Purchase
Agreement. The initial adjustment has been determined preliminarily as $443, to
be added to the secured promissory note.
 
 
 
 Mandalay
      Media, Inc. and Subsidiaries
                23
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 Prior to
closing, each outstanding option to purchase shares of capital stock of AMV (an
“AMV Option”) was either exercised in full or terminated. The Note matures on
January 30, 2010, and bears interest at an initial rate of 5% per annum, subject
to adjustment as provided therein. In the event the Company completes an equity
financing that results in gross proceeds of over $6,000, the Company will prepay
a portion of the Note in an amount equal to one-third of the excess of the gross
proceeds of such financing over $6,000. In addition, if within nine months of
the issuance date of the Note, the Company completes a financing that results in
gross proceeds of over $15,000, then the Company shall prepay the entire
principal amount then outstanding under the Note, plus accrued interest. If
within nine months of the issuance date of the Note, the aggregate principal sum
then outstanding under the Note plus accrued interest thereon has not been
prepaid, then on and after such date, interest shall accrue on the unpaid
principal balance of the Note at a rate of 7% per annum. Additionally, in
connection with the Note, AMV granted to the Sellers a security interest in its
assets. Such security interest is subordinate to the security interest granted
to ValueAct Small Cap Master Fund, L.P. (“ValueAct) under the Senior Secured
Note, issued by Twistbox Entertainment, Inc., a wholly-owned subsidiary of
the Company (“Twistbox”),  due January 30, 2010, as amended on February 12,
2008 (the “ValueAct Note”), and as subsequently amended on October 23, 2008. AMV
also agreed to guarantee Mandalay’s repayment of the Note to the
Sellers.
 
 The
Purchase Price was preliminarily estimated by the Company to be $23,030
consisting of $9,900 attributed to the Stock Consideration issued, $5,375 in
cash, $95 in stamp duty, $5,818 under the Note referenced above (inclusive of
the working-capital adjustment), $1,098 as an estimate of the initial period
earn-out adjustment and $744 in transaction costs.  Any
further  adjustments required under the “working capital adjustment”
provision and any further adjustment under the “earn-out” provision of the
Agreement have not yet been determined and therefore have not been included in
the preliminary calculation of the purchase price. The shares of the Stock
Consideration were valued using the closing stock price at the acquisition date
of $2.20 per share. Under the purchase method of accounting, the Company
allocated the total Purchase Price of $23,030 to the net tangible and intangible
assets acquired and liabilities assumed based upon their respective estimated
fair values as of the acquisition date as follows:
 
 Cash
      and cash equivalents
                      
                      $
                      3,380Accounts
      receivable, net of allowances
                      
                      
                      9,087Prepaid
      expenses and other current assets
                      
                      
                      16Property
      and equipment, net
                      
                      
                      406Accounts
      payable
                      
                      
                      (10,391
                      )Bank
      overdrafts
                      
                      
                      (1,902
                      )Other
      current liabilities
                      
                      
                      (1,262
                      )Other
      long term liabilities
                      
                      
                      (223
                      )Minority
      interests
                      
                      
                      95Identified
      intangibles
                      
                      
                      1,368Acquisition
      related restructuring reservesGoodwill
                      
                      
                      22,456$
                      23,030
 
 Net
assets associated with Fierce Media were insignificant. Goodwill recognized in
the above transaction is preliminarily estimated at $22,456. The business
acquired is not capital intensive and does not require significant identifiable
intangible assets – as a result the greater proportion of consideration has been
allocated to goodwill.  Goodwill in relation to the acquisition of AMV
is not expected to be deductible for US income tax purposes. The preliminary
purchase price allocation, including the allocation of goodwill, will be updated
as additional information becomes available.


Mandalay
      Media, Inc. and Subsidiaries
                  24
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 Unaudited
Pro Forma Summary
 The
following pro forma consolidated amounts give effect to the acquisition of
Twistbox and AMV by the Company accounted for by the purchase method of
accounting as if it had occurred as at the beginning of each of the periods
presented.  The pro forma consolidated results are not necessarily
indicative of the operating results that would have been achieved had the
transaction been in effect as of the beginning of the period presented and
should not be construed as being representative of future operating
results.
  Year ended
                            
                            
                            3 months ended
                            
                            
                            Year endedMarch 31,
                            
                            
                            March 31,
                            
                            
                            December 31,2009
                            
                            
                            2008
                            
                            
                            2007Revenues
                            
                            $
                            51,734
                            
                            
                            $
                            13,939
                            
                            
                            $
                            44,289Cost
      of revenues
                            
                            
                            18,654
                            
                            
                            
                            2,739
                            
                            
                            
                            23,887Gross
      profit
                            
                            
                            33,080
                            
                            
                            
                            11,200
                            
                            
                            
                            20,402Operating
      expenses net of interest income and other expense
                            
                            
                            72,244
                            
                            
                            
                            11,643
                            
                            
                            
                            36,063Income
      tax expense and minority interests
                            
                            
                            (112
                            )
                            
                            
                            (153
                            )
                            
                            
                            (1,358
                            )Net
      loss from continuing operations, net of taxes
                            
                            
                            (39,276
                            )
                            
                            
                            (596
                            )
                            
                            
                            (17,019
                            )Income
      (loss) from discontinued operations, net of taxes
                            
                            
                            (147
                            )
                            
                            
                            -
                            
                            
                            
                            -Net
      loss
                            
                            $
                            (39,423
                            )
                            
                            $
                            (596
                            )
                            
                            $
                            (17,019
                            )Basic
      and Diluted net loss per common shareContinuing
      operations
                            
                            $
                            (1.08
                            )
                            
                            $
                            (0.02
                            )
                            
                            $
                            (0.65
                            )Discontinued
      operations
                            
                            $
                            (0.00
                            )
                            
                            $
                            -
                            
                            
                            $
                            -Net
      loss
                            
                            $
                            (1.09
                            )
                            
                            $
                            (0.02
                            )
                            
                            $
                            (0.65
                            )
 
 7. Goodwill
and Other Intangible Assets
  Goodwill
  A
reconciliation of the changes to the Company's carrying amount of goodwill for
fiscal 2009 was as follows:
 
 Balance
      at March 31, 2008
                          
                          $
                          61,377Goodwill
      acquired during the period
                          
                          
                          22,456adjustments
      made to goodwill
                          
                          
                          (156
                          )Goodwill
      impairment
                          
                          
                          (27,844
                          )Balance
      at March 31, 2009
                          
                          $
                          55,833
 
 In
October 2008, goodwill was increased by $22,456 due to the acquisition of AMV
(Note 6). Both acquisitions described in Note 6 included the issuance of Company
stock as all or part of the consideration.  Based on the trading price of
the Company’s common stock as of the acquisition dates, the total consideration
was $67,538 for the Twistbox acquisition and $23,342 for the AMV
acquisition.  Subsequent to the acquisitions, the Company experienced a
significant and continued decline in the market value of its common stock, which
resulted in the Company’s market capitalization falling below its net book
value. In addition, the Company performed its annual review of goodwill in the
fourth quarter of fiscal 2009. As a result of the assessment, the Company
determined that its net book value exceeded the implied fair value; therefore,
the Company recorded an impairment charge of $27,844 in fiscal 2009 to write
down goodwill. This impairment charge was recorded as “Impairment of goodwill
and intangible assets” in the Consolidated Statements of
Operations.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  25
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  Other
Intangible Assets
  A
reconciliation of the changes to the Company's carrying amount of intangible
assets for fiscal 2009 was as follows:
 
 Balance
      at March 31, 2008
                        
                        $
                        19,780Intangibles
      acquired during the period
                        
                        
                        1,368Amortization
                        
                        
                        (1,087
                        )Impairment
      charge
                        
                        
                        (3,940
                        )Balance
      at March 31, 2009
                        
                        $
                        16,121
 
 In
October 2008, intangible assets were increased by $1,368 due to the acquisition
of AMV (Note 6).  The Company performed its annual review of the fair
value of intangible assets in the fourth quarter of fiscal 2009. As a result of
the assessment, the Company determined that its net book value exceeded the
implied fair value; therefore, the Company recorded an impairment charge of
$3,940 in fiscal 2009 to write down intangible assets. This impairment charge
was recorded as “Impairment of Goodwill and intangible assets” in the
Consolidated Statements of Operations.
 
 The
components of intangible assets as at March 31, 2009 and 2008 were as
follows:
  March
      31,
                          
                          
                          March
      31,2009
                          
                          
                          2008Software
                          
                          $
                          1,922
                          
                          
                          $
                          1,611Trade
      Name / Trademark
                          
                          
                          9,824
                          
                          
                          
                          13,030Customer
      list
                          
                          
                          4,378
                          
                          
                          
                          4,378License
      agreements
                          
                          
                          886
                          
                          
                          
                          886Non-compete
      agreements
                          
                          
                          323
                          
                          
                          
                          -17,333
                          
                          
                          
                          19,905Accumulated
      amortization
                          
                          
                          (1,212
                          )
                          
                          
                          (125
                          )$
                          16,121
                          
                          
                          $
                          19,780
 
 The
Company has included amortization of acquired intangible assets directly
attributable to revenue-generating activities in cost of revenues. The Company
has included amortization of acquired intangible assets not directly
attributable to revenue-generating activities in operating expenses. During the
year ended March 31, 2009; the three months ended March 31, 2008 and 2007, and
the year ended December 31, 2007, the Successor recorded amortization expense in
the amount of $459; $53, $0, and $0, respectively, in cost of revenues; and
amortization expense in the amount of $628; $72, $0, and $0, respectively in
operating expenses.  During the period from April 1, 2007 through
February 12, 2008, the Predecessor recorded amortization expense in the amount
of $26 in cost of revenues; and amortization expense in the amount of $93 in
operating expenses.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  26
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  As of
March 31, 2009, the total expected future amortization related to intangible
assets was as follows:
 
 12 Months ended March 31,2010
                        
                        
                        2011
                        
                        
                        2012
                        
                        
                        2013
                        
                        
                        2014
                        
                        
                        ThereafterSoftware
                        
                        $
                        334
                        
                        
                        $
                        334
                        
                        
                        $
                        282
                        
                        
                        $
                        230
                        
                        
                        $
                        230
                        
                        
                        $
                        200Customer
      List
                        
                        
                        547
                        
                        
                        
                        547
                        
                        
                        
                        547
                        
                        
                        
                        547
                        
                        
                        
                        547
                        
                        
                        
                        1,023License
      Agreements
                        
                        
                        177
                        
                        
                        
                        177
                        
                        
                        
                        177
                        
                        
                        
                        154
                        
                        
                        
                        -
                        
                        
                        
                        -Non-compete
      agreements
                        
                        
                        162
                        
                        
                        
                        81
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -$
                        1,220
                        
                        
                        $
                        1,139
                        
                        
                        $
                        1,006
                        
                        
                        $
                        931
                        
                        
                        $
                        777
                        
                        
                        $
                        1,223
 
 8. Debt
  March
      31,
                                  
                                  
                                  March
      31,2009
                                  
                                  
                                  2008Short
      Term DebtCapitalized
      lease liabilities, current portion
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  20Senior
      secured note, inclusive of accrued interest,net
      of discount of $247 and $0, respectively
                                  
                                  
                                  17,351
                                  
                                  
                                  
                                  228Deferred
      purchase consideration inclusive of accrued interest
                                  
                                  
                                  5,945
                                  
                                  
                                  
                                  -$
                                  23,296
                                  
                                  
                                  $
                                  248
 
 March
      31,
                                      
                                      
                                      March
      31,2009
                                      
                                      
                                      2008Long
      Term DebtSenior
      Secured Note, long term portion, net of discount of $2
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      16,483
  In July
2007, Twistbox entered into a debt financing agreement in the form of a senior
secured note amounting to $16,500, payable at 30 months with ValueAct Small Cap
Master Fund L.P. (the “ValueAct Note”). The holder of the ValueAct Note was
granted first lien over all of the Company’s assets. The ValueAct Note carried
interest of 9% annually for the first year and 10% subsequently, with
semi-annual interest only payments. The agreement included certain restrictive
covenants. In conjunction with the merger described in Note 6, the Company
guaranteed up to $8,250 of the principal; and the restrictive covenants were
modified, including a requirement for both the Company and Twistbox to maintain
certain minimum cash balances. In connection with the guaranty, the Company
issued the lender warrants to purchase 1,093 and 1,093 shares of common stock of
the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing
to $7.55 per share, if not exercised in full by February 12, 2009),
respectively, through July 30, 2011. These warrants replaced warrants originally
issued by Twistbox in conjunction with the ValueAct Note.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  27
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  On
October 23, 2008, the Company, Twistbox and ValueAct entered into a Second
Amendment (the “Second Amendment”) to the ValueAct Note. Among other things, the
Second Amendment provides for a payment in kind election, whereby, in lieu of
making any cash payments to ValueAct on the following two interest payment
dates, Twistbox may elect that the amount of any interest due on such date be
added to the principal amount due under the ValueAct Note. That election was
made in connection with the first interest payment following the amendment. In
addition, ValueAct agreed to amend the ValueAct Note to modify the covenant
requiring that the Company and Twistbox maintain certain minimum combined cash
balances, during specified periods of time. Lastly, the Second Amendment
provides that an event of default may be triggered in the event the Company
fails to observe certain covenants as agreed to in the Second Amendment,
including a covenant that, until all principal and interest and any other
amounts due under the ValueAct Note are paid in full in cash, the Company: (i)
will not create, incur, assume or permit to exist certain indebtedness, except
for indebtedness in connection with a receivables facility as described in the
Second Amendment, which indebtedness would rank pari passu in right of payment
on the ValueAct Note, provided, that any receivables used to procure and
maintain such receivables facility shall not be subject to any lien of ValueAct
during the term of such receivables facility; and (ii) will not, and will not
permit any subsidiary to, without the prior consent of ValueAct, prepay any
indebtedness incurred in connection with the AMV Note, other than prepayments
with proceeds raised in an equity financing as permitted by the AMV Note.
Additionally, on October 23, 2008, in connection with the ValueAct Note, as
amended, AMV agreed to grant to ValueAct a security interest in its assets,
which ranks senior to the security interest granted to the Sellers. AMV also
agreed to guarantee Twistbox’s repayment of the ValueAct Note.
  As
described above, the Company had previously issued to ValueAct two warrants to
purchase shares of the Company’s common stock, $0.0001 par value per share (the
“Common Stock”). One warrant entitled ValueAct to purchase up to a total of
1,093 shares of Common Stock at an exercise price of $7.55 per share
(“$7.55 Warrant”). The other warrant entitled ValueAct to purchase up to a total
of 1,093 shares of Common Stock at an initial exercise price of $5.00 per
share (“$5.00 Warrant,” and together with the $7.55 Warrant, the “ValueAct
Warrants”). On October 23, 2008, the Company and ValueAct entered into an
allonge to each of the ValueAct Warrants. Among other things, the exercise price
of each of the ValueAct Warrants was amended to be $4.00 per share.
  Minimum
future obligations, including interest, under the Senior Secured Note are
$19,101 during the year ended March 31, 2010 including repayment of the
principal. Capitalized lease assets are set out in Note 4. Future obligations
under capitalized leases are included as part of Other Obligations in Note
15.
 
 9. Related
Party Transactions
  The
Company engages in various business relationships with shareholders and officers
and their related entities. The significant relationships are disclosed
below.
  Mandalay
Media, Inc
  On
September 14, 2006, the Company entered into a management agreement (the
“Management Agreement”) with Trinad Management for five years. Pursuant to the
terms of the Management Agreement, Trinad Management will provide certain
management services, including, without limitation, the sourcing, structuring
and negotiation of a potential business combination transaction involving the
Company in exchange for a fee of $90 per quarter, plus reimbursements of all
expenses reasonably incurred in connection with the provision of Agreement. The
Management Agreement expires on September 14, 2011. Either party may terminate
with prior written notice. However, if the Company terminates, it shall pay a
termination fee of $1,000. For the year ended March 31, 2009 the Company paid
management fees under the agreement of $360; for the three months ended March
31, 2008 and 2007, the Company paid management fees under the agreement of $90
and $90, respectively; and for the year ended December 31, 2007 the Company paid
management fees under the agreement of $360.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  28
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  In March
2007, the Company entered into a month to month lease for office space with
Trinad Management for rent of $9 per month. Rent expense in connection with this
lease was $104, $26, $26, and $104, respectively for the year ended March 31,
2009; for the three months ended March 31, 2008 and 2007; and for the year ended
December 31, 2007.
  Twistbox
Entertainment, Inc.
 
 Lease of
Premises
 Twistbox
leases its primary offices in Los Angeles from Berkshire Holdings, LLC, a
company with common ownership by officers of Twistbox. Amount paid in connection
with this lease was $330 for the period from April 1, 2007 through February 12,
2008.
 
 Twistbox
was party to an oral agreement with a person affiliated with Twistbox with
respect to a lease of an apartment in London.  Amounts paid in
connection with this lease was $152 for the period from April 1, 2007 through
February 12, 2008.
 
 10. Capital
Stock Transactions
 
 Preferred
Stock
 
 On
October 3, 2006, the Company designated a Series A Preferred Stock, par value
$.0001 per share (Series A). The Series A holders shall be entitled to: (1) vote
on an equal per share basis as holders of common stock; (2) dividends on an
if-converted basis; and (3) a liquidation preference equal to the greater of
$10, per share of Series A (subject to adjustment) or such amount that would
have been paid on an if-converted basis. Each Series A holder may treat as a
dissolution or winding up of the Company any of the following transactions: a
consolidation, merger, sale of substantially all the assets of the company,
issuance/sale of common stock of the Company constituting a majority of all
shares outstanding and a merger/business combination, each as
defined.
 
 In
addition, the Series A holders may convert, at their discretion, all or any of
their Series A shares into the number of common shares equal to the number
calculated by dividing the original purchase price of such Series A Preferred,
plus the amount of any accumulated, but unpaid dividends, as of the conversion
date, by the original purchase price (subject to certain adjustments) in effect
at the close of business on the conversion date.
 
 On August
3, 2006, the Company sold 100 shares of the Series A to Trinad Management, LLC
(Trinad Management), an affiliate of Trinad Capital LP (Trinad Capital), one of
the Company’s principal shareholders, for an aggregate sale price of $100, $1.00
per share. The Company recognized a one time, non-cash deemed preferred dividend
of $43 because the fair value of our common stock at the time of the sale of
$1.425 per share, greater than the conversion price of $1.00 per
share.
 
 Common
Stock
 
 On July
24, 2007, the Company sold 5,000 shares of the Company's common stock,
at $0.50 per share, for aggregate proceeds of $2,473, net of offering
costs of $27.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  29
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 In
September, October and December 2007, warrants to purchase 625 shares of common
stock were exercised in a cashless exchange for 239 shares of the Company’s
common stock based on the average closing price of the Company’s common stock
for the five days prior to the exercise date.
  On
November 7, 2007, the Company granted non-qualified stock options to purchase
500 shares of common stock of the Company to a director under the Plan. The
options have a ten year term and are exercisable at $2.65 per share, with
one-third of the options vesting immediately upon grant, one-third vesting on
the first anniversary of the date of grant and the remaining one-third on the
second anniversary of the date of grant. The options were valued at $772 using a
Black-Scholes model assuming a risk free interest rate of 3.89%, expected life
of four years, and expected volatility of 75.2%.
 
 On
November 14, 2007, the Company granted non-qualified stock options to purchase
100 shares of common stock of the Company to a director under the Plan. The
options have a ten year term and are exercisable at a price of $2.50 per share,
with one-third of the options granted vesting immediately upon grant, one-third
vesting on the first anniversary of the date of grant and the remaining
one-third vesting on the second anniversary of the date of grant. The options
were valued at $160 using a Black-Scholes model assuming a risk free interest
rate of 3.89%, expected life of four years, and expected volatility of
75.2%.
 
 On
February 12, 2008, the Company issued 10,180 shares of common stock in
connection with the merger with Twistbox. The Company also assumed all the
outstanding options of Twistbox’s 2006 Stock Incentive Plan by the issuance of
options to purchases 2,463 shares of common stock of the Company, including
2,144 vested and 319 unvested options; and the Company issued two warrants to a
lender to Twistbox, one to purchase 1,093 shares of common stock and the other
to purchase 1,093 shares of common stock of the Company, exercisable at $7.55
per share, and at $5.00 per share, (increasing to $7.55 per share, if not
exercised in full by February 12, 2009), respectively, through July 30,
2011.
  On April
9, 2008 a former director of the company exercised warrants to purchase 50
shares of common stock in a cashless exchange for 25 shares of the Company’s
common stock.
  In April
and June 2008, warrants to purchase 350 shares of common stock were exercised in
a cashless exchange for 217 shares of the Company’s common stock based on the
average closing price of the Company’s common stock for the five days prior to
the exercise date.
 
 On June
18, 2008, the Company granted non-qualified stock options to purchase 1,500
shares of common stock of the Company to four directors under the Plan. The
options have a ten year term and are exercisable at a price of $2.75 per share,
with one-third of the options granted vesting immediately upon grant, one-third
vesting on the first anniversary of the date of grant and the remaining
one-third vesting on the second anniversary of the date of grant. The options
were valued at $2,403 using a Black-Scholes model assuming a risk free interest
rate of 3.89%, expected life of four years, and expected volatility of
75.2%.
 
 On
September 29, 2008, the Company granted non-qualified stock options to purchase
350 shares of common stock of the Company to two directors under the Plan. The
options have a ten year term and are exercisable at a price of $2.40 per share,
with one-third of the options granted vesting immediately upon grant, one-third
vesting on the first anniversary of the date of grant and the remaining
one-third vesting on the second anniversary of the date of grant. The options
were valued at $489 using a Black-Scholes model assuming a risk free interest
rate of 3.89%, expected life of four years, and expected volatility of
75.2%.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  30
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 On
October 23, 2008, the Company entered into a Securities Purchase Agreement with
certain investors, pursuant to which the Company agreed to sell in a private
offering an aggregate of 1,685 shares of Common Stock and warrants to purchase
843 shares of Common Stock (the “Warrants”), for gross proceeds to the Company
of $4,500. Offering costs were $146.  The Warrants have a five year
term and an exercise price of $2.67 per share.
 
 In
October 2008, warrants to purchase 2,300 shares of common stock were exercised
in a cashless exchange for 286 shares of the Company’s common stock based on the
average closing price of the Company’s common stock for the five days prior to
the exercise date.
 
 On March
16, 2009, the Company approved the issuance of an aggregate of 938,697 shares of
common stock pursuant to the Company’s 2007 Employee, Director and Consultant
Stock Plan at a purchase price of $0.0001 per share to certain executives of the
Company and subsidiary in connection with agreed salary reductions. An aggregate
of 683,457 shares were granted prior to March 31, 2009. Certain of the shares
granted are subject to forfeiture to the Company if such executive terminates
his position with the Company prior to one year from the grant date, and such
shares become fully vested one year from the grant date or upon the occurrence
of a change-in-control of the Company. 184,691 of these shares were vested as of
March 31, 2009.All such shares granted to the executives may not be sold or
transferred for a period of one year from the Grant Date.
 
 11. Employee
Benefit Plans
 
 The
Company has an employee 401(k) savings plan covering full-time eligible
employees.  These employees may contribute eligible compensation up to
the annual IRS limit. The Company does not make matching
contributions.
 
 12. Income
Taxes
 
 The
components of income tax benefit/(provision) were as follows:
 
 Successor
                            
                            
                            PredecessorPeriod
      FromYear
      Ended
                            
                            
                            Year
      Ended
                            
                            
                            3
      Months Ended
                            
                            
                            3
      Months Ended
                            
                            
                            April
      1, 2007 ThroughMarch
      31, 2009
                            
                            
                            December
      31, 2007
                            
                            
                            March
      31, 2008
                            
                            
                            March
      31, 2007
                            
                            
                            February
      12, 2008(unaudited)Statutory
      federal income tax
                            
                            $
                            14,191
                            
                            
                            $
                            800
                            
                            
                            $
                            100
                            
                            
                            $
                            95
                            
                            
                            $
                            3,089State
      income taxes (benefit), net of federal taxes
                            
                            
                            2,087
                            
                            
                            
                            100
                            
                            
                            
                            15
                            
                            
                            
                            12
                            
                            
                            
                            441Write
      down of goodwill and other permanent differences
                            
                            
                            (12,057
                            )
                            
                            
                            -
                            
                            
                            
                            219
                            
                            
                            
                            -
                            
                            
                            
                            -Difference
      in depreciation and amortization
                            
                            
                            (171
                            )
                            
                            
                            -
                            
                            
                            
                            (25
                            )
                            
                            
                            -
                            
                            
                            
                            (48
                            )Stock-based
      compensation
                            
                            
                            (1,154
                            )
                            
                            
                            (400
                            )
                            
                            
                            (125
                            )
                            
                            
                            -
                            
                            
                            
                            (169
                            )Net
      operating loss carryforward
                            
                            
                            (2,785
                            )
                            
                            
                            (500
                            )
                            
                            
                            (200
                            )
                            
                            
                            (107
                            )
                            
                            
                            (3,257
                            )Income
      tax (provision) benefit
                            
                            $
                            111
                            
                            
                            $
                            -
                            
                            
                            $
                            (16
                            )
                            
                            $
                            -
                            
                            
                            $
                            (56
                            )
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  31
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  The
components of deferred tax expense consisted of the following:
 
 Successor
                        
                        
                        PredecessorPeriod
      FromYear
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        3
      Months Ended
                        
                        
                        3
      Months Ended
                        
                        
                        April
      1, 2007 ThroughMarch
      31, 2009
                        
                        
                        December
      31, 2007
                        
                        
                        March
      31, 2008
                        
                        
                        March
      31, 2007
                        
                        
                        February
      12, 2008(unaudited)Net
      operating loss
                        
                        $
                        2,785
                        
                        
                        $
                        500
                        
                        
                        $
                        200
                        
                        
                        $
                        125
                        
                        
                        $
                        3,553Amortization
      of intangible assets
                        
                        
                        171
                        
                        
                        
                        -
                        
                        
                        
                        25
                        
                        
                        
                        -
                        
                        
                        
                        48Stock-based
      compensation
                        
                        
                        1,154
                        
                        
                        
                        400
                        
                        
                        
                        125
                        
                        
                        
                        -
                        
                        
                        
                        1694,110
                        
                        
                        
                        900
                        
                        
                        
                        350
                        
                        
                        
                        125
                        
                        
                        
                        3,770Less
      valuation allowance
                        
                        
                        (4,110
                        )
                        
                        
                        (900
                        )
                        
                        
                        (350
                        )
                        
                        
                        (125
                        )
                        
                        
                        (3,770
                        )Income
      tax provision (benefit)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
  Deferred
tax assets and liabilities consist of the following:
  2009
                          
                          
                          2008Deferred
      tax assets (liabilities):Net
      operating loss carry-forwards
                          
                          
                          16,985
                          
                          
                          
                          14,200Amortization
      of intangible assets
                          
                          
                          196
                          
                          
                          
                          25Stock-based
      compensation
                          
                          
                          1,679
                          
                          
                          
                          525Deferred
      tax assets, net
                          
                          
                          18,860
                          
                          
                          
                          14,750Valuation
      allowance
                          
                          
                          (18,860
                          )
                          
                          
                          (14,750
                          )Net
      deferred tax assets
                          
                          $
                          -
                          
                          
                          $
                          -
 
 In
accordance with SFAS 109 and based on all available evidence on a
jurisdictional basis, the Company believes that, it is more likely than not that
its deferred tax assets will not be utilized, and has recorded a full valuation
allowance against its net deferred tax assets in each jurisdiction.
 
 As of
March 31, 2009, the Company had net operating loss (NOL) carry-forwards to
reduce future Federal income taxes of approximately $42,900, expiring in various
years ranging through 2027. The Company may have had ownership changes, as
defined by the Internal Revenue Service, which may subject the NOL's to annual
limitations which could reduce or defer the use of the NOL
carry-forwards.
  In
connection with the acquisitions described in Note 6 above, the Company has
recorded Goodwill, amounting to $55,833 after impairment, which will not be
amortized for book purposes and is not deductible for US tax purposes. The
Company also recorded intangibles which will have differing amortization for
book and tax purposes. Trademarks, amounting to $9,821 after impairment, will
not be amortized for book purposes, but will be subject to amortization for tax
purposes, giving rise to a permanent difference. Other intangible assets,
amounting to $7,506, will be amortized over a shorter period for book purposes
than tax purposes, giving rise to timing differences. These differences will
impact the Company’s NOL carry-forwards in the future.
  As of
March 31, 2009, realization of the Company's net deferred tax asset of
approximately $18,860 was not considered more likely than not and, accordingly,
a valuation allowance of $18,860 has been provided. During the year ended March
31, 2009, the valuation allowance increased by $4,110.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  32
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  Management
has evaluated and concluded that there are no significant uncertain tax
positions requiring recognition in the Company’s financial statements as of
March 31, 2009.
  The
Company adopted the provisions of FIN 48 on January 1, 2008 and there was no
difference between the amounts of unrecognized tax benefits recognized in the
balance sheet prior to the adoption of FIN 48 and those after the adoption of
FIN 48. There were no unrecognized tax benefits not subject to valuation
allowance as at March 31, 2009 and March 31, 2008. The Successor did not
recognize interest and penalties on income taxes in its statement of operations
for the year ended March 31, 2009; the three months ended March 31, 2008 and
2007, or the year ended December 31, 2007.  The Predecessor did not
recognize interest and penalties on income taxes in its statement of operations
for the period from April 1, 2007 through February 12,
2008.  Management believes that with few exceptions, the Company is no
longer subject to income tax examinations by tax authorities for years before
March 31, 2004.
  13. Segment
and Geographic information
  The
Company operates in one reportable segment in which it is a developer and
publisher of branded entertainment content for mobile phones. Revenues are
attributed to geographic areas based on the country in which the carrier’s
principal operations are located. The Company attributes its long-lived assets,
which primarily consist of property and equipment, to a country primarily based
on the physical location of the assets. Goodwill and intangibles are not
included in this allocation. The following information sets forth geographic
information for the Successor on net property and equipment as at March 31, 2009
and December 31, 2007; and for revenues in the years ended March 31, 2009 and
December 31, 2007 and the; three months ended March 31, 2008.
  North
                        
                        
                        
                        
                        
                        SouthAmerica
                        
                        
                        Europe
                        
                        
                        America
                        
                        
                        Other Regions
                        
                        
                        ConsolidatedYear
      ended March 31, 2009Net
      sales to unaffiliated customers
                        
                        $
                        4,818
                        
                        
                        $
                        22,030
                        
                        
                        $
                        671
                        
                        
                        $
                        3,737
                        
                        
                        $
                        31,256Year
      ended December 31, 2007Net
      sales to unaffiliated customers
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Three
      months ended March 31, 2008Net
      sales to unaffiliated customers
                        
                        $
                        398
                        
                        
                        $
                        2,553
                        
                        
                        $
                        147
                        
                        
                        $
                        110
                        
                        
                        $
                        3,208Property
      and equipment, net at March 31, 2009
                        
                        $
                        730
                        
                        
                        $
                        490
                        
                        
                        $
                        -
                        
                        
                        $
                        10
                        
                        
                        $
                        1,230Property
      and equipment, net at December 31, 2007
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
  The
Successor’s three largest customers accounted for 21%, 19% and 11% of our
revenue in the year ended March 31, 2009; and 48%, 0% and 0% of our revenue in
the three months ended March 31, 2008.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  33
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  The
following information sets forth geographic information for the Predecessor on
net property and equipment as of February 12, 2008 and for revenues for the
period April 1, 2007 through February 12, 2008.
  North
                        
                        
                        
                        
                        
                        SouthAmerica
                        
                        
                        Europe
                        
                        
                        America
                        
                        
                        Other Regions
                        
                        
                        ConsolidatedPeriod
      from April 1, 2007 through February 12, 2008Net
      sales to unaffiliated customers
                        
                        $
                        1,035
                        
                        
                        $
                        10,680
                        
                        
                        $
                        354
                        
                        
                        $
                        213
                        
                        
                        $
                        12,282Property
      and equipment, net at February 12, 2008
                        
                        $
                        858
                        
                        
                        $
                        20
                        
                        
                        $
                        -
                        
                        
                        $
                        197
                        
                        
                        $
                        1,075
 
 The
Predecessor’s largest customer accounted for 54.1% of our gross sales for period
from April 1, 2007 through February 12, 2008.
  14. Commitments
and Contingencies
 
 Operating
Lease Obligations
 The
Company leases office facilities under noncancelable operating leases expiring
in various years through 2011.
 
 Following
is a summary of future minimum payments under initial terms of leases at March
31, 2009:
 
 Year
      Ending March 312009
                            
                            $
                            3692010
                            
                            $
                            111Total
      minimum lease payments
                            
                            $
                            480
 
 These
amounts do not reflect future escalations for real estate taxes and building
operating expenses.  Rental expense for the Successor amounted to $867
for the year ended March 31, 2009; $121 and $26 for the three months ended March
31, 2008 and 2007; and $102 for the year ended December 31,
2007.  Rental expense for the Predecessor amounted to $482 for the
period from April 1, 2007 through February 12, 2008.
  Minimum
Guaranteed Royalties
 The
Company has entered into license agreements with various owners of brands and
other intellectual property so that it could develop and publish branded
products for mobile handsets.
 
 Pursuant
to some of these agreements, the Company is required to pay minimum royalties
over the term of the agreements regardless of actual sales. Future minimum
royalty payments for those agreements as of March 31, 2009 were as
follows:
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  34
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 MinimumGuaranteedYear
      Ending March 31
                          
                          Royalties2009
                          
                          $
                          902010
                          
                          
                          1202011
                          
                          
                          60Total
      minimum payments
                          
                          $
                          270
 
 Other
Obligations
 As of
March 31, 2009, the Company was obligated for payments under various
distribution agreements, equipment lease agreements, employment contracts and
the management agreement described in Note 9 with initial terms greater than one
year.  Annual payments relating to these commitments at March 31, 2009
are as follows:
  Year
      Ending March 31
                          
                          Commitments2009
                          
                          $
                          2,7982010
                          
                          
                          2,0282011
                          
                          
                          226Total
      minimum payments
                          
                          $
                          5,052
 
 Litigation
  Twistbox’s
wholly owned subsidiary WAAT Media Corp. (“WAAT”) and General Media
Communications, Inc. (“GMCI”) are parties to a content license
agreement dated May 30, 2006, whereby GMCI granted to WAAT certain
exclusive rights to exploit GMCI branded content via mobile devices.  GMCI
terminated the agreement on January 26, 2009 based on its claim that WAAT
failed to cure a material breach pertaining to the non-payment of a minimum
royalty guarantee installment in the amount of $485,000.  On or about March
16, 2009, GMCI filed a complaint seeking the balance of the minimum guarantee
payments due under the agreement in the approximate amount of $4,085,000. 
WAAT has counter-sued claiming GMCI is not entitled to the claimed amount and
that it has breached the agreement by, among other things, failing to promote,
market and advertise the mobile services as required under the agreement and by
fraudulently inducing WAAT to enter into the agreement based on GMCI’s
repeated assurances of its intention to reinvigorate its flagship
brand.  GMCI has filed a demurrer to the counter-claim.  WAAT's
response is due by August 31, 2009. WAAT intends to vigorously defend
against this action.  Principals of both parties continue to communicate to
find a mutually acceptable resolution. The company has accrued for its estimated
liability in this matter.
  From time
to time, we are subject to various claims, complaints and legal actions in the
normal course of business. We do not believe we are party to any currently
pending litigation, the outcome of which will have a material adverse effect on
our operations or financial position.
  
 
 Mandalay
      Media, Inc. and Subsidiaries
                  35
 Notes
to Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 15. Discontinued
Operations
  Discontinued
operations consist of Fierce Media, an 80% subsidiary of AMV Holdings,
Limited.   In conjunction with the acquisition of the Company's
acquisition of AMV, the Company had the intention of discontinuing the Fierce
Media subsidiary. The assets of Fierce Media on October 23, 2008 (date of AMV
acquisition)  were less than ($150) and as such, were not segregated on the
balance sheets as assets held for sale.  On January 31, 2009, the Company
finalized the sale of Fierce Media to the 20% minority owner for a nominal
amount.   In March 2009, the Company evaluated the continued
costs of operating Fierce Media from October 23, 2008 to January 31,
2009  in accordance with the provisions of Statement of Financial
Accounting Standards No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”) and determined that the continued costs
of operating this subsidiary met the criteria required to account for the
operations as discontinued.
  The
Company recorded a pre tax charge of $147 related to the costs of operating
Fierce Media from the acquisition date to sale date.  These costs are
included in discontinued operations in the accompanying consolidated statement
of operations for the year ended March 31, 2009.