UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549








FORM
10-Q





(Mark
One)





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





For the
quarterly period ended September 30, 2009





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





For the
transition period from _____________ to ___________


Commission
file number   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)





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes   x
    No    ̈





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    ̈   
     No   ̈





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
definition of  “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 a smaller reporting company)
            Smaller
      reporting company x




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





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes   x
    No    ̈





On
November 13, 2009, there were 39,863,191 shares of the Registrant’s common
stock, par value $0.0001 per share, issued and outstanding.





MANDALAY
MEDIA, INC.


Table
of Contents




PagePART I - FINANCIAL
    INFORMATIONItem
      1.
                Financial
      StatementsConsolidated
      Balance Sheets as of September 30, 2009 (Unaudited) and March 31,
      2009
                1Consolidated
      Statements of Operations (Unaudited) For the Three Month and the Six Month
      Periods Ended September 30, 2009 and 2008
                2Consolidated
      Statements of Cash Flows (Unaudited) For the Three Month and the Six Month
      Periods September 30, 2009 and 2008
                4Notes
      to the Unaudited Consolidated Financial Statements
                5Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                31Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                38Item
      4T.
                Controls
      and Procedures
                38PART II - OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                39Item 1A.
                Risk
      Factors
                39Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                39Item
      3.
                Defaults
      Upon Senior Securities
                39Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                39Item
      5.
                Other
      Information
                39Item
      6.
                Exhibits
                39Signatures
                40





PART I -
FINANCIAL INFORMATION




Item 1.   Financial
Statements.




Page(s)Consolidated
      Balance Sheets as of September 30, 2009 (Unaudited) and March 31,
      2009
                  
                  1Consolidated
      Statements of Operations (Unaudited) for the three months and the six
      months ended September 30, 2009 and September 30, 2008
                  
                  2Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss (Unaudited) for
      the period ended September 30, 2009
                  
                  3Consolidated
      Statements of Cash Flows (Unaudited) for the six months ended September
      30, 2009 and September 30, 2008
                  
                  4Notes
      to Unaudited Consolidated Financial Statements
                  
                  5-31











Mandalay
Media, Inc. and Subsidiaries


Consolidated
Balance Sheets







(In
thousands, except share amounts)




September
      30,
                                
                                
                                March
      31,2009
                                
                                
                                2009(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                                
                                $
                                2,807
                                
                                
                                $
                                5,927Accounts
      receivable, net of allowances of $177 and $174,
    respectively
                                
                                
                                10,886
                                
                                
                                
                                10,745Prepaid
      expenses and other current assets
                                
                                
                                961
                                
                                
                                
                                1,334Total
      current assets
                                
                                
                                14,654
                                
                                
                                
                                18,006Property
      and equipment, net
                                
                                
                                1,159
                                
                                
                                
                                1,230Intangible
      assets, net
                                
                                
                                15,511
                                
                                
                                
                                16,121Goodwill
                                
                                
                                55,833
                                
                                
                                
                                55,833TOTAL
      ASSETS
                                
                                $
                                87,157
                                
                                
                                $
                                91,190LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                                
                                $
                                7,365
                                
                                
                                $
                                9,557Accrued
      license fees
                                
                                
                                2,387
                                
                                
                                
                                2,795Accrued
      compensation
                                
                                
                                603
                                
                                
                                
                                592Current
      portion of long term debt
                                
                                
                                24,506
                                
                                
                                
                                23,296Other
      current liabilities
                                
                                
                                4,463
                                
                                
                                
                                5,899Total
      currrent liabilities
                                
                                
                                39,324
                                
                                
                                
                                42,139Other
      long-term liabilities
                                
                                
                                -
                                
                                
                                
                                27Total
      liabilities
                                
                                $
                                39,324
                                
                                
                                
                                42,166Commitments
      and contingencies (Note 15)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; 39,863,191 issued
      and outstanding at September 30, 2009;  39,653,125 issued and
      outstanding at March 31, 2009
                                
                                
                                4
                                
                                
                                
                                4Additional
      paid-in capital
                                
                                
                                95,048
                                
                                
                                
                                93,918Accumulated
      other comprehensive income/(loss)
                                
                                
                                (288
                                )
                                
                                
                                (129
                                )Accumulated
      deficit
                                
                                
                                (47,031
                                )
                                
                                
                                (44,869
                                )Total
      stockholders' equity
                                
                                
                                47,833
                                
                                
                                
                                49,024TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                
                                $
                                87,157
                                
                                
                                $
                                91,190





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





1




Mandalay
Media, Inc. and Subsidiaries


Consolidated
Statement of Operations (Unaudited)







(In
thousands, except per share amounts)





3
      Months Ended
                              
                              
                              3
      Months Ended
                              
                              
                              6
      Months Ended
                              
                              
                              6
      Months EndedSeptember
      30
                              
                              
                              September
      30
                              
                              
                              September
      30
                              
                              
                              September
      302009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Net
      revenues
                              
                              $
                              10,141
                              
                              
                              $
                              5,003
                              
                              
                              $
                              20,224
                              
                              
                              $
                              10,349Cost
      of revenuesLicense
      fees
                              
                              
                              857
                              
                              
                              
                              1,785
                              
                              
                              
                              1,876
                              
                              
                              
                              3,934Other
      direct cost of revenues
                              
                              
                              2,149
                              
                              
                              
                              102
                              
                              
                              
                              3,986
                              
                              
                              
                              204Total
      cost of revenues
                              
                              
                              3,006
                              
                              
                              
                              1,887
                              
                              
                              
                              5,862
                              
                              
                              
                              4,138Gross
      profit
                              
                              
                              7,135
                              
                              
                              
                              3,116
                              
                              
                              
                              14,362
                              
                              
                              
                              6,211Operating
      expensesProduct
      development
                              
                              
                              1,358
                              
                              
                              
                              1,800
                              
                              
                              
                              2,780
                              
                              
                              
                              3,567Sales
      and marketing
                              
                              
                              3,024
                              
                              
                              
                              1,004
                              
                              
                              
                              6,405
                              
                              
                              
                              2,283General
      and administrative
                              
                              
                              2,956
                              
                              
                              
                              2,559
                              
                              
                              
                              5,344
                              
                              
                              
                              5,372Amortization
      of intangible assets
                              
                              
                              177
                              
                              
                              
                              137
                              
                              
                              
                              354
                              
                              
                              
                              274Total
      operating expenses
                              
                              
                              7,515
                              
                              
                              
                              5,500
                              
                              
                              
                              14,883
                              
                              
                              
                              11,496Loss
      from operations
                              
                              
                              (380
                              )
                              
                              
                              (2,384
                              )
                              
                              
                              (521
                              )
                              
                              
                              (5,285
                              )Interest
      and other income/(expense)Interest
      income
                              
                              
                              3
                              
                              
                              
                              44
                              
                              
                              
                              7
                              
                              
                              
                              121Interest
      expense
                              
                              
                              (737
                              )
                              
                              
                              (468
                              )
                              
                              
                              (1,406
                              )
                              
                              
                              (952
                              )Foreign
      exchange transaction gain/(loss)
                              
                              
                              139
                              
                              
                              
                              (57
                              )
                              
                              
                              294
                              
                              
                              
                              73Other
      income / (expense)
                              
                              
                              154
                              
                              
                              
                              (102
                              )
                              
                              
                              149
                              
                              
                              
                              (187
                              )Interest
      and other income/(expense)
                              
                              
                              (441
                              )
                              
                              
                              (583
                              )
                              
                              
                              (956
                              )
                              
                              
                              (945
                              )Loss
      from operations before income taxes
                              
                              
                              (821
                              )
                              
                              
                              (2,967
                              )
                              
                              
                              (1,477
                              )
                              
                              
                              (6,230
                              )Income
      tax provision
                              
                              
                              (380
                              )
                              
                              
                              (74
                              )
                              
                              
                              (685
                              )
                              
                              
                              (148
                              )Net
      loss
                              
                              $
                              (1,201
                              )
                              
                              $
                              (3,041
                              )
                              
                              $
                              (2,162
                              )
                              
                              $
                              (6,378
                              )Comprehensive
      loss
                              
                              $
                              (1,563
                              )
                              
                              $
                              (3,147
                              )
                              
                              $
                              (2,321
                              )
                              
                              $
                              (6,494
                              )Basic
      and diluted net loss per common share
                              
                              $
                              (0.03
                              )
                              
                              $
                              (0.09
                              )
                              
                              $
                              (0.05
                              )
                              
                              $
                              (0.20
                              )Weighted
      average common shares outstanding, basic and diluted
                              
                              
                              39,863
                              
                              
                              
                              32,423
                              
                              
                              
                              39,836
                              
                              
                              
                              32,377





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





2





Mandalay
Media, Inc. and Subsidiaries


Consolidated
Statements of Stockholders’ Equity and Comprehensive Loss
(Unaudited)







(In
thousands, except share amounts)





AccumulatedAdditional
                                          
                                          
                                          OtherCommon
      Stock
                                          
                                          
                                          Preferred
      Stock
                                          
                                          
                                          Paid-In
                                          
                                          
                                          Comprehensive
                                          
                                          
                                          Accumulated
                                          
                                          
                                          
                                          
                                          
                                          ComprehensiveShares
                                          
                                          
                                          Amount
                                          
                                          
                                          Shares
                                          
                                          
                                          Amount
                                          
                                          
                                          Capital
                                          
                                          
                                          Income/(Loss)
                                          
                                          
                                          Deficit
                                          
                                          
                                          Total
                                          
                                          
                                          LossBalance
      at March 31, 2009
                                          
                                          
                                          39,653,125
                                          
                                          
                                          $
                                          4
                                          
                                          
                                          
                                          100,000
                                          
                                          
                                          $
                                          100
                                          
                                          
                                          $
                                          93,918
                                          
                                          
                                          $
                                          (129
                                          )
                                          
                                          $
                                          (44,869
                                          )
                                          
                                          $
                                          49,024Net
      Loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (961
                                          )
                                          
                                          
                                          (961
                                          )
                                          
                                          
                                          (961
                                          )Foreign
      currency translation gain/(loss)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          203
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          203
                                          
                                          
                                          
                                          203Issuance
      of common stock as part of compensation
                                          
                                          
                                          210,066
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          172
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          172Deferred
      stock-based compensation
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          311
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          311Comprehensive
      loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          (758
                                          )Balance
      at June 30, 2009
                                          
                                          
                                          39,863,191
                                          
                                          
                                          $
                                          4
                                          
                                          
                                          
                                          100,000
                                          
                                          
                                          $
                                          100
                                          
                                          
                                          $
                                          94,401
                                          
                                          
                                          $
                                          74
                                          
                                          
                                          $
                                          (45,830
                                          )
                                          
                                          $
                                          48,749Net
      Loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,201
                                          )
                                          
                                          
                                          (1,201
                                          )
                                          
                                          
                                          (1,201
                                          )Foreign
      currency translation gain/(loss)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (362
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (362
                                          )
                                          
                                          
                                          (362
                                          )Issuance
      of warrants to vendor for services rendered
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          134
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          134Deferred
      stock-based compensation
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          513
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          513Comprehensive
      loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          (1,563
                                          )Balance
      at September 30, 2008
                                          
                                          
                                          39,863,191
                                          
                                          
                                          $
                                          4
                                          
                                          
                                          
                                          100,000
                                          
                                          
                                          $
                                          100
                                          
                                          
                                          $
                                          95,048
                                          
                                          
                                          $
                                          (288
                                          )
                                          
                                          
                                          (47,031
                                          )
                                          
                                          $
                                          47,833





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





3





Mandalay
Media, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows (Unaudited)







(In
thousands)





6
      Months Ended
                    
                    
                    6
      Months EndedSeptember
      30,
                    
                    
                    September
      30,2009
                    
                    
                    2008Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (2,162
                    )
                    
                    
                    (6,378
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    853
                    
                    
                    
                    642Allowance
      for doubtful accounts
                    
                    
                    3
                    
                    
                    
                    (45
                    )Stock-based
      compensation
                    
                    
                    996
                    
                    
                    
                    1,966Warrants
      issued as compensation for services
                    
                    
                    134
                    
                    
                    
                    -(Increase)
      / decrease in assets:Accounts
      receivable
                    
                    
                    (290
                    )
                    
                    
                    4Prepaid
      expenses and other current assets
                    
                    
                    327
                    
                    
                    
                    (22
                    )Increase
      / (decrease) in liabilities:Accounts
      payable
                    
                    
                    (2,230
                    )
                    
                    
                    2,022Accrued
      license fees
                    
                    
                    (429
                    )
                    
                    
                    (1,020
                    )Accrued
      compensation
                    
                    
                    (9
                    )
                    
                    
                    58Other
      liabilities
                    
                    
                    (331
                    )
                    
                    
                    (750
                    )Net
      cash used in operating activities
                    
                    
                    (3,138
                    )
                    
                    
                    (3,523
                    )Cash
      flows from investing activitiesPurchase
      of property and equipment
                    
                    
                    (172
                    )
                    
                    
                    (120
                    )Transaction
      costs related to merger with Twistbox
                    
                    
                    -
                    
                    
                    
                    (59
                    )Net
      cash used in investing activities
                    
                    
                    (172
                    )
                    
                    
                    (179
                    )Effect
      of exchange rate changes on cash and cash equivalents
                    
                    
                    190
                    
                    
                    
                    (112
                    )Net
      decrease in cash and cash equivalents
                    
                    
                    (3,122
                    )
                    
                    
                    (3,814
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    5,927
                    
                    
                    
                    10,936Cash
      and cash equivalents, end of period
                    
                    $
                    2,807
                    
                    
                    
                    7,122Supplemental
      disclosure of cash flow information:Taxes
      paid
                    
                    
                    109
                    
                    
                    
                    148





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





4





Mandalay
Media, Inc. and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements


(all
numbers in thousands except per share amounts)








1.
            Organization





Mandalay
Media, Inc. (the “Company” or “Mandalay Media”), formerly Mediavest, Inc.
(“Mediavest”) , 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, Mediavest 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 Media, with Mandalay Media as the surviving corporation.
Mandalay Media 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 Media’s preferred and common
stock had the same status and par value as the respective stock of
Mediavest and Mandalay Media acceded to all the rights, acquired all the assets
and assumed all of the liabilities of Mediavest.





On
February 12, 2008, Mandalay Media 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 of all the outstanding options
under Twistbox’s Stock Incentive Plan by the issuance of options to purchases
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.





Twistbox
Entertainment, Inc. (formerly known as The WAAT Corporation) is incorporated in
the State of Delaware.





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.




5


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited 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
Stock Purchase Agreement (“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 shares of Common Stock (the “Stock
Consideration”); (c) a secured promissory note in the aggregate original
principal amount of $5,375 (the “AMV 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 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 AMV Note, as
set forth in the Stock Purchase Agreement. An initial adjustment of $443 was
made subsequent to closing, and has been added to the AMV Note. The initial
period earn-out was recognized in the year ended March 31, 2009 and was 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 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
accompanying consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K, filed with the Securities and Exchange Commission.
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments, which
the Company believes are necessary for a fair statement of the Company’s
financial position as of September 30, 2009 and its results of operations for
the three months and the six months ended September 30, 2009 and 2008,
respectively. These consolidated financial statements are not necessarily
indicative of the results to be expected for the entire year. The consolidated
balance sheet presented as of September 30, 2009 has been derived from the
unaudited consolidated financial statements as of that date, and the
consolidated balance sheet presented as of March 31, 2009 has been derived from
the audited consolidated financial statements as of that date.




6


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


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.





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 Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 985-605, Software Revenue Recognition,
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 license agreement to be evidence of an arrangement with a carrier or
aggregator 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.




7


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


In
accordance with FASB ASC 605-45, 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
(Loss) per Common Share





Basic
loss per common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed by dividing net 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 were as
follows:




3
      Months Ended
                  
                  
                  3
      Months Ended
                  
                  
                  6
      Months Ended
                  
                  
                  6
      Months EndedSeptember
      30
                  
                  
                  September
      30
                  
                  
                  September
      30
                  
                  
                  September
      302009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Potentially
      dilutive shares
                  
                  
                  100
                  
                  
                  
                  2,300
                  
                  
                  
                  100
                  
                  
                  
                  3,695





8





Mandalay
Media, Inc. and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements


(all
numbers in thousands except per share amounts)








These
shares were not included in the computation of diluted loss per share as they
were anti-dilutive in each period.





Comprehensive
Loss


Comprehensive
loss consists of two components, net loss and other comprehensive loss. Other
comprehensive 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 loss. The Company’s other comprehensive 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.





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 our 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 FASB ASC 985-20, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed(“ASC 985-20”). ASC
985-20 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.




9


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


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.





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. Advertising expense was
$2,176 and $139 in the three months ended September 30, 2009 and 2008,
respectively and $4,515 and $563 in the six months ended September 30, 2009 and
2008, respectively.





Restructuring


The
Company accounts for costs associated with employee terminations and other exit
activities in accordance with FASB ASC 420-10, 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


As of
September 30, 2009 and March 31, 2009, the carrying value of cash and cash
equivalents, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued license fees, accrued compensation and other current
liabilities approximates fair value due to the short-term nature of such
instruments. The carrying value of current portion of long-term debt
approximates fair value as the related interest rates approximate rates
currently available to the Company.




10


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


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 of $362 in the three months ended September
30, 2009 and $159 in the six months ended September 30, 2009 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 shareholder's equity.





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.
Most of our sales are made directly to 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 September 30, 2009, two major customers
represented approximately 12% and 11%, respectively, of our gross accounts
receivable outstanding. These two customers accounted for 22% and 14%,
respectively, of our gross revenues in the three months ended September 30,
2009; and 21% and 15% in the six months ended September 30, 2009. 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.





Property
and Equipment


Property
and equipment is stated at cost.  Depreciation and amortization is
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 FASB ASC 350-20 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.




11


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


In the
year ended March 31, 2009, the Company determined that there was an impairment
of goodwill, amounting to $27,844.  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 6 below.





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 FASB ASC 360-10,
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.





In the
year ended March 31, 2009, the Company determined that there was an impairment
of intangible assets, amounting to $3,940.  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 8 below.





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. We have determined that there
is no impairment in the current period.





Income
Taxes


The
Company accounts for income taxes in accordance with FASB ASC
740-10,  Accounting
for Income Taxes(“ASC 740-10”), 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 ASC
740-10, 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.




12


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


ASC
740-10 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.





Stock-based compensation.


We have
applied FASB ASC 718 Share-Based Payment (“ASC
718”) and accordingly, we record stock-based compensation expense for all of our
stock-based awards.





Under ASC
718, 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, interest rates, dividend rates 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 FASB ASC 480-10, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(“ASC
480-10”) 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 ASC
480-10. All other issuances of preferred stock are subject to the classification
and measurement principles of ASC 480-10. 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, and stock-based compensation expense.




13


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


Recent
Accounting Pronouncements


With the
exception of those discussed below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the three and six
months ended September 30, 2009, as compared to the recent accounting
pronouncements described in the Company’s Annual Report on Form 10-K for the
fiscal year ended March 31, 2009, that are of significance, or potential
significance to the Company.





Adopted
Accounting Pronouncements





Effective
July 1, 2009, the Company adopted FASB ASC 105-10, Generally Accepted Accounting
Principles (“ASC 105-10”) (the “Codification”). ASC 105-10 establishes
the exclusive authoritative reference for U.S. GAAP for use in financial
statements, except for SEC rules and interpretive releases, which are also
authoritative GAAP for SEC registrants. The Codification will supersede all
existing non-SEC accounting and reporting standards. The Company has included
the references to the Codification, as appropriate, in these consolidated
financial statements. As the Codification was not intended to change or alter
existing GAAP, it did not have any impact on the Company’s consolidated
financial statements.





Effective
April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC
855-10”). The standard modifies the names of the two types of subsequent events
either as “recognized subsequent events” (previously referred to in practice as
Type I subsequent events) or “non-recognized subsequent events” (previously
referred to in practice as Type II subsequent events). In addition, the standard
modifies the definition of subsequent events to refer to events or transactions
that occur after the balance sheet date, but before the financial statements are
issued (for public entities) or available to be issued (for nonpublic entities).
It also requires the disclosure of the date through which subsequent events have
been evaluated. The standard did not result in significant changes in the
practice of subsequent event disclosures or the related accounting thereof, and
therefore the adoption did not have any impact on the Company’s consolidated
financial statements.





Effective
April 1, 2009, the Company adopted three accounting standard updates which
were intended to provide additional application guidance and enhanced
disclosures regarding fair value measurements and impairments of securities.
They also provide additional guidelines for estimating fair value in accordance
with fair value accounting. The first update, as codified in ASC 820-10-65,
provides additional guidelines for estimating fair value in accordance with fair
value accounting. The second accounting update, as codified in ASC 320-10-65,
changes accounting requirements for other-than-temporary-impairment
(OTTI) for debt securities by replacing the current requirement that a
holder have the positive intent and ability to hold an impaired security to
recovery in order to conclude an impairment was temporary with a requirement
that an entity conclude it does not intend to sell an impaired security and it
will not be required to sell the security before the recovery of its amortized
cost basis. The third accounting update, as codified in ASC 825-10-65, increases
the frequency of fair value disclosures. These updates were effective for fiscal
years and interim periods ended after June 15, 2009. The adoption of these
accounting updates did not have any impact on the Company’s consolidated
financial statements.




14


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


Effective
April 1, 2009, the Company adopted a new accounting standard update regarding
business combinations, ASC 805, which establishes principles and requirements
for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. ASC 805-10 also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. ASC 805-10 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 will apply the
requirements of ASC 805-10 prospectively to any future acquisitions. Although
the Company did not enter into any business combinations during the first six
months of 2009, the Company believes ASC 805-10 may have a material impact on
the Company’s future consolidated financial statements if the Company were to
enter into any future business combinations depending on the size and nature of
any such future transactions.





New
Accounting Pronouncements





In
September 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force ” (ASU
2009-13). It updates the existing multiple-element revenue arrangements guidance
currently included under ASC 605-25, which originated primarily from the
guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF 00-21). The revised guidance primarily provides two
significant changes: (1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a delivered item to
be treated as a separate unit of accounting, and (2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised
guidance is retroactively applied to the beginning of the year of adoption. The
Company is currently assessing the future impact of this new accounting update
to its consolidated financial statements.





In
August 2009, the FASB issued Update No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) — Measuring Liabilities at Fair
Value  (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value
Measurements and Disclosures, of the Codification to provide further guidance on
how to measure the fair value of a liability, an area where practitioners have
been seeking further guidance. It primarily does three things: (1) sets
forth the types of valuation techniques to be used to value a liability when a
quoted price in an active market for the identical liability is not available,
(2) clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability and (3) clarifies that both a quoted price in an
active market for the identical liability at the measurement date and the quoted
price for the identical liability when traded as an asset in an active market
when no adjustments to the quoted price of the asset are required are Level 1
fair value measurements. This standard is effective beginning fourth quarter of
2009 for the Company. The adoption of this standard update is not expected to
impact the Company’s consolidated financial statements.





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.




15


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
  In
addition, Twistbox has a significant amount of debt, in the form of a secured
note, as detailed in Note 8. The Company has guaranteed 50% of this debt, and
the group is subject to certain covenants. The debt and the operation of
covenants were restructured on August 11, 2009.




The
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 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 and to improve liquidity.  These actions include the debt
restructuring described in Note 8, and the Company has taken further action to
reduce its ongoing operating cost base, and has been in discussions 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 commitments, and to obtain additional
debt and/or equity placements.




4.
            Fair
      Value Measurements




The
carrying amounts of cash and cash equivalents, accounts receivables, accounts
payable and accrued liabilities approximate their fair values due to the
short-term maturities of these instruments.




On April
1, 2009, the Company adopted FASB ASC 820-10, Fair Value Measurements and
Disclosures - Measuring
Liabilities at Fair Value (“ASC 820-10”). ASC 820-10, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
ASC 820-10 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information.




ASC
820-10 establishes a three-level valuation hierarchy of valuation techniques
that is based on observable and unobservable inputs. Classification within the
hierarchy is determined based on the lowest level of input that is significant
to the fair value measurement. The first two inputs are considered observable
and the last unobservable, that may be used to measure fair value and include
the following:




Level 1
- Quoted prices in active markets for identical assets or
liabilities.




Level 2
- Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of
the assets or liabilities.




Level 3
- Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.




As of
September 30, 2009, the Company held certain assets and liabilities that are
required to be measured at fair value on a recurring basis, including its cash
and cash equivalents. The fair value of these assets and liabilities was
determined using the following inputs in accordance with ASC 820-10 at September
30, 2009:




16


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


Fair Value Measurement as of September
      30, 2009Total
                                                      
                                                      
                                                      Level 1
                                                      
                                                      
                                                      Level 2
                                                      
                                                      
                                                      Level 3Description
                                                      
                                                      $
                                                      
                                                      
                                                      $
                                                      
                                                      
                                                      $
                                                      
                                                      
                                                      $Cash
      and cash equivalents
                                                      
                                                      
                                                      2,807
                                                      
                                                      
                                                      
                                                      2,807
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -




5.
            Balance
      Sheet Components




Accounts
Receivable




September
      30,
                      
                      
                      March
      31,2009
                      
                      
                      2009(unaudited)Accounts
      receivable
                      
                      $
                      11,063
                      
                      
                      $
                      10,919Less:
      allowance for doubtful accounts
                      
                      $
                      (177
                      )
                      
                      
                      (174
                      )$
                      10,886
                      
                      
                      $
                      10,745




Accounts
receivable includes amounts billed and unbilled as of the respective balance
sheet dates. The Company had no significant write-offs or recoveries during the
period ended September 30, 2009.




Property
and Equipment




September
      30,
                        
                        
                        March
      31,2009
                        
                        
                        2009(unaudited)Equipment
                        
                        $
                        1,318
                        
                        
                        $
                        1,192Furniture
      & fixtures
                        
                        
                        432
                        
                        
                        
                        386Leasehold
      improvements
                        
                        
                        140
                        
                        
                        
                        1401,890
                        
                        
                        
                        1,718Accumulated
      depreciation
                        
                        
                        (731
                        )
                        
                        
                        (488
                        )$
                        1,159
                        
                        
                        $
                        1,230




Depreciation
expense for the three months ended September 30, 2009 and 2008 was $133 and $86,
respectively; and for the six months ended September 30, 2009 and 2008 was $243
and $164 respectively.




6.
            Description
      of Stock Plans




On
September 27, 2007, the stockholders of the Company adopted the 2007 Employee,
Director and Consultant Stock Plan (“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, 2009, 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, 2009, 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.




17


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


The
following table summarizes options granted for the periods or as of the dates
indicated:




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
              
              
              $
              2.51Granted
              
              
              -
              
              
              $
              -Canceled
              
              
              (380
              )
              
              $
              0.81Exercised
              
              
              -
              
              
              $
              -Outstanding
      at September 30, 2009 (unaudited)
              
              
              6,580
              
              
              $
              2.51Exercisable
      at September 30, 2009 (unaudited)
              
              
              5,308
              
              
              $
              2.27




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
      GrantedThree
      Months Ended
                
                
                
                
                Options
      tranferredSeptember 30, 2008
                
                Options Granted
                
                from TwistboxExpected
      life (years)
                
                
                4
                
                
                4
      to 6
                
                
                3
      to 7Risk-free
      interest rate
                
                
                3.89
                
                
                2.7%
      to 3.89
                %
                
                2.03%
      to 5.03
                %Expected
      volatility
                
                
                75.20
                %
                
                70%
      to 75.2
                %
                
                70%
      to 75
                %Expected
      dividend yield
                
                
                0
                %
                
                0
                %
                
                0
                %




The
exercise price for options outstanding at September 30, 2009 was as
follows:





18


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


Options
      outstandingWeightedAverage
                                  
                                  
                                  
                                  
                                  
                                  WeightedRemaining
                                  
                                  
                                  Number
                                  
                                  
                                  Average
                                  
                                  
                                  AggregateRange
      of
                                  
                                  Contractual
      Life
                                  
                                  
                                  Outsanding
                                  
                                  
                                  Exercise
                                  
                                  
                                  IntrinsicExercise
      Price
                                  
                                  (Years)
                                  
                                  
                                  September
      30, 2009
                                  
                                  
                                  Price
                                  
                                  
                                  Value$0
      - $1.00
                                  
                                  
                                  6.83
                                  
                                  
                                  
                                  2,264
                                  
                                  
                                  $
                                  0.64
                                  
                                  
                                  $
                                  23,608$2.00
      - $3.00
                                  
                                  
                                  8.58
                                  
                                  
                                  
                                  2,616
                                  
                                  
                                  $
                                  2.67
                                  
                                  
                                  $
                                  -$4.00
      - $5.00
                                  
                                  
                                  8.38
                                  
                                  
                                  
                                  1,700
                                  
                                  
                                  $
                                  4.75
                                  
                                  
                                  $
                                  -7.92
                                  
                                  
                                  
                                  6,580
                                  
                                  
                                  $
                                  2.51
                                  
                                  
                                  $
                                  23,608





The
exercise price for options exercisable at September 30, 2009 was as
follows:




Options
      ExercisableWeightedAverage
                  
                  
                  
                  
                  
                  WeightedRemaining
                  
                  
                  Options
                  
                  
                  Average
                  
                  
                  AggregateRange
      of
                  
                  Contractual
      Life
                  
                  
                  Exercisable
                  
                  
                  Exercise
                  
                  
                  IntrinsicExercise
      Price
                  
                  (Years)
                  
                  
                  September
      30, 2009
                  
                  
                  Price
                  
                  
                  Value$0
      - $1.00
                  
                  
                  6.81
                  
                  
                  
                  2,206
                  
                  
                  $
                  0.63
                  
                  
                  $
                  23,541$2.00
      - $3.00
                  
                  
                  8.53
                  
                  
                  
                  1,969
                  
                  
                  $
                  2.66
                  
                  
                  $
                  -$4.00
      - $5.00
                  
                  
                  8.38
                  
                  
                  
                  1,133
                  
                  
                  $
                  4.75
                  
                  
                  $
                  -7.78
                  
                  
                  
                  5,308
                  
                  
                  $
                  2.27
                  
                  
                  
                  23,541


A summary
of the status of the Company’s nonvested shares as of September 30, 2009
pursuant to the Plan, and changes during the three months ended September 30,
2009 is presented below:




Weighted AverageNumber
      of
                      
                      
                      Grant
      DateNonvested shares
                      
                      Shares
                      
                      
                      Fair ValueNonvested
      at March 31, 2009
                      
                      
                      498,767
                      
                      
                      $
                      0.85Granted
                      
                      
                      229,388
                      
                      
                      $
                      0.89Vested
                      
                      
                      219,550
                      
                      
                      $
                      0.86Nonvested
      at June 30, 2009
                      
                      
                      508,605
                      
                      
                      $
                      0.86Vested
                      
                      
                      233,955
                      
                      
                      $
                      0.86Nonvested
      at September 30, 2009
                      
                      
                      274,650
                      
                      
                      $
                      0.86Forfeited
                      
                      
                      (81,333
                      )
                      
                      $
                      0.88




19


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


As of
September 30, 2009, there was $236 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 a further 8
months. The total fair value of shares vested during the three months ended
September 30, 2009 was $202; the total fair value of shares vested during the
six months ended September 30, 2009 was $392.





Stock
compensation expense is included in the following income statement
components:




3
      Months Ended
              
              
              3
      Months Ended
              
              
              6
      Months Ended
              
              
              6
      Months EndedSeptember
      30
              
              
              September
      30
              
              
              September
      30
              
              
              September
      302009
              
              
              2008
              
              
              2009
              
              
              2008Product
      development
              
              $
              3
              
              
              $
              9
              
              
              $
              6
              
              
              $
              19Sales
      and marketing
              
              
              7
              
              
              
              7
              
              
              
              14
              
              
              
              14General
      and administrative
              
              
              503
              
              
              
              728
              
              
              
              995
              
              
              
              1,933$
              513
              
              
              $
              744
              
              
              $
              1,014
              
              
              $
              1,966




7.
              Acquisitions/Purchase
      Price Accounting




Twistbox
Entertainment Inc. and related entities





On
February 12, 2008, the Company completed an acquisition of 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.




20





Mandalay
Media, Inc. and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements


(all
numbers in thousands except per share amounts)







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:





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 “AMV
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 AMV Note, as set forth in the Stock Purchase
Agreement. The initial adjustment has been determined preliminarily as $443, to
be added to the AMV Note.




21


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited 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 was
either exercised in full or terminated. The AMV Note matures on July 31, 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 AMV 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 AMV 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 AMV Note, plus accrued interest. If
within nine months of the issuance date of the 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. Additionally, in
connection with the AMV 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,  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 Media’s repayment of the AMV
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 AMV 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 Stock
Purchase 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
              
              
              1,368Goodwill
              
              
              22,456$
              23,030




22


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)




Net
assets associated with Fierce Media Limited 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.





Unaudited
Pro Forma Summary


The
following pro forma consolidated amounts give effect to the acquisition of 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 period.  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.




3
      months ended
              
              
              6
      months endedSeptember
      30,
              
              
              September
      30,2008
              
              
              2008Revenues
              
              $
              14,296
              
              
              $
              30,827Cost
      of revenues
              
              
              4,079
              
              
              
              11,642Gross
      profit/(loss)
              
              
              10,217
              
              
              
              19,185Operating
      expenses net of interest income and other expense
              
              
              12,642
              
              
              
              23,015Income
      tax expense and minority interests
              
              
              (197
              )
              
              
              (370
              )Net
      loss
              
              $
              (2,622
              )
              
              $
              (4,200
              )Basic
      and Diluted net loss per common share
              
              $
              (0.07
              )
              
              $
              (0.11
              )




8.
              Other
      Intangible Assets




A
reconciliation of the changes to the Company's carrying amount of intangible
assets for the six months ended September 30, 2009 was as
follows:




Balance
      at March 31, 2009
              
              $
              16,121Amortization
              
              
              (305
              )Balance
      at June 30, 2009
              
              
              15,816Amortization
              
              
              (305
              )Balance
      at September 30, 2009
              
              $
              15,511




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; and recorded
an impairment charge of $3,940 to write down intangible assets.





23





Mandalay
Media, Inc. and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements


(all
numbers in thousands except per share amounts)








The
components of intangible assets as at September 30, 2009 and 2008 were as
follows:




September
      30,
                              
                              
                              March
      31,2009
                              
                              
                              2009(unaudited)Software
                              
                              $
                              1,922
                              
                              
                              $
                              1,922Trade
      name / Trademark
                              
                              
                              9,824
                              
                              
                              
                              9,824Customer
      list
                              
                              
                              4,378
                              
                              
                              
                              4,378License
      agreements
                              
                              
                              886
                              
                              
                              
                              886Non-compete
      agreements
                              
                              
                              323
                              
                              
                              
                              32317,333
                              
                              
                              
                              17,333Accumulated
      amortization
                              
                              
                              (1,822
                              )
                              
                              
                              (1,212
                              )$
                              15,511
                              
                              
                              $
                              16,121





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
three months ended September 30, 2009 and 2008, the Company recorded
amortization expense in the amount of $128 and $102, respectively, in cost of
revenues; and amortization expense in the amount of $177 and $137 respectively
in operating expenses. During the six months ended September 30, 2009 and 2008
the Company recorded amortization expense in the amount of $256 and $204,
respectively, in cost of revenues; and amortization expense in the amount of
$354 and $274, respectively, in operating expenses.





As of
September 30, 2009, the total expected future amortization related to intangible
assets was as follows:




12 Months Ended September
      30,2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    ThereafterSoftware
                    
                    $
                    334
                    
                    
                    $
                    334
                    
                    
                    $
                    230
                    
                    
                    $
                    230
                    
                    
                    $
                    230
                    
                    
                    $
                    85Customer
      List
                    
                    
                    547
                    
                    
                    
                    547
                    
                    
                    
                    547
                    
                    
                    
                    547
                    
                    
                    
                    547
                    
                    
                    
                    751License
      Agreements
                    
                    
                    177
                    
                    
                    
                    177
                    
                    
                    
                    177
                    
                    
                    
                    65
                    
                    
                    
                    -
                    
                    
                    
                    -Non-compete
      agreements
                    
                    
                    162
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    1,220
                    
                    
                    $
                    1,058
                    
                    
                    $
                    954
                    
                    
                    $
                    842
                    
                    
                    $
                    777
                    
                    
                    $
                    836





24





Mandalay
Media, Inc. and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements


(all
numbers in thousands except per share amounts)








9.
              Debt




September
      30,
                  
                  
                  March
      31,2009
                  
                  
                  2009(unaudited)Short
      Term DebtSenior
      secured note, inclusive of accrued interest net of discount of $98
      and $247, respectively
                  
                  $
                  18,389
                  
                  
                  
                  17,351Deferred
      purchase consideration inclusive of accrued interest
                  
                  
                  6,117
                  
                  
                  
                  5,945$
                  24,506
                  
                  
                  $
                  23,296




In July
2007 Twistbox entered into a debt financing agreement pursuant to the
ValueAct Note amounting to $16,500, payable at 30 months. The holder of the
ValueAct Note was granted first lien over all of the Company’s assets. The
ValueAct Note carries interest of 9% annually for the first year and 10%
subsequently, with semi-annual interest only payments. The debt-financing
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
Mandalay Media 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.




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.




25


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)




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. The price
change resulted is an adjustment to the valuation of the warrants and therefore
to the debt discount which is amortized over the life of the term of the
debt.





On August
14, 2009, the Company, Twistbox and ValueAct entered into a Third Amendment
(the “Third Amendment”) to the ValueAct Note. Among other things, the Third
Amendment provides for the due date to be extended to July 31, 2010, an interest
rate of 12.5% from the date of the agreement through maturity, an extension of
the payment in kind (“PIK”) election through to the interest payment otherwise
due in January 2010, and a reduction in the minimum cash covenant to $1 million
until January 31, 2010 and $4 million thereafter, subject to certain conditions.
There were no other significant changes.




As
described above, the Company had previously issued to ValueAct warrants to
purchase shares of the Company’s common stock. On August 14, 2009, the Company
and ValueAct entered into an allonge to the warrant to purchase 1,093 shares of
Common Stock. The exercise price of the Warrant was amended from $4.00 to $1.25
per share, and the termination date of the warrants was amended to July 14,
2010. The impact of the price change of the warrants is immaterial to the
consolidated financial statements.





In
addition the Company and the sellers of AMV Limited entered into an agreement
which extended the maturity date of the Promissory Note (the “AMV Note”) which
represents deferred purchase consideration in relation to the AMV acquisition,
until July 31, 2010.





Minimum
future obligations, including interest, under the ValueAct Note are $20,118
during the year ended September 30, 2010 including repayment of the
principal.





10.
            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
(“Agreement”) with Trinad Management for five years. Pursuant to the terms of
the 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 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 three months ended September 30, 2009 and 2008, the Company paid
management fees under the agreement of $90 and $90 respectively. For the
six months ended September 30, 2009 and 2008, the Company paid management fees
under the Agreement of $180 and $180 respectively.




In March
2008, 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 $26 and $26 respectively for the three months ended September 30,
2009 and 2008. Rent expense was $52 and $52 respectively for the six months
ended September 30, 2009 and 2008.




26


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


11.
            Capital
      Stock Transactions





Preferred
Stock





There are
100 shares of Series A Convertible Preferred Stock authorized, issued and
outstanding. The stock has a par value of $0.0001 per share. The Series A
holders shall be entitled to: (1) vote on an equal per share basis as common,
(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.





Common
Stock





In
October 2009, the Company granted warrants to purchase 1,200 shares of common
stock of the Company a vendor. The warrants are exercisable at $1.25 per share,
through September 23, 2014.





12.
            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.





13.
            Income
      Taxes





The
income tax provision for the quarter represents foreign withholding taxes paid
in jurisdictions outside of the US and income taxes currently payable in foreign
jurisdictions, primarily the United Kingdom based on revenue derived in that
territory. AMV Limited had taxable income in the quarter which is subject to
taxation in the United Kingdom. The effective tax rate used for calculation of
the UK tax provision in the quarter was 28% and the difference between the US
statutory rate of 34% and the effective rate of (43%) primarily relates to the
taxes related to the Company’s UK operations and the increase in the reserve for
deferred tax assets for the US operations.




As of
September 30, 2009, there were no material changes to either the nature or the
amounts of the uncertain tax positions previously determined and disclosed as at
March 31, 2009.




ASC 740
requires the consideration of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.  Significant management judgment
is required in determining any valuation allowance recorded against deferred tax
assets. There were no unrecognized tax benefits not subject to valuation
allowance as at September 30, 2009, and March 31, 2009. The Company will
classify interest and penalties on any unrecognized tax benefits as a component
of the provision for income taxes.




27


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)




14.
            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 on our sales and
net property and equipment for the period ended September 30, 2009:


North
                        
                        
                        
                        
                        
                        South
                        
                        
                        South
                        
                        
                        OtherAmerica
                        
                        
                        Europe
                        
                        
                        Africa
                        
                        
                        America
                        
                        
                        Regions
                        
                        
                        ConsolidatedThree
      Months ended September 30, 2009Net sales to unaffiliated
      customers
                        
                        
                        1,131
                        
                        
                        
                        6,943
                        
                        
                        
                        1,642
                        
                        
                        
                        214
                        
                        
                        
                        211
                        
                        
                        $
                        10,141Six
      Months ended September 30, 2009Net sales to unaffiliated
      customers
                        
                        
                        3,043
                        
                        
                        
                        13,754
                        
                        
                        
                        3,029
                        
                        
                        
                        309
                        
                        
                        
                        89
                        
                        
                        $
                        20,224Property
      and equipment, net at September 30, 2009
                        
                        
                        632
                        
                        
                        
                        530
                        
                        
                        
                        -
                        
                        
                        
                        2
                        
                        
                        
                        8
                        
                        
                        $
                        1,172


Our two
largest customers accounted for 22% and 14%, respectively, of gross revenues in
the three months ended September 30, 2009; and 21% and 15% in the six months
ended September 30, 2009.




15.
            Commitments
      and Contingencies





Operating
Lease Obligations


The
Company leases office facilities under noncancelable operating leases expiring
in various years through 2014.





Following
is a summary of future minimum payments under initial terms of leases at
September 30, 2009:




Year Ending September 302010
            
            $
            3042011
            
            
            1752012
            
            
            1072013
      and thereafter
            
            
            280Total
      minimum lease payments
            
            $
            866


These
amounts do not reflect future escalations for real estate taxes and building
operating expenses.  Rental expense amounted to $235 for the three
months ended September 30, 2009; and $458 for the six months ended September 30,
2009.





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.




28


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)


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 September 30, 2009 were as follows:




MinimumGuaranteedYear Ending September 30
            
            Royalties2010
            
            $
            902011
            
            
            120Total
      minimum payments
            
            $
            210


Commitments
in the above table include guaranteed royalties to licensors that are included
as a liability in the Company’s consolidated balance sheet of $210 at September
30, 2009, because the Company has determined that recoupment is
unlikely.





Other
Obligations


As of
September 30, 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 at September 30, 2009.  Annual payments relating to these
commitments at September 30, 2009 are as follows:




Year Ending September 30
            
            Commitments2010
            
            $
            2,3822011
            
            
            7242012
            
            
            48Total
      minimum payments
            
            $
            3,154




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 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.




29


Mandalay
Media, Inc. and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)




The
Company is subject to various claims and legal proceedings arising in the normal
course of business.  Based on the opinion of the Company’s legal
counsel, management believes that the ultimate liability, if any in the
aggregate of other claims will not be material to the financial position or
results of operations of the Company for any future period; and no liability has
been accrued.




16.
            Subsequent
      Events




Management
has evaluated subsequent events through November 16, 2009, the business date
that this Quarterly Report on the Form 10-Q was filed with the SEC.




No
subsequent were noted which would have a significant impact on the financial
statements.





30




Item 2.   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 Quarterly Report on Form
10-Q, 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” in our Annual Report on Form 10-K for the period
ended March 31, 2009. 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 Media”) 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
Media was originally incorporated in the State of Delaware on November 6,
1998 under the name eB2B Commerce, Inc. On April 27, 2000, Mandalay Media merged
into DynamicWeb Enterprises Inc., a New Jersey corporation, and changed its name
to eB2B Commerce, Inc. On April 13, 2005, Mandalay Media 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 Media 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 Media’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 Media to fund the expenses of remaining
public; (4) 3.5% of the new common stock of Mandalay Media (140,000 shares) was
issued to the holders of record of Mandalay Media’s preferred stock in
settlement of their liquidation preferences; (5) 3.5% of the new common stock of
Mandalay Media (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 Media
(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 Media 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, the Company 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
Media 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 Media (“Merger
Sub”), Twistbox Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark
Capital, 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.




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 Media
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 Media, 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 Media 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 Media 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 Media also assumed all unvested Twistbox options. The merger
consideration consisted of an aggregate of up to 12,325,000 shares of Mandalay
Media common stock, which included the conversion of all shares of Twistbox
capital stock and the reservation of 2,144,700 shares of Mandalay Media common
stock required for assumption of the vested Twistbox options. Mandalay Media
reserved an additional 318,772 shares of Mandalay Media 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.




31




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 Media or any subsidiary of Twistbox or
Mandalay Media 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 Media 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 Media 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 to maintain a cash balance of not less than
$2,500,000 at all times and Mandalay Media 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.




SUMMARY
OF THE AMV ACQUISITION





On
October 23, 2008, Mandalay Media 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 July 31, 2010, and
bears interest at an initial rate of 5% per annum, subject to adjustment as
provided therein. In the event Mandalay Media completes an equity financing
which results in gross proceeds of over $6,000,000, Mandalay Media 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 Media completes a financing
that results in gross proceeds of over $15,000,000, then Mandalay Media 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 Media, 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 Media and Twistbox
maintain certain minimum combined cash balances and provides for certain
covenants with respect to the indebtedness of Mandalay Media 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 Media 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 August 14, 2009, Mandalay Media, Twistbox and
ValueAct entered into a Third Amendment to the ValueAct Note. Pursuant
to the Third Amendment, the maturity date was changed to July 31, 2010 and the
interest rate of the Note increased from 10% to 12.5%.  Additionally, the
Third Amendment provides that Twistbox may prepay the ValueAct Note in whole or
in part at any time without penalty.  In the event of any such prepayment
prior to January 31, 2010, in an aggregate amount of not less than 50% of the
then outstanding and unpaid principal plus accrued interest under the ValueAct
Note, the balance of the ValueAct Note shall be payable on the earlier of July
31, 2015, or the date when such amount becomes due and payable as a result of an
event of default under the ValueAct Note (the earlier of such date, the “New
Maturity Date”).  If Twistbox receives any net proceeds from a debt
financing (other than any proceeds from a Company Receivables Facility as
defined in the ValueAct Note) not to exceed $9,000,000, at least 50% of such
proceeds shall be paid by Twistbox to ValueAct to satisfy a portion of the
then-outstanding and unpaid principal plus accrued interest under the Note; any
indebtedness incurred by Twistbox in connection with such a prepayment shall be
excluded from Twistbox’s covenants, as set forth in the Note, not to incur
additional indebtedness.  If the Company receives any net proceeds from an
equity financing, at least 50% of such proceeds shall be paid to ValueAct to
satisfy a portion of the then-outstanding and unpaid principal plus accrued
interest under the Note, and the balance of the Note shall be payable on the New
Maturity Date.  In the event Twistbox or the Company have made any
prepayments in connection with a debt or equity financing, as applicable, which
payments are greater than or equal to $9,000,000 in the aggregate, then the
balance of the Note shall be payable on the New Maturity Date.  Lastly, if
certain of the earn-out payments set forth in that certain Stock Purchase
Agreement, by and among the Company, Jonathan Creswell, Nathaniel MacLeitch and
the shareholders of AMV, dated as of October 23, 2008, as amended, have been
paid, the Company and Twistbox agreed to maintain certain minimum combined cash
balances.




32





Also, on
August 14, 2009, the Company and ValueAct entered into a Second Allonge to
Warrant to Purchase 1,092,621 Shares of Common Stock (the “Second Allonge”),
which amended that certain warrant to purchase 1,092,621 shares of the Company’s
common stock, issued to ValueAct on February 12, 2008, as amended (the “ValueAct
Warrant”).  Pursuant to the Second Allonge, the exercise price of the
ValueAct Warrant decreased from $4.00 per share to the lesser of $1.25 per
share, or the exercise price per share for any warrant to purchase shares of the
Company’s common stock issued by the Company to certain other
parties.





On
October 23, 2008, Mandalay Media entered into a Securities Purchase Agreement
with certain investors identified therein (the “Investors”), pursuant to which
Mandalay Media 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 Media 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 Media 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.




Comparison
of the Three Months Ended September 30, 2009 and 2008





Revenues


Three Months Ended September
      30,2009
                    
                    
                    2008unaudited
                    
                    
                    unaudited(In
      thousands)Revenues
      by type:Games
                    
                    $
                    1,223
                    
                    
                    $
                    1,217Other
      content
                    
                    
                    8,918
                    
                    
                    
                    3,786Total
                    
                    $
                    10,141
                    
                    
                    $
                    5,003





Games
revenue – expanded development revenue in the US in the period offset declines
experienced in European platform management revenues. Games revenue includes
both licensed and internally developed games for use on mobile
phones.




The
increase in other content revenues over the second quarter of fiscal 2009 is
primarily due to the inclusion of revenues from AMV which was acquired in the
third quarter of fiscal 2009.  This was partially offset by decreased
carrier sales as a result of a very challenging European sales environment.
Other content includes a broad range of licensed and internally-developed
product delivered in the form of WAP, Video, Wallpaper and Mobile TV as well as
interactive voice services.




33





Cost
of Revenues


Three Months Ended September
      30,2009
                  
                  
                  2008unaudited
                  
                  
                  unaudited(In
      thousands)Cost
      of revenues:License
      fees
                  
                  $
                  967
                  
                  
                  $
                  1,785Other
      direct cost of revenues
                  
                  
                  2,149
                  
                  
                  
                  102Total
      cost of revenues
                  
                  $
                  3,116
                  
                  
                  $
                  1,887Revenues
                  
                  $
                  10,141
                  
                  
                  $
                  5,003Gross
      margin
                  
                  
                  69.3
                  %
                  
                  
                  62.3
                  %





License
fees represent costs payable to content providers for use of their intellectual
property in products sold. License fees have decreased as  a result of
reductions in the revenue share attributable to several licensed product
arrangements and a significant change in mix towards product for which the
rights have been acquired in perpetuity. In addition license fees in the quarter
benefited from the reversal of previously accrued license fees in the quarter,
following resolution with providers. Other direct cost of revenues 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 improvement in margin is due the mix changes noted above and the impact of
AMV, which has higher margin sales, and adjustments related to settlement
agreements with certain content providers.





Operating
Expenses


Three Months Ended September
      30,2009
                
                
                2008unaudited
                
                
                unaudited(In
      thousands)Product
      development expenses
                
                $
                1,358
                
                
                $
                1,800Sales
      and marketing expenses
                
                
                3,024
                
                
                
                1,004General
      and administrative expenses
                
                
                2,956
                
                
                
                2,559Amortization
      of intangible assets
                
                
                177
                
                
                
                137





Product
Development expenses include the costs to develop, edit and make content ready
for consumption on a mobile phone.  The decrease in expenses compared
to the second quarter of the prior year are primarily the result of
restructuring during the year resulting in a reduction in employees,
particularly in the product development areas.





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
each  of the subsidiary companies and related expenses, as well as
professional and consulting costs, and other costs such as stock based
compensation, depreciation and bad debt expenses.  The increase in
expenses over the second quarter in the prior year is largely the result of
higher professional costs in the quarter, including costs related to the
company’s restructuring initiatives.





Amortization
of intangibles represents amortization of the intangibles identified as part of
the purchase price accounting related to both acquisitions and attributed to
operating expenses.





34





Other
Expenses


Three Months Ended September
      30,2009
                      
                      
                      2008unaudited
                      
                      
                      unaudited(In
      thousands)Interest
      and other income/(expense)
                      
                      $
                      (441
                      )
                      
                      $
                      (583
                      )




Interest
and other income/(expense) includes interest income on invested funds, interest
expense related to the ValueAct and AMV Notes, foreign exchange transaction
gains, and other income/expense.  The decrease in net expense compared
to the second quarter of the prior year  relates to foreign exchange
gains (versus losses in the prior year period) and miscellaneous income related
to a asset disposals, partially offset by increased interest expense related to
the increase in the balance due under the ValueAct Note, and the addition of the
AMV Note, which represents deferred purchase consideration related to the AMV
Acquisition;





Comparison
of the Six Months Ended September 30, 2009 and 2008





Revenues


Six Months Ended September
    30,2009
                
                
                2008unaudited
                
                
                unaudited(In
      thousands)Revenues
      by type:Games
                
                $
                2,525
                
                
                $
                2,493Other
      content
                
                
                17,699
                
                
                
                7,856Total
                
                $
                20,224
                
                
                $
                10,349





Games
revenue – expansion of the Play 4 Prizes platform and higher development revenue
in the US offset declines in European games sales and platform management
revenues. Games revenue includes both licensed and internally developed games
for use on mobile phones.




The
increase in other content revenues over the first half of fiscal 2009 over the
prior year is primarily due to the inclusion of revenues from AMV Holding which
was acquired in the third quarter of fiscal 2009.  This was partially
offset by decreased carrier sales as a result of a very challenging European
sales environment. Other content includes a broad range of licensed and
internally-developed product delivered in the form of WAP, Video, Wallpaper and
Mobile TV as well as interactive voice services.





Cost
of Revenues


Six
      Months Ended September 30,2009
                    
                    
                    2008unaudited
                    
                    
                    unaudited(In
      thousands)Cost
      of revenues:License
      fees
                    
                    $
                    1,986
                    
                    
                    $
                    3,934Other
      direct cost of revenues
                    
                    
                    3,986
                    
                    
                    
                    204Total
      cost of revenues
                    
                    $
                    5,972
                    
                    
                    $
                    4,138Revenues
                    
                    $
                    20,224
                    
                    
                    $
                    10,349Gross
      margin
                    
                    
                    70.5
                    %
                    
                    
                    60.0
                    %





License
fees represent costs payable to content providers for use of their intellectual
property in products sold. License fees have decreased as  a result of
reductions in the revenue share attributable to several licensed product
arrangements and a significant change in mix towards product for which the
rights have been acquired in perpetuity. In addition license fees in the
half  benefited from the reversal of previously accrued license fees,
following resolution with providers. Other direct cost of revenues 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 improvement in margin is due the mix changes noted above and the impact of
AMV, which has higher margin sales, and adjustments related to settlement
agreements with certain content providers.




35




Operating
Expenses





Six Months Ended September
    30,2009
                
                
                2008unaudited
                
                
                unaudited(In
      thousands)Product
      development expenses
                
                $
                2,780
                
                
                $
                3,567Sales
      and marketing expenses
                
                
                6,405
                
                
                
                2,283General
      and administrative expenses
                
                
                5,344
                
                
                
                5,372Amortization
      of intangible assets
                
                
                354
                
                
                
                274





Product
Development expenses include the costs to develop, edit and make content ready
for consumption on a mobile phone.  The decrease in expenses compared
to the same period of the prior year are primarily the result of restructuring
during the year resulting in a reduction in employees, particularly in the
product development areas.





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
each  of the subsidiary companies and related expenses, as well as
professional and consulting costs, and other costs such as stock based
compensation, depreciation and bad debt expenses.  The net decrease in
expenses over the same period in the prior year are the result of employee
reductions and cost savings initiatives implemented during the period, offset by
higher professional costs in the period, including costs related to the
company’s restructuring initiatives.





Amortization
of intangibles represents amortization of the intangibles identified as part of
the purchase price accounting related to both acquisitions and attributed to
operating expenses.





Other
Expenses


Six Months Ended September
    30,2009
                    
                    
                    2008unaudited
                    
                    
                    unaudited(In
      thousands)Interest
      and other income/(expense)
                    
                    $
                    (956
                    )
                    
                    $
                    (945
                    )





Interest
and other income/(expense) includes interest income on invested funds, interest
expense related to the ValueAct and AMV Notes, foreign exchange transaction
gains, and other income/expense.  In the first half of fiscal 2009,
the net expense included foreign exchange gains (versus losses in the prior year
period)  and miscellaneous income related to a asset
disposals,  which were offset by increased interest expense related to
the increase in the balance due under the ValueAct Note, and the addition of the
AMV Note, representing deferred purchase consideration related to the AMV
Acquisition.





Financial
Condition





Assets





Our
current assets totaled $14.7 million and $18.0 million at September 30, 2009 and
March 31, 2009, respectively. Total assets were $87.2 million and $91.2 million
at September 30, 2009 and March 31, 2009, respectively. The decrease in current
assets is primarily due to the lower cash balances. The decrease in total assets
is primarily due to the amortization of intangibles assets, as well as the
movement in cash balances.




36





Liabilities
and Working Capital




At
September 30, 2009, our total liabilities were $39.3 million.  Our
current liabilities totaled $39.3 million and $42.1 million at September 30,
2009 and March 31, 2009, respectively. The change in current liabilities was
primarily related to the reduction in accounts payable and other current
liabilities.  The Company had negative working capital of $24.7
million at September 30, 2009 and $24.1 million at March 31, 2009 as a result of
the timing of maturity of the ValueAct Note.




Liquidity
and Capital Resources


Six Months Ended September
    30,2009
                
                
                2008unaudited
                
                
                unaudited(In
      thousands)Consolidated
      Statement of Cash Flows Data:Capital
      expenditures
                
                $
                172
                
                
                $
                120Cash
      flows used in operating activities
                
                
                3,138
                
                
                
                3,523Cash
      flows used in investing activities
                
                
                -
                
                
                
                59




Twistbox
has incurred losses and negative annual cash flows since inception, although the
operating loss has narrowed significantly in the current period.  AMV
has generally experienced profits and strongly positive cash flows. The primary
sources of liquidity have historically been issuance of common and preferred
stock, in the case of Twistbox, borrowings under credit facilities with
aggregate proceeds of $16.5 million. In the future, we anticipate that our
primary sources of liquidity will be cash generated by our operating
activities.





Operating
Activities




In the
six months ended September 30, 2009, we used $3.1 million of net cash, flowing
from the loss of $2.3 million as well as decreases in accounts payable of $2.2
million and in accrued license fees/other liabilities of $0.8 million, offset by
non cash stock based compensation and depreciation and
amortization.  In the six months ended September 30, 2008, we used
$3.1 million of net cash in operating expenses. This primarily related to the
net loss of $6.4 million, and reductions in accrued license fees/other
liabilities of $1.7 million, partially offset by non cash stock based
compensation and depreciation and amortization included in the net loss and
increases in accounts payable.




As of
September 30, 2009, the Company had approximately $2.8 million of cash. The
Company has restructured its debt, as described in Note 8 to the financial
statements.  Among other things, this provides for the due date to be
extended to July 31, 2010, an interest rate of 12.5% from the date of the
agreement through maturity, an extension of the payment in kind (“PIK”) election
through to the interest payment otherwise due in January 2010, and a reduction
in the minimum cash covenant to $1 million until January 31, 2010 and $4 million
thereafter, subject to certain conditions. In addition the Company and the
sellers of AMV Limited entered into an agreement which extended the maturity
date of the AMV Note, which represents deferred purchase consideration in
relation to the AMV Acquisition, until July 31, 2010.




The
Company’s cash requirements will be dependent on actions taken to improve cash
flow, including the debt restructuring and operational restructuring within the
subsidiaries. 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 July 2010, and interest payments under the AMV Note, payable
at the end of the term, in July 2010. 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 non-cancelable operating leases for the Company’s
office facilities in several locations, expiring in various years through 2014.
Twistbox has entered into license agreements with various owners of brands and
other intellectual property in order to 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.




37


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.




Item 3.   Quantitative and Qualitative
Disclosures About Market Risk.





Interest Rate and Credit Risk




Our
current operations have exposure to interest rate risk that relates primarily to
our investment portfolio. All of our current investments are classified as cash
equivalents or short-term investments and carried at cost, which approximates
market value. We do not currently use or plan to use derivative financial
instruments in our investment portfolio. The risk associated with fluctuating
interest rates is limited to our investment portfolio, and we do not believe
that a 10% change in interest rates would have a significant impact on our
interest income, operating results or liquidity.




Currently,
our cash and cash equivalents are maintained by financial institutions in
the United States, Germany, the United Kingdom, Poland, Russia, Argentina and
Colombia, and our current deposits are likely in excess of insured limits. We
believe that the financial institutions that hold our investments are
financially sound and, accordingly, minimal credit risk exists with respect to
these investments. Our accounts receivable primarily relate to revenues earned
from domestic and international Mobile phone carriers. We perform ongoing credit
evaluations of our carriers’ financial condition but generally require no
collateral from them.  As of September 30, 2009, our largest customer
represented approximately 12% of our gross accounts receivable
outstanding.





Foreign
Currency Risk




The
functional currencies of our United States, United Kingdom and German operations
are the United States Dollar, or USD, Pound Sterling and the Euro, respectively.
A significant portion of our business is conducted in currencies other than the
USD, the Pound or the Euro. Our revenues are usually denominated in the
functional currency of the carrier. Operating expenses are usually in the local
currency of the operating unit, which mitigates a portion of the exposure
related to currency fluctuations. Intercompany transactions between our domestic
and foreign operations are denominated in the USD, Pound or the Euro. At
month-end, foreign currency-denominated accounts receivable and intercompany
balances are marked to market and unrealized gains and losses are included in
other income (expense), net. Our foreign currency exchange gains and losses have
been generated primarily from fluctuations in the Euro and pound sterling versus
the USD and in the Euro versus the pound sterling. In the future, we may
experience foreign currency exchange losses on our accounts receivable and
intercompany receivables and payables. Foreign currency exchange losses could
have a material adverse effect on our business, operating results and financial
condition.





Inflation




We do not
believe that inflation has had a material effect on our business, financial
condition or results of operations. If our costs were to become subject to
significant inflationary pressures, we might not be able to offset these higher
costs fully through price increases. Our inability or failure to do so could
harm our business, operating results and financial condition.





Item 4T.  Controls and
Procedures.





Evaluation of Disclosure Controls and
Procedures





Members
of our management, including our Principal Executive Officer, Ray Schaaf, and
Principal Financial Officer, Russell Burke, have evaluated the effectiveness of
our disclosure controls and procedures, as defined by the Securities Exchange
Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e), as of September
30, 2009, the end of the period covered by this report. Based upon that
evaluation, Messrs. Schaaf and Burke concluded that our disclosure controls and
procedures are adequate and effective to ensure that material information was
made known to them by others within those entities, particularly during the
period for which this Quarterly Report on Form 10-Q was prepared.




Changes
in Controls and Procedures




There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13(a)-15 and 15(d)-15 that occurred during
the second quarter ended September 30, 2009 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.




38




PART II - OTHER
INFORMATION





Item
1. Legal Proceedings.





There has
been no material changes in our legal proceedings from those disclosed in our
Annual Report on Form 10-K for the year ended March 31, 2009, filed with the
Securities and Exchange Commission on July 14, 2009. From time to time, we are
subject to various claims, complaints and legal actions in the normal course of
business. As of the date of filing this Quarterly Report on Form 10-Q, we are
not a party to any litigation that we believe would have a material adverse
effect on us.




Item
1A. Risk Factors.





There has
been no material changes in our risk factors from those disclosed in our Annual
Report on Form 10-K for the year ended March 31, 2009, filed with the Securities
and Exchange Commission on July 14, 2009.





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




On
September 23, 2009, the Company granted a warrant to purchase 1,200,000 shares
of Common Stock at an exercise price of $1.25 per share to Vivid Entertainment,
LLC in connection with a Content License and Output Agreement. The securities
were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended.




Item
3. Defaults Upon Senior Securities.





None.





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





None.




Item
5. Other Information.





None.





Item 6.   Exhibits.




4.1
              Warrant
      dated September 23, 2008 issued to Vivid Entertainment,
  LLC10.1
              Registration
      Rights Agreement, dated September 23, 2008, by and between Mandalay Media,
      Inc. and Vivid Entertainment, Inc.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


39





Signatures




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized





Mandalay
      Media, Inc.Date:
        November 16, 2009
              By:
              /s/ Ray SchaafRay
      SchaafPresident(Authorized
      Officer and Principal Executive
Officer)




Date:
        November 16, 2009By:
                /s/
      Russell BurkeRussell
      BurkeChief
      Financial Officer and Secretary(Authorized
      Officer and Principal Financial
Officer)


40