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 June 30, 2010





 ̈
                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




NEUMEDIA,
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.)2000 Avenue of the Stars, Suite 410, Los Angeles, CA
              90067(Address
      of Principal Executive Offices)
              (Zip
      Code)





(310)
601-2500


(Registrant’s
Telephone Number, including area code)





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





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





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




Large Accelerated filer 
       ̈
              Accelerated filer 
       ̈Non-accelerated filer 
       ̈
                (do not check if a smaller reporting company)
              Smaller reporting company 
      x




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





On August
23, 2010, there were 35,674,225 shares of the Registrant’s common stock, par
value $0.0001 per share, issued and outstanding.








NEUMEDIA,
INC.


Table
of Contents




PagePART I - FINANCIAL
    INFORMATIONItem
      1.
                        Financial
      StatementsConsolidated
      Balance Sheets as of June 30, 2010 (Unaudited) and March 31,
      2010
                        
                        1Consolidated
      Statements of Operations (Unaudited) For the Three Month Periods Ended
      June 30, 2010 and 2009
                        
                        2Consolidated
      Statements of Cash Flows (Unaudited) For the Three Month Periods Ended
      June 30, 2010 and 2009
                        
                        4Notes
      to the Unaudited Consolidated Financial Statements
                        
                        5Item
      2.
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        
                        29Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        
                        38Item
      4
                        Controls
      and Procedures
                        
                        39PART II - OTHER INFORMATIONItem
      1.
                        Legal
      Proceedings
                        
                        39Item 1A.
                        Risk
      Factors
                        
                        39Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        
                        40Item
      3.
                        Defaults
      Upon Senior Securities
                        
                        40Item
      4.
                        (Removed
      and Reserved)
                        
                        40Item
      5.
                        Other
      Information
                        
                        40Item
      6.
                        Exhibits
                        
                        40Signatures
                        
                        43










PART I - FINANCIAL
INFORMATION




Item 1.   Financial
Statements.







NeuMedia,
Inc.


(formerly
known as Mandalay Media, Inc.)


and
Subsidiaries


Unaudited
Consolidated Financial Statements


June
30, 2010















Page(s)Consolidated
      Balance Sheets as of June 30, 2010 (unaudited) and March 31,
      2010
                        1Consolidated
      Statements of Operations
      (unaudited) for month periodsended
      June 30, 2010 and June 30, 2009
                        2Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss
      (unaudited)for
      the period ended June 30, 2010
                        3Consolidated
      Statements of Cash Flows (unaudited) for month periods
      endedJune
      30, 2010 and June 30, 2009
                        4Notes
      to Unaudited Consolidated Financial Statements
                        5-28










NeuMedia,
      Inc. and Subsidiaries
            1Consolidated
      Balance Sheets







(In
thousands, except share amounts)




June 30,
              
              
              March 31,2010
              
              
              2010unauditedASSETSCurrent
    assetsCash and cash
      equivalents
              
              $
              2,933
              
              
              $
              640Accounts receivable, net of
      allowances of $244 and $403, respectively
              
              
              3,770
              
              
              
              4,711Prepaid expenses and other current
      assets
              
              
              447
              
              
              
              477Net current assets of discontinued
      operations
              
              
              -
              
              
              
              7,377Total current
      assets
              
              
              7,150
              
              
              
              13,205Property and equipment,
      net
              
              
              547
              
              
              
              603Intangible assets,
      net
              
              
              8,104
              
              
              
              8,195Goodwill
              
              
              8,155
              
              
              
              8,155Net non-current assets of
      discontinued operations
              
              
              -
              
              
              
              16,623TOTAL
ASSETS
              
              $
              23,956
              
              
              $
              46,781LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
              
              $
              3,966
              
              
              $
              4,011Accrued license
      fees
              
              
              2,059
              
              
              
              1,814Accrued
      compensation
              
              
              381
              
              
              
              537Current portion of long term
      debt
              
              
              -
              
              
              
              26,082Other current
      liabilities
              
              
              1,696
              
              
              
              1,638Net current liabilities of
      discontinued operations
              
              
              -
              
              
              
              4,625Total currrent
      liabilities
              
              
              8,102
              
              
              
              38,707Long term debt and convertible
      debt
              
              
              3,557
              
              
              
              -Total
      liabilities
              
              $
              11,659
              
              
              $
              38,707Commitments and contingencies
      (Note 15)Stockholders'
      equityPreferred
    stockSeries A convertible preferred
      stockat $0.0001 par value;100,000 shares authorized,issued
      and outstanding(liquidation preference of
      $1,000,000)
              
              
              100
              
              
              
              100Common stock, $0.0001 par value:
      100,000,000 shares authorized;35,674,225 issued and outstanding
      at June 30, 2010;39,776,597 issued and outstanding
      at March 31, 2010;
              
              
              4
              
              
              
              4Additional paid-in
      capital
              
              
              97,169
              
              
              
              95,741Accumulated other comprehensive
      loss
              
              
              (238
              )
              
              
              (419
              )Accumulated
      deficit
              
              
              (84,738
              )
              
              
              (87,352
              )Total stockholders'
      equity
              
              
              12,297
              
              
              
              8,074TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY
              
              $
              23,956
              
              
              $
              46,781





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










NeuMedia,
      Inc. and Subsidiaries
            2Consolidated
      Statement of Operations (Unaudited)







(In
thousands, except per share amounts)




3 Months
    Ended
              
              
              3 Months
    EndedJune 30,
              
              
              June 30,2010
              
              
              2009Net
revenues
              
              $
              2,858
              
              
              $
              3,777Cost of
      revenuesLicense
fees
              
              
              586
              
              
              
              945Other direct cost of
      revenues
              
              
              76
              
              
              
              76Total cost of
      revenues
              
              
              662
              
              
              
              1,021Gross
profit
              
              
              2,196
              
              
              
              2,756Operating
      expensesProduct
      development
              
              
              1,074
              
              
              
              1,104Sales and
      marketing
              
              
              596
              
              
              
              831General and
      administrative
              
              
              1,828
              
              
              
              1,873Amortization of intangible
      assets
              
              
              17
              
              
              
              137-Total operating
      expenses
              
              
              3,515
              
              
              
              3,945Loss from
      operations
              
              
              (1,319
              )
              
              
              (1,189
              )Interest and other income /
      (expense)Interest
    income
              
              
              1
              
              
              
              3Interest
      expense
              
              
              (680
              )
              
              
              (661
              )Foreign exchange transaction gain
      / (loss)
              
              
              (157
              )
              
              
              124Other income /
      (expense)
              
              
              (187
              )
              
              
              (5
              )Interest and other
      expense
              
              
              (1,023
              )
              
              
              (539
              )Loss from operations before income
      taxes
              
              
              (2,342
              )
              
              
              (1,728
              )Income tax
      provision
              
              
              (68
              )
              
              
              (35
              )Net loss from continuing
      operations net of taxes
              
              
              (2,410
              )
              
              
              (1,763
              )Discontinuedoperations, net of
      taxes:Income from discontinued
      operations net of taxes
              
              
              709
              
              
              
              802Gain on disposal of discontinued
      operations, net of taxes
              
              
              4,315
              
              
              
              -Net income from discontinued
      operations, net of taxes
              
              
              5,024
              
              
              
              802Net profit /
      (loss)
              
              $
              2,614
              
              
              $
              (961
              )Comprehensive income /
      (loss)
              
              $
              2,795
              
              
              $
              (758
              )Basic and diluted net income /
      (loss) per common share
              
              $
              0.07
              
              
              $
              (0.02
              )Continuing
      operations
              
              $
              (0.06
              )
              
              $
              (0.04
              )Discontinued
      operations
              
              $
              0.13
              
              
              $
              0.02Diluted net income / (loss) per
      common share
              
              $
              0.06
              
              
              $
              (0.02
              )Continuing
      operations
              
              $
              (0.06
              )
              
              $
              (0.04
              )Discontinued
      operations
              
              $
              0.12
              
              
              $
              0.02Weightedaverage common shares outstanding,
      basic
              
              
              39,375
              
              
              
              39,808basic and
      dilutedWeighted average common shares
      outstanding, diluted
              
              
              40,424
              
              
              
              39,908




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











NeuMedia,
      Inc. and Subsidiaries
            3Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss
      (Unaudited)









AccumulatedAdditional
                                                
                                                
                                                OtherCommon Stock
                                                
                                                
                                                Preferred Stock
                                                
                                                
                                                Paid-In
                                                
                                                
                                                Comprehensive
                                                
                                                
                                                Accumulated
                                                
                                                
                                                
                                                
                                                
                                                ComprehensiveShares
                                                
                                                
                                                Amount
                                                
                                                
                                                Shares
                                                
                                                
                                                Amount
                                                
                                                
                                                Capital
                                                
                                                
                                                Income/(Loss)
                                                
                                                
                                                Deficit
                                                
                                                
                                                Total
                                                
                                                
                                                LossBalance
      at March 31, 2010
                                                
                                                
                                                39,776,597
                                                
                                                
                                                $
                                                4
                                                
                                                
                                                
                                                100,000
                                                
                                                
                                                $
                                                100
                                                
                                                
                                                $
                                                95,741
                                                
                                                
                                                $
                                                (419
                                                )
                                                
                                                $
                                                (87,352
                                                )
                                                
                                                $
                                                8,074Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,614
                                                
                                                
                                                
                                                2,614
                                                
                                                
                                                
                                                2,614Foreign
      currency translation gain/(loss)
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                181
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                181
                                                
                                                
                                                
                                                181Stock-based
      compensation
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                192
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                192Stock
      voided as part of disposal of subsidiary
                                                
                                                
                                                (561,798
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (197
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (197
                                                )Stock
      acquired by company as part of disposal of subsidiary
                                                
                                                
                                                (3,540,574
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,239
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,239
                                                )Issuance
      of convertible debt and associated warrants
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,500
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,500Repricing
      of warrants
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                172
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                172Comprehensive
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                2,795Balance
      at June 30, 2010
                                                
                                                
                                                35,674,225
                                                
                                                
                                                $
                                                4
                                                
                                                
                                                
                                                100,000
                                                
                                                
                                                $
                                                100
                                                
                                                
                                                $
                                                97,169
                                                
                                                
                                                $
                                                (238
                                                )
                                                
                                                $
                                                (84,738
                                                )
                                                
                                                $
                                                12,297





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











NeuMedia,
      Inc. and Subsidiaries
            4Consolidated
      Statements of Cash Flows (Unaudited)




(In
thousands)




3 Months
    Ended
              
              
              3 Months
    EndedJune 30,
              
              
              June 30,2010
              
              
              2009Cash
      flows from operating activitiesNet
      income / (loss)
              
              $
              2,614
              
              
              $
              (961
              )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Gain on disposal of discontinued
      operations, net of taxes, net ofImpact
      of foreign currency translation
              
              
              (4,315
              )
              
              
              -Depreciation
      and amortization
              
              
              347
              
              
              
              425Allowance
      for doubtful accounts
              
              
              (159
              )
              
              
              -Stock-based
      compensation
              
              
              192
              
              
              
              483Warrants
      issued as compensation for services
              
              
              172(Increase)
      / decrease in assets, net of effect of disposal of
    subsidiary:Accounts
      receivable
              
              
              2,056
              
              
              
              4Prepaid
      expenses and other current assets
              
              
              (40
              )
              
              
              164Increase
      / (decrease) in liabilities, net of effet of disposal of
      subsidiary:Accounts
      payable
              
              
              (3,022
              )
              
              
              (1,058
              )Accrued
      license fees
              
              
              245
              
              
              
              106Accrued
      compensation
              
              
              (156
              )
              
              
              124Other
      liabilities and other items
              
              
              1,715
              
              
              
              (1,144
              )Net
      cash used in operating activities
              
              
              (351
              )
              
              
              (1,857
              )Cash
      flows from investing activitiesPurchase
      of property and equipment
              
              
              (57
              )
              
              
              (129
              )Transaction
      costs
              
              
              (548
              )
              
              
              -Cash
      remaining with disposed subsidiary
              
              
              (641
              )
              
              
              -Net
      cash used in investing activities
              
              
              (1,246
              )
              
              
              (129
              )Cash
      flows from financing activitiesProceeds
      from new Senior Note
              
              
              2,500
              
              
              
              -Net
      cash provided by financing activities
              
              
              2,500
              
              
              
              -Effect
      of exchange rate changes on cash and cash equivalents
              
              
              139
              
              
              
              304Net
      increase / (decrease) in cash and cash equivalents
              
              
              1,042
              
              
              
              (1,681
              )Cash
      and cash equivalents, beginning of period
              
              
              1,891
              
              
              
              5,927Cash
      and cash equivalents, end of period
              
              $
              2,933
              
              
              $
              4,246Supplemental
      disclosure of cash flow information:Taxes
      paid
              
              
              68
              
              
              
              39




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










NeuMedia,
      Inc. and Subsidiaries
              5Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





1.
            Organization





NeuMedia,
Inc. (“we”, “us”, “our”, the “Company” or “NeuMedia”), formerly Mandalay Media,
Inc. (“Mandalay Media”) and 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., on February 12, 2008.  On September 14,
2007, Mediavest was re-incorporated in the state of Delaware as Mandalay Media,
Inc.





On
November 7, 2007, Mediavest merged into its wholly-owned, newly formed
subsidiary, Mandalay Media, with Mandalay Media as the surviving corporation.
Mandalay Media issued: (1) one new share of common stock in exchange for
each share of Mediavest’s outstanding common stock and (2) one new share of
preferred stock in exchange for each share of Mediavest’s outstanding
preferred stock as of November 7, 2007. Mandalay Media’s preferred and common
stock had the same status and par value as the respective stock of
Mediavest and Mandalay Media acceded to all the rights, acquired all the assets
and assumed all of the liabilities of Mediavest.





On
February 12, 2008, Mandalay Media completed a merger (the “Merger”) with
Twistbox Entertainment, Inc. (“Twistbox”) through an exchange of all outstanding
capital stock of Twistbox for 10,180 shares of common stock of the Company. In
connection with the Merger, the Company assumed of all the outstanding options
under Twistbox’s Stock Incentive Plan by the issuance of options to purchase
2,464 shares of common stock of the Company, including 2,145 vested and 319
unvested options.





After the
Merger, Twistbox became a wholly-owned subsidiary of the Company, and the
Company’s only active subsidiary. Twistbox Entertainment, Inc. (formerly known
as The WAAT Corporation) was incorporated in the State of Delaware.





Twistbox
is a global publisher and distributor of branded and non-branded entertainment
content, including images, video, and games for all mobile platforms and third
generation (3G) and pre-fourth generation 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.











NeuMedia,
      Inc. and Subsidiaries
              6Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





On
October 23, 2008, the Company completed an acquisition of 100% of the issued and
outstanding share capital of AMV Holding Limited, a United Kingdom private
limited company (“AMV”), and 80% of the issued and outstanding share capital of
Fierce Media Ltd (“Fierce”).





In
consideration for the shares of AMV and Fierce, and subject to adjustment as set
forth in the Stock Purchase Agreement (“Stock Purchase Agreement”), the
aggregate purchase price (the “Purchase Price”) consisted of: (a) $5,375 in cash
(the “Cash Consideration”); (b) 4,500 fully paid shares of common stock (the
“Stock Consideration”); (c) a secured promissory note in the aggregate original
principal amount of $5,375 (the “AMV Note”); and (d) additional earn-out
amounts, if any, if the acquired companies achieved certain targeted earnings
for each of the periods from October 1, 2008 to March 31, 2009, April 1, 2009 to
March 31, 2010, and April 1, 2010 to September 30, 2010, as determined in
accordance with the Stock Purchase Agreement. The Purchase Price was subject to
certain adjustments based on the working capital of AMV, to be determined
initially within 75 days of the closing, and subsequently within 60 days
following June 30, 2009. Any such adjustment of the Purchase Price would be made
first by means of an adjustment to the principal sum due under the AMV Note, as
set forth in the Stock Purchase Agreement. An initial adjustment of $443 was
made subsequent to closing, and was added to the AMV Note. The initial period
earn-out was recognized in the year ended March 31, 2009 and was added to the
amount of consideration for the acquisition, as described in Note
7.





AMV is a
leading mobile media and marketing company delivering games and lifestyle
content directly to consumers in the United Kingdom, Australia, South Africa and
various other European countries. AMV markets its well established branded
services through a unique Customer Relationship Management platform that drives
revenue through mobile internet, print and TV advertising. AMV is headquartered
in Marlow, outside of London in the United Kingdom.





On May
10, 2010, an administrator was appointed over AMV in the UK, at the request of
the Company’s senior debt holder. As from that date, AMV and its subsidiaries
are considered to be a discontinued operation.





On May
11, 2010, Mandalay Media merged into its wholly-owned, newly formed subsidiary,
NeuMedia Inc. (“NeuMedia”), with NeuMedia as the surviving corporation. NeuMedia
issued: (1) one new share of common stock in exchange for each share of
outstanding common stock of Mandalay Media and (2) one new share of preferred
stock in exchange for each share outstanding preferred stock of Mandalay
Media as of May 11, 2010. Preferred and common stock of NeuMedia had the
same status and par value as the respective stock of Mandalay Media and NeuMedia
acceded to all the rights, acquired all the assets and assumed all of the
liabilities of Mandalay Media.




On June
21, 2010, the Company signed and closed an agreement whereby ValueAct and the
AMV Founders, acting through a newly formed company (“NewCo”), acquired the
operating subsidiaries of AMV (the “Assets”) in exchange for the release of
$23,231 of secured indebtedness (the “Sale”), comprising of a release of all
amounts due and payable under the AMV Note and all of the amounts due and
payable under the ValueAct Note except for $3,500 in principal. The Company
retained all assets and liabilities of Twistbox and the Company other than the
Assets.










NeuMedia,
      Inc. and Subsidiaries
              7Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





2.
            Summary
      of Significant Accounting Policies





Basis
of Presentation


The
accompanying consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K, filed with the Securities and Exchange Commission.
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments, which
the Company believes are necessary for a fair statement of the Company’s
financial position as of June 30, 2010 and its results of operations for the
three months ended June 30, 2010 and 2009, 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
June 30, 2010 has been derived from the unaudited consolidated financial
statements as of that date, and the consolidated balance sheet presented as of
March 31, 2010 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. Discontinued operations have been treated
in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”)  205-20, Discontinued
Operations.





Revenue
Recognition


The
Company’s revenues are derived primarily by licensing material and software in
the form of products (Image Galleries, Wallpapers, video, WAP Site access,
Mobile TV) and mobile games. License arrangements with the end user can be on a
perpetual or subscription basis.





A
perpetual license gives an end user the right to use the product, image or game
on the registered handset on a perpetual basis. A subscription license gives an
end user the right to use the product, image or game on the registered handset
for a limited period of time, ranging from a few days to as long as one
month.





The
Company either markets and distributes its products directly to consumers, or
distributes products through mobile telecommunications service providers
(“carriers”), in which case the carrier markets the product, images or games to
end users. License fees for perpetual and subscription licenses are usually
billed upon download of the product, image or game by the end user. In the case
of subscriber licenses, many subscriber agreements provide for automatic renewal
until the subscriber opts-out, while others provide opt-in renewal. In either
case, subsequent billings for subscription licenses are generally billed
monthly. The Company applies the provisions of FASB ASC 985-605, Software Revenue Recognition,
to all transactions.





Revenues
are recognized from the Company’s products, images and games when persuasive
evidence of an arrangement exists, the product, image or game has been
delivered, the fee is fixed or determinable, and the collection of the resulting
receivable is probable. For both perpetual and subscription licenses, management
considers a license agreement to be evidence of an arrangement with a carrier or
aggregator and a “clickwrap” agreement to be evidence of an arrangement with an
end user. For these licenses, the Company defines delivery as the download of
the product, image or game by the end user.











NeuMedia,
      Inc. and Subsidiaries
              8Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





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.





In
accordance with FASB ASC 605-45, Reporting Revenue Gross as a
Principal Versus Net as an Agent, the Company recognizes as revenues the
amount the carrier reports as payable upon the sale of the Company’s products,
images or games. The Company has evaluated its carrier agreements and has
determined that it is not the principal when selling its products, images or
games through carriers. Key indicators that it evaluated to reach this
determination include:




•
              wireless
      subscribers directly contract with the carriers, which have most of the
      service interaction and are generally viewed as the primary obligor by the
      subscribers;
 •
              carriers
      generally have significant control over the types of content that they
      offer to their subscribers;
 •
              carriers
      are directly responsible for billing and collecting fees from their
      subscribers, including the resolution of billing
  disputes;
 •
              carriers
      generally pay the Company a fixed percentage of their revenues or a fixed
      fee for each game;
 •
              carriers
      generally must approve the price of the Company’s content in advance of
      their sale to subscribers, and the Company’s more significant carriers
      generally have the ability to set the ultimate price charged to their
      subscribers; and
 •
              the
      Company has limited risks, including no inventory risk and limited credit
      risk.










NeuMedia,
      Inc. and Subsidiaries
              9Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





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. Substantially all of our discontinued
operations represents direct to consumer business.





Net
(Income/Loss) per Common Share





Basic
loss per common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed by dividing net loss attributable
to common stockholders by the weighted average number of common shares
outstanding for the period plus dilutive common stock equivalents, using the
treasury stock method. Potentially dilutive shares from stock options and
warrants and the conversion of the Series A preferred stock were as
follows:





3 Months Ended
                    
                    
                    3 Months EndedJune 30
                    
                    
                    June 302010
                    
                    
                    2009Potentially
      dilutive shares
                    
                    
                    9,700
                    
                    
                    
                    100





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





Comprehensive
Income/Loss


Comprehensive
income consists of two components, net income 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.





Content
Provider Licenses





Content
Provider License Fees and Minimum Guarantees


The
Company’s royalty expenses consist of fees that it pays to branded content
owners for the use of
their intellectual property in the development of the Company’s games and other
content, and other expenses directly incurred in earning revenue. Royalty-based
obligations are either accrued as incurred and subsequently paid, or in the case
of longer term content acquisitions, paid in advance and capitalized on our
balance sheet as prepaid royalties. These royalty-based obligations are expensed
to cost of revenues either at the applicable contractual rate related to that
revenue or over the estimated life of the prepaid royalties. Advanced license
payments that are not recoupable against future royalties are capitalized and
amortized over the lesser of the estimated life of the branded title or the term
of the license agreement.











NeuMedia,
      Inc. and Subsidiaries
              10Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





The
Company’s contracts with some licensors include minimum guaranteed royalty
payments, which are payable regardless of the ultimate volume of sales to end
users. Each quarter, the Company evaluates the realization of its royalties as
well as any unrecognized guarantees not yet paid to determine amounts that it
deems unlikely to be realized through product sales. The Company uses estimates
of revenues, and share of the relevant licensor to evaluate the future
realization of future royalties and guarantees. This evaluation considers
multiple factors, including the term of the agreement, forecasted demand,
product life cycle status, product development plans, and current and
anticipated sales levels, as well as other qualitative factors. To the extent
that this evaluation indicates that the remaining future guaranteed royalty
payments are not recoverable, the Company records an impairment charge to cost
of revenues and a liability in the period that impairment is
indicated.





Content
Acquired


Amounts
paid to third party content providers as part of an agreement to make content
available to the Company for a term or in perpetuity, without a revenue share,
have been capitalized and are included in the balance sheet as prepaid
expenses.  These balances will be expensed over the estimated life of
the material acquired.





Software
Development Costs


The
Company applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed(“ASC 985-20”). ASC
985-20 requires that software development costs incurred in conjunction with
product development be charged to research and development expense until
technological feasibility is established. Thereafter, until the product is
released for sale, software development costs must be capitalized and reported
at the lower of unamortized cost or net realizable value of the related
product.





The
Company has adopted the “tested working model” approach to establishing
technological feasibility for its products and games. Under this approach, the
Company does not consider a product or game in development to have passed the
technological feasibility milestone until the Company has completed a model of
the product or game that contains essentially all the functionality and features
of the final game and has tested the model to ensure that it works as expected.
To date, the Company has not incurred significant costs between the
establishment of technological feasibility and the release of a product or game
for sale; thus, the Company has expensed all software development costs as
incurred. The Company considers the following factors in determining whether
costs can be capitalized: the emerging nature of the mobile market; the gradual
evolution of the wireless carrier platforms and mobile phones for which it
develops products and games; the lack of pre-orders or sales history for its
products and games; the uncertainty regarding a product’s or game’s
revenue-generating potential; its lack of control over the carrier distribution
channel resulting in uncertainty as to when, if ever, a product or game will be
available for sale; and its historical practice of canceling products and games
at any stage of the development process.





Product
Development Costs


The
Company charges costs related to research, design and development of products to product
development expense as incurred. The types of costs included in product
development expenses include salaries, contractor fees and allocated facilities
costs.











NeuMedia,
      Inc. and Subsidiaries
              11Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





Advertising
Expenses


The
Company expenses the production costs of advertising, including direct response
advertising, the first time the advertising takes place. Advertising expense for
continuing operations was $12 and $39 in the periods ended June 30, 2010 and
2009, respectively. Advertising expense for discontinued operations was $956 and
$2,300 in the periods ended June 30, 2010 and 2009, respectively.





Restructuring


The
Company accounts for costs associated with employee terminations and other exit
activities in accordance with FASB ASC 420-10, Accounting for Costs Associated
with Exit or Disposal Activities. The Company records employee
termination benefits as an operating expense when it communicates the benefit
arrangement to the employee and it requires no significant future services,
other than a minimum retention period, from the employee to earn the termination
benefits.





Fair
Value of Financial Instruments


As of
June 30, 2010 and March 31, 2010, the carrying value of cash and cash
equivalents, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued license fees, accrued compensation and other current
liabilities approximates fair value due to the short-term nature of such
instruments. The carrying value of current portion of long-term debt
approximates fair value as the related interest rates approximate rates
currently available to the Company.





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 gain of $181 in the period ended June 30, 2010
and the foreign currency translation adjustment gain of $74 in the period ended
June 30, 2009 have been reported as a component of comprehensive income/loss in
the consolidated statements of stockholders’ equity and comprehensive
income/loss. Translation gains or losses are shown as a separate component of
stockholders’ equity.





Concentrations
of Credit Risk


Financial
instruments which potentially subject us to concentration of credit risk consist
principally of cash and cash equivalents, and accounts receivable. We have
placed cash and cash equivalents with a single high credit-quality institution.
Most of our sales are made directly to large national Mobile Phone Operators in
the countries that we operate. We have a significant level of business and
resulting significant accounts receivable balance with one operator and
therefore have a high concentration of credit risk with that operator. We
perform ongoing credit evaluations of our customers and maintain an allowance
for potential credit losses. As of June 30, 2010, one major customer represented
approximately 36% of our gross accounts receivable outstanding. This customer
accounted for 36% of our gross accounts receivable outstanding as of March 31,
2010. The customer accounted for 52% of our gross revenues in the period ended
June 30, 2010; and 41% based on support provided in the period ended June
30, 2009.





Property
and Equipment


Property
and equipment is stated at cost.  Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives of the
related assets. Estimated useful lives are 8 to 10 years for leasehold
improvements and 5 years for other assets.











NeuMedia,
      Inc. and Subsidiaries
              12Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





Goodwill
and Indefinite Life Intangible Assets


Goodwill
represents the excess of cost over fair value of net assets of businesses
acquired. In accordance with FASB ASC 350-20 Goodwill and Other Intangible
Assets, the value assigned to goodwill and indefinite lived intangible
assets, including trademarks and tradenames, is not amortized to expense, but
rather they are evaluated at least on an annual basis to determine if there are
potential impairments. If the fair value of the reporting unit is less than its
carrying value, an impairment loss is recorded to the extent that the implied
fair value of the reporting unit goodwill is less than the carrying value. If
the fair value of an indefinite lived intangible (such as trademarks and trade
names) is less than its carrying amount, an impairment loss is recorded. Fair
value is determined based on discounted cash flows, market multiples or
appraised values, as appropriate. Discounted cash flow analysis requires
assumptions about the timing and amount of future cash inflows and outflows,
risk, the cost of capital, and terminal values. Each of these factors can
significantly affect the value of the intangible asset. The estimates of future
cash flows, based on reasonable and supportable assumptions and projections,
require management’s judgment. Any changes in key assumptions about the
Company’s businesses and their prospects, or changes in market conditions, could
result in an impairment charge. Some of the more significant estimates and
assumptions inherent in the intangible asset valuation process include: the
timing and amount of projected future cash flows; the discount rate selected to
measure the risks inherent in the future cash flows; and the assessment of the
asset’s life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal or regulatory trends.





Impairment of Long-Lived Assets and Finite Life
Intangibles





Long-lived
assets, including intangible assets subject to amortization, primarily consist
of customer lists, license agreements and software that have been acquired, and
are amortized using the straight-line method over their useful lives ranging
from three to ten years and are reviewed for impairment in accordance with FASB
ASC 360-10, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.





Income
Taxes


The
Company accounts for income taxes in accordance with FASB ASC 740-10, Accounting for Income Taxes(“ASC 740-10”), which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in its financial statements or tax returns. Under ASC 740-10, the
Company determines deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities along with net operating losses, if it is more likely than not the
tax benefits will be realized using the enacted tax rates in effect for the year
in which it expects the differences to reverse.  To the extent a
deferred tax asset cannot be recognized, a valuation allowance is established if
necessary.











NeuMedia,
      Inc. and Subsidiaries
              13Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





ASC
740-10 prescribes that a company should use a more-likely-than-not recognition
threshold based on the technical merits of the tax position taken. Tax positions
that meet the “more-likely-than-not” recognition threshold should be measured as
the largest amount of the tax benefits, determined on a cumulative probability
basis, which is more likely than not to be realized upon ultimate settlement in
the financial statements. We recognize interest and penalties related to income
tax matters as a component of the provision for income taxes. We do not
currently anticipate that the total amount of unrecognized tax benefits will
significantly change within the next 12 months.





Stock-based
compensation


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





Under ASC
718, we estimate the fair value of stock options granted using the Black-Scholes
option pricing model. The fair value for awards that are expected to vest is
then amortized on a straight-line basis over the requisite service period of the
award, which is generally the option vesting term. The amount of expense
recognized represents the expense associated with the stock options we expect to
ultimately vest based upon an estimated rate of forfeitures; this rate of
forfeitures is updated as necessary and any adjustments needed to recognize the
fair value of options that actually vest or are forfeited are
recorded.





The
Black-Scholes option pricing model, used to estimate the fair value of an award,
requires the input of subjective assumptions, including the expected volatility
of our common stock, interest rates, dividend rates and an option’s expected
life. As a result, the financial statements include amounts that are based upon
our best estimates and judgments relating to the expenses recognized for
stock-based compensation.





Preferred
Stock


The
Company applies the guidance enumerated in FASB ASC  480-10, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity(“ASC
480-10”) when determining the classification and measurement of preferred stock.
Preferred shares subject to mandatory redemption (if any) are classified as
liability instruments and are measured at fair value in accordance with ASC
480-10. All other issuances of preferred stock are subject to the classification
and measurement principles of ASC 480-10. Accordingly, the Company classifies
conditionally redeemable preferred shares (if any), which includes preferred
shares that feature redemption rights that are either within the control of the
holder or subject to redemption upon the occurrence of uncertain events not
solely within the Company’s control, as temporary equity. At all other times,
the Company classifies its preferred shares in stockholders’
equity.





Use
of Estimates


The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent asset and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the period. Actual results could
differ from those estimates. The most significant estimates relate to revenues
for periods not yet reported by Carriers, liabilities recorded for future
minimum guarantee payments under content licenses, accounts receivable
allowances, and stock-based compensation expense.





Recent
Accounting Pronouncements


With the
exception of those discussed below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the period ended
June 30, 2010, as compared to the recent accounting pronouncements described in
the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,
2010, that are of significance, or potential significance to the
Company.










NeuMedia,
      Inc. and Subsidiaries
              14Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)





New
Accounting Pronouncements





In
September 2009, the FASB issued Update No. 2009-13, (Multiple-Deliverable Revenue
Arrangements—)a consensus of the FASB Emerging Issues Task Force (ASU
2009-13). It updates the existing multiple-element revenue arrangements guidance
currently included under ASC 605-25, which originated primarily from the
guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF 00-21). The revised guidance primarily provides two
significant changes: (1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a delivered item to
be treated as a separate unit of accounting, and (2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised
guidance is retroactively applied to the beginning of the year of adoption. The
adoption of this standard update is not expected to impact the Company’s
consolidated financial statements.





In
February 2010, the FASB issued Accounting Standards Update (“ASU”) No.2010-09,
(“Amendments to Certain Recognition and Disclosure Requirements”) (“ASU
2010-09”), which is included in the FASB Accounting Standards Codification (the
"ASC") Topic 855 (Subsequent Events).  ASU 2010-09 clarifies that an SEC
filer is required to evaluate subsequent events through the date that the
financial statements are issued.  ASU 2010-09 is effective upon the
issuance of the final update and had no impact on our financial position,
results of operations or cash flows.





Effective
January 2010, an amendment to the Consolidation Topic of the Codification
(“ASU 810”)  replaced the quantitative-based risks and rewards calculation
for determining which reporting entity, if any, has a controlling financial
interest in a variable interest entity (“VIE”) with a primarily qualitative
analysis.  The qualitative analysis is based on identifying the party that
has both the power to direct the activities that most significantly impact the
VIE’s economic performance (the “power criterion”) and the obligation to absorb
losses from or the right to receive benefits of the VIE that could potentially
be significant to the VIE (the “losses/benefit criterion”).  The party that
meets both these criteria is deemed to have a controlling financial interest.
 The party with the controlling financial interest is considered to be the
primary beneficiary and as a result is required to consolidate the VIE.
 The amendment to ASU 810 had no impact on our financial position, results
of operations or cash flows.





In
January 2010, the FASB issued ASU2010-06,
(“Improving Disclosures about Fair Value Measurements”) which provides
amendments to the FASB ASC Subtopic 820-10 that require new disclosures
regarding (i) transfers in and out of Level 1 and Level 2 fair value
measurements and (ii) activity in Level 3 fair value measurements.ASU2010-06 also clarifies existing disclosures
regarding (i) the level of asset and liability disaggregation and
(ii) fair value measurement inputs and valuation techniques.  The new
disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for
the disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements.  Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years.  We are currently evaluating the
disclosure impact of adoption on our condensed consolidated financial
statements.









NeuMedia,
      Inc. and Subsidiaries
            15Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share amounts)




3.
            Fair
      Value Measurements




As of
June 30, 2010 and March 31, 2010, the carrying value of cash and cash
equivalents, accounts receivable, prepaid expenses and other current assets,
accounts payable, and accrued expenses approximates fair value due to the
short-term nature of such instruments.
  On April
1, 2009, the Company adopted FASB ASC  820-10, Fair Value Measurements and
Disclosures - Measuring
Liabilities at Fair Value (“ASC 820-10”). ASC 820-10, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
ASC 820-10 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information.




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




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




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




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




4.
            Accounts
      Receivable




June
      30,
                            
                            
                            March
      31,2010
                            
                            
                            2010Accounts
      receivable
                            
                            $
                            4,016
                            
                            
                            $
                            5,114Less:
      allowance for doubtful accounts
                            
                            
                            (244
                            )
                            
                            
                            (403
                            )Net
      Accounts receivable of continuing operations
                            
                            $
                            3,770
                            
                            
                            $
                            4,711Net
      Accounts receivable of discontinued operations
                            
                            $
                            -
                            
                            
                            $
                            5,694




Accounts
receivable includes amounts billed and unbilled as of the respective balance
sheet dates. The Company had no significant write-offs or recoveries during the
quarter ended June 30, 2010 and the fiscal year ended March 31,
2010.










NeuMedia,
      Inc. and Subsidiaries
              16Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)




5.
            Property
      and Equipment




June
      30,
                            
                            
                            March
      31,2010
                            
                            
                            2010Equipment
                            
                            $
                            976
                            
                            
                            $
                            829Furniture
      & fixtures
                            
                            
                            266
                            
                            
                            $
                            278Leasehold
      improvements
                            
                            
                            140
                            
                            
                            $
                            1401,382
                            
                            
                            $
                            1,247Accumulated
      depreciation
                            
                            
                            (835
                            )
                            
                            $
                            (644
                            )Net
      Property and Equipment of continuing operations
                            
                            $
                            547
                            
                            
                            $
                            603Net
      Property and Equipment of discontinued operations
                            
                            $
                            -
                            
                            
                            $
                            668




Depreciation
expense for the periods ended June 30, 2010 and 2009 was $81 and $89,
respectively, for continuing operations and $27 and $27 for discontinued
operations.




6.
            Description
      of Stock Plans




On
September 27, 2007, the stockholders of the Company adopted the 2007 Employee,
Director and Consultant Stock Plan (“Plan”). Under the Plan, the Company may
grant up to 3,000 shares or equivalents of common stock of the Company as
incentive stock options (“ISO”), non-qualified options (“NQO”), stock grants or
stock-based awards to employees, directors or consultants, except that ISO’s
shall only be issued to employees. Generally, ISO’s and NQO’s shall be issued at
prices not less than fair market value at the date of issuance, as defined, and
for terms ranging up to ten years, as defined. All other terms of grants shall
be determined by the board of directors of the Company, subject to the
Plan.




On
February 12, 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.





Option
Plans





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





Number
      of
                  
                  
                  Weighted
      AverageShares
                  
                  
                  Exercise
      PriceOutstanding
      at March 31, 2010
                  
                  
                  6,187
                  
                  
                  $
                  2.49Granted
                  
                  
                  -
                  
                  
                  $
                  -Canceled
                  
                  
                  -
                  
                  
                  $
                  -Exercised
                  
                  
                  -
                  
                  
                  $
                  -Outstanding
      at June 30, 2010
                  
                  
                  6,187
                  
                  
                  $
                  2.49Exercisable
      at June 30, 2010
                  
                  
                  6,048
                  
                  
                  $
                  2.50










NeuMedia,
      Inc. and Subsidiaries
              17Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)





The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions:





Options
      GrantedYear
      Ended
                  
                  
                  
                  Options
      TranferredMarch
      31, 2010
                  
                  Options
      Granted
                  
                  from
      TwistboxExpected
      life (years)
                  6
                  
                  4
      to 6
                  
                  3
      to 7Risk-free
      interest rate
                  3.90%
      to 3.92%
                  
                  2.7%
      to 3.89%
                  
                  2.03%
      to 5.03%Expected
      volatility
                  49.73%
      to 54.33%
                  
                  70%
      to 75.2%
                  
                  70%
      to 75%Expected
      dividend yield
                  0%
                  
                  0%
                  
                  0%





The
exercise price for options outstanding at June 30, 2010 were as
follows:





WeightedAverage
                        
                        
                        
                        
                        
                        WeightedRemaining
                        
                        
                        Number
                        
                        
                        Average
                        
                        
                        AggregateRange
      of
                        
                        Contractual
      Life
                        
                        
                        Outstanding
                        
                        
                        Exercise
                        
                        
                        IntrinsicExercise
      Price
                        
                        (Years)
                        
                        
                        June
      30, 2010
                        
                        
                        Price
                        
                        
                        Value$0
      - $1.00
                        
                        
                        6.08
                        
                        
                        
                        2,071
                        
                        
                        $
                        0.63
                        
                        
                        $
                        -$2.00
      - $3.00
                        
                        
                        7.83
                        
                        
                        
                        2,617
                        
                        
                        $
                        2.67
                        
                        
                        $
                        -$4.00
      - $5.00
                        
                        
                        7.63
                        
                        
                        
                        1,500
                        
                        
                        $
                        4.75
                        
                        
                        $
                        -7.20
                        
                        
                        
                        6,188
                        
                        
                        $
                        2.49
                        
                        
                        $
                        -





The
exercise price for options exercisable at June 30, 2010 were as
follows:





WeightedAverage
                            
                            
                            
                            
                            
                            WeightedRemaining
                            
                            
                            Options
                            
                            
                            Average
                            
                            
                            AggregateRange
      of
                            
                            Contractual
      Life
                            
                            
                            Exercisable
                            
                            
                            Exercise
                            
                            
                            IntrinsicExercise
      Price
                            
                            (Years)
                            
                            
                            June
      30, 2010
                            
                            
                            Price
                            
                            
                            Value$0
      - $1.00
                            
                            
                            6.07
                            
                            
                            
                            2,047
                            
                            
                            $
                            0.63
                            
                            
                            $
                            -$2.00
      - $3.00
                            
                            
                            7.81
                            
                            
                            
                            2,501
                            
                            
                            $
                            2.68
                            
                            
                            $
                            -$4.00
      - $5.00
                            
                            
                            7.63
                            
                            
                            
                            1,500
                            
                            
                            $
                            4.75
                            
                            
                            $
                            -7.18
                            
                            
                            
                            6,048
                            
                            
                            $
                            2.50
                            
                            
                            
                            -





Option
Plans and Stock Plans





Total
stock compensation expense is included in the following statements of operations
components:











NeuMedia,
      Inc. and Subsidiaries
                18Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)





3
      Months Ended
                        
                        
                        3
      Months EndedJune
      30,
                        
                        
                        June
      30,2010
                        
                        
                        2009Product
      development
                        
                        $
                        2
                        
                        
                        $
                        3Sales
      and marketing
                        
                        
                        5
                        
                        
                        
                        27General
      and administrative
                        
                        
                        185
                        
                        
                        
                        453$
                        192
                        
                        
                        $
                        483





7.
            Acquisitions/Purchase
      Price Accounting/Discontinued
Operations




Acquisition
- AMV Holding Limited and subsidiaries (Discontinued Operation)





On
October 23, 2008, the Company completed an acquisition of 100% of AMV Holding
Limited, a United Kingdom private limited company (“AMV”) and 80% of Fierce
Media Limited. The acquisition was effective on October 1, 2008.





Subject to adjustment as set forth in the Stock Purchase
Agreement, the aggregate purchase price (the “Purchase Price”) consisted of: (a)
$5,375 in cash (the “Cash Consideration”); (b) 4,500 fully paid and
non-assessable shares of common stock (the “Stock Consideration”); (c) a secured
promissory note in the aggregate original principal amount of $5,375 (the “AMV
Note”); and (d) additional earn-out amounts, if any, if the acquired companies
achieved 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.




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 AMV Note was
scheduled to mature on July 31, 2010, and bore interest at an initial rate of 5%
per annum, subject to adjustment as provided therein. In the event the Company
completed an equity financing that resulted in gross proceeds of over $6,000,
the Company would have been obligated to prepay a portion of the AMV Note in an
amount equal to one-third of the excess of the gross proceeds of such financing
over $6,000.   Additionally, in connection with the AMV Note, AMV
granted to the sellers a security interest in its assets. Such security interest
was subordinate to the security interest granted to ValueAct Small Cap Master
Fund, L.P. (“ValueAct) under the Senior Secured Note, issued by Twistbox,
 due July 31, 2010, as amended on February 12, 2008 (the “ValueAct Note”),
and as subsequently amended on October 23, 2008. AMV also agreed to guarantee
Mandalay Media’s repayment of the AMV Note to the sellers.





The
Purchase Price was preliminarily estimated by the Company to be $23,030
consisting of $9,900 attributed to the Stock Consideration issued, $5,375 in
cash, $95 in stamp duty, $5,818 under the AMV Note referenced above (inclusive
of the working-capital adjustment), $1,098 as an estimate of the initial period
earn-out adjustment and $744 in transaction costs.  Any
further  adjustments required under the “working capital adjustment”
provision and any further adjustment under the “earn-out” provision of the Stock
Purchase Agreement have not yet been determined and therefore have not been
included in the preliminary calculation of the purchase price. The shares of the
Stock Consideration were valued using the closing stock price at the acquisition
date of $2.20 per share. Under the purchase method of accounting, the Company
allocated the total Purchase Price of $23,030 to the net tangible and intangible
assets acquired and liabilities assumed based upon their respective estimated
fair values as of the acquisition date as follows:










NeuMedia,
      Inc. and Subsidiaries
                19Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)





Cash
      and cash equivalents
                          
                          $
                          3,380Accounts
      receivable, net of allowances
                          
                          
                          9,087Prepaid
      expenses and other current assets
                          
                          
                          16Property
      and equipment, net
                          
                          
                          406Accounts
      payable
                          
                          
                          (10,391
                          )Bank
      overdrafts
                          
                          
                          (1,902
                          )Other
      current liabilities
                          
                          
                          (1,262
                          )Other
      long term liabilities
                          
                          
                          (223
                          )Minority
      interests
                          
                          
                          95Identified
      intangibles
                          
                          
                          1,368Goodwill
                          
                          
                          22,456$
                          23,030





Net
assets associated with Fierce Media Limited were insignificant. Goodwill
recognized in the above transaction was $22,456. The business acquired is not
capital intensive and does not require significant identifiable intangible
assets – as a result the greater proportion of consideration has been allocated
to goodwill.  Goodwill in relation to the acquisition of AMV is not
expected to be deductible for US income tax purposes.





At March
31, 2010 AMV has been treated as a discontinued operation, and it was disposed
during the period ended June 30, 2010.





Discontinued
Operations





The
Company had been negotiating a restructuring of debt with its senior debt holder
for some time.  These negotiations were finalized on June 21,
2010.  On that date, the Company signed and closed a number of
transactions, which included the sale of AMV. Pursuant to the Agreement,
ValueAct and the AMV Founders, acting through a newly formed company (“NewCo”),
acquired the operating subsidiaries of AMV in exchange for the release of
$23,231 of secured indebtedness, which included a release of all amounts due and
payable under the AMV Note and all of the amounts due and payable under the
ValueAct Note except for $3,500 in principal. In addition, all intercompany
balances at that date were cancelled, and all shares of common stock and
warrants of the Company held by ValueAct were cancelled. In addition,
approximately 3,541 shares of common stock of the Company held by two of the
founders of AMV were acquired by the Company. As of June 30,
2010 the Company accrued $300 to a related party pertaining
to the sale of  AMV.




In
accordance with FASB ASC 205-20, Discontinued Operations, the
operating results and net assets and liabilities related to AMV were
reclassified as of June 21, 2010 and reported as discontinued operations in the
accompanying consolidated financial statements.









NeuMedia,
      Inc. and Subsidiaries
                20Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)




The following amounts represent the
operations of the discontinued unit and have been segregated from continuingoperations and reported as
discontinued operations as of March 31, 2010 and 2009.


3 Months
    Ended
                      
                      
                      3 Months
    EndedMarch 31,
                      
                      
                      March 31,2010
                      
                      
                      2009Revenues
                      
                      
                      5,132
                      
                      
                      
                      6,306Cost of
      revenues
                      
                      
                      2,060
                      
                      
                      
                      1,833Gross
      profit
                      
                      
                      3,072
                      
                      
                      
                      4,473Operating expenses and other
      expenses
                      
                      
                      2,052
                      
                      
                      
                      3,400Income from discontinued
      operations
                      
                      
                      1,020
                      
                      
                      
                      1,073Income tax
      provision
                      
                      
                      (311
                      )
                      
                      
                      (271
                      )Income from discontinued
      operations, net of tax
                      
                      
                      709
                      
                      
                      
                      802
  The following is a summary of
assets andliabilities of
the discontinued operations as of the disposal date of June 21, 2010 and as at
March 31, 2010
  June 21,
                      
                      
                      March 31,2010
                      
                      
                      2010AssetsCash
                      
                      $
                      641
                      
                      
                      $
                      1,251Working Capital, net of
      cash
                      
                      
                      1,367
                      
                      
                      
                      1,501Property and Equipment,
      net
                      
                      
                      591
                      
                      
                      
                      668Goodwill and
      intangibles
                      
                      
                      15,948
                      
                      
                      
                      15,955Net Assets
      Sold
                      
                      $
                      18,547
                      
                      
                      $
                      19,375Direct costs associated with
      the sale
                      
                      
                      1,173Currency translation
      adjustment
                      
                      
                      234Other
                      
                      
                      3$
                      19,957Consideration
                      
                      
                      24,272Gain on
      sale
                      
                      $
                      4,315










NeuMedia,
      Inc. and Subsidiaries
                21Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)




8.
            Other
      Intangible Assets




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
periods ended June 30, 2010 and 2009, the Company recorded amortization expense
for continuing operations in the amount of $76 and $76, respectively, in cost of
revenues; and amortization expense in the amount of $17 and $137 respectively,
in operating expenses. During the periods ended June 30, 2010 and 2009 the
Company recorded amortization expense for discontinued operations in the amount
of $26 and $26, respectively, in cost of revenues; and amortization expense in
the amount of $40 and $40, respectively, in operating expenses.





As of
June 30, 2010, the total expected future amortization related to intangible
assets for continuing operations was as follows:





12
      Months Ended June 30,2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    2015
                    
                    
                    ThereafterSoftware
                    
                    $
                    232
                    
                    
                    $
                    232
                    
                    
                    $
                    232
                    
                    
                    $
                    232
                    
                    
                    $
                    136
                    
                    
                    $
                    -Customer
      List
                    
                    
                    65
                    
                    
                    $
                    65
                    
                    
                    $
                    65
                    
                    
                    $
                    65
                    
                    
                    
                    65
                    
                    
                    
                    39License
      Agreements
                    
                    
                    71
                    
                    
                    $
                    71
                    
                    
                    
                    42
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    368
                    
                    
                    $
                    368
                    
                    
                    $
                    339
                    
                    
                    $
                    297
                    
                    
                    $
                    201
                    
                    
                    $
                    39




9.
            Debt




June
      30,
                                                    
                                                    
                                                    March
      31,2010
                                                    
                                                    
                                                    2010Short
      Term DebtSenior
      secured note, inclusive of accrued interestnet
      of discount of $0 and $40, respectively
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    
                                                    19,749Deferred
      purchase consideration inclusive of accrued interest
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    6,333$
                                                    -
                                                    
                                                    
                                                    $
                                                    26,082June
      30,
                                                    
                                                    
                                                    March
      31,2010
                                                    
                                                    
                                                    2010Long
      Term DebtSenior
      secured note, inclusive of accrued interest,net
      of discount of $2,479 and $0, respectively
                                                    
                                                    $
                                                    21
                                                    
                                                    
                                                    $
                                                    -Secured
      note, inclusive of accrued interest
                                                    
                                                    
                                                    3,510
                                                    
                                                    
                                                    
                                                    -Other
                                                    
                                                    
                                                    27
                                                    
                                                    
                                                    
                                                    -$
                                                    3,557
                                                    
                                                    
                                                    $
                                                    -










NeuMedia,
      Inc. and Subsidiaries
                22Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)





ValueAct
Note





In July
2007 Twistbox entered into a debt financing agreement pursuant to the ValueAct
Note amounting to $16,500, payable at 30 months. The holder of the ValueAct Note
was granted first lien over all of the Company’s assets. The ValueAct Note
carried interest of 9% annually for the first year and 10% subsequently, with
semi-annual interest only payments. The debt-financing agreement included
certain restrictive covenants. In conjunction with the Merger described in Note
7, the Company guaranteed up to $8,250 of the principal; and the restrictive
covenants were modified, including a requirement for both Mandalay Media and
Twistbox to maintain certain minimum cash balances. In connection with the
guaranty, the Company issued the lender warrants to purchase 1,093 and 1,093
shares of common stock of the Company, exercisable at $7.55 per share, and at
$5.00 per share, (increasing to $7.55 per share, if not exercised in full by
February 12, 2009), respectively, through July 30, 2011. These warrants replaced
warrants originally issued by Twistbox in conjunction with the ValueAct
Note.




On
October 23, 2008 in conjunction with the acquisition of AMV, as described in
Note 7, the Company entered into a secured promissory note in the aggregate
original principal amount of $5,375 (the “AMV Note”). With accrued interest, the
balance of this note was $6,433 at June 30, 2010 and $5,945 at March 31,
2010.




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 provided for a payment in kind election, whereby, in lieu of
making any cash payments to ValueAct on the following two interest payment
dates, Twistbox had the option to 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 provided 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)
would 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 would not be subject to any lien of ValueAct
during the term of such receivables facility; and (ii) would not, and would 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 of AMV. AMV
also agreed to guarantee Twistbox’s repayment of the ValueAct Note.




As
described above, the Company had previously issued to ValueAct two warrants to
purchase shares of the Company’s common stock. One warrant entitled ValueAct to
purchase up to a total of 1,093 shares of common stock at an exercise price
of $7.55 per share (“$7.55 Warrant”). The other warrant entitled ValueAct to
purchase up to a total of 1,093 shares of common stock at an initial
exercise price of $5.00 per share (“$5.00 Warrant,” and together with the $7.55
Warrant, the “ValueAct Warrants”). On October 23, 2008, the Company and ValueAct
entered into an allonge to each of the ValueAct Warrants. Among other things,
the exercise price of each of the ValueAct Warrants was amended to be $4.00 per
share. The price change resulted is an adjustment to the valuation of the
warrants and therefore to the debt discount which is amortized over the life of
the term of the debt.











NeuMedia,
      Inc. and Subsidiaries
                23Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)




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




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





In
addition the Company and the sellers of AMV entered into an agreement which
extended the maturity date of the AMV Note which represented deferred purchase
consideration in relation to the AMV acquisition, until July 31,
2010.





On
January 25, 2010, the Company, Twistbox and ValueAct entered into a Waiver to
Senior Secured Note (the “Waiver”), pursuant to which ValueAct agreed to waive
certain provisions of the ValueAct Note. Pursuant to the Waiver, subject to
Twistbox’s compliance with certain conditions set forth in Section 2 of the
Waiver (the “Conditions”), certain rights to prepay the ValueAct Note were
extended from January 31, 2010 to March 1, 2010. In addition, subject to
Twistbox’s compliance with the Conditions, the timing obligation of the Company
and Twistbox to comply with the cash covenant set forth in the ValueAct Note was
extended to March 1, 2010 and the minimum cash balance which Twistbox and the
Company was required to maintain was increased to $1,600.




On
February 25, 2010, Twistbox received a letter (the “Notice”) from ValueAct
alleging certain events of default with respect to the ValueAct Note. The Notice
claimed that an event of default had occurred and was continuing under the
ValueAct Note as a result of certain alleged defaults. In the Notice, ValueAct
reserved its rights and remedies under the loan documents relating to the
ValueAct Note. The Notice did not state that ValueAct had elected for the unpaid
principal and accrued interest under the ValueAct Note to become due and
payable. The Notice claimed that the Waiver, which among other things, had
extended certain rights of Twistbox to prepay amounts under the ValueAct Note
from January 31, 2010 to March 1, 2010 in order to extend the maturity of
remaining amounts due under the ValueAct Note and extended the time period for
the Company and Twistbox to comply with the $4,000 minimum cash balance covenant
set forth in the ValueAct Note to March 1, 2010, had ceased to be effective as a
result of the alleged failure of the Company to comply with the conditions set
forth in the Waiver. Under the ValueAct Note, upon the occurrence of an event of
default, ValueAct, by written notice to Twistbox, may declare the unpaid
principal amount of the ValueAct Note, plus accrued but unpaid interest thereon,
to be immediately due and payable. Commencing after the occurrence of an event
of default and so long as the default is continuing, the interest rate
applicable under the ValueAct Note is to increase an additional 2% per annum. If
an event of default had been determined to have occurred and continuing, and
ValueAct had declared the unpaid principal amount of the ValueAct Note, plus
accrued but unpaid interest thereon, to be immediately due and payable, it may
also have exercised its rights pursuant to the Guaranty and Security Agreement
and the Debenture to foreclose on the assets of Twistbox and AMV. The
Company believed that the events described in the Notice did not constitute
defaults or if such events did constitute defaults, that Twistbox was entitled
to requisite cure periods which ValueAct had failed to observe and that ValueAct
had not properly exercised its rights under the ValueAct
Note.










NeuMedia,
      Inc. and Subsidiaries
                24Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)




On May
10, 2010, Twistbox received from ValueAct a Notice of Event of Default and
Acceleration (“Acceleration Notice”) in which ValueAct stated that an event of
default occurred under the ValueAct Note as a result of Twistbox’s and the
Company’s failure to comply with the cash balance covenant under the ValueAct
Note and, therefore, ValueAct had accelerated all outstanding amounts payable by
Twistbox under the ValueAct Note.  In connection with the Acceleration
Notice, ValueAct instituted an administration proceeding in the United Kingdom
against AMV.  The Company continued to dispute the timeliness of
ValueAct’s claim and contended that the commencement of the administration in
the United Kingdom may have been unfounded.




As
described in Note 7, in connection with the disposal of AMV on June 21, 2010,
all amounts due and payable under the AMV Note were released, and the ValueAct
Note was amended and restated in its entirety and reduced to $3.5 million of
principal (the “Amended ValueAct Note”).





Senior
Secured Convertible Notes





In
addition, for purposes of capitalizing the Company, the Company sold and issued
$2,500 of Senior Secured Convertible Notes due June 21, 2013 of the Company (the
“New Senior Secured Notes”) to certain of the Company’s significant
stockholders.  The New Senior Secured Notes have a three year term and
bear interest at a rate of 10% per annum payable in arrears semi-annually.
Notwithstanding the foregoing, at any time on or prior to the 18th month
following the original issue date of the New Senior Secured Notes, the Company
may, at its option, in lieu of making any cash payment of interest, elect that
the amount of any interest due and payable on any interest payment date on or
prior to the 18th month following the original issue date of the New Senior
Secured Notes be added to the principal due under the New Senior Secured Notes.
The accrued and unpaid principal and interest due on the New Senior Secured
Notes are convertible at any time at the election of the holder into shares of
common stock of the Company at a conversion price of $0.15 per share, subject to
adjustment. The New Senior Secured Notes are secured by a first lien on
substantially all of the assets of the Company and its subsidiaries pursuant to
the terms of that certain Guarantee and Security Agreement, dated as of June 21,
2010, among Twistbox, the Company, each of the subsidiaries thereof party
thereto, the investors party thereto and Trinad Management. The Amended ValueAct
Note is subordinated to the New Senior Secured Notes pursuant to the terms of
that certain Subordination Agreement, dated as of June 21, 2010, by and between
Trinad Fund, and ValueAct, and each of the Company and Twistbox.




Each
purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to
purchase shares of common stock of the Company at an exercise price of $0.25 per
share, subject to adjustment.  For each $1 of New Senior Secured Notes
purchased, the purchaser received a Warrant to purchase 3.33 shares of common
stock of the Company.  Each Warrant has a five year term.




The
Warrants granted to the New Senior Secured Note holders on June 21, 2010 and
conversion feature in the New Senior Secured Notes are not considered derivative
instruments since the Warrants and the New Senior Secured Notes have a set
conversion price. The Company determined the fair value of the detachable
warrants issued in connection with the New Senior Secured Notes to be $1,678,
using the Black-Scholes option pricing model and the following
assumptions:  expected life of 5 years, a risk free interest rate
of 2.05%, a dividend yield of 0% and volatility of 54.62%. In
addition, the Company determined the value of the beneficial conversion feature
to be $5,833. The combined total discount for the New Senior Secured
Notes  is limited to the face value of the New Senior Secured
Notes  of $2,500 and is being amortized over the term of the New
Senior Secured Notes, using the effective interest method. For the three months
ended June 30, 2010, the Company amortized $21 of the aforesaid discounts as
interest and financing costs in the accompanying consolidated statements of
operations










NeuMedia,
      Inc. and Subsidiaries
                25Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)





At June
30, 2010,  minimum future obligations through June 21, 2013, including
interest, under the New Senior Secured and convertible Notes were $8,041
including repayment of the principal.





18
      Months Ended June 30,2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  Thereafter$
                  -
                  
                  
                  $
                  1,312
                  
                  
                  $
                  6,729
                  
                  
                  $
                  -





10.
            Related
      Party Transactions




The
Company engages in various business relationships with shareholders and officers
and their related entities. The significant relationships are disclosed
below.




On
September 14, 2006, the Company entered into a management agreement
(“Agreement”) with Trinad Management for five years. Pursuant to the terms of
the Agreement, Trinad Management will provide certain management services,
including, without limitation, the sourcing, structuring and negotiation of a
potential business combination transaction involving the Company in exchange for
a fee of $90 per quarter, plus reimbursements of all expenses reasonably
incurred in connection with the provision of Agreement. The Agreement expires on
September 14, 2011. Either party may terminate with prior written notice.
However, if the Company terminates, it shall pay a termination fee of $1,000.
For the periods ended June 30, 2010 and 2009, the Company incurred management
fees under the agreement of $90 and $90 respectively. In March 2008, the Company
entered into a month to month lease for office space with Trinad Management for
rent of $9 per month, subsequently reduced to $5 per month.  Rent
expense in connection with this lease was $15 and $26, respectively, for the
periods ended June 30, 2010 and 2009.




11.
            Capital
      Stock Transactions





Preferred
Stock





There are
100 shares of Series A Convertible Preferred Stock of the Company authorized,
issued and outstanding. The Series A Convertible Preferred Stock  has
a par value of $0.0001 per share. The holders of Series A Convertible Preferred
Stock are entitled to: (1) vote on an equal per share basis as common stock of
the Company, (2) dividends on an as-converted basis and (3) a liquidation
preference equal to the greater of $10 per share of Series A Convertible
Preferred Stock  (subject to adjustment) or such amount that would
have been paid on an as-converted basis. The holder of the Series A Convertible
Preferred Stock has agreed not to exercise certain rights until such time as the
Amended ValueAct Note has been repaid in cash in full.










NeuMedia,
      Inc. and Subsidiaries
                26Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)




Common
Stock





In
September 2009, the Company issued warrants to purchase 1,200 shares of common
stock of the Company to a vendor. The warrants are exercisable at $1.25 per
share, through September 23, 2014 and were valued at $134 at the time of
issue.





In
connection with the restructuring described in Note 7, on June 21, 2010, 562
shares of common stock of the Company held by ValueAct were cancelled, and 3,541
shares of common stock of the Company held by certain founders of AMV were
acquired by the Company at a price of $0.02 per share. In addition, a total of
2,185 warrants to purchase common stock of the Company held by ValueAct were
cancelled.




In
addition, in connection with the New Senior Secured Notes described in Note 10,
on June 21, 2010, each purchaser of a New Senior Secured Note also received a
warrant (“Warrant”) to purchase shares of common stock of the Company at an
exercise price of $0.25 per share, subject to adjustment.  For each $1
of New Senior Secured Notes purchased, the purchaser received a Warrant to
purchase 3.33 shares of common stock of the Company.  Each Warrant has
a five year term.




12.
            Employee
      Benefit Plans





The
Company has an employee 401(k) savings plan covering full-time eligible
employees.  These employees may contribute eligible compensation up to
the annual IRS limit. The Company does not make matching
contributions.





13.
            Income
      Taxes





The
income tax provision for the quarter represents foreign withholding taxes
related to continuing opeartions paid in jurisdictions outside of the
US.  Profit from discontinued operations is disclosed net of taxes –
these are income taxes currently payable in foreign jurisdictions, primarily the
United Kingdom based on revenue derived in that territory. The discontinued
operation had taxable income in the quarter which is subject to taxation in the
United Kingdom. The tax provision arising from the gain on disposal of
discontinued operations is offset against available tax losses.




Management
has evaluated and concluded that there are no significant uncertain tax
positions requiring recognition in the Company’s financial statements as of June
30, 2010.




ASC 740
requires the consideration of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.  Significant management judgment
is required in determining any valuation allowance recorded against deferred tax
assets. The Company adopted the provisions of ASC 740 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 ASC 740 and those after
the adoption of ASC 740. There were no unrecognized tax benefits not subject to
valuation allowance as of June 30, 2010 and March 31, 2010. The Company
recognized no interest and penalties on income taxes in its statement of
operations for the periods ended June 30, 2010 and 2009.  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.










NeuMedia,
      Inc. and Subsidiaries
                27Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)





14.
            Segment
      and Geographic information




The
Company operates in one reportable segment in which it is a developer and
publisher of branded and non-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 June 30, 2010:





North
                    
                    
                    
                    
                    
                    OtherAmerica
                    
                    
                    Europe
                    
                    
                    Regions
                    
                    
                    ConsolidatedThree
      Months ended June 30, 2010Net
      sales to unaffiliated customers
                    
                    
                    243
                    
                    
                    
                    2,160
                    
                    
                    
                    455
                    
                    
                    $
                    2,858Three
      Months ended June 30, 2009Net
      sales to unaffiliated customers
                    
                    
                    806
                    
                    
                    
                    2,683
                    
                    
                    
                    287
                    
                    
                    $
                    3,777Property
      and equipment, netat
      June 30, 2010
                    
                    
                    468
                    
                    
                    
                    77
                    
                    
                    
                    2
                    
                    
                    $
                    547




Our
largest customers accounted for 52% of gross revenues in the period ended June
30, 2010; and 39%  in the period ended March 31, 2010.




15.
            Commitments
      and Contingencies





Operating
Lease Obligations


The
Company leases office facilities under noncancelable operating leases expiring
in various years through 2012.





Following
is a summary of future minimum payments under initial terms of leases at June
30, 2010:





Year Ending June 30,2011
                      
                      $
                      742012
                      
                      
                      1Total
      minimum lease payments
                      
                      $
                      75




These
amounts do not reflect future escalations for real estate taxes and building
operating expenses.  Rental expense for continuing operations amounted
to $142 and $200, respectively, for the periods ended June 30, 2010
and  2009.










NeuMedia,
      Inc. and Subsidiaries
                28Notes
      to Unaudited Consolidated Financial Statements(all
      numbers in thousands except per share
amounts)





Other
Obligations


As of
June 30, 2010, the Company was obligated for payments under various distribution
agreements, equipment lease agreements, employment contracts and the management
agreement described in Note 10 with initial terms greater than one year at June
30, 2010.  Annual payments relating to these commitments at June 30,
2010 are as follows:




Year Ending June 30,
                      
                      Commitments2011
                      
                      $
                      2,0482012
                      
                      
                      862013
                      
                      
                      1Total
      minimum payments
                      
                      $
                      2,135




Litigation




Twistbox’s
wholly owned subsidiary, WAAT Media Corp. (“WAAT”) and General Media
Communications, Inc. (“GMCI”) are parties to a content license
agreement dated May 30, 2006, whereby GMCI granted to WAAT certain
exclusive rights to exploit GMCI branded content via mobile devices.  GMCI
terminated the agreement on January 26, 2009 based on its claim that WAAT
failed to cure a material breach pertaining to the non-payment of a minimum
royalty guarantee installment in the amount of $485.  On or about March 16,
2009, GMCI filed a complaint seeking the balance of the minimum guarantee
payments due under the agreement in the approximate amount of $4,085.  WAAT
has counter-sued claiming GMCI is not entitled to the claimed amount and that it
has breached the agreement by, among other things, failing to promote, market
and advertise the mobile services as required under the agreement and by
fraudulently inducing WAAT to enter into the agreement based on GMCI’s
repeated assurances of its intention to reinvigorate its flagship
brand.  GMCI has filed a demurrer to the counter-claim.  WAAT
subsequently filed an amended counter-claim. WAAT intends to vigorously defend
against this action.  Principals of both parties continue to communicate to
find a mutually acceptable resolution. The Company has accrued for its estimated
liability in this matter.




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




16.
            Subsequent
      Events




Management has evaluated subsequent
events through the business date that this quarterly report on the Form 10-Q
was filed with the SEC.  No material matters requiring disclosure were
noted.









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




The
following discussion should be read in conjunction with, and is qualified in its
entirety by, the Financial Statements and the Notes thereto included in this
report. This discussion contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Quarterly Report on Form
10-Q, the words “anticipate,” “believe,” “estimate,” “expect” and similar
expressions, as they relate to our management or us, are intended to identify
such forward-looking statements. Our actual results, performance or achievements
could differ materially from those expressed in, or implied by, these
forward-looking statements as a result of a variety of factors including those
set forth under “Risk Factors” in our Annual Report on Form 10-K for the period
ended March 31, 2010. 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 NeuMedia, Inc. (“NeuMedia”)
through its operating and wholly-owned subsidiary, Twistbox Entertainment, Inc.
(“Twistbox”).




Historical
Operations of NeuMedia, Inc.




NeuMedia
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 May 12, 2010, the company changed
its name to NeuMedia, Inc.




On
October 27, 2004, and as amended on December 17, 2004, NeuMedia 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) NeuMedia’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 NeuMedia to fund the expenses of remaining public; (4) 3.5% of the
new common stock of NeuMedia (140,000 shares) was issued to the holders of
record of NeuMedia’s preferred stock in settlement of their liquidation
preferences; (5) 3.5% of the new common stock of NeuMedia (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 NeuMedia (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, NeuMedia 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, NeuMedia was a public shell company with no operations, and
controlled by its significant stockholder, Trinad Capital Master Fund,
L.P.




SUMMARY
OF THE MERGER




NeuMedia
entered into an Agreement and Plan of Merger on December 31, 2007, as
subsequently amended by the Amendment to Agreement and Plan of Merger dated
February 12, 2008 (the “Merger Agreement”), with Twistbox Acquisition, Inc., a
Delaware corporation and a wholly-owned subsidiary of NeuMedia (“Merger Sub”),
Twistbox Entertainment, Inc. (“Twistbox”), and Adi McAbian and Spark Capital,
L.P., as representatives of the stockholders of Twistbox, pursuant to which
Merger Sub would merge with and into Twistbox, with Twistbox as the surviving
corporation (the “Merger”). The Merger was completed on February 12,
2008.




Pursuant
to the Merger Agreement, upon the completion of the Merger, each outstanding
share of Twistbox common stock, $0.001 par value per share, on a fully-converted
basis, with the conversion on a one-for-one basis of all issued and outstanding
shares of the Series A Convertible Preferred Stock of Twistbox and the Series B
Convertible Preferred Stock of Twistbox, each $0.01 par value per share (the
“Twistbox Preferred Stock”), converted automatically into and became
exchangeable for NeuMedia common stock in accordance with certain exchange
ratios set forth in the Merger Agreement. In addition, by virtue of the Merger,
each outstanding Twistbox option to purchase Twistbox common stock issued
pursuant to the Twistbox 2006 Stock Incentive Plan (the “Plan”) was assumed by
NeuMedia, subject to the same terms and conditions as were applicable under such
plan immediately prior to the Merger, except that (a) the number of shares of
NeuMedia common stock issuable upon exercise of each Twistbox option was
determined by multiplying the number of shares of Twistbox common stock that
were subject to such Twistbox option immediately prior to the Merger by 0.72967
(the “Option Conversion Ratio”), rounded down to the nearest whole number; and
(b) the per share exercise price for the shares of NeuMedia common stock
issuable upon exercise of each Twistbox option was determined by dividing the
per share exercise price of Twistbox common stock subject to such Twistbox
option, as in effect prior to the Merger, by the Option Conversion Ratio,
subject to any adjustments required by the Internal Revenue Code. As part of the
Merger, NeuMedia also assumed all unvested Twistbox options. The merger
consideration consisted of an aggregate of up to 12,325,000 shares of NeuMedia
common stock, which included the conversion of all shares of Twistbox capital
stock and the reservation of 2,144,700 shares of NeuMedia common stock required
for assumption of the vested Twistbox options. NeuMedia reserved an additional
318,772 shares of NeuMedia common stock required for the assumption of the
unvested Twistbox options. All warrants to purchase shares of Twistbox
common stock outstanding at the time of the Merger were terminated on or before
the effective time of the Merger.


29





Upon the
completion of the Merger, all shares of the Twistbox capital stock were no
longer outstanding and were automatically canceled and ceased to exist, and each
holder of a certificate representing any such shares ceased to have any rights
with respect thereto, except the right to receive the applicable merger
consideration. Additionally, each share of the Twistbox capital stock held by
Twistbox or owned by Merger Sub, NeuMedia or any subsidiary of Twistbox or
NeuMedia immediately prior to the Merger, was canceled and extinguished as of
the completion of the Merger without any conversion or payment in respect
thereof. Each share of common stock, $0.001 par value per share, of Merger Sub
issued and outstanding immediately prior to the Merger was converted upon
completion of the Merger into one validly issued, fully paid and non-assessable
share of common stock, $0.001 par value per share, of the surviving
corporation.





As part
of the Merger, NeuMedia agreed to guarantee up to $8,250,000 of
Twistbox’s outstanding debt to ValueAct SmallCap Master Fund L.P.
(“ValueAct”), with certain amendments. On July 30, 2007,
Twistbox had entered into a Securities Purchase Agreement by and among
Twistbox, the Subsidiary Guarantors (as defined therein) and
ValueAct, pursuant to which ValueAct purchased a note in the
amount of $16,500,000 (the “ValueAct Note”) and a warrant which entitled
ValueAct to purchase from Twistbox up to a total of 2,401,747 shares of
Twistbox’s common stock (the “Warrant”).  Twistbox and ValueAct 
- also entered into a Guarantee and Security Agreement by and among Twistbox,
each of the subsidiaries of Twistbox, the Investors, as defined therein, and
ValueAct, as collateral agent, pursuant to which the parties agreed that the
ValueAct Note would be secured by substantially all of the assets of Twistbox
and its subsidiaries (the “VAC Note Security Agreement”). In connection with the
Merger, the Warrant was terminated and we issued two warrants in place
thereof to ValueAct to purchase shares of our common stock. One of such
warrants entitled ValueAct to purchase up to a total of 1,092,622 shares
of our common stock at an exercise price of $7.55 per share. The other
warrant entitled ValueAct to purchase up to a total of 1,092,621 shares
of our common stock at an initial exercise price of $5.00 per share,
which, if not exercised in full by February 12, 2009, would have been
permanently increased to an exercise price of $7.55 per share. 
Both warrants were scheduled to expire on July 30, 2011. The warrants were
subsequently modified on October 23, 2008 and cancelled on June 21, 2010, as set
forth below. We also entered into a Guaranty (the “ValueAct Note Guaranty”) with
ValueAct whereby NeuMedia agreed to guarantee Twistbox’s payment to ValueAct of
up to $8,250,000 of principal under the Note in accordance with the terms,
conditions and limitations contained in the ValueAct Note, which was
subsequently amended as set forth below. The financial covenants of the ValueAct
Note were also amended,  pursuant to which Twistbox was
required to maintain a cash balance of not less than $2,500,000 at all
times and NeuMedia is required to maintain a cash balance of not less
than $4,000,000 at all times. The ValueAct Note was subsequently amended and
restated as set forth below.





SUMMARY
OF THE AMV ACQUISITION





On
October 23, 2008, NeuMedia consummated the acquisition of 100% of the issued and
outstanding share capital of AMV Holding Limited, a United Kingdom private
limited company (“AMV”) and 80% of the issued and outstanding share capital of
Fierce Media Limited, United Kingdom private limited company (collectively the
“Shares”).  The acquisition of AMV is referred to herein as the “AMV
Acquisition”. The aggregate purchase price (subject to adjustments as provided
in the stock purchase agreement) for the Shares consisted of (i) $5,375,000 in
cash; (ii) 4,500,000 shares of common stock, par value $0.0001 per share; (iii)
a secured promissory note in the aggregate principal amount of $5,375,000 (the
“AMV Note”); and (iv) additional earn-out amounts, if any, based on certain
targeted earnings as set forth in the stock purchase agreement. The
AMV Note was scheduled to mature on July 31, 2010, and bore interest at an
initial rate of 5% per annum, subject to adjustment as provided
therein.





In
addition, also on October 23, 2008, in connection with the AMV Acquisition,
NeuMedia, Twistbox and ValueAct  entered into a Second Amendment to the
ValueAct Note, which among other things, provided for a payment-in-kind election
at the option of Twistbox, modified the financial covenants set forth in
the ValueAct Note to require that NeuMedia and Twistbox maintain certain
minimum combined cash balances and provided for certain covenants with respect
to the indebtedness of NeuMedia 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, NeuMedia and ValueAct
entered into an allonge to each of those certain warrants issued to ValueAct in
connection with the Merger, which, among other things, amended the exercise
price of each of the warrants to $4.00 per share.





In
addition, also on October 23, 2008, NeuMedia entered into a Securities Purchase
Agreement with certain investors identified therein (the “Investors”), pursuant
to which NeuMedia 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 NeuMedia 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 NeuMedia on or about November 8,
2008.





On August
14, 2009, the Company and ValueAct entered into a Second Allonge to Warrant to
Purchase 1,092,621 shares of common stock (the “Second Allonge”), which amended
that certain warrant to purchase 1,092,621 shares of the Company’s common stock,
issued to ValueAct on February 12, 2008, as amended (the “ValueAct
Warrant”).  Pursuant to the Second Allonge, the exercise price of the
ValueAct Warrant decreased from $4.00 per share to the lesser of $1.25 per
share, or the exercise price per share for any warrant to purchase shares of the
Company’s common stock issued by the Company to certain other parties. In
addition, also on August 14, 2009, NeuMedia, Twistbox and ValueAct entered
into a Third Amendment to the ValueAct Note. Pursuant to the Third
Amendment, the maturity date was changed to July 31, 2010 and the interest rate
of the ValueAct Note increased from 10% to 12.5%.


30





On
January 25, 2010, NeuMedia, Twistbox and ValueAct entered into a Waiver to
Senior Secured Note (the “Waiver”), pursuant to which ValueAct agreed to waive
certain provisions of the ValueAct Note. Pursuant to the Waiver, subject to
Twistbox’s compliance with certain conditions set forth in the Waiver, certain
rights to prepay the ValueAct Note were extended from January 31, 2010 to March
1, 2010. In addition, subject to Twistbox’s compliance with certain conditions
set forth in the Waiver, the timing obligation of NeuMedia and Twistbox to
comply with the cash covenant set forth in the ValueAct Note was extended to
March 1, 2010 and the minimum cash balance by which Twistbox and NeuMedia must
maintain was increased to $1,600,000.





On
February 25, 2010, Twistbox received a letter (the “Letter”) from ValueAct
alleging certain events of default with respect to the ValueAct Note. The Letter
claimed that an event of default had occurred and was continuing under the
ValueAct Note as  result of certain alleged defaults, including the
failure to provide weekly evidence of compliance with certain of Twistbox’s and
NeuMedia’s covenants under the ValueAct Note, the failure to comply with
limitations on certain payments by NeuMedia and each of its subsidiaries, and
the failure of Twistbox and Neumedia to maintain minimum cash balances in
deposit accounts of each of Twistbox and Neumedia. The Letter also claimed that
the Waiver had ceased to be effective as a result of the alleged failure of
NeuMedia to comply with the conditions set forth in the Waiver.  On
May 10, 2010, Twistbox received from ValueAct a Notice of Event of Default and
Acceleration (“Notice”) in which ValueAct stated that an event of default had
occurred under the ValueAct Note as a result of Twistbox’s and NeuMedia’s
failure to comply with the cash balance covenant under the ValueAct Note and,
therefore, ValueAct accelerated all outstanding amounts payable by Twistbox
under the ValueAct Note. In connection with the Notice, ValueAct instituted
an administration proceeding in the United Kingdom against
AMV.





On June
21, 2010, NeuMedia sold all of the operating subsidiaries of AMV to an entity
controlled by ValueAct and certain of AMV’s founders in exchange for the release
of $23,231,000 of secured indebtedness, comprising of a release of all amounts
due and payable under the AMV Note and all amounts due and payable under the VAC
Note except for $3,500,000 in principal (the “Restructure”). In connection with
the Restructure, the ValueAct Note (as amended and restated, the “Amended
ValueAct Note”), the Value Act Security Agreement and the Value Act Guaranty
were amended and restated in their entirety. In addition, all warrants and
common stock of NeuMedia held by ValueAct were cancelled and all warrants and
common stock of NeuMedia held by AMV founders Nate MacLeitch and Jonathan
Cresswell were repurchased by NeuMedia for a price of $0.02 per
share.





The
Amended ValueAct Note matures on June 21, 2013 and bears interest at 10% payable
in cash semi-annually in arrears on each January 1 and July 1 that the Amended
ValueAct Note is outstanding. Twistbox may prepay the Amended ValueAct Note in
whole or in part at any time without penalty. Notwithstanding the
foregoing, at any time on or prior to January 1, 2012, Twistbox may, at its
option, in lieu of making any cash payment of interest, elect that the amount of
any interest due and payable on any interest payment date on or prior to January
1, 2012 be added to the principal due under the Amended ValueAct
Note.  In the event of a Fundamental Change (as defined therein) of
Twistbox, the holder of the Amended ValueAct Note will have the right for a
period of thirty days to require Twistbox to repurchase the Amended ValueAct
Note at a price equal to 100% of the outstanding principal and all accrued and
unpaid interest.





Also on
June 21, 2010, for purposes of capitalizing NeuMedia, NeuMedia sold and issued
$2,500,000 of Senior Secured Convertible Notes due June 21, 2013 (the “New
Senior Secured Notes” or the “Senior Debt”) to certain significant
stockholders.  The New Senior Secured Notes have a three year term and
bear interest at a rate of 10% per annum payable in arrears semi-annually.
Notwithstanding the foregoing, at any time on or prior to the 18th month
following the original issue date of the New Senior Secured Notes,
NeuMedia  - may, at its option, in lieu of making any cash payment of
interest, elect that the amount of any interest due and payable on any interest
payment date on or prior to the 18th month following the original issue date of
the New Senior Secured Notes be added to the principal due under the New Senior
Secured Notes. The accrued and unpaid principal and interest due on the New
Senior Secured Notes are convertible at any time at the election of the holder
into shares of common stock of NeuMedia at a conversion price of US$0.15 per
share, subject to adjustment. The New Senior Secured Notes are secured by a
first lien on substantially all of the assets of NeuMedia and its subsidiaries.
The Amended ValueAct Note is subordinated to the New Senior Secured
Notes.





Each
purchaser of a New Senior Secured Note also received a warrant (“Warrant”) to
purchase shares of common stock of NeuMedia at an exercise price of US$0.25 per
share, subject to adjustment.  For each $1 of New Senior Secured Notes
purchased, the purchaser received a Warrant to purchase 3.33 shares of common
stock of NeuMedia.  Each Warrant has a five year
term.


31





Overview




From
February 12, 2008 to October 23, 2008, our sole operations were those of our
wholly-owned subsidiary, Twistbox. In October 2008, we acquired AMV Holding
Limited, a mobile media and marketing company. On June 21, 2010, we sold all of
the operating subsidiaries of AMV. Twistbox is a global publisher and
distributor of branded and non-branded entertainment content, including images,
video, and games, for all mobile platforms and third generation (3G) and
pre-fourth generation 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 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, in some of its top-performing
territories. 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, Three, O2 and
Orange.




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.





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.


32




RESULTS
OF OPERATIONS




3
      months ended
              
              
              3
      months endedJune 30,
              
              
              June 30,2010
              
              
              2009Revenues
              
              $
              2,858
              
              
              $
              3,777Cost of
      revenues
              
              
              662
              
              
              
              1,021Gross
profit
              
              
              2,196
              
              
              
              2,756SG&A
              
              
              3,498
              
              
              
              3,809Amortization of intangible
      assets
              
              
              17
              
              
              
              137Operating
      (loss)
              
              
              (1,319
              )
              
              
              (1,190
              )Interest expense,
      net
              
              
              (679
              )
              
              
              (657
              )Other income /
      (expenses)
              
              
              (344
              )
              
              
              119(Loss) before income
      taxes
              
              
              (2,342
              )
              
              
              (1,728
              )Income tax
      provision
              
              
              (68
              )
              
              
              (35
              )(Loss) from continuing
      operations
              
              
              (2,410
              )
              
              
              (1,763
              )Profit from discontinued
      operations, net of taxes
              
              
              709
              
              
              
              802Gain on disposal of discontinued
      operations, net of taxes
              
              
              4,315
              
              
              
              -Net income /
      (loss)
              
              $
              2,614
              
              
              $
              (961
              )Basic and Diluted net income /
      (loss) per common share:Continuing
      operations
              
              $
              (0.06
              )
              
              $
              (0.04
              )Discontinued
      operations
              
              $
              0.13
              
              
              $
              0.02Net
      loss
              
              $
              0.07
              
              
              $
              (0.02
              )Basic and Diluted weighted average
      shares outstanding
              
              
              39,375
              
              
              
              39,808Diluted net income / (loss) per
      common share:Continuing
      operations
              
              $
              (0.06
              )
              
              $
              (0.04
              )Discontinued
      operations
              
              $
              0.12
              
              
              $
              0.02Net
      loss
              
              $
              0.06
              
              
              $
              (0.02
              )Diluted weighted average shares
      outstanding
              
              
              40,424
              
              
              
              39,908





Comparison
of the three Months Ended June 30, 2010 and June 30, 2009
 
 Revenues


Three Months Ended June 30,2010
                            
                            
                            2009(In thousands)Revenues
      by type:Services
                            
                            $
                            530
                            
                            
                            $
                            323Content
      - Games
                            
                            
                            341
                            
                            
                            
                            947Content
      - Other
                            
                            
                            1,679
                            
                            
                            
                            2,177Advertising
                            
                            
                            308
                            
                            
                            
                            330Total
                            
                            $
                            2,858
                            
                            
                            $
                            3,777


In the
quarter ended June 30, 2010, the Company was reorganized into four functional
groups, reflecting the primary revenue drivers for the Company’s business, as
follows:





“Services”
includes carrier platform management, content aggregation services and
development fees derived primarily as an outsourced extended services contract
basis. The increase in Services revenue in the quarter ended June 30, 2010 is
primarily the result of an increase in the level of development projects
undertaken by our technology and development team in the quarter ended June 30,
2010.




33




“Content
– Games” includes both licensed and internally developed games for use on mobile
phones. The decline in revenue largely reflects a strategic decision to curtail
investment in the development of new JAVA and BREW games for on-deck carrier
sales. Games will continue to build applications for smartphones (iPhone, iPad,
Android, and Blackberry) and social networks





“Content
– Other” includes a broad range of licensed and internally developed products
delivered in the form of WAP, Video, Wallpaper and Mobile TV. The decline in
revenue year over year is attributable to two factors: off-deck revenue
recognized in the quarter ended June 30, 2009 was transferred to Twistbox’s
former sister company, which was sold on June 21, 2010, and thus was not part of
continuing operations in the quarter ended June 30, 2010, and the restructuring
of our Russian operations in the later part of fiscal 2010.





“Advertising”
includes revenues earned by managing carrier advertising portals, revenues
derived from the sale of advertising inventory within our mobile sites, and from
the monetization and mediation of traffic through our mobile sites. Building a
significant Advertising ecosystem is a key strategic initiative for the Company
in fiscal 2011.  The quarter ended June 30, 2010 shows significant
growth in our core advertising business which was offset by reductions in
carrier portal managed revenues.





Cost
of Revenues




Three Months Ended June 30,2010
                          
                          
                          2009(In thousands)Cost
      of revenues:License
      fees
                          
                          $
                          586
                          
                          
                          $
                          919Other
      direct cost of revenues
                          
                          
                          76
                          
                          
                          
                          76Total
      cost of revenues
                          
                          $
                          662
                          
                          
                          $
                          995Revenues
                          
                          $
                          2,858
                          
                          
                          $
                          3,777Gross
      margin
                          
                          
                          76.8
                          %
                          
                          
                          73.7
                          %





License
fees represent costs payable to content providers for use of their brands and
intellectual property in products sold. Our licensing agreements are predominantly
on a revenue-share basis, and therefore license fees have decreased as a result
of reductions in the revenue share attributable to several licensed product
arrangements, renegotiation of major license agreements resulting in a lower
revenue share, and a change in mix towards product for which the rights have
been acquired in perpetuity. In addition, license fees decreased from the
reversal of previously accrued license fees, following resolution of discussions
with providers. These one-time adjustments contributed approximately 19% of
margin in the period ended June 30, 2010.





Operating
Expenses





Three Months Ended June 30,2010
                    
                    
                    2009(In thousands)Product
      development expenses
                    
                    $
                    1,074
                    
                    
                    $
                    1,104Sales
      and marketing expenses
                    
                    
                    596
                    
                    
                    
                    831General
      and administrative expenses
                    
                    
                    1,828
                    
                    
                    
                    1,873Amortization
      of intangible assets
                    
                    
                    17
                    
                    
                    
                    137





Product
development expenses include the costs to develop, edit and make content ready
for consumption on a mobile phone. Expenses in this area are primarily driven by
personnel costs, with headcount consistent from period to period.





Sales and
marketing expenses represent the costs of sales and marketing personnel, and
advertising and marketing campaigns. The decrease year-over-year is the
result of cost savings due to headcount reductions and reduced
travel.





General
and administrative expenses represent management and support personnel costs in
each of the subsidiary companies and related expenses, as well as
professional and consulting costs, and other costs such as stock based
compensation, depreciation and bad debt expenses. Savings resulting from
headcount reductions were largely offset by increased legal expenses in the
quarter ended June 30, 2010.





Amortization
of intangibles represents amortization of the intangibles identified as part of
the purchase price accounting related to the Twistbox acquisition and
attributed to operating expenses. The reduction in amortization expense is
the result of the reduced base, following the impairment write down in the last
quarter.


34





Other
Income and Expenses





Three Months Ended June 30,2010
                    
                    
                    2009(In thousands)Interest
      and other income/(expense)
                    
                    $
                    (1,023
                    )
                    
                    $
                    (539
                    )Profit
      from discontinued operations, net of taxes
                    
                    $
                    709
                    
                    
                    $
                    802Gain
      on disposal of discontinued operations, net of taxes
                    
                    $
                    4,315
                    
                    
                    $
                    -





Interest
and other income/(expense) includes interest income on invested funds, interest
expense related to the ValueAct Note and the AMV Note, foreign exchange
transaction gains, and other income/expense. The increase in net expense
compared to the prior year relates to foreign exchange losses (versus gains in
the prior year), and an increase in miscellaneous income primarily related to
the re-pricing of warrants. The
profit from discontinued operations is the net profit from operations of AMV for
the quarter, net of taxes. The gain
on disposal of discontinued operations represents the net gain recorded from the
sale of AMV during the quarter ended June 30, 2010.





Financial
Condition





Assets


Our
current assets related to continuing operations totaled $7.2 million and $5.8
million at June 30, 2010 and March 31, 2010, respectively. Total assets related
to continuing operations were $24.0 million and $22.8 million at June 30, 2010
and March 31, 2010, respectively. The increase in both current and total assets
is primarily due to higher cash balances.





Liabilities
and Working Capital


At June
30, 2010, our current and total liabilities related to continuing operations
were $11.7 million, compared to $34.1 million at March 31, 2010. The
change in liabilities was related to the reduction in debt as part of the AMV
disposal transaction. The Company had negative working capital of $1.0 million
at June 30, 2010 and negative working capital of $25.5 million at March 31, 2010
as a result of the timing of both the reduction in debt and the reclassification
of debt from short term to long term.





Liquidity
and Capital Resources


Twistbox
has incurred losses and negative annual cash flows since inception, although the
operating loss has narrowed significantly in the most recent several
quarters.  The primary sources of liquidity have historically been
issuance of common and preferred stock, and in the case of Twistbox, borrowings
under credit facilities. In the future, we anticipate that our primary sources
of liquidity will be cash generated by our operating activities.





Operating
Activities


In the
period ended June 30, 2010, we generated $1.0 million of net cash, flowing from
the overall profit of $2.6 million as well as decreases in accounts
receivable of $2.0 million, as well as non-cash stock based compensation and
depreciation and amortization, and $2.5 million from the new Senior Debt; offset
by deccreases in liabilities of $1.3 million, and $1.2 in transaction costs
and cash remaining with the disposed subsidiary. In the period ended June 30,
2009, we used $1.7 million of net cash. This primarily related to the net loss
of $1.0 million, and reductions in accounts payable/accrued license fees/other
liabilities of $2.0 million, partially offset by non cash stock based
compensation and depreciation and amortization.





As of
June 30, 2010, the Company had approximately $2.9 million of cash. The Company’s
cash requirements in the future will be dependent on actions taken to improve
cash flow, including operational restructuring. We may require additional cash
resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If these
sources are insufficient to satisfy our cash requirements, we may seek to sell
additional debt securities or additional equity securities or to obtain a credit
facility. The sale of convertible debt securities or additional equity
securities could result in additional dilution to our stockholders. The
incurrence of increased indebtedness would result in additional debt service
obligations and could result in additional operating and financial covenants
that would restrict our operations. In addition, there can be no assurance that
any additional financing will be available on acceptable terms, if at
all.





Debt
obligations include interest payments under the new Senior Debt facility, and
also under the Amended ValueAct Note. Under both facilities the Company
may elect to add interest to the principal, until 18 months following June 21,
2010, with the full amount payable at the end of the term. The Company’s
operating lease obligations include non-cancelable operating leases for the
Company’s office facilities in several locations, expiring in various years
through 2012.





Off-Balance
Sheet Arrangements


We do not
have any relationships with unconsolidated entities or financial partners, such
as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes.
In addition, we do not have any undisclosed borrowings or debt, and we have not
entered into any synthetic leases. We are, therefore, not
materially


exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.





Stock
Sales and Liquidity


On August
3, 2006, we increased our authorized shares of common stock from 19,000,000 to
100,000,000 and authorized and effectuated a 2.5 to 1 stock
split of our common stock to increase our outstanding shares from 4,000,000 to
10,000,000. All share and per share amounts have been retroactively adjusted
to reflect the effect of the stock split.


35





On
September 14, 2006, we sold 2,800,000 units; on October 12, 2006, we sold
3,400,000 units; and on December 26, 2006, we sold 530,000 units. Each unit
sold, at a price per unit of $1.00, consisted of one share of our common stock
and one warrant to purchase one share of our common stock. We realized
net proceeds of $6,057,000 after the costs of the offering. The warrants had an
exercise price of $2.00 per share and expired as follows: 2,800,000 warrants
expired in September 2008, 3,400,000 warrants expired in October 2008, and
530,000 warrants expired in December 2008.





On
October 12, 2006, we entered into a Series A Convertible Preferred Stock
Purchase Agreement with Trinad Management, LLC (“Trinad Management”).
Pursuant to the terms of the agreement, Trinad Management purchased 100,000
shares of our Series A Convertible Preferred Stock, par value $ 0.0001
per share (“Series A Preferred Stock”), for an aggregate purchase price of
$100,000. Series A Preferred stockholders are entitled to convert, at their option,
all or any shares of the Series A Preferred Stock into the number of fully paid
and non-assessable shares of common stock equal to the number obtained by
dividing the original purchase price of such Series A Preferred Stock, plus the
amount of any accumulated but unpaid dividends as of the conversion date, by the
original purchase price (subject to certain adjustments) in effect at the close
of business on the conversion date. The fair value of the 100,000 shares of our
common stock underlying the Series A Convertible Preferred Stock was $1.425 per
share at the date of grant. Since the value was $0.425 lower than the fair value
of our common stock on October 12, 2006, the $42,500 intrinsic value of the
conversion option resulted in the reduction of stockholders’ equity for the
recognition of a preferred stock dividend and an increase to additional paid-in
capital.





On July
24, 2007, we entered into a Subscription Agreement with certain investors,
pursuant to which such investors agreed to subscribe for an aggregate of
5,000,000 shares of our common stock. Each share of common stock was sold at the
price of $0.50, for an aggregate purchase price of $2,500,000. In
September, October and December 2007, warrants to purchase 625,000 shares of
common stock were exercised in a cashless exchange for 239,000 shares of
the Company’s common stock based on the average closing price of the Company’s
common stock for the five days prior to the exercise date.





As
described above, pursuant to the Merger, we issued 10,180,292 shares of NeuMedia
common stock as part of the merger consideration in connection
with the Merger. Such issuance was made pursuant to the exemption from
registration permitted under Section 4(2) of the Securities Act. In
addition, also in connection with the Merger, on February 12, 2008, we entered
into non-qualified stock option agreements with certain of our directors
and officers under the Plan whereby we issued options to purchase an aggregate
of 1,700,000 shares of our common stock to Ian Aaron, former Chief Executive
Officer of Twistbox and former director of the Company, Russell Burke, Chief
Financial Officer of Twistbox and the Company, David Mandell, Executive
Vice-President, General Counsel and Corporate Secretary of Twistbox and Patrick
Dodd, former Senior Vice of Worldwide Sales and Marketing of Twistbox, each of
whom received an option to purchase 600,000 shares, 350,000 shares, 450,000
shares and 300,000 shares, respectively, of our common stock. The options have a
ten-year term and are exercisable at a price of $4.75 per share. The options
become exercisable over a two-year period, with one-third of the options granted
vesting immediately upon grant, an additional one-third vesting on the first
anniversary of the date of grant, and the remaining one-third on the second
anniversary of the date of grant. The options were granted pursuant to the
exemption from registration permitted under Rule 506 of Regulation D of the
Securities Act.





In April
and June 2008, warrants to purchase 350,000 shares of common stock were
exercised in a cashless exchange for 217,000 shares of the Company’s
common stock based on the average closing price of the Company’s common stock
for the five days prior to the exercise date. On June
18, 2008, the Company granted non-qualified stock options to purchase 1,500,000
shares of common stock of the Company to four directors under the
Plan. The options have a ten year term and are exercisable at a price of $2.75
per share, with one-third of the options granted vesting immediately upon
grant, one-third vesting on the first anniversary of the date of grant and the
remaining one-third vesting on the second anniversary of the date of
grant.





As
described above, pursuant to the AMV Acquisition, on October 23, 2008, we
entered into a Securities Purchase Agreement with certain investors identified
therein, pursuant to which NeuMedia agreed to sell to the investors in a private
offering an aggregate of 1,685,394 shares of common stock and warrants
to purchase 842,697 shares of common stock for gross proceeds to the Company of
$4,500,000. The warrants have a five year term and an exercise price of
$2.67 per share. The funds were held in an escrow account pursuant to an Escrow
Agreement, dated October 23, 2008 and were released to NeuMedia on or
about November 8, 2008.





Also as
described above, in connection with the AMV Acquisition, on October 23, 2008,
NeuMedia and ValueAct entered into an allonge to each of those
certain warrants issued to ValueAct in connection with the Merger, which, among
other things, amended the exercise price of each of the warrants to $4.00 per
share.





In
October 2008, warrants to purchase 2,300,000 shares of common stock were
exercised in a cashless exchange for 286,000 shares of the Company’s common
stock based on the average closing price of the Company’s common stock for the
five days prior to the exercise date.





In
September 2009, the Company granted warrants to purchase 1,200,000 shares of
common stock of the Company a vendor. The warrants are exercisable at $1.25 per
share, through September 23, 2014 and were valued at $134,000 at the time of
issue.





In
connection with the restructuring described above, on June 21, 2010 561,798
shares of common stock held by ValueAct were cancelled, and 3,540,574 shares
held by Cresswell and MacLeitch were acquired by the Company at a price of $0.02
per share. In addition, a total of 2,185,000 warrants held by ValueAct were
cancelled.





Revenues


The
discussion herein regarding our future operations pertain to the results and
operations of Twistbox. Twistbox has historically generated and expects to
continue to generate the vast majority of its revenues from mobile phone
carriers that market and distribute its content. These carriers generally charge
a onetime purchase fee or a monthly subscription fee on their subscribers’ phone
bills when the subscribers download Twistbox’s games to their mobile phones. The
carriers perform the billing and collection functions and generally remit to
Twistbox a contractual percentage of their collected fee for each game. Twistbox
recognizes as revenues the percentage of the fees due to it from the carrier.
End users may also initiate the purchase of Twistbox’s games through various
Internet portal sites or through other delivery mechanisms, with carriers or
third parties being responsible for billing, collecting and remitting to
Twistbox a portion of their fees. To date, Twistbox’s international revenues
have been much more significant than its domestic revenues.


36


We
believe that improving quality and greater availability of 2.5 and 3G handsets
and “smartphones”  is in turn encouraging consumer awareness and
demand for high quality content on their mobile devices. At the same time,
carriers and branded content owners are focusing on a small group of publishers
that have the ability to provide high-quality mobile content consistently and
port it rapidly and cost-effectively to a wide variety of handsets.
Additionally, branded content owners are seeking publishers that have the
ability to distribute content globally through relationships with most or all of
the major carriers. We believe Twistbox has created the requisite development
and porting technology and has achieved the scale to operate at this level. We
also believe that leveraging carrier and content owner relationships will allow
us to grow our revenues without corresponding percentage growth in our
infrastructure and operating costs. Our revenue growth rate will depend
significantly on continued growth in the mobile content market and our ability
to leverage our distribution and content relationships, as well as to continue
to expand. Our ability to attain profitability will be affected by the extent to
which we must incur additional expenses to expand our sales, marketing,
development, and general and administrative capabilities to grow our business.
The largest component of our expenses is personnel costs. Personnel costs
consist of salaries, benefits and incentive compensation, including bonuses and
stock-based compensation, for our employees. Our operating expenses will
continue to grow in absolute dollars, assuming our revenues continue to grow. As
a percentage of revenues, we expect these expenses to decrease. Many new mobile
handset models are released in the fourth calendar quarter to coincide with the
holiday shopping season. Because many end users download our content soon after
they purchase new handsets, we may experience seasonal sales increases based on
this key holiday selling period. However, due to the time between handset
purchases and content purchases, much of this holiday impact may occur in our
March quarter. For a variety of reasons, we may experience seasonal sales
decreases during the summer, particularly in Europe, which is predominantly
reflected in our September quarter. In addition to these possible seasonal
patterns, our revenues may be impacted by new or changed carrier deals, and by
changes in the manner that our major carrier partners marketing our content on
their deck. Initial spikes in revenues as a result of successful launches or
campaigns may create further aberrations in our revenue patterns.





Cost
of Revenues


Twistbox’s
cost of revenues historically, and our cost of revenues going forward, consists
primarily of royalties that we pay to content owners from which we
license brands and other intellectual property. In addition, certain other
direct costs such as quality assurance (“QA”) and use of short codes are included
in cost of revenues. Our cost of revenues also includes noncash
expenses—amortization of certain acquired intangible assets, and any impairment
of


guarantees.
We generally do not pay advance royalties to licensors. Where we acquire rights
in perpetuity or for a specific time period without revenue share or additional
fees, we record the payments made to content owners as prepaid royalties on our
balance sheet when payment is made to the licensor. We recognize royalties
in cost of revenues based upon the revenues derived from the relevant game
multiplied by the applicable royalty rate. If applicable, we will record an impairment
of prepaid royalties or accrue for future guaranteed royalties that are in
excess of anticipated recoupment. At each balance sheet date, we perform a detailed
review of prepaid royalties and guarantees that considers multiple factors,
including forecasted demand, anticipated share for specific content providers,
development and launch plans, and current and anticipated sales levels. We
expense the costs for development of our content prior to technological
feasibility as we incur them throughout the development process, and we include
these costs in product development expenses.





Gross
Margin


Our gross
margin going forward will be determined principally by the mix of content that
we deliver, and the costs of distribution. Our games based on licensed
intellectual property require us to pay royalties to the licensor and the
royalty rates in our licenses vary significantly. Our own in-house developed games,
which are based on our own intellectual property, require no royalty payments to
licensors. For lifestyle business, branded content requires royalty


payment
to the licensors, generally on a revenue share basis, while for acquired content
we amortize the cost against revenues, and this will generally result in a lower
cost associated with it. There are multiple internal and external factors that
affect the mix of revenues between games and lifestyle content, and among licensed,
developed and acquired content within those categories, including the overall
number of licensed games and developed games available for sale during a
particular period, the extent of our and our carriers’ marketing efforts for
each type of content, and the deck placement of content on our carriers’ mobile
handsets. We believe the success of any individual game during a particular
period is affected by the recognizability of the title, its quality, its
marketing and media exposure, its overall acceptance by end users and the
availability of competitive games. In the case of Play for Prizes games, this is
further impacted by its suitability to “tournament” play and the prizes
available. For other content, we believe that success is driven by the carrier’s
deck placement, the rating of the content, by quality and by brand recognition.
If our product mix shifts more to licensed games or games with higher royalty
rates, our gross margin would decline. For other content as we increase scale,
we believe that we will have the opportunity to move the mix towards higher
margin acquired product. Our gross margin is also affected by direct costs such
as charges for mobile phone short codes, and QA, and by periodic charges for
impairment of intangible assets and of prepaid royalties and guarantees. These
charges can cause gross margin variations, particularly from quarter to
quarter.





Operating
Expenses


Our
operating expenses going forward will primarily include product development
expenses, sales and marketing expenses and general and administrative expenses.
Our product development expenses consist primarily of salaries and benefits for
employees working on creating, developing, editing, programming, porting,
quality assurance, carrier certification and deployment of our content, on
technologies related to interoperating with our various mobile phone carriers
and on our internal platforms, payments to third parties for developing our
content, and allocated facilities costs. We devote substantial resources to the
development, supporting technologies, porting and quality assurance of our
content. We believe that developing games internally through our own development
studios allows us to increase operating margins, leverage the technology we have
developed and better control game delivery. Games development may encompass
development of a game from concept through deployment or adaptation or
rebranding of an existing game. For acquired content, typically we will receive
content from our licensors which must be edited for mobile phone users, combined
with other appropriate content, and packaged for end consumers. The process is
made more complex by the need to deliver content on multiple carriers platforms
and across a large number of different handsets.





Sales and
Marketing. Sales and marketing expenses historically, and our sales and
marketing expenses going forward, will consist primarily of salaries, benefits
and incentive compensation for sales, business development, project management
and marketing personnel, expenses for advertising, trade shows, public relations
and other promotional and marketing activities, expenses for general business
development activities, travel and entertainment expenses and allocated
facilities costs. We expect sales and marketing expenses to increase in absolute
terms with the growth of our business and as we further promote


our
content and expand our carrier network.


37





General and
Administrative.Our general and administrative expenses historically, and going forward,
will consist primarily of salaries and benefits for general and administrative
personnel, consulting fees, legal, accounting and other professional fees,
information technology costs and allocated facilities costs. We expect that
general and administrative expenses will increase in absolute terms as we hire
additional personnel and incur costs related to the anticipated growth of our
business and our operation as a public company. We also expect that these
expenses will increase because of the additional costs to comply with the
Sarbanes-Oxley Act and related regulation, our efforts to expand our
international operations and, in the near term, additional accounting costs
related to our operation as a public company.





Amortization of
Intangible Assets.We will record amortization of acquired intangible assets that are
directly related to revenue-generating activities as part of
our cost of revenues and amortization of the remaining acquired intangible
assets, such as customer lists and platform, as part of our operating expenses. We will
record intangible assets on our balance sheet based upon their fair value at the
time they are acquired. We will determine the fair value of the intangible
assets using a contribution approach. We will amortize the amortizable
intangible assets using the straight-line method over their estimated useful
lives of three to five years.





Estimates
and Assumptions


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





Income
Taxes


We
provide for deferred income taxes using the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and the tax
effect of net operating loss carry-forwards. A valuation allowance has been
provided as it is more likely than not that the deferred assets will not be
realized.





Recent
Accounting Pronouncements





New
Accounting Pronouncements


In
September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable
Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU
2009-13). It updates the existing multiple-element revenue arrangements guidance
currently included under ASC 605-25, which originated primarily from the
guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF 00-21). The revised guidance primarily provides two
significant changes: (1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a delivered item to
be treated as a separate unit of accounting, and (2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised
guidance is retroactively applied to the beginning of the year of adoption. The
adoption of this standard update is not expected to impact the Company’s
consolidated financial statements.





In
February 2010, the FASB issued Accounting Standards Update ("ASU") No.2010-09,
“Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”),
which is included in the FASB Accounting Standards Codification (the "ASC")
Topic 855 (Subsequent Events).  ASU 2010-09 clarifies that an SEC filer is
required to evaluate subsequent events through the date that the financial
statements are issued.  ASU 2010-09 is effective upon the issuance of the
final update and had no impact on our financial position, results of operations
or cash flows.





Effective
January 2010, an amendment to the Consolidation Topic of the Codification
(“ASU 810”)  replaced the quantitative-based risks and rewards calculation
for determining which reporting entity, if any, has a controlling financial
interest in a variable interest entity (“VIE”) with a primarily qualitative
analysis.  The qualitative analysis is based on identifying the party that
has both the power to direct the activities that most significantly impact the
VIE’s economic performance (the “power criterion”) and the obligation to absorb
losses from or the right to receive benefits of the VIE that could potentially
be significant to the VIE (the “losses/benefit criterion”).  The party that
meets both these criteria is deemed to have a controlling financial interest.
 The party with the controlling financial interest is considered to be the
primary beneficiary and as a result is required to consolidate the VIE.
 The amendment to ASU 810 had no impact on our financial position, results
of operations or cash flows.





In
January 2010, the FASB issued ASU2010-06, “
Improving Disclosures about Fair Value Measurements ” which provides amendments
to the FASB ASC Subtopic 820-10 that require new disclosures regarding
(i) transfers in and out of Level 1 and Level 2 fair value measurements and
(ii) activity in Level 3 fair value measurements.ASU2010-06 also clarifies existing disclosures regarding
(i) the level of asset and liability disaggregation and (ii) fair
value measurement inputs and valuation techniques.  The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements.  Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years.  We are currently evaluating the
disclosure impact of adoption on our condensed consolidated financial
statements.





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.


38




Currently,
our cash and cash equivalents are maintained by financial institutions in
the United States, Germany, the United Kingdom, Poland, Argentina and Colombia
and our current deposits are likely in excess of insured limits. We believe that
the financial institutions that hold our investments are financially sound and,
accordingly, minimal credit risk exists with respect to these investments. Our
accounts receivable primarily relate to revenues earned from domestic and
international mobile phone carriers. We perform ongoing credit evaluations of
our carriers’ financial condition but generally require no collateral from
them. As of June 30, 2010, our largest customer (in multiple territories)
represented approximately 36% of our gross accounts receivable
outstanding.





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.





Item
4.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness, as of the end of the
period covered by this report, of our disclosure controls and procedures, as
such term is defined in Exchange Act Rule 13a-15(e).  Based on this
evaluation, our principal executive officer and principal financial officer
concluded that, as of such date, the Company’s disclosure controls and
procedures were effective.





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in our Exchange Act reports is recorded, processed, summarized,
and reported, within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.




Changes in
Controls and Procedures





There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13(a)-15 and 15(d)-15 that occurred during
the first quarter ended June 30, 2010 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.





There has
been no material changes in our legal proceedings from those disclosed in our
Annual Report on Form 10-K for the year ended March 31, 2010. From time to time,
we are subject to various claims, complaints and legal actions in the normal
course of business. As of the date of filing this Quarterly Report on Form 10-Q,
we are not a party to any litigation that we believe would have a material
adverse effect on us.




Item
1A. Risk Factors.





There has
been no material changes in our risk factors from those disclosed in our Annual
Report on Form 10-K for the year ended March 31, 2010.


39





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





Period
                                
                                (a) Total Number of
                                  Shares (or Units)
                                  Purchased
                                
                                (b) Average Price Paid
                                  per Share (or Unit) ($)
                                
                                (c)
                                  Total Number of
                                  Shares (or Units)
                                  Purchased as Part of
                                  Publicly Announced
                                  Plans or Programs
                                
                                
                                (d)
                                  Maximum Number
                                  (or Approximate
                                  Dollar Value) of
                                  Shares (or Units)
                                  that May Yet Be
                                  Purchased Under
                                  the Plans or
                                  ProgramsApril
      1, 2010 -
                                  April
      30, 2010
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                
                                -May
      1, 2010 -
                                  May
      31, 2010
                                
                                
                                -
                                
                                
                                -
                                
                                
                                -
                                
                                
                                
                                -June
      1, 2010 –
                                  June
      30, 2010
                                
                                
                                4,102,372
                                
                                
                                0.01
                                
                                
                                -
                                
                                
                                
                                -





Item
3. Defaults Upon Senior Securities.





None.





Item
4.  (Removed and Reserved)




Item
5. Other Information.





None.





Item 6.   Exhibits.





Exhibit
                No.
              
              Description2.1
              
              Amended
      Disclosure Statement filed with the United States Bankruptcy Court for the
      Southern District of New York. 12.2
              
              Amended
      Plan of Reorganization filed with the United States Bankruptcy Court for
      the Southern District of New York 12.3
              
              Order
      Confirming Amended Plan of Reorganization issued by the United States
      Bankruptcy Court for the Southern District of New York. 12.4
              
              Plan
      and Agreement of Merger, dated September 27, 2007, of NeuMedia Media,
      Inc., a Delaware corporation, and Mediavest, Inc., a New Jersey
      corporation. 22.5
              
              Certificate
      of Merger merging Mediavest, Inc., a New Jersey corporation, with and into
      NeuMedia Media, Inc., a Delaware corporation, as filed with the Secretary
      of State of the State of Delaware. 22.6
              
              Certificate
      of Merger merging Mediavest, Inc., a New Jersey corporation, with and into
      NeuMedia Media, Inc., a Delaware corporation, as filed with the Secretary
      of State of the State of New Jersey. 22.7
              
              Agreement
      and Plan of Merger, dated as of December 31, 2007, by and among NeuMedia
      Media, Inc., Twistbox Acquisition, Inc., Twistbox Entertainment, Inc. and
      Adi McAbian and Spark Capital, L.P. 32.8
              
              Amendment
      to Agreement and Plan of Merger, dated as of February 12, 2008, by and
      among NeuMedia Media, Inc., Twistbox Acquisition, Inc., Twistbox
      Entertainment, Inc. and Adi McAbian and Spark Capital, L.P. 43.1
              
              Certificate
      of Incorporation. 23.2
              
              Bylaws.
      24.1
              
              Form
      of Warrant to Purchase Common Stock dated September 14, 2006. 5




40





4.2
              
              Form
      of Warrant to Purchase Common Stock dated October 12, 2006. 64.3
              
              Form
      of Warrant to Purchase Common Stock dated December 26, 2006. 74.4
              
              Form
      of Warrant Issued to David Chazen to Purchase Common Stock dated August 3,
      2006. 84.5
              
              Form
      of Warrant issued to Investors, dated October 23, 2008. 94.6
              
              Warrant
      dated September 23, 2008 issued to Vivid Entertainment, LLC. 104.7
              
              Form
      of Warrant issued to Investors, dated June 21, 2010. 114.8
              
              Form
      of Senior Secured Convertible Note due June 21, 213. 114.9
              
              Amended
      and Restated Senior Subordinated Secured Note due June 21, 2013, by
      Twistbox Entertainment, Inc. in favor of ValueAct SmallCap Master Fund,
      L.P. 1110.1
              
              Agreement,
      dated as of June 21, 2010, between ValueAct SmallCap Master Fund, L.P.,
      NeuMedia, Inc., Jonathan Cresswell, Nathaniel MacLeitch, Robert Ellin,
      Trinad Management, LLC, Trinad Capital Master Fund, Ltd. and the Guber
      Family Trust.1110.2
              
              Mutual
      Release, dated as of June 21, 2010, among ValueAct SmallCap Master Fund,
      L.P., Antiphony (Management Holdings) Limited, Nathaniel MacLeitch,
      Jonathan Cresswell, NeuMedia, Inc., Twistbox Entertainment, Inc., Peter
      Guber, Robert Ellin, Paul Schaeffer, Adi McAbian, Richard Spitz, Ray
      Schaaf, Keith McCurdy, Russell Burke, James Lefkowitz and Trinad
      Management.1110.3
              
              Subordination
      Agreement, dated as of June 21, 2010, by and between Trinad Capital Master
      Fund, Ltd., and ValueAct SmallCap Master Fund, L.P., and each of NeuMedia,
      Inc. and Twistbox Entertainment, Inc.1110.4
              
              Deed
      Poll Release, dated as of June 21, 2010, between NeuMedia, Inc., Twistbox
      Entertainment, Inc., James Lefkowitz and Russell Burke.1110.5
              
              Non-Competition
      Agreement, dated as of June 21, 2010, among NeuMedia, Inc., Antiphony
      (Management Holdings) Limited,  Jack Cresswell and Nate
      MacLeitch.1110.6
              
              Earn-Out
      Termination Letter Agreement, dated as of June 21, 2010, among ValueAct
      SmallCap Master Fund, L.P., NeuMedia, Inc., Jonathan Cresswell, Nathaniel
      MacLeitch and certain other parties.1110.7
              
              Amended
      and Restated Senior Subordinated Secured Note due June 21, 2013, by
      Twistbox Entertainment, Inc. in favor of ValueAct SmallCap Master Fund,
      L.P.1110.8
              
              Amended
      and Restated Guaranty, dated as of June 21, 2010, by NeuMedia, Inc. to
      ValueAct SmallCap Master Fund, L.P.1110.9
              
              Letter
      Agreement, dated as of June 21, 2010, between ValueAct SmallCap Master
      Fund, L.P., NeuMedia, Inc., Rob Ellin and Trinad Management, LLC.1110.10
              
              Amended
      and Restated Guarantee and Security Agreement, dated as of June 21, 2010,
      among Twistbox Entertainment, Inc., NeuMedia, Inc. and each of its
      subsidiaries identified on Schedule I as being a subsidiary guarantor, the
      investors party thereto and ValueAct SmallCap Master Fund, L.P.1110.11
              
              Form
      of Senior Secured Convertible Note due June 21, 20131110.12
              
              Guarantee
      and Security Agreement, dated as of June 21, 2010, among Twistbox
      Entertainment, Inc., NeuMedia, Inc., each of the subsidiaries thereof
      party thereto, the investors party thereto and Trinad Capital Management,
      LLC.1131.1
              
              Certification
      of Ray Schaaf, Principal Executive Officer, pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *31.2
              
              Certification
      of Russell Burke, Principal Financial Officer, pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002. *32.1
              
              Certification
      of Ray Schaaf, Principal Executive Officer, pursuant to 18 U.S.C. Section
      1350. *32.2
              
              Certification
      of Russell Burke, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350. *




41




* Filed
herewith





(1)
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB (File
No. 000-10039), filed with the Commission on December 2, 2005.


(2)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on November 14, 2007.


(3)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on January 2, 2008.


(4)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on February 12,
2008.


(5)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on September 20, 2006.


(6)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on October 18, 2006.


(7)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on January 3, 2007.


(8)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on August 9, 2006.


(9)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File
No. 000-10039), filed with the Commission on October 27, 2008.


(10)
Incorporated by reference to our Quarterly Report on Form 10-Q (File No.
000-10039 ), filed with the Commission on November 16, 2009.


(11)
Incorporated by reference to our Current Report on Form 8-K (File No. 000-10039
), filed with the Commission on June 23, 2010.


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





NeuMedia,
      Inc.Date:
        August 23, 2010
                  By:
                  /s/
      Ray SchaafRay
      SchaafPresident(Authorized
      Officer and Principal Executive
Officer)




Date:  August
      23, 2010By:
                  /s/
      Russell BurkeRussell
      BurkeChief
      Financial Officer and Secretary(Authorized
      Officer and Principal Financial
Officer)




43