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 December 31, 2008





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





For the
transition period from _____________ to ___________


Commission
file number   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 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
February 19, 2009, there were 38,965,643 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
      Statements
                        3Consolidated
      Balance Sheets as of December 31, 2008 (Unaudited) and March 31,
      2008
                        4Consolidated
      Statement of Operations (Unaudited) For the Three Month and the Nine Month
      Periods Ended December 31, 2008 and 2007
                        5Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss (Unaudited) for
      the Period Ended December 31, 2008
                        6Consolidated
      Statements of Cash Flows (Unaudited) For the Three Month and the Nine
      Month Periods Ended December 31, 2008 and 2007
                        7Notes
      to Unaudited Consolidated Financial Statements
                        8Item
      2.
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        33Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        40Item
      4T.
                        Controls
      and Procedures
                        41PART II - OTHER INFORMATIONItem
      1.
                        Legal
      Proceedings
                        41Item 1A.
                        Risk
      Factors
                        41Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        41Item
      3.
                        Defaults
      Upon Senior Securities
                        41Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        41Item
      5.
                        Other
      Information
                        41Item
      6.
                        Exhibits
                        42Signatures
                        43




2





PART I -
FINANCIAL INFORMATION




Item 1.   Financial
Statements.


Page(s)Consolidated
      Balance Sheets as of December 31, 2008 (Unaudited) and March 31,
      2008
                  4Consolidated
      Statements of Operations (Unaudited) for the three months and the nine
      months ended December 31, 2008 and December 31, 2007
                  5Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss (Unaudited) for
      the period ended December 31, 2008
                  6Consolidated
      Statements of Cash Flows (Unaudited) for the nine months ended December
      31, 2008 and December 31, 2007
                  7Notes
      to Unaudited Consolidated Financial Statements
                  8-32
 
 3
 
 Mandalay
Media, Inc. and Subsidiaries
 Consolidated
Balance Sheets
  
 (In
thousands, except share amounts)
 
 December 31,
                                              
                                              
                                              March 31,2008
                                              
                                              
                                              2008(Unaudited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                                              
                                              $
                                              6,411
                                              
                                              
                                              $
                                              10,936Accounts
      receivable, net of allowances
                                              
                                              
                                              11,835
                                              
                                              
                                              
                                              6,162Prepaid
      expenses and other current assets
                                              
                                              
                                              798
                                              
                                              
                                              
                                              531Total
      current assets
                                              
                                              
                                              19,044
                                              
                                              
                                              
                                              17,629Property
      and equipment, net
                                              
                                              
                                              1,266
                                              
                                              
                                              
                                              1,037Other
      long-term assets
                                              
                                              
                                              278
                                              
                                              
                                              
                                              301Intangible
      assets, net
                                              
                                              
                                              20,366
                                              
                                              
                                              
                                              19,780Goodwill
                                              
                                              
                                              84,124
                                              
                                              
                                              
                                              61,377TOTAL
      ASSETS
                                              
                                              $
                                              125,078
                                              
                                              
                                              $
                                              100,124LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                                              
                                              $
                                              9,930
                                              
                                              
                                              $
                                              2,399Accrued
      license fees
                                              
                                              
                                              2,749
                                              
                                              
                                              
                                              3,833Accrued
      compensation
                                              
                                              
                                              674
                                              
                                              
                                              
                                              688Current
      portion of long term debt
                                              
                                              
                                              3
                                              
                                              
                                              
                                              248Other
      current liabilities
                                              
                                              
                                              6,317
                                              
                                              
                                              
                                              2,087Total
      currrent liabilities
                                              
                                              
                                              19,673
                                              
                                              
                                              
                                              9,255Accrued
      license fees, long term portion
                                              
                                              
                                              530
                                              
                                              
                                              
                                              1,337Long
      term debt, net of current portion
                                              
                                              
                                              23,089
                                              
                                              
                                              
                                              16,483Other
      long-term liabilities
                                              
                                              
                                              57
                                              
                                              
                                              
                                              -Total
      liabilities
                                              
                                              $
                                              43,349
                                              
                                              
                                              
                                              27,075Commitments
      and contingencies (Note 14)Stockholders’
      equityPreferred
      stockSeries
      A Convertible Preferred Stockat
      $0.0001 par value; 100,000 shares authorized,issued and
      outstanding(liquidation
      preference of $1,000,000 at December 31, 2008
                                              
                                              
                                              100
                                              
                                              
                                              
                                              100Common
      stock, $0.0001 par value: 100,000,000 shares authorized;38,965,643
      issued and outstanding at December 31, 2008;32,149,089
      issued and outstanding at March 31, 2008;
                                              
                                              
                                              4
                                              
                                              
                                              
                                              3Additional
      paid-in capital
                                              
                                              
                                              93,486
                                              
                                              
                                              
                                              76,154Accumulated
      other comprehensive income/(loss)
                                              
                                              
                                              340
                                              
                                              
                                              
                                              61Accumulated
      deficit
                                              
                                              
                                              (12,201
                                              )
                                              
                                              
                                              (3,269
                                              )Total
      stockholders' equity
                                              
                                              
                                              81,729
                                              
                                              
                                              
                                              73,049TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                              
                                              $
                                              125,078
                                              
                                              
                                              $
                                              100,124
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  4
 
 Mandalay
Media, Inc. and Subsidiaries
 Consolidated
Statement of Operations (Unaudited)
 
  (In
thousands, except per share amounts)
 
 3 MonthsEnded
                        
                        
                        3 MonthsEnded
                        
                        
                        9 MonthsEnded
                        
                        
                        9 MonthsEndedDecember 31,
                        
                        
                        December 31,
                        
                        
                        December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Revenues
                        
                        $
                        11,005
                        
                        
                        $
                        -
                        
                        
                        $
                        21,354
                        
                        
                        $
                        -Cost
      of revenuesLicense
      fees
                        
                        
                        1,670
                        
                        
                        
                        -
                        
                        
                        
                        5,604
                        
                        
                        
                        -Other
      direct cost of revenues
                        
                        
                        2,264
                        
                        
                        
                        -
                        
                        
                        
                        2,468
                        
                        
                        
                        -Total
      cost of revenues
                        
                        
                        3,934
                        
                        
                        
                        -
                        
                        
                        
                        8,072
                        
                        
                        
                        -Gross
      profit
                        
                        
                        7,071
                        
                        
                        
                        -
                        
                        
                        
                        13,282
                        
                        
                        
                        -Operating
      expensesProduct
      development
                        
                        
                        1,563
                        
                        
                        
                        -
                        
                        
                        
                        5,130
                        
                        
                        
                        -Sales
      and marketing
                        
                        
                        4,243
                        
                        
                        
                        -
                        
                        
                        
                        6,526
                        
                        
                        
                        -General
      and administrative
                        
                        
                        2,173
                        
                        
                        
                        1,278
                        
                        
                        
                        7,545
                        
                        
                        
                        2,189Amortization
      of intangible assets
                        
                        
                        177
                        
                        
                        
                        -
                        
                        
                        
                        451
                        
                        
                        
                        -Total
      operating expenses
                        
                        
                        8,156
                        
                        
                        
                        1,278
                        
                        
                        
                        19,652
                        
                        
                        
                        2,189Loss
      from operations
                        
                        
                        (1,085
                        )
                        
                        
                        (1,278
                        )
                        
                        
                        (6,370
                        )
                        
                        
                        (2,189
                        )Interest
      and other income/(expense)Interest
      income
                        
                        
                        21
                        
                        
                        
                        91
                        
                        
                        
                        141
                        
                        
                        
                        256Interest
      (expense)
                        
                        
                        (465
                        )
                        
                        
                        -
                        
                        
                        
                        (1,417
                        )
                        
                        
                        -Foreign
      exchange transaction gain (loss)
                        
                        
                        (418
                        )
                        
                        
                        -
                        
                        
                        
                        (345
                        )
                        
                        
                        -Other
      (expense)
                        
                        
                        (276
                        )
                        
                        
                        -
                        
                        
                        
                        (463
                        )
                        
                        
                        -Interest
      and other income/(expense)
                        
                        
                        (1,138
                        )
                        
                        
                        91
                        
                        
                        
                        (2,084
                        )
                        
                        
                        256Loss
      before income taxes
                        
                        
                        (2,223
                        )
                        
                        
                        (1,187
                        )
                        
                        
                        (8,454
                        )
                        
                        
                        (1,933
                        )Income
      tax provision
                        
                        
                        (350
                        )
                        
                        
                        1
                        
                        
                        
                        (497
                        )
                        
                        
                        2Minority
      interest in consolidated subsidiaries
                        
                        
                        19
                        
                        
                        
                        -
                        
                        
                        
                        19
                        
                        
                        
                        -Net
      loss
                        
                        $
                        (2,554
                        )
                        
                        $
                        (1,186
                        )
                        
                        $
                        (8,932
                        )
                        
                        $
                        (1,931
                        )Basic
      and Diluted net loss per common share
                        
                        $
                        (0.07
                        )
                        
                        $
                        (0.05
                        )
                        
                        $
                        (0.26
                        )
                        
                        $
                        (0.09
                        )Comprehensive
      loss
                        
                        $
                        (2,159
                        )
                        
                        $
                        (1,186
                        )
                        
                        $
                        (8,653
                        )
                        
                        $
                        (1,931
                        )Weighted
      average common shares outstanding, basic and diluted
                        
                        
                        37,366
                        
                        
                        
                        21,730
                        
                        
                        
                        34,028
                        
                        
                        
                        21,902
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  5
 
 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, 2008
                                                                                                                      
                                                                                                                      
                                                                                                                      32,149,089
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      100
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      76,154
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      61
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (3,269
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      73,049Net
      Loss
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (3,337
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (3,337
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (3,337
                                                                                                                      )Issuance
      of common stock in satisfaction of amount
      payable
                                                                                                                      
                                                                                                                      
                                                                                                                      25,000
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100Issuance
      of common stockon cashless exercise of
    warrants
                                                                                                                      
                                                                                                                      
                                                                                                                      241,688
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0Foreign
      currency translation gain/(loss)
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (10
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (10
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (10
                                                                                                                      )Stock-based
      compensation
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,222
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,222Comprehensive
      loss
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (3,347
                                                                                                                      )Balance
      at June 30, 2008
                                                                                                                      
                                                                                                                      
                                                                                                                      32,415,777
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      100
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      77,476
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      51
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (6,606
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      71,024Net
      Loss
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (3,041
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (3,041
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (3,041
                                                                                                                      )Issuance
      of common stockon cashless exercise of
    warrants
                                                                                                                      
                                                                                                                      
                                                                                                                      33,672
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0Foreign
      currency translation gain/(loss)
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (106
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (106
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (106
                                                                                                                      )Stock-based
      compensation
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      744
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      744Comprehensive
      loss
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (3,147
                                                                                                                      )Balance
      at September 30, 2008
                                                                                                                      
                                                                                                                      
                                                                                                                      32,449,449
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      100
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      78,220
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (55
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      (9,647
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      68,621Net
      Loss
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (2,554
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (2,554
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (2,554
                                                                                                                      )Issuance
      of common stockrelated to acquisition
                                                                                                                      
                                                                                                                      
                                                                                                                      4,500,000
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      9,899
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      9,900Adjustment
      in valuation of warrantsin connection with the
      acquisition
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      313
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      313Issuance
      of common stockin satisfaction of amount
    payable
                                                                                                                      
                                                                                                                      
                                                                                                                      45,000
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      79
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      79Issuance
      of common stockon cashless exercise of
    warrants
                                                                                                                      
                                                                                                                      
                                                                                                                      285,800
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0Issuance
      of common stocknet of issuance costs
                                                                                                                      
                                                                                                                      
                                                                                                                      1,685,394
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4,354
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4,354Foreign
      currency translation gain/(loss)
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      395
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      395
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      395Stock-based
      compensation
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      621
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      621Comprehensive
      loss
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (2,159
                                                                                                                      )Balance
      at December 31, 2008
                                                                                                                      
                                                                                                                      
                                                                                                                      38,965,643
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      4
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100,000
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      100
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      93,486
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      340
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      (12,201
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      81,729
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  6
 
 Mandalay
Media, Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows (Unaudited)
 
 
 (In
thousands)
 
 9 MonthsEnded
                                  
                                  
                                  9 MonthsEndedDecember 31,
                                  
                                  
                                  December 31,2008
                                  
                                  
                                  2007Cash
      flows from operating activitiesNet
      loss
                                  
                                  $
                                  (8,932
                                  )
                                  
                                  $
                                  (1,931
                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                  
                                  
                                  1,060
                                  
                                  
                                  
                                  -Allowance
      for doubtful accounts
                                  
                                  
                                  50
                                  
                                  
                                  
                                  -Stock-based
      compensation
                                  
                                  
                                  2,587
                                  
                                  
                                  
                                  1,036(Increase)
      / decrease in assets:Accounts
      receivable
                                  
                                  
                                  3,424
                                  
                                  
                                  
                                  -Prepaid
      expenses and other
                                  
                                  
                                  (24
                                  )
                                  
                                  
                                  -Increase
      / (decrease) in liabilities:Accounts
      payable
                                  
                                  
                                  (2,721
                                  )
                                  
                                  
                                  399Accrued
      license fees
                                  
                                  
                                  (1,064
                                  )
                                  
                                  
                                  -Accrued
      compensation
                                  
                                  
                                  (14
                                  )
                                  
                                  
                                  -Other
      liabilities
                                  
                                  
                                  43
                                  
                                  
                                  
                                  -Net
      cash used in operating activities
                                  
                                  
                                  (5,591
                                  )
                                  
                                  
                                  (496
                                  )Cash
      flows from investing activitiesPurchase
      of property and equipment
                                  
                                  
                                  (101
                                  )
                                  
                                  
                                  -Transaction
      costs
                                  
                                  
                                  (812
                                  )
                                  
                                  
                                  (141
                                  )Cash
      used in acquisition of subsidiary
                                  
                                  
                                  (5,470
                                  )
                                  
                                  
                                  -Cash
      acquired with purchase of subsidiary
                                  
                                  
                                  3,020
                                  
                                  
                                  
                                  -Net
      cash used in investing activities
                                  
                                  
                                  (3,363
                                  )
                                  
                                  
                                  (141
                                  )Cash
      flows from financing activitiesProceeds
      from the sale of common stock(net
      of issuance costs)
                                  
                                  
                                  4,354
                                  
                                  
                                  
                                  2,473Instalment
      payments related to prior acquisition
                                  
                                  
                                  (54
                                  )
                                  
                                  
                                  -Net
      cash provided by financing activities
                                  
                                  
                                  4,300
                                  
                                  
                                  
                                  2,473Effect
      of exchange rate changes on cash and cash equivalents
                                  
                                  
                                  129
                                  
                                  
                                  
                                  -Net
      increase/(decrease) in cash and cash equivalents
                                  
                                  
                                  (4,525
                                  )
                                  
                                  
                                  1,836Cash
      and cash equivalents, beginning of period
                                  
                                  
                                  10,936
                                  
                                  
                                  
                                  5,418Cash
      and cash equivalents, end of period
                                  
                                  $
                                  6,411
                                  
                                  
                                  $
                                  7,254Supplemental
      disclosure of cash flow information:Taxes
      paid
                                  
                                  
                                  (270
                                  )
                                  
                                  
                                  -Noncash
      investing and financing activities:Acquisition
      of subsidiary
                                  
                                  
                                  16,790
                                  
                                  
                                  
                                  -
    7
 
 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), 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, the Company was re-incorporated in the state of Delaware as Mandalay Media
Inc.
 
 On
November 7, 2007, the Company merged into its wholly-owned, newly
formed subsidiary, Mandalay, with Mandalay as the surviving corporation.
Mandalay issued: (1) one new share of common stock in exchange for each
share of Mediavest’s outstanding common stock and (2) one new share of preferred
stock in exchange for each share of Mediavest’s outstanding preferred stock
as of November 7, 2007. Mandalay’s preferred and common stock had the same
status and par value as the respective stock of Mediavest and Mandalay acceded
to all the rights, acquired all the assets and assumed all of the liabilities of
Mediavest.
 
 On
February 12, 2008, the Company completed a merger (the “Merger”) with Twistbox
Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding capital
stock of Twistbox for 10,180 shares of common stock of the Company. In
connection with the Merger, the Company assumed all the outstanding options
under Twistbox’s Stock Incentive Plan by the issuance of options to purchase
2,463 shares of common stock of the Company, including 2,145 vested and 319
unvested options.
 
 After the
Merger, Twistbox became a wholly-owned subsidiary of the Company, and the
company’s only active subsidiary at that time.  Twistbox Entertainment
Inc. (formerly known as The WAAT Corporation) is incorporated in the State of
Delaware.
 
 Twistbox
is 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.
 
 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”).
 8
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 In
consideration for the shares, and subject to adjustment as set forth in the
Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a)
$5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid shares of Common
Stock (the “Stock Consideration”); (c) a secured promissory note in the
aggregate original principal amount of $5,375 (the “Note”); and (d) additional
earn-out amounts, if any, if the Acquired Companies achieve certain targeted
earnings for each of the periods from October 1, 2008 to March 31, 2009, April
1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as
determined in accordance with the Agreement. The Purchase Price is subject to
certain adjustments based on the working capital of AMV, to be determined
initially within 75 days of the closing, and subsequently within 60 days
following June 30, 2009. Any such adjustment of the Purchase Price will be made
first by means of an adjustment to the principal sum due under the Note, as set
forth in the Agreement.
 
 AMV is a
leading mobile media and marketing company delivering games and lifestyle
content directly to consumers in the United Kingdom, Australia, South Africa and
various other European countries. AMV markets its well established branded
services through a unique Customer Relationship Management (CRM) platform that
drives revenue through mobile internet, print and TV advertising. AMV is
headquartered in Marlow, outside of London in the United Kingdom.
 
 2.
                Summary
      of Significant Accounting
Policies
 
 Basis
of Presentation
 The
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/T, 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 December 31, 2008 and its results of operations for the
three months and the nine months ended December 31, 2008 and 2007, 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 December 31, 2008 has been derived from the unaudited
consolidated financial statements as of that date, and the consolidated balance
sheet presented as of March 31, 2008 has been derived from the audited
consolidated financial statements as of that date.
  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.
 9
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 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. Twistbox applies the provisions of Statement of Position 97-2, Software Revenue Recognition,
as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions, to all transactions.
 
 Revenues
are recognized from the Company’s products, images and games when persuasive
evidence of an arrangement exists, the product, image or game has been
delivered, the fee is fixed or determinable, and the collection of the resulting
receivable is probable. For both perpetual and subscription licenses, management
considers a signed license agreement to be evidence of an arrangement with a
carrier and a “clickwrap” agreement to be evidence of an arrangement with an end
user. For these licenses, the Company defines delivery as the download of the
product, image or game by the end user.
 
 The
Company estimates revenues from carriers in the current period when reasonable
estimates of these amounts can be made. Most carriers only provide detailed
sales transaction data on a one to two month lag. Estimated revenue is treated
as unbilled receivables until the detailed reporting is received and the
revenues can be billed. Some carriers provide reliable interim preliminary
reporting and others report sales data within a reasonable time frame following
the end of each month, both of which allow the Company to make reasonable
estimates of revenues and therefore to recognize revenues during the reporting
period when the end user licenses the product, image or game. Determination of
the appropriate amount of revenue recognized involves judgments and estimates
that the Company believes are reasonable, but it is possible that actual results
may differ from the Company’s estimates. The Company’s estimates for revenues
include consideration of factors such as preliminary sales data,
carrier-specific historical sales trends, volume of activity on company
monitored sites, seasonality, time elapsed from launch of services or product
lines, the age of games and the expected impact of newly launched games,
successful introduction of new handsets, growth of 3G subscribers by carrier,
promotions during the period and economic trends. When the Company receives the
final carrier reports, to the extent not received within a reasonable time frame
following the end of each month, the Company records any differences between
estimated revenues and actual revenues in the reporting period when the Company
determines the actual amounts. Revenues earned from certain carriers may not be
reasonably estimated. If the Company is unable to reasonably estimate the amount
of revenues to be recognized in the current period, the Company recognizes
revenues upon the receipt of a carrier revenue report and when the Company’s
portion of licensed revenues are fixed or determinable and collection is
probable. To monitor the reliability of the Company’s estimates, management,
where possible, reviews the revenues by country by carrier and by product line
on a regular basis to identify unusual trends such as differential adoption
rates by carriers or the introduction of new handsets. If the Company deems a
carrier not to be creditworthy, the Company defers all revenues from the
arrangement until the Company receives payment and all other revenue recognition
criteria have been met.
 10






Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 In
accordance with Emerging Issues Task Force, or EITF Issue No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, the Company recognizes as revenues the
amount the carrier reports as payable upon the sale of the Company’s products,
images or games. The Company has evaluated its carrier agreements and has
determined that it is not the principal when selling its products, images or
games through carriers. Key indicators that it evaluated to reach this
determination include:
  •
                wireless
      subscribers directly contract with the carriers, which have most of the
      serviceinteraction
      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 theirsubscribers;
 •
                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 foreach
      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’s limited risks, including no inventory risk and limited credit
      risk.
 
 For
direct to consumer business, revenue is earned by delivering a product or
service directly to the end user of that product or service. In those cases the
Company records as revenue the amount billed to that end user and recognizes the
revenue when persuasive evidence of an arrangement exists, the product, image or
game has been delivered, the fee is fixed or determinable, and the collection of
the resulting receivable is probable.
 
 Net
Income (Loss) per Common Share
 
 Basic
income (loss) per common share is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per share is
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding for the period plus
dilutive common stock equivalents, using the treasury stock method. Potentially
dilutive shares from stock options and warrants and the conversion of the Series
A preferred stock for the three months ended December 31, 2008 and December 31,
2007 consisted of 1,630 and 2,690 shares, respectively, and for the nine
months ended December 31, 2008 and 2007 consisted of 1,986 and 1,947 shares,
respectively, and were not included in the computation of diluted loss per share
as they were anti-dilutive in each period.
 
 Comprehensive
Income/(Loss)
 Comprehensive
income/(loss) consists of two components, net income/(loss) and other
comprehensive income/(loss). Other comprehensive income/(loss) refers to gains
and losses that under generally accepted accounting principles are recorded as
an element of stockholders’ equity but are excluded from net income/(loss). The
Company’s other comprehensive income/(loss) currently includes only foreign
currency translation adjustments.
 
 Cash
and Cash Equivalents
 The
Company considers all highly liquid short-term investments purchased with a
maturity of three months or less to be cash equivalents.
 11
 
 Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 Content
Provider Licenses
 
 Content
Provider License Fees and Minimum Guarantees
 The
Company’s royalty expenses consist of fees that it pays to branded content
owners for the use of
their intellectual property in the development of the Company’s games and other
content, and other expenses directly incurred in earning revenue. Royalty-based
obligations are either accrued as incurred and subsequently paid, or in the case
of longer term content acquisitions, paid in advance and capitalized on the
balance sheet as prepaid royalties. These royalty-based obligations are expensed
to cost of revenues either at the applicable contractual rate related to that
revenue or over the estimated life of the prepaid royalties. Advanced license
payments that are not recoupable against future royalties are capitalized and
amortized over the lesser of the estimated life of the branded title or the term
of the license agreement.
 
 The
Company’s contracts with some licensors include minimum guaranteed royalty
payments, which are payable regardless of the ultimate volume of sales to end
users. Each quarter, the Company evaluates the realization of its royalties as
well as any unrecognized guarantees not yet paid to determine amounts that it
deems unlikely to be realized through product sales. The Company uses estimates
of revenues, and share of the relevant licensor to evaluate the future
realization of future royalties and guarantees. This evaluation considers
multiple factors, including the term of the agreement, forecasted demand,
product life cycle status, product development plans, and current and
anticipated sales levels, as well as other qualitative factors. To the extent
that this evaluation indicates that the remaining future guaranteed royalty
payments are not recoverable, the Company records an impairment charge to cost
of revenues and a liability in the period that impairment is
indicated.
 
 Content
Acquired
 Amounts
paid to third party content providers as part of an agreement to make content
available to the Company for a term or in perpetuity, without a revenue share,
have been capitalized and are included in the balance sheet as prepaid
expenses.  These balances will be expensed over the estimated life of
the material acquired.
 
 Software
Development Costs
 The
Company applies the principles of Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed(“SFAS No. 86”). SFAS
No. 86 requires that software development costs incurred in conjunction with
product development be charged to research and development expense until
technological feasibility is established. Thereafter, until the product is
released for sale, software development costs must be capitalized and reported
at the lower of unamortized cost or net realizable value of the related
product.
 
 The
Company has adopted the “tested working model” approach to establishing
technological feasibility for its products and games. Under this approach, the
Company does not consider a product or game in development to have passed the
technological feasibility milestone until the Company has completed a model of
the product or game that contains essentially all the functionality and features
of the final game and has tested the model to ensure that it works as expected.
To date, the Company has not incurred significant costs between the
establishment of technological feasibility and the release of a product or game
for sale; thus, the Company has expensed all software development costs as
incurred. The Company considers the following factors in determining whether
costs can be capitalized: the emerging nature of the mobile market; the gradual
evolution of the wireless carrier platforms and mobile phones for which it
develops products and games; the lack of pre-orders or sales history for its
products and games; the uncertainty regarding a product’s or game’s
revenue-generating potential; its lack of control over the carrier distribution
channel resulting in uncertainty as to when, if ever, a product or game will be
available for sale; and its historical practice of canceling products and games
at any stage of the development process.
 12
 
 Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 Product
Development Costs
 The
Company charges costs related to research, design and development of products to product
development expense as incurred. The types of costs included in product
development expenses include salaries, contractor fees and allocated facilities
costs.
 
 Advertising
Expenses
 The
Company expenses the production costs of advertising, including direct response
advertising, the first time the advertising takes place. Advertising expense was
$2,487 and $0 in the three months ended December 31, 2008 and 2007,
respectively, and $3,060 and $0 in the nine months ended December 31, 2008 and
2007, respectively.
 
 Restructuring
 The
Company accounts for costs associated with employee terminations and other exit
activities in accordance with Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities. The
Company records employee termination benefits as an operating expense when it
communicates the benefit arrangement to the employee and it requires no
significant future services, other than a minimum retention period, from the
employee to earn the termination benefits.
 
 Fair
Value of Financial Instruments
 For
certain of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other current
liabilities, the carrying amounts approximate their fair value due to their
relatively short maturity. Based on the borrowing rates available to the Company
for loans with similar terms, the carrying value of borrowings outstanding
approximates their fair value.
 
 Foreign Currency
Translation.
 The
Company uses the United States dollar for financial reporting
purposes.  Assets and liabilities of foreign operations are translated
using current rates of exchange prevailing at the balance sheet date. Equity
accounts have been translated at their historical exchange rates when the
capital transaction occurred.  Statement of Operations amounts are
translated at average rates in effect for the reporting period. The foreign
currency translation adjustment (loss) of $395 in the three months ended
December 31, 2008 and $279 in the nine months ended December 31, 2008 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 retained earnings. Other comprehensive income /
(loss) amounted to $395 in the three months ended December 31, 2008 and $279 in
the nine months ended December 31, 2008.
 
 Concentrations
of Credit Risk.
 Financial
instruments which potentially subject us to concentration of credit risk consist
principally of cash and cash equivalents, short-term investments, and accounts
receivable. We have placed cash and cash equivalents and short-term investments
with a single high credit-quality institution. As of December 31, 2008, we did
not have any long-term marketable securities. The Company’s sales are made
either directly to consumers, with the billings performed by and the receivable
due from industry aggregators; or directly to the large national Mobile Phone
Operators in the countries that we operate. We have a significant level of
business and resulting significant accounts receivable balance with one operator
and therefore have a high concentration of credit risk with that operator. We
perform ongoing credit evaluations of our customers and maintain an allowance
for potential credit losses. As of December 31, 2008, approximately 20% of our
gross accounts receivable outstanding was with one major customer. This customer
accounted for 13% of our gross sales in the three months ended December 31, 2008
and 7% in the nine months ended December 31, 2008.
 13
 
 Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 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 eight to ten years for
leasehold improvements and 5 years for other assets.
 
 Goodwill
 In
accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible
Assets (“SFAS No. 142”), the Company’s goodwill is not amortized but is tested
for impairment
on an annual basis or whenever events or changes in circumstances indicate that
the carrying
amount of these assets may not be recoverable.
 
 Impairment
of Long-Lived Assets and Intangibles
 Long-lived
assets, including purchased intangible assets with finite lives are amortized
using the straight-line method over their useful lives ranging from three to ten
years and are reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets.  Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
 
 Income
Taxes
 The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes(“SFAS No. 109”), which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in its financial statements or tax returns. Under SFAS No. 109, the
Company determines deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities along with net operating losses, if it is more likely than not the
tax benefits will be realized using the enacted tax rates in effect for the year
in which it expects the differences to reverse.  To the extent a
deferred tax asset cannot be recognized, a valuation allowance is established if
necessary.
 
 We
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes—An Interpretation of FASB Statement 109 (“FIN 48”)
on January 1, 2008. FIN 48 did not impact the Company’s financial position or
results of operations at the date of adoption. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. FIN 48 prescribes that a company
should use a more-likely-than-not recognition threshold based on the technical
merits of the tax position taken. Tax positions that meet the
“more-likely-than-not” recognition threshold should be measured as the largest
amount of the tax benefits, determined on a cumulative probability basis, which
is more likely than not to be realized upon ultimate settlement in the financial
statements. We recognize interest and penalties related to income tax matters as
a component of the provision for income taxes. We do not currently anticipate
that the total amount of unrecognized tax benefits will significantly change
within the next 12 months.
 14
 
 Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 Stock-based compensation.
 We have
applied SFAS No. 123(R) Share-Based Payment (“FAS 123R”) and accordingly, we
record stock-based compensation expense for all of our stock-based
awards.
 
 Under FAS
123R, we estimate the fair value of stock options granted using the
Black-Scholes option pricing model. The fair value for awards that are expected
to vest is then amortized on a straight-line basis over the requisite service
period of the award, which is generally the option vesting term. The amount of
expense recognized represents the expense associated with the stock options we
expect to ultimately vest based upon an estimated rate of forfeitures; this rate
of forfeitures is updated as necessary and any adjustments needed to recognize
the fair value of options that actually vest or are forfeited are
recorded.
 
 The
Black-Scholes option pricing model, used to estimate the fair value of an award,
requires the input of subjective assumptions, including the expected volatility
of our common stock and an option’s expected life. As a result, the financial
statements include amounts that are based upon our best estimates and judgments
relating to the expenses recognized for stock-based compensation.
 
 Preferred
Stock
 
 The
Company applies the guidance enumerated in SFAS No. 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity,” and EITF Topic D-98, “Classification and Measurement of Redeemable
Securities,” when determining the classification and measurement of preferred
stock. Preferred shares subject to mandatory redemption (if any) are classified
as liability instruments and are measured at fair value in accordance with
SFAS 150. The Company does not have any preferred shares subject to
mandatory redemption. All other issuances of preferred stock are subject to the
classification and measurement principles of EITF Topic D-98. Accordingly, the
Company classifies conditionally redeemable preferred shares (if any), which
includes preferred shares that feature redemption rights that are either within
the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within the Company’s control, as temporary equity.
At all other times, the Company classifies its preferred shares in stockholders’
equity.
 
 Use
of Estimates
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent asset and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the period. Actual results could
differ from those estimates. The most significant estimates relate to revenues
for periods not yet reported by Carriers, liabilities recorded for future
minimum guarantee payments under content licenses, accounts receivable
allowances, stock-based compensation expense, the application of purchase
accounting, the carrying value and recoverability of long-lived assets,
including goodwill, amortizable intangibles, the realizability of deferred tax
assets, and the fair value of equity instruments.
 15
 
 Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 Recent
Accounting Pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”, which is an amendment of
Accounting Research Bulletin (“ARB”) No. 51.  This statement clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
  In
December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business
Combinations.”  This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non controlling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS 141R to have
a significant impact on its results of operations or financial
position.
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB No. 133,” (“SFAS
161”). SFAS 161 is intended to improve transparency in financial reporting by
requiring enhanced disclosures of an entity’s derivative instruments and hedging
activities and their effects on the entity’s financial position, financial
performance, and cash flows. SFAS 161 applies to all derivative instruments
within the scope of SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (“SFAS 133”). SFAS 161 also applies to non-derivative
hedging instruments and all hedged items designated and qualifying under SFAS
133. SFAS 161 is effective prospectively for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. SFAS 161 encourages, but does not require,
comparative disclosures for periods prior to its initial adoption. The Company
does not expect the adoption of SFAS 161 to have a significant impact on its
results of operations or financial position.
  In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets”.  This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008.  Early adoption is
prohibited.  The Company does not expect the adoption of SFAS 161 to
have a significant impact on its results of operations or financial
position.
 
 16
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
  3.
                Liquidity
  The
accompanying consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of the Company as a going concern.  One of the Company’s operating
subsidiaries, Twistbox, has sustained substantial operating losses since
commencement of operations.  In addition, the Company has incurred negative
cash flows from operating activities and the majority of the Company’s assets
are intangible assets and goodwill.
  In view
of these matters, realization of a major portion of the assets in the
accompanying consolidated balance sheet is dependent upon continued operations
of the Company, which is in turn dependent on the Company reaching a positive
cash flow position or obtaining additional financing, while maintaining adequate
liquidity.
  Management
believes that actions undertaken to achieve this position provide the
opportunity for the Company to continue as a going concern. These actions
include the acquisition consummated in the current quarter along with a
restructuring as part of the integration, and debt restructuring and equity
placements which occurred in the current quarter. In addition, the Company has
taken action subsequent to the period end to reduce its ongoing operating cost
base. Other actions include continued increases in revenues by introducing new
products and revenue streams, continued expansion into new territories,
reviewing additional financing options, and accretive acquisitions.
  4.
                Balance
      Sheet Components
  Accounts
Receivable
  December 31,
                
                
                March 31,2008
                
                
                2008(Unaudited)Accounts
      receivable
                
                $
                12,053
                
                
                $
                6,330Less:
      allowance for doubtful accounts
                
                
                (218
                )
                
                
                (168
                )$
                11,835
                
                
                $
                6,162
 
 Accounts
receivable includes amounts billed and unbilled as of the respective balance
sheet dates. Unbilled receivables were $6,861 at December 31, 2008 and $983 at
March 31, 2008.  During the three months ended December 31, 2008 $95
was provided and $0 was written off against the allowance. During the nine
months ended December 31, 2008, $106 was provided and $56 was written off
against the allowance.
  17
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
  Property
and Equipment
  December 31,
                
                
                March 31,2008
                
                
                2008(Unaudited)Equipment
                
                $
                1,067
                
                
                $
                654Equipment
      subject to capitalized lease
                
                
                81
                
                
                
                71Furniture
      & fixtures
                
                
                312
                
                
                
                228Leasehold
      improvements
                
                
                140
                
                
                
                1401,600
                
                
                
                1,093Accumulated
      depreciation
                
                
                (334
                )
                
                
                (56
                )$
                1,266
                
                
                $
                1,037
 
 Depreciation
expense for the three months ended December 31, 2008 and 2007 was $113 and $0,
respectively; and for the nine months ended December 31, 2008 and 2007 was $278
and $0, respectively.
  Capital
Lease
 Accumulated
depreciation associated with the equipment under capital lease noted above was
$10 and $0 at December 31, 2008 and December 31, 2007, respectively. The Company
has a commitment to pay $0 under these leases during the year ending December
31, 2009. These payments have a net present value of $0.
 
 5.
                Description
      of Stock Plans
  On
September 27, 2007, the stockholders of the Company adopted the 2007 Employee,
Director and Consultant Stock Plan (the “Plan”). Under the Plan, the Company may
grant up to 3,000 shares or equivalents of common stock of the Company as
incentive stock options (ISO), non-qualified options (NQO), stock grants or
stock-based awards to employees, directors or consultants, except that ISO’s
shall only be issued to employees. Generally, ISO’s and NQO’s shall be issued at
prices not less than fair market value at the date of issuance, as defined, and
for terms ranging up to ten years, as defined. All other terms of grants shall
be determined by the board of directors of the Company, subject to the
Plan.
  On
February 12, 2008, the Company amended the Plan to increase the number of shares
of our common stock that may be issued under the Plan to 7,000 shares and on
March 7, 2008, amended the Plan to increase the maximum number of shares of
the Company's common stock with respect to which stock rights may be granted in
any fiscal year to 1,100 shares. All other terms of the Plan remain in full
force and effect.
  18
  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
                      
                      
                      -
                      
                      
                      $
                      2.64Outstanding
      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
                      
                      
                      1,861
                      
                      
                      $
                      2.67Canceled
                      
                      
                      (138
                      )
                      
                      $
                      0.48Exercised
                      
                      
                      (45
                      )
                      
                      $
                      0.48Outstanding
      at December 31, 2008
                      
                      
                      8,479
                      
                      
                      $
                      2.74Exercisable
      at December 31, 2008
                      
                      
                      4,599
                      
                      
                      $
                      2.06
 
 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 GrantedNine Months Ended
                                  
                                  
                                  
                                  Options tranferredDecember 31, 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 December 31, 2008 was as
follows:
  WeightedAverage
                                      
                                      
                                      
                                      
                                      
                                      WeightedRemaining
                                      
                                      
                                      Number
                                      
                                      
                                      Average
                                      
                                      
                                      AggregateRange of
                                      
                                      Contractual Life
                                      
                                      
                                      Outsanding
                                      
                                      
                                      Exercise
                                      
                                      
                                      IntrinsicExercise Price
                                      
                                      (Years)
                                      
                                      
                                      December 31, 2008
                                      
                                      
                                      Price
                                      
                                      
                                      Value$0
      - $1.00
                                      
                                      
                                      7.58
                                      
                                      
                                      
                                      2,277
                                      
                                      
                                      $
                                      0.64
                                      
                                      
                                      $
                                      2,530,788$2.00
      - $3.00
                                      
                                      
                                      9.16
                                      
                                      
                                      
                                      3,450
                                      
                                      
                                      $
                                      2.66
                                      
                                      
                                      $
                                      -$3.00
      - $4.00
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -$4.00
      - $5.00
                                      
                                      
                                      9.14
                                      
                                      
                                      
                                      2,752
                                      
                                      
                                      $
                                      4.57
                                      
                                      
                                      $
                                      -8.73
                                      
                                      
                                      
                                      8,479
                                      
                                      
                                      $
                                      2.74
                                      
                                      
                                      $
                                      2,530,788
  19
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 The
exercise price for options exercisable at December 31, 2008 was as
follows:
  WeightedAverage
                          
                          
                          
                          
                          
                          WeightedRemaining
                          
                          
                          Options
                          
                          
                          Average
                          
                          
                          AggregateRange
      of
                          
                          Contractual
      Life
                          
                          
                          Exercisable
                          
                          
                          Exercise
                          
                          
                          IntrinsicExercise Price
                          
                          (Years)
                          
                          
                          December 31, 2008
                          
                          
                          Price
                          
                          
                          Value$0
      - $1.00
                          
                          
                          7.56
                          
                          
                          
                          2,157
                          
                          
                          $
                          0.63
                          
                          
                          $
                          2,412,438$2.00
      - $3.00
                          
                          
                          9.02
                          
                          
                          
                          1,620
                          
                          
                          $
                          2.66
                          
                          
                          $
                          -$3.00
      - $4.00
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -$4.00
      - $5.00
                          
                          
                          9.14
                          
                          
                          
                          822
                          
                          
                          $
                          4.61
                          
                          
                          $
                          -8.36
                          
                          
                          
                          4,599
                          
                          
                          $
                          2.06
                          
                          
                          $
                          2,412,438
 
 Stock
option expense of $621 and $711 for the three months ended December 31, 2008 and
2007 respectively; and $2,587 and $1,032 for the nine months ended December 31,
2008 and 2007 respectively, is included primarily in general and administrative
expense.
 
 6.
                Acquisitions/Purchase
      Price Accounting
  Twistbox
Entertainment, Inc. and related entities
 
 On
February 12, 2008, the Company completed an acquisition of Twistbox
Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding capital
stock of Twistbox for 10,180 shares of common stock of the Company and the
Company’s assumption of all the outstanding options of Twistbox’s 2006 Stock
Incentive Plan by the issuance of options to purchase 2,463 shares of common
stock of the Company, including 2,145 vested and 318 unvested options. After the
Merger, Twistbox became a wholly-owned subsidiary of the Company.
  Twistbox
is a global publisher and distributor of branded entertainment content,
including images, video, TV programming and games, for Third Generation (3G)
mobile networks. It publishes and distributes its content globally and has
developed an intellectual property portfolio unique to its target demographic
that includes worldwide mobile rights to global brands and content from leading
film, television and lifestyle content publishing companies. Twistbox has built
a proprietary mobile publishing platform and has leveraged its brand portfolio
and platform to secure “direct” distribution agreements with the largest mobile
operators in the world. These factors contributed to a purchase price in excess
of the fair value of net tangible and intangible assets acquired, and, as a
result, the Company recorded goodwill in connection with this
transaction.
  In
connection with the Merger, the Company guaranteed up to $8,250 of principal
under an existing note of Twistbox in accordance with the terms, conditions and
limitations contained in the note. In connection with the guaranty, the Company
issued the lender two warrants, one to purchase 1,093 and the other to purchase
1,093 shares of common stock of the Company, exercisable at $7.55 per share, and
at $5.00 per share, (increasing to $7.55 per share, if not exercised in full by
February 12, 2009), respectively, through July 30, 2011. The warrants have been
included as part of the purchase consideration and have been valued using the
Black-Scholes method, using the stock price at the merger date of $4.75 per
share discounted for certain restrictions, a volatility of 70%, and the exercise
price and the expected time to vest for each group. These warrants were
subsequently amended as described in Note 8.
  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 by an independent valuation 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 last
quarter, 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
  Goodwill
recognized in the above transaction amounted to $61,436. Goodwill in relation to
the acquisition of Twistbox is not expected to be deductible for income tax
purposes. The preliminary purchase price allocation, including the allocation of
goodwill, will continue to be updated as additional information becomes
available. Merger related restructuring reserves include reserves for employee
severance and for office relocation.
 
 AMV
Holding Limited group
 
 On
October 23, 2008, the Company completed an acquisition of 100% of AMV Holding
Limited, a United Kingdom private limited company (“AMV”) and 80% of Fierce
Media Limited. The acquisition was effective on October 1, 2008.
 
 Subject
to adjustment as set forth in the Stock Purchase Agreement, the aggregate
purchase price (the “Purchase Price”) consisted of: (a) $5,375 in cash (the
“Cash Consideration”); (b) 4,500 fully paid and non-assessable shares of Common
Stock (the “Stock Consideration”); (c) a secured promissory note in the
aggregate original principal amount of $5,375 (the “Note”); and (d) additional
earn-out amounts, if any, if the Acquired Companies achieve certain targeted
earnings for each of the periods from October 1, 2008 to March 31, 2009, April
1, 2009 to March 31, 2010, and April 1, 2010 to September 30, 2010, as
determined in accordance with the Stock Purchase Agreement. The Purchase Price
is subject to certain adjustments based on the working capital of AMV, to be
determined initially within 75 days of the closing, and subsequently within 60
days following June 30, 2009. Any such adjustment of the Purchase Price will be
made first by means of an adjustment to the principal sum due under the Note, as
set forth in the Stock Purchase Agreement. The initial adjustment has been
determined preliminarily as $443, to be added to the secured promissory
note.
  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 (an
“AMV Option”) was either exercised in full or terminated. The Note matures on
January 30, 2010, and bears interest at an initial rate of 5% per annum, subject
to adjustment as provided therein. In the event the Company completes an equity
financing that results in gross proceeds of over $6,000, the Company will prepay
a portion of the Note in an amount equal to one-third of the excess of the gross
proceeds of such financing over $6,000. In addition, if within nine months of
the issuance date of the Note, the Company completes a financing that results in
gross proceeds of over $15,000, then the Company shall prepay the entire
principal amount then outstanding under the Note, plus accrued interest. If
within nine months of the issuance date of the Note, the aggregate principal sum
then outstanding under the Note plus accrued interest thereon has not been
prepaid, then on and after such date, interest shall accrue on the unpaid
principal balance of the Note at a rate of 7% per annum. Additionally, in
connection with the Note, AMV granted to the Sellers a security interest in its
assets. Such security interest is subordinate to the security interest granted
to ValueAct Small Cap Master Fund, L.P. (“ValueAct) under the Senior Secured
Note, issued by Twistbox Entertainment, Inc., a wholly-owned subsidiary of
the Company (“Twistbox”),  due January 30, 2010, as amended on February 12,
2008 (the “ValueAct Note”), and as subsequently amended on October 23, 2008. AMV
also agreed to guarantee Mandalay’s repayment of the Note to the
Sellers.
 
 The
Purchase Price has been preliminarily estimated by the Company to be $22,255
consisting of $9,900 attributed to the Stock Consideration issued, $5,375 in
cash, $95 is stamp duty, $5,818 under the Note referenced above, $313 adjustment
in valuation of warrants which were re-priced in connection with the acquisition
and $658 in transaction costs.  Any further  adjustments
required under the “working capital adjustment” provision and any adjustment
under the “earn-out” provision of the Agreement have not yet been determined and
therefore have not been included in the preliminary calculation of the purchase
price. The shares of the Stock Consideration were valued using the closing stock
price at the acquisition date of $2.20 per share. Under the purchase method of
accounting, the Company allocated the total Purchase Price of $22,255 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:
  22
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 Cash
      and cash equivalents
              
              $
              3,020Accounts
      receivable, net of allowances
              
              
              9,087Prepaid
      expenses and other current assets
              
              
              16Property
      and equipment, net
              
              
              406Accounts
      payable
              
              
              (10,391
              )Bank
      overdrafts
              
              
              (1,902
              )Other
      current liabilities
              
              
              (1,262
              )Other
      long term liabilities
              
              
              (223
              )Minority
      interests
              
              
              95Identified
      intangibles
              
              
              1,368Acquisition
      related restructuring reserves
              
              
              (647
              )Goodwill
              
              
              22,688$
              22,255
  Goodwill
recognized in the above transaction is preliminarily estimated at $22,688.
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 income tax
purposes. The preliminary purchase price allocation, including the allocation of
goodwill, will be updated as additional information becomes available.
Acquisition related restructuring reserves include reserves for employee
severance and for office relocation.
 
 The
acquisitions described above both included the issuance of Company stock as all
or part of the consideration.  Based on the trading price of the Company’s
common stock as of the acquisition dates, the total consideration was $67,538
for the Twistbox acquisition and $22,255 for the AMV acquisition. 
Subsequent to the acquisition, the Company’s average trading price 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.
 
 Unaudited
Pro Forma Summary
  The
following pro forma consolidated amounts give effect to the acquisition of
Twistbox and AMV by the Company accounted for by the purchase method of
accounting as if it had occurred as at the beginning of each of the periods
presented.  The pro forma consolidated results are not necessarily
indicative of the operating results that would have been achieved had the
transaction been in effect as of the beginning of the period presented and
should not be construed as being representative of future operating
results.
  23
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 3 months ended
                        
                        
                        9 months endedDecember 31,
                        
                        
                        December 31,
                        
                        
                        December 31,2007
                        
                        
                        2008
                        
                        
                        2007(unaudited)
                        
                        
                        (unaudited)Revenues
                        
                        $
                        8,866
                        
                        
                        $
                        41,832
                        
                        
                        $
                        35,766Cost
      of revenues
                        
                        
                        3,467
                        
                        
                        
                        15,576
                        
                        
                        
                        13,841Gross
      profit/(loss)
                        
                        
                        5,399
                        
                        
                        
                        26,256
                        
                        
                        
                        21,925Operating
      expenses net of interestincome
      and other expense
                        
                        
                        7,563
                        
                        
                        
                        32,309
                        
                        
                        
                        27,647Income
      tax expense and minority interests
                        
                        
                        90
                        
                        
                        
                        701
                        
                        
                        
                        1,289Net
      loss
                        
                        
                        (2,254
                        )
                        
                        
                        (6,754
                        )
                        
                        
                        (7,011
                        )Basic
      and Diluted net loss per common share
                        
                        $
                        (0.09
                        )
                        
                        $
                        (0.18
                        )
                        
                        $
                        (0.27
                        )
 
 7.
                Other
      Intangible Assets
  December 31,
                                    
                                    
                                    March 31,2008
                                    
                                    
                                    2008(Unaudited)Software
                                    
                                    $
                                    1,922
                                    
                                    
                                    $
                                    1,611Trade
      Name / Trademark
                                    
                                    
                                    13,764
                                    
                                    
                                    
                                    13,030Customer
      list
                                    
                                    
                                    4,378
                                    
                                    
                                    
                                    4,378License
      agreements
                                    
                                    
                                    886
                                    
                                    
                                    
                                    886Non-compete
      agreements
                                    
                                    
                                    323
                                    
                                    
                                    
                                    -21,273
                                    
                                    
                                    
                                    19,905Accumulated
      amortization
                                    
                                    
                                    (907
                                    )
                                    
                                    
                                    (125
                                    )$
                                    20,366
                                    
                                    
                                    $
                                    19,780
  The
Company has included amortization of acquired intangible assets directly
attributable to revenue-generating activities in cost of revenues. The Company
has included amortization of acquired intangible assets not directly
attributable to revenue-generating activities in operating expenses. During the
three months ended December 31, 2008 and 2007, the Company recorded amortization
expense in the amount of $128 and $0, respectively, in cost of revenues; and
amortization expense in the amount of $177 and $0 respectively in operating
expenses. During the nine months ended December 31, 2008 and 2007, the Company
recorded amortization expense in the amount of $331 and $0, respectively, in
cost of revenues; and amortization expense in the amount of $451 and $0,
respectively, in operating expenses.
 
 As of
September 30, 2008, the total expected future amortization related to intangible
assets was as follows:
  12 Months ended December 31,2009
                          
                          
                          2010
                          
                          
                          2011
                          
                          
                          2012
                          
                          
                          2013
                          
                          
                          ThereafterSoftware
                          
                          $
                          334
                          
                          
                          $
                          334
                          
                          
                          $
                          308
                          
                          
                          $
                          230
                          
                          
                          $
                          230
                          
                          
                          $
                          257Customer
      List
                          
                          
                          547
                          
                          
                          
                          547
                          
                          
                          
                          547
                          
                          
                          
                          547
                          
                          
                          
                          547
                          
                          
                          
                          1,162License
      Agreements
                          
                          
                          177
                          
                          
                          
                          177
                          
                          
                          
                          177
                          
                          
                          
                          177
                          
                          
                          
                          21
                          
                          
                          
                          -Non-compete
      agreements
                          
                          
                          162
                          
                          
                          
                          121
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -$
                          1,220
                          
                          
                          $
                          1,179
                          
                          
                          $
                          1,032
                          
                          
                          $
                          954
                          
                          
                          $
                          798
                          
                          
                          $
                          1,419
  24
 
 Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 8.
                Debt
  December 31,
                                
                                
                                March 31,2008
                                
                                
                                2008(Unaudited)Short
      Term DebtCapitalized
      lease liabilities, current portion
                                
                                $
                                3
                                
                                
                                $
                                20Senior
      secured note, accrued interest
                                
                                
                                -
                                
                                
                                
                                228$
                                3
                                
                                
                                $
                                248
  December 31,
                          
                          
                          March 31,2008
                          
                          
                          2008(Unaudited)Long
      Term DebtSenior
      Secured Note, long term portion, net of discount
                          
                          $
                          17,102
                          
                          
                          $
                          16,483Secured
      Note, long term portion
                          
                          
                          5,818
                          
                          
                          
                          -Deferred
      purchase consideration, long term portion
                          
                          
                          169
                          
                          
                          
                          -$
                          23,089
                          
                          
                          $
                          16,483
  In July
2007, Twistbox entered into a debt financing agreement in the form of a senior
secured note amounting to $16,500, payable at 30 months with ValueAct Small Cap
Master Fund L.P. (the “ValueAct Note”). The holder of the ValueAct Note was
granted first lien over all of the Company’s assets. The ValueAct Note carried
interest of 9% annually for the first year and 10% subsequently, with
semi-annual interest only payments. The agreement included certain restrictive
covenants. In conjunction with the merger described in Note 6, the Company
guaranteed up to $8,250 of the principal; and the restrictive covenants were
modified, including a requirement for both the Company and Twistbox to maintain
certain minimum cash balances. In connection with the guaranty, the Company
issued the lender warrants to purchase 1,093 and 1,093 shares of common stock of
the Company, exercisable at $7.55 per share, and at $5.00 per share, (increasing
to $7.55 per share, if not exercised in full by February 12, 2009),
respectively, through July 30, 2011. These warrants replaced warrants originally
issued by Twistbox in conjunction with the ValueAct Note.
  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.
  Minimum
future obligations, including interest, under the Senior Secured Note are
$19,101 during the year ended December 31, 2010 including repayment of the
principal. Capitalized lease assets are set out in Note 4. Future obligations
under capitalized leases are included as part of Other Obligations in Note
15.
 
 9.
                Related
      Party Transactions
  The
Company engages in various business relationships with shareholders and officers
and their related entities. The significant relationships are disclosed
below.
  Mandalay
Media, Inc.
  On
September 14, 2006, the Company entered into a management agreement (the
“Management Agreement”) with Trinad Management for five years. Pursuant to the
terms of the Management Agreement, Trinad Management will provide certain
management services, including, without limitation, the sourcing, structuring
and negotiation of a potential business combination transaction involving the
Company in exchange for a fee of $90 per quarter, plus reimbursements of all
expenses reasonably incurred in connection with the provision of Agreement. The
Management Agreement expires on September 14, 2011. Either party may terminate
with prior written notice. However, if the Company terminates, it shall pay a
termination fee of $1,000. For the three months ended December 31, 2008 and
2007, the Company paid management fees under the agreement of $90 and $90,
respectively. For the nine months ended December 31, 2008 and 2007, the Company
paid management fees under the agreement of $270 and $270,
respectively.
  In March
2007, the Company entered into a month to month lease for office space with
Trinad Management for rent of $9 per month. Rent expense in connection with this
lease was $26 and $26 respectively for the three months ended December 31, 2008
and 2007; and $81 and $81 respectively for the nine months ended December 31,
2008 and 2007.
  26
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
  Twistbox
Entertainment, Inc.
 
 Lease of
Premises
 Twistbox
leases its primary offices in Los Angeles from Berkshire Holdings, LLC, a
company with common ownership by officers of Twistbox. Amount paid in connection
with this lease was $95 and $95 for the three months ended December 31, 2008 and
2007, respectively, and $284 and $284 for the nine months ended December 31,
2008 and 2007, respectively.
 
 Twistbox
is party to an oral agreement with a person affiliated with Twistbox with
respect to a lease of an apartment in London.  Amount paid in
connection with this lease was $12 and $18 for the three months ended December
31, 2008 and 2007, respectively, and $48 and $54 for the nine months ended
December 31, 2008 and 2007, respectively.
  27
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 10.
              Capital
      Stock Transactions
 
 Preferred
Stock
 
 On
October 3, 2006, the Company designated a Series A Preferred Stock, par value
$.0001 per share (Series A). The Series A holders shall be entitled to: (1) vote
on an equal per share basis as holders of common stock; (2) dividends on an
if-converted basis; and (3) a liquidation preference equal to the greater of
$10, per share of Series A (subject to adjustment) or such amount that would
have been paid on an if-converted basis. Each Series A holder may treat as a
dissolution or winding up of the Company any of the following transactions: a
consolidation, merger, sale of substantially all the assets of the company,
issuance/sale of common stock of the Company constituting a majority of all
shares outstanding and a merger/business combination, each as
defined.
 
 In
addition, the Series A holders may convert, at their discretion, all or any of
their Series A shares into the number of common shares equal to the number
calculated by dividing the original purchase price of such Series A Preferred,
plus the amount of any accumulated, but unpaid dividends, as of the conversion
date, by the original purchase price (subject to certain adjustments) in effect
at the close of business on the conversion date.
 
 On August
3, 2006, the Company sold 100 shares of the Series A to Trinad Management, LLC
(Trinad Management), an affiliate of Trinad Capital LP (Trinad Capital), one of
the Company’s principal shareholders, for an aggregate sale price of $100, $1.00
per share. The Company recognized a one time, non-cash deemed preferred dividend
of $43 because the fair value of our common stock at the time of the sale of
$1.425 per share, greater than the conversion price of $1.00 per
share.
 
 Common
Stock
 
 On July
24, 2007, the Company sold 5,000 shares of the Company's common stock,
at $0.50 per share, for aggregate proceeds of $2,473, net of offering
costs of $27.
  In
September, October and December 2007, warrants to purchase 625 shares of common
stock were exercised in a cashless exchange for 239 shares of the Company’s
common stock based on the average closing price of the Company’s common stock
for the five days prior to the exercise date.
  On
November 7, 2007, the Company granted non-qualified stock options to purchase
500 shares of common stock of the Company to a director under the Plan. The
options have a ten year term and are exercisable at $2.65 per share, with
one-third of the options vesting immediately upon grant, one-third vesting on
the first anniversary of the date of grant and the remaining one-third on the
second anniversary of the date of grant. The options were valued at $772 using a
Black-Scholes model assuming a risk free interest rate of 3.89%, expected life
of four years, and expected volatility of 75.2%.
 
 On
November 14, 2007, the Company granted non-qualified stock options to purchase
100 shares of common stock of the Company to a director under the Plan. The
options have a ten year term and are exercisable at a price of $2.50 per share,
with one-third of the options granted vesting immediately upon grant, one-third
vesting on the first anniversary of the date of grant and the remaining
one-third vesting on the second anniversary of the date of grant. The options
were valued at $160 using a Black-Scholes model assuming a risk free interest
rate of 3.89%, expected life of four years, and expected volatility of
75.2%.
  28
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 On
February 12, 2008, the Company issued 10,180 shares of common stock in
connection with the merger with Twistbox. The Company also assumed all the
outstanding options of Twistbox’s 2006 Stock Incentive Plan by the issuance of
options to purchases 2,463 shares of common stock of the Company, including
2,144 vested and 319 unvested options; and the Company issued two warrants to a
lender to Twistbox, one to purchase 1,093 shares of common stock and the other
to purchase 1,093 shares of common stock of the Company, exercisable at $7.55
per share, and at $5.00 per share, (increasing to $7.55 per share, if not
exercised in full by February 12, 2009), respectively, through July 30,
2011.
  On April
9, 2008 a former director of the company exercised warrants to purchase 50
shares of common stock in a cashless exchange for 25 shares of the Company’s
common stock.
  In April
and June 2008, warrants to purchase 350 shares of common stock were exercised in
a cashless exchange for 217 shares of the Company’s common stock based on the
average closing price of the Company’s common stock for the five days prior to
the exercise date.
 
 On June
18, 2008, the Company granted non-qualified stock options to purchase 1,500
shares of common stock of the Company to four directors under the Plan. The
options have a ten year term and are exercisable at a price of $2.75 per share,
with one-third of the options granted vesting immediately upon grant, one-third
vesting on the first anniversary of the date of grant and the remaining
one-third vesting on the second anniversary of the date of grant. The options
were valued at $2,403 using a Black-Scholes model assuming a risk free interest
rate of 3.89%, expected life of four years, and expected volatility of
75.2%.
 
 On
September 29, 2008, the Company granted non-qualified stock options to purchase
350 shares of common stock of the Company to two directors under the Plan. The
options have a ten year term and are exercisable at a price of $2.40 per share,
with one-third of the options granted vesting immediately upon grant, one-third
vesting on the first anniversary of the date of grant and the remaining
one-third vesting on the second anniversary of the date of grant. The options
were valued at $489 using a Black-Scholes model assuming a risk free interest
rate of 3.89%, expected life of four years, and expected volatility of
75.2%.
 
 On
October 23, 2008, the Company entered into a Securities Purchase Agreement with
certain investors, pursuant to which the Company agreed to sell in a private
offering an aggregate of 1,685 shares of Common Stock and warrants to purchase
843 shares of Common Stock (the “Warrants”), for gross proceeds to the Company
of $4,500. The Warrants have a five year term and an exercise price of $2.67 per
share.
 
 In
October 2008, warrants to purchase 2,300 shares of common stock were exercised
in a cashless exchange for 286 shares of the Company’s common stock based on the
average closing price of the Company’s common stock for the five days prior to
the exercise date.
 
 11.
              Employee
      Benefit Plans
 
 The
Company has an employee 401(k) savings plan covering full-time eligible
employees.  These employees may contribute eligible compensation up to
the annual IRS limit. The Company does not make matching
contributions.
  29
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
 
 12.
              Income
      Taxes
 
 As of
December 31, 2008, the Company had net operating loss (NOL) carry-forwards to
reduce future Federal income taxes of approximately $41,400, expiring in various
years ranging through 2027. The Company may have had ownership changes, as
defined by the Internal Revenue Service, which may subject the NOL's to annual
limitations which could reduce or defer the use of the NOL
carry-forwards.
  In
connection with the acquisitions described in Note 6 above, the Company has
recorded Goodwill, amounting to $83,758, which will not be amortized for book
purposes and is not deductible for tax purposes. The Company also recorded
intangibles which will have differing amortization for book and tax purposes.
Trademarks, amounting to $13,761, will not be amortized for book purposes, but
will be subject to amortization for tax purposes, giving rise to a permanent
difference. Other intangible assets, amounting to $7,506, will be amortized over
a shorter period for book purposes than tax purposes, giving rise to timing
differences. These differences will impact the Company’s NOL carry-forwards in
the future.
  As of
December 31, 2008, realization of the Company's net deferred tax asset of
approximately $18,120 was not considered more likely than not and, accordingly,
a valuation allowance of $18,120 has been provided. During the three months
ended December 31, 2008, the valuation allowance decreased by $80.
  Management
has evaluated and concluded that there are no significant uncertain tax
positions requiring recognition in the Company’s financial statements as of
December 31, 2008.
  The
Company adopted the provisions of FIN 48 on January 1, 2008 and there was no
difference between the amounts of unrecognized tax benefits recognized in the
balance sheet prior to the adoption of FIN 48 and those after the adoption of
FIN 48. There were no unrecognized tax benefits not subject to valuation
allowance as at December 31, 2008 and December 31, 2007. The Company recognized
no interest and penalties on income taxes in it’s statement of operations for
the three months or the nine months ended December 31, 2008 and 2007 .
Management believes that with few exceptions, the Company is no longer subject
to income tax examinations by tax authorities for years before March 31,
2004.
  30
  Mandalay Media, Inc.
and Subsidiaries
 Notes
to Unaudited Consolidated Financial Statements
 (all
numbers in thousands except per share amounts)
  13.
              Segment
      and Geographic information
  The
Company operates in one reportable segment in which it is a developer and
publisher of branded entertainment content for mobile phones. Revenues are
attributed to geographic areas based on the country in which the carrier’s
principal operations are located. The Company attributes its long-lived assets,
which primarily consist of property and equipment, to a country primarily based
on the physical location of the assets. Goodwill and intangibles are not
included in this allocation. The following information sets forth geographic
information on our sales and net property and equipment for the period ended
December 31,
2008:
 North
                        America
                      
                      
                      Europe
                      
                      
                      South
                        America
                      
                      
                      Other
                        Regions
                      
                      
                      ConsolidatedThree Months ended December 31, 2008
                        Net
      sales to unaffiliated customers
                      
                      $
                      1,160
                      
                      
                      $
                      7,356
                      
                      
                      $
                      172
                      
                      
                      $
                      2,317
                      
                      
                      $
                      11,005Nine
      Months ended December 31, 2008
                        Net
      sales to unaffiliated customers
                      
                      $
                      2,831
                      
                      
                      $
                      15,168
                      
                      
                      $
                      524
                      
                      
                      $
                      2,831
                      
                      
                      $
                      21,354Property
      and equipment, net at December 31, 2008
                      
                      $
                      754
                      
                      
                      $
                      501
                      
                      
                      $
                      -
                      
                      
                      $
                      11
                      
                      
                      $
                      1,266
  Our three
largest customers accounted for 14%,13% and 12% of our revenue in the three
months ended December 31,
2008; and 26%, 7% and 7% of our revenue in the nine months ended December 31, 2008.
  14.
              Commitments
      and Contingencies
 
 Operating
Lease Obligations
 The
Company leases office facilities under noncancelable operating leases expiring
in various years through 2011.
 
 Following
is a summary of future minimum payments under initial terms of leases at
December 31, 2008:
 Year Ending December
      312009
                      
                      $
                      4122010
                      
                      $
                      1932011
                      
                      $
                      -Total
      minimum lease payments
                      
                      $
                      605
  These
amounts do not reflect future escalations for real estate taxes and building
operating expenses.  Rental expense amounted to $254 for the three
months ended December 31, 2008; and $621 for the nine months ended December 31,
2008.
  Minimum
Guaranteed Royalties
 The
Company has entered into license agreements with various owners of brands and
other intellectual property so that it could develop and publish branded
products for mobile handsets.
  31
  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 December 31, 2008 were as follows:
  MinimumGuaranteedYear Ending December
      31
                          
                          Royalties2009
                          
                          
                          2242010
                          
                          
                          1202011
                          
                          
                          602012
                          
                          
                          -Total
      minimum payments
                          
                          $
                          404
 
 Other
Obligations
 As of
December 31, 2008, 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 December 31, 2008.  Annual payments relating to these
commitments at December 31, 2008 are as follows:
 Year Ending December
      31
                                        
                                        Commitments2009
                                        
                                        
                                        2,9072010
                                        
                                        
                                        2,4492011
                                        
                                        
                                        3792012
                                        
                                        
                                        -Total
      minimum payments
                                        
                                        $
                                        5,735
  Litigation
 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.
  32





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 Transitional Report on Form 10-KT for the
Transition Period ended March 31, 2008. Historical operating results are not
necessarily indicative of the trends in operating results for any future
period.




Unless
the context otherwise indicates, the use of the terms “we,” “our” “us” or the
“Company” refer to the business and operations of Mandalay Media, Inc.
(“Mandalay”) through its operating and wholly-owned subsidiaries, Twistbox
Entertainment, Inc. (“Twistbox”) and AMV Holding Limited, a United Kingdom
private limited company (“AMV”).




Historical
Operations of Mandalay Media, Inc.




The
Company was originally incorporated in the State of Delaware on November 6, 1998
under the name eB2B Commerce, Inc. On April 27, 2000, the Company merged into
DynamicWeb Enterprises Inc., a New Jersey corporation, and changed its name to
eB2B Commerce, Inc. On April 13, 2005, the Company 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,
the Company 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) the Company’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 the Company
to fund the expenses of remaining public; (4) 3.5% of the new common stock of
the Company (140,000 shares) was issued to the holders of record of the Company
‘s preferred stock in settlement of their liquidation preferences; (5) 3.5% of
the new common stock of the Company (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 the Company (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, the Company 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.




Twistbox
Entertainment, Inc.




On
February 12, 2008, Mandalay completed its acquisition of Twistbox Entertainment,
Inc. pursuant to an Agreement and Plan of Merger entered into on December 31,
2007, as subsequently amended by the Amendment to Agreement and Plan of Merger
dated February 12, 2008, with Twistbox Acquisition, Inc., a Delaware corporation
and a wholly-owned subsidiary of Mandalay (“Merger Sub”), Twistbox
Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark Capital, L.P., as
representatives of the stockholders of Twistbox, as part of which Merger Sub
merged with and into Twistbox, with Twistbox as the surviving corporation (the
“Merger”). Following the Merger, Twistbox became the sole operating subsidiary
of Mandalay until the acquisition of AMV on October 23, 2008 as described
below.




Twistbox is
a global publisher and distributor of branded entertainment content, including
images, video, TV programming and games, for Third Generation (3G) mobile
networks. Twistbox publishes and distributes its content in over 40 countries
representing more than one billion subscribers. Operating since 2003, Twistbox
has developed an intellectual property portfolio unique to its target
demographic (18 to 35 year old) that includes worldwide exclusive (or territory
exclusive) mobile rights to global brands and content from leading film,
television and lifestyle content publishing companies. Twistbox has built a
proprietary mobile publishing platform that includes: tools that automate
handset portability for the distribution of images and video; a mobile games
development suite that automates the porting of mobile games and applications to
over 1,500 handsets; and a content standards and ratings system globally adopted
by major wireless carriers to assist with the responsible deployment of
age-verified content. Twistbox has leveraged its brand portfolio and platform to
secure “direct” distribution agreements with the largest mobile operators in the
world, including, among others, AT&T, Hutchinson 3G, O2, MTS, Orange,
T-Mobile, Telefonica, Verizon and Vodafone. Twistbox has experienced annual
revenue growth in excess of 50% over the past two years and expects to become
one of the leading players in the rapidly-growing, multibillion-dollar mobile
entertainment market.




Twistbox
maintains a worldwide distribution agreement with Vodafone. Through this
relationship, Twistbox serves as Vodafone’s exclusive supplier of late night
content, a portion of which is age-verified. Additionally, Twistbox is one of
the select few content aggregators for Vodafone. Twistbox aggregates content
from leading entertainment companies and manages distribution of this content to
Vodafone. Additionally, Twistbox maintains distribution agreements with other
leading mobile network operators throughout the North American, European, and
Asia-Pacific regions that include Verizon, Virgin Mobile, T-Mobile, Telefonica,
Hutchinson 3G, , O2 and Orange.




33




Twistbox’s
intellectual property encompasses over 75 worldwide exclusive or territory
exclusive content licensing agreements that cover all of its key content genres
including lifestyle, glamour, and celebrity news and gossip for U.S. Hispanic
and Latin American markets, poker news and information, late night entertainment
and casual games.




Twistbox
currently has content live on more than 100 network operators in 40 countries.
Through these relationships, Twistbox can currently reach over one billion
mobile subscribers worldwide. Its existing content portfolio includes 300 WAP
sites, 250 games and 66 mobile TV channels.




In
addition to its content publishing business, Twistbox operates a rapidly growing
suite of Premium Short Message Service (Premium SMS) services that include text
and video chat and web2mobile marketing services of video, images and games that
are promoted through on-line, magazine and TV affiliates. The Premium SMS
infrastructure essentially allows end consumers of Twistbox content to pay for
their content purchases directly from their mobile phone bills.





Twistbox’s
end-users are the highly-mobile, digitally-aware 18 to 35 year old demographic.
This group is a major consumer of digital entertainment services and commands
significant amounts of disposable income. In addition, this group is very
focused on consumer lifestyle brands and is much sought after by
advertisers.





AMV
Holding Limited





As
previously disclosed in our Current Report on Form 8-K filed with the Securities
and Exchange Commission (the “SEC”) on October 28, 2008, Mandalay consummated
the acquisition of 100% of the issued and outstanding share capital of AMV
Holding Limited, a United Kingdom private limited company (“AMV”) and 80% of the
issued and outstanding share capital of Fierce Media Limited, United Kingdom
private limited company (collectively the “Shares”) on October 23, 2008 (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 (the “Common Stock”); (iii) a secured promissory note in the aggregate
principal amount of $5,375,000 (the “Note”); and (iv) additional earn-out
amounts, if any, based on certain targeted earnings as set forth in the stock
purchase agreement.





The Note
matures on January 30, 2010, and bears interest at an initial rate of 5% per
annum, subject to adjustment as provided therein. In the event Mandalay
completes an equity financing that results in gross proceeds of over $6,000,000,
Mandalay will prepay a portion of the Note in an amount equal to one-third of
the excess of the gross proceeds of such financing over $6,000,000. In addition,
if within nine months of the issuance date of the Note, Mandalay completes a
financing that results in gross proceeds of over $15,000,000, then Mandalay
shall prepay the entire principal amount then outstanding under the Note, plus
accrued interest. If within nine months of the issuance date of the Note, the
aggregate principal sum then outstanding under the Note plus accrued interest
thereon has not been prepaid, then on and after such date, interest shall accrue
on the unpaid principal balance of the Note at a rate of 7% per
annum.





In
addition, also on October 23, 2008, in connection with the AMV Acquisition,
Mandalay, Twistbox and ValueAct SmallCap Master Fund L.P. (“ValueAct”) entered
into a Second Amendment to the a certain senior secured promissory note
purchased by ValueAct from Twistbox in the amount of $16,500,000 (the “ValueAct
Note”), which among other things, provides for a payment in kind election at the
option of Twistbox, modifies the financial covenants set forth in the
ValueAct Note to require that Mandalay and Twistbox maintain certain
minimum combined cash balances and provides for certain covenants with respect
to the indebtedness of Mandalay and its subsidiaries.  Also on October 23,
2008, AMV granted to ValueAct a security interest in its assets to secure
the obligations under the ValueAct Note. In addition, Mandalay and ValueAct
entered into an allonge to each of the 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.





AMV is a
mobile media and marketing company delivering games and lifestyle content
directly to consumers in the United Kingdom, Australia, South Africa and various
other European countries. AMV markets its well established branded services
including Bling, Phonebar and GameZone through a unique
Customer Relationship Management (CRM) platform that drives revenue through
mobile internet, print and TV advertising.





On
October 23, 2008, Mandalay entered into a Securities Purchase Agreement with
certain investors identified therein (the “Investors”), pursuant to which
Mandalay agreed to sell to the Investors in a private offering an aggregate
of 1,685,394 shares of Common Stock and warrants to purchase 842,697 shares of
Common Stock for gross proceeds to Mandalay of $4,500,000. The warrants have a
five year term and an exercise price of $2.67 per share. The funds were held in
an escrow account pursuant to an Escrow Agreement, dated October 23, 2008 and
were released to Mandalay on or about November 8, 2008.





The
Merger and the AMV Acquisition both included the issuance of Common Stock as all
or part of the consideration. Based on the trading price of the Common Stock as
of the acquisition dates, the total consideration was approximately $67.5
million for the Merger and approximately $22.2 million for the AMV Acquisition.
Subsequent to the Merger and the AMV Acquisition, the average trading price of
the Common Stock has decreased significantly. If the decrease in trading price
is deemed to “not be temporary in nature”, management expects that an impairment
of goodwill and other long lived intangible assets could occur by year end.
Other factors affecting management’s estimate of impairment include the current
profitability and expected future cash flows from the acquired
business.




34




Comparison of the Three Months Ended
December 31, 2008 and 2007





Revenues





Three Months EndedDecember 31,2008
                        
                        
                        2007(In thousands)Revenues
      by type:Games
                        
                        $
                        1,245
                        
                        
                        $
                        -Other
      content
                        
                        
                        9,760
                        
                        
                        
                        -Total
                        
                        $
                        11,005
                        
                        
                        
                        -





The
Company had no operations in 2007 and consequently no revenues. Revenues in the
three months ended December 31, 2008 relate to the revenues of Twistbox and AMV.
Games revenue includes both licensed and internally developed games for use on
mobile phones. Other content includes a broad range of products delivered in the
form of WAP, Video, Wallpaper and Mobile TV.





Cost
of Revenues




Three Months EndedDecember 31,2008
                            
                            
                            2007(In thousands)Cost
      of Revenues:License
      Fees
                            
                            $
                            1,670
                            
                            
                            $
                            -Other
      direct cost of revenues
                            
                            
                            2,264
                            
                            
                            
                            -Total
      Cost of Revenues
                            
                            $
                            3,934
                            
                            
                            $
                            -Revenues
                            
                            
                            11,005
                            
                            
                            $
                            -Gross
      Margin
                            
                            
                            64.3
                            %
                            
                            
                            N/A




35




The
Company had no operations in 2007 and consequently no cost of revenues. Cost of
revenues in the three months ended December 31, 2008 relate to the cost of
revenues of Twistbox and AMV. License fees represent costs payable to content
providers for use of their intellectual property in products sold. 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.




Operating
Expenses




Three Months EndedDecember 31,2008
                    
                    
                    2007(In thousands)Product
      Development Expenses
                    
                    $
                    1,563
                    
                    
                    $
                    -Sales
      and Marketing Expenses
                    
                    
                    4,243
                    
                    
                    
                    -General
      and Administrative Expenses
                    
                    
                    2,173
                    
                    
                    
                    1,278Amortization
      of Intangible Assets
                    
                    
                    177
                    
                    
                    
                    -





Prior to
the Merger, the Company was a public shell company with no operations; and as a
result the only activity in the three months ended December 31, 2007 represents
expenses incurred in developing the Company. In both years, General and
Administrative expenses consists primarily of consulting and professional fees,
accounting and legal expenses and employee related expenses including stock
based compensation. The increase in 2008 over 2007 is primarily the result of
stock based compensation to directors, employing executive management for the
company, a significant increase in legal and other professional fees, and the
addition of Twistbox expenses. Product Development and Sales and Marketing
Expenses represent the operating expenses of Twistbox and AMV. 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




Three Months EndedDecember 31,2008
                    
                    2007(In thousands)Interest
      and other income/(expense)
                    
                    $
                    (1,138
                    )
                    
                    $
                    91




Interest
and other income/(expense) includes interest income on invested funds, interest
expense related the ValueAct Note, foreign exchange transaction gains and
losses, and depreciation expense.





Comparison
of the Nine Months Ended December 31, 2008 and 2007





Revenues





Nine Months Ended December 31,2008
                          
                          
                          2007(In thousands)Revenues
      by type:Games
                          
                          $
                          3,738
                          
                          
                          $
                          -Other
      content
                          
                          
                          17,616
                          
                          
                          
                          -Total
                          
                          $
                          21,354
                          
                          
                          
                          -





36




The
Company had no operations in 2007 and consequently no revenues. Revenues in the
nine months ended December 31, 2008 relate to the revenues of Twistbox, and AMV
for the current quarter. Games revenue includes both licensed and internally
developed games for use on mobile phones. Other content includes a broad range
of products delivered in the form of WAP, Video, Wallpaper and Mobile
TV.





Cost
of Revenues




Nine Months Ended December 31,2008
                            
                            
                            2007(In thousands)Cost
      of Revenues:License
      Fees
                            
                            $
                            5,604
                            
                            
                            $
                            -Other
      direct cost of revenues
                            
                            
                            2,468
                            
                            
                            
                            -Total
      Cost of Revenues
                            
                            $
                            8,072
                            
                            
                            $
                            -Revenues
                            
                            
                            21,354
                            
                            
                            $
                            -Gross
      Margin
                            
                            
                            62.2
                            %
                            
                            
                            N/A




The
Company had no operations in 2007 and consequently no cost of revenues. Cost of
revenues in the nine months ended December 31, 2008 relate to the cost of
revenues of Twistbox, and AMV for the current quarter. License fees represent
costs payable to content providers for use of their intellectual property in
products sold. 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.




Operating
Expenses




Nine Months Ended December 31,2008
                    
                    
                    2007(In thousands)Product
      Development Expenses
                    
                    $
                    5,130
                    
                    
                    $
                    -Sales
      and Marketing Expenses
                    
                    
                    6,527
                    
                    
                    
                    -General
      and Administrative Expenses
                    
                    
                    7,545
                    
                    
                    
                    2,189Amortization
      of Intangible Assets
                    
                    
                    451
                    
                    
                    
                    -





Prior to
the Merger, the Company was a public shell company with no operations; and as a
result the only activity in the nine months ended December 31, 2007 represents
expenses incurred in developing the Company. In both years, General and
Administrative expenses consists primarily of consulting and professional fees,
accounting and legal expenses and employee related expenses including stock
based compensation. The increase in 2008 over 2007 is primarily the result of
stock based compensation to directors, employing executive management for the
company, a significant increase in legal and other professional fees, and the
addition of Twistbox expenses. Product Development and Sales and Marketing
Expenses represent the operating expenses of Twistbox and AMV. 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.





37




Other
Expenses





Nine Months Ended December 31,2008
                    
                    2007(In thousands)Interest
      and other income/(expense)
                    
                    $
                    (2,084
                    )
                    
                    $
                    256




Interest
and other income/(expense) includes interest income on invested funds, interest
expense related the ValueAct Note, foreign exchange transaction gains and
losses, and depreciation expense.





Financial
Condition





Assets





Our current assets totaled $19,044 and
$17,629 at December 31, 2008 and March 31, 2008, respectively. Total assets were
$125,078 and $100,124 at December 31, 2008 and March 31, 2008, respectively. The
increase in current assets is primarily due to the addition of AMV accounts
receivables following the AMV Acquisition. The increase in total assets is
primarily due to the additional intangibles flowing from the AMV
Acquisition.





Liabilities
and Working Capital





At December 31, 2008, our total
liabilities were $43,349.  Our current liabilities totaled $19,673 and
$9,255 at December 31, 2008 and March 31, 2008, respectively. This resulted in
negative working capital of ($629) at December 31, 2008 as accounts payable and
other current liabilities increased, largely as a result of the AMV Acquisition,
with additional AMV payables, amounts payable related to the AMV Acquisition and
restructuring reserves in connection with the AMV Acquisition.





Liquidity and Capital Resources




Nine Months
                        
                        
                        Nine MonthsEnded
                          December 31,
                        
                        
                        Ended
                          December 31,2008
                        
                        
                        2007(In thousands)
                        
                        
                        (In thousands)Consolidated
      Statement of Cash Flows Data:Capital
      expenditures
                        
                        
                        (101
                        )
                        
                        
                        -Cash
      flows used in operating activities
                        
                        
                        (5,591
                        )
                        
                        
                        (496
                        )Cash
      flows (used in)/ provided by investing activities
                        
                        
                        (3,363
                        )
                        
                        
                        (141
                        )Cash
      flows from financing activities
                        
                        
                        4,300
                        
                        
                        
                        2,473




Prior to
the Merger, the Company was a public shell company with no operations. Twistbox
has incurred losses and negative annual cash flows since inception. The primary
sources of liquidity have historically been issuance of common and preferred
stock, in the case of Twistbox, borrowings under the ValueAct Note 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
and potentially equity raises and/or additional borrowing.





Operating
Activities





In the
nine months ended December 31, 2008, operating expense consisted solely of
employee compensation and other general and administrative expenses. In the nine
months ended December 31, 2008, we used $5.6 million of net cash in operating
expenses. This primarily related to the net loss of $8.9 million, decreases in
accounts payable, accrued license fees and other liabilities of $3.8 million,
partially offset by a decrease in accounts receivable of $3.4 million and non
cash stock based compensation and depreciation and amortization included in the
net loss of $2.6 million and $1.1 million respectively.




38




Investing
Activities





In the
nine months ended December 31, 2008, $3.4 million was used in investing
activities, primarily the cash consideration in the acquisition of AMV,
amounting to $6.3 million, and the purchase of plant and equipment of $0.1
million; offset by cash acquired on acquisition of the subsidiary of $3.0
million.





Financing
Activities





In the nine months ended December 31,
2008, $4.4 million was provided from the sale of Common Stock, while $0.1
million was used in payments related to a prior acquisition.




39





As of
December 31, 2008, the Company had approximately $6.4 million of cash, and
management believes it has sufficient cash to satisfy the Company’s monetary
needs for the next twelve months. We may, however, 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. In
addition, there are specific minimum cash covenants under the ValueAct Note, and
there is no certainty that these covenants will be achieved.





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. At December 31, 2008, our largest customer
represented 20% of our gross accounts receivable.





Foreign
Currency Risk




The
functional currencies of our United States and German operations are the United
States Dollar, or USD, and the Euro, respectively. A significant portion of our
business is conducted in currencies other than the USD 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 either the USD 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.




40




Item 4T.
Controls and Procedures.





Evaluation of Disclosure Controls and
Procedures





Members
of our management, including our Principal Executive Officer, James Lefkowitz,
and Principal Financial Officer, Jay A. Wolf, 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 December
31, 2008, the end of the period covered by this report. Based upon that
evaluation, Messrs. Lefkowitz and Wolf concluded that our disclosure controls
and procedures are adequate and effective to ensure that material information
relating to use 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.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal controls over financial reporting are
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.





Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Our
management assessed the effectiveness of our internal controls over financial
reporting as of December 31, 2008. Based on our assessment, we have concluded
that our internal controls over financial reporting were effective as of
December 31, 2008.





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 or 15(d)-15 that occurred during the third
quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




PART II - OTHER
INFORMATION





Item
1. Legal Proceedings.





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.





The
effects of the recession in the United States and general downturn in the global
economy, including financial market disruptions, could have an adverse impact on
our business, operating results or financial condition.





Our operating results also may be
affected by uncertain or changing economic conditions such as the challenges
that are currently affecting economic conditions in the United States. If global
economic and market conditions, or economic conditions in the United States or
other key markets, remain uncertain or persist, spread, or deteriorate further,
we may experience material impacts on our business, operating results, and
financial condition in a number of ways including negatively affecting our
profitability and causing our stock price to decline.




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





On
December 17, 2008, the Board granted 25,000 and 20,000 shares of Common Stock to
each of Merriman, Curhan and Ford & Co. and CEOcast Inc., respectively, in
connection with consulting services provided to the Company. The issuances of
the shares were made in reliance on the exemption from registration provided
under Rule 506 promulgated under 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.




41





Item 6.   Exhibits.




31.1
            Certification
      of James Lefkowitz, Principal Executive Officer, pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002. *31.2
            Certification
      of Jay A. Wolf, Principal Financial Officer, pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002. *32.1
            Certification
      of James Lefkowitz, Principal Executive Officer, pursuant to 18 U.S.C.
      Section 1350. *32.1
            Certification
      of Jay A. Wolf, Principal Financial Officer, pursuant to 18 U.S.C. Section
      1350. *


* Filed
herewith





42





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:
        February 20, 2009
              By:
              /s/
      James LefkowitzJames
      LefkowitzPresident(Authorized
      Officer and Principal Executive
Officer)




Date:
        February 20, 2009By:
              /s/
      Jay A. WolfJay
      A. WolfChief
      Financial Officer and Secretary(Authorized
      Officer and Principal Financial
Officer)





43