Revenue,Table Cost of Sales and Accounts Receivable Process Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Revenue,Table Cost of Sales and Accounts Receivable Process Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

For the fiscal year ended March 31, ~~2006~~2007


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

For the transition period from ~~___to ___~~ to

Commission File No.: 0-27338

ATARI, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization) 13-3689915 (I.R.S. Employer Identification No.)


Delaware		13-3689915
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

417 Fifth Avenue, New York, NY 10016
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (212) 726-6500

Securities registered pursuant to Section 12(b) of the Act: ~~None~~Common Stock, $0.10 par value

Securities registered pursuant to Section 12(g) of the Act: ~~Common Stock, $0.01 par value~~None

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

~~Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.~~ Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o Accelerated filer þ o Non-accelerated filer oþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant, based on the $15.4480 closing sale price of the Common Stock on September 3029, ~~2005~~2006 as reported on the NASDAQ ~~National~~Global Market (giving effect to a one-for-ten reverse stock split), was approximately $9337,~~870~~837,~~626~~000. As of ~~June~~September 2710, ~~2006~~2007, ~~there~~ ~~were~~a ~~134~~total of 13,~~765~~477,~~510~~920 shares of the registrant’s Common Stock were outstanding.

Documents Incorporated by Reference

Portions of Registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be held in ~~2006~~2007 are incorporated by reference into Part III hereof.

ATARI, INC. AND SUBSIDIARIES MARCH 31, ~~2006~~2007 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

	Page		~~Page~~
PART I
ITEM 1.	Business			2
ITEM 1. Business		2
ITEM 1A.	Risk Factors			13
ITEM 1A. Risk Factors		13
ITEM 1B.	Unresolved Staff Comments			20
ITEM 1B. Unresolved Staff Comments		21
ITEM 2.	Properties			20
ITEM 2. Properties		21
ITEM 3.	Legal Proceedings			21
ITEM 3. Legal Proceedings		22
ITEM 4.	Submission of Matters to a Vote of Security Holders			23
ITEM 4. Submission of Matters to a Vote of Security Holders		23
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			23
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		23
ITEM 6.	Selected Financial Data			23
ITEM 6. Selected Financial Data		24
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk			40
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk		45
ITEM 8.	Financial Statements and Supplementary Data			40
ITEM 8. Financial Statements and Supplementary Data		45
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			40
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		46
ITEM 9A.	Controls and Procedures			40
ITEM 9A. Controls and Procedures		46
ITEM 9B.	Other Information			42
ITEM 9B. Other Matters		47
PART III
ITEM 10.	Directors and Executive Officers of the Registrant			43
ITEM 10. Directors, Executive Officers, and Corporate Governance		50
ITEM 11.	Executive Compensation			43
ITEM 11. Executive Compensation		50
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			43
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50
ITEM 13.	Certain Relationships and Related Transactions			43
ITEM 13. Certain Relationships and Related Transactions, and Director Independence		50
ITEM 14.	Principal Accountant Fees and Services			43
ITEM 14. Principal Accountant Fees and Services		50
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules			44
ITEM 15. Exhibits and Financial Statement Schedules		50
SIGNATURES		56		50
CONSOLIDATED FINANCIAL STATEMENTS		F-1		~~F-1~~
EXHIBIT INDEX
EX-3.1: RESTATED CERTIFICATE OF INCORPORATION
EX-10.25: DESCRIPTION OF ANNUAL INCENTIVE PLAN
EX-10.9: MANAGEMENT AND SERVICES AGREEMENT
EX-10.58: AGREEMENT OF LEASE
EX-10.10: SERVICES AGREEMENT
EX-10.11: PRODUCTION SERVICES AGREEMENT
EX-10.38: DESCRIPTION OF ANNUAL INCENTIVE PLAN FOR FISCAL 2006
EX-21.1: LIST OF SUBSIDIARIES
EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-99.5: XBOX PUBLISHER LICENSE AGREEMENT
EX-32.2: CERTIFICATION
EX-99.6: CONFIDENTIAL LICENSE AGREEMENT

This Annual Report contains ~~statements that may constitute~~ forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. We caution readers regarding ~~certain~~ forward-looking statements in this Report, press releases, securities filings, and ~~all~~ other documents and communications. All statements, other than statements of historical fact, including statements regarding industry prospects and expected future results of operations or financial position, made in this Annual Report on Form 10-K are forward looking. The words “believe”, “expect”, “anticipate”, “intend” and similar expressions generally identify forward-looking statements. These forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies and known and unknown risks. As a result of such risks, our actual results could differ materially from those anticipated by any forward-looking statements made by, or on behalf of, us. We will not necessarily update information if ~~any~~it ~~forward-looking statement~~ later turns out tothat bewhat ~~inaccurate~~occurs is different from what was anticipated in a forward-looking statement. For a discussion of ~~some~~ some factors that could cause our operating results or other matters not to be as anticipated by forward-looking statements in this document, please see Item 1A entitled “Risk Factors” on pages 13 to 2021.

PART I

ITEM 1. BUSINESS

OVERVIEW

We are a ~~global~~ publisher ~~and developer~~ of video game software ~~for~~that ~~gaming~~is ~~enthusiasts~~distributed ~~and~~throughout the ~~mass-market~~ ~~audience,~~world and a distributor of video game software in North America. We ~~develop~~publish, develop (through external ~~publish~~resources), and distribute video games for all platforms, including Sony PlayStation, ~~PlayStation~~ 2, ~~PlayStation~~ PlayStation 3, and PSP;, Nintendo Game Boy Advance, ~~GameCube~~Game Cube, Wii, and DS;, and Microsoft Xbox and Xbox ~~360;~~ ~~and personal computers~~360, ~~referred~~as well to as ~~PCs. We also publish and sublicense games~~ for ~~the wireless,~~personal ~~internet~~computers, ~~and~~or ~~other~~PCs. ~~evolving~~The ~~platforms,~~products ~~an area to which~~ we ~~expect~~publish toor ~~devote~~distribute ~~increasing attention.~~extend ~~Our diverse portfolio of products extends~~ across most major video game genres, including action, adventure, strategy, role- playing, and racing. ~~Our~~The ~~products~~games we ~~are~~distribute ~~based~~in ~~on intellectual~~North ~~properties~~America ~~that~~include games we ~~have~~publish, ~~either~~games ~~created~~published ~~internally~~by unrelated publishers and ~~own~~games orpublished ~~which~~by ~~have~~our ~~been~~majority ~~licensed from~~stockholder ~~third~~Infogrames ~~parties~~Entertainment S.A., or ~~related~~IESA, ~~parties.~~a ~~Our~~French corporation ~~fiscal~~listed ~~2006~~on ~~product~~Euronext, ~~portfolio~~which ~~included~~owns ~~products~~approximately ~~such~~51% ~~as Matrix:~~of ~~Path~~our stock. IESA is the largest distributor of ~~Neo~~video games in Europe, ~~several~~and ~~Dragon~~distributes ~~Ball~~the Zvideo ~~titles~~games that we publish throughout the world, ~~and~~other ~~Atari~~than ~~Flashback~~in 2North America.0.

~~Our~~ Until ~~publishing activities include the management of business development~~2005, ~~strategic alliances,~~we ~~product~~were ~~development,~~actively ~~marketing,~~involved ~~packaging,~~in ~~and~~developing ~~sales of~~ video ~~game~~games ~~software. In addition to our publishing~~ and ~~development activities, we also distribute video game software~~ in ~~the~~financing ~~United~~development ~~States, Canada and Mexico, handling both our own products and titles developed by third-party publishers with whom we have contracts. As a distributor~~ of video ~~game~~games ~~software~~by ~~throughout~~independent ~~North America~~developers, wewhich ~~maintain what~~ we ~~believe~~would topublish beand ~~state-of-the-art~~distribute ~~distribution~~under ~~operations~~licenses ~~and systems,~~from ~~reaching~~the ~~well in excess of 30,000 retail outlets nationwide~~developers. ~~Additionally~~However, ~~through~~beginning ~~our relationship~~in ~~with our majority stockholder~~2005, ~~Infogrames~~because ~~Entertainment~~of ~~S.A.,~~cash ~~or IESA~~constraints, awe ~~French corporation~~substantially ~~listed on Euronext,~~ reduced our ~~products~~involvement ~~are~~in ~~distributed~~development ~~exclusively~~of byvideo ~~IESA throughout Europe~~games, ~~Asia~~ and ~~other~~announced ~~regions.~~plans ~~See~~to ~~our~~divest ~~risk~~ourselves ~~factor~~of ~~regarding~~ our ~~relationship with IESA. Similarly, we~~ ~~exclusively~~internal ~~distribute~~development ~~IESA’s products in the United States and Canada~~studios. ~~Furthermore, we distribute~~ ~~product in Mexico through various non-exclusive agreements.~~

~~Our~~ During ~~extensive~~fiscal ~~library~~2006 ofand ~~licensed properties~~2007, ~~which~~we ~~constitutes~~sold ana ~~important~~number ~~component~~ of ~~our product~~intellectual ~~strategy,~~properties ~~includes~~and ~~some~~development facilities ~~of the most recognizable names~~ in ~~popular~~order ~~entertainment,~~to aobtain ~~factor which~~cash weto ~~believe~~fund ~~reduces~~our ~~product risk~~operations. ADuring ~~number~~2007, ofwe ~~our~~raised ~~licensed properties have come~~approximately ~~from the television and motion picture industries~~$35.0 million ~~Further,~~ through ~~our~~the ~~distribution~~sale ~~agreement with~~of ~~IESA, we have~~ the rights to ~~publish~~the Driver games and ~~sublicense~~ certain other intellectual ~~properties~~property, ~~either owned~~and orthe ~~licensed~~sale byof ~~IESA~~our orReflections and ~~its~~Shiny ~~subsidiaries, including Atari Interactive, Inc~~studios., orBy ~~Atari Interactive.~~the ~~Our~~end ~~extensive~~of ~~library~~fiscal ~~includes~~2007, ~~the~~we USdid ~~and/or~~not ~~world-wide~~own ~~rights~~any todevelopment ~~the following key~~studios. ~~properties:~~

§ The ~~Dragon~~reduction ~~Ball~~in Zour ~~(FUNimation);~~development §and ~~Alone~~development infinancing activities has significantly reduced the ~~Dark~~number ~~(IESA);~~of §games ~~Asteroids~~we publish. During fiscal 2007, ~~PONG~~our revenues from publishing activities were $104.0 million, ~~Missile~~compared ~~Command~~with $153.6 million during fiscal 2006 and ~~Centipede~~$289.6 million during ~~(Atari~~fiscal ~~Interactive);~~2005. §However, ~~Dungeons~~we &continue ~~Dragons~~to ~~(Hasbro~~have ~~and~~a ~~Atari~~significant ~~Interactive);~~library §of ~~Earthworm~~well ~~Jim~~known ~~(Interplay);~~properties that §we ~~RollerCoaster~~license ~~Tycoon~~from IESA (~~Chris~~directly ~~Sawyer~~or ~~and~~through its wholly-owned subsidiary Atari Interactive);, ~~and~~Inc., or §Atari ~~Godzilla~~Interactive) ~~(Sony~~or ~~Pictures).~~unrelated companies, including:

~~During~~• ~~fiscal~~Dragon ~~2006,~~Ball weZ ~~closed two operations~~(FUNimation), ~~sold~~• aAlone ~~studio and the rights that had been used~~ in ~~connection with~~ the ~~games~~Dark ~~developed~~(IESA), at• ~~that~~Asteroids, ~~studio~~PONG, ~~and~~Missile ~~sold~~Command ~~the~~and ~~rights~~Centipede to(Atari ~~two~~Interactive), ~~other~~• ~~game franchises.~~Dungeons Weand ~~also~~Dragons ~~reduced~~(Hasbro ~~the~~and ~~amount~~Atari weInteractive), ~~invested~~• inEarthworm ~~development~~Jim of new games. We did this partly in implementation of a strategy to focus our resources primarily on intellectual properties that management believes have the greatest potential to deliver substantial returns on our investment(Interplay), ~~partly~~• toRollerCoaster ~~reduce~~Tycoon ~~costs~~(Chris Sawyer and ~~restructure~~Atari ~~operations~~Interactive), and ~~partly~~• toGodzilla ~~obtain~~(Sony ~~funds we needed to meet our operating expenses~~Pictures).

~~Specifically:~~ The reduction in our development and publishing activities has increased our focus on distribution activities. We maintain in North America distribution operations and systems that reach in excess of 30,000 retail outlets throughout the United States.

• We Inare ~~fiscal~~in ~~2006, we completed~~ the ~~closure~~process of ~~our~~developing ~~operations~~a instrategic ~~Beverly,~~plan ~~Massachusetts~~that ~~and~~would ~~Santa~~expand ~~Monica,~~our ~~California and either discontinued the~~ activities ~~we had been conducting at those locations~~into new, oremerging ~~transferred~~aspects ~~them to our main office in New York City. • In August 2005, we sold shares~~ of ~~IESA stock (acquired in connection with~~ the ~~sale~~video ofgame ~~the~~industry, ~~Humongous~~including ~~studio)~~casual ~~into~~games, ~~the~~online ~~market~~sites, ~~for~~digital downloading, ~~approximately $10.1 million. • As of June 2006~~advergaming, ~~we sold the rights to Timeshift~~ and ~~Stuntman~~brand ~~and certain other game rights for approximately $15~~licensing.2 ~~million~~However, ofour ~~which~~ability ~~$6.2~~to ~~million~~do ~~was~~those ~~recorded~~things inwill require ~~fiscal~~that ~~2006. • In February 2006,~~ we ~~terminated~~have ~~the~~a ~~employment~~source of ~~approximately~~funding ~~20%~~and some of ~~the~~them ~~employees~~will inrequire ~~our~~expansion ~~New~~and ~~York~~extension ~~City office, with an overall worldwide workforce reduction~~ of ~~approximately 25%. • We reduced~~ our ~~payments~~rights to ~~external~~use ~~developers~~and bysublicense ~~$7.1~~certain ~~million~~properties, ~~compared~~including ~~with~~our license ~~the~~to ~~prior~~use ~~year by reducing~~ the ~~number~~“Atari” ~~of titles we were developing (although we increased spending on products we were developing internally by $4~~name.~~7 million).~~

Due to product launch delays throughout fiscal 2006 and a weak holiday season for the industry combined with the underperformance of new product launches, our fiscal year results were substantially below our expectations. For the year ended March 31, ~~2006~~2007, our net revenues were only $~~218~~122.73 million, compared with $~~407~~206.8 million in the prior year, and we had an operating loss of $6877.6 million in fiscal ~~2006~~2007, which ~~compared~~included ~~with~~a ancharge ~~operating profit~~ of $654.31 million ~~the~~for ~~prior~~impairment ~~year. Further, our scheduled releases in fiscal 2007 are significantly fewer than had been the case in prior years. For the third and fourth quarters~~ of ~~fiscal~~goodwill ~~2006,~~related weto ~~were not in compliance with certain financial covenants of~~ our ~~credit~~publishing ~~facility with HSBC Business Credit (USA) Inc~~unit. ~~(“HSBC”),~~ ~~which~~We ~~has expired as of the date hereof. Historically, we~~ have ~~relied~~taken onsignificant ~~IESA~~steps to ~~provide~~reduce ~~limited financial~~our ~~support~~costs. toOur ~~us;~~ability ~~however,~~to asdeliver ~~IESA~~products ~~continues~~on totime depends ~~address~~in ~~its~~good ~~own~~part ~~financial~~on ~~condition,~~developers’ ~~its~~ ability to ~~fund~~meet ~~its~~completion ~~subsidiaries’ operations, including ours, remains limited~~schedules. ~~Therefore~~Further, ~~there~~our expected ~~can~~releases bein nofiscal ~~assurance~~2008 weare ~~will~~even ~~ultimately~~fewer ~~receive~~than ~~any~~our ~~funding~~releases ~~from~~in ~~them~~fiscal 2007. ~~The~~In ~~uncertainties~~addition, ~~caused~~most ~~by these~~of ~~conditions raise substantial doubt about~~ our ~~ability to continue as a going concern. The~~ ~~consolidated~~releases ~~financial~~for ~~statements~~fiscal do2008 ~~not include any adjustments that might result from the outcome~~are ~~of this uncertainty.~~

In an effort to improve our sales performance, profitability, and competitive position, during fiscal 2006, we began to make certain structural, financial and creative changes. Leading our structural changes has been an almost complete transformation of our senior management team, other than our Chief Executive and Creative Officer. We have new senior executives in finance, marketing, business and legal affairs, and corporate communications.

Creatively, we have initiated a redirection of the focus of our product portfolio, applying our resources primarily to those intellectual properties that – based on market trends, consumer base growth, and emerging technologies – management believes have the greatest potential to deliver the most substantial returns on investment. As a result, we began to divest of certain non-core assets that are not consistent with our revised product focus, including the sale of rights to certain of our intellectual properties. We will continue to examine our intellectual property portfolio and will further divest ourselves of items considered non-core or not part of our long-term strategy throughout fiscal 2007. We are currently negotiating for the sale of our Reflections studio and the related Driver franchise.

We have also implemented more rigorous financial and design controls that we expect will better enable us to deliver quality products to the market on time, on budget, and supported by appropriate marketing initiatives. Furthermore, we are putting a greater focus on casual online gaming as well as the expansion of the retail marketplace through digital distribution.

Also in May 2006, we announced an aggressive pricing program. The program includes a new price point of $19.95 on all existing console titles sold prior to March 31, 2006 for PlayStation 2, Xbox, GameCube, and Game Boy Advance, as well as all PC titles (excluding Dungeons & Dragons Online, released in the fourth quarter of fiscal 2006). Additionally, all PC titles included in the program will be available for immediate download at Valve and Direct2Drive, two video game download websites, also for $19.95. Titles include several of our most successful releases of fiscal 2006: Dragon Ball Z: Budokai Tenkaichi, Driver: Parallel Lines, Getting Up: Contents Under Pressure, and Indigo Prophecy.

Regardless of the above initiatives, we still need to raise significant additional capital and further improve our financial position. We are still exploring various alternatives to improve our financial position and secure other sources of financing which could include a new credit facility, new arrangements to license intellectual property, additional sales of selected intellectual property rights and the sale of internal development studios. We continue to examine the reduction of working capital requirements to further conserve cash and may need to take additional actions in the near-term, which may include additional personnel reductions and suspension of certain development projects during fiscal 2007. Further, as we are contemplating various alternatives, we have reconstituted the special committee of our board of directors, consisting of our independent board members, James Ackerly, Ronald Bernard, and Michael Corrigan, who are authorized to review significant and special transactions.

The above actions may or may not prove to be consistent with our long-term strategic objectives. We cannot guarantee the completion of these actions or that such actions will generate sufficient resources to fully address the uncertainties of our financial position.

~~Atari,~~focused ~~Inc.~~on ~~(formerly~~the ~~known~~holiday ~~as Infogrames, Inc~~season. ~~and~~As ~~GT Interactive Software Corp.) was organized as~~ a ~~corporation~~result ~~in Delaware in 1992. In May 2003, we changed~~ our ~~name~~cash toneeds ~~Atari,~~have ~~Inc.~~become ~~and~~more ~~changed~~seasonal ~~our~~and ~~trading~~we ~~symbol~~face onsignificant ~~the~~cash ~~NASDAQ~~requirements ~~National Market~~ to ~~“ATAR”.~~fund ~~Our~~our ~~corporate~~working ~~office~~capital ~~and U.S.~~needs ~~headquarters is located at 417 Fifth Avenue, New York, New York 10016 (main telephone: (212)~~during ~~726-6500). We maintain a worldwide website at www.atari.com. Information contained on~~ the ~~website is~~second ~~not~~quarter ~~part~~ of ~~this~~our ~~Annual~~fiscal ~~Report~~year.

Currently, our only borrowing facility is an asset-based secured credit facility that we established in November 2006 with a group of lenders for which Guggenheim Corporate Funding LLC, or Guggenheim, is the administrative agent. The credit facility consists of a revolving line of credit in an amount up to $15.0 million (subject to a borrowing base calculation), which includes a $10.0 million sublimit for the issuance of letters of credit. However, the maximum borrowings we can make under the credit facility will not by themselves provide all the funding we will need for the calendar 2007 holiday season. Further, the credit facility may be terminated if we do not comply with financial and other covenants prior to our need for borrowing (i.e. Nasdaq Delisting).

Historically, we have relied on IESA to provide limited financial support to us, through loans or, in recent years, through purchases of assets. However, IESA has its own financial needs, and its ability to fund its subsidiaries’ operations, including ours, is limited. Therefore, there can be no assurance we will ultimately receive any funding from IESA.

The uncertainty caused by these above conditions raises substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We are still exploring various alternatives to improve our financial position and secure other sources of financing which could include raising equity, forming both operational and financial strategic partnerships, renegotiating or entering into a new credit facility, entering into new arrangements to license intellectual property, and selling selected owned intellectual property and licensed rights. Further, as we are contemplating various alternatives, we utilize a special committee of our board of directors, consisting of our independent board members, James Ackerly, Ronald Bernard, and Michael Corrigan, who are authorized to review significant and special transactions. We continue to examine the reduction of working capital requirements to further conserve cash and may need to take additional actions in the near-term, which may include additional personnel reductions and suspension of certain development projects during fiscal 2008. In May of 2007, we announced a workforce reduction of approximately 20%.

The above actions may or may not prove to be consistent with our long-term strategic objectives, which have been shifted in the last fiscal year, as we have discontinued our internal development activities and increased our focus on online and casual gaming, among other things. We cannot guarantee the completion of these actions or that such actions will generate sufficient resources to fully address the uncertainties of our financial position.

Atari, Inc. (formerly known as Infogrames, Inc. and GT Interactive Software Corp.) was organized as a corporation in Delaware in 1992. In May 2003, we changed our name to Atari, Inc. and changed our trading symbol on the NASDAQ Global Market to “ATAR.” Our corporate office and U.S. headquarters is located at 417 Fifth Avenue, New York, New York 10016 (main telephone: (212) 726-6500). We maintain a worldwide website at www.atari.com. Information contained on the website is not part of this Annual Report.

INDUSTRY OVERVIEW

The video game ~~software~~ industry primarily comprises software for dedicated game consoles or ~~platforms~~ platforms (such as PlayStation 2, PlayStation 3, Xbox, Xbox 360, Wii, and GameCube), handhelds (such as Game Boy Advance, Nintendo DS and Sony PSP) and PCs. Publishers of video game software include the console manufacturers, or “first-party publishers”,” and third-party publishers, such as ourselves, whose primary role is the development, publishing and/or distribution of video game software. ~~Additionally, the use of wireless devices (such as mobile phones and personal digital~~ ~~assistants) as a gaming platform, known as “mobile gaming”, is growing rapidly.~~ According to International Data Group (IDG), an independent technology, media, research, and event company, sales of PC, console, and handheld games (excluding wireless) in North America and Europe in ~~2005~~ 2006 reached $1415.0 billion. We anticipate an expanding market for interactive entertainment ~~software~~ software over the next several years as a result of the ~~introduction~~success of the ~~next~~ current/connected generation console platforms. We believe that greater online functionality and the expanded artificial intelligence capabilities of the new platforms ~~will~~ improve game play and ~~help our industry grow. In addition,~~game ~~according to DFC Intelligence and Montgomery & Co.~~accessibility, ~~new revenue opportunities from wireless gaming, online console gaming,~~ and ~~in-game~~will ~~advertising~~help ~~are~~our ~~expected~~industry to grow ~~from $1 billion in 2005 to $5 billion in 2009~~.

~~The~~ Additionally, ~~Console~~the use of wireless devices (such as mobile phones and ~~Handheld~~personal ~~Market~~digital assistants) as a gaming platform, known as “mobile gaming,” is growing rapidly, as is online gaming such as casual gaming and massively multiplayer online games.

Console platforms as they exist today have made significant technological advances since the introduction of the first generation of modern consoles by Nintendo in 1985. Hardware manufacturers have historically introduced a new and more technologically advanced gaming console platform every four to five years. Handhelds have also made advances since their introduction. However, handhelds have typically experienced longer product cycles. With each new cycle, the customer base for video game software has expanded as gaming enthusiasts mature and advances in video game hardware and software technology engage new participants, generating greater numbers of console units purchased than the prior cycle. The beginning of each cycle is largely dominated by console sales as consumers upgrade to the next-generation technology. As the cycle matures, consumers’ focus shifts to software, resulting in a period of rapid growth for the video game software industry.

~~Sony~~The ~~was~~Console the first manufacturer to introduce the last generation of console hardware with the introduction of the PlayStation 2 platform in 2000. Nintendo introduced its current generation platforms a year later, launching the GameCube and ~~Game~~Handheld ~~Boy Advance in 2001. This generation also saw the entrance of Microsoft into the industry~~Market ~~with the introduction of the Xbox console.~~

In Console ~~2005,~~platforms ~~Microsoft~~as ~~initiated~~they aexist ~~new~~today have made significant technological advances since the introduction of the first generation of ~~console~~modern ~~hardware~~consoles ~~when~~by itNintendo in 1985. Hardware manufacturers have historically introduced ~~Xbox~~a ~~360.~~new and more technologically advanced gaming console ~~Sony~~platform isevery ~~expected~~four to ~~launch~~five ~~PlayStation~~years. 3Handhelds inhave ~~November 2006~~also made advances since their introduction. However, ~~and~~handhelds ~~Nintendo~~have ~~announced~~typically ~~that~~experienced ~~its~~longer product cycles. With each new ~~generation~~ ~~system~~cycle, ~~Wii,~~the customer ~~will~~base ~~launch~~for invideo ~~November 2006~~game software has expanded as ~~well.~~gaming ~~These~~enthusiasts ~~systems~~mature ~~will~~and ~~represent~~advances ain ~~significant~~video ~~advance~~game inhardware ~~gaming~~and software technology engage new participants, ~~with~~generating ~~the~~greater ~~potential~~numbers ~~eventually~~of console tounits ~~reach~~purchased ~~broader~~than ~~audiences~~the prior cycle. ~~However,~~ ~~shortage~~The beginning of ~~Xbox~~each ~~360~~cycle ~~units~~is ~~after~~largely itdominated ~~was~~by console ~~introduced,~~sales ~~and~~as ~~delays~~consumers inupgrade ~~releasing~~to ~~PlayStation~~the ~~3 and~~current-generation ~~Wii~~technology. ~~led~~As tothe acycle ~~severe~~matures, consumers’ ~~transition~~focus ~~period~~shifts ~~slowdown~~to software, resulting in ~~sales~~a period of ~~video~~rapid ~~games~~growth ~~that~~for ~~affected~~the ~~almost~~video ~~all~~game ~~publishers~~software industry.

In Sony ~~addition~~was ~~to these technological innovations, there has been greater competition for shelf space and creative talent as well as increased buyer selectivity. As a result,~~ the ~~video~~first ~~game industry~~manufacturer ~~has become increasingly hit-driven, which has led~~ to ~~higher~~introduce ~~per~~the ~~game~~previous ~~production~~generation ~~budgets, longer~~of ~~and~~console ~~more~~hardware ~~complex development processes, and generally shorter product life cycles. The~~with ~~importance of~~ the ~~timely~~introduction ~~release~~ of ~~hit~~the ~~titles,~~PlayStation as2 ~~well~~platform asin ~~the~~2000. ~~increased~~Nintendo ~~scope~~introduced ~~and~~its ~~complexity~~current ofgeneration ~~the~~platforms ~~product~~a ~~development~~year ~~process~~later, ~~have~~launching ~~increased~~ the ~~need~~GameCube ~~for~~and ~~disciplined~~Game ~~product~~Boy ~~development processes~~Advance ~~that~~in ~~control cost and overruns~~2001. This ingeneration ~~turn~~also saw ~~has increased~~ the ~~importance~~entrance of ~~leveraging the~~Microsoft ~~technologies, characters or storylines of existing hit titles~~ into ~~additional~~the ~~video~~industry ~~game software~~with ~~franchises~~the inintroduction ~~order~~of tothe ~~spread~~Xbox ~~development costs among multiple products~~console.

In 2005, Microsoft initiated a new generation of console hardware when it introduced Xbox 360. Both Sony and Nintendo followed suit by launching PlayStation 3 and Nintendo Wii, respectively, in November 2006. The calendar 2006 year also saw the rapid expansion of the Nintendo DS in the handheld market, and the continuing longevity of the PlayStation 2 (Sony’s previous generation console).

Innovation also continues in the handheld market with manufacturers offering more sophisticated units, such as Sony’s PSP and Nintendo’s DS, each of which offer multiple features and capabilities in addition to game play functionality and wi-fi connectivity.

Personal Computers

Advances in personal computer technology outpace advances in console and handheld technology. Advances in microprocessors, graphics chips, hard-drive capacity, operating systems and memory capacity have greatly enhanced the ability of the PC to serve as a video game platform. These technological advances have enabled developers to introduce video games for PCs with enhanced game play technology and superior graphics. ~~The~~After PC5 years ~~market~~of ~~has~~decline ~~typically~~in ~~not~~the ~~been~~PC ~~subject to video game industry cycles and~~market, ~~coupled with~~ the ~~fact~~PC returned ~~that publishers are not required~~ to ~~pay~~growth ~~hardware royalties~~in ~~and high manufacturing costs for PC products~~2006, ~~this~~with is an ~~attractive~~increase ~~market~~in ~~for~~total ~~video~~gross ~~game publishers.~~sales ~~Though~~of ~~retailers~~2% ~~have~~from ~~been~~2005. ~~allocating~~Much ~~diminished~~of ~~shelf~~the success ~~space~~of tothis PC ~~products,~~growth ~~this trend~~has ~~may~~been bedue ~~offset~~to bythe ~~demand~~success ~~for~~of ~~Massively~~massively ~~Multiplayer~~multiplayer ~~Online Games~~online, or ~~MMOG. Additionally~~MMO, ~~the~~role ~~advancements~~playing ingames. ~~high-speed~~Over ~~connectivity~~25 ~~have~~new ~~increased~~MMO ~~the~~titles ~~casual~~came online ~~gaming~~during ~~community~~2006. ~~Coupled with~~However, ~~dramatically~~PC ~~lower~~shelf ~~development~~space ~~costs,~~has ~~casual~~been declining ~~gaming~~in isretail astores, ~~very~~and ~~attractive~~the ~~market~~demand for uscatalogue ~~to compete~~PC titles in jewel case format has drastically diminished in ~~the~~many ~~future~~retail environments.

Online

Though in fiscal 2007 we derived limited revenue from online exploitation, there are three ways that we publish games that are playable by consumers online:

	•		Online-only casual games that we make available on the Internet. These are made available to consumers on our website, www.atari.com, and on certain online services provided by third parties.

	•		Another type of online-only games is called “massively multiplayer online” games. Players experience these games as interactive virtual worlds where thousands of other players can interact with one another. We currently have one massively multiplayer online game, Test Drive Unlimited.

	•		We include online capability features in certain of our console products, which enable consumers to participate in online communities and play against one another via the Internet.

In addition, online downloads are available for (1) certain PC games either from our atari.com site or third party sites such as Gametap, and (2) Microsoft’s Xbox Live service. We are also developing digital content, which we intend to sell online via microtransactions, for next-generation console-based games.

We are currently in the process of revamping our online strategy with a view toward increased forms of online casual gaming. The casual games market is a desirable target for us to pursue due to its revenue growth, diverse revenue streams, and extended reach beyond the historical demographics of the core gamer/console market. The designation ‘casual’ game is used to reference a type of electronic or computer game intended for a broad audience with a focus on reaching a consumer that typically does not play ‘hardcore’ console video games. The mass-market penetration of the casual games industry owes its appeal to the fact that casual games are designed with a low barrier to entry — making it easy for a new player to start playing a game within minutes. The primary distribution channel for casual games is the Internet, which allows the genre of casual gaming to benefit from the ever-growing advances in Internet technology and take advantage of varied online revenue streams. By 2010, the market for online games is expected to reach $4.4 billion in revenue, quadrupling in size from $1.1 billion in 2005. The appeal of casual games spans generations, with college students, teens, school-aged children and seniors all providing significant portions of the consumer makeup. However, the core demographic profile of casual gamers tends to skew older (35+). The largest audience for casual gaming remains women aged 35 to 50, although the overall gender break-down of casual gamers varies greatly depending on genre and game. Due to the rich nature of our intellectual property and brand legacy, we believe we are in a good position to capitalize on the casual games sector.

ESRB Ratings and Litigation

The Entertainment Software Ratings Board, (“or ESRB”), through its ratings system, requires game publishers to provide consumers with information relating to material that includes, but is not limited to, graphic violence, profanity or sexually explicit material contained in software titles. Consumer advocacy groups have opposed sales of interactive entertainment software containing graphic ~~such~~violence ~~content~~or sexually explicit material by pressing for legislation in these areas and by engaging in public demonstrations and media campaigns., ~~Various~~and various governmental bodies have proposed regulation aimed at our industry ~~which~~to ~~would~~ prohibit the sale of software containing such material to minors. Additionally, retailers may decline to sell interactive entertainment ~~products~~software containing ~~that contain~~ graphic violence, or sexually explicit, ~~material~~or toother ~~the~~material ~~extent~~ that they deem it inappropriate for their businesses. IfFor example, if retailers decline to sell ~~our~~a publisher’s “M” rated (age 17 and over) products or if ~~our~~the “M” rated products are re-rated “AO” (age 18 and over), wethe publisher might be required to significantly change or discontinue particular titles.

Consolidation

We and other publishers have used acquisitions to obtain creative talent as well as independently developed intellectual properties. We believe economies of scale will be increasingly important as the complexity and costs associated with video game development continue to increase. In addition, the acquisition of proven intellectual properties has become increasingly important as publishers seek to diversify and expand their product portfolios, while limiting exposure to unsuccessful product development efforts. Acquisitions have also been used as a means of vertically integrating functions that are key to the business process. ~~Given~~We ~~these~~expect ~~facts,~~consolidation ~~coupled~~within ~~with~~ the ~~fact~~video ~~that~~game ~~financial~~software ~~performance within the~~ industry ~~indicates~~to ~~that~~continue. ~~the~~Recently, ~~more~~Atari ~~successful~~has ~~companies are~~been ~~those~~a ~~that are the most vertically integrated~~seller, wenot ~~expect~~a ~~consolidation within the video game software industry to continue~~buyer.

PRODUCTS

~~Our~~ The ~~core~~following ~~strength~~identifies ~~has~~games ~~typically~~and ~~been~~franchises inthat ~~titles~~generated ~~for~~ the ~~action,~~most ~~adventure,~~significant ~~strategy,~~portion ~~and driving genres. We have developed a number~~ of ~~successful game franchises based on proven television~~ ~~and~~our ~~movie~~publishing ~~franchises,~~net ~~and have created and fostered new internally owned and developed intellectual properties. We continually seek to expand our~~ product ~~portfolio~~revenues ~~with~~during ~~proven~~the ~~intellectual~~years ~~properties and~~ended ~~through~~March 31, ~~the~~2005, ~~creation~~2006, ~~of sequels~~ and ~~expansions of successful titles~~2007.

• Fiscal 2005 – the Dragon Ball Z franchise generated 28.3% of our publishing net product revenues, driven by Dragon Ball Z: Budokai 3 (PlayStation 2) and Dragon Ball Z: Sagas (PlayStation 2, Xbox, and GameCube). Additionally, the Driver franchise (which was sold in August 2006) generated 14.0% of our publishing net revenues, lead by the release of DRIV3R (PlayStation 2 and Xbox). • Fiscal 2006 – the Dragon Ball Z franchise generated 28.6% of our publishing net product revenues, driven by the October 2005 release of Dragon Ball Z: Budokai Tenkaichi (PlayStation 2). Additionally, the Matrix franchise generated 14.4 % of our publishing net revenues, lead by the November 2005 release of Matrix: Path of Neo (PlayStation 2, Xbox, and PC). Other new releases in fiscal 2006 included Atari Flashback 2.0 (plug and play), Getting Up: Contents Under Pressure (PlayStation 2, Xbox, and PC), Dungeons & Dragons Online: Stormreach (PC), Driver: Parallel Lines (PlayStation 2, and Xbox), and Indigo Prophecy (PC, PlayStation 2, and Xbox). • Fiscal 2007 – the Dragon Ball Z franchise generated 45.7% of our publishing net product revenues, driven by the November 2006 release of Dragon Ball Z: Budokai Tenkaichi 2 (PlayStation 2 and Nintendo Wii). Additionally, the

~~The~~Neverwinter ~~following~~Nights ~~identifies~~franchise ~~games~~generated ~~and~~13.9% ~~franchises~~of ~~that~~our ~~generated~~publishing net product revenues, lead by the ~~most~~October ~~significant~~2006 ~~portion~~release of Neverwinter Nights 2 (PC). Furthermore, the Test Drive franchise generated 13.4% of our publishing net product revenues, ~~during~~lead by the ~~years~~September ~~ended~~2006 ~~March 31~~release of Test Drive Unlimited on the Xbox 360 platform, ~~2004~~followed by its March 2007 release on the PlayStation 2, ~~2005~~PSP, and ~~2006~~PC platforms.

• Fiscal 2004 — the Dragon Ball Z franchise generated 23.7% of our publishing net product revenues, driven by Dragon Ball Z: Budokai 2 (PlayStation 2). Additionally, Enter the Matrix (PC, PlayStation 2, Xbox, and GameCube) generated 25.0% of our publishing net revenues. • Fiscal 2005 — the Dragon Ball Z franchise generated 28.3% of our publishing net product revenues, driven by Dragon Ball Z: Budokai 3 (PlayStation 2) and Dragon Ball Z: Sagas (PlayStation 2, Xbox, and GameCube). Additionally, the Driver franchise (which we are currently negotiating the sale of) generated 14.0% of our publishing net revenues, lead by the release of DRIV3R (PlayStation 2 and Xbox). • Fiscal 2006 — the Dragon Ball Z franchise generated 28.6% of our publishing net product revenues, driven by the October 2005 release of Dragon Ball Z: Budokai Tenkaichi (PlayStation 2). Additionally, the Matrix franchise generated 14.4% of our publishing net revenues, lead by the November 2005 release of Matrix: Path of Neo (PlayStation 2, Xbox, and PC). Other new releases in the current period include Atari Flashback 2.0 (Retro plug and play), Getting Up: Contents Under Pressure (PC, PlayStation 2, and Xbox), Dungeons & Dragons Online: Stormreach (PC), Driver: Parallel Lines (PlayStation 2, and Xbox), and Indigo Prophecy (PC, PlayStation 2, and Xbox).

PUBLISHING

Our publishing activities include the management of business development, strategic alliances, product development, marketing, packaging and sales of video game software for all platforms, including Sony PlayStation, ~~PlayStation~~ 2, PlayStation 3, and PSP; Nintendo DS, Game Boy Advance, Wii, and GameCube; Microsoft Xbox and Xbox 360; and PC.

During the year ended March 31, ~~2006~~2007, we ~~centralized~~built upon the centralization of our publishing operations atin our New York headquarters. inIn ~~order~~addition, towe ~~capitalize~~focused on ~~managerial~~increased outsourcing and cost management ~~efficiencies~~for our Quality Assurance and Production Support group based in California. Greater emphasis was also placed on publishing style activities leveraging products created outside of North America and then re-published by the organization, with a focus on reducing direct development costs and offering more launch predictability. Alliances with external partners and developers in lieu of solely internally developed product have increased in accordance with this transition and as such we have sold-off all of our internal development studios.

With a lineup that spans from games for hardcore ~~games~~enthusiasts through mass market titles, we publish games at various price points, ranging from value-priced titles to premium-priced products. Appropriate ~~Pricing~~branding is selected and used to provide consumers with distinct offerings and ~~determined~~different tiers. Pricing is affected by a variety of factors, including but not limited to: licensed or franchise property; ~~internal~~ ~~or external development;~~ single or multiple platform development; production costs and volumes; target audience; ~~and~~the distribution territory; quality level; and consumer trends.

DEVELOPMENT

~~Internal~~ During fiscal 2007, we sold all of our internal development studios and ~~Related-Party~~now ~~Development~~leverage external resources in the development of our games, assessing each project independently to determine which development team is best suited to handle the product based on technical expertise and historical development experience, among other factors. We believe that through the use of independent developers it will be more cost efficient to publish certain of our games.

We leverage both internal and external resources in the development of our games, assessing each project independently to determine which development team is best suited to handle the product based on technical expertise and historical development experience, among other factors. However, recent evaluations of our development activities have led us to place stronger emphasis on external development. We believe that through the use of independent developers it will be more cost efficient to publish certain of our games. As a result, we have announced an initiative to sell certain of our internal studios.

In addition to our publishing operations described above, we currently own studios and manage the development of product at studios owned by IESA that focus solely on game development. Titles from these locations range in genre and are published for various audiences on the full array of gaming platforms.

Development studios owned by us include:

	•		Shiny Entertainment—Newport Beach, California—We acquired Shiny in April 2002, along with the rights to develop console and PC games based on The Matrix film trilogy. Shiny developed Enter the Matrix, which was released simultaneously with The Matrix Reloaded, the second film in The Matrix trilogy, in May 2003 and has sold in excess of 6 million units worldwide to date. In fiscal 2006, Shiny developed the next installment of The Matrix franchise, Matrix: Path of Neo, which was released in November 2005. Currently, Shiny is working on Earthworm Jim on the PSP platform.
	•		Reflections—Newcastle, England—Reflections is responsible for the creation and development of our Driver

franchise, which has sold more than 15 million units worldwide to date. During fiscal 2006, Reflections developed the latest installment of the Driver franchise, Driver: Parallel Lines, which was released in March 2006. As of the first quarter of fiscal 2007, we have formally adopted a plan to divest ourselves of this asset.

In addition to the studios we own, we also manage or will manage development of product at several studios owned by IESA:

• Eden Studios SAS—Lyon, France—Eden Studios SAS, or Eden, developed the successful V-Rally series, which, to date, has sold more than 3.8 million units worldwide, and Kya, which was released for the 2003 holiday season. Eden is currently developing Test Drive Unlimited for Xbox 360 and PC, and Alone in the Dark for Xbox 360, PlayStation 3, and PC, both expected to be released in fiscal 2007. • Atari Melbourne House Pty Ltd—Melbourne, Australia—Atari Melbourne House Pty Ltd is the studio behind TRANSFORMERS, released in May 2004. Previously, the studio had developed Grand Prix Challenge, and is currently developing Test Drive Unlimited for PlayStation 2 and PSP, expected to be released in fiscal 2007. • Paradigm Entertainment, Inc.—Dallas, Texas—Paradigm Entertainment, Inc., or Paradigm, is the studio behind the successful Pilot Wings game, and also developed Mission Impossible: Operation Surma and Terminator 3: The Redemption. Currently, Paradigm is developing Battlezone for the PSP platform. In May 2006, a third party publisher exercised an option to acquire the studio from IESA.

External Development

InWe ~~addition to developing products ourselves or through IESA wholly-owned subsidiaries, we~~ publish or have contracts to publish in North America video game software developed by some of of the industry’s most highly regarded independent external developers. These developers include, among others:

• Frontier Development — Chris Sawyer (RollerCoaster Tycoon series); • Obsidian (Neverwinter Nights); • Quantic Dream (Indigo Prophecy); • The Collective (Marc Ecko’s Getting Up: Contents Under Pressure); • Webfoot Technologies (Dragon Ball Z: The Legacy of Goku); • Eugen Systems (Act of War); • ZSlide (Hot PXL); • Spike (Dragon Ball Z: Budokai Tenkaichi 2); • Crafts & Master (Super Dragon Ball Z); ~~• Mistic Software (Totally Spies, Arthur and the Minimoys); • Etranges Libellules (Arthur and the Minimoys); • Spellbound (Desperados); • Kuju Entertainment (Dungeons & Dragons Tactics).~~

~~Products~~• ~~which~~Frontier ~~are~~Development ~~acquired~~— ~~from~~Chris ~~these~~Sawyer ~~external~~(RollerCoaster ~~developers~~Tycoon ~~are marketed under the Atari name, as well as the name of the external developer. The agreements with external developers typically provide us with exclusive publishing and~~ series);

•

Kuju Entertainment (Dungeons & Dragons Tactics);

•

Obsidian (Neverwinter Nights); and

•

Spike (Dragon Ball Z: Budokai Tenkaichi 2).

Products which are acquired from these external developers are marketed under the Atari name, as well as the name of the external developer. The agreements with external developers typically provide us with exclusive publishing and distribution rights for a specific period of time for specified platforms and territories. The agreements may grant us the right to publish sequels, enhancements and add-ons to the products originally developed and produced by the external developer. We pay the external developer a royalty based on sales of its products. A portion of this royalty may be in the form of advances against future royalties payable at the time of execution of the development agreement, with additional payments tied to the completion of detailed performance and development milestones by the developer.

In addition to using external studios we also manage or will manage development of certain product at IESA’s development studio:

~~distribution~~• ~~rights~~Eden ~~for~~Studios aSAS—Lyon, ~~specific~~France—Eden ~~period~~Studios ofSAS, ~~time~~or ~~for specified~~Eden, ~~platforms~~developed ~~and~~the ~~territories.~~successful ~~The~~V-Rally ~~agreements~~series, ~~may~~which, ~~grant us the right~~ to ~~publish sequels~~date, ~~enhancements~~ ~~and~~has ~~add-ons~~sold tomore ~~the~~than ~~products~~3.8 ~~originally~~million ~~developed~~units worldwide, and ~~produced~~Kya, bywhich ~~the~~was ~~external developer. We~~released ~~pay~~for the ~~external~~2003 ~~developer~~holiday aseason. ~~royalty~~Eden ~~based~~most onrecently ~~sales~~developed ofTest ~~its~~Drive ~~products.~~Unlimited Afor ~~portion~~Xbox of360 ~~this~~and ~~royalty may~~PC, bereleased induring ~~the~~fiscal ~~form~~2007, ofand ~~advances~~is ~~against~~currently ~~future~~developing ~~royalties~~Alone ~~payable~~in at the ~~time~~Dark offor ~~execution~~Xbox of360 ~~the development~~and ~~agreement~~PC, ~~with~~expected ~~additional payments tied~~ to ~~the~~be ~~completion~~released ofin ~~detailed~~fiscal ~~performance and development milestones by the developer~~2008.

We previously managed development of certain products at Paradigm Entertainment, Inc., or Paradigm, and Atari Melbourne House, both previously owned by IESA and sold to third parties during fiscal 2007.

We manage external development projects by appointing a producer to oversee each product’s development and to work with the external developer to design, develop and test the product. The producer also helps ensure that development milestones are met in a timely manner. We generally have the right to suspend or terminate making payments to an external developer if the developer fails to meet its development milestones in a timely fashion. Also, we generally have the option to terminate these agreements at relatively low costs.

We no longer internally develop games, nor do we have plans to do so in the future.

SALES AND MARKETING

~~Our~~The sales team presently comprises 11 positions: sales management, senior sales executives, associate account managers, and ~~marketing~~customer ~~programs~~service ~~emphasize~~representatives. aThe ~~number~~sales ofteam manages direct relationships with key ~~areas:~~accounts in the U.S., Canada, and Mexico. Accounts are assigned to sales team members by retailer and industry expertise.

• The ~~Managing~~sell-in ~~the life cycle~~ of annew ~~extensive~~properties ~~catalog~~begins ofwith ~~new~~research and ~~existing~~marketing ~~products;~~materials, ~~• Researching industry trends~~ and ~~customer~~product specific ~~needs~~meetings toat ~~inform~~which ~~the~~we ~~production~~present ~~process~~trailers, ~~advertising generation~~gameplay, ~~forecasting,~~and ~~retail~~product ~~distribution~~highlights, ~~and~~among ~~pricing;~~other things. •The ~~Working~~team ~~with~~manages ~~physical retail partners to maximize sales; • Establishing online sales distribution systems for both boxed products~~ and ~~digitally~~coordinates ~~distributed~~all ~~products;~~MDF •decisions, ~~Fostering~~secures ~~media and online community interest in products and properties; • Leveraging and strengthening~~ the ~~Atari~~order, ~~brand;~~ and •is ~~Exploiting~~responsible for ~~the~~all ~~marketability~~day-to-day ofaccount ~~our~~management, ~~intellectual property~~ and ~~products~~utilizes ~~through~~existing ~~licensing~~relationships ~~arrangements~~to ~~that~~develop ~~expand~~exclusive title ~~application~~programs ~~into other gaming platforms~~ and ~~consumer~~catalog ~~product categories and bring in new revenue streams such as advertising and product placement~~opportunities.

To At ~~achieve~~the ~~maximum~~store ~~benefit~~level, ~~from~~we ~~our~~utilize ~~sales~~professional ~~and~~merchandising ~~marketing~~companies to promote hit releases, facilitate compliance of pricing, pre-sell programs, weand ~~employ~~stock. Our merchandising partners ensure compliance in over 10,000 retail locations to assure a ~~wide~~quality ~~range~~and ofconsistent ~~marketing~~consumer ~~techniques~~experience. The sales department manages reporting, ~~including:~~forecasting, and analysis with state-of-the-art software.

• The ~~Understanding~~sales ~~our consumers through professional qualitative~~ and ~~quantitative~~marketing ~~research;~~teams •are ~~Promoting~~aligned ~~product~~to ~~publicity~~ensure ~~via~~the ~~enthusiast~~development ~~and~~of ~~mass~~programs ~~market~~with ~~outlets,~~the interests ~~including~~of ~~broadcast~~the ~~television,~~customers ~~internet, newspapers, specialty magazines, radio,~~ (retailers) and ~~theater;~~consumers ~~• Retail marketing and in-store promotions and displays; • On-line marketing and two way online “conversations” with~~ (gamers~~; • “Underground” marketing techniques,~~ ) in ~~which~~mind. ~~marketing~~The ~~materials~~core ~~are~~functions ~~placed in physical and online locations which are frequented by targeted groups~~ of ~~consumers; • Strategic partnerships and cross-promotions with other consumer~~ the product ~~companies~~management ~~and~~team ~~third-parties; and • Working with “first-party” console manufacturers to exploit their marketing opportunities, including presence on their websites, retail exposure and public relations events.~~includes:

~~Our~~• ~~marketing~~Managing ~~approach~~the ~~uses~~life cycle of a ~~product~~catalog ~~management~~of ~~system~~new and existing products; • Researching industry trends and customer needs to ~~evaluate~~inform the production process, ~~position~~advertising generation, forecasting, retail distribution, and ~~try~~pricing; • Working with physical retail partners to ~~improve~~ ~~our~~maximize ~~brands~~sales; ~~based~~• onEstablishing ~~analyses~~online sales distribution systems for both boxed products and digitally distributed products; • Fostering media and online community interest in products and properties; • Leveraging and strengthening the Atari brand; and • Exploiting the marketability of ~~market~~our ~~trends,~~intellectual ~~consumers,~~property ~~competition,~~and ~~core~~products ~~competencies, retail~~through licensing arrangements that expand application into other gaming platforms and ~~“first-party”~~consumer ~~partner~~product ~~support,~~categories and bring in new revenue streams such as advertising and product placement.

To achieve maximum benefit from our coordinated sales and marketing programs, we employ a wide range of marketing techniques, including:

~~other~~• ~~key~~Understanding ~~factors.~~our ~~This~~consumers ~~system~~through isprofessional ~~combined~~qualitative ~~with entertainment~~and quantitative research; • Examining competitive product launches to help determine optimal marketing ~~approaches~~budgets; • Promoting product publicity via enthusiast and mass market outlets, including broadcast television, internet, newspapers, specialty magazines, and theater; • Retail marketing and in-store promotions and displays; • Online marketing and two way online “conversations” with gamers; • “Underground” marketing techniques, toin ~~create~~which marketing materials are placed in physical and online locations which are frequented by targeted groups of consumers; • Strategic partnerships and cross-promotions with other consumer product companies and ~~trade~~third-parties; ~~anticipation~~and • Working with “first-party” console manufacturers to exploit their marketing opportunities, including presence on their websites, retail exposure and ~~demand~~ ~~for~~public ~~our~~relations ~~products~~events.

Our marketing approach uses a product management system to evaluate, position, and try to improve our brands based on analyses of market trends, consumers, competition, core competencies, retail and “first-party” partner support, and other key factors. Actionable results of our analyses are provided to the product development team, which, in turn and when reasonable, adjusts product to maximize consumer appeal. This system is combined with entertainment marketing approaches and techniques to create consumer and trade anticipation, as well as demand for our products.

We monitor and measure the effectiveness of our marketing strategies throughout the life cycle of each product. To maximize our marketing efforts, we may deploy an integrated marketing program for a product more than a year in advance of its release. Historically, we have expended a substantial portion of the marketing resources we will devote to a game prior to the game’s retail availability, and we intend to do so in the future.

The Internet is an integral element of our marketing efforts. We use it, in part, to generate awareness of and “buzz” about titles months prior to their market debut. We incorporate the Internet into our marketing programs via video, screenshot, and ~~podcast~~other game asset distribution; product-dedicated mini-sites; and ~~on-line~~online promotions. We also use the Internet to establish ongoing communication with gamers to translate their commitment and interest in our products into word of mouth sales.

In the months leading up to the release of a new product, we provide extensive editorial material to publications that reach the product’s expected audience as a part of executing customized public relations programs designed to create awareness of our products with all relevant audiences, including core gamers and mass entertainment consumers. These public relations efforts have resulted in coverage in key computer and video gaming publications and websites, as well as major consumer sites, newspapers, magazines and broadcast outlets.

In order to improve efficiency, our sales efforts have recently evolved into a two-tiered sales operation model that is common in the industry. We have an internal sales and licensing organization of 12 people that manage several of our key accounts, such as Wal-mart and GameStop/Electronics Boutique, and we have partnered with a leading sales broker to maintain the day-to-day relationships for other accounts, including Target and Best Buy. Importantly, we continue to lead and own all accounts that are maintained by our broker partner. The two-tiered approach allows us to operate at a lower cost structure while maintaining high quality relationships and accountability with our retail partners.

INTELLECTUAL PROPERTY

Licenses

Licensed properties

Our strategy includes the creation of games based on licensed properties that have attained a high level of consumer recognition or acceptance. We have entered into licensing agreements with a number of licensors, including ~~Warner~~FUNimation ~~Bros.,~~and ~~Viacom/Nickelodeon,~~ Sony Pictures~~, and FUNimation~~.

We pay royalties to licensors at various rates based on our net sales of the corresponding ~~title~~ titles. We frequently make advance payments against minimum guaranteed royalties over the license term. License fees tend to be higher for properties with proven popularity and less perceived risk of of commercial failure. Licenses are of various durations and may in some instances be renewable ~~upon~~ upon payment of minimum royalties or the attainment of specified sales levels. Other licenses are not renewable upon expiration, and we cannot be sure that we will reach agreement with the licensor to extend the term of any particular license. Our property licenses usually grant us exclusive use of the property for the specified titles on specified platforms, worldwide or within a defined territory, during the license term. Licensors typically retain the right to exploit the property for all other purposes and to license to other developers with regard to other properties.

renewable upon expiration, and we cannot be sure that we will reach agreement with the licensor to extend the term of any particular license. Our property licenses usually grant us exclusive use of the property for the specified titles on specified platforms, worldwide or within a defined territory, during the license term. Licensors typically retain the right to exploit the property for all other purposes and to license to other developers with regard to other properties.

In-Game Advertising

Working with external development teams and software providers, we incorporate two methods of advertising in certain of our games: static advertising (fixed content within our code executed during the product development stage) and dynamic advertising (real time messages executed on an on-going basis). In addition, we work with other brands to develop “advergames,” which are original, unique game experiences with highly customized brand integration. Advertisers are increasingly interested in reaching and engaging consumers, and interactive entertainment provides a unique medium in which to do so. As such, this is a line of business to which we plan to give increasing focus.

Hardware licenses

We currently develop software for use with PlayStation, ~~PlayStation~~ 2, PlayStation 3, and PSP; GameCube, Game Boy Advance, Wii, and DS; and Xbox and Xbox 360, pursuant to licensing agreements (some in negotiation) with each of the respective hardware developers. Each license allows us to create one or more products for the applicable system, subject to certain approval rights, which are reserved by each hardware licensor. Each license also requires us to pay the hardware licensor a per-unit license fee for the product produced.

The following table sets forth information with respect to our platform licenses:


Manufacturer	Platform	Agreement	Territory*	Expiration Date
Microsoft	Xbox	Publisher License Agreement, dated April 18, 2000	Determined on a title-by-title basis	November 15, 2007

Microsoft	Xbox 360	Publisher License Agreement, dated February 17, 2006	Determined on a title-by-title basis	November 21, 2008

Nintendo	DS	License Agreement, dated October 14, 2005	Western Hemisphere	February 16, 2008

Nintendo	Game Boy Advance	License Agreement, dated September 24, 2001	Western Hemisphere	September 23, 2007

Nintendo	GameCube	License Agreement dated March 29, 2002	Western Hemisphere	March 29, 2008

Nintendo	Wii	In negotiation	Western Hemisphere	In negotiation

Sony	PlayStation 2	Licensed Publisher Agreement, dated June 6, 2000	US and Canada	March 31, 2008, with automatic 1 year renewals

Sony	PlayStation Portable	Licensed Publisher Agreement, dated March 23, 2005	US and Canada	March 31, 2008, with automatic 1 year renewals

Sony	PlayStation 3	In negotiation	US and Canada	In negotiation

Manufacturer	Platform	Agreement	Territory*	Expiration Date
Microsoft	Xbox	Publisher License Agreement, dated April 18, 2000	Determined on a title-by-title basis	November 15, 2007
Microsoft	Xbox 360	Publisher License Agreement, dated February 17, 2006	Determined on a title-by-title basis	November 21, 2008
Nintendo	DS	License Agreement, dated October 14, 2005	Western Hemisphere	February 16, 2008
Nintendo	Game Boy Advance	License Agreement, dated September 24, 2001	Western Hemisphere	September 23, 2007
Nintendo	GameCube	License Agreement dated March 29, 2002	Western Hemisphere	March 29, 2008
Sony	PlayStation	Licensed Publisher Agreement, dated January 19, 2003	US, Canada, Mexico, Latin America	January 18, 2007
Sony	PlayStation 2	Licensed Publisher Agreement, dated June 6, 2000	US and Canada	March 31, 2007, with automatic 1 year renewals
Sony	PlayStation Portable	Licensed Publisher Agreement, dated March 23, 2005	US and Canada	March 31, 2007, with automatic 1 year renewals


*		IESA, our majority stockholder and the distributor of our products in Europe, has entered into similar agreements (directly or through its subsidiaries) with each of the manufacturers for applicable European territories.

* IESA, our majority stockholder and the distributor of our products in Europe, has entered into similar agreements with each of the manufacturers for applicable European territories.

We expect to negotiate agreements for platform licenses for Nintendo Wii and Sony PlayStation 3 prior to the hardware releases.

We currently are not required to obtain any license for the publishing of video game software for PCs. Accordingly, our per-unit manufacturing cost for such software products is less than the per-unit manufacturing cost for console products.

Protection

We develop proprietary software titles and have obtained the rights to publish and distribute software titles developed by third parties. Our products are susceptible to unauthorized copying. Unauthorized third parties may be able to copy or to reverse engineer our titles to obtain and use programming or production techniques that we regard as proprietary. In addition, our competitors could independently develop technologies substantially equivalent or superior to our technologies. We attempt to protect our software and production techniques under copyright, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution. Although we generally do not hold any patents, we seek to obtain trademark and copyright registrations for our products. In addition, each manufacturer incorporates security devices in its platform to prevent unlicensed use.

DISTRIBUTION

United States, Canada, and Mexico

Throughout the United States, Canada, and Mexico, we distribute our own products, as well as the products of other publishers, utilizing our distribution operations and systems. We are the exclusive distributor for the products of IESA (and its subsidiaries, including Atari Interactive) in the United States and Canada. Furthermore, we distribute product in Mexico through various non-exclusive agreements. Utilizing ~~our~~ point-of-sale replenishment systems and electronic data interchange links with our largest customers, we are able to efficiently handle high sales volume and manage and replenish inventory on a store-by-store basis. We also utilize ~~what we believe to be state-of-the-art~~ systems for our entire supply chain management, including manufacturing, EDI/order processing, inventory management, purchasing, and tracking of shipments. We believe these systems accomplish:

•

efficient and accurate processing of orders and payments;

•

expedited order turnaround time; and

•

prompt delivery.

We are a distributor of video game software to mass merchants in the United States. ~~Our~~We ~~strength~~distribute ~~in distribution enhances access to favorable shelf space for~~ our products. ~~We distribute our products~~ to a variety of outlets, including mass-merchant retailers such as Wal-Mart ~~and~~ and Target; major retailers, such as Best Buy, ~~Circuit City,~~ and Toys ‘R’ Us; specialty stores such as ~~GameStop/Electronics~~ ~~Boutique~~GameStop; rental chains such as Blockbuster and Hollywood Video; and warehouse clubs such as Sam’s Club and Costco. Wal-Mart, GameStop~~/Electronics Boutique~~, and Target accounted for 3125.1%, 1319.02%, and 1210.83%, respectively, of our net revenues for the year ended March 31, ~~2006~~2007. Additionally, our games are made available through various ~~on-line~~online retail and “e-tail” companies (e.g. Amazon.com), ~~and~~on our website atari.com, and through the emerging digital distribution/electronic software download marketplace. We believe that during the coming years, there will be a significant increase in digitally distributed titles and we are positioning ourselves to exploit this expansion of the marketplace.

~~Based~~ Other ~~on the strength of our distribution operations, we have successfully attracted other~~ publishers toalso utilize our distribution capabilities. ~~Other~~Their ~~publishers’~~ products are generally acquired by us and distributed under the name of the publisher of such products. Our agreements with these publishers typically grant us retail distribution rights in designated territories for specific periods of time, which are typically renewable. Under such agreements, the third party publisher is typically responsible for the publishing, packaging, marketing and customer support of such products. ~~In August 2005, we entered into a distribution agreement with Humongous, Inc., a~~ wholly-owned subsidiary of IESA and developer of the Backyard Sports game series for children, for the distribution of their product in North America. In the fourth quarter of fiscal 2006, this distribution agreement was extended through March 2007.

We outsource our warehouse operations in the United States to Arnold Logistics, which is located in Lancaster, Pennsylvania. The warehouse operations include the receipt and storage of inventory as well as the distribution of inventory to mass market and other retailing customers.

Europe, Asia and Other Regions

IESA distributes our products in Europe, Asia, and elsewhere outside of North America pursuant to a distribution agreement we entered into with IESA. We believe that IESA’s strong presence in Europe, Asia and certain other regions provides effective distribution in these regions of our titles while allowing us to focus our efforts in the United States, Canada and Mexico. IESA distributes our products to several major retailers in Europe, Asia and certain other regions; these retailers include Auchan, Carrefour, Mediamarket and Tesco. IESA has extensive access to retail outlets in these regions. See our risk factor regarding our dependence upon IESA. Under our distribution agreement with IESA, we are entitled to receive 30.0% of the gross margin of the products distributed by IESA, or 130.0% of the royalty rate due to the developer or licensor, whichever is greater.

Europe, Asia and Other Regions

IESA distributes our products in Europe, Asia, and elsewhere outside of North America pursuant to a distribution agreement we entered into with IESA. We believe that IESA’s strong presence in Europe, Asia and certain other regions provides effective distribution in these regions of our titles while allowing us to focus our distribution efforts in the United States, Canada, and Mexico. IESA distributes our products to several major retailers in Europe, Asia and certain other regions; these retailers include Auchan, Carrefour, Mediamarket and Tesco. IESA has extensive access to retail outlets in these regions. See our risk factor regarding our dependence upon IESA. Under our distribution agreement with IESA, we are entitled to receive 30.0% of the gross margin of the products distributed by IESA, or 130.0% of the royalty rate due to the developer or licensor, whichever is greater.

Backlog

We typically ship products within three days of receipt of orders. As a result, backlog is not material to our business.

MANUFACTURING

Disk duplication and the printing of user manuals and packaging materials are performed to our specifications by outside sources. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products, or material returns due to product defects. There is some concentration for the supply of our publishing needs, but a number of other outside vendors are also available as sources for these manufacturing and replication services.

Sony, Nintendo and Microsoft, either directly or through an authorized third party, control the manufacture of our products that are compatible with their respective video game consoles, as well as the manuals and packaging for these products, and ship the finished products to us, either directly or through third party vendors, for distribution. Sony PlayStation ~~and~~2, PlayStation 23, and PSP, Nintendo GameCube and Wii, and Microsoft Xbox and Xbox 360 products consist of proprietary format CD- or DVD-ROMs and are typically delivered to us within a relatively short lead time (approximately 3-4 weeks). Manufacturers of other Nintendo products, which use a cartridge format, typically deliver these products to us within 45 to 60 days after receipt of a purchase order. ~~It is not expected that the delivery time for products for the next generation consoles will differ greatly from the last generation.~~ To date, we have not experienced any material difficulties or delays in the manufacture and assembly of products we distribute. However, manufacturers’ difficulties, which are beyond our control, could impair our ability to bring products to the marketplace in a timely manner.

EMPLOYEES

As of the end of fiscal ~~2006~~2007, we had ~~232~~143 employees domestically, with ~~111~~49 in product development, 3728 in administration (i.e., senior management, human resources, legal, IT and facilities), 4131 in finance, 2719 in sales and operations, and 16 in marketing. During the fiscal year, we had domestic operations in New York, New York~~; Beverly~~, ~~Massachusetts~~and ~~(closed~~Sunnyvale inand ~~June 2005);~~Santa ~~Bothell~~Clara, ~~Washington~~California. ~~(closed~~We also had operations at our formerly wholly-owned Shiny studio in ~~August 2005);~~Newport ~~Sunnyvale~~Beach, California; ~~Santa~~until Shiny ~~Monica,~~was ~~California~~sold ~~(closed~~to a third party in ~~August~~September ~~2005~~2006 (see Development)~~; and~~. ~~Newport~~During ~~Beach~~the year, ~~California.~~we We also ~~have~~ had operations internationally at our formerly wholly-owned Reflections studio, which was sold in August 2006 (~~which~~see Development). In May 2007, we ~~are~~announced ~~currently~~a ~~negotiating~~plan ~~the~~to ~~sale~~reduce ~~of)~~our ~~located~~total inworkforce ~~Newcastle,~~by ~~England~~approximately 20%, ~~which~~primarily ~~had~~in 97general ~~employees~~and administrative functions. Most of those reductions have been made as of ~~March~~the ~~31,~~date ~~2006~~of this filing.

In February 2005, we announced the closing of our operations in Beverly, Massachusetts and Santa Monica, California. As a result, by August 2005 all of the employees located in those offices ceased employment with us and we re-staffed most of the functions handled by such employees to our New York headquarters. Additionally, in August 2005, we completed the sale of our Humongous development studio (located in Bothell, Washington) to our majority stockholder, IESA, and subsequently terminated most Humongous employees. Further, in February 2006, we terminated approximately 20% of the employees at our New York headquarters due to general downsizing of the organization.

RELATIONSHIP WITH IESA

As of March 31, ~~2006~~2007, IESA beneficially owned, ~~directly and indirectly,~~ approximately 51% of our common stock. IESA renders management services to us (systems and administrative support) and we render management services and production services to Atari Interactive and other subsidiaries of IESA. Atari Interactive develops video games, and owns the name “Atari” and the Atari logo, which we use under a license. IESA distributes our products in Europe, Asia, and certain other regions, and pays us royalties in this respect. IESA also develops (through its subsidiaries) products which we distribute in the U.S., Canada, and Mexico and for which we pay royalties to IESA. Both IESA and Atari Interactive are material sources of products which we bring to market in the United States, Canada, and Mexico. ~~Atari~~During ~~Interactive~~fiscal ~~was~~2007, international royalties earned from IESA were the source of ~~approximately 31~~ 4% of our ~~fiscal~~ ~~2006~~ net ~~publishing~~revenues. ~~product~~Additionally, ~~revenue~~IESA and weits ~~generated~~subsidiaries ~~approximately~~(primarily 8%Atari ofInteractive) ~~our fiscal 2006 net~~were ~~revenue~~the ~~from~~source ~~royalties~~of onapproximately ~~IESA’s~~38% ~~distribution~~ of our ~~products~~net inpublishing ~~Europe,~~product ~~Asia,~~revenue ~~and~~for ~~certain~~the ~~other~~year ended March 31, ~~regions~~2007.

IESA has incurred significant continuing operating losses and is highly leveraged. IESA has taken steps to improve its financial situation, including, (i) restructuring its outstanding debt obligations such that the debt amount is reduced and the debt maturity schedule is more favorable, (ii) reducing operating expenses, (iii) raising capital by selling assets (such as the Games.com URL), (iv) entering into banking arrangements to fund operations and position itself for the new hardware cycle, and (v) entering into production fund agreements to finance certain game development projects. However, IESA has not yet completed all of the actions it plans to take in order to improve its operations and reduce its debt. As a result, IESA’s current

Historically, IESA has incurred significant continuing operating losses and has been highly leveraged. On September 12, 2006, IESA announced a multi-step debt restructuring plan, subject to its shareholders’ approval, which would significantly reduce its debt and provide liquidity to meet its operating needs. On November 15, 2006, IESA shareholders approved the debt restructuring plan, permitting IESA to execute on this plan. As of the date of this report, IESA has raised approximately 74 million Euros, of which approximately 45 million Euros has paid down outstanding short-term and long-term debt and has provided approximately 20 million Euro of liquidity for working capital needs. As of the date of this report, IESA has completed its debt restructuring plan; however, its current ability to fund, among other things, its subsidiaries’ operations remains ~~is diminished~~limited. ~~There~~Our ~~can~~results of operations could be nomaterially impaired if IESA fails to fund ~~assurance~~Atari ~~that~~Interactive, as any delay or cessation in product development could materially decrease our revenue from the distribution of Atari Interactive and IESA ~~will~~products. ~~complete~~If ~~sufficient~~the above contingencies occurred, we probably would be forced to take actions that could result in a significant further reduction in the size of our operations and could have a material adverse effect on our revenue and cash flows. Further, our ability to ~~assure~~expand ~~its~~our ~~future~~activities ~~financial~~into ~~stability~~new areas will depend, among other things, on our ability to obtain funding from IESA or other sources.

If Additionally, ~~IESA~~although Atari is ~~unable~~a toseparate ~~complete~~and ~~its~~independent ~~action~~legal ~~plan~~entity and ~~address~~we ~~its~~are ~~liquidity~~not ~~problems~~a ~~and~~party to, ~~fund~~or ~~its working~~a ~~capital~~guarantor ~~needs~~of, ~~IESA~~and ~~would~~have ~~likely~~no beobligations ~~unable~~or toliability ~~fund~~in ~~its~~respect ~~and~~of ~~its subsidiaries~~IESA’s ~~video game~~indebtedness ~~development~~(except ~~operations,~~that ~~including~~we ~~those~~have ofguaranteed ~~Atari~~the ~~Interactive.~~Beverly, ~~Our~~MA ~~results~~lease obligation of ~~operations~~Atari ~~could~~Interactive), bebecause ~~materially~~IESA ~~impaired~~owns ifthe ~~IESA~~majority ~~fails~~of toour ~~fund~~common ~~Atari Interactive~~stock, aspotential ~~any~~investors ~~delay~~and orcurrent ~~cessation~~and ~~in product~~potential ~~development~~business/trade ~~could~~partners ~~materially~~may ~~decrease~~view ~~our~~IESA’s ~~revenue~~financial ~~from~~situation ~~the~~as ~~distribution~~relevant ofto ~~Atari~~an ~~Interactive~~assessment ~~and IESA~~of ~~products~~Atari. Therefore, Ifif ~~the~~IESA ~~above~~has ~~contingencies~~negative ~~occurred~~financial results, weit ~~probably~~may ~~would~~taint beour ~~forced~~relationship towith ~~take~~our ~~actions~~suppliers ~~that~~and ~~could~~distributors, ~~result~~damage inour abusiness ~~significant~~reputation, ~~reduction~~affect inour ~~the~~ability ~~size~~to ofgenerate ~~our~~business ~~operations~~ and ~~could~~enter into ~~have~~agreements ~~a material~~on ~~adverse~~financially ~~effect~~favorable onterms, and otherwise impair our ~~revenue~~ability ~~and~~to ~~cash~~raise ~~flows~~and generate capital.

~~Additionally~~ On April 4, ~~although~~2007, weIESA ~~are~~entered ainto ~~separate~~an ~~and~~agreement ~~independent~~with ~~legal~~Bruno ~~entity~~Bonnell, ~~and~~its wefounder, ~~are~~CEO, ~~not~~and ~~a party~~the ~~to,~~Chairman orof aits ~~guarantor of~~Board, ~~and~~under ~~have~~which noMr. Bonnell ~~obligations~~agreed orto ~~liability~~resign infrom ~~respect~~his ofduties ~~IESA’s~~as ~~indebtedness~~a Director and ~~(except~~CEO ~~that~~of weIESA ~~have~~and ~~guaranteed~~from all the ~~Beverly,~~offices MAhe ~~lease~~holds ~~obligation~~with subsidiaries of IESA, including Atari ~~Interactive),~~and ~~because~~its ~~IESA~~subsidiaries. ~~owns~~Mr. Bonnell was also the ~~majority~~Chairman of our ~~common stock~~Board, ~~potential~~our ~~investors~~Chief ~~and~~Creative ~~current~~Officer and ~~potential~~our ~~business/trade~~Acting ~~partners~~Chief ~~may~~Financial ~~view~~Officer, ~~IESA’s~~and ~~financial~~previously ~~situation~~had asbeen ~~relevant~~our Chief Executive Officer. IESA agreed to anpay ~~assessment~~Mr. Bonnell a total of ~~Atari~~approximately 3. ~~Therefore~~0 million Euros, ifincluding ~~IESA~~applicable isforeign ~~unable~~taxes. Neither toour ~~address~~Board ~~its~~of ~~financial~~Directors ~~issues,~~nor itany ~~may~~member ~~taint~~of our ~~relationship~~management ~~with~~was consulted about the agreement ~~our~~between ~~suppliers~~IESA and ~~distributors,~~Mr. Bonnell ~~damage~~or ~~our~~at ~~business~~any ~~reputation,~~time ~~affect~~requested ~~our~~any ~~ability~~of the things to ~~generate~~which Mr. Bonnell ~~business~~agreed, and ~~enter~~our ~~into~~management ~~agreements~~was onnot ~~financially~~provided ~~favorable~~with ~~terms,~~a ~~and~~copy ~~otherwise~~of ~~impair~~the ~~our~~agreement ~~ability~~until more than two months toafter ~~raise~~it was signed. Mr. Bonnell resigned as a director and ~~generate~~officer ~~capital~~of Atari, Inc. and of our subsidiaries on April 4, 2007.

Despite the fact that we did not participate in the preparation of, or know the terms of, the agreement between Mr. Bonnell and IESA, and that IESA, not we, made all the payments under that agreement, management has determined that we have benefited from this separation, and that approximately $0.8 million of the payments IESA made should be allocated to the benefit we received. Our consolidated statement of operations for the year ended March 31, 2007 reflects a charge in this amount. As we are not obligated to make any payments, this amount has been recorded as a capital contribution as of March 31, 2007.

COMPETITION

The video game software publishing industry is intensely competitive, and relatively few products achieve market acceptance. The availability of significant financial resources has become a major competitive factor in the industry primarily as a result of the increasing development, acquisition, production and marketing, as well as potential licensing, costs, required to publish quality titles. We compete with other third-party publishers of video game software, including Electronic Arts, Inc., THQ, Inc., Activision, Inc., Take Two Interactive, Inc., ~~and~~ Midway Games, Inc., Sega Corporation, Ubisoft Entertainment, SA, and Vivendi SA, among others. Most of these companies are substantially larger than we are, and at least some of them have far greater financial resources than we currently have. In addition, we compete with first-party publishers such as Sony, Nintendo, and Microsoft, which in some instances publish their own products in competition with third-party publishers.

Atari Interactive has granted us a license to use the name “Atari” until 2013 for software video games in the United States, Canada, and Mexico. We believe that the Atari brand, which has a heritage deeply rooted in innovation and is largely credited with launching the video game industry, continues to carry a level of recognition that can provide a competitive advantage. Unlike many of our competitors, our Atari brand can be seen as three separate entities—a pop icon, a classic gaming original and a modern interactive entertainment company. This enhances our opportunities to attract partnerships, talent and other vehicles, providing a distinct advantage against our competitors.

~~We believe that a number of additional factors provide us with competitive opportunities in~~12 the industry, including our extensive catalogue of multi-platform products, strength in the mass-market, and strong sales forces in the United States, Canada and Mexico and, through IESA, in Europe, Asia and other regions. We believe that popular franchises such as Test Drive and RollerCoaster Tycoon, along with the catalog of classic Atari Games, as well as attractive licenses, such as The Matrix, Dragon Ball Z and Dungeons & Dragons, provide us with a solid competitive position in the marketing of our products.

We believe that a number of additional factors provide us with competitive opportunities in the industry, including our catalogue of multi-platform products, strength in the mass-market, and strong sales forces in the United States, Canada, and Mexico and, through IESA, in Europe, Asia and other regions. We believe that popular franchises such as Test Drive and RollerCoaster Tycoon, along with the catalog of classic Atari Games, as well as attractive licenses, such as Dragon Ball Z and Dungeons & Dragons, provide us with a solid competitive position in the marketing of our products.

In our distribution business, we compete with both large national distributors and smaller regional distributors. We also compete with the major entertainment software companies that distribute over the internet or directly to retailers. Most of our competitors have greater financial and other resources than we do, and are able to carry larger inventories and provide more comprehensive product selection than we can.

SEASONALITY

Our business is highly seasonal with sales typically significantly higher during the calendar year-end holiday season.

SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

We operate in three reportable segments: publishing, distribution and corporate. Please see the discussion regarding segment reporting in Note 1821 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report.

12 Please see Note 21 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report, for geographic information with respect to our revenues from external customers and our long-lived assets.

Please see Note 18 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report, for geographic information with respect to our revenues from external customers and our long-lived assets.

ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Our business has contracted significantly.

Due primarily to our limited funds, during the past two years we have reduced substantially our expenditures on product development and sold the intellectual property related to some game franchises that have generated substantial revenues for us in the past. This has ~~both~~ materially reduced our revenues ~~and made distribution, which carries lower margins, a larger percentage of our business~~. Because of the reduction in available product, as well as unusually difficult market conditions, in fiscal ~~2006~~2007, our net revenues were only $~~218~~122.73 million compared with net revenues of $~~407~~206.8 million in the prior year and $~~468~~343.98 million in the year before that. Because ~~Primarily because~~ of this, wedecrease ~~had~~in anrevenues, ~~operating~~among ~~loss~~other ofthings including a $6854.61 million charge for impairment ~~the~~of ~~year~~goodwill ~~ended~~in ~~March 31,~~fiscal ~~2006~~2007, ~~compared~~we ~~with operating~~have ~~profits~~had ofsignificant ~~$6.3 million~~operating ~~and~~losses ~~$7.6 million~~over ~~for~~ the ~~2005~~past several ~~and 2004 fiscal~~ years~~, respectively~~. Further, we have substantially fewer titles available for release in fiscal ~~2007~~2008 than has historically been the case. ~~We are reviewing our operating strategy, and it is likely that we will increasingly focus on~~ ~~publishing products developed by others as a source of revenue. However, we cannot be sure that any revised operating strategy will be successful in returning us to profitability.~~

We need to raise additional funds.

In recent years, our losses have been substantial. We currently have a credit facility that is limited to $15.0 million and, given our decrease in product sales, is further limited by a borrowing availability that ties to outstanding accounts receivable. Based on current assessments, we will need to raise funds in order to support our calendar 2007 holiday season cash needs and our on-going product development efforts and other operational needs. In order to complete a redirection of our product portfolio and to increase our slate of titles in fiscal 2008 and 2009, we will need to make a significant investment in product development. This investment is critical in order to maintain and grow our business, keep current with changing technology (including new hardware platforms), attract premier development partners, and secure profitable intellectual properties. We may raise funds in any number of ways, including through the issuance of debt or equity, or through other financing. If we borrow funds, we likely will be obligated to make periodic interest or other debt service payments, and the terms of this debt may impose burdensome restrictions on our ability to operate our business. If we seek financing through the sale of equity securities, our current stockholders will suffer significant dilution in their percentage ownership of common stock. Additionally, due to the relative size of Atari, our majority ownership by a financially challenged foreign entity and our history of significant losses, we are not certain as to our ability to raise additional funds in the future or under what terms funds would be available. If we are not successful in raising funds, we will have to take various actions that may include, but not be limited to, a reduction in our expenditures for internal and external new product development, further reduction in overhead expenses, and further sales of intellectual property. These actions,

should they become necessary, will probably result in further reduction in our size of operations. Such fund raising needs are being discussed with our majority stockholder, among others, with respect to appropriate timing, structure, and amount of such funding.

Our revenues will decline and our competitive position will be adversely affected if we are unable to introduce successful new products on a timely basis.

Our performance in the video game software publishing business depends on the timely introduction of successful new products, sequels or enhancements of existing products to replace declining revenues from older products. Our inability to introduce compelling new products, sequels or enhancements, or significant delays in their release, ~~could~~have materially and adversely ~~affect~~affected the ultimate success of our products and, in turn, our business, results of operations and financial condition. Our product development activities over the last fiscal year and in the coming fiscal year have been and will be less robust than our historical product development, resulting in fewer product releases. This increases the adverse effects we suffer if particular products we release are not successful. The process of introducing new products, sequels or product ~~enhancements~~ enhancements is extremely complex, time consuming and expensive~~, and will become more complex as new platforms and technologies emerge~~. Competitive factors in our industry demand that we create increasingly sophisticated products, which in turn makes it difficult to produce and release compelling products on a predictable schedule. ~~If we introduce a relatively limited number of products in any period,~~ ~~the failure of such products to achieve strong market acceptance adversely affects our results of operations.~~

~~The~~Our ~~loss~~rights ofto ~~Wal-Mart,~~use ~~GameStop/Electronics~~the ~~Boutique,~~“Atari” ~~Target,~~name orare ~~Best Buy as key customers could negatively affect our business~~limited.

~~Our~~ The ~~sales~~“Atari” toname ~~Wal-Mart,~~has ~~GameStop/Electronics~~been ~~Boutique,~~an ~~Target~~important part of our branding strategy, and ~~Best~~we ~~Buy~~believe ~~accounted~~it provides ~~for~~us with an important competitive advantage in dealing with video game developers and in ~~approximately~~distributing 31our products.1% However, ~~13.0%~~the “Atari” name is owned by a subsidiary of IESA, ~~12.8%~~which has licensed us to use the name with regard to video games in the United States, Canada, and 9Mexico until 2013.~~1%,~~ ~~respectively~~Therefore, ofwe ~~net~~are ~~revenues~~limited ~~for~~both in how we can exploit the ~~year~~“Atari” ~~ended~~name ~~March~~and how long we ~~31,~~will ~~2006~~be able to use it. ~~Our~~We ~~gross~~have ~~accounts~~no ~~receivable~~agreements ~~from~~or ~~these~~understandings ~~retailers~~that ~~were~~assure ~~approximately~~us ~~$6.2 million,~~that ~~$11.1~~we will be ~~million,~~able ~~$6.4 million,~~to ~~and~~expand ~~$4.8 million,~~the ~~respectively,~~purposes asfor ofwhich ~~March 31,~~we ~~2006.~~can ~~Our~~use ~~business,~~the ~~results of~~“Atari” ~~operations~~name ~~and~~or ~~financial~~extend ~~condition~~the ~~would~~period during which we will be ~~adversely~~able ~~affected~~to ~~if:~~use it.

Lack of funds and limits on our license rights may limit our ability to expand into new business activities.

Our management has been developing a strategic plan that would expand our activities into new, emerging aspects of the video game industry, including casual games, online sites, and digital downloading. In addition, they are considering having us try to license the “Atari” name for use in products other than video games. These activities would be used to replace some of the revenues we lost as we reduced our conventional video game development and publishing activities. However, our ability to do those things will require that we have a source of funding and some of them will require expansion and extension of our rights to use the “Atari” name. We do not have a source even of the funds we expect to need for our current operations, and we have no agreements or understandings regarding expansion or extension of licenses. Therefore, even if our Board were to approve a strategic plan that contemplates our expanding our activities into new areas (whether or not those currently contemplated by our management), there is a significant possibility we would not be able to implement that strategic plan.

The loss of Wal-Mart, GameStop, Target, or Best Buy as key customers could negatively affect our business.

Our sales to Wal-Mart, GameStop, Target, and Best Buy accounted for approximately 25.1%, 19.2%, 10.3%, and 9.3%, respectively, of net revenues (excluding international royalty, licensing, and other income) for the year ended March 31, 2007. Our net accounts receivable from these retailers were approximately $0.2 million, $2.2 million, $0.2 million, and $1.3 million, respectively, as of March 31, 2007. Our business, results of operations and financial condition would be adversely affected if:

•		we lost any of these retailers as a customer;

•		any of these retailers purchased significantly fewer products from us;

•		we were unable to collect receivables from any of these retailers on a timely basis or at all; or

•		we experienced any other adverse change in our relationship with any of these retailers.

~~We cannot assure you that Wal-Mart, GameStop/Electronics Boutique, Target, and Best Buy will~~14 continue to use us as a major supplier of video game software, or at all. We have experienced difficulties in collecting on certain accounts. We cannot guarantee that we will not continue to have such difficulties and, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient.

We cannot assure you that Wal-Mart, GameStop, Target, and Best Buy will continue to use us as a major supplier of video game software, or at all. We have experienced difficulties in collecting on certain accounts. We cannot guarantee that we will not continue to have such difficulties and, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient.

Our results of operations and competitive position may be adversely affected if we are unable to anticipate and adapt to rapidly changing technology, including new console technology.

The video game software industry is characterized by rapidly changing technology. The introduction of new technologies, ~~including~~can ~~new~~render ~~console~~our ~~technology~~previously released products obsolete or unmarketable. Therefore, ~~software~~we ~~media~~must ~~formats~~continually anticipate the emergence of, and adapt our products ~~delivery~~to, ~~channels~~new ~~could~~technologies ~~render~~and ~~our~~systems. ~~previously~~When ~~released~~we ~~products~~choose ~~obsolete~~to publish or ~~unmarketable.~~develop Wea ~~are~~product for a new system, ~~continuing~~we may need to ~~devote~~make ~~significant~~a substantial development ~~resources~~investment toone or two years in advance of when we actually ship products for ~~PlayStation~~that 2system. If ~~consumer demand~~we ~~for~~develop ~~titles~~products for ~~this~~a ~~platform~~new ~~declines~~system asthat ais ~~result~~ultimately unpopular, ofwe ~~the~~may ~~next~~not ~~generation~~be ofable ~~console~~to ~~games systems~~recoup our investment as quickly as anticipated, or ~~generally~~at all. Conversely, if we ~~may~~choose ~~experience~~not ~~lower~~to ~~than~~publish ~~expected~~products ~~sales~~for ~~from~~a ~~products~~new ~~designed~~system ~~for~~that ~~this~~is ultimately popular, our ~~platform~~competitive position may be adversely affected.

We must continually anticipate the emergence of, and adapt our products to, new technologies and systems. In addition, the development cycle for products designed to operate on new systems has been defined by an increased rate of change and complexity in the technological innovations of video game hardware and software. When we choose to publish or develop a product for a new system, we may need to make a substantial development investment one or two years in advance of when we actually ship products for that system. If we develop products for a new system that is ultimately unpopular, our net revenues from that product may be less than expected and we may not be able to recoup our investment as quickly as anticipated, if at all. Conversely, if we choose not to publish products for a new system that is ultimately popular, our competitive position may be adversely affected.

A number of our competitors have developed or are developing online games. Increased consumer acceptance and increased availability of online games may result in a decline in platform-based software and negatively impact sales of our products. Direct sales of software over the Internet by competitors could materially adversely affect our distribution business.

We need to raise additional capital.

In recent years, our profits have been minimal compared to the profits reported by our industry competitors, and in the past year we have generated significant losses. We do not currently have a credit facility. Based on current assessments, we will need to raise capital in order to support our product development efforts and other operational needs. In order to complete the redirection of our product portfolio and to increase our slate of titles in fiscal 2007 and 2008, we will need to make a significant investment in product development. This investment is critical in order to maintain and grow our business, keep current with changing technology (including new hardware platforms), attract premier development partners, and secure profitable intellectual properties. We may raise capital in any number of ways, including through the issuance of debt or equity, or through other financing. If we borrow funds, we likely will be obligated to make periodic interest or other debt service payments, and the terms of this debt may impose burdensome restrictions on our ability to operate our business. If we seek financing through the sale of equity securities, our current stockholders will suffer significant dilution in their percentage ownership of common stock. Additionally, due to the relative size of Atari, our majority ownership by a financially challenged foreign entity and our history of significant losses, we are not certain as to our ability to raise additional capital in the future or under what terms capital would be available. Specifically, if we are not successful in raising capital, we will have to take various actions that may include, but not be limited to, a reduction in our expenditures for internal and external new product development, further reduction in overhead expenses, and further sales of intellectual property. These actions, should they become necessary, will probably result in further reduction in our size of operations. Such capital raising needs are discussed with our majority stockholder with respect to appropriate timing and structure of such funding.

We may be unable to develop and publish new products if we are unable to secure or maintain relationships with leading independent video game software developers.

We As we have discontinued our internal development operations in fiscal 2007, we are even more dependent than in prior years upon leading independent software ~~developers,~~ ~~as we have scaled back our internal development capabilities~~developers. Consequently, our ~~success~~ success depends ~~in part~~ on our continued ability to obtain or renew product development agreements with leading independent video game software developers. Particularly in view of our financial situation, we may not be able to obtain or renew product development agreements on favorable terms, or at all, including obtaining the rights to sequels of successful products which were originally developed for us by leading independent video game software developers. Many of our competitors have greater financial resources and access to capital than we do, which puts us at a competitive disadvantage when bidding to attract leading independent video game software developers to enter into publishing agreements with us. WeAmong ~~may~~other bethings, ~~unable~~we are severely limited in our ability to pay ~~secure~~advance royalties or ~~maintain~~otherwise ~~relationships~~provide ~~with~~pre-development financing to developers. Also, many leading independent video game software developers ifare ~~our~~small ~~competitors~~companies ~~can~~with ~~offer~~a ~~them~~few ~~better~~key ~~shelf~~individuals ~~access,~~without ~~better~~whom ~~marketing~~a ~~support,~~project ~~more~~may ~~development~~be ~~funding,~~difficult ~~higher~~or ~~royalty~~impossible ~~rates,~~to ~~or other advantages~~complete. ~~Usually~~Consequently, ~~our~~we ~~agreements~~are ~~with~~exposed ~~independent~~to the ~~software~~risk that these developers ~~are~~will ~~easily~~go ~~terminable, often~~out ~~without~~of ~~notice~~business before completing a project, ifor ~~either~~simply ~~party~~cease work ~~declares~~on ~~bankruptcy,~~a ~~becomes~~project ~~insolvent,~~for ~~ceases~~which we have hired them.

operations or materially breaches its agreement and fails to cure that breach within a designated time frame. In addition, many leading independent video game software developers have limited financial resources. Many are small companies with a few key individuals without whom a project may be difficult or impossible to complete. Consequently, we are exposed to the risk that these developers will go out of business before completing a project, or simply cease work on a project for which we have hired them.

If we are unable to maintain or acquire licenses to intellectual property, our operating results will be adversely impacted.

Many of our products are based on or incorporate intellectual property owned by others. For example, some of our titles are based on key television and film licenses. We expect that many of the products we publish in the future will also be based on intellectual property owned by others. The rights we enjoy to licensed intellectual property may vary based on the agreement we have with the licensor. Competition for these licenses is intense and many of our competitors have greater resources to take advantage of opportunities for such licenses. If we are unable to maintain our current licenses and obtain additional licenses with significant commercial value, ~~we believe~~ our ~~sales~~ sales will decline. In addition, obtaining licenses for popular franchises owned by others could ~~require~~ require us to expend significant resources and the licenses may require us to pay relatively high ~~royalty~~ royalty rates. If ~~these~~ titles exploiting particular licenses are ultimately unpopular, we may not recoup investments ~~our~~we ~~investment~~make ~~made~~ to obtain such licenses. Furthermore, in many instances we do not have exclusive licenses for intellectual property owned by others. In these cases, we may face direct competition from other publishers holding a similar ~~license~~licenses. ~~Additionally, many of the products we distribute are products that are~~ published by IESA or its subsidiaries, such as certain Hasbro games. In fiscal 2006, IESA sold several properties that we distributed, including selling back to Hasbro the rights to certain properties previously under the Hasbro license. If IESA continues to dispose of such properties, we will continue to lose revenue.

Termination or modification of our agreements with hardware manufacturers will adversely affect our business.

We are required to obtain a license to develop and distribute software for each of the video game consoles. We currently have licenses from Sony to develop products for PlayStation~~, PlayStation~~ 2, and PSP, from Nintendo to develop products for Game Boy Advance, GameCube, and DS and from Microsoft to develop products for Xbox and Xbox 360. We ~~expect~~ toare ~~obtain~~currently negotiating licenses for Nintendo Wii and Sony PlayStation 3 ~~during fiscal 2007~~. These licenses are non-exclusive, and as a result, many of our competitors also have licenses to develop and distribute video game software for these systems. These licenses must be periodically renewed, and if they are not, or if any of our licenses are terminated or adversely modified, we may not be able to publish games for ~~such~~ the applicable platforms or we may be required to do so on less attractive terms. In addition, our contracts with these manufacturers often grant them approval rights over new products and control over the manufacturing of our products. In some circumstances, this could adversely affect our business, results of operations or financial condition by:

•

terminating a project for which we have expended significant resources;

•

leaving us unable to have our products manufactured and shipped to customers;

•

increasing manufacturing lead times and expense to us over the lead times and costs we could achieve if we were able to manufacture our products independently;

•

delaying the manufacture and, in turn, the shipment of products; and

•

requiring us to take significant risks in prepaying for and holding an inventory of products.

~~The loss of our senior management and skilled personnel could negatively affect our business.~~16

Our future success will depend to a significant degree upon the performance and contribution of our senior management team and upon our ability to attract, motivate and retain highly qualified employees with technical, management, marketing, sales, product development, creative and other skills. In the video game software industry, competition for highly skilled and creative employees is intense and costly. We expect this competition to continue for the foreseeable future, and we may experience increased costs in order to attract and retain skilled employees. We cannot provide any assurance that that we will be successful in attracting and retaining skilled personnel. Our business, operating results and financial condition could be materially and adversely affected if we lost the services of senior management or key technical or creative employees or if we failed to attract additional highly qualified employees.

The loss of our senior management and skilled personnel could negatively affect our business.

Our future success will depend to a significant degree upon the performance and contribution of our senior management team and upon our ability to attract, motivate and retain highly qualified employees with technical, management, marketing, sales, product development, creative and other skills. In the video game software industry, competition for highly skilled and creative employees is intense and costly. We expect this competition to continue for the foreseeable future, and we may experience increased costs in order to attract and retain skilled employees. We cannot provide any assurance that we will be successful in attracting and retaining skilled personnel. Our business, operating results and financial condition could be materially and adversely affected if we lost the services of senior management or key technical or creative employees or if we failed to attract additional highly qualified employees. This has become increasingly difficult, as we have reduced our workforce twice in the last eighteen months.

If returns and other concessions given to our customers exceed our reserves, our business may be negatively affected.

To cover returns and other concessions, we establish reserves at the time we ship our products. We estimate the potential for future returns and other concessions based on, among other factors, management’s evaluation of historical experience, market acceptance of products produced, retailer inventory levels, budgeted customer allowances, the nature of the title and existing commitments to customers. While we are able to recover the majority of our costs when third-party products we distribute are returned, we bear the full financial risk when our own products are returned. In addition, the license fees we pay Sony, Microsoft and Nintendo are non-refundable and we cannot recover these fees when our products are returned. Although we believe we maintain adequate reserves with respect to product returns and other concessions, we cannot be certain that actual returns and other concessions will not exceed our reserves, which could adversely affect our business, results of operations and financial condition.

Significant competition in our industry could adversely affect our business.

The video game software market is highly competitive and relatively few products achieve significant market acceptance. Currently, we compete primarily with other publishers of video game software for both video game consoles and PCs. Our competitors include Activision, Inc., Electronic Arts, Inc., Midway Games, Inc., Take Two Interactive, Inc., ~~and~~ THQ, Inc., Sega Corporation, Ubisoft Entertainment, SA, and Vivendi SA, among others. InMost of these companies are substantially larger and have better access to funds than us. In addition, console manufacturers including Microsoft, Nintendo, and Sony publish products for their respective platforms. Media companies and film studios, such as Warner Bros., are increasing their focus on the video game software market and may become significant competitors and/or may increase the price of their outbound licenses. Current and future competitors may also gain access to wider distribution channels than we do. As a result, these current and future competitors may be able to:

•

respond more quickly than we can to new or emerging technologies or changes in customer preferences;

•

carry larger inventories than we do;

•

undertake more extensive marketing campaigns than we do;

•

adopt more aggressive pricing policies than we can; and

•

make higher offers or guarantees to software developers and licensors than we can.

We may not have the resources required for us to respond effectively to market or technological changes or to compete successfully with current and future competitors. Increased competition may also result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations or financial condition. ~~We cannot assure you that we will be able to compete successfully against our~~ ~~current or future competitors or that competitive pressures will not have a material adverse effect on our business, results of operations and financial condition.~~

Retailers of our products typically have a limited amount of shelf space and promotional resources. Therefore, ~~and~~ there is ~~intense~~increased competition ~~among~~amongst ~~consumer~~the ~~interactive~~publishers ~~entertainment~~to ~~software products~~deliver ~~for~~a high quality ~~retail~~product ~~shelf~~that ~~space~~merits ~~and~~retail ~~promotional support from retailers~~acceptance. To the extent that the number of products and platforms increases, competition for shelf space may intensify and may require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers ~~and distributors~~ are in a strong ~~stronger~~ position to ~~negotiate favorable terms of~~ sale, including price discounts, price protection, marketing and display fees and product return policies. We cannot be certain that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support on acceptable terms. A prolonged failure in this regard may significantly harm our business and financial results.

~~Revenues from our distribution business may decline as competition increases and Internet~~17 ~~technology improves.~~

During the years ended March 31, 2005 and March 31, 2006, net revenues from our distribution business were approximately 13.3% and 24.3%, respectively, of our total net revenues. This increase as a percentage of net revenues is primarily a result of a decline in our development and publishing activities, which makes us increasingly dependent on our distribution activities. New video game systems and electronic delivery systems may also be introduced into the software market and potential new competitors may enter the software development and distribution market, resulting in greater

~~competition.~~negotiate ~~Revenues~~favorable ~~from~~terms ~~our~~of ~~distribution~~sale, ~~business~~including ~~may~~price bediscounts, ~~adversely~~price ~~affected~~protection, asmarketing ~~Internet~~and ~~technology~~display isfees ~~improved~~and toproduct ~~enable~~return ~~consumers~~policies. toWe ~~purchase~~cannot ~~and~~be ~~download~~certain ~~full-version~~that ~~software~~retailers ~~products~~will continue to purchase our products or ~~order~~to provide our products ~~directly~~with ~~from~~adequate ~~publishers~~levels orof ~~from~~shelf ~~unauthorized~~space orand promotional ~~illegal~~support ~~sources~~on ~~over~~acceptable ~~the~~terms. A prolonged failure in this regard may significantly harm ~~Internet~~our business and financial results.

Revenues from our distribution business may decline if the products which we distribute for third-party developers become unavailable to us.

As part of our distribution business, we earn revenues by distributing to retailers our own products and products of others, including products published by our competitors. We cannot assure you that these competitors will continue to provide us with their products for distribution to our mass merchant customers. Our inability to obtain software titles developed or published by our competitors, coupled with our inability to obtain these titles from other distributors, could have a material adverse effect on our relationships with retailers and our ability to obtain shelf space for our own products, as well as our own revenues that we earn from our distribution activities. This, in turn, could have a material adverse effect on our business, results of operations and financial condition.

If our distribution arrangements with IESA are adversely modified or terminated, we may lose revenue or incur disruption in the distribution of our products.

Pursuant to agreements we have in place with IESA, we distribute products on their behalf in the United States, Canada, and Mexico, and IESA distributes products on our behalf in Europe, Asia and certain other regions throughout the world. If these agreements, or product licenses to which IESA is a party, are terminated or amended in a manner adverse to us, we may, as applicable:

•

obtain new distribution arrangements for our products which may be on less favorable terms;

•

lose revenue from the distribution of IESA’s products;

• experience difficulties or other delays in the distribution of our products outside the United States, Canada, and Mexico;

• incur an increase in the cost of distributing our products outside the United States, Canada, and Mexico; or

•

incur problems with retailers to whom we distribute IESA’s products or to whom IESA distributes our products.

Revenues from our distribution business may decline as competition increases and Internet technology improves.

During the years ended March 31, 2006 and March 31, 2007, net revenues from our distribution business were approximately 25.7% and 14.4%, respectively, of our total net revenues. Our distribution revenues as a percentage of net revenues is driven by the mix between publishing and distribution sales. Over the past three years our funding constraints have reduced our publishing and distribution activities, causing shifts in this mix.

Revenues from our distribution business may decline if the products which we distribute for IESA are reduced or products we distribute for third-party developers become unavailable to us.

As part of our distribution business, we earn revenues by distributing to retailers our own products and products of others, including products published by IESA and by our competitors. We cannot assure you that IESA will not reduce the rate at which it develops or obtains rights with regard to video games or that our competitors will continue to provide us with their products for distribution to our mass merchant customers. Our inability to obtain software titles developed or published by IESA or by our competitors, coupled with our inability to obtain these titles from other distributors, could have a material adverse effect on our relationships with retailers and our ability to obtain shelf space for our own products, as well as reducing the revenues that we earn from our distribution activities. This, in turn, could have a material adverse effect on our business, results of operations and financial condition.

We may face increased competition and downward price pressure if we are unable to protect our intellectual property rights.

Our business is heavily dependent upon our confidential and proprietary intellectual property. We sell a significant portion of our published software under licenses from independent ~~software~~ software developers, and, in these cases, we do not acquire the copyrights for the underlying work. We rely primarily on a combination of confidentiality and non-disclosure agreements, patent, copyright, trademark and trade secret laws, as well as other proprietary rights laws and legal methods, to protect our proprietary rights and the intellectual property rights of our developers. However, current U.S. and international laws afford us only limited protection and amendments to such laws or newly enacted laws may weaken existing protections. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our products or franchises, or obtain and use information that we regard as proprietary. Software piracy is also a persistent problem in the video game software industry. Policing unauthorized use of our products is extremely difficult because video game software can be easily duplicated and disseminated. Furthermore, the laws of some foreign countries may not protect our proprietary rights to as great an extent as U.S. law. Our business, results of operations and financial condition could be adversely affected if a significant amount of unauthorized copying of our products were to occur or if other parties develop products substantially similar to our products. We cannot assure you that our attempts to protect our proprietary rights will be adequate or that our competitors will not independently develop similar or competitive products.

~~We may face intellectual property infringement claims which would be costly to resolve.~~18

~~not~~significant ~~assert~~amount ~~infringement~~of ~~claims~~unauthorized ~~against~~copying usof inour ~~the~~products ~~future~~were ~~with respect~~ to ~~past,~~occur ~~current~~ or ~~future products.~~if ~~There~~other ~~has been substantial litigation in the industry regarding copyright, trademark and~~parties ~~other~~develop ~~intellectual~~products ~~property~~substantially ~~rights.~~similar ~~We have sometimes initiated litigation~~ to ~~assert~~ our ~~intellectual~~ ~~property rights~~products. ~~Whether~~We ~~brought~~cannot byassure oryou ~~against~~that ~~us,~~our ~~these~~attempts ~~claims can be time consuming,~~to ~~result~~protect inour ~~costly~~proprietary ~~litigation~~rights ~~and~~will ~~divert~~be ~~management’s~~adequate ~~attention~~or ~~from~~that our ~~day-to-day~~competitors ~~operations,~~will ~~which~~not independently ~~can~~develop ~~have~~similar aor ~~material~~competitive ~~adverse effect on our business, operating results and financial condition~~products.

We may face intellectual property infringement claims which would be costly to resolve.

As the number of available video game software products increases, and their functionality overlaps, software developers and publishers may increasingly become subject to infringement claims. We are not aware that any of our products infringe on the proprietary rights of third parties. However, we cannot provide any assurance that third parties will not assert infringement claims against us in the future with respect to past, current or future products. There has been substantial litigation in the industry regarding copyright, trademark and other intellectual property rights. We have sometimes initiated litigation to assert our intellectual property rights. Whether brought by or against us, these claims can be time consuming, result in costly litigation and divert management’s attention from our day-to-day operations, which can have a material adverse effect on our business, operating results and financial condition.

We may be burdened with payment defaults and uncollectible accounts if our customers do not or cannot satisfy their payment obligations.

Distributors and retailers in the video game software industry have, from time to time, experienced significant fluctuations in their businesses, and a number of them have become insolvent. The insolvency or business failure of any significant retailer or distributor of our products could materially harm our business, results of operations and financial condition. We typically make sales to most of our retailers and some distributors on unsecured credit, with terms that vary depending upon the customer’s credit history, solvency, credit limits and sales history. In addition, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could significantly harm our business and results of operations.

Our software is subject to governmental restrictions or rating systems.

Legislation is periodically introduced at the local, state and federal levels in the United States and in foreign countries to establish systems for providing consumers with information about graphic violence and sexually explicit material contained in video game software. In addition, many foreign countries have laws that permit governmental entities to censor the content and advertising of video game software. We believe that mandatory government-run rating systems may eventually be adopted in many countries that are potential markets for our products. We may be required to modify our products or alter our marketing strategies to comply with new regulations, which could increase development costs and delay the release of our products in those countries. Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business.

In addition to such regulations, certain retailers have in the past declined to stock some of our and our competitors’ video game products because they believed that the content of the packaging artwork or the products would be offensive to the retailer’s customer base. Although to date these actions have not impacted our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business.

We may become subject to litigation which could be expensive or disruptive.

Similar to our competitors in the video game software industry, we have been and will likely become subject to litigation. Such litigation may be costly and time consuming and may divert management’s attention from our day-to-day operations. In addition, we cannot assure you that such litigation will be ultimately resolved in our favor or that an adverse outcome will not have a material adverse effect on our business, results of operations and financial condition.

RISKS RELATED TO OUR CORPORATE STRUCTURE AND FINANCING ARRANGEMENTS

Our performance may be affected by IESA’s performance and financial stability.

Historically, IESA has incurred significant continuing operating losses and ishas been highly leveraged. ~~IESA has~~On ~~taken steps to improve its financial situation, including (i)~~September ~~restructuring its outstanding debt obligations such that the debt amount is reduced and the debt maturity schedule is more favorable~~12, ~~(ii) reducing operating expenses~~2006, ~~(iii) raising~~IESA ~~capital~~announced bya ~~selling~~multi-step ~~assets~~debt ~~(such~~restructuring ~~as the Games.com URL)~~plan, ~~(iv) entering into banking arrangements to fund operations and position itself for~~ ~~the~~subject ~~new hardware cycle, and (v) entering into production fund agreements~~ to ~~finance~~its ~~certain~~shareholders’ ~~game development projects. However~~approval, ~~IESA~~which ~~has~~would ~~not~~significantly ~~yet~~reduce ~~completed~~its ~~all~~debt ofand ~~the actions it plans to take in~~provide ~~order~~liquidity to ~~improve~~meet its ~~operations~~operating ~~and reduce its debt~~needs. AsOn ~~a result~~November 15, ~~IESA’s current ability to fund~~2006, ~~among~~ ~~other things, its subsidiaries’ operations is diminished. There can be no assurance that~~ IESA ~~will~~shareholders ~~complete~~approved ~~sufficient~~the ~~actions to assure its future financial stability.~~debt

~~IESA distributes our products in Europe, Asia, and certain other regions, and pays us~~19 royalties in this respect. IESA (through its subsidiaries) also develops products which we distribute in the U.S., Canada, and Mexico and for which we pay royalties to IESA. Both IESA and Atari Interactive are material sources of products which we market in the United States, Canada and Mexico. Atari Interactive was the source of approximately 31% of our fiscal 2006 net publishing product revenue

restructuring plan, permitting IESA to execute on this plan. As of the date of this report, IESA has raised approximately 74 million Euros, of which approximately 45 million Euros has paid down outstanding short-term and long-term wedebt ~~generated~~and has provided approximately 8%20 million Euro of ~~our~~liquidity ~~fiscal~~for ~~2006~~working ~~net~~capital needs. ~~revenue~~As ~~from~~of ~~royalties~~the ondate of this report, IESA has completed its debt restructuring plan; however, its current ability to fund, among other things, its subsidiaries’s operations remains limited. Our ~~distribution~~results of operations could be materially impaired if IESA fails to fund Atari Interactive, as any delay or cessation in product development could materially decrease our revenue from the distribution of Atari Interactive and IESA products. inIf ~~Europe,~~the ~~Asia~~above contingencies occurred, we probably would be forced to take actions that could result in a significant reduction in the size of our operations and ~~certain~~could ~~other~~have ~~regions.~~a material adverse effect on our revenue and cash flows

If IESA isdistributes ~~unable~~our toproducts ~~complete~~in ~~its~~Europe, ~~action~~Asia, ~~plan~~ and ~~address~~certain ~~its~~other ~~liquidity~~regions, ~~problems~~ and ~~fund~~pays ~~its~~us ~~working~~royalties ~~capital~~in ~~needs,~~this respect. IESA ~~would~~also ~~likely~~develops be(through ~~unable to fund~~ its ~~and its~~ subsidiaries’) ~~video~~products ~~game~~which we ~~development~~distribute ~~operations,~~in ~~including~~the ~~those~~U.S., ofCanada, ~~Atari~~and ~~Interactive.~~Mexico ~~Our~~and ~~results~~for ofwhich ~~operations~~we ~~could~~pay ~~be materially~~royalties ~~impaired~~to if IESA. ~~fails~~Both toIESA ~~fund~~ and Atari Interactive, asare ~~any~~material ~~delay~~sources orof ~~cessation~~products inwhich ~~product development~~we ~~could~~market ~~materially~~in ~~decrease our revenue from~~ the ~~distribution~~United ofStates, ~~Atari~~Canada, ~~Interactive~~ and ~~IESA products~~Mexico. IfDuring ~~the~~fiscal ~~above contingencies occurred~~2007, weinternational ~~probably~~royalties ~~would~~earned befrom ~~forced~~IESA towere ~~take~~the ~~actions that~~source ~~could~~of ~~result~~4% inof aour net ~~significant~~revenues. ~~reduction~~Additionally, inIESA ~~the~~and ~~size~~its ofsubsidiaries ~~our~~(primarily ~~operations~~Atari ~~and~~Interactive) ~~could~~were ~~have a~~the ~~material~~source ~~adverse~~of ~~effect~~approximately on38% of our net publishing product revenue ~~and~~for ~~cash~~the ~~flows~~year ended March 31, 2007.

Additionally, although we are a separate and independent legal entity and we are not a party to, or a guarantor of, and have no obligations or liability in respect of IESA’s indebtedness (except that we have guaranteed the Beverly, MA lease obligation of Atari Interactive), because IESA owns the majority of our common stock, potential investors and current and potential business/trade partners may view IESA’s financial situation as relevant to an assessment of Atari. Therefore, if IESA ishas ~~unable~~negative ~~to address its~~ financial ~~issues~~results, it may taint our relationship with our suppliers and distributors, damage our business reputation, affect our ability to generate business and enter into agreements on financially favorable terms, and otherwise impair our ability to raise and generate capital.

IESA controls us and could prevent a transaction favorable to our other stockholders.

IESA beneficially owns approximately 51% of our common stock, which gives it sufficient voting power to prevent any transaction that it finds unfavorable, including an acquisition, consolidation or sale of shares or assets that might be desirable to our other stockholders. Additionally, IESA could unilaterally approve certain transactions as a result of its majority position. IESA also has sufficient voting power to elect all of the members of our Board of Directors. Currently, ~~four~~ three of the eight members of our Board of Directors are directors, employees or former employees (within three years) of IESA or its affiliates. ~~One of the remaining four directors is currently affiliated with us. Therefore, only three of the eight directors are considered independent.~~ This concentration of control could be disadvantageous to other stockholders whose interests differ from those of IESA.

Our affiliates retain considerable control over the Atari trademarks, and their oversight or exploitation of such trademarks could affect our business.

Atari Interactive, a wholly owned subsidiary of IESA, has granted us the right to use the Atari name for software video games in the United States, Canada and Mexico until 2013. However, in addition to an initial upfront payment we made in 2003, we must pay a royalty equal to 1% of our net revenues during each of 2009 through 2013. We are subject to quality control oversight for our use of the Atari name. Any disputes over our performance under the trademark license agreement could materially affect our business. Furthermore, ~~Atari~~the ~~Interactive’s~~ use of the Atari mark ~~(either~~by ~~itself~~Atari orInteractive ~~through its affiliates~~ or other ~~third~~subsidiaries ~~parties)~~of toIESA ~~exploit products~~ could affect the reputation or value associated with the Atari mark, and ~~therefore~~ therefore materially affect our business. ~~Therefore, we are dependent upon the cooperation and business~~ ~~actions of IESA and its affiliates with regard to the Atari trademark.~~

Our restructuring efforts will create short term costs that may not be offset by increased efficiencies.

We are incurring substantial costs in connection with our restructuring efforts, including severance obligations, ~~relocation expenses,~~ advisor fees, and lease obligations for unused property. Though we anticipate that the restructuring will ultimately result in reduced general and administrative expenses and more efficient corporate operations, we can give no assurance that we will be successful in redefining our cost and operational structures in the near term. If we are not successful, we may not see cost savings that justify these measures, which may negatively ~~impact~~ impact our results of operations.

WeOur ~~have~~credit nofacility ~~revolving~~could ~~credit~~be ~~facility~~terminated.

On Since ~~May~~November 312006, ~~2006~~we ~~our~~have ~~$50.0 million~~utilized ~~revolving~~the ~~credit~~proceeds ~~facility~~of ~~with HSBC expired. However, in January 2006, HSBC suspended~~ our ~~right to borrow under the revolving~~ credit facility ~~because we were not in compliance~~ with ~~certain~~Guggenheim ~~financial covenants in the Revolving~~to ~~Credit~~fund ~~Agreement.~~our ~~Therefore,~~working incapital ~~effect~~needs, weincluding ~~have~~the ~~not~~manufacturing ~~had~~and adevelopment ~~revolving credit facility, or any other source~~ of ~~working capital financing since January 2006~~products. WeThe ~~have had discussions with possible~~credit ~~providers~~documents ofwhich ~~working capital financing, and believe that~~ we ~~could~~entered ~~arrange~~into ~~working~~with ~~capital~~Guggenheim ~~financing secured~~to byobtain ~~our~~this ~~accounts~~credit ~~receivable~~facility ~~and~~contain ~~inventory. However, the~~numerous ~~financing~~covenants ~~would likely be expensive at our current levels of accounts receivable,~~ and ~~inventory~~conditions ~~would~~which ~~likely~~may ~~not~~cause ~~provide~~a ~~adequate~~default ~~financing~~upon ~~capacity~~breach ~~to justify the cost.~~

1920

thereof by us. For the quarter ended March 31, 2007, we were not in compliance with certain financial covenants required by the credit facility; however, in May 2007, we received a waiver of the covenants effective March 31, 2007. There can be no assurance that we will be in compliance in future periods. If an event of default occurs under any credit document and Guggenheim opts not to waive such default, the credit facility may be terminated and any debt outstanding accelerated, in which case we will need to raise additional funds or seek other alternatives, many of which may adversely affect our stock price. Further, the credit facility may be terminated if we do not comply with financial and other covenants prior to our need for borrowing in the third quarter of fiscal 2008 (i.e. Nasdaq Delisting).

RISKS RELATED TO OUR COMMON STOCK

The price of our common stock is very low.

At ~~June~~ 27September 10, ~~2006~~2007, the last reported sale price of our common stock was $02.5260 per share. ~~This~~ This represents a sharp decline from the price at which it ~~once~~ traded one, two, and three years earlier. ~~The~~(adjusted ~~last~~for ~~reported~~a ~~sale~~one-for-ten ~~prices~~reverse onstock ~~June~~split ~~27,~~in ~~2005, 2004, and 2003 were $2~~2007).~~76,~~ ~~$2.53, and $4.69, respectively.~~ Because of that, a sale of stock, convertible debt, or other forms of stock-based securities in order to raise even a relatively moderate amount of funds would significantly dilute the percentage ownership of our existing stockholders.

IESA is in a position to prevent us from selling stock.

It is likely that anyone who purchases from us a significant amount of our common stock will insist on receiving a discount even from the current very low market price of the stock. Under the rules of the NASDAQ ~~National~~Global Market, a sale of 20% or more of our stock for less than its market price (or its book value) must be approved by our stockholders. AsBecause ~~the~~IESA ~~owner~~owns ofa ~~the~~ majority of our common stock, we will not be able to obtain stockholder approval of a sale of 20% or more of our common stock ~~unless~~if IESA ~~approves~~ opposes it. IESA has historically desired to maintain its ownership of a majority of our outstanding stock. Because IESA currently owns only a little more than 50% of our common stock, unless IESA changes that position, we will not be able to sell stock or securities that are convertible into our common stock unless we simultaneously sell shares to IESA or otherwise enter into a transaction in which we issue shares to IESA.

We are not in compliance with the NASDAQ continued listing requirements.

We have been notified by the NASDAQ National Market that, because the price of our common stock traded below $1.00 per share for thirty consecutive days, and continues to do so, we are not in compliance with one of the NASDAQ National Market’s continued listing requirements. If our common stock does not, by August 30, 2006, trade at or above $1.00 per share for at least 10 consecutive trading days, we will be notified that our common stock will be delisted. We have the right to appeal a decision to delist our common stock, but that appeal will probably have to be based on a plan that will present substantial assurance that our common stock will trade at prices above $1.00. A plan of that type might involve a reverse stock split, although it is not uncommon for stocks that are the subject of reverse stock splits to decline rapidly to prices near those before the reverse stock splits. Another possibility if our common stock were delisted from the NASDAQ National Market System would be to attempt to list it on the NASDAQ Capital Market. Ultimately, however, if the price of our common stock were to continue to trade at its current level, it would probably no longer be eligible to be quoted on any NASDAQ electronic trading market.

AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are available to the public free of charge over the Internet at our website at http://www.atari.com or at the SEC’s web site at http://www.sec.gov. Our SEC filings will be available on our website as soon as reasonably practicable after we have electronically filed or furnished them to the SEC. You may also read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The following table contains the detail of the square footage of our properties by geographic location ~~for~~as ~~the~~of ~~year ended~~ March 31, ~~2006~~2007:


	North America		Europe		Total
New York		70,000		—		70,000
California		20,476		—		20,476
Washington		65,500		—		65,500
Massachusetts		53,184		—		53,184
Newcastle, UK		—		14,576		14,576

Total		209,160		14,576		223,736

	North America		Europe		Total
New York		90,000		—		90,000
California		17,400		—		17,400
Washington		65,500		—		65,500
Minnesota		14,291		—		14,291
Massachusetts		53,184		—		53,184
Other		25,000		—		25,000
Newcastle, UK		—		23,285		23,285
Total		265,375		23,285		288,660

New York. In fiscal 2007, our principal offices were located in approximately 70,000 square feet of office space at 417 Fifth Avenue in New York City. The term of this lease commenced on July 1, 2006 and is to expire on June 30, 2021. Upon entering into this lease, our previous lease was terminated. The previous lease of approximately 90,000 square feet of office space at the same location commenced in December 1996 and was to expire in December 2006 (see Item 7 for further details). We had subleased 10,000 square feet of such space for a period beginning in May 2003 and ending in December 2006; our obligations under this sublease were assigned to and assumed by the Landlord effective July 1, 2006. In August 2007, we agreed to surrender, effective December 31, 2007, one-half of square feet of the space we are leasing. We also lease corporate residences in the greater New York City area for use by our executive officers, directors, and consultants.

~~New York~~ California. InDuring ~~fiscal~~a ~~2006,~~portion ~~our~~of ~~principal~~fiscal ~~offices~~2007, ~~were~~we ~~located~~leased in approximately 9017,~~000 square~~400 square feet of office space ~~at 417 Fifth Avenue~~ in ~~New~~Santa ~~York~~Monica, ~~City~~California, under a lease ~~(the “Existing Lease”)~~ which ~~commenced~~expired in ~~December~~May ~~1996 and was to expire in December~~ 2006. We ~~subleased~~also lease 10approximately 16,~~000~~ 460 square feet of ~~such~~office space ~~for~~in aNewport ~~period~~Beach, ~~beginning~~California infor ~~May 2003~~use ~~and~~by Shiny, ~~ending~~an ininternal ~~December 2006~~development ~~(or~~studio ~~upon the~~which ~~earlier~~was ~~expiration~~sold ofin ~~the~~September 2006 ~~Existing~~(see ~~Lease~~Development). OnThis lease ~~June 21,~~has ~~2006,~~been wesubleased ~~entered~~to ~~into~~the apurchaser ~~new~~of ~~lease~~Shiny; (the ~~“New~~ ~~Lease”)~~lease ~~with~~expires ~~Fifth~~in ~~and~~August 2007. Additionally, ~~38th~~we ~~LLC~~had ~~(“Landlord”)~~a lease for approximately 7015,000 square feet of office space ~~and~~in 2Sunnyvale,~~500~~ California, ofwhich ~~storage~~expired ~~space at 417 Fifth Avenue~~ in ~~New York City for our principal offices~~December 2006. The ~~term~~occupants of this ~~New~~facility ~~Lease~~were ~~commences~~relocated ~~on July~~in December 1, 2006 ~~and is~~ to ~~expire June 30~~4,016 ~~2021. Pursuant to the terms of this New Lease, the Existing Lease of 90,000~~ square feet of new office space in ~~the~~that ~~same~~we ~~building~~leased ~~(described~~in ~~above)~~Santa ~~was terminated as of June 30~~Clara, ~~2006~~California, ~~and our obligations~~ ~~under~~which ~~the~~expires ~~sublease~~in ~~(described above) of 10,000 square feet of such leased space were assigned to and assumed by the Landlord effective July~~December ~~1, 2006~~2009. ~~We also lease several corporate residences in~~ ~~the greater New York City area for use by our executive officers, directors, consultants and relocating executives.~~

~~California~~ Washington. ~~During~~We ~~fiscal~~lease ~~2006, we leased~~ approximately 1765,~~400~~500 square feet of office space in ~~Santa Monica~~Bothell, ~~California~~ Washington, under a lease which ~~expired~~expires in May ~~2006~~2008. WeThis ~~also lease approximately 16,460 square feet of~~ office space inwas ~~Newport~~occupied ~~Beach, California for long-term use~~ by our ~~Shiny,~~Humongous ~~an internal development~~ studio., ~~This~~which ~~lease~~was ~~expires~~sold in August ~~2007~~2005. We ~~have~~now asublease ~~lease~~parking ~~for approximately~~lot ~~15,000~~space ~~square~~and ~~feet~~the majority of the office space inunder ~~Sunnyvale,~~seven ~~California~~subleases, one of which expires in April 2008 and six of ~~December~~which expire in May ~~2006~~2008.

~~Washington~~ Massachusetts. WeIn ~~lease~~Beverly, ~~approximately 65~~Massachusetts,~~500~~ ~~square~~we ~~feet~~sublease ofa ~~office~~portion ~~space~~of inthe ~~Bothell~~53,184 square ~~Washington,~~feet ~~under~~of athe ~~lease which expires in May 2008. This~~ office space ~~was~~leased ~~occupied~~ by ~~our Humongous~~Atari ~~studio,~~Interactive. ~~which~~Our ~~was~~lease ~~sold~~expires in ~~August~~June ~~2005~~2007. WeIn ~~now sublease parking lot space and the~~June ~~majority of the office space under six subleases~~2005, ~~one~~we ofceased ~~which~~operations ~~expires~~at inthis ~~April 2008~~location; ~~and~~no ~~five~~sublease ~~of which~~has ~~expire~~been inentered ~~May 2008~~into.

~~Minnesota~~ Europe. ~~During~~In ~~fiscal~~Newcastle ~~2006~~upon Tyne, United Kingdom, we ~~leased~~lease approximately 14,~~291~~576 square feet of office space ~~in Plymouth~~, ~~Minnesota,~~which ~~under~~was aoccupied ~~lease~~by our formerly wholly-owned Reflections studio, which ~~expired~~was sold in ~~March~~August 2006 (see Development). This ~~office~~lease ~~space~~expires ~~was~~in ~~occupied~~August 2011. byThe purchaser of ~~the~~Reflections ~~Minneapolis~~currently ~~studio~~subleases ~~which~~this ~~ceased~~space ~~operations~~from us in a sublease which expires in August 2007. The sublease is expected to be renewed through fiscal ~~2004~~2008.

Massachusetts. In Beverly, Massachusetts, we sublease a portion of the 53,184 square feet of the office space leased by Atari Interactive. Our lease expires in June 2007. In February 2005, we announced that we were ceasing operations at this location and we were looking to sublease this space. As of June 2006, no sublease has been entered into.

Other States in the U.S. In Scottsdale, Arizona, we leased 25,000 square feet of office space under a lease which expired in March 2006.

Europe. For our internal Reflections studio, we maintain a lease for approximately 23,285 square feet of office space in Newcastle upon Tyne, United Kingdom. This lease expires in August 2011. As part of management’s formal plan to divest of Reflections, it is our intention for any prospective purchaser to assume our lease obligations.

ITEM 3. LEGAL PROCEEDINGS

Our management believes that the ultimate resolution of any of the matters summarized below and/or any other claims which are not stated herein, if any, will not have a material adverse effect on our liquidity, financial condition or results of operations. With respect to matters in which we are the defendant, we believe that the underlying complaints are without merit and intend to defend ourselves vigorously.

Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II , and Chicago West Pullman LLC

On May 17, 2004, we and Atari Interactive together with Hasbro, Inc. (“Hasbro”) filed a complaint against Games, Inc. (“Games”), its CEO, Roger W. Ach, II (“Ach”), and Chicago West Pullman LLC (“Chicago West Pullman”) in the United States District Court for the Southern District of New York and sought a temporary restraining order and preliminary injunction to stop Games’ and Ach’s use of certain trademarks and copyrights owned by Atari Interactive and Hasbro. The plaintiffs alleged that an interim license that we granted to Games for the development and publication of certain games in a specified online format expired by its terms when Games failed to pay us certain fees by April 30, 2004, pursuant to an Asset Purchase, License and Assignment Agreement between us and Games dated December 31, 2003, as amended (the “Agreement”). The plaintiffs also alleged that Games’ failure to pay voided an expected transfer of the “Games.com” domain name and certain web site assets from us to Games and constituted a breach of contract and that Chicago West Pullman’s failure to pay constituted a breach of guarantee. The plaintiffs further alleged that upon the expiration of the interim license, all intellectual property rights granted under that license reverted back to us, but that Games nevertheless continued to use plaintiffs’ intellectual property.

On May 4, 2005, the Court issued a memorandum order granting us damages in the following amount: (1) immediate payment of $3,104,108, plus interest at an annual rate of nine percent from April 30, 2004; (2) immediate redemption of 10,250 shares of Games, Inc. stock for $1.025 million, plus interest at an annual rate of nine percent from April 30, 2004; (3) immediate redemption of 10,000 additional shares of Games, Inc. stock for $1 million; (4) redemption of the remaining 10,000 share at any time after December 29, 2005. The order provided that the “judgment runs directly against Games but in the event Games fails to satisfy it, it runs secondarily against Chicago West Pullman and Ach.”

On June 30, 2005, defendants filed a Notice of Appeal to the United States Court of Appeals for the Second Circuit. On July 6, 2005, defendants filed a motion for a stay of enforcement of the amended judgment pending resolution of the appeal. On July 13, 2005, the Court of Appeals granted a temporary stay of execution, but on August 3, 2005, the Court of Appeals denied defendants’ motion for a stay, holding that defendants had not shown a substantial likelihood of success on appeal or that they would suffer irreparable injury if a stay was not issued. On February 2, 2006, the Court of Appeals issued an order affirming the judgment against Ach, Games, and Chicago West Pullman.

On April 19, 2006, we, Atari Interactive, Hasbro, Games, Chicago West Pullman and Ach executed a Settlement Agreement pursuant to which Games paid us (for the benefit of ourselves and our affiliates) $1.2 million in full settlement of the lawsuit. Our portion will be recorded in fiscal 2007.

American Video Graphics, L.P., v. Electronic Arts, Inc. et al.

On August 23, 2004, American Video Graphics, L.P. (“AVG”) filed a lawsuit against us, Electronic Arts, Inc., Take-Two Interactive Software, Inc., Ubi Soft, Activision Inc., THQ, Inc., Vivendi Universal Games, Inc., Sega of America, Inc., Square Enix, Inc., Tecmo, Inc., Lucasarts, a division of Lucas Films Entertainment Co., Ltd., and Namco Hometek, Inc. in the United States District Court for the Eastern District of Texas, Tyler Division (Case No. 6:04 CV-398-LED). We were served with the Summons and Complaint on September 7, 2004. The Complaint alleges infringement of US Patent No. 4,734,690 (method and apparatus for spherical panning) and seeks unspecified damages. We were served with a First Amended Complaint on or about October 7, 2004, which amended the original Complaint to properly name certain of the other defendants in the suit. We filed an Answer on November 8, 2004.

On February 7, 2005, a Second Amended Complaint was filed against all of the above defendants, plus Sony Online Entertainment, Inc., Sony Computer Entertainment America, Inc., Microsoft Corp., and Nintendo of America, Inc. We answered the Second Amended Complaint on February 24, 2005.

On October 19, 2005, we and AVG executed a Patent License and Settlement Agreement pursuant to which we made a settlement payment and received an irrevocable, nonexclusive, worldwide license to use, publish, sell, etc. products covered by the AVG patents.

iEntertainment Network, Inc. v. Epic Games, Inc., Atari, Inc. Valve Corporation, Sierra Entertainment, Inc., Sony Corporation of Japan, Sony Corporation of America, Sony Computer Entertainment America, Inc. and Sony Online Entertainment, Inc.

On December 22, 2004, we were served with a Complaint by iEntertainment, Inc. The Complaint has been filed in the United States District Court of the Eastern District of North Carolina Western Division (5:04-CV-647-BD(1)) and names the following defendants: us, Epic Games, Inc., Valve Corporation, Sierra Entertainment, Inc., Sony Corporation of Japan,

Sony Corporation of America, Sony Computer Entertainment America, Inc. and Sony Online Entertainment, Inc. The Complaint alleges infringement of US Patent No. 6,042,477 (method of and system for minimizing the effects of time latency in multiplayer electronic games played on interconnected computers) and seeks unspecified damages. We answered the Complaint on or about March 28, 2005. The parties reached an agreement in principle for settling the claim. In exchange for a settlement amount, iEntertainment will release all parties (and their affiliates) from claims and will grant to Atari an irrevocable, fully paid-up, nonexclusive right and license under US Patent No. 6,042,477 and all other patents and patent applications currently owned by or enforceable by iEntertainment, with the right to sublicense to others, to make, have made, import, use, practice, offer for sale, sell or otherwise dispose of our products worldwide. We paid our portion of the settlement amount. The Settlement Agreement was signed as of December 22, 2005 and a Stipulation of Dismissal was entered with the Court.

Bouchat v. Champion Products, et al. (Accolade)

This suit involving Accolade, Inc. (a predecessor entity of Atari, Inc.) was filed in 1999 in the District Court of Maryland. The plaintiff originally sued the NFL claiming copyright infringement of a logo being used by the Baltimore Ravens that plaintiff allegedly designed. The plaintiff then also sued nearly 500 other defendants, licensees of the NFL, on the same basis. The NFL hired White & Case to represent all the defendants. Plaintiff filed an amended complaint in 2002. In 2003, the District Court held that plaintiff was precluded from recovering actual damages, profits or statutory damages against the defendants, including Accolade. Plaintiff has appealed the District Court’s ruling to the Fourth Circuit Court of Appeals. White & Case continues to represent Accolade and the NFL continues to bear the cost of the defense.

Indigo Moon Productions, LLC v. Hasbro, Inc., et al.

On August 12, 2005, Indigo Moon Productions, LLC, or Indigo Moon, filed a lawsuit against Hasbro, Inc., Hasbro Interactive, Atari Interactive, us and Infogrames, Inc. in the United States District Court in the Western District of Kentucky. Indigo Moon alleges that on or about June 28, 2000, Indigo Moon and Hasbro Interactive, Inc. (n/k/a Atari Interactive) entered into a Confidential Information Agreement for sharing information regarding the possibility of cooperating on the production or exploitation of interactive games. Indigo Moon alleges that it provided Atari Interactive with designs and concepts for a computerized version of Clue and that Atari Interactive represented that it would compensate Indigo Moon for its work, but did not. Indigo Moon further alleges that in October 2003 Hasbro, Atari Interactive and/or Infogrames, Inc. (n/k/a Atari) released a Clue FX Game and that in the Spring of 2005 Hasbro, Atari Interactive and/or Infogrames, Inc. released Clue Mysteries, each of which allegedly incorporates Indigo Moon’s work. Indigo Moon’s complaint alleges the ~~following specific causes of action: breach of express contract,~~ ~~breach of implied contract, promissory estoppel, quasi-contract and unjust enrichment, breach of a confidential relationship and misappropriation of trade secret; and seeks unspecified damages.~~

~~Rafael Curulla v. SAS Atari Europe and Atari, Inc.~~22

On April 1, 2005, Mr. Curulla, a former employee of Atari Europe filed a Complaint against Atari Europe and Atari, Inc. Mr. Curulla was an employee of Atari Europe who had been assigned to work at Atari’s Santa Monica studio as of December 1, 2001. His assignment in the US was on a three year renewable basis. As of August 31, 2004, Mr. Curulla’s assignment in the US was terminated. Mr. Curulla’s Complaint was lodged before the Industrial Tribunal of Lyon, France (Conseil de Prud’hommes). A hearing took place on October 6, 2005 and a discovery period was established. Curulla is claiming that he is owed damages for dismissal without serious cause in the amount of 88,674 Euros, a bonus in the amount of 5,494 Euros, compensation for dismissal in the amount of 4,261 Euros, damages under Article 700 of the New Code of Civil Procedure in the amount of 2,000 Euros plus expenses. Discovery closed on January 5, 2006. The next hearing was scheduled to take place on February 16, 2006 at which time all parties were to have an opportunity to make their case. The parties were not prepared to move forward as of February 16, 2006 and the matter has been adjourned until November 2006. Atari Europe has secured representation on behalf of itself and us.

Thomas Licensing, LLC v. Atari Interactive, Inc. and Atari, Inc.

On May 15, 2006, we were served with a lawsuit by Thomas Licensing, LLC (“Thomas Licensing”). The complaint was filed in Supreme Court in the County of New York. Under a licensing agreement between Thomas Licensing and Atari Interactive, Atari Interactive was granted a license to design, develop, manufacture, distribute, promote and sell interactive computer games on CD-ROM and 3D key-top playsets (“License Agreement”). In return, Atari Interactive was obligated to make certain payments to Thomas Licensing. Pursuant to intercompany services agreements, we provided services to Atari Interactive in connection with Atari Interactive’s performance under the License Agreement. These services included administering royalty calculations and payments, subject to the review and approval of Atari Interactive. Thomas Licensing

~~alleges~~following ~~that~~specific wecauses ~~controlled~~of ~~Atari Interactive~~action: ~~and~~breach ~~caused~~of ~~Atari~~express ~~Interactive~~contract, breach toof ~~not~~implied ~~make~~contract, ~~required~~promissory ~~payments~~estoppel, ~~under~~quasi-contract ~~the~~and ~~License Agreement.~~unjust ~~Therefore~~enrichment, ~~Thomas~~breach ~~Licensing~~of ~~claims~~a confidential ~~that~~relationship weand ~~are~~misappropriation ~~equally~~of ~~liable~~trade ~~along~~secret; ~~with~~and ~~Atari~~seeks ~~Interactive~~unspecified ~~for liabilities to Thomas Licensing~~damages. ~~These~~Plaintiff ~~liabilities~~has ~~include~~agreed ~~failures~~ to: ~~(i) make certain~~dismiss ~~guaranteed~~us ~~payments,~~from ~~(ii) rectify~~this ~~inconsistencies~~case ~~and~~without ~~mistakes~~prejudice ~~in royalty statements,~~ and ~~(iii) make~~to ~~full~~proceed ~~payments~~against ~~from~~ the ~~sale~~remaining ~~and~~defendants. ~~distribution~~A Notice of ~~the~~Dismissal ~~licensed~~has ~~products.~~been Infiled ~~total,~~with ~~Thomas Licensing~~the ~~demands~~Court aand Atari, ~~judgment~~Inc. ofhas ~~just~~been ~~over~~dismissed ~~$2 million~~from ~~dollars~~this case.

~~Pursuant~~Ernst to& ~~the intercompany services agreement~~Young, ~~Atari Interactive is fully indemnifying us for all damages (including legal fees) that are incurred in this matter~~Inc. ~~An answer to the complaint was due by June 5, 2006~~v. ~~However~~Atari, ~~Atari Interactive sought an extension of time to answer for itself and on behalf of us~~Inc.

On July 21, 2006 we were served with a complaint filed by Ernst & Young as Interim Receiver for HIP Interactive, Inc. This suit was filed in New York State Supreme Court, New York County. HIP is a Canadian company that has gone into bankruptcy. HIP contracted with us to have us act as its distributor for various software products in the U.S. HIP is alleging breach of contract claims; to wit, that we failed to pay HIP for product in the amount of $0.7 million. We will investigate filing counter claims against HIP, as HIP owes us, via our Canadian Agent, Hyperactive, for our product distributed in Canada. Our answer and counterclaim were filed in August of 2006 and we initiated discovery against Ernst & Young at the same time. Settlement discussions commenced in September 2006 and are currently on-going.

Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.

On October 26, 2006, Research in Motion Limited, or RIM, filed a claim against us and Atari Interactive in the Ontario Superior Court of Justice. RIM is seeking a declaration that (i) the game BrickBreaker, as well as the copyright, distribution, sale and communication to the public of copies of the game in Canada and the United States, does not infringe any Atari copyright for Breakout or Super Breakout in Canada or the United States, (ii) the audio-visual displays of Breakout do not constitute a work protected by copyright under Canadian law, and (iii) Atari holds no right, title or interest in Breakout under US or Canadian law. RIM is also requesting the costs of the action and such other relief as the court deems appropriate. Breakout and Super Breakout are games owned by Atari Interactive. On January 19, 2007, RIM added claims to its case requesting a declaration that (i) its game Meteor Crusher does not infringe an Atari copyright for its game Asteroids in Canada, (ii) the audio-visual displays of Asteroids do not constitute a work protected under Canadian law, and (iii) Atari holds no right, title or interest in Asteroids under Canadian law. In August 2007, the Court ruled against Atari’s December 2006 motion to have the RIM claims dismissed on the grounds that there is no statutory relief available to RIM under Canadian law. Atari is in the process of appealing this decision.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

~~There~~A Special Meeting of Stockholders was held on January 3, 2007. Of the 134,779,670 shares of common stock outstanding and entitled to vote at the Special Meeting, 115,577,742 shares were present noin ~~matters~~person ~~submitted~~or by proxy, each entitled to aone vote ofon ~~our~~each ~~security~~matter ~~holders~~to ~~during~~come before the ~~quarter~~meeting. The ~~ended~~matters ~~March 31~~acted upon at our Special Meeting of Stockholders, ~~2006.~~and the voting tabulation for each such matter is as follows:

Proposal 1. To approve amendments to our Restated Certificate of Incorporation that will (i) effectuate a one-for-ten reverse stock split, and (ii) decrease the number of shares that Atari is authorized to issue.

As set forth above, at the Special Meeting, the stockholders of Atari approved the amendments of our Restated Certificate of Incorporation. On January 3, 2007, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Restated Certificate of Incorporation. The Certificate of Amendment was effective as of January 3, 2007, and affected a one-for-ten reverse stock split of our issued and outstanding shares of Common Stock, par value $0.01 and decreased the number of shares of Common Stock we are authorized to issue from 300,000,000 to 30,000,000. As of January 3, 2007, every 10 shares of our issued and outstanding Common Stock, $0.01 par value, automatically converted to one share of Common Stock, $0.10 par value. No fractional shares were issued in connection with the reverse split. Cash was paid in lieu of fractional shares. The Reverse Split did not alter any voting rights or other terms of our Common Stock. In accordance with the Reverse Split, the Compensation Committee of our Board of Directors adjusted the amount of shares reserved under, and all awards made pursuant to, the Atari, Inc. 2005 Stock Incentive Plan and all of our prior stock incentive plans, as applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is quoted on the NASDAQ ~~National~~Global Market under the symbol “ATAR”.” The high ~~and~~ and low sale prices for our Common Stock as reported by the NASDAQ ~~National~~Global Market for the fiscal ~~years~~ years ended March 31, ~~2005~~2006 and March 31, ~~2006~~2007 ~~are~~(adjusted ~~summarized~~to ~~below.~~give ~~These~~effect ~~over~~to a one-~~the~~for-~~counter~~ten ~~market~~reverse stock ~~quotations~~split ~~reflect~~that ~~inter-dealer~~was ~~prices,~~effective ~~without~~on ~~retail mark-ups~~January 3, ~~mark-downs,~~2007) orare ~~commissions~~summarized ~~and may not necessarily represent actual transactions~~below.

	High		Low
Fiscal 2005
First Quarter	$	3.66	$	2.10
Second Quarter	$	2.51	$	1.35
Third Quarter	$	2.94	$	1.10
Fourth Quarter	$	3.40	$	2.10
Fiscal 2006
First Quarter	$	331.1880	$	223.3000
Second Quarter	$	229.9440	$	111.1550
Third Quarter	$	114.4660	$	09.9879
Fourth Quarter	$	111.1280	$	05.5661
Fiscal 2007
First Quarter	$	9.70	$	4.70
Second Quarter	$	7.90	$	4.75
Third Quarter	$	6.00	$	4.60
Fourth Quarter	$	6.50	$	2.94

On ~~June~~ 27September 10, ~~2006~~2007, the last reported sale price of our Common Stock on the NASDAQ ~~National~~Global Market was $02.5260. As of ~~June~~September 2710, ~~2006~~2007, there were approximately 358 ~~333~~ record owners of our Common Stock.

We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business. We have not paid any cash dividends nor do we anticipate paying any cash dividends on our Common Stock in the foreseeable future. In addition, the payment of cash dividends may be limited by financing agreements entered into by us.

Securities Authorized for Issuance under Equity Compensation Plans

The table setting forth this information is included in Part III — Item 12. Security Ownership of Certain Beneficial Owners and Management.

Recent Sales of Unregistered Securities

None.

Purchase of Equity Securities by the Issuer and Affiliated Purchases.

None.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected consolidated financial information which, for the ~~year ended June 30, 2002, the~~ nine months ended March 31, 2003, and the years ended March 31, 2004, 2005, 2006, and ~~2006~~2007, is derived from our audited consolidated financial statements. Effective March 28, 2003, we changed our fiscal year-end from June 30 to March 31.

As In ~~previously~~the ~~reported~~first inquarter ~~our~~of ~~Amendment~~fiscal ~~No. 3~~2007, tomanagement ~~Form~~committed ~~10-K/A~~to ~~for~~a ~~the~~plan ~~year~~to ~~ended~~divest ~~March 31, 2004,~~of ~~and~~ our previously ~~Form 10~~wholly-Qsowned ~~for~~Reflections ~~the~~studio ~~quarters~~and ofits ~~the~~related ~~year~~Driver ~~ended~~intellectual ~~March 31~~property, and in August 2006, ~~the~~we ~~results~~sold ofto ~~the~~a ~~sale of~~third ~~our~~party ~~Humongous~~the ~~studio~~Driver ~~were~~intellectual ~~presented~~property as ~~discontinued~~well ~~operations~~as certain assets of Reflections. ~~However~~Therefore, ~~during~~beginning in the first quarter of fiscal 2007, we ~~determined~~began ~~that, while Humongous is expected~~ to beclassify ~~sold,~~ the ~~potential buyer has requested us to continue~~ toresults ~~distribute~~of ~~Humongous,~~Reflections ~~Inc.’s~~as ~~products~~results ~~beyond~~of ~~the~~discontinued ~~assessment period ending August 22~~operations, ~~2006,~~ and ~~therefore~~all ~~will~~prior ~~not~~period ~~eliminate our~~financial ~~significant~~statements ~~continuing involvement. Therefore, we~~ have ~~reclassified~~been ~~its results~~restated ~~back~~retroactively to ~~continuing~~reflect ~~operations~~this classification.

~~These tables should be read in conjunction with our Consolidated Financial Statements,~~24 ~~including the notes thereto, appearing elsewhere in this Form 10-K. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.~~

				Nine
	Year			Months		Years
	Ended			Ended		Ended
	June 30,			March 31,		March 31,
	2002			2003		2004			2005 (1)		2006 (1)
				(in thousands, except per share data)
Statement of Operations Data:
Net revenues	$	419,045		$	404,645	$	468,944		$	407,813	$	218,661
Operating income (loss)		916			27,429		7,573			6,293		(68,588	)
Net (loss) income		(10,930	)		18,070		766			5,692		(68,986	)
Dividend to parent		—			—		(39,351	)		—		—
(Loss) income attributable to common stockholders	$	(10,930	)	$	18,070	$	(38,585	)	$	5,692	$	(68,986	)
Basic and diluted net (loss) income per share	$	(0.16	)	$	0.26	$	0.01		$	0.05	$	(0.54	)
Basic and diluted (loss) per share related to dividend to parent		—			—		(0.41	)		—		—
Basic and diluted (loss) income per share attributable to common stockholders	$	(0.16	)	$	0.26	$	(0.40	)	$	0.05	$	(0.54	)
Basic weighted average shares outstanding		69,722			69,878		96,990			121,276		128,631
Diluted weighted average shares outstanding		69,722			70,055		96,990			121,587		128,631

~~(1)~~ These ~~During~~tables ~~fiscal~~should ~~2005~~be ~~and~~read ~~fiscal~~in ~~2006~~conjunction with our Consolidated Financial Statements, including wethe ~~recorded~~notes ~~restructuring~~thereto, ~~expenses~~appearing ofelsewhere $4in this Form 10-K.9 ~~million~~See “Item 7. Management’s Discussion and ~~$8.9~~Analysis ~~million,~~of ~~respectively~~Financial Condition and Results of Operations.”

	June 30,			March 31,
	Nine
	2002			2003			2004			2005			2006
	Months			Years
Balance Sheet Data:
	Ended			Ended
Cash	$	5,403		$	815		$	9,621		$	10,438		$	15,386
	March 31,			March 31,
Working (deficit) capital		(51,547	)		(91,648	)		24,914			33,655			(3,711	)
	2003			2004			2005 (1)			2006 (1)(2)			2007 (1)(2)(3)
Total assets		241,863			232,082			193,956			190,039			143,670
Statement of Operations Data:
Total debt		236,211			220,061			—			—			—
Net revenues	$	393,529		$	465,639		$	343,837		$	206,796		$	122,285
Stockholders’ (deficit) equity		(115,329	)		(96,918	)		115,063			120,667			73,212
Operating income (loss)		32,258			20,840			(23,970	)		(62,977	)		(77,644	)
Income (loss) from continuing operations		22,908			13,606			(14,855	)		(63,375	)		(66,586	)
(Loss) income from discontinued operations of Reflections Interactive Ltd, net of tax provision of $0, $0, $9,352, $0, and $7,559, respectively		(4,838	)		(12,840	)		20,547			(5,611	)		(3,125	)
Net income (loss)		18,070			766			5,692			(68,986	)		(69,711	)
Dividend to parent		—			(39,351	)		—			—			—
Income (loss) attributable to common stockholders	$	18,070		$	(38,585	)	$	5,692		$	(68,986	)	$	(69,711	)
Basic and diluted income (loss) per share attributable to common stockholders (4):
Income (loss) from continuing operations	$	3.28		$	1.40		$	(1.22	)	$	(4.93	)	$	(4.94	)
(Loss) income from discontinued operations of Reflections Interactive Ltd, net of tax		(0.69	)		(1.32	)		1.69			(0.43	)		(0.23	)
Net income (loss)		2.59			0.08			0.47			(5.36	)		(5.17	)
Dividend to parent		—			(4.06	)		—			—			—
Income (loss) attributable to common stockholders	$	2.59		$	(3.98	)	$	0.47		$	(5.36	)	$	(5.17	)
Basic weighted average shares outstanding (4)		6,988			9,699			12,128			12,863			13,477
Diluted weighted average shares outstanding (4)		7,006			9,699			12,159			12,863			13,477


(1)		During fiscal 2005, 2006, and 2007, we recorded restructuring expenses of $4.9 million, $8.9 million, and $0.7 million, respectively.

(2)		During fiscal 2006, we recorded a gain on sale of intellectual property of $6.2 million and in fiscal 2007, we recorded a gain on sale of intellectual property of $9.0 million and a gain on sale of development studio assets of $0.9 million. Additionally, in fiscal 2007 the gain on sale of Reflections of $11.5 million is included as a reduction of the loss from discontinued operations.

(3)		During fiscal 2007, we recorded an impairment loss on our goodwill of $54.1 million, which is included in the loss from continuing operations.

(4)		Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated retroactively to reflect the reverse stock split.


	March 31,
	2003			2004		2005		2006			2007
Balance Sheet Data:
Cash	$	392		$	8,858	$	9,988	$	14,948		$	7,603
Working capital (deficit)		(90,260	)		25,844		34,467		(2,996	)		1,213
Total assets		232,082			193,956		190,039		143,670			42,819
Total debt		220,061			—		—		—			—
Stockholders’ equity (deficit)		(96,918	)		115,063		120,667		73,212			3,094

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Going Concern

A Until ~~weak~~2005, ~~holiday~~we ~~season~~were ~~for~~actively ~~the~~involved ~~industry~~in ~~combined~~developing ~~with~~video ~~underperformance~~games ~~from~~and ~~new~~in ~~product~~financing development ~~launches~~of ~~and~~video ~~product~~games ~~launch~~by ~~delays~~independent ~~have~~developers, ~~contributed~~which towe ~~fiscal~~would ~~year~~publish ~~results~~and ~~substantially~~distribute ~~below~~under ~~our~~licenses from ~~expectations~~the developers. ~~For~~However, ~~the~~beginning ~~year~~in ~~ended~~2005, ~~March 31~~because of cash constraints, we substantially reduced our involvement in development of video games, and announced plans to divest ourselves of our internal development studios.

During fiscal 2006 and 2007, we sold a number of intellectual properties and development facilities in order to obtain cash to fund our operations. During 2007, we raised approximately $35.0 million through the sale of the rights to the Driver games and certain other intellectual property, and the sale of our Reflections and Shiny studios. By the end of fiscal 2007, we did not own any development studios.

The reduction in our development and development financing activities has significantly reduced the number of games we publish. During fiscal 2007, our revenues from publishing activities were $104.7 million, compared with $153.6 million during fiscal 2006 and $289.6 million during fiscal 2005.

~~2006,~~ We ~~we generated~~are ~~net~~in ~~losses~~the process of ~~$69.0 million,~~developing ~~and, for~~a ~~the~~strategic ~~third~~plan ~~and~~that ~~fourth~~would ~~quarters~~expand ofour ~~fiscal~~activities ~~2006~~into new, ~~were~~emerging ~~not~~aspects ~~in compliance~~of ~~with~~the ~~certain~~video ~~financial~~game ~~covenants~~industry, onincluding ~~our~~casual ~~credit facility~~games, ~~with~~online ~~HSBC~~sites, ~~which has expired as of the date hereof.~~digital ~~Historically~~downloading, weadvergaming, ~~have~~and ~~relied~~brand onlicensing. ~~IESA~~However, toour ~~provide~~ability ~~limited financial support~~ to ~~us;~~do ~~however,~~those asthings ~~IESA~~will ~~continues~~require tothat ~~address~~we ~~its~~have ~~own~~a ~~financial~~source ~~condition,~~of ~~its~~funding ~~ability~~and tosome ~~fund~~of ~~its~~them ~~subsidiaries’~~will ~~operations, including~~require ~~ours,~~expansion ~~remains~~and ~~limited.~~extension ~~Therefore,~~of our ~~there~~rights ~~can~~to beuse noand ~~assurance~~sublicense wecertain ~~will~~properties, ~~ultimately~~including ~~receive~~our ~~any~~license ~~funding~~to ~~from~~use ~~them~~the “Atari” name.

~~The~~ For ~~uncertainties~~the ~~caused~~year byended ~~these~~March 31, ~~conditions~~2007, ~~raise~~our ~~substantial~~net ~~doubt~~revenues ~~about~~were only $122.3 million, compared with $206.8 million in the prior year, and we had an operating loss of $77.6 million in fiscal 2007, which included a charge of $54.1 million for the impairment of our goodwill, which is related to our publishing unit. We have taken significant steps to reduce our costs. Our ability to deliver ~~continue~~products ason atime ~~going~~depends ~~concern~~in good part on developers’ ability to meet completion schedules. Further, ~~The~~our ~~consolidated~~expected ~~financial~~releases ~~statements~~in dofiscal ~~not~~2008 ~~include~~are ~~any~~even ~~adjustments~~fewer than our releases in fiscal 2007. In ~~that~~addition, ~~might~~most of our releases for fiscal 2008 are focused on the holiday season. As a result ~~from~~our cash needs have become more seasonal and we face significant cash requirements to fund our working capital needs during the ~~outcome~~second quarter of ~~this~~our ~~uncertainty~~fiscal year.

We Currently, ~~are~~our ~~exploring~~only ~~various~~borrowing ~~alternatives~~facility tois ~~improve~~an ~~our~~asset-based ~~financial~~secured ~~position~~credit ~~and~~facility ~~secure~~that ~~other~~we ~~sources~~established ofin ~~financing.~~November 2006 ~~Such~~with ~~possibilities include~~ a ~~replacement~~group of ~~the~~lenders ~~credit~~for ~~facility,~~which ~~new arrangements~~Guggenheim tois ~~license~~the ~~intellectual~~administrative agent. ~~property,~~The ~~the~~credit ~~sale~~facility consists of ~~selected~~a ~~intellectual~~revolving ~~property~~line ~~rights and sale~~ of ~~development~~credit ~~studios.~~in Toan ~~reduce~~amount ~~working~~up ~~capital~~to ~~requirements~~$15.0 million (subject ~~and~~to ~~further~~a ~~conserve~~borrowing ~~cash we~~base ~~will~~calculation), ~~need~~which toincludes ~~take~~a ~~additional~~$10.0 million ~~actions~~sublimit infor the ~~near-term,~~issuance of ~~which~~letters ~~may~~of ~~include~~credit. ~~further~~However, ~~personnel reductions~~the ~~and~~maximum ~~suspension~~borrowings ofwe ~~certain~~can ~~development~~make under ~~projects.~~the ~~These~~credit ~~actions~~facility ~~may~~will ornot ~~may~~by ~~not~~themselves ~~prove~~provide toall the befunding ~~consistent~~we ~~with~~will ~~our~~need ~~long-term~~for ~~strategic~~the ~~objectives.~~calendar We2007 ~~cannot~~holiday ~~guarantee~~season. Further, the credit ~~completion~~facility ofmay ~~these actions~~be orterminated ~~that~~if ~~such~~we ~~actions~~do ~~will~~not ~~generate~~comply ~~sufficient~~with ~~resources~~financial and toother ~~fully~~covenants ~~address~~prior ~~the~~to ~~uncertainties of~~ our ~~financial~~need ~~position~~for borrowing (i.e. Nasdaq Delisting).

As Historically, ofwe ~~the~~have ~~date~~relied ofon ~~this~~IESA ~~filing,~~to weprovide ~~have~~limited ~~raised~~financial ~~approximately~~support ~~$15.2 million~~to us, ofthrough ~~which $6.2~~loans ~~million~~or, ~~was recorded~~ in ~~the~~recent ~~fourth~~years, ~~quarter~~through purchases of ~~fiscal~~assets. ~~2006~~However, ~~through~~IESA ~~sales~~has ofits ~~certain~~own ~~intellectual properties;~~financial ~~however~~needs, ~~these~~and its ~~amounts~~ability ~~are~~to ~~insufficient~~fund toits ~~fully~~subsidiaries’ ~~address~~operations, ~~the~~including ~~uncertainties~~ours, ofis ~~our~~limited. Therefore, there can ~~financial~~be ~~position.~~no Weassurance ~~continue~~we towill ~~seek~~ultimately ~~additional~~receive any funding from IESA.

Related party transactions

We are involved in numerous related party transactions with IESA and its subsidiaries. These related party transactions include, but are not limited to, the purchase and sale of product, game development, administrative and support services and distribution agreements. In addition, we use the name “Atari” under a license from Atari Interactive (a wholly-owned subsidiary of IESA) that expires in 2013.

Reverse Stock Split

On January 3, 2007, we effected a one-for-ten reverse stock split. The number of shares we are authorized to issue was reduced from 300,000,000 to 30,000,000, and the par value was increased from $0.01 to $0.10 per share. Preferred stock remain at 5,000,000 authorized shares with a par value of $0.01 per share, none of which are outstanding.

Business and Operating Segments

We are a global publisher and developer of video game software for gaming enthusiasts and the mass-market audience, and a distributor of video game software in North America. We develop, publish, and distribute (both retail and digital) games for all platforms, including Sony PlayStation, ~~PlayStation~~ 2, PlayStation 3, and PSP; Nintendo Game Boy Advance, ~~GameCube, DS, and Wii; Microsoft Xbox and Xbox~~ 360; and personal computers, referred to as PCs. We also publish and sublicense games for the wireless, internet, and other evolving platforms, an area to which we expect to devote increasing attention. Our diverse portfolio of products extends across most major video game genres, including action, adventure, strategy, role-playing, and racing. Our products are based on intellectual properties that we have created internally and own or that have been licensed to us by third parties. We leverage both internal and external resources in the development of our games, assessing each project independently to determine which development team is best suited to handle the product based on technical expertise and historical development experience, among other factors. Additionally, through our relationship with IESA, our products are distributed exclusively by IESA throughout Europe, Asia and other regions. Through our distribution agreement with IESA, we have the rights to publish and sublicense in North America certain intellectual properties either owned or licensed by IESA or its subsidiaries, including Atari Interactive. We also manage the development of product at studios owned by IESA that focus solely on game development.

In addition to our publishing and development activities, we also distribute video game software in North America for titles developed by third-party publishers with whom we have contracts. As a distributor of video game software throughout the U.S., we maintain what we believe to be state-of-the-art distribution operations and systems, reaching well in excess of 30,000 retail outlets nationwide. The distribution channels for interactive software have expanded significantly in recent years. Consumers have access to interactive software through a variety of outlets, including mass-merchant retailers such as Wal-Mart and Target; major retailers, such as Best Buy and Toys ‘R’ Us; and specialty stores such as GameStop/Electronics Boutique. Additionally, our games are made available through various Internet and online networks. Our sales to key customers Wal-Mart, GameStop/Electronics Boutique, Target, and Best Buy accounted for approximately 31.1%, 13.0%, 12.8%, and 9.1%, respectively, of net revenues for the year ended March 31, 2006.

Humongous Discontinued Operations Treatment

In the fourth quarter of fiscal 2005, following the guidance established under FASB Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, management committed to a plan to divest of Humongous. During the second quarter of fiscal 2006, selected Humongous assets were sold to our majority stockholder, IESA in exchange for 4,720,771 of their shares valued at $8.3 million. Humongous’ book value approximated $4.7 million and consisted primarily of intellectual property, existing inventory, license rights, and an allocation of goodwill of $3.8 million. The difference of approximately $3.6 million between the sale price and the Humongous’ book value was recorded to additional paid-in capital, as no gain can be recorded on sales of businesses with entities under common control.

~~Immediately~~GameCube, ~~following~~DS, ~~the~~and ~~sale,~~Wii; weMicrosoft ~~entered~~Xbox ~~into~~and aXbox ~~Distribution~~360; ~~Agreement~~and personal computers, ~~dated~~referred to as PCs. ofWe ~~August 22,~~also ~~2005,~~publish ~~(the~~and ~~“Humongous~~sublicense ~~Distribution~~games ~~Agreement”),~~for ~~with~~the ~~Humongous~~wireless, ~~Inc.~~internet (~~formerly~~casual ~~Humongous~~games, MMOGs), aand ~~newly~~other ~~formed~~evolving ~~wholly-owned~~platforms, ~~subsidiary~~an ofarea ~~IESA,~~to ~~under~~ which ~~were~~we tohave bebegun ~~the~~to ~~sole~~devote ~~distributor~~increasing inattention. ~~the~~Our ~~US,~~diverse ~~Canada,~~portfolio ~~and Mexico~~ of products ~~developed~~extends ~~by Humongous,~~across ~~Inc.~~most ~~This~~major ~~agreement~~video ~~had~~game agenres, ~~term~~including ~~through~~action, adventure, ~~March 31~~strategy, ~~2006~~role-playing, ~~with~~and anracing. ~~option~~Our toproducts ~~extend~~ are ~~through~~based ~~March 31,~~on ~~2007,~~intellectual atproperties that ~~the~~we ~~discretion~~have ofcreated ~~Humongous~~internally ~~Inc.~~and ~~Although~~own ~~this~~or ~~distribution agreement~~that ~~was~~have ~~expected~~been licensed to ~~generate~~us ~~continuing~~by ~~cash~~third ~~flows~~parties. ~~from~~We leverage external resources in the ~~distribution~~ development of ~~their~~our ~~product~~games, itassessing ~~was~~each ~~expected~~project ~~that~~independently to ~~IESA~~determine ~~would~~which ~~have~~development ~~sold~~team ~~Humongous,~~is ~~Inc.~~best suited to ahandle ~~third~~the ~~party~~product ~~within~~based ~~twelve~~on ~~months from the~~technical ~~disposal~~expertise ~~date~~and ofhistorical ~~August 22~~development experience, ~~2005~~among other factors. AsDuring offiscal ~~June 2006~~2007, we ~~have~~sold ~~determined~~our ~~that,~~remaining ~~while~~internal ~~Humongous~~development isstudios; ~~expected~~we tobelieve bethat ~~sold,~~through the use of independent ~~potential~~developers ~~buyer~~it ~~has~~will ~~requested~~be usmore tocost ~~continue~~efficient to publish certain of our games. Additionally, through ~~distribute~~our ~~Humongous~~relationship with IESA, ~~Inc.’s~~our products ~~beyond~~are ~~the~~distributed ~~assessment period~~exclusively ~~ending~~by ~~August 22,~~IESA ~~2006~~throughout Europe, Asia and ~~therefore~~ ~~will~~other ~~not~~regions. ~~eliminate~~Through our ~~significant~~distribution ~~continuing~~agreement ~~involvement.~~with ~~Therefore~~IESA, ~~under~~we ~~guidance~~have ~~established~~the ~~under~~rights to ~~FASB~~publish ~~Statement~~and ~~No. 144,~~sublicense wein noNorth ~~longer~~America ~~qualify~~certain tointellectual ~~consider~~properties ~~Humongous~~either aowned ~~discontinued~~or ~~operation~~licensed ~~and~~by ~~have~~IESA ~~reclassified~~or its ~~results~~subsidiaries, ~~back~~including toAtari ~~continuing~~Interactive. ~~operations~~We ~~and~~also ~~its~~manage ~~assets~~the ~~and~~development ~~liabilities~~of ~~as held~~certain ~~and~~product ~~used~~at ~~for~~studios ~~all~~owned ~~periods~~by ~~presented~~IESA that focus solely on game development.

In addition to our publishing and development activities, we also distribute video game software in North America for titles developed by third-party publishers with whom we have contracts. As a distributor of video game software throughout the U.S., we maintain distribution operations and systems that reach in excess of 30,000 retail outlets nationwide. Consumers have access to interactive software through a variety of outlets, including mass-merchant retailers such as Wal-Mart and Target; major retailers, such as Best Buy and Toys ‘R’ Us; and specialty stores such as GameStop. Our sales to key customers Wal-Mart, GameStop, and Target accounted for approximately 25.1%, 19.2%, and 10.3%, respectively, of net revenues (excluding international royalty, licensing, and other income) for the year ended March 31, 2007. No other customers had sales in excess of 10% of net product revenues. Additionally, our games are made available through various internet, online, and wireless networks.

Adoption of FASB Statement No. 123(R)

Effective April 1, 2006, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment,” which requires the measurement and recognition of compensation expense at fair value for employee stock awards. Prior to fiscal 2007, we accounted for employee stock option plans under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Included in the fiscal 2007 net loss is $1.6 million of stock-based compensation expense, of which $0.9 million is included in research and product development expenses, $0.6 million is included in general and administrative expenses, and $0.1 million is included in selling and distribution expenses. No such expense was recorded in prior periods.

Key Challenges

The video game ~~software~~ industry has experienced an increased rate of change and complexity in ~~the~~ the technological innovations of video game hardware and software. In addition to these ~~technological~~ technological innovations, there has been greater competition for retail shelf space ~~and creative talent~~ as well as increased buyer selectivity. There is also increased competition for creative and executive talent. As a result, the video game industry has become increasingly hit-driven, which has led to higher per game production budgets, longer and more complex development processes, and generally shorter product life cycles. The importance of the timely release of hit titles, as well as the increased scope and complexity of the product development process, have increased the need for disciplined product development processes that limit costs and overruns. This, in turn, has increased the importance of leveraging the technologies, characters or storylines of existing hit titles into additional video game software franchises in order to spread development costs among multiple products. ~~In this environment, we~~ ~~are determined to achieve balances between internal and external development, and licensed and proprietary products.~~

~~Due~~ We ~~primarily~~suffered tolarge ~~our~~operating ~~limited~~losses ~~funds, we have~~ during ~~the~~fiscal ~~past~~2007 ~~two~~and ~~years~~2006. ~~reduced~~To ~~substantially our~~fund ~~expenditures~~these onlosses, ~~product~~we ~~development and~~ sold assets, ~~the~~including intellectual property rights related to ~~some~~ game franchises that had generated substantial revenues for us and including our development studios. ~~This~~Further ~~has~~significant ~~both~~asset ~~materially~~sales may ~~reduced~~not be practical if we are going to continue to engage in our current activities. However, we ~~revenues~~have both short and ~~made~~long ~~distribution~~term aneed ~~larger~~for ~~percentage~~funds. ofCurrently, our ~~business.~~only Wecredit ~~are~~line ~~reviewing~~is ~~our~~an ~~operating~~asset based ~~strategy~~secured credit line that is limited to $15.0 million (subject to a borrowing base calculation), and which itthe lenders will have the right to cancel if, as is likely, ~~that~~we fail to meet financial covenants at June 30, 2007 (the lenders waived defaults resulting from our failure to meet financial covenants at March 31, 2007). Even if the credit line remains in effect, it will not provide all the funds we will ~~increasingly~~need ~~focus~~to onpay ~~distribution~~for ininventory ~~various~~that ~~forms~~will ofbe needed for the calendar 2007 ~~products~~holiday ~~developed~~season. byHistorically, ~~others~~IESA ashas asometimes ~~source~~provided offunds ~~revenue~~we needed for our operations, but it is not certain that it will be able, or will be willing, to provide the funding we will need for fiscal 2008 or subsequent to that.

The “Atari” name (which we license) has been an important part of our branding strategy, and we believe it provides us with an important competitive advantage in dealing with video game developers and in distributing products. Further, our management has been working on a strategic plan to replace part of the revenues we lost in recent years by expanding into new emerging aspects of the video game industry, including casual games, online sites, and digital downloading. In addition, we are considering licensing the “Atari” name for use in products other than video games. However, our ability to do at least some of those things will require expansion and extension of our rights to use and sublicense others to use the “Atari” name. We have no agreements or understandings that assure us that we will be able to expand the purposes for which we can use the “Atari” name or extend the period during which we will be able to use it.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations ~~are~~relates ~~based~~to ~~upon~~ our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to accounts and notes receivable, inventories, intangible assets, investments, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition, sales returns, price protection, other customer related allowances and allowance for doubtful accounts

Revenue is recognized when title and risk of loss transfer to the customer, provided that collection of the resulting receivable is deemed probable by management.

Sales are recorded net of estimated future returns, price protection and other customer related allowances. We are not contractually obligated to accept returns; however, based on facts and circumstances at the time a customer may request approval for a return, we may permit the return or exchange of products sold to ~~certain~~ customers. In addition, we may provide price protection, co-operative advertising and other allowances to ~~certain~~ customers in accordance with industry practice. These reserves are determined based on historical experience, market acceptance of products produced, retailer inventory levels, budgeted customer allowances, the nature of the title and existing commitments to customers. Although management believes it provides adequate reserves with respect to these items, actual activity could vary from management’s estimates and such variances could have a material impact on reported results.

management believes it provides adequate reserves with respect to these items, actual activity could vary from management’s estimates and such variances could have a material impact on reported results.

We maintain allowances for doubtful accounts for estimated losses resulting from the failure of our customers to make payments when due or within a reasonable period of time thereafter. If the financial condition of our customers were to deteriorate, resulting in an inability to make required payments, additional allowances may be required.

For the years ended March 31, ~~2004~~2005, ~~2005~~2006, and ~~2006~~2007, we recorded allowances for bad debts, returns, price protection and other customer promotional programs of approximately $~~108~~79.59 million, $8856.9 million, and $6022.37 million, respectively. As of March 31, ~~2005~~2006 and March 31, ~~2006~~2007, the aggregate reserves against accounts receivable for bad debts, returns, price protection and other customer promotional programs were approximately $2430.39 million and $3014.91 million, respectively.

Inventories

We write down our inventories for estimated slow-moving or obsolete inventories equal to the difference between the cost of inventories and estimated market value based upon assumed market conditions. If actual market conditions are less favorable than those assumed by management, additional inventory write-downs may be required. For the years ended March 31, ~~2004~~2005, ~~2005~~2006, and ~~2006~~2007, we recorded obsolescence expense of approximately $12.76 million, $23.67 million, and $32.75 million, respectively. As of March 31, ~~2005~~2006 and March 31, ~~2006~~2007, the aggregate reserve against inventories was approximately $2.74 million and $21.69 million, respectively.

Research and product development costs

Research and product development costs related to the design, development, and testing of new software products, whether internally or externally developed, are charged to expense as incurred. Research and product development costs also include payments for royalty advances (milestone payments) to third-party developers for products that are currently in development. Once a product is sold, we may be obligated to make additional payments in the form of backend royalties to developers which are calculated based on contractual terms, typically a percentage of sales. Such payments are expensed and included in cost of goods sold in the period the sales are recorded.

Rapid technological innovation, shelf-space competition, shorter product life cycles and buyer selectivity have made it difficult to determine the likelihood of individual product acceptance and success. As a result, we follow the policy of expensing milestone payments as incurred, treating such costs as research and product development expenses. Due to recently implemented enhancements in our internal project planning and acceptance process and anticipated additional improvements in our ability to assess post-release consumer acceptance, we are currently considering a change from expensing such costs when incurred to a method of deferral and amortization, when appropriate over each product’s life cycle. Such change may be implemented prospectively as early as our next fiscal year. Management believes that the ability to amortize such costs over the product’s life cycle will result in a better matching of costs and revenues.

Licenses

Licenses for intellectual property are capitalized as assets upon the execution of the contract when no significant obligation of performance remains with us or the third party. If significant obligations remain, the asset is capitalized when payments are due or when performance is completed as opposed to when the contract is executed. These licenses are amortized at the licensor’s royalty rate over unit sales to cost of goods sold. Management evaluates the carrying value of these capitalized licenses and records an impairment charge in the period management determines that such capitalized amounts are not expected to be realized. Such impairments are charged to cost of goods sold if the product has released or previously sold, and if the product has never released, these impairments are charged to research and product development.

Income taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations as well as making judgments regarding the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is established. The estimated effective tax rate is adjusted for the tax related to significant unusual items. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate.

AsResearch ~~of March 31, 2006, we have combined net operating loss carryforwards of approximately $532.6 million for federal~~ and ~~state~~product ~~tax~~development ~~purposes. These loss carryforwards are available to~~expenses ~~offset future taxable income, if any, and will expire~~ beginning in the years 2009 through 2027. We experienced an ownership change in 1999 as a result of the acquisition by IESA. Under Section 382 of the Internal Revenue Code, when there is an ownership change, the pre-ownership-change loss carryforwards are subject to an annual limitation which could reduce or defer the utilization of these losses. Pre-acquisition losses of approximately $186.8 million are subject to an annual limitation (approximately $7.2 million). We are considering transactions that might subject additional loss carryforwards to an annual limitation. A full valuation allowance has been recorded against our net deferred tax asset of $232.8 million, based on our historical operating results and the conclusion that it is more likely than not that such asset will not be realized. Management reassesses its position with regard to the valuation allowance on a quarterly basis.

~~Related~~ Research and product development expenses related to the design, development, and testing of newly developed software products, both internal and external, are charged to expense as incurred. Research and product development expenses also include royalty payments (milestone payments) to third-party ~~transactions~~developers for products that are currently in development. Once a product is sold, we may be obligated to make additional payments in the form of backend royalties to developers which are calculated based on contractual terms, typically a percentage of sales. Such payments are expensed and included in cost of goods sold in the period the sales are recorded.

We Rapid ~~are~~technological ~~involved~~innovation, inshelf-space ~~numerous~~competition, ~~related~~shorter ~~party~~product ~~transactions~~life ~~with~~cycles ~~IESA~~ and ~~its~~buyer selectivity ~~subsidiaries.~~have ~~These related~~made ~~party~~it ~~transactions~~difficult ~~include,~~to ~~but~~determine ~~are~~the ~~not~~likelihood ~~limited~~of ~~to,~~individual ~~the~~product ~~purchase~~acceptance and success. ~~sale~~As ofa ~~product~~result, ~~game development,~~we ~~administrative~~follow ~~and~~the ~~support~~policy ~~services~~of ~~and~~expensing ~~distribution~~milestone ~~agreements.~~payments ~~(See~~as ~~Note~~incurred, ~~12 to the~~treating ~~Consolidated~~such ~~Financial~~costs ~~Statements~~as ~~for~~research ~~information~~and onproduct ~~related~~development ~~party transactions~~expenses.)

~~Results of Operations~~Licenses

~~Year~~ Licenses ~~ended~~for ~~March 31~~intellectual property are capitalized as assets upon the execution of the contract when no significant obligation of performance remains with us or the third party. If significant obligations remain, ~~2005~~the ~~versus~~asset ~~year~~is ~~ended~~capitalized ~~March 31~~when payments are due or when performance is completed as opposed to when the contract is executed. These licenses are amortized at the licensor’s royalty rate over unit sales to cost of goods sold. Management evaluates the carrying value of these capitalized licenses and records an impairment charge in the period management determines that such capitalized amounts are not expected to be realized. Such impairments are charged to cost of goods sold if the product has released or previously sold, ~~2006~~and if the product has never released, these impairments are charged to research and product development expenses.

~~Consolidated~~Atari ~~Statement~~Trademark ~~of Operations (dollars in thousands):~~License

	Year			% of			Year			% of
	Ended			Net			Ended			Net			(Decrease)/
	March 31,			Revenues			March 31,			Revenues			Increase
	2005						2006						$			%
Net revenues	$	407,813			100.0	%	$	218,661			100.0	%		(189,152	)		(46.4	)%
Costs and expenses:
Cost of goods sold		217,065			53.2	%		137,582			62.9	%		(79,483	)		(36.6	)%
Research and product development		68,592			16.8	%		63,263			29.0	%		(5,329	)		(7.8	)%
Selling and distribution expenses		64,221			15.7	%		44,846			20.5	%		(19,375	)		(30.2	)%
General and administrative expenses		35,792			8.9	%		30,385			13.9	%		(5,407	)		(15.1	)%
Restructuring expenses		4,932			1.2	%		8,867			4.1	%		3,935			79.8	%
Gain on sale of intellectual property		—			0.0	%		(6,224	)		(2.9	)%		6,224			100.0	%
Depreciation and amortization		10,918			2.7	%		8,530			3.9	%		(2,388	)		(21.9	)%
Total costs and expenses		401,520			98.5	%		287,249			131.4	%		(114,271	)		(28.5	)%
Operating income (loss)		6,293			1.5	%		(68,588	)		(31.4	)%		(74,881	)		(1,189.9	)%
Interest expense, net		(459	)		(0.1	)%		(595	)		(0.2	)%		136			29.6	%
Other income (expense)		42			0.0	%		(208	)		(0.1	)%		(250	)		(595.2	)%
Income (loss) before provision for (benefit from) income taxes		5,876			1.4	%		(69,391	)		(31.7	)%		(75,267	)		(1,280.9	)%
Provision for (benefit from) income taxes		184			0.0	%		(405	)		(0.2	)%		(589	)		(320.1	)%
Net income (loss)	$	5,692			1.4	%	$	(68,986	)		(31.5	)%	$	(74,678	)		(1,312.0	)%

In connection with a recapitalization completed in fiscal 2004, Atari Interactive extended the term of the license under which we use the Atari trademark to ten years expiring on December 31, 2013. We issued 200,000 shares of our common stock to Atari Interactive for the extended license and will pay a royalty equal to 1% of our net revenues during years six through ten of the extended license. We recorded a deferred charge of $8.5 million, representing the fair value of the shares issued, which was expensed monthly until it became fully expensed in the first quarter of fiscal 2007. The monthly expense was based on the total estimated cost to be incurred by us over the ten-year license period; upon the full expensing of the deferred charge, this expense is being recorded as a deferred liability owed to Atari Interactive, to be paid beginning in year six of the license. Based on these assumptions, a $100.0 million increase/decrease in the estimated total net revenues during years six through ten of the extended license period would result in a $0.2 million increase/decrease in this expense. During fiscal 2007, we recorded $2.2 million of expense related to this license.

~~Net~~Goodwill ~~Revenues~~and Acquired Intangible Assets

~~Net~~ Goodwill ~~revenues~~is bythe ~~segment~~excess purchase price paid over identified intangible and tangible net assets of acquired companies. Goodwill is not amortized, and is tested for impairment at the ~~years~~reporting unit ~~ended~~level ~~March~~annually or when there are any indications of impairment, as required by FASB Statement No. 31142, ~~2005~~“Goodwill and ~~2006~~Other ~~are~~Intangible asAssets.” ~~follows~~A ~~(in~~reporting ~~thousands):~~unit is an operating segment for which discrete financial information is available and is regularly reviewed by management. We only have one reporting unit, our publishing business, to which goodwill is assigned.

	Years
	Ended
	March 31,				(Decrease)
	2005		2006
Publishing	$	353,612	$	165,463	$	(188,149	)
Distribution		54,201		53,198		(1,003	)
Total	$	407,813	$	218,661	$	(189,152	)

A two-step approach is required to test goodwill for impairment for each reporting unit. The first step tests for impairment by applying fair value-based tests (described below) to a reporting unit. The second step, if deemed necessary, measures the impairment by applying fair value-based tests to specific assets and liabilities within the reporting unit. Application of the goodwill impairment tests require judgment, including identification of reporting units, assignment of assets and liabilities to each reporting unit, assignment of goodwill to each reporting unit, and determination of the fair value of each reporting unit. The determination of fair value for each reporting unit could be materially affected by changes in these estimates and assumptions. Such changes could trigger impairment.

~~The~~ In ~~platform~~fiscal ~~mix~~2007, ~~for~~we completed the ~~years~~first ~~ended~~step ~~March~~of the annual goodwill impairment testing as of December 31, ~~2005~~2006 ~~and~~with ~~2006~~regard ~~for~~to the goodwill, which is all associated with our publishing business. ~~net~~As ~~revenues~~part of step one, we considered three methodologies to determine the fair-value of our reporting unit. The first, which we believe is our primary and most reliable approach, is a market capitalization approach. This aligns our market capitalization at the balance sheet date to our publishing business, as we believe this measure is a good indication of third-party ~~follows:~~determination of fair value. The second approach entails determining the fair value of the reporting unit using a discounted cash flow methodology, which requires

	Publishing Platform Mix
	2005			2006
PlayStation 2		39.4	%		36.6	%
PC		25.9	%		31.2	%
Xbox		11.9	%		10.9	%
Plug and Play		4.8	%		8.7	%
Game Boy Advance		12.0	%		7.0	%
Nintendo DS		0.7	%		2.0	%
PlayStation Portable		0.0	%		1.9	%
Game Cube		4.3	%		1.7	%
PlayStation		1.0	%		0.0	%
Total		100.0	%		100.0	%

significant judgment to estimate the future cash flows and to determine the appropriate discount rates, growth rates, and other assumptions. The third approach is an orderly sale of assets process, which values the publishing unit based on estimated sale price of assets and intellectual property, less any related liabilities. Due to our history of operating losses and diminishing financial performance, we do not place heavy reliance on the second approach. The third approach is not a commonly used analysis; therefore, we place minimal reliance on that approach as well. Pursuant to the analysis using the market capitalization approach, we found no indications of impairment of our recorded goodwill at December 31, 2006.

~~Net~~ However, ~~revenues~~during ~~for~~ the ~~year~~fourth quarter ended March 31, ~~2006~~2007, ~~decreased~~our ~~approximately~~market 46capitalization declined significantly.~~4%,~~ ~~largely~~As ~~due~~this measure is our primary indicator of the fair value of our publishing unit, management considered this decline to ~~underperformance~~be ~~from~~a ~~new~~triggering ~~product~~event, ~~launches~~requiring us to perform an impairment analysis. As of March 31, ~~product~~2007, ~~launch~~we ~~delays~~completed this analysis and our management, with the ~~and~~concurrence aof ~~weak~~the ~~holiday~~Audit ~~season~~Committee of our Board of Directors, ~~compounded~~has byconcluded ~~the~~that an impairment ~~transition~~charge toof ~~next~~$54.1 million ~~generation~~should ~~consoles~~be recognized. This is a non-cash charge and has been recorded in the fourth quarter of fiscal 2007.

• During ~~The~~fiscal ~~current~~2007, ~~period~~we ~~net~~recorded ~~publishing~~acquired ~~revenues~~intangible ofassets ~~$165.5 million include net product sales of $59.3 million~~ for ~~the~~website ~~top~~development ~~sellers of fiscal 2006: Dragon Ball Z: Budokai Tenkaichi~~ costs (~~PlayStation~~related ~~2),~~to ~~Matrix:~~the ~~Path~~Atari ofOnline ~~Neo (PC~~website, ~~PlayStation~~including 2,a ~~and Xbox~~URL), ~~Atari~~which ~~Flashback~~are ~~2.0~~accounted ~~(Plug~~for ~~and Play), and Getting Up: Contents Under Pressure (PC, PlayStation 2, and Xbox). Other new releases~~ in ~~the~~accordance ~~current~~with Emerging ~~year~~Issues ~~included~~Task ~~Dungeons~~Force ~~and Dragons: Stormreach~~ (PC“EITF”), ~~Driver: Parallel Lines (PlayStation 2 and Xbox)~~00-02, ~~Indigo~~“Accounting ~~Prophecy~~for ~~(PC,~~Web ~~PlayStation~~Site 2,Development ~~and Xbox), and Dragon Ball Z: Transformations (Game Boy Advance)~~Costs.” InEITF ~~the~~00-02 requires ~~prior~~that ~~year,~~web ~~net~~site ~~publishing~~development ~~revenues~~costs ofbe ~~$353.6~~treated ~~million~~as ~~were~~computer ~~driven~~software bydeveloped ~~the~~for ~~successful launch of DRIV3R in June 2004~~internal use, ~~which~~and ~~generated~~that ~~approximately~~costs ~~$41.8~~incurred ~~million~~ in ~~net~~the ~~product~~application ~~sales,~~ and ~~the~~development ~~Dragon~~stages ~~Ball~~be Zcapitalized ~~franchise,~~in ~~which~~accordance with ~~generated~~AICPA ~~full~~Statement ~~year net product sales~~ of ~~$85.9~~Position ~~million, led by Budokai 3~~ (~~PlayStation 2~~“SOP”), ~~Sagas (PlayStation 2~~98-1, ~~Xbox~~“Accounting ~~and~~for ~~GameCube),~~the ~~Buu’s~~Costs ~~Fury~~of ~~(Game~~Computer ~~Boy~~Software Developed ~~Advance),~~or ~~and~~Obtained ~~Super~~for ~~Sonic~~Internal ~~Warriors (Game Boy Advance)~~Use.” •As ~~During~~of ~~the year ended~~ March 31, ~~2006~~2007, ~~back~~we ~~catalogue~~determined ~~sales~~that ~~were~~certain ~~22%~~ of ~~our net product revenues, compared with 19% of our net product revenues during~~ the acquired ~~prior~~intangible ~~year.~~assets •previously ~~Publishing~~capitalized ~~net~~no ~~revenues~~longer ~~include~~provided ~~international~~a ~~royalty~~future ~~income~~benefit ~~earned~~to ~~on IESA’s international sales of our titles. International royalty income decreased slightly by $0.4 million from $18.7 million in~~ the ~~year ended March 31~~ company, ~~2005~~as tomanagement ~~$18.3~~decided ~~million~~at in the ~~current~~end ~~year. The current year income was driven by international sales~~ of ~~Matrix: Path of Neo, Getting Up: Contents Under Pressure, and Indigo Prophecy, while~~ the ~~prior~~fourth ~~year’s~~quarter ~~income~~to ~~included~~move ~~$16.0~~to ~~million from DRIV3R. The current balance includes~~ an ~~unfavorable~~outsourced ~~exchange~~technology model; ~~rate~~these ~~impact~~costs ofwere ~~approximately~~written ~~$1.0~~off, ~~million~~and ~~from~~ the ~~strengthening~~charge ~~U.S.~~is ~~dollar against the euro. • Domestic licensing and other income,~~ included in ~~publishing~~research ~~net~~and ~~revenues,~~product ~~decreased~~development expenses ~~approximately~~for ~~49.4% to $13.0 million from $25.7 million in~~ the ~~prior~~ year. ~~The~~ended ~~decrease~~March 31, ~~was driven by:~~2007.

°Results ~~domestic licensing income~~ of $9.2 million in the current year, compared with $17.4 million in the prior year, driven by the prior year’s recognition of the Duke Nukem Royalty Advance Promissory Note of $4.3 million, and ° the prior year’s recognition of $4.0 million in fees paid by Microsoft to develop DRIV3R for the Xbox platform, as well as $1.2 million in in-game advertising revenues, offset by ° the current year recognition of production services revenue of $2.0 million from Atari Interactive pursuant to an agreement signed in March 2006.Operations

•Year ~~The~~ended ~~overall average sales price (“ASP”) of the publishing business increased from $19.71 in the prior year~~March 31, to2006 ~~$20.71~~versus ~~in the current~~ year. ~~Trends~~ended ~~include:~~March 31, 2007

°Consolidated ~~slight~~Statement ~~increase in the ASP for PC titles from $14.06 to $14.65, and ° current year inclusion~~ of ~~PlayStation~~Operations ~~Portable,~~(dollars ~~with an ASP of $26.08, increasing the overall console ASP from $22.94~~ in ~~the prior year to $25.49 in the current year, offset by ° a decrease in the ASP of the Atari Flashback plug-and-play games from $29.87 in the prior year to $19.90.~~thousands):


	Year			% of			Year			% of
	Ended			Net			Ended			Net			(Decrease)/
	March 31,			Revenues			March 31,			Revenues			Increase

	2006						2007						$			%

Net revenues	$	206,796			100.0	%	$	122,285			100.0	%		(84,511	)		(40.9	)%
Costs and expenses:
Cost of goods sold		133,604			64.6	%		72,629			59.4	%		(60,975	)		(45.6	)%
Research and product development expenses		51,887			25.1	%		30,077			24.6	%		(21,810	)		(42.0	)%
Selling and distribution expenses		42,985			20.8	%		25,296			20.7	%		(17,689	)		(41.2	)%
General and administrative expenses		30,385			14.7	%		21,788			17.8	%		(8,597	)		(28.3	)%
Restructuring expenses		8,867			4.3	%		709			0.6	%		(8,158	)		(92.0	)%
Impairment of goodwill		—			0.0	%		54,129			44.3	%		54,129			100.0	%
Gain on sale of intellectual property		(6,224	)		(3.0	)%		(9,000	)		(7.4	)%		2,776			44.6	%
Gain on sale of development studio assets		—			0.0	%		(885	)		(0.7	)%		885			100.0	%
Atari trademark license expense		3,067			1.5	%		2,218			1.8	%		(849	)		(27.7	)%
Depreciation and amortization		5,202			2.5	%		2,968			2.4	%		(2,234	)		(42.9	)%

Total costs and expenses		269,773			130.5	%		199,929			163.5	%		(69,844	)		(26.0	)%

Operating (loss)		(62,977	)		(30.5	)%		(77,644	)		(63.5	)%		14,667			23.3	%
Interest (expense) income, net		(595	)		(0.2	)%		301			0.2	%		(896	)		(150.6	)%
Other (expense) income		(208	)		(0.1	)%		77			0.1	%		(285	)		(137.0	)%

(Loss) before (benefit from) income taxes		(63,780	)		(30.8	)%		(77,266	)		(63.2	)%		13,486			21.2	%
(Benefit from) income taxes		(405	)		(0.2	)%		(10,680	)		(8.8	)%		10,275			2,537.0	%

(Loss) from continuing operations		(63,375	)		(30.6	)%		(66,586	)		(54.4	)%		3,211			5.1	%
(Loss) from discontinued operations of Reflections Interactive Ltd, net of tax provision of $0 and $7,559, respectively		(5,611	)		(2.8	)%		(3,125	)		(2.6	)%		(2,486	)		(44.3	)%

Net (loss)	$	(68,986	)		(33.4	)%	$	(69,711	)		(57.0	)%	$	725			1.1	%

•Net Platform mix has shifted away from console product toward lower priced PC and plug-and-play product. The current year to date mix consisted of 60.1% console product, 31.2% PC product, and 8.7% Atari Flashback product, compared with the prior year mix of 69.3% console product, 25.9% PC product, and 4.8% Atari Flashback product. • Total distribution net revenues decreased $1.0 million due to increased competition; however, the current period includes net revenues of Humongous, Inc. as a distributed party since August 2005. • In the fourth quarter of fiscal 2006, we recorded additional price protection allowances of $4.2 million in connection with our aggressive pricing program which reduces existing console and certain PC titles sold prior to March 31, 2006 to a retail price of $19.95.Revenues

Net revenues by segment for the years ended March 31, 2006 and 2007 are as follows (in thousands):


	Years
	Ended
	March 31,				(Decrease)

	2006		2007

Publishing	$	153,598	$	104,650	$	(48,948	)
Distribution		53,198		17,635		(35,563	)

Total	$	206,796	$	122,285	$	(84,511	)

The platform mix for the years ended March 31, 2006 and 2007 for net publishing revenues from product sales is as follows:


	Publishing Platform Mix
	2006			2007
PlayStation 2		35.5	%		35.5	%
PC		32.7	%		27.2	%
Xbox 360		0.0	%		12.1	%
Nintendo Wii		0.0	%		8.4	%
PlayStation Portable		2.1	%		7.6	%
Game Boy Advance		6.7	%		3.9	%
Plug and Play		9.3	%		2.8	%
Nintendo DS		2.1	%		2.0	%
Xbox		9.8	%		0.3	%
Game Cube		1.8	%		0.2	%

Total		100.0	%		100.0	%

Net revenues for the year ended March 31, 2007 decreased approximately 40.9%, largely due to fewer successful new releases and product launch delays, compounded by decreased international royalty income.

	•		The fiscal 2007 net publishing revenues of $104.7 million include net product sales from new releases of $61.8 million, driven by Dragon Ball Z: Budokai Tenkaichi 2 (PlayStation 2 and Nintendo Wii), Neverwinter Nights 2 (PC), and Test Drive Unlimited (Xbox 360, PlayStation 2, PSP, and PC). Comparatively, in fiscal 2006, net publishing revenues of $153.6 million were driven by new release sales of $95.1 million which included Dragon Ball Z: Budokai Tenkaichi (PlayStation 2), Matrix: Path of Neo (PlayStation 2, Xbox, and PC), Atari Flashback 2.0 (plug and play), and Getting Up: Contents Under Pressure (PlayStation 2, Xbox, and PC).

	•		During the year ended March 31, 2007, back catalogue sales were 28% of our net product revenues, compared with 24% of our net product revenues during fiscal 2006.

	•		Publishing net revenues include international royalty income earned on IESA’s international sales of our titles. International royalty income decreased by $8.3 million from $13.5 million in fiscal 2006 to $5.2 million in fiscal 2007. The current year income was driven by international sales of Test Drive Unlimited, while the prior year’s income reflected international sales of Matrix: Path of Neo, Getting Up: Contents Under Pressure, and Indigo Prophecy.

	•		Domestic licensing and other income, included in publishing net revenues, decreased slightly to $12.0 million from $12.1 million in fiscal 2006. Included in this change are:

	o		decreased domestic licensing income of $1.0 million in fiscal 2007 due to an overall decrease in volume of licensing transactions, offset by

	o		increased miscellaneous revenues of $0.9 million driven by increased quality and assurance services (product testing) performed, and sponsorship and in-game advertising revenue which did not exist in fiscal 2006.

•

The overall average sales price (“ASP”) of the publishing business was relatively consistent with fiscal 2006, increasing slightly from $20.50 to $20.80 in fiscal 2007. Trends include:

	o		increase in the ASP for PC titles from $14.67 to $17.44, and

	o		decrease in the ASP for console titles from $25.44 to $22.41. The current year includes sales of Xbox 360 and Nintendo Wii titles, with ASPs of $31.04 and $36.37, respectively, that were not included in fiscal 2006; however, this is offset by a decrease in the ASP for Xbox titles from $30.33 to $5.55, and in PlayStation 2 titles from $29.28 to $21.05, as a result of the recent transition to the newest generation consoles.

	•		Platform mix in fiscal 2007 consisted of 27.2% PC products and 72.8% console (including plug and play) products, as compared with fiscal 2006’s mix of 32.7% PC products and 67.3% console (including plug and play) products.

	•		In the fourth quarter of fiscal 2006, we recorded additional price protection allowances of $4.2 million in connection with our aggressive pricing program, which reduced console and certain PC titles sold prior to March 31, 2006 to a retail price of $19.95.

Total distribution net revenues decreased by $35.6 million, or 66.9%, due to an overall decrease in product sales of third party publishers as a result of management’s decision to reduce our third party distribution operations in efforts to move away from lower margin products. Due to our financial constraints related to fully funding our product development program, we will attempt to increase our focus on higher-margin distribution in the future.

Cost of Goods Sold

Cost of goods sold as a percentage of net revenues can vary primarily due to segment mix, platform mix within the publishing business, average unit sales prices, mix of royalty bearing products and mix of licensed product. These expenses decreased by $7961.50 million primarily from decreased sales volume. Cost of goods sold as a percentage of net revenues ~~increased~~decreased from 5364.26% to 6259.94%, reflecting:

• a higher mix of higher cost third-party distributed product sales as a percentage of net revenues (24.3% in the current year compared with 13.3% in the prior year), • lower licensing and other income, on which we incur lower costs, and • higher license expense in the current period due to higher mix of licensed product sales, primarily Dragon Ball Z sales.

	•		a lower mix of higher cost third-party distributed product sales as a percentage of net revenues (14.4% in fiscal 2007 compared with 25.7% in fiscal 2006), and

	•		a lower mix of royalty bearing products (fiscal 2006 included sales of Matrix: Path of Neo and Getting Up: Contents Under Pressure, both bearing a high amount of royalty expense).

Research and Product Development Expenses

Research and product development expenses consist of development costs relating to the design, development, and testing of new software products whether internally or externally developed, including the payment of royalty advances to third-party developers on products that are currently in development and billings from related party developers. We expect to increase the use of external developers as we have sold all of our internal development studios. These expenses for the year ended March 31, ~~2006~~2007 decreased approximately $521.38 million due to:

• a decrease in expense incurred with external developers of $76.19 million ~~due~~from lack of financial resources to ~~fewer~~invest ~~titles~~in full-fledged development projects (however, we do expect to see savings in research and product development cost in the future if we focus on casual gaming, which has lower development costs), • a decrease in spending of $10.0 million at our related party development studios due to the sale of our Stuntman franchise and development project, in process at Paradigm in fiscal 2006, as well as the completion of Test Drive Unlimited on Xbox 360, released in September 2006 and in process at Eden Studios and Atari Melbourne House (which was sold in fiscal 2007) in fiscal 2006, and • a decrease in salary and other related expenses of $37.09 million due to ~~office~~the ~~closures~~closure inof the Beverly and Santa Monica publishing studios during fiscal 2006, the divestiture of the Shiny studio in the second quarter of fiscal 2007, and ~~Beverly~~other personnel reductions, offset by • ~~increased~~the ~~spending~~current period write-off of $42.74 million ~~for~~of ~~certain~~website-related ~~projects~~acquired ~~currently~~intangible inand ~~development~~other atassets ~~our~~previously ~~internal~~capitalized ~~studios.~~that were determined during the fourth quarter not to provide us with a future benefit, and

~~Internal research and product development expenses represented 53.7% and 53.5% of the total~~32 research and product development expenses for the years ended March 31, 2005 and 2006, respectively. Research and product development expenses, as a percentage of net revenues, increased from 16.8% in the prior year to 29.0% in the current year due to a general shortfall in sales.

Selling and Distribution Expenses

Selling and distribution expenses primarily include shipping, personnel, advertising, promotions and distribution expenses. During the year ended March 31, 2006, selling and distribution expenses decreased approximately $19.4 million due to:

• significant savings in the current period on advertising ($26.8 million in the current period as compared to $37.1 million in the prior period) due to fewer new titles released, • lower variable distribution costs, including freight, shipping and handling, on lower sales, and • savings in salaries and related overhead costs from the closure of the Santa Monica and Beverly studios, as well as personnel reduction at our New York headquarters.

•

the allocated charge of $0.8 million related to the benefit we received from resignation agreement entered into by IESA with our former Chief Creative Officer.

Internal research and product development expenses represented 43.6% and 51.0% of the total research and product development expenses for the years ended March 31, 2006 and 2007, respectively. As of March 31, 2007, we no longer own any internal development studios. Research and product development expenses, as a percentage of net revenues, decreased from 25.1% in fiscal 2006 to 24.6% in fiscal 2007.

Selling and Distribution Expenses

Selling and distribution expenses primarily include shipping, personnel, advertising, promotions and distribution expenses. During the year ended March 31, 2007, selling and distribution expenses decreased approximately $17.7 million due to:

	•		significant savings in the current period on advertising ($12.9 million in fiscal 2007 as compared to $25.2 million in the prior period) due to fewer new releases as well as management’s focus on lower cost and more direct marketing (fiscal 2006 included significant spend for Matrix: Path of Neo television campaigns),

	•		lower variable distribution costs, including freight, shipping and handling, of $2.4 million due to lower sales, and

	•		savings of $2.7 million in salaries and related overhead costs from the closure of the Santa Monica and Beverly studios, as well as personnel reductions at our New York headquarters.

General and Administrative Expenses

General and administrative expenses primarily include personnel expenses, facilities costs, professional expenses and other overhead charges. During the year ended March 31, ~~2006~~2007, general and administrative expenses decreased approximately $58.46 million due to:

• reduction in salary and related costs due to reduced headcount, • reduction in rent and other overhead costs due to the closure of Beverly and Santa Monica studios (included in restructuring expense), offset by • increased professional fees primarily due to increased use of outside legal and other consulting services, and • prior year inclusion of a $0.9 million translation gain from the liquidation of the dormant Australian subsidiary.

	•		reduction in salaries of $6.2 million due to publishing studio closures and other personnel reductions, as well as savings in rent and other overhead and administrative costs, and

	•		decreased bad debt expense of $1.7 million due to lower sales.

Restructuring Expenses

In ~~February~~ the fourth quarter of fiscal 2005, management announced the planned closure of the Beverly, Massachusetts, and Santa Monica, California, publishing studios and the relocation of the functions ~~previously~~ previously provided by ~~the~~those studios to our corporate headquarters in New York. In fiscal 2006, we incurred $8.9 million in expenses related to this restructuring plan, and additionally we recorded ~~activities~~expenses ~~continued~~related ~~with~~to further headcount reduction in our corporate headquarters in New York, as well as as other locations, and terminations at our Humongous studio which was sold in August of 2005. ~~These~~In ~~costs~~fiscal ~~increased~~2007, bywe incurred $30.97 million ~~due~~of restructuring costs primarily related to: our lease for the closed Beverly studio, as well as remaining severance costs.

• On ~~current~~May 1, ~~period~~2007, ~~recognition~~we ofannounced ~~the~~a ~~present~~plan ~~value~~to ofreduce ~~all~~our ~~future~~total ~~lease~~workforce ~~payments~~by ~~for~~approximately ~~offices~~20%, primarily ~~closed~~in asgeneral ~~part~~and ofadministrative ~~the~~functions. ~~restructuring~~We ~~plan,~~anticipate asrecording ~~well~~a asrestructuring ~~other~~reserve during ~~lease~~our ~~related~~fiscal ~~expenses,~~2008 offirst ~~$1.6~~quarter ~~million,~~to •reflect ~~current period~~ severance ~~costs~~packages of approximately $2.0 .8 million ~~related~~ to $1.1 million. ~~headcount~~We ~~reductions~~expect inpayments ~~our~~regarding ~~New~~the ~~York~~severance ~~office~~packages into ~~February~~extend ~~2006,~~through •the ~~relocation~~first quarter ~~expenses~~ of $0fiscal 2009.4 ~~million~~Most ~~recorded~~of inthese ~~fiscal~~reductions ~~2006,~~have ~~and~~been •made ~~fixed~~as ~~asset~~of ~~write~~the ~~offs~~date of ~~$0.4~~this ~~million recorded in the current year~~filing.

Impairment of Goodwill

In the fourth quarter of fiscal 2007, our market capitalization declined significantly, which was considered by management to be a triggering event requiring us to perform a goodwill impairment analysis. As a result of this analysis, management concluded that an impairment charge of $54.1 million should be recognized. No such charge was recorded in fiscal 2006. See Goodwill and Acquired Intangible Assets above.

Gain on Sale of Intellectual Property

In the fourth quarter of fiscal 2006, we sold certain of our intellectual properties to a third party for approximately $6.2 million, which was recorded as a gain. The amount is ~~primarily~~ primarily driven by the sale of our Timeshift property. In the first quarter of fiscal 2007, we sold the Stuntman intellectual property to a third party for $9.0 million, which was recorded as a gain.

Gain on Sale of Development Studio Assets

In the second quarter of fiscal 2007, we sold certain development studio assets of Shiny to a third party for a gain of $0.9 million. The gain represents the proceeds of $1.8 million (of which $0.2 million will be held in escrow for nine months from the date of the sale), less the net book value of the assets sold of $0.9 million. No such gain was recorded in the prior comparable period.

Atari Trademark License Expense

Atari trademark license expense is associated with the Atari name and logo which we use under a license from Atari Interactive, a wholly-owned subsidiary of IESA. The expense is based on the total estimated cost that will be incurred by us over the 10-year license period, which includes the fair value of 200,000 shares issued during fiscal 2004 (determined at that time to be $8.5 million) plus 1% of our net revenues during years six through ten of the license period. The expense decreased by $0.8 million in fiscal 2007 due to a change in the expected future earnings upon which this expense is based.

Depreciation and Amortization

Depreciation and amortization for the year ended March 31, ~~2006~~2007 decreased by $2.42 million due to: assets becoming fully depreciated as well as prior year inclusion of depreciation expense for assets from the Beverly and Santa Monica studios which were written off in the second quarter of fiscal 2006, offset by depreciation expense for new assets placed into service.

•Interest ~~decrease~~(Expense) ~~in amortization expense of $0.3 million related to the Atari name license based on revised expectations of future earnings~~Income, ~~and • asset write offs associated with the restructuring as well as assets becoming fully depreciated during the year, offset by • new assets placed into service during the current period.~~net

Interest ~~Expense~~(expense) income, net, decreased from expense of $0.6 million to income of $0.3 million. This decrease is due to the signing of our Guggenheim credit facility late in our fiscal year and minimal average borrowings as compared with the prior comparable period. Furthermore, in fiscal 2007, we recorded $0.4 million of interest income on our money market account as well as interest income on a tax refund recorded at our dormant UK subsidiary (see below). Fiscal 2006 expense consisted primarily of interest expense on our former HSBC credit facility, which expired in May 2006.

~~Interest~~Other ~~expense,~~(Expense) ~~net, increased by $0.1 million as a result of:~~Income

• In ~~prior~~fiscal ~~year~~2006, ~~recognition~~we ofrecorded ~~interest~~a ~~income~~loss of $0.9 2 million ~~earned~~ on the ~~various~~sale ~~related~~of ~~party~~IESA ~~notes~~common ~~receivable~~shares ~~outstanding~~received in ~~during~~connection with the ~~period,~~sale ~~offset~~of bythe Humongous studio. No significant items were recorded in fiscal 2007.

32Benefit From Income Taxes

During fiscal 2007, the benefit from income taxes of $10.7 million is the result of:

	•		a tax refund of $1.0 million received in connection with our dormant UK subsidiary;

	•		a non-cash tax benefit of $2.1 million resulting from the reversal of a deferred tax liability established for the deferred tax consequences of a temporary difference that arose from a difference in the book and tax basis of goodwill in a prior period, upon the impairment of our goodwill in the fourth quarter of fiscal 2007; and

	•		a non-cash tax benefit of $7.6 million which offsets a non-cash tax provision of the same amount included in loss from discontinued operations, recorded in accordance with FASB Statement No, 109, “Accounting for Income Taxes,” paragraph 140, which states that all items should be considered for purposes of determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. The recording of a benefit is appropriate in this instance, under the guidance of Paragraph 140, because such domestic loss offsets the domestic gain generated in discontinued operations. The effect of this transaction on net loss for fiscal 2007 is zero, and it does not result in the receipt or payment of any cash.

	•		lower credit facility interest of $0.7 million in the current period due to lower outstanding borrowings, and
	•		interest income of $0.1 million earned on a prior period income tax refund.

During fiscal 2006, the total benefit from income taxes of $0.4 million resulted from a reversal of a prior period tax reserve upon the successful conclusion ($0.3 million benefit) of an IRS examination of the tax year ended June 30, 2003 which was completed during the year, as well as the reversal of the $0.2 million UK tax reserve (benefit) recorded in fiscal 2005, pursuant to discussions with UK tax inspectors, offset by an additional state tax provision of $0.1 million recorded arising from a New York State tax audit.

~~Other~~Loss ~~Income~~from ~~(Expense)~~Discontinued Operations of Reflections Interactive Ltd, net of tax

InLoss from discontinued operations of Reflections Interactive Ltd decreased from $5.6 million in fiscal 2006 to $3.1 million in fiscal 2007. The fiscal 2006 loss was driven by the ~~current~~operating costs ~~year~~of the Reflections studio, wewhich ~~recorded~~was asold in August 2006. The fiscal 2007 loss results from the tax provision associated with discontinued operations of $07.26 million, onrecorded ~~the~~in ~~sale~~accordance with ofFASB ~~IESA~~Statement ~~common~~No, ~~shares~~109, “Accounting for Income Taxes,” paragraph 140, and offset by a tax ~~received~~benefit of an equal amount in ~~connection~~continuing ~~with~~operations ~~the~~(see ~~sale~~Benefit from Income Taxes above). Excluding this tax provision, we had income of $4.4 million, which is driven by the ~~Humongous~~gain ~~studio~~of $11.5 million Noon ~~significant~~the ~~items~~sale ~~were~~of ~~recorded in~~the Reflections studio and the ~~prior~~related ~~year~~Driver property.

~~Provision~~Year ~~for~~ended ~~(Benefit~~March 31, ~~from)~~2005 ~~Income~~versus ~~Taxes~~year ended March 31, 2006

During the year ended March 31, 2005, we recorded approximately $0.2 million for foreign tax liabilities at our dormant UK subsidiary. In the current period, the benefit from income taxes resulted from the reversal of a prior period tax reserve resulting from the successful conclusion of an IRS examination of the tax year ended June 30, 2003 which was completed in the current year, as well as the reversal of the $0.2 million UK tax reserve recorded in the prior year, pursuant to discussions with UK tax inspectors, offset by an additional state tax provision of $0.1 million recorded arising from a current New York State tax audit.

Year ended March 31, 2004 versus year ended March 31, 2005

Consolidated Statement of Operations (dollars in thousands):

	Year			% of			Year			% of
	Ended			Net			Ended			Net			(Decrease)/
	March 31,			Revenues			March 31,			Revenues			Increase
	2004						2005
	2005						2006						$			%
Net revenues	$	~~468~~343,~~944~~837			100.0	%	$	~~407~~206,~~813~~796			100.0	%	$	(61137,~~131~~041	)		(1339.09	)%
Costs and expenses:
Cost of goods sold		~~260~~200,~~072~~244			5558.52	%		~~217~~133,~~065~~604			5364.26	%		(4366,~~007~~640	)		(1633.53	)%
Research and product development		78,179			16.7	%		68,592			16.8	%		(9,587	)		(12.3	)%
Research and product development expenses		58,311			17.0	%		51,887			25.1	%		(6,424	)		(11.0	)%
Selling and distribution expenses		8558,~~606~~220			1816.39	%		6442,~~221~~985			1520.78	%		(2115,~~385~~235	)		(2526.02	)%
General and administrative expenses		3235,~~103~~792			610.75	%		3530,~~792~~385			814.97	%		3(5,~~689~~407	)		11(15.51	)%
Restructuring expenses		—4,932			01.04	%		48,~~932~~867			14.23	%		43,~~932~~935			~~100~~79.08	%
Gain on sale of development project to a related party		(3,744	)		(0.8	)%		—			0.0	%		(3,744	)		(100.0	)%
Gain on sale of intellectual property		—			0.0	%		(6,224	)		(3.0	)%		6,224			100.0	%
Depreciation and amortization		9,155			2.0	%		10,918			2.7	%		1,763			19.3	%
Atari trademark license expense		3,350			1.0	%		3,067			1.5	%		(283	)		(8.4	)%
Total costs and expenses		461,371			98.4	%		401,520			98.5	%		(59,851	)		(13.0	)%
Depreciation and amortization		6,958			2.0	%		5,202			2.5	%		(1,756	)		(25.2	)%
Operating income		7,573			1.6	%		6,293			1.5	%		(1,280	)		(16.9	)%
Total costs and expenses		367,807			107.0	%		269,773			130.5	%		(98,034	)		(26.7	)%
Interest expense, net		(7,658	)		(1.6	)%		(459	)		(0.1	)%		(7,199	)		(94.0	)%
Operating (loss)		(23,970	)		(7.0	)%		(62,977	)		(30.5	)%		39,077			162.7	%
Other (expense) income		(2,068	)		(0.5	)%		42			0.0	%		(2,110	)		(102.0	)%
Interest expense, net		(459	)		(0.1	)%		(595	)		(0.2	)%		136			29.6	%
(Loss) income before (benefit from) provision for income taxes		(2,153	)		(0.5	)%		5,876			1.4	%		(8,029	)		(372.9	)%
Other income (expense)		42			0.0	%		(208	)		(0.1	)%		(250	)		(595.2	)%
(Benefit from) provision for income taxes		(2,919	)		(0.7	)%		184			0.0	%		(3,103	)		(106.3	)%
(Loss) before (benefit from) income taxes		(24,387	)		(7.1	)%		(63,780	)		(30.8	)%		39,393			161.5	%
Net income		766			0.2	%		5,692			1.4	%		4,926			643.1	%
(Benefit from) income taxes		(9,532	)		(2.8	)%		(405	)		(0.2	)%		(9,127	)		(95.8	)%
Dividend to parent		(39,351	)		(8.4	)%		—			0.0	%		(39,351	)		(100.0	)%
(Loss) from continuing operations		(14,855	)		(4.3	)%		(63,375	)		(30.6	)%		48,520			326.6	%
(Loss) income attributable to common stockholders	$	(38,585	)		(8.2	)%	$	5,692			1.4	%	$	(44,277	)		(114.8	)%
Income (loss) from discontinued operations of Reflections Interactive Ltd, net of tax provision of $9,716 and $0, respectively		20,547			6.0	%		(5,611	)		(2.8	)%		(26,158	)		(127.3	)%
Net income (loss)	$	5,692			1.7	%	$	(68,986	)		(33.4	)%	$	(74,678	)		(1,312.0	)%

Net Revenues

Net revenues by segment for the years ended March 31, ~~2004~~2005 and ~~2005~~2006 are as follows (in thousands):

	Years
	Ended
	March 31,				(Decrease)
	2004		2005
	2005		2006
Publishing	$	~~405~~289,~~983~~636	$	~~353~~153,~~612~~598	$	(52136,~~371~~038	)
Distribution		6254,~~961~~201		5453,~~201~~198		(81,~~760~~003	)
Total	$	~~468~~343,~~944~~837	$	~~407~~206,~~813~~796	$	(61137,~~131~~041	)

The platform mix for the years ended March 31, ~~2004~~2005 and ~~2005~~2006 for ~~publishing~~ net publishing revenues from product sales is as follows:

3335

	Publishing Platform Mix
	2004			2005
	2005			2006
PlayStation 2		3536.26	%		3935.45	%
PC		2928.27	%		2532.97	%
Xbox		138.57	%		~~11.~~9.8	%
Game Boy Advance		12.1	%		12.0	%
Plug and Play		5.8	%		9.3	%
Plug and Play		0.0	%		4.8	%
Game Boy Advance		13.0	%		6.7	%
Game Cube		7.1	%		4.3	%
Nintendo DS		0.8	%		2.1	%
PlayStation		2.7	%		1.0	%
PlayStation Portable		0.0	%		2.1	%
Nintendo DS		0.0	%		0.7	%
Game Cube		5.3	%		1.8	%
Game Boy Color		0.2	%		0.0	%
PlayStation		1.1	%		0.0	%
Total		100.0	%		100.0	%

Net revenues for the year ended March 31, ~~2005~~2006 decreased approximately 1339.09%, largely adue ~~function~~to ofunderperformance ~~that~~from ~~year’s~~new ~~highly~~product ~~competitive holiday season~~launches, ~~compounded~~product ~~by our hugely successful~~ launch indelays, ~~the~~and ~~first~~a ~~quarter~~weak ofholiday ~~the~~season, compounded ~~2004~~by ~~fiscal year of Enter~~ the ~~Matrix~~ ~~versus~~transition ~~fiscal~~to ~~2005’s~~next ~~best seller~~generation ~~of DRIV3R~~consoles.

• ~~The~~Fiscal ~~successful~~2006 ~~launch~~net publishing revenues of ~~DRIV3R~~$153.6 inmillion ~~June~~include ~~2004~~net ~~and~~product sales from new releases of $95.1 million, which includes the ~~continued~~top ~~success~~sellers of ~~our~~fiscal 2006: Dragon Ball Z: ~~franchise~~Budokai ~~have~~Tenkaichi ~~contributed~~(PlayStation to2), ~~the~~Matrix: ~~generation~~Path of ~~$353~~Neo (PlayStation 2, Xbox, and PC), Atari Flashback 2.60 ~~million~~(plug ofand ~~net~~play), ~~publishing~~and ~~revenues~~Getting ~~for~~Up: ~~the~~Contents ~~year~~Under ~~ended~~Pressure ~~March~~(PlayStation 312, ~~2005~~Xbox, and PC). ~~Full~~Other ~~year~~new ~~domestic~~releases ~~net~~in ~~revenues~~fiscal on2006 ~~DRIV3R~~included ~~were~~Dungeons ~~approximately~~and ~~$41.8~~Dragons: ~~million~~Stormreach ~~compared~~(PC), ~~with~~Indigo ~~full~~Prophecy ~~year~~(PC, ~~domestic~~PlayStation ~~net~~2, ~~revenues~~and ofXbox), ~~Enter~~and ~~the~~Dragon ~~Matrix~~Ball inZ: ~~the~~Transformations ~~prior~~(Game ~~year~~Boy ofAdvance). ~~approximately~~In fiscal 2005, net publishing revenues of $87289.46 million. ~~The~~were driven by the Dragon Ball Z franchise, which generated ~~fiscal~~full ~~2005~~year net ~~revenues~~product sales of $85.9 million, ~~was~~ led by Budokai 3 (PlayStation 2), Sagas (PlayStation 2, Xbox and GameCube), Buu’s Fury (Game Boy Advance), and Super Sonic Warriors (Game Boy Advance). ~~The~~• ~~Dragon~~During ~~Ball Z franchise generated $85.0 million in~~ the ~~prior~~ year ~~primarily~~ended ~~from~~March ~~sales of Budokai 2 (PlayStation 2). Other new releases in fiscal 2005 included RollerCoaster Tycoon 3 (PC)~~31, ~~TRANSFORMERS (PlayStation 2)~~2006, ~~Duel~~back ~~Masters:~~catalogue ~~Sempai~~sales ~~Legends~~were ~~(PlayStation~~ 24.2% ~~and~~of ~~Game~~our ~~Boy~~net ~~Advance)~~product revenues, ~~Atari~~which ~~Anthology~~is ~~(PlayStation~~comparable 2with ~~and~~22.6% ~~Xbox),~~of ~~and~~our ~~Atari~~net ~~Flashback,~~product arevenues ~~plug~~during ~~and~~fiscal ~~play classic game console~~2005. • Publishing net revenues include international royalty income earned on IESA’s international sales of our titles. International royalty income ~~decreased~~increased by $1011.20 million from $282.95 million in ~~the~~fiscal ~~year~~2005 ~~ended March 31, 2004~~ to $1813.75 million in fiscal ~~2005,~~2006. ~~due~~The tofiscal ~~higher~~2006 ~~international royalty~~ income ~~from~~was ~~Enter~~driven ~~the~~by ~~Matrix,~~international ~~Unreal~~sales ~~Tournament~~of ~~2004,~~Matrix: ~~Mission~~Path ~~Impossible~~of 2Neo, ~~and~~Getting ~~Terminator 3~~Up: ~~Rise~~Contents ofUnder ~~the Machines~~Pressure, ~~totaling~~and ~~$26.7~~Indigo ~~million in the prior year compared with income from DRIV3R of $16~~Prophecy.0 ~~million~~The in2006 ~~the~~revenues ~~2005~~also ~~fiscal~~include ~~year.~~an ~~The~~unfavorable ~~decrease included a favorable~~ exchange rate impact ~~in the 2005 fiscal year~~ of approximately $1.80 million from the ~~weakening~~strengthening U.S. dollar against the ~~euro~~Euro. • Domestic licensing and other income, included in publishing net revenues, ~~increased~~decreased approximately $837.~~7 million or 51.2~~9% to $2512.71 million ~~in fiscal 2005~~ from $1719.0 million in the prior year. We recognized $17.4 million in domestic licensing income, an increase of $2.7 million or 18.4%, primarily from the recognition of the Duke Nukem Royalty Advance Promissory Note of $4.3 million. Additionally, we recognized $4.0 million in fees paid by Microsoft to develop DRIV3R for the Xbox platform; $1.2 million in in-game advertising revenue; and $2.4 million in sales of quality and assurance services to Atari Interactive. In fiscal 2004, we recognized $3.5 million ~~of previously deferred revenue~~ in sublicensing income as a result of the termination of our sublicensing arrangement with Microsoft and the retention of a previously collected nonrefundable advance. • The overall ASP of the publishing business increased in fiscal 2005 ~~by 10~~.0% ~~over~~The ~~the~~decrease ~~prior~~was ~~year~~driven ~~from $17.92 to $19.71 due to~~by:

° sales of Atari Flashback, which had an average sales price of approximately $30.00 per unit, and ° an improvement in the ASP of PC titles from $11.85 to $14.06, ° a relatively flat console ASP (approximately $23.00), and ° a relatively consistent platform mix. The 2005 year mix consisted of 69.3% console product, 25.9% PC product, and 4.8% Atari Flashback product. The prior year’s mix consisted of 70.8% console product and 29.2% PC product.

	o		domestic licensing income of $8.2 million in fiscal 2006, compared with $15.3 million in fiscal 2005, driven by fiscal 2005’s recognition of the Duke Nukem Royalty Advance Promissory Note of $4.3 million, offset by

	o		fiscal 2006’s recognition of production services revenue of $2.0 million from Atari Interactive pursuant to an agreement signed in March 2006.

34 • The overall average sales price (“ASP”) of the publishing business increased from $18.98 in fiscal 2005, to $20.50 in fiscal 2006. Trends include:

	o		fiscal 2006 inclusion of PlayStation Portable, with an ASP of $26.08, increasing the overall console ASP from $21.59 in the fiscal 2005 to $25.44 in fiscal 2006, offset by

	o		a decrease in the ASP of the Atari Flashback plug-and-play games from $29.87 in fiscal 2005 to $19.90.

	•		Platform mix has shifted away from console product toward lower priced PC and plug-and-play product. Fiscal 2006’s year to date mix consisted of 58.0% console product, 32.7% PC product, and 9.3% Atari Flashback product, compared with the fiscal 2005 mix of 65.5% console product, 28.7% PC product, and 5.8% Atari Flashback product.

	•		Total distribution net revenues decreased $1.0 million due to increased competition; however, the fiscal 2006 period includes net revenues of Humongous, Inc. as a distributed party since August 2005.

• ~~Total~~In ~~distribution~~the ~~net~~fourth ~~revenues~~quarter ~~decreased~~of fiscal 2006, we recorded additional price protection allowances of $84.82 million ~~due~~in connection with our aggressive pricing program, which reduced console and certain PC titles sold prior to ~~increased~~March ~~competition~~31, 2006 to a retail price of $19.95.

Cost of Goods Sold

Cost of goods sold for the year ended March 31, 2006 decreased by $4366.06 million primarily from decreased sales volume. Cost of goods sold as a percentage of net revenues ~~decreased~~increased from 5558.52% to 53 64.26%, reflecting:

• ~~lower~~a ~~average~~higher ~~unit~~mix ~~costs~~of higher cost third-party distributed product sales as a percentage of ~~ASPs~~net onrevenues (25.7% in the ~~console~~2006 ~~products~~year ~~within~~compared ~~the~~with ~~publishing~~15.8% ~~business~~in ~~and~~the •prior ayear), ~~higher~~• ~~mix~~lower oflicensing ~~international~~and ~~royalty~~other income, on which we incur lower costs, asand ~~well~~• ashigher license expense in the current period due to higher ~~licensing~~mix ~~and~~of ~~other~~licensed ~~revenue~~product ~~with~~sales, ~~lower~~primarily ~~associated~~Dragon ~~royalty~~Ball ~~costs~~Z sales.

Research and Product Development Expenses

Research and product development expenses for the year ended March 31, ~~2005~~2006 decreased approximately $9.6.4 million due to:

• a ~~planned~~decrease ~~reduction~~ in ~~the~~expense ~~number~~incurred ~~of titles in development~~ with external developers, ~~• bonus expense~~ of $0.6.8 million indue ~~the~~to ~~fiscal~~fewer ~~2005~~titles ~~period~~in ~~versus~~development, ~~prior~~• ~~year’s~~a ~~expense~~decrease ofin ~~$3.0~~salary ~~million~~and ~~(including~~other arelated expenses of $13.51 million ~~completion~~due ~~bonus related~~ to ~~Enter~~office ~~the~~closures ~~Matrix),~~in ~~and~~Santa •Monica ~~savings over the prior year from the closure of the Legend~~ and ~~Minnesota studios in fiscal 2004~~Beverly, ~~partially~~ offset by • increased spending of $4.7 million for certain projects in development at our internal studios.

Internal research and product development expenses represented 4946.72% and 5343.76% of the total research and product development expenses for the years ended March 31, ~~2004~~2005 and ~~2005~~2006, respectively. Research and product development expenses, as a percentage of net revenues, ~~remained~~ ~~consistent~~increased ~~with~~from ~~the~~17.0% ~~prior~~in ~~period~~the at2005 year ~~approximately~~to 1625.71% in fiscal 2006 due to a general shortfall in sales.

Selling and Distribution Expenses

Selling and distribution expenses for the year ended March 31, 2006 decreased approximately $2115.42 million due to:

• significant savings in ~~fiscal~~the ~~2005~~current period on advertising ($3725.12 million in fiscal 2006 as compared to $5331.6 million in the prior ~~year~~period) due to ~~stricter rationalization of advertising funds and~~ fewer new titles released, • lower variable distribution costs, including freight, shipping and handling, on lower sales, and • ~~reduced~~savings ~~inventory warehousing costs due to increased inventory turn (5.4~~ in ~~2004~~salaries ~~versus 6.7 in 2005)~~ and arelated ~~reduced~~overhead ~~number~~costs offrom ~~active~~the ~~titles,~~closure ~~• bonus expense~~ of ~~$0.2 million in~~ the ~~current~~Santa ~~period~~Monica ~~versus~~and ~~$1.2~~Beverly ~~million in the prior period~~studios, ~~and~~as •well ~~savings~~as inpersonnel ~~salaries~~reduction ~~and~~at ~~related~~our ~~overhead~~New ~~costs~~York ~~from the closure of the Minnesota studio in fiscal 2004~~headquarters.

General and Administrative Expenses

General and administrative expenses ~~increased~~for ~~approximately~~the year ended March 31, 2006 decreased approximately $35.74 million due to:

• ~~bonus~~reduction ~~expense~~in ofsalary ~~$0.3~~and ~~million~~related incosts ~~the~~due ~~current~~to ~~period~~reduced ~~compared~~headcount, ~~with~~• areduction ~~reversal~~in ofrent ~~$1.6~~and ~~million~~other inoverhead ~~the~~costs ~~2004~~due ~~year,~~to •the ~~increased~~closure ~~external~~of ~~spending~~Beverly ofand ~~approximately~~Santa ~~$1.1~~Monica ~~million~~studios ~~for~~(included ~~Sarbanes-Oxley~~in ~~compliance~~restructuring ~~work~~expense), offset by • increased professional ~~and~~fees ~~legal~~primarily ~~fees~~due to increased use of ~~approximately~~outside ~~$0.7~~legal ~~million~~and other consulting services, and

3537

	•		general salary increases and the addition of fully salaried senior executives, offset by
	•		the recognition of a $0.9 million translation gain from the liquidation of the dormant Australian subsidiary in the first quarter of the 2005 year.

•

the prior year’s inclusion of a $0.9 million translation gain from the liquidation of the dormant Australian subsidiary.

Restructuring Expenses

~~The~~In ~~costs~~February 2005, ~~associated~~management ~~with~~announced the ~~closures~~planned closure of the Beverly, ~~and~~Massachusetts, and Santa Monica, California, publishing studios ~~incurred~~and inthe relocation of the ~~year~~ ~~ended~~functions ~~March 31,~~previously provided ~~2005~~by ~~were~~the ~~$4.9 million.~~studios ~~The~~to ~~costs~~our ~~were~~corporate ~~comprised~~headquarters ofin $4New York.~~2 million~~ ofIn ~~severance~~fiscal 2006, restructuring ~~and~~activities ~~retention~~continued ~~costs,~~with ~~$0.6 million~~headcount ofreduction ~~costs~~in ~~related~~our tocorporate ~~the~~headquarters ~~modification~~in ofNew ~~stock~~York, ~~options~~as ~~for~~well as ~~terminated~~other ~~executives~~locations, and ~~$0.1 million~~terminations ofat ~~miscellaneous~~our ~~expenses~~Humongous ~~related~~studio towhich ~~the~~was ~~transition~~sold in August 2005. WeThese ~~expected~~costs toincreased ~~incur~~by ~~an additional~~ $53.09 million todue ~~$8.0 million over the next twelve month period in order~~ to ~~complete management’s plan.~~:

~~Gain~~• onfiscal ~~Sale~~2006 recognition of ~~Development~~the ~~Project~~ present value of all future lease payments for offices closed as part of the restructuring plan, as well as other lease related expenses, of $1.6 million, • severance costs of $2.0 million related to headcount reductions in our New York office in February 2006, • relocation expenses of $0.4 million recorded in fiscal 2006, and • fixed asset write offs of $0.4 million recorded in fiscal 2006.

~~During~~Gain ~~the~~on ~~third~~Sale ~~quarter~~ of ~~the~~Intellectual ~~prior year, we sold a development project to Atari Interactive~~Property for $3.7 million resulting in a gain of that amount. The sales price to Atari Interactive was equal to the development costs incurred by us, which were expensed during the period of development. The sale was initiated as a result of concerns expressed by the original third party licensor relating to our development efforts. No similar gain was recorded in the current period.

In the fourth quarter of fiscal 2006, we sold certain of our intellectual properties to a third party for approximately $6.2 million. The amount is primarily driven by the sale of our Timeshift property.

Atari Trademark License Expense

Atari trademark license expense decreased by $0.3 million due to a change made in the fourth quarter of fiscal 2006 in the expected future earnings upon which this expense is based.

Depreciation and Amortization

Depreciation and amortization for year ended March 31, ~~2005~~2006 ~~increased~~decreased by $1.8 million due to ~~$1.6 million~~asset inwrite ~~amortization~~offs ~~expense~~associated onwith ~~our~~the ~~amended~~restructuring ~~license~~as ~~with~~well ~~Atari~~as ~~Interactive~~assets ~~for~~becoming ~~the~~fully ~~rights~~depreciated toduring the ~~Atari~~year, ~~name.~~offset ~~The~~by ~~license~~new ~~was~~assets ~~amended~~placed ~~late~~into inservice ~~September 2003~~during the period.

Interest Expense, net

Interest expense, net, ~~decreased~~increased by $70.21 million as a result of:

	•		our September 2003 recapitalization whereby all outstanding related party debt was converted to equity (savings of $6.8 million in interest expense over the prior year), and
	•		interest income of $0.9 million earned on the various related party notes receivable outstanding during the period.

	•		prior year recognition of interest income of $0.9 million earned on the various related party notes receivable outstanding during the period, offset by

	•		lower credit facility interest of $0.7 million in the period due to lower outstanding borrowings, and

	•		interest income of $0.1 million earned on a prior period income tax refund.

~~Since~~Other ~~the~~Income ~~recapitalization, interest and financing fees consisted of expenses incurred under~~(Expense) ~~our credit facility arrangement with GECC, which expired in the first quarter of fiscal 2006.~~

~~Other~~ In ~~(Expense)~~fiscal ~~Income~~2006, we recorded a loss of $0.2 million on the sale of IESA common shares received in connection with the sale of the Humongous studio. No significant items were recorded in the prior year.

InBenefit ~~the~~from ~~prior~~Income ~~year, we recorded a $1.7 million write down of an investment in an independent~~Taxes ~~developer as part of the termination of a publishing agreement with Microsoft. No significant similar items were recorded in the 2005 period.~~

~~(Benefit~~ With regards to the year ended March 31, 2005, we recorded a benefit from) ~~Provision~~income taxes of $9.5 million. This includes a non-cash tax benefit of $9.7 million which offsets a non-cash tax provision of the same amount included in loss from discontinued operations, recorded in accordance with FASB Statement No, 109, “Accounting for Income Taxes,” paragraph 140. Paragraph 140 states that all items should be considered for purposes of determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. The

~~During the year ended March 31, 2005, we recorded approximately $0.2 million for foreign tax~~38 liabilities at our dormant UK subsidiary. For the year ended March 31, 2004, we recorded a tax benefit of approximately $2.9 million, which resulted primarily from a June 30, 2001 amended federal tax return that enabled us to recover taxes paid in 1996 and refunds of estimated state tax payments made during the tax year ended June 30, 2003.

Dividend to Parent

In connection with a recapitalization agreement entered into in fiscal 2004, we issued stock in satisfaction of a 5% subordinated note held by IESA at a rate that was more favorable to the holder than the conversion rate under the note. The incremental value of the additional stock issued was reported as a dividend to IESA of $39.4 million, which had no impact on total stockholders’ equity but has been reported as a charge in computing (loss) income attributable to common stockholders.

recording of a benefit is appropriate in this instance, under the guidance of Paragraph 140, because such domestic loss offsets the domestic gain generated in discontinued operations. This is offset by approximately $0.2 million for foreign tax liabilities at our dormant UK subsidiary. In fiscal 2006, the total benefit from income taxes $0.4 million resulted from a reversal of a prior period tax reserve resulting from the successful conclusion ($0.3 million benefit) of an IRS examination of the tax year ended June 30, 2003 which was completed in fiscal 2006, as well as the reversal of the $0.2 million UK tax reserve (benefit) recorded in the prior year, pursuant to discussions with UK tax inspectors, offset by an additional state tax provision of $0.1 million recorded arising from a current New York State tax audit.

Income (Loss) from Discontinued Operations of Reflections Interactive Ltd, net of tax

Income (loss) from discontinued operations of Reflections Interactive Ltd decreased from income of $20.5 million in fiscal 2005 to a loss of $5.6 million in fiscal 2006. The fiscal 2006 loss was driven by the operating costs of the Reflections studio, which was sold in August 2006. The fiscal 2005 income is driven by sales from the successful launch of Driver 3 in June 2004, offset by the operations of the Reflections studio and a tax provision of $9.7 million associated with discontinued operations (which is offset by a tax benefit of an equal amount in continuing operations; see Benefit from Income Taxes above).

Liquidity and Capital Resources

Overview

AsA ~~consumers~~need ~~shift~~for increased investment in development and increased need to ~~next~~spend ~~generation~~advertising ~~hardware~~dollars to support product launches, ~~demand~~caused ~~for~~in ~~games~~part ~~played~~by on“hit-driven” ~~current~~consumer ~~generation~~taste, have created a ~~hardware~~significant ~~and~~increase ~~unit~~in ~~prices~~the amount of ~~those~~financing ~~games~~required ~~are~~to ~~expected~~sustain tooperations, ~~decline~~while negatively impacting margins. ~~Meanwhile~~Further, ~~delivery~~as ofour ~~next~~business continues to be more seasonal, which creates a need ~~generation~~for ~~hardware~~significant ~~from~~financing ~~Sony~~to fund the seasonal development and ~~Nintendo~~manufacturing activities, ~~expected~~in addition ~~this~~to ~~fall,~~the financing we need throughout the year to fund our working capital requirements. Our only credit line is ~~uncertain~~an ~~with~~asset ~~respect~~based secured credit line that is limited to $15.0 million ~~available~~(subject ~~quantities~~to ~~just~~a asborrowing ~~quantities~~base ofcalculation), ~~Microsoft’s~~and ~~newly~~which the lenders will have the right to cancel if ~~launched~~we ~~Xbox~~fail ~~360~~to ~~remain~~meet ~~tight.~~financial ~~Due~~covenants (the lenders waived defaults resulting from our failure to meet covenants at March 31, 2007). Further, the ~~risks~~credit ~~and~~facility ~~uncertainties~~may be ~~associated~~terminated if we do not comply with ~~these~~financial and other ~~significant~~covenants ~~changes~~prior into our need for borrowing (i.e. Nasdaq Delisting). Even if the ~~marketplace~~credit line remains in effect, ~~coupled~~it ~~with~~will ~~our~~not ~~fiscal~~provide ~~year-~~all the funds we will need to~~-date~~ ~~losses~~pay ~~and~~for inventory that will be needed for the ~~termination~~calendar of2007 ~~our~~holiday ~~credit~~season. ~~facility~~Historically, ~~with~~IESA ~~HSBC~~has sometimes provided funds we needed for our operations, ~~management~~but it is not ~~uncertain~~certain asthat toit ~~whether~~will webe ~~will~~able, ~~have~~or ~~sufficient~~will ~~capital resources~~be willing to ~~finance~~provide ~~our~~the ~~operational~~funding ~~requirements~~we ~~through~~will need for fiscal 2008 ~~2007~~or subsequent to that.

WeBecause ~~are~~of ~~exploring various alternatives to improve~~ our ~~financial~~funding ~~position and secure other sources of financing. Such possibilities include a replacement of the credit facility~~difficulties, ~~new arrangements~~we tohave ~~license~~sharply ~~intellectual~~reduced ~~property,~~our ~~further~~expenditures ~~sales~~for ofresearch ~~selected intellectual property~~and ~~rights~~product ~~and~~ development ~~studios,~~regarding ~~and~~new ~~equity capital from external sources~~games. ToDuring ~~reduce~~the ~~working capital~~year ~~requirements~~ended ~~and~~March 31, ~~further~~2007, ~~conserve~~our ~~cash~~expenditures ~~we will need to take additional actions in the~~on ~~near-term,~~research ~~which may include additional personnel reductions~~ and ~~suspension~~product ~~of additional~~ development ~~projects.~~decreased ~~These~~by ~~actions~~42.0%, ~~may or may not prove~~ to be$30.1 million, ~~consistent~~compared with ~~our long-term~~$51.9 million ~~strategic~~in ~~objectives~~fiscal 2006. WeThis ~~cannot~~will ~~guarantee~~reduce the ~~completion~~flow of ~~these~~new ~~actions~~games or that ~~such actions~~ will ~~generate~~be ~~sufficient~~available ~~resources~~ to ~~fully~~us ~~address~~in ~~the~~fiscal ~~uncertainties~~2008 and of2009, ~~our~~and ~~financial~~possibly ~~position~~after that. As ofOur ~~the~~lack ~~date~~ of ~~this~~financial ~~filing~~resources weto ~~have~~fund ~~raised~~a ~~approximately~~full ~~$15.2 million, of which $6.2 million was~~product ~~recorded~~development inprogram ~~fiscal~~may ~~2006,~~reinforce ~~through~~our ~~sales~~focus ofon ~~certain~~casual ~~intellectual properties; however~~gaming, ~~these~~which ~~amounts~~requires ~~are~~substantially ~~insufficient to fully address the uncertainties of our financial~~less ~~position.~~research Weand ~~continue~~product ~~to seek additional funding~~investment.

During fiscal 2007, we raised approximately $35.0 million through the sale of a certain intellectual property and the divestiture of our internal development studios. In May 2007, we announced a plan to reduce our total workforce by approximately 20% as a cost cutting initiative. To reduce working capital requirements and further conserve cash we will need to take additional actions in the near-term, which may include additional personnel reductions and suspension of additional development projects. However, these steps may not fully resolve the problems with our financial position. Also, lack of funds will make it difficult for us to undertake a strategic plan to general new sources of revenues and otherwise enable us to attain long-term strategic objectives. We continue to seek additional funding.

Cash Flows

(in thousands)


	March 31,			March 31,
(in thousands)	2006			2007
Cash	$	14,948		$	7,603
Working capital (deficit)	$	(2,996	)	$	1,213

	March 31,		March 31,
	2005		2006
Cash	$	10,438	$	15,386
Working capital (deficit)	$	33,655	$	(3,711	)

	Year			Year
	Ended			Ended
	March 31,			March 31,
	2005			2006
Cash provided by (used in) operating activities	$	2,918		$	(15,982	)
Cash (used in) provided by investing activities		(2,112	)		13,774
Cash (used in) provided by financing activities		(17	)		7,211
Effect of exchange rates on cash		28			(55	)
Net increase in cash	$	817		$	4,948

During the year ended March 31, 2006, cash of $16.0 million was used in operating activities, driven by our net loss offset by a decrease of $30.1 million in accounts receivable in the current year, as well as current period price protection allowances recorded in connection with our previously announced aggressive pricing program.

Investing activities for the year ended March 31, 2006 provided approximately $13.8 million as compared to a usage of $2.1 million in the comparable prior period, due to the proceeds of $10.1 million received from the sale of the IESA shares obtained in connection with the sale of the Humongous studio in August 2005, as well as $6.2 million in proceeds received from the sale of two of our intellectual properties.

During the year ended March 31, 2006, our financing activities provided net cash of $7.2 million, driven by proceeds from the issuance of our common stock, while financing activities during the 2005 period used a nominal amount of cash.

Our revolving credit facility was suspended in January 2006 because we could not meet certain financial covenants, and it expired on May 31, 2006. We do not currently have a short term borrowing facility and are currently seeking a replacement credit facility and/or other sources of short term borrowings.

Our outstanding accounts receivable balance varies significantly on a quarterly basis due to the seasonality of our business and the timing of new product releases. There were no significant changes in the credit terms with customers during the twelve month period.


	Year			Year
	Ended			Ended
	March 31,			March 31,
	2006			2007
Cash (used in) operating activities	$	(16,005	)	$	(36,939	)
Cash provided by investing activities		13,774			29,757
Cash provided by (used in) financing activities		7,211			(216	)
Effect of exchange rates on cash		(20	)		53


Net increase (decrease) in cash	$	4,960		$	(7,345	)

WeDuring dothe ~~not~~year ~~currently~~ended ~~have~~March 31, ~~any~~2007, ~~material~~cash ~~commitments~~of ~~with~~$36.9 million ~~respect~~was toused ~~any~~in ~~capital~~operating activities, ~~expenditures~~driven by our loss from continuing operations of $66. ~~However~~6 million, wecompounded doby ~~have~~payments made ~~commitments~~on totrade ~~pay~~and royalty payables and ~~license~~offset ~~advances~~by a non-cash impairment charge on our goodwill of $54.1 million. In fiscal 2006, ~~milestone~~cash ~~payments~~used in operating activities was driven by a net loss of $69.0 million, ~~and~~but was offset by a decrease of $30.1 million in accounts receivable from cash collections ~~operating~~on ~~lease~~balances ~~obligations~~on hand at March 2005.

~~Our~~During ~~ability~~fiscal to2007, ~~maintain~~investing ~~sufficient~~activities ~~levels~~provided of cash ~~could be affected by various risks and uncertainties including, but not limited to, customer demand and acceptance~~ of ~~our~~$29.8 million ~~new~~due ~~versions of our titles on existing platforms and our titles on new platforms, our ability~~ to ~~collect~~several ~~our~~sale ~~receivables~~transactions ascompleted ~~they~~during become due, risks of product returns, successfully achieving our product release schedules and attaining our forecasted sales goals, seasonality in operating results, fluctuations in market conditions and the ~~other risks described in the “Risk Factors” (See Risk~~period: ~~Factors on page 13).~~

We• ~~are~~proceeds ~~also~~of ~~party~~$23.4 tomillion ~~various~~received ~~litigation~~in ~~arising~~connection inwith the ~~course~~sale of our ~~business~~Reflections studio, • proceeds of $9.0 ~~Management believes~~million ~~that~~from the ~~ultimate~~sale ~~resolution~~ of ~~these~~the ~~matters~~Stuntman ~~will~~intellectual ~~not~~property, ~~have~~and a• ~~material~~proceeds ~~adverse~~of ~~effect~~$1.6 ~~on our~~million ~~liquidity,~~from ~~financial~~the ~~condition~~sale orof ~~results~~our ofShiny ~~operations~~studio in the current period.

The cash proceeds are partially offset by a restricted security deposit of $1.8 million to collateralize a letter of credit related to our new office lease, purchases of intangible assets of $1.7 million, and purchases of property and equipment of $0.8 million. Investing activities for the year ended March 31, 2006 provided approximately $13.8 million, driven by $10.1 million received from the sale of IESA shares obtained in connection with the sale of the Humongous studio in August 2005, as well as $6.2 million received from the sale of two of our intellectual properties.

During fiscal 2007, net cash used in financing activities was $0.2 million due to payments under our capitalized lease obligations. During fiscal 2007, we borrowed approximately $15.0 million from our credit facility to fund our calendar 2006 holiday season. All borrowings were repaid prior to March 31, 2007. During fiscal 2006, our financing activities provided net cash of $7.2 million, driven by proceeds from an issuance of our common stock. Through out fiscal 2006, we borrowed approximately $157.6 million from our credit facility of which all borrowings have been repaid prior to March 31, 2006.

We have a three-year revolving credit facility with Guggenheim to fund our working capital needs. For the quarter ended March 31, 2007, we were not in compliance with certain financial covenants required by the credit facility. In May 2007, we received a waiver of the covenants effective March 31, 2007. We are currently seeking additional sources of funding.

Due to our reduced product releases, our business has become increasingly seasonal. This increased seasonality has put significant pressure on our liquidity prior to our holiday season as financing requirements to build inventory are high. During fiscal 2007, our third quarter (which includes the holiday season) represented approximately 38.7% of our net revenues for the entire year.

We do not currently have any material commitments with respect to capital expenditures. However, we do have commitments to pay royalty and license advances, milestone payments, and operating and capital lease obligations.

We are also party to several litigations arising in the ordinary course of our business. Management believes that the ultimate resolution of these matters will not have a material adverse effect on our liquidity, financial condition or results of operations.

Selected Balance Sheet Accounts

~~Receivables~~Accounts Receivable, net

~~Receivables~~Accounts receivable, net, decreased by $305.16 million from $4212.21 million at March 31, ~~2005~~2006 to $126.1 5 million at March 31, ~~2006. The decrease is primarily due to the high level of accounts receivable at March 31~~2007, ~~2005~~driven ~~associated~~by ~~with~~fewer ~~the successful release of Dragon Ball Z: Sagas in March 2005, compared with higher collections of accounts receivable in March 2006 from~~ new releases ~~Getting Up: Contents Under Pressure and Driver: Parallel Lines, compounded by additional allowances for price protection recorded in March 2006 of $4~~.~~2 million.~~

~~Prepaid~~Inventories, ~~Expenses and Other Current Assets~~net

~~Prepaid expenses~~Inventories, ~~and~~net, ~~other current assets~~ decreased by $1012.20 million from $2220.8 million at March 31, ~~2005~~2006 to $128.6 8 million at March 31, ~~2006.~~2007, ~~The decrease is~~ driven by aan overall decrease in ~~royalties~~ ~~receivable~~the ofdistribution ~~$4.4 million~~business ~~due~~as towell ~~collection of a Duke Nukem promissory note of $4.3 million. Additionally, we collected an income tax refund of~~as ~~$1.5 million~~fewer ~~and~~planned ~~amortized~~new $3releases.~~0 million of the Atari name license.~~

Goodwill

Goodwill decreased by $66.4 million due to an allocation of $12.3 million to the sale of Reflections, completed in the second quarter of fiscal 2007, and a non-cash impairment charge of $54.1 million recorded in the fourth quarter of fiscal 2007.

Due from Related Parties/Due to Related Parties

Due from related parties ~~increased~~decreased by $42.49 million and due to related parties ~~increased~~decreased by $4.86 million from March 31, ~~2005~~2006 to March 31, ~~2006~~2007. The ~~increases~~decreases are driven by ~~increased~~decreased royalty and development activity between related parties. ~~Due~~compounded ~~from~~by ~~and due to related parties fluctuate based on the timing of nettings and/or~~ payments ~~between~~made ~~parties.~~during ~~Prior to March 31, 2005, a large netting was completed, decreasing~~ the ~~balances~~fiscal year.

~~Sale~~ Accounts ofPayable, ~~Studio~~Accrued Liabilities, and Royalties Payable

InAccounts ~~the~~payable, ~~first~~accrued ~~quarter~~liabilities, ofand ~~fiscal~~royalties ~~2007~~payable decreased by $12.9 million, we$5.7 million, ~~adopted~~and a$9.2 million, ~~formal~~respectively, ~~plan~~from March 31, 2006 to ~~sell~~March 31, ~~the~~2007. ~~Reflections~~The ~~studio,~~decreases were ~~and~~driven ~~its~~by ~~related~~a IPlower ~~Driver,~~volume asof ~~part~~transactions ofin ~~management’s~~the ~~plan~~current toperiod, ~~dispose~~and offewer ~~certain~~planned ~~non-core~~unit ~~assets~~sales, ofwhich ~~the~~resulted ~~company~~in lower total manufacturing costs.

Long-term Liabilities

Long-term liabilities increased by $2.7 million from $0.7 million at March 31, 2006 to $3.4 million at March 31, 2007 due to the provisions of our new New York headquarters lease, which resulted in deferred rent of $1.9 million. Additionally, our lease provided for a landlord allowance for renovations of $4.5 million, of which $1.2 million has been completed as of March 31, 2007 and was recorded as a deferred credit that will be amortized against rent expense over the life of the lease.

Credit Facilities

~~HSBC~~Guggenheim ~~Loan~~Credit ~~and Security Agreement~~Facility

~~Until~~On ~~May~~November 313, 2006, we ~~had~~established a ~~one~~secured ~~year~~credit facility with several lenders for which Guggenheim is the administrative agent. The Guggenheim credit facility will terminate and be payable in full on November 3, 2009. The credit facility consists of a secured, committed, revolving line of credit in an amount up to $5015.0 million, ~~revolving~~which includes a $10.0 million sublimit for the issuance of letters of credit. Availability under the credit facility ~~(“Revolving~~is determined by a ~~Credit~~formula ~~Facility”)~~based ~~with~~on ~~HSBC~~a topercentage ~~fund~~of our eligible receivables. The proceeds may be used for general corporate purposes and working capital needs in the ordinary course of business and ~~general~~to ~~corporate~~finance acquisitions ~~needs~~subject to limitations in the Credit Agreement. OnThe ~~January~~credit facility bears interest at 18our choice of (i) LIBOR plus 5% per year, ~~2006~~or (ii) the greater of (a) the prime rate in effect, ~~HSBC~~or (b) the ~~notified~~Federal usFunds ~~that~~Effective asRate in effect plus 2.25% per year. Additionally, we are required to pay a ~~result~~commitment fee on the undrawn portions of ~~our~~the ~~failure~~credit facility at the rate of 0.75% per year and we paid to ~~meet~~Guggenheim ~~certain~~a ~~financial~~closing ~~covenants~~fee ~~for~~of $0.2 million. We may terminate or reduce the committed amount of the ~~quarter~~facility ~~ended~~at ~~December 31,~~any ~~2005~~time, ~~they~~subject ~~would~~to ~~not~~payment ~~extend~~satisfying ~~further~~certain ~~credit~~requirements and ~~under~~payment ~~our~~of ~~revolving credit~~a ~~facility~~prepayment fee. ~~The~~Obligations ~~revolving~~under the credit facility ~~expired~~are secured by liens on substantially ~~May 31,~~all ~~2006~~of our present and ~~has~~future ~~not~~assets, ~~been~~including ~~replaced.~~accounts receivable, inventory, Wegeneral ~~are~~intangibles, ~~however~~fixtures, ~~holding~~and ~~discussions~~equipment, ~~with~~but ~~possible~~excluding ~~short~~the ~~term~~stock ~~lenders~~of our subsidiaries and certain assets located outside of the U.S.

~~Availability~~The ~~under~~credit ~~the~~facility ~~Revolving~~includes ~~Credit~~provisions ~~Facility~~for ~~was~~a ~~determined~~possible ~~based~~term onloan ~~percentages~~facility ofand ~~our~~an increased ~~eligible~~revolving ~~receivables~~credit ~~and~~facility ~~eligible~~line ~~inventory~~in ~~for~~the ~~certain~~future. ~~seasonal~~If ~~peak~~such ~~periods~~term loan is made, the early termination prepayment fee is no longer applicable. The ~~Revolving~~credit facility also contains financial covenants that ~~Credit~~require ~~Facility~~us ~~bore~~to ~~interest~~maintain atenumerated ~~prime~~EBITDA, ~~for~~liquidity, ~~daily~~and net debt minimums, and a capital

3841

~~borrowings~~expenditure ormaximum. ~~LIBOR~~As ~~plus~~of ~~1.75%~~March 31, ~~for~~2007, ~~borrowings~~we ~~with a~~were ~~maturity~~not ofin ~~30 days~~compliance orwith ~~greater.~~all Wefinancial covenants; ~~were~~however, ~~required~~we tohave ~~pay~~received a ~~commitment~~waiver ~~fee~~as of 0that date.~~25%~~ onThere ~~the~~were ~~average~~no borrowings ~~unused~~outstanding ~~portion~~under of the facility ~~quarterly~~as ~~in arrears and closing costs~~ of ~~approximately~~March 31, $02007.1 ~~million.~~

~~GECC~~HSBC ~~Senior~~Loan ~~Credit~~and ~~Facility~~Security Agreement

OnUntil ~~November~~May 1231, ~~2002~~2006, we ~~obtained~~had a ~~30-month~~one year $50.0 million ~~senior~~revolving credit facility (“Revolving Credit Facility”) with ~~GECC~~HSBC to fund our working capital and general corporate needs,. asOn ~~well as to fund advances to Atari~~January ~~Interactive~~18, ~~and Paradigm~~2006, ~~each~~HSBC anotified ~~related~~us ~~party.~~that ~~Loans~~as ~~under the senior credit facility were based on~~ a ~~borrowing~~result ~~base comprised~~ of ~~the value of~~ our ~~accounts~~failure ~~receivable~~to ~~and~~meet ~~short-term~~certain ~~marketable~~financial ~~securities.~~covenants ~~The senior credit facility bore~~for ~~interest~~the atquarter ~~prime~~ended ~~plus~~December 31, ~~1.25%~~2005, ~~for~~they ~~daily~~would ~~borrowings~~not orextend ~~LIBOR~~further ~~plus~~credit 3%under ~~for~~our ~~borrowings with a maturity~~revolving ofcredit ~~30 days or greater~~facility. ~~This~~The ~~senior~~revolving credit facility expired on May 1231, ~~2005~~2006 and was replaced by the ~~HSBC~~Guggenheim ~~Revolving~~revolving ~~Credit~~credit ~~Facility~~facility in November 2006 (see above).

Availability under the Revolving Credit Facility was determined based on percentages of our eligible receivables and eligible inventory for certain seasonal peak periods. The Revolving Credit Facility bore interest at prime for daily borrowings or LIBOR plus 1.75% for borrowings with a maturity of 30 days or greater. We were required to pay a commitment fee of 0.25% on the average unused portion of the facility quarterly in arrears and closing costs of approximately $0.1 million.

Contractual Obligations

As of March 31, ~~2006~~2007, royalty and license advance obligations, milestone payments and future minimum lease obligations under non-cancelable operating and capital leases ~~are~~were ~~summarized~~ as follows (in thousands):

	Contractual Obligations		~~Contractual Obligations~~
	Royalty and
	license		Milestone		Operating lease		Capital lease
Fiscal Year	advances (1)		payments (2)		obligations (3)		obligations (4)		Total
2007	$	2,132	$	16,305	$	3,947	$	351	$	22,735
2008	$	1,849	$	3,764	$	3,557	$	75	$	9,245
2008		100		4,911		1,509		199		6,719
2009		—		—		3,024		12		3,036
2009		75		4,630		720		13		5,438
2010		—		—		2,997		—		2,997
2010		75		—		700		—		775
2011		—		—		2,937		—		2,937
2011		—		—		700		—		700
2012		—		—		2,822		—		2,822
Thereafter		—		—		~~292~~24,465		—		~~292~~24,465
Total	$	21,~~382~~849	$	253,~~846~~764	$	739,~~868~~802	$	~~563~~87	$	3645,~~659~~502

(1)		We have committed to pay advance payments under certain royalty and license agreements. The payments of these obligations are dependent on the delivery of the contracted services by the developers.
(2)		Milestone payments represent royalty advances to developers for products that are currently in development. Although milestone payments are not guaranteed, we expect to make these payments if all deliverables and milestones are met timely and accurately. Included in the total contractual obligations of $3.8 million are payments of $0.3 million to be made to a related party development studio.
(3)		We account for our office leases as operating leases, with expiration dates ranging from fiscal ~~2007~~2008 through fiscal ~~2012~~2022. ~~These~~There are future minimum annual rental payments required under the leases, ~~inclding~~including a related party sub-lease with Atari Interactive, net of $2.1.6 million of sublease income to be received ~~from~~in fiscal ~~2007~~2008 ~~through~~and fiscal 2009. Leasehold improvements made at the beginning of or during a lease are amortized over the shorter of the remaining lease term or the estimated useful lives of the assets.
		As of June 2006, we entered into a new lease at our current headquarters in New York. The lease commencement date will be July 1, 2006, and the term of the lease is 15 years. Upon entering into the new lease, our existing lease, originally set to expire in December 2006, was terminated. See Note 21 for further details.
		During June 2006, we entered into a new lease with our current landlord at our New York headquarters for approximately 70,000 square feet of office space for our principal offices. The term of this lease commenced on July 1, 2006 and is to expire on June 30, 2021. Upon entering into the new lease, our current lease, which was set to expire in December 2006, was terminated. The rent under the new lease for the office space is approximately $2.4 million per year for the first five years, increases to approximately $2.7 million per year for the next five years, and increases to $2.9 million for the last five years of the term. In addition, we must pay for electricity, increases in real estate taxes and increases in porter wage rates over the term. The landlord is providing us with a one year rent credit of $2.4 million and an allowance of $4.5 million to be used for building out and furnishing the premises, of which $1.2 million has been recorded as a deferred credit as of March 31, 2007; the remainder of the deferred credit will be recorded as the improvements are completed, and will be amortized against rent expense
(4)		We have entered into several capital leases for computer equipment. Per Financial Accounting Standards Board, or FASB, Statement No. 13, “Accounting for Leases,” we account for capital leases by recording them at the present value of the total future lease payments. They are amortized using the straight-line method over the minimum lease term. As of March 31, 2005, the net book value of the assets, included within property and equipment on the balance sheet, was $0.3 million, net of accumulated depreciation of $0.1 million. As of March 31, 2006, the net book value of the assets was $0.5 million, net of accumulated depreciation of $0.3 million.

~~Effect of Relationship with IESA on Liquidity~~42

Historically, we have relied on IESA to provide limited financial support to us; however, as IESA continues to address its own financial condition, its ability to fund its subsidiaries’ operations, including ours, remains limited. See Item 1 for a discussion of our relationship with IESA, as well as our risk factors on page 13.


		over the life of the lease. A nominal amount of amortization was recorded during the year ended March 31, 2007. We provided the landlord with a security deposit under the new lease in the form of a letter of credit in the initial amount of $1.7 million, which has been cash collateralized and is included in security deposits on our consolidated balance sheet. In August 2007, we amended this lease to reduce the space we occupy by one-half, effective December 31, 2007.

(4)		We maintain several capital leases for computer equipment. Per FASB Statement No. 13, “Accounting for Leases,” we account for capital leases by recording them at the present value of the total future lease payments. They are amortized using the straight-line method over the minimum lease term. As of March 31, 2006, the net book value of the assets, included within property and equipment on the balance sheet, was $0.5 million, net of accumulated depreciation of $0.3 million. As of March 31, 2007, the net book value of the assets was $0.1 million, net of accumulated depreciation of $0.5 million.

Effect of Relationship with IESA on Liquidity

Historically, we have relied on IESA to provide limited financial support to us; however, IESA has its own financial needs and, as it assesses its business operations/plan, its ability and willingness to fund its subsidiaries’ operations, including ours, is uncertain. See Item 1 for a discussion of our relationship with IESA, as well as our risk factors on page 13.

Recent Accounting Pronouncements

InEffective ~~December~~April ~~2004~~1, ~~the~~2006, ~~FASB~~we ~~issued~~adopted FASB Statement No. ~~153~~123(R), “~~Exchanges~~Share-Based ~~of Nonmonetary Assets~~Payments,”. ~~This~~issued ~~Statement~~in ~~requires~~December 2004. ~~that~~FASB ~~exchanges~~Statement ofNo. 123(R) ~~nonmonetary~~is ~~assets~~a berevision ~~measured based on the fair value~~ of ~~the assets~~FASB ~~exchanged.~~ Statement No. ~~153~~123, ~~is effective~~ “Accounting for ~~nonmonetary~~Stock-Based ~~asset~~Compensation,” ~~exchanges~~and ~~occurring~~supersedes ~~in fiscal~~APB ~~periods~~Opinion ~~beginning after June 15, 2005~~No. ~~As of March~~ 3125, ~~2006,~~“Accounting ~~the~~for ~~adoption~~Stock ofIssued ~~this issue has~~to ~~had~~Employees.” noSee ~~material~~Note ~~impact~~2 onfor ~~our~~further ~~consolidated~~information ~~financial~~regarding ~~statements~~this adoption.

In ~~December~~October ~~2004~~2005, the FASB issued ~~Statement~~FASB Staff Position (“FSP”) No. FAS 123-(R)-2, “~~Share~~Practical Accommodation ~~Based~~to ~~Payments”.~~the Application of Grant Date as Defined in FASB Statement No. 123-(R).” isThe FASB provides companies with a ~~revision~~“practical accommodation” when determining the grant date of an award subject to FASB Statement No. 123(R). If (1) the award is a unilateral grant, ~~“Accounting~~that ~~for~~is, ~~Stock-Based~~the recipient ~~Compensation”~~does not have the ability to negotiate the key terms and ~~supersedes~~conditions of the award with the ~~APB~~employer, ~~Opinion~~(2) the ~~No.~~key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period, and (3) 25as long as all other criteria in the grant date definition have been met, then a mutual understanding of the key terms and conditions of an award is presumed to exist at the date the award is approved.

~~“Accounting~~In ~~for~~November 2005, ~~Stock~~the ~~Issued~~FASB toissued ~~Employees”.~~FSP ~~Statement~~ No. FAS 123-(R)-3, ~~eliminates~~“Transition ~~the~~Election ~~alternative~~Related to ~~use~~Accounting for the ~~intrinsic~~Tax ~~value~~Effects ~~method~~ of ~~accounting~~Share-Based ~~that~~Award ~~was~~Payments.” ~~provided~~FSP ~~in Statement~~ No. FAS 123,(R)-3 ~~which~~provides an ~~generally~~alternative ~~resulted~~method inof nocalculating ~~compensation~~the ~~expense~~excess ~~recorded~~tax inbenefits ~~the~~available ~~financial~~to ~~statements~~absorb ~~related~~tax ~~to the~~deficiencies ~~issuance~~recognized ofsubsequent ~~equity~~to ~~awards~~the toadoption ~~employees.~~of FASB Statement No. 123-(R). ~~establishes~~The ~~fair~~adoption ~~value~~of asthis ~~the measurement~~FSP ~~objective in accounting for share-based payment arrangements and requires all companies~~did tonot ~~apply~~have a ~~fair~~material ~~value~~impact ~~based~~on ~~measurement~~our ~~method~~results inof ~~accounting~~operations ~~for~~or ~~generally~~financial ~~all share-based payment transactions~~condition.

WeIn ~~plan~~May 2005, tothe ~~adopt~~FASB issued Statement No. ~~123-R~~154, ~~using~~“Accounting aChanges ~~modified~~and ~~prospective~~Error ~~application.~~Corrections, ~~Under this~~a ~~application,~~replacement ~~companies~~of ~~are~~APB ~~required~~Opinion toNo. 20 ~~record~~and ~~compensation~~FASB ~~expense~~Statement ~~for~~No. 3.” ~~all~~FASB ~~awards~~Statement ~~granted~~No. 154 ~~after~~provides guidance on the ~~required~~ ~~effective~~accounting ~~date~~for and ~~for~~reporting ~~the~~of, ~~unvested~~accounting ~~portion~~changes ofand ~~previously~~error ~~granted~~corrections. ~~awards~~It establishes ~~that~~retrospective ~~remain~~application to prior periods’ financial ~~outstanding~~statements atas the ~~date~~required ofmethod ~~adoption.~~for reporting ~~The~~a ~~provisions~~change ofin ~~Statement~~accounting ~~No. 123-R~~principle ~~are~~and ~~effective~~the asreporting of ~~the beginning~~a correction of ~~the~~an ~~first~~error. ~~annual~~We ~~reporting~~have implemented ~~period~~this ~~that~~Statement ~~begins~~in ~~after~~fiscal ~~June 15,~~2007. ~~2005,~~See ~~but~~Note ~~early~~25 ~~adoption is~~in ~~encouraged.~~our Asaudited consolidated offinancial ~~March 31,~~statements ~~2006,~~for ~~management~~the isfiscal ~~currently~~year ~~reviewing~~end ~~the~~March ~~effect~~31, 2007 ~~that~~for the adoption of FASB Statement No. ~~123-R~~ ~~will~~154 ~~have~~and onNote ~~our~~23 ~~consolidated~~for ~~financial~~the implementation ~~statements~~of the SEC Staff accounting Bulletin No. 108.

In June ~~2005~~2006, the ~~EITF~~FASB ~~Issue~~issued FASB Interpretation No. ~~05-6,~~ (“~~Determining~~FIN”) ~~the~~48, ~~Amortization~~“Accounting ~~Period~~ for ~~Leasehold~~Uncertainty ~~Improvements~~in ~~Purchased~~Income ~~after~~Taxes—An ~~Lease~~Interpretation ~~Inception~~of orFASB ~~Acquired~~Statement ~~in a Business Combination”. Issue~~ No. ~~05-6 states~~109.” ~~that~~FIN ~~leasehold~~48 ~~improvements~~clarifies ~~that~~the ~~are~~accounting ~~placed~~for uncertainty in ~~service~~income ~~significantly~~taxes ~~after~~recognized ~~the~~in ~~beginning~~financial ~~of the~~statements ~~lease~~in ~~term~~accordance ~~should~~with beFASB ~~amortized~~Statement No. 109, ~~over~~“Accounting ~~the~~for ~~shorter~~Income ofTaxes.” ~~the~~FIN ~~useful~~48 ~~life~~prescribes ofa ~~the~~recognition ~~assets~~threshold orand ameasurement attribute ~~term~~for ~~that includes~~the ~~required~~financial ~~lease~~statement ~~periods~~recognition and ~~renewals~~measurement ~~that~~of ~~are~~a ~~deemed~~tax toposition betaken ~~reasonably~~or expected ~~assured~~to atbe ~~the~~taken ~~date the~~in ~~leasehold~~a ~~improvements~~tax ~~are purchased~~return. ~~The~~FIN ~~pronouncement~~48 isalso ~~effective~~provides ~~for~~guidance ~~leasehold~~on ~~improvements~~derecognition, ~~that~~classification, ~~are~~interest ~~purchased~~and orpenalties, ~~acquired~~accounting in ~~reporting~~interim periods, ~~beginning after June 29~~disclosure, ~~2005~~and transition. We Asare required to adopt the provisions of ~~March 31, 2006,~~FIN 48 in the ~~adoption~~first quarter of ~~this~~fiscal ~~issue~~2008. ~~has~~We ~~had~~have nonot yet ~~material~~evaluated the impact of this implementation on our consolidated financial statements.

In ~~June~~September ~~2005~~2006, the FASB issued ~~FSP~~FASB Statement No. ~~FAS~~157, ~~150-5.~~“Fair ~~This~~Value ~~FSP~~Measurements,” ~~clarifies that freestanding~~which ~~warrants~~provides ~~and~~a ~~other~~single ~~similar~~definition ~~instruments~~of onfair ~~shares~~value, ~~that~~together ~~are~~with ~~redeemable~~a ~~(either~~framework ~~puttable or mandatorily redeemable) should be accounted~~ for asmeasuring ~~liabilities~~it, ~~under~~and requires ~~FASB~~additional ~~Statement~~disclosure ~~No. 150, “Accounting~~about ~~for~~the ~~Certain~~use ~~Financial~~of ~~Instruments~~fair ~~with~~value ~~Characteristics~~to ofmeasure ~~Both~~assets ~~Liabilities~~ and ~~Equity”,~~liabilities. ~~regardless~~Furthermore, ofin ~~the timing of the redemption feature or price~~February 2007, ~~even though~~ the ~~underlying~~FASB ~~shares~~issued ~~may be~~FASB ~~classified~~Statement ~~as equity~~No. 159, ~~This~~“The ~~FSP~~Fair isValue ~~effective~~Option for ~~the first reporting period beginning after June~~ ~~30,~~Financial ~~2005.~~Assets Asand ~~of March 31~~Liabilities,” ~~2006,~~which ~~the~~permits ~~adoption~~an ofentity ~~this~~to ~~issue~~measure ~~has~~certain ~~had~~financial noassets ~~material impact on our~~and ~~consolidated financial statements.~~

~~In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election~~43 Related to Accounting for the Tax Effects of Share-Based Award Payments” (“FSP 123(R)-3”). FSP 123(R)-3 provides an alternative method of calculating the excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FASB Statement No. 123(R). We are currently evaluating our available alternatives for the adoption of FSP 123(R)-3 and have until the earlier of November 2006 or one year from adoption to make our one-time election.

financial liabilities at fair value, and report unrealized gains and losses in earnings at each subsequent reporting date. Its objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes without having to apply complex hedge accounting provisions. Statement No. 159 is effective for fiscal years beginning after November 15, 2007, but early application is encouraged. The requirements of Statement No. 157 are adopted concurrently with or prior to the adoption of Statement No. 159. We have not yet evaluated the impact of this implementation on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using both a balance sheet and an income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial application is material, companies will record the effect as a cumulative effect adjustment to the beginning balance of retained earnings. The provisions of SAB No. 108 are effective for us for the fiscal year ended March 31, 2007. The implementation of SAB No. 108 has impacted our consolidated financial statements. See Note 23 in our audited consolidated financial statements for the fiscal year end March 31, 2007 for the adoption of SEC Staff accounting Bulletin No. 108.

During the year ended March 31, 2007, the SEC finalized Rule Release 33-8732A regarding disclosure requirements for executive and director compensation. The final rule increases the disclosure requirements of total compensation for the principal executive officer, the principal financial officer, and up to three of the other most highly paid officers, and requires tabular presentation of all director compensation. The new requirements are effective in Forms 8-K for triggering events that occur on or after November 7, 2006, and in Forms 10-K for fiscal years ending on or after December 15, 2006. This information is incorporated by reference to our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in fiscal 2008, which we expect to be filed with the SEC within 120 days after the end of fiscal 2007.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our carrying ~~value~~values of cash, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, accrued liabilities, royalties payable, assets and liabilities of discontinued operations, and amounts due to and from related parties are a reasonable approximation of of their fair value.

Foreign Currency Exchange Rates

We earn royalties on sales of our product sold internationally. These revenues, which are based on various foreign currencies and are billed and paid in U.S. dollars, represented $185.32 million of our revenue for the year ended March 31, ~~2006~~2007. We also purchase certain of our inventories from foreign developers and pay royalties primarily denominated in euros to IESA ~~from~~with regards to the ~~sale~~sales of IESA products in North America. ~~While~~We we do not hedge against foreign exchange ~~rate~~ rate fluctuations. Therefore, our business in this regard is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Our future results could be materially and adversely impacted by changes in these or other factors. As of March 31, ~~2006~~2007, we did not have any net revenues earned by our foreign subsidiaries. These subsidiaries represented 01.08% ~~and~~of 1total assets; of these foreign assets, $0.6% million ofwas ~~consolidated~~associated with ~~net~~the ~~revenues~~Reflections ~~and~~development ~~total~~studio ~~assets~~located outside the United States, which was sold during ~~respectively~~the current period. We also recorded approximately $114.56 million in operating expenses attributed to the foreign operations of Reflections, which is included in income (loss) from discontinued operations on our consolidated statements of operations. Currently, substantially all of our business is conducted in the United States where revenues and expenses are transacted in U.S. dollars. As a result, the majority of our results of operations are not subject to foreign exchange rate fluctuations.

million in operating expenses attributed to foreign operations related primarily to a development studio located outside the United States. Currently, substantially all of our business is conducted in the United States where revenues and expenses are transacted in U.S. dollars. As a result, the majority of our results of operations are not subject to foreign exchange rate fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements, and notes thereto, and our Financial Statement Schedule, are presented on pages F-1 through F-45 hereof as set forth below:

	PAGE
ATARI, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of March 31, 2005 and March 31, 2006		F-2
Consolidated Balance Sheets as of March 31, 2006 and March 31, 2007		F-2
Consolidated Statements of Operations for the Years Ended March 31, 2004, 2005, and 2006		F-3
Consolidated Statements of Operations for the Years Ended March 31, 2005, 2006, and 2007		F-3
Consolidated Statements of Cash Flows for the Years Ended March 31, 2004, 2005, and 2006		F-4
Consolidated Statements of Cash Flows for the Years Ended March 31, 2005, 2006, and 2007		F-4
Consolidated Statements of Stockholders’ Equity (Deficiency) and Comprehensive Income (Loss) for the Years Ended March 31, 2004, 2005, and 2006		F-6
Notes to the Consolidated Financial Statements	F-7 to F-34
FINANCIAL STATEMENT SCHEDULE
Schedule II—Valuation and Qualifying Accounts for the Years Ended March 31, 2004, 2005, and 2006		F-35


	PAGE
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended March 31, 2005, 2006, and 2007		F-6
Notes to the Consolidated Financial Statements	F-7 to F-40
FINANCIAL STATEMENT SCHEDULE
Schedule II—Valuation and Qualifying Accounts for the Years Ended March 31, 2005, 2006, and 2007		F-41

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, ~~2006~~2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. As described below under Management’s Report on Internal Control over Financial Reporting, we identified material weaknesses in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of March 31, ~~2006~~2007. As a result ~~of the existence of these material weaknesses~~, management has concluded that ~~our~~ disclosure controls and procedures were ineffective ~~as of March 31, 2006~~.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in ~~Rules~~Rule 13a-15(f) ~~or 15d-15(f)~~ under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

	•		Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

	•		Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

	•		Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of March 31, ~~2006~~2007. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO”).

A material weakness is a control deficiency, or a combination of control deficiencies, that result in ~~more than~~ a ~~remote~~reasonable ~~likelihood~~possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. ~~In connection with management’s assessment of our~~ internal control over financial reporting described above, management has identified the following material weaknesses in the Company’s internal control over financial reporting as of March 31, 2006:

4145

•In ~~During~~connection ~~February~~with ~~2006~~management’s ~~prior~~assessment ~~to the filing~~ of our ~~December~~internal ~~31,~~control ~~2005~~over ~~Form~~financial ~~10-Q~~reporting described above, wemanagement ~~determined~~has ~~that~~identified ~~we needed to restate our consolidated statement of cash flows for~~ the ~~nine~~following ~~months ended December 31, 2004 as a result of a~~ material ~~weakness~~weaknesses in the Company’s internal ~~controls~~control over financial reporting. ~~Specifically, the controls in place~~ as ~~they relate to the financial close and reporting review process failed to detect certain accounting errors. Further, during the fourth quarter~~ of March 31, 2006, the financial close and reporting review process failed to detect an accounting error related to license amortization expense. Accordingly, management has determined that this control deficiency constitutes a material weakness.2007:

• ~~Certain~~There was a material weakness in the design and operation of ~~our~~the Company’s internal controls ~~were~~over ~~dependent~~financial ~~upon~~reporting ~~computer-generated~~related ~~information~~to ~~but~~income ~~were~~taxes ~~not~~which ~~designed~~resulted toin ~~ensure~~a ~~the~~more ~~integrity~~than ofremote likelihood that ~~information~~a ~~prior~~material tomisstatement ~~its~~of ~~use~~the annual or interim financial statements would not be prevented or detected. AsManagement did not maintain a ~~result,~~sufficient wenumber ~~were~~of ~~not~~technically ~~able~~qualified personnel during the year to ~~provide~~facilitate ~~reasonable~~the ~~assurance~~identification ~~that~~of ~~only~~all ~~valid~~issues ~~orders~~associated ~~are~~with ~~recorded~~the ~~and~~Company’s ~~processed~~income ~~and~~tax ~~that~~closing ~~credit~~process ~~notes~~or to appropriately prepare and review income tax related analysis. This material weakness resulted in material adjustments to ~~revenue,~~income tax accounts ~~receivable~~within the current and ~~cost~~prior ofperiod ~~sales~~consolidated ~~are~~financial ~~accurately~~statements. ~~calculated~~• There were material design and ~~recorded~~operational deficiencies related to the preparation and review of financial information during the Company’s year end closing process. ~~Accordingly,~~These ~~management~~items ~~has~~resulted ~~determined~~in ~~that~~more ~~this~~than ~~control~~a ~~deficiency~~remote ~~constitutes~~likelihood that a material ~~weakness.~~misstatement •or ~~Certain~~lack of ~~our~~disclosure ~~internal~~within ~~controls~~the ~~were~~annual ~~dependent~~or ~~upon~~interim ~~computer-generated~~financial ~~information~~statements ~~but~~would ~~were~~ not ~~designed~~be toprevented ~~ensure~~or ~~the~~detected. ~~integrity~~The Company experienced significant turnover of ~~that~~senior ~~information~~financial ~~prior~~management toand ~~its~~did ~~use.~~not Asmaintain a ~~result,~~sufficient wenumber ~~were~~of ~~not~~qualified ~~able~~personnel to ~~provide~~support ~~reasonable~~the ~~assurance~~Company’s ~~that~~financial ~~payments~~reporting ~~had~~and ~~been~~close ~~properly~~process. ~~approved~~This ~~and~~has ~~disbursed~~resulted toin ~~the~~a ~~appropriate~~significant ~~suppliers,~~workload ~~nor~~for ~~that~~the ~~they~~existing ~~were~~personnel ~~recorded~~who inmanage the ~~appropriate~~financial ~~period.~~reporting ~~Accordingly,~~and ~~management~~closing ~~has~~process ~~determined~~and reduced the likelihood that ~~this~~such ~~control~~individuals ~~deficiency~~could ~~constitutes~~detect a material ~~weakness.~~adjustment •to Wethe ~~did~~Company’s ~~not~~books ~~maintain~~and ~~adequate~~records ~~controls~~or ~~over~~anticipate, ~~payroll~~identify, ~~records~~ and ~~related~~resolve ~~reconciliations~~accounting atissues ~~one~~in the normal course of ~~our~~performing ~~development~~their ~~studios~~assigned functions. ~~Specifically,~~This ~~the~~material ~~studio~~weakness ~~did~~resulted ~~not~~in ~~effectively~~material ~~maintain~~adjustments ~~required~~to ~~employee~~the ~~records.~~inventory, ~~Further~~operating expenses, ~~the~~additional ~~development~~paid-in ~~studio~~capital ~~did~~accounts ~~not~~within ~~effectively~~the ~~perform~~financial ~~formal~~statements ~~monthly~~and ~~reconciliations~~financing ~~related~~activities towithin ~~its~~the ~~payroll~~fiscal ~~accounts~~2005 and ~~related~~2006 ~~bank~~consolidated statements of cash flows. ~~Accordingly~~• There were material design and operational deficiencies in the Company’s controls over related party transactions, which, when aggregated, ~~management~~resulted ~~has~~in ~~determined~~a ~~that~~more ~~these~~than ~~control~~remote ~~deficiencies~~likelihood ~~constitute~~that a material ~~weakness.~~misstatement •or Welack ~~did~~of ~~not~~disclosure ~~maintain~~in ~~adequate~~the ~~controls~~annual ~~over~~or ~~income~~interim ~~tax~~financial ~~accounts~~statements ~~and~~would ~~related~~not ~~disclosures~~be prevented or detected. ~~Specifically,~~The ~~these~~Company ~~controls~~can ~~failed~~be toimpacted ~~ensure~~by ~~the~~certain ~~proper~~financial ~~calculations~~transactions and ~~presentation~~operating decisions of ~~our~~IESA. ~~required~~Management ~~income~~determined ~~tax~~that ~~footnote~~an ~~disclosures.~~inadequate ~~Accordingly,~~level ~~management~~of communication between the Company and IESA has ~~determined~~resulted in an increased likelihood that ~~this~~the ~~control~~accounting ~~deficiency~~department ~~constitutes~~would not detect a significant transaction affecting the Company which would lead to a material ~~weakness~~adjustment to the Company’s books and records or a material change to the disclosure in the footnotes to the financial statements. This material weakness resulted in adjustments to operating expense and additional paid-in capital accounts and related party disclosures in the current period consolidated financial statements

Management has concluded that, as a result of these material weaknesses, the Company did not maintain effective internal control over financial reporting as of March 31, ~~2006~~2007, based on the criteria in Internal Control-Integrated Framework issued by COSO.

Management’s isassessment ~~currently~~of ~~evaluating~~the ~~various~~effectiveness ~~forms~~of the Company’s internal control over financial reporting as of ~~remediation~~March 31, ~~and~~2007 ~~expects~~has tobeen ~~have~~audited ~~these~~by ~~material~~Deloitte & Touche LLP, an independent registered ~~weaknesses~~public ~~corrected~~accounting ~~prior~~firm, toas ~~the~~stated ~~end~~in their report, which is included on pages 47 through 48 of this ~~fiscal~~Annual ~~2007~~Report on Form 10-K.

~~Management’s~~46 assessment of the effectiveness of the Company’ internal control over financial reporting as of March 31, 2006 has been audited by Deloitte & touche LLP, an independent registered public accounting firm, as stated in their report, which is included on page 43 of this Annual Report on Form 10-K.

Atari, Inc. June 29, 2006

Changes in Internal Control over Financial Reporting

During the fourth quarter of fiscal 2006, the Company outsourced certain information technology processes to a third party relating to the management of its servers, which changed the design and operations of certain related security control processes. As of March 31, 2006, the design and operation of certain of these controls were not effective.

~~REPORT~~Changes OFin ~~INDEPENDENT~~Internal ~~REGISTERED~~Control ~~PUBLIC~~over ~~ACCOUNTING~~Financial ~~FIRM~~Reporting

As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, management determined that, as of March 31, 2006, there were material weaknesses in the Company’s internal control over financial reporting relating to (i) the financial close and reporting process (ii) control design deficiencies related to the reliance on computer generated information for accounts receivable and revenue (iii) control design deficiencies related to the reliance on computer generated information for cost of sales and payment approval and disbursements to suppliers (iv) payroll records and reconciliations at an internal development studio and (v) income tax accounts and related disclosures. As reported in the Annual Report for fiscal 2006, the Company initiated a number of changes in its internal controls to remediate these material weaknesses. As of March 31, 2007, the following measures to remediate the control deficiencies have been implemented:

	•		We sold all our internal development studios; as a result, all payroll processes are now centralized in the US in our corporate headquarters.

	•		We reorganized the review and approval process within our Information Technology group, including integrating our external service providers into the formal review process.

	•		We enhanced our general computer controls and internal procedures related to Information Technology operations, security and change control, so that we can rely on computer generated information.

Based on the implementation of the additional internal controls discussed above and the subsequent testing of those internal controls for a sufficient period of time, management has concluded that items (ii), (iii) and (iv) of the five material weaknesses identified at March 31, 2006 and discussed above have been remediated.

There have been no other changes in our internal control over financial reporting that occurred during the fourth quarter of the fiscal year ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Atari, Inc.
New York, New York

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Atari, Inc. and subsidiaries (the “Company”), did not maintain effective internal control over financial reporting as of March 31, ~~2006~~2007, because of the effect of the material weaknesses identified in management’s assessment based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

~~Financial~~• ~~Closing~~There was a material weakness in the design and ~~Reporting~~operation ~~Process~~ of the Company’s internal controls over financial reporting related to income taxes which resulted in a more than remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. The tax department did not maintain a sufficient number of technically qualified personnel during the year to facilitate the identification of all issues associated with the Company’s income tax closing process or to appropriately prepare and review income tax related analysis. This material weakness resulted in material adjustments to income tax accounts within the current and prior period consolidated financial statements.

~~The Company did not have an adequate process over the review of financial~~47 information produced during the financial closing and reporting process, nor sufficient resources to effectively perform such reviews. During the fourth quarter ended March 31, 2006, the Chief Financial Officer left the Company and the position was temporarily filled by the Chief Executive Officer as Acting Chief Financial Officer. This inadequate review process and the lack of sufficient resources constitute design deficiencies in the Company’s controls over the financial closing and reporting process. Errors in the financial information were identified in the current year including an accounting error that resulted in a restatement to the consolidated statement of cash flows for the nine months ended December 31, 2004 and an error in the fourth quarter ended March 31, 2006 relating to the recording of license amortization expense. Due to (1) the significance of the financial closing process to the preparation of reliable financial statement; (2) the significance of the identified misstatements and the potential misstatement that could have resulted due to the deficient controls and (3) the absence of sufficient other mitigating controls, we determined that, in the aggregate, these control deficiencies result in more than a remote likelihood that a material misstatement or lack of disclosure within the annual or interim financial statements will not be prevented or detected.

Certain of the Company’s internal controls were dependent upon computer-generated information but were not designed to ensure the integrity of that information prior to its use. As a result, the Company was not able to provide reasonable assurance that only valid orders are recorded and processed and that credit notes and adjustments to revenue, accounts receivable and cost of sales are accurately calculated and recorded. Due to (1) the significance of the potential misstatement that could have resulted due to the deficient controls and (2) the absence of sufficient other mitigating controls, we determined that, in the aggregate, these control deficiencies result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

	•		There were material design and operational deficiencies related to the preparation and review of financial information during the Company’s year end closing process. These items resulted in more than a remote likelihood that a material misstatement or lack of disclosure within the annual or interim financial statements would not be prevented or detected. The Company experienced significant turnover of senior financial management and did not maintain a sufficient number of qualified personnel to support the Company’s financial reporting and close process. This has resulted in a significant workload for the existing personnel who manage the financial reporting and closing process and reduced the likelihood that such individuals could detect a material adjustment to the Company’s books and records or anticipate, identify, and resolve accounting issues in the normal course of performing their assigned functions. This material weakness resulted in material adjustments to the inventory, operating expenses, additional paid-in capital accounts within the financial statements and financing activities within the fiscal 2005 and 2006 consolidated statements of cash flows.

	•		There were material design and operational deficiencies in the Company’s controls over related party transactions, which, when aggregated, resulted in a more than remote likelihood that a material misstatement or lack of disclosure in the annual or interim financial statements would not be prevented or detected. The Company can be impacted by certain financial transactions and operating decisions of Infogrames Entertainment S.A. (the “Parent Company”). There is an inadequate level of communication between the Company and the Parent Company which has resulted in an increased likelihood that the accounting department would not detect a significant transaction affecting the Company which would lead to a material adjustment to the Company’s books and records or a material change to the disclosures in the footnotes to the financial statements. This material weakness resulted in adjustments to operating expense and additional paid-in capital accounts and related party disclosures in the current period consolidated financial statements.

~~Accounts~~These material ~~Payable~~weaknesses ~~Process~~were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2007, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

~~Certain~~In ~~of the~~our ~~Company~~opinion, management’s ~~internal~~assessment ~~controls~~that ~~were~~the ~~dependent~~Company ~~upon~~did ~~computer-generated~~not ~~information~~maintain ~~but~~effective internal ~~were~~control ~~not~~over ~~designed~~financial toreporting ~~ensure~~as ~~the integrity~~ of ~~that~~March 31, ~~information~~2007, ~~prior~~is tofairly ~~its~~stated, ~~use.~~in Asall amaterial ~~result the~~respects, ~~Company~~based ~~was~~on ~~not~~the ~~able~~criteria toestablished ~~provide~~in ~~reasonable~~Internal ~~assurance~~Control—Integrated ~~that~~Framework ~~payments~~issued ~~had~~by ~~been~~the ~~properly~~Committee of ~~approved~~Sponsoring ~~and disbursed~~Organizations toof the ~~appropriate~~Treadway ~~suppliers,~~Commission. ~~nor~~Also ~~that~~in ~~they~~our ~~were~~opinion, ~~recorded~~because inof the ~~appropriate period. Due~~effect toof ~~(1)~~ the ~~significance~~material ofweaknesses ~~the~~described ~~potential~~above ~~misstatement~~on ~~that~~the ~~could~~achievement ~~have~~of ~~resulted~~the ~~due~~objectives toof the ~~deficient~~control ~~controls~~criteria, ~~and (2)~~ the ~~absence~~Company ofhas ~~sufficient~~not ~~other~~maintained ~~mitigating~~effective ~~controls,~~internal wecontrol ~~determined~~over ~~that~~financial ~~these control~~reporting ~~deficiencies~~as ~~result~~of March 31, in2007, ~~more~~based ~~than~~on athe ~~remote~~criteria ~~likelihood~~established ~~that~~in aInternal ~~material~~Control—Integrated ~~misstatement~~Framework ofissued by the ~~annual~~ orCommittee ~~interim~~of ~~financial~~Sponsoring ~~statements~~Organizations ~~will~~of ~~not~~the beTreadway ~~prevented or detected~~Commission.

~~Payroll~~We ~~Controls~~have –also ~~Reflections~~audited, ~~Development~~in ~~Studio~~accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2007, of the Company and our report dated September 18, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule and includes an explanatory paragraph regarding the application of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements” and the Company’s adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, an explanatory paragraph regarding the restatements of the fiscal 2005 and 2006 consolidated statements of cash flows, and an explanatory paragraph relating to uncertainties which raise substantial doubt about the Company’s ability to continue as a going concern as discussed in Note 1 to the consolidated financial statements.

Certain of the Company’s payroll-related controls at the Reflections development studio location relating to the maintenance of employee records were not operating effectively. Further, the Company had deficiencies in the design of controls related to reconciliations of payroll accounts and related bank statements. As a result of these deficiencies, the Company's controls do not provide reasonable assurance as to the accuracy of the payroll accounts at the Reflections development studio. The potential error related to this design deficiency and control ineffectiveness would be limited to the payroll expense at that studio. Due to (1) the significance of the potential misstatement that could have resulted due to the deficient controls and (2) the absence of sufficient other mitigating controls, we determined that these control deficiencies, when aggregated, result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Accounting for Income Taxes

There were design deficiencies in the Company’s controls related to the computation of the income tax accounts and related analyses. In addition there were operational deficiencies in the review process of the accounting for income taxes and related analyses. As a result of these deficiencies, the Company's controls do not provide reasonable assurance as to the accuracy of the income tax accounts. Due to (1) the significance of the potential misstatement that could have resulted due to the deficient controls and (2) the absence of sufficient other mitigating controls, we determined that, in the aggregate, these control deficiencies result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2006, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2006, of the Company and our report dated June 29, 2006 expressed an unqualified opinion on those financial statements and financial statement schedule and includes an explanatory paragraph relating to uncertainties which raise substantial doubt about the Company’s ability to continue as a going concern as discussed in Note 1.

DELOITTE & TOUCHE LLP

New York, NY ~~June 29~~September 18, ~~2006~~2007

43ITEM 9B. OTHER MATTERS

Bruno Bonnell’s Resignation

On April 4, 2007, IESA entered into an agreement with Bruno Bonnell, its founder, CEO, and the Chairman of its Board, under which Mr. Bonnell agreed to resign from his duties as a Director and CEO of IESA and from all the offices he holds with subsidiaries of IESA, including Atari and its subsidiaries. Mr. Bonnell was also the Chairman of our Board, our Chief Creative Officer and our Acting Chief Financial Officer, and previously had been our Chief Executive Officer. IESA agreed to pay Mr. Bonnell a total of approximately 3.0 million Euros ($4.0 million), including applicable foreign taxes. Neither our Board of Directors nor any member of our management was consulted about the agreement between IESA and Mr. Bonnell or at any time requested any of the things to which Mr. Bonnell agreed, and our management was not provided with a copy of the agreement until more than two months after it was signed. Mr. Bonnell resigned as a director and officer of Atari, Inc. and of our subsidiaries effective April 4, 2007.

This series of events has caused us to conclude that we have a material weakness in internal controls over related party transactions as disclosed in Item 9A. Specifically, IESA failed to provide us on a timely basis, after numerous attempts by management, the termination agreement between Bruno Bonnell and IESA. Further, this failure to deliver the contract on a timely basis is the primary reason for the significant filing delay of our Annual Report on Form 10-K for the year-end March 31, 2007 and the receipt of a delisting notice from NASDAQ.

Shareholders’ Meeting

Our Annual Shareholders’ Meeting, to be held on November 6, 2007, has been delayed more than 30 days from the one-year anniversary of our last Annual Shareholders’ Meeting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, ~~AND~~ EXECUTIVE OFFICERS, OFAND ~~THE~~CORPORATE ~~REGISTRANT~~GOVERNANCE

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in ~~2006~~2007, entitled “Election of Directors” and “Executive Officers.”, Our toDefinitive beProxy Statement has been filed with the Securities and Exchange Commission ~~within 120 days after the end of the fiscal year covered by this Form 10-K~~.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in ~~2006~~2007, entitled “Executive Compensation.”, Our toDefinitive beProxy Statement has been filed with the Securities and Exchange Commission ~~within 120 days after the end of the fiscal year covered by this Form 10-K~~.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in ~~2006~~2007, entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”~~, to be filed~~ ~~with~~Our ~~the~~Definitive ~~Securities~~Proxy ~~and~~Statement ~~Exchange~~has ~~Commission~~been ~~within~~filed ~~120 days~~with ~~after~~ the ~~end~~Securities ~~of the fiscal year~~and ~~covered~~Exchange ~~by this Form 10-K~~Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS., AND DIRECTOR INDEPENDENCE.

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in ~~2006~~2007, entitled “Certain Relationships and Related Transactions”, ~~to be filed with the Securities~~ and ~~Exchange~~Director ~~Commission~~Independence.” ~~within~~Our ~~120 days~~Definitive ~~after~~Proxy ~~the~~Statement ~~end~~has ofbeen ~~the~~filed ~~fiscal~~with ~~year~~the ~~covered~~Securities byand Exchange ~~this Form 10-K~~Commission.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in ~~2006~~2007, entitled “Principal Accountant Fees and Services.”, Our toDefinitive beProxy Statement has been filed with the Securities and Exchange Commission ~~within 120 days after the end of the fiscal year covered by this Form 10-K~~.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Report:

	(i)		Financial Statements. See Index to Financial Statements at Item 8 of this Report.

	(ii)		Financial Statement Schedule. See Index to Financial Statements at Item 8 of this Report.

	(iii)		Exhibits

3.1		Restated Certificate of Incorporation. **
3.2		~~Amended~~Certificate ~~and~~of Amendment of Restated ~~By-laws~~Certificate ~~are~~of Incorporation as filed with the Secretary of State of the State of Delaware on January 3, 2007 is incorporated herein by reference to Exhibit 399.21 to our ~~Quarterly~~Current Report on Form 108-QK ~~for~~filed ~~the~~on ~~quarter~~January ~~ended June 30~~9, ~~1998~~2007.
3.3		~~Amendment No. 1 to~~ Amended and Restated By-laws isare incorporated herein by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended ~~December~~June 3130, ~~2003~~1998.
3.4		Amendment No. 2 to Amended and Restated By-laws is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on July 28, 2005.
4.1		Specimen form of stock certificate of Common Stock is incorporated herein by reference to our Registration Statement on Form S-1 (File No. 333-14441) initially filed with the SEC on October 20, 1995, and all amendments thereto.
4.2		Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and us is incorporated herein by reference to an exhibit filed as a part of our Registration Statement on Form S-1 filed October 20, 1995.
4.3		Second Amended and Restated Registration Rights Agreement, dated as of October 2, 2000, between California U.S. Holdings, Inc. and us is incorporated herein by reference to Exhibit 4.6 of our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.1		Distribution Agreement between Infogrames Entertainment SA, Infogrames Multimedia SA and us, dated as of December 16, 1999, is incorporated herein by reference to Exhibit 7 to the Schedule 13D filed by Infogrames Entertainment SA and California U.S. Holdings, Inc. on January 10, 2000.
10.2		Addendum to Distribution Agreement between Infogrames Entertainment SA and us, dated as of December 16, 1999, is incorporated herein by reference to Exhibit 10.26a to our Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.3		Amendment to Distribution Agreement between Infogrames Entertainment SA and us dated as of July 1, 2000, is incorporated by reference to Exhibit 10.24a to our Transitional Report on Form 10-K for the transition period March 31, 2000 to June 30, 2000.
10.4		Distribution Agreement between Infogrames Entertainment SA and us, dated October 2, 2000, as supplemented on November 12, 2002 is incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the fiscal year ended March 31, 2005.
10.5		Agreement for Purchase and Sale of Assets, dated August 22, 2005, between us and Humongous, Inc. is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.6		Stock Transfer Agreement, dated August 22, 2005, among us, Infogrames Entertainment S.A. and Atari Interactive, Inc. (English Translation) is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.

4549

3.4		Amendment No. 1 to Amended and Restated By-laws is incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.
3.5		Amendment No. 2 to Amended and Restated By-laws is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on July 28, 2005.
4.1		Specimen form of stock certificate of Common Stock is incorporated herein by reference to our Registration Statement on Form S-1 (File No. 333-14441) initially filed with the SEC on October 20, 1995, and all amendments thereto.
4.2		Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and us is incorporated herein by reference to an exhibit filed as a part of our Registration Statement on Form S-1 filed October 20, 1995.
4.3		Second Amended and Restated Registration Rights Agreement, dated as of October 2, 2000, between California U.S. Holdings, Inc. and us is incorporated herein by reference to Exhibit 4.6 of our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.1		Distribution Agreement between Infogrames Entertainment SA, Infogrames Multimedia SA and us, dated as of December 16, 1999, is incorporated herein by reference to Exhibit 7 to the Schedule 13D filed by Infogrames Entertainment SA and California U.S. Holdings, Inc. on January 10, 2000.
10.2		Addendum to Distribution Agreement between Infogrames Entertainment SA and us, dated as of December 16, 1999, is incorporated herein by reference to Exhibit 10.26a to our Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.3		Amendment to Distribution Agreement between Infogrames Entertainment SA and us dated as of July 1, 2000, is incorporated by reference to Exhibit 10.24a to our Transitional Report on Form 10-K for the transition period March 31, 2000 to June 30, 2000.
10.4		Distribution Agreement between Infogrames Entertainment SA and us, dated October 2, 2000, as supplemented on November 12, 2002 is incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the fiscal year ended March 31, 2005.
10.5		Agreement for Purchase and Sale of Assets, dated August 22, 2005, between us and Humongous, Inc. is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.6		Stock Transfer Agreement, dated August 22, 2005, among us, Infogrames Entertainment S.A. and Atari Interactive, Inc. (English Translation) is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.7		Liquidity Agreement, dated August 22, 2005, between us and Infogrames Entertainment S.A. by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.7		Distribution Agreement, dated August 22, 2005, between us and Humongous, Inc. by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.8		Distribution Agreement, dated August 22, 2005, between us and Humongous, Inc. by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.9		Management and Services Agreement, dated as of March 31, 2006, between Infogrames Entertainment S.A. and us, is incorporated herein by reference to Exhibit 10.9 **to our Annual Report on Form 10-K for the year ended March 31, 2006.
10.10		Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A. and its subsidiaries, is incorporated herein by reference to Exhibit 10.10 **to our Annual Report on Form 10-K for the year ended March 31, 2006.
10.11		Production Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A. and its subsidiaries. **
10.12		Warehouse Services Contract, dated March 2, 1999, by and between us and Arnold Transportation Services, Inc. t/d/b/a Arnold Logistics is incorporated herein by reference to Exhibit 10.50 to our Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
10.13		Credit Agreement, dated as of November 12, 2002, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender, and GECC Capital Markets Group, Inc., as Lead Arranger, is incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 19, 2002. ***
10.14		First Amendment and Consent to the Credit Agreement, dated as of March 28, 2003, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is incorporated herein by reference to Exhibit 10.57a to our Transition Report on Form 10-K for the fiscal year ended March 31, 2003.
10.15		Second Amendment and Consent to the Credit Agreement, dated as of April 15, 2003, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is incorporated herein by reference to Exhibit 10.57b to our Transition Report on Form 10-K for the fiscal year ended March 31, 2003.
10.16		Third Amendment and Waiver to the Credit Agreement, dated as of July 11, 2003, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is incorporated herein by reference to Exhibit 10.57c to our Transition Report on Form 10-K for the fiscal year ended March 31, 2003.
10.17		Fourth Amendment and Consent to the Credit Agreement, dated as of September 12, 2003, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003.
10.18		Fifth Amendment to the Credit Agreement, dated as of October 15, 2003, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003.

4650

10.19		Sixth Amendment to the Credit Agreement, dated as of December 23, 2003, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2003.
10.11		Production Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A. and its subsidiaries, is incorporated herein by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the year ended March 31, 2006.
10.20		Seventh Amendment to the Credit Agreement, dated as of March 31, 2004, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender, is incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the year ended March 31, 2004.
10.12		Warehouse Services Contract, dated March 2, 1999, by and between us and Arnold Transportation Services, Inc. t/d/b/a Arnold Logistics is incorporated herein by reference to Exhibit 10.50 to our Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
10.21		Eighth Amendment to the Credit Agreement, dated as of May 20, 2004, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender, is incorporated herein by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the year ended March 31, 2004.
10.13		Loan and Security Agreement, dated as of May 13, 2005, among us, as Borrower, and HSBC Business Credit (USA) Inc., as Lender is incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended March 31, 2005.
10.22		Consent to Credit Agreement, dated as of July 15, 2004, among us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time to time, and General Electric Capital Corporation, as Administrative Agreement, Agent and Lender, is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004.
10.14		First Amendment to Loan and Security Agreement, dated as of June 30, 2005, between us and HSBC Business Credit (USA) Inc. is incorporated herein by reference Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.23		Intercreditor and Subordination Agreement, dated as of November 12, 2002, among Infogrames Entertainment S.A, California U.S. Holdings, Inc., General Electric Capital Corporation and the Credit Parties signatory thereto, is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on February 14, 2003.
10.15*		The 1995 Stock Incentive Plan (as amended on October 31, 1996) is incorporated herein by reference to Exhibit 10.1 to Amendment No. 2 to our Registration Statement on Form S-1, filed December 6, 1996.
10.24		First Amendment to Intercreditor and Subordination Agreement, dated as of December 23, 2003, among Infogrames Entertainment S.A, California U.S. Holdings, Inc., Atari Interactive, Inc., General Electric Capital Corporation and the Credit Parties signatory thereto is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2003.
10.16*		The 1997 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.25		Loan and Security Agreement, dated as of May 13, 2005, among us, as Borrower, and HSBC Business Credit (USA) Inc., as Lender is incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended March 31, 2005.
10.17*		The 1997 Stock Incentive Plan (as amended on June 17, 1998) is incorporated herein by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.26		First Amendment to Loan and Security Agreement, dated as of June 30, 2005, between us and HSBC Business Credit (USA) Inc. is incorporated herein by reference Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.18*		The 2000 Stock Incentive Plan is incorporated herein by reference to Appendix B to our proxy statement dated June 29, 2000.
10.27*		Letter of Employment, dated as of April 23, 2002, between David Perry and us is incorporated herein by reference to Exhibit 10.53 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
10.19*		Amendment No. 1 to 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit A to our Information Statement dated November 27, 2000.
10.28*		The 1995 Stock Incentive Plan (as amended on October 31, 1996) is incorporated herein by reference to Exhibit 10.1 to Amendment No. 2 to our Registration Statement on Form S-1, filed December 6, 1996.
10.20*		Third Amendment to the Atari, Inc. 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004.
10.29*		The 1997 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.21*		Atari, Inc. 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.10 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.30*		The 1997 Stock Incentive Plan (as amended on June 17, 1998) is incorporated herein by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.22*		Form of 2005 Stock Incentive Plan Option Award Agreement is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.31*		The 2000 Stock Incentive Plan is incorporated herein by reference to Appendix B to our proxy statement dated June 29, 2000.
10.23*		Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement is incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.32*		Amendment No. 1 to 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit A to our Information Statement dated November 27, 2000.
10.24*		The 1998 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.33*		Third Amendment to the Atari, Inc. 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004.
10.25*		Description of Registrant’s Annual Incentive Plan for fiscal 2007.**
10.34*		Atari, Inc. 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.10 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.26*		Employment Agreement with Bruno Bonnell, dated as of July 1, 2004 and effective as of April 1, 2004, is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004.
10.27*		Amendment No. 1 to Employment Agreement, dated as of November 23, 2005, between us and Bruno Bonnell is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.

4751

10.35*		Form Of 2005 Stock Incentive Plan Option Award Agreement is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.28*‡		Termination and General Release Agreement, dated October 15, 2004, by and between us and Denis Guyennot is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
10.36*		Form Of 2005 Stock Incentive Plan Restricted Stock Award Agreement is incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.29*		Employment Agreement, dated September 1, 2006, by and between us and David R. Pierce is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
10.37*		The 1998 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.31*		Amendment to Employment Agreement, dated May 1, 2007, between David Pierce and Atari, Inc., is incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 2, 2007.
10.38*		Description of Registrant’s Annual Incentive Plan for fiscal 2006. **
10.32*		Consulting Agreement between us and Ann Kronen, dated as of November 8, 2006, is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006.
10.39*		Employment Agreement with Bruno Bonnell, dated as of July 1, 2004 and effective as of April 1, 2004, is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004.
10.33		Compromise Agreement, dated August 12, 2005, by and among us, Reflections Interactive Limited and Martin Lee Edmondson is incorporated herein by reference to Exhibit 10.1 to our Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-129099).
10.40		Amendment No. 1 to Employment Agreement, dated as of November 23, 2005, between us and Bruno Bonnell is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.34‡		Licensed Publisher Agreement between us and Sony Computer Entertainment America, Inc., dated January 19, 2003, is incorporated herein by reference to Exhibit 10.62 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.41*‡		Termination and General Release Agreement, dated October 15, 2004, by and between us and Denis Guyennot is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
10.35‡		PlayStation® 2 Licensed Publisher Agreement between us and Sony Computer Entertainment America, Inc., dated April 1, 2000, as amended is incorporated by reference to Exhibit 10.45 to our Annual Report on Form 10-K for the year ended March 31, 2005.
10.42*		Employment Agreement, dated November 26, 2004, by and between us and James Caparro is incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
10.36‡		Xbox® Publisher License Agreement between us and Microsoft Corporation, dated April 18, 2000, is incorporated herein by reference to Exhibit 10.63 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.***
10.43*		Letter Agreement by and between us and Diane Price Baker, dated January 24, 2005 is incorporated by reference to Exhibit 10.34 to our Annual Report on Form 10-K for the year ended March 31, 2005.
10.37		Sublicense Agreement between us and Funimation Productions, Ltd., dated October 27, 1999, is incorporated herein by reference to Exhibit 10.64 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.***
10.44*		Consulting Agreement between us and Ann Kronen, dated as of November 22, 2005, is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.38		Amendment One to the Sublicense Agreement between us and Funimation Productions, Ltd., dated April 20, 2002, is incorporated herein by reference to Exhibit 10.65 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.45		Compromise Agreement, dated August 12, 2005, by and among us, Reflections Interactive Limited and Martin Lee Edmondson is incorporated herein by reference to Exhibit 10.1 to our Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-129099).
10.39		Amendment Two to the Sublicense Agreement between us and Funimation Productions, Ltd., dated June 15, 2002, is incorporated herein by reference to Exhibit 10.66 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.46		Agreement of Lease, dated as of December 12, 1996, by and between us and F.S. Realty Corp is incorporated herein by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the year ended December 31, 1996.
10.40		Amendment Three to the Sublicense Agreement between us and Funimation Productions, Ltd., dated October 15, 2002, is incorporated herein by reference to Exhibit 10.67 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.47		First Amendment of Lease dated July 1, 1997 by and between us and F.S. Realty Corporation is incorporated by reference to Exhibit 10.37 to our Annual Report on Form 10-K for the year ended March 31, 2005.
10.41		Amendment Four to the Sublicense Agreement between us and Funimation Productions, Ltd., dated November 13, 2002, is incorporated herein by reference to Exhibit 10.68 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.48		Lease Agreement between us and Netbreeders Realty LLC, dated November 1, 1999, is incorporated herein by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.42		Amendment Five to the Sublicense Agreement between us and Funimation Productions, Ltd., dated February 21, 2003, is incorporated herein by reference to Exhibit 10.69 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.43		Amendment Six to the Sublicense Agreement between us and Funimation Productions, Ltd., dated August 11, 2003, is incorporated herein by reference to Exhibit 10.83 to our Annual Report on Form 10-K for the year ended March 31, 2004.

4852

10.49		Sublease Agreement between us and SAVI Technology, Inc., dated May 30, 2001, is incorporated herein by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.44		Agreement Regarding Satisfaction of Debt and License Amendment among us, Infogrames Entertainment S.A. and California U.S. Holdings, Inc., dated September 4, 2003, is incorporated herein by reference to Exhibit 10.70 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.50		Lease Agreement between us and Edward Silver, Co-Trustee of the Silver Trust and Paul Weinstein, Co-Trustee of the Weinstein Trust (dba PTL Realty), dated May 7, 2001, is incorporated herein by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.45		Amended Trademark License Agreement between us and Infogrames Entertainment S.A., dated September 4, 2003, is incorporated herein by reference to Exhibit 10.71 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.51		Lease Agreement between us and MV 1997, L.L.C., dated November 24, 1997, is incorporated herein by reference to Exhibit 10.16 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.46		Amendment No. 1 Trademark License Agreement between us, Atari Interactive, Inc. and Infogrames Entertainment S.A. is incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.52		Lease Agreement between Parabola Estates Limited and Reflections Interactive Limited dated September 10, 2001 is incorporated herein by reference to Exhibit 10.56 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
10.47		Obligation Assignment and Securing Agreement, dated as of November 3, 2004, by and among us, Infogrames Entertainment SA, Atari Interactive, Inc., Atari Europe SAS, and Paradigm Entertainment, Inc. is incorporated herein by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
10.53		Lease Agreement between Prima Development Corp. and us dated May 17, 2002 is incorporated herein by reference to Exhibit 10.55 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
10.48		Secured Promissory Note of Atari Interactive, Inc. in the aggregate amount of $23,058,997.19 payable us is incorporated herein by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
10.54‡		Licensed Publisher Agreement between us and Sony Computer Entertainment America, Inc., dated January 19, 2003, is incorporated herein by reference to Exhibit 10.62 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.49‡		Promissory Note of Atari Interactive, Inc., in the aggregate amount of $5,122,625 payable to us, is incorporated herein by reference to Exhibit 10.86 to our Annual Report on Form 10-K for the year ended March 31, 2004.
10.55‡		PlayStation® 2 Licensed Publisher Agreement between us and Sony Computer Entertainment America, Inc., dated April 1, 2000, as amended is incorporated by reference to Exhibit 10.45 to our Annual Report on Form 10-K for the year ended March 31, 2005.
10.50‡		Promissory Note of Atari Interactive, Inc., in the aggregate amount of $2,620,280 payable to us, is incorporated herein by reference to Exhibit 10.87 to our Annual Report on Form 10-K for the year ended March 31, 2004.
10.56‡		Xbox® Publisher License Agreement between us and Microsoft Corporation, dated April 18, 2000, is incorporated herein by reference to Exhibit 10.63 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.***
10.51‡		Promissory Note of Paradigm Entertainment, Inc., in the aggregate amount of $828,870 payable to us, is incorporated herein by reference to Exhibit 10.88 to our Annual Report on Form 10-K for the year ended March 31, 2004.
10.57		Sublicense Agreement between us and Funimation Productions, Ltd., dated October 27, 1999, is incorporated herein by reference to Exhibit 10.64 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.***
10.52		Agreement Regarding Issuance of Shares, dated September 15, 2005, between us and Infogrames Entertainment S.A. is incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.58		Amendment One to the Sublicense Agreement between us and Funimation Productions, Ltd., dated April 20, 2002, is incorporated herein by reference to Exhibit 10.65 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.53		GT Interactive UK Settlement of Indebtedness Agreement, dated as of September 15, 2005, between us and Atari UK, Infogrames Entertainment S.A. and all of its subsidiaries is incorporated herein by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.59		Amendment Two to the Sublicense Agreement between us and Funimation Productions, Ltd., dated June 15, 2002, is incorporated herein by reference to Exhibit 10.66 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.54		Securities Purchase Agreement, dated September 15, 2005, between us and CCM Master Qualified Fund, Ltd. is incorporated herein by reference to Exhibit 10.1 to our Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-129098) filed on November 18, 2005.
10.60		Amendment Three to the Sublicense Agreement between us and Funimation Productions, Ltd., dated October 15, 2002, is incorporated herein by reference to Exhibit 10.67 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.55		Securities Purchase Agreement, dated September 15, 2005, between us and Sark Master Fund, Ltd. is incorporated herein by reference to Exhibit 10.2 to our Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-129098) filed on November 18, 2005.
10.61		Amendment Four to the Sublicense Agreement between us and Funimation Productions, Ltd., dated November 13, 2002, is incorporated herein by reference to Exhibit 10.68 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.56		Asset Purchase Agreement, dated July 13, 2006, between us and Reflections Interactive Ltd as the sellers and Ubisoft Holdings, Inc. and Ubisoft Entertainment Ltd as the purchasers, as amended by Amendment No. 1 dated August 3, 2006 is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
10.62		Amendment Five to the Sublicense Agreement between us and Funimation Productions, Ltd., dated February 21, 2003, is incorporated herein by reference to Exhibit 10.69 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.57		Credit Agreement, dated November 3, 2006, among Atari, Inc, the Lenders Party Hereto, and Guggenheim Corporate Funding, LLC, as Administrative Agent is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006.
10.63		Amendment Six to the Sublicense Agreement between us and Funimation Productions, Ltd., dated August 11, 2003, is incorporated herein by reference to Exhibit 10.83 to our Annual Report on Form 10-K for the year ended March 31, 2004.
10.58		Agreement of Lease, dated June 21, 2006, between us and Fifth and 38th LLC.**
10.64		Agreement Regarding Satisfaction of Debt and License Amendment among us, Infogrames Entertainment S.A. and California U.S. Holdings, Inc., dated September 4, 2003, is incorporated herein by reference to Exhibit 10.70 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.65		Amended Trademark License Agreement between us and Infogrames Entertainment S.A., dated September 4, 2003, is incorporated herein by reference to Exhibit 10.71 to our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.66		Amendment No. 1 Trademark License Agreement between us, Atari Interactive, Inc. and Infogrames Entertainment S.A. is incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.67		Obligation Assignment and Securing Agreement, dated as of November 3, 2004, by and among us, Infogrames Entertainment SA, Atari Interactive, Inc., Atari Europe SAS, and Paradigm Entertainment, Inc. is incorporated herein by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.

4953

10.68		Secured Promissory Note of Atari Interactive, Inc. in the aggregate amount of $23,058,997.19 payable us is incorporated herein by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
21.1		List of Subsidiaries.**
10.69‡		Promissory Note of Atari Interactive, Inc., in the aggregate amount of $5,122,625 payable to us, is incorporated herein by reference to Exhibit 10.86 to our Annual Report on Form 10-K for the year ended March 31, 2004.
23.1		Consent of Deloitte & Touche LLP.**
10.70‡		Promissory Note of Atari Interactive, Inc., in the aggregate amount of $2,620,280 payable to us, is incorporated herein by reference to Exhibit 10.87 to our Annual Report on Form 10-K for the year ended March 31, 2004.
31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
10.71‡		Promissory Note of Paradigm Entertainment, Inc., in the aggregate amount of $828,870 payable to us, is incorporated herein by reference to Exhibit 10.88 to our Annual Report on Form 10-K for the year ended March 31, 2004.
31.2		Acting Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
10.72		Agreement Regarding Issuance of Shares, dated September 15, 2005, between us and Infogrames Entertainment S.A. is incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
32.1		Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡‡
10.73		GT Interactive UK Settlement of Indebtedness Agreement, dated as of September 15, 2005, between us and Atari UK, Infogrames Entertainment S.A. and all of its subsidiaries is incorporated herein by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
32.2		Certification by the Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.‡‡
10.74		Securities Purchase Agreement, dated September 15, 2005, between us and CCM Master Qualified Fund, Ltd. is incorporated herein by reference to Exhibit 10.1 to our Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-129098) filed on November 18, 2005.
10.75		Securities Purchase Agreement, dated September 15, 2005, between us and Sark Master Fund, Ltd. is incorporated herein by reference to Exhibit 10.2 to our Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-129098) filed on November 18, 2005.
21.1		List of Subsidiaries. **
23.1		Consent of Deloitte & Touche LLP. **
31.1		Chief Executive Officer and Acting Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
32.1		Certification by the Chief Executive Officer and Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ‡‡
99.1‡		Licensed PSP Publisher Agreement by and between us and Sony Computer Entertainment America, Inc., dated March 23, 2005, for PlayStation® Portable is incorporated by reference to Exhibit 99.1 to our Annual Report on Form 10-K for the year ended March 31, 2005.
99.2‡		Amendment to the Xbox® Publisher Licensing Agreement, dated March 1, 2005 is incorporated by reference to Amendment No. 2 to our Annual Report on Form 10-K/A for the year ended March 31, 2005.
99.3‡		Confidential License Agreement for Nintendo GameCube™, by and between Nintendo of America, Inc. and us effective March 29, 2002 is incorporated by reference to Exhibit 99.3 to our Annual Report on Form 10-K for the year ended March 31, 2005.
99.4		First Amendment to Confidential License Agreement for Nintendo GameCube™, by and between Nintendo of America, Inc. and us effective March 29, 2002 is incorporated herein by reference to Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
99.5‡		Xbox® 360 Publisher License Agreement between us and Microsoft Licensing GP, effective February 17, 2006, is incorporated herein by reference to Exhibit 99.5 **to our Annual Report on Form 10-K for the year ended March 31, 2006.
99.6‡		Confidential License Agreement for Nintendo DS (Western Hemisphere), by and between Nintendo of America, Inc. and us effective October 14, 2005, is incorporated herein by reference to Exhibit 99.6 **to our Annual Report on Form 10-K for the year ended March 31, 2006.

Exhibit indicated with an * symbol is a management contract or compensatory plan or arrangement.

Exhibit indicated with an ** symbol is filed herewith.

*** All immaterial amendments/extensions to this agreement were filed as an exhibit 99 in our Quarterly Report for the respective period.

‡ Portions of this exhibit have been redacted pursuant to a confidential treatment request filed with the SEC.

Exhibit indicated with a ‡‡ is furnished herewith

A copy of any of the exhibits included in the Annual Report on Form 10-K as amended, may be obtained by written request to Atari, Inc. upon payment of a fee of $0.10 per page to cover costs. Requests should be sent to Atari, Inc. at the address set forth on the front cover, attention Director, Investor Relations.

5054

~~SIGNATURE~~SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) 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.

~~ATARI, INC.~~	ATARI, INC.
~~By:~~	~~/s/ Bruno Bonnell~~By:		/s/ David R. Pierce
	Name:	Bruno Bonnell
			Name: David R. Pierce
	Title:	Chief Executive Officer and Acting Chief Financial Officer
			Title: President and Chief Executive Officer
	Date:	June 29, 2006
			Date: September 18, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title(s)	Date
/s/ Bruno Bonnell Bruno Bonnell	Chief Executive Officer (principal executive officer), Acting Chief Financial Officer (principal financial officer), and Director	June 26, 2006
/s/ David R. Pierce	President and Chief Executive Officer (principal	September 18, 2007
/s/ Arturo Rodriguez Arturo Rodriguez	Vice President and Controller (principal accounting officer)	June 29, 2006
David R. Pierce	executive officer)
/s/ James Ackerly James Ackerly	Director	June 26, 2006
/s/ Arturo Rodriguez	Acting Chief Financial Officer, Vice President and	September 18, 2007
/s/ Ronald Bernard Ronald Bernard	Director	June 27, 2006
Arturo Rodriguez	Controller (principal financial and accounting officer)
/s/ Michael Corrigan Michael Corrigan	Director	June 26, 2006
/s/ James Ackerly	Director	September 18, 2007
/s/ Evence Charles Coppee Evence Charles Coppee	Director	June 28, 2006
James Ackerly
/s/ Denis Guyennot Denis Guyennot	Director	June 27, 2006
/s/ Ronald C. Bernard	Director	September 18, 2007
/s/ Ann E. Kronen Ann E. Kronen	Director	June 26, 2006
Ronald C. Bernard
/s/ Thomas Schmider Thomas Schmider	Director	June 28, 2006
/s/ Evence-Charles Coppee	Director	September 18, 2007
Evence-Charles Coppee
/s/ Michael G. Corrigan	Director	September 18, 2007
Michael G. Corrigan
/s/ Denis Guyennot	Director	September 18, 2007
Denis Guyennot
/s/ Ann E. Kronen	Director	September 18, 2007
Ann E. Kronen
/s/ Jean-Michel Perbet	Director	September 13, 2007
Jean-Michel Perbet
/s/ Thomas Schmider	Director	September 18, 2007
Thomas Schmider

5155

ATARI, INC. AND SUBSIDIARIES ~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Atari, Inc.
New York, New York

We have audited the accompanying consolidated balance sheets of Atari, Inc. and subsidiaries (the “Company”) as of March 31, ~~2006~~2007 and ~~2005~~2006, and the related consolidated statements of operations, stockholders’ equity ~~(deficiency)~~ and comprehensive income (loss) and cash flows for the three years in the period ended March 31, ~~2006~~2007. Our audits also included the consolidated financial statement schedule listed at Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 2007 and 2006, and the results of its operations and its cash flows for the three years in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced significant operating losses. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No.123(R), “Share Based Payment”, as revised, effective April 1, 2006. As discussed in Note 23 to the consolidated financial statements, effective March 31, 2007, the Company elected application of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. As discussed in Note 24 to the consolidated financial statements, the Company has restated its fiscal 2005 and 2006 consolidated statement of cash flows. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of March 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 18, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 2006 and 2005, and the results of its operations and its cash flows for the three years in the period ended March 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced significant operating losses and its line of credit facility has expired. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 29, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of material weaknesses.

DELOITTE & TOUCHE LLP

New York, New York ~~June~~September 2918, ~~2006~~2007

F-1

ATARI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)

CONSOLIDATED BALANCE SHEETS


	March 31,			March 31,
	2006			2007
ASSETS
Current assets:
Cash	$	14,948		$	7,603
Accounts receivable, net of allowances of $30,918 and $14,148 at March 31, 2006 and March 31, 2007, respectively		12,072			6,473
Inventories, net		20,787			8,843
Due from related parties (Note 13)		4,692			1,799
Prepaid expenses and other current assets		11,345			10,229
Assets of discontinued operations (Note 19)		2,949			645

Total current assets		66,793			35,592
Property and equipment, net of accumulated depreciation of $30,139 and $30,945 at March 31, 2006 and March 31, 2007, respectively		6,113			4,217
Goodwill		66,398			—
Security deposits		137			1,940
Other assets		4,229			1,070

Total assets	$	143,670		$	42,819


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,935		$	11,013
Accrued liabilities		19,105			13,381
Royalties payable		13,468			4,282
Due to related parties (Note 13)		10,263			5,703
Liabilities of discontinued operations (Note 19)		3,018			—

Total current liabilities		69,789			34,379
Due to related parties – long term (Note 13)		—			1,912
Long-term liabilities		669			3,434

Total liabilities		70,458			39,725

Commitments and contingencies (Note 15)

Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding		—			—
Common stock, $0.10 par value, 30,000,000 shares authorized, 13,476,551 and 13,477,920 shares issued and outstanding at March 31, 2006 and March 31, 2007, respectively (1)		1,348			1,348
Additional paid-in capital		758,165			760,527
Accumulated deficit		(688,730	)		(761,299	)
Accumulated other comprehensive income		2,429			2,518

Total stockholders’ equity		73,212			3,094

Total liabilities and stockholders’ equity	$	143,670		$	42,819

(in1) ~~thousands~~Reflects the one-for-ten reverse stock split effected on January 3, ~~except~~2007. ~~share~~All ~~data)~~periods have been restated to reflect the reverse stock split.

	March 31,			March 31,
	2005			2006
ASSETS
Current assets:
Cash	$	10,438		$	15,386
Receivables, net of allowances of $24,285 and $30,918, at March 31, 2005 and March 31, 2006, respectively		42,179			12,072
Inventories, net		26,313			21,361
Due from related parties (Note 12)		248			4,692
Prepaid expenses and other current assets		22,789			12,567
Total current assets		101,967			66,078
Property and equipment, net		8,741			6,364
Goodwill		70,224			66,398
Other assets		9,107			4,830
Total assets	$	190,039		$	143,670
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,787		$	24,809
Accrued liabilities		21,077			19,836
Royalties payable		14,027			14,881
Due to related parties (Note 12)		5,421			10,263
Total current liabilities		68,312			69,789
Long-term liabilities		1,060			669
Total liabilities		69,372			70,458
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding		—			—
Common stock, $0.01 par value, 300,000,000 shares authorized, 121,296,092 and 134,765,510 shares issued and outstanding at March 31, 2005 and March 31, 2006, respectively		1,213			1,348
Additional paid-in capital		736,790			758,165
Accumulated deficit		(619,744	)		(688,730	)
Accumulated other comprehensive income		2,408			2,429
Total stockholders’ equity		120,667			73,212
Total liabilities and stockholders’ equity	$	190,039		$	143,670

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

F-2

ATARI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)

CONSOLIDATED STATEMENTS OF OPERATIONS


				Years
				Ended March 31,
	2005			2006			2007
Net revenues	$	343,837		$	206,796		$	122,285
Costs, expenses, and income:
Cost of goods sold		200,244			133,604			72,629
Research and product development expenses		58,311			51,887			30,077
Selling and distribution expenses		58,220			42,985			25,296
General and administrative expenses		35,792			30,385			21,788
Restructuring expenses		4,932			8,867			709
Impairment of goodwill		—			—			54,129
Gain on sale of intellectual property		—			(6,224	)		(9,000	)
Gain on sale of development studio assets		—			—			(885	)
Atari trademark license expense		3,350			3,067			2,218
Depreciation and amortization		6,958			5,202			2,968

Total costs, expenses, and income		367,807			269,773			199,929

Operating (loss)		(23,970	)		(62,977	)		(77,644	)
Interest (expense) income, net		(459	)		(595	)		301
Other income (expense)		42			(208	)		77

(Loss) before (benefit from) income taxes		(24,387	)		(63,780	)		(77,266	)
(Benefit from) income taxes		(9,532	)		(405	)		(10,680	)

(Loss) from continuing operations		(14,855	)		(63,375	)		(66,586	)
Income (loss) from discontinued operations of Reflections Interactive Ltd, net of tax provision of $9,716, $0, and $7,559, respectively		20,547			(5,611	)		(3,125	)


Net income (loss)	$	5,692		$	(68,986	)	$	(69,711	)


Basic and diluted net income (loss) per share (1):
(Loss) from continuing operations	$	(1.22	)	$	(4.93	)	$	(4.94	)
Income (loss) from discontinued operations of Reflections Interactive Ltd, net of tax		1.69			(0.43	)		(0.23	)

Net income (loss)	$	0.47		$	(5.36	)	$	(5.17	)


Basic weighted average shares outstanding (1)		12,128			12,863			13,477

Diluted weighted average shares outstanding (1)		12,159			12,863			13,477

(in1) ~~thousands~~Reflects the one-for-ten reverse stock split effected on January 3, ~~except~~2007. ~~per~~All ~~share~~periods ~~data)~~have been restated to reflect the reverse stock split.

	Years
	Ended March 31,
	2004			2005			2006
Net revenues	$	468,944		$	407,813		$	218,661
Costs and expenses:
Cost of goods sold		260,072			217,065			137,582
Research and product development		78,179			68,592			63,263
Selling and distribution expenses		85,606			64,221			44,846
General and administrative expenses		32,103			35,792			30,385
Restructuring expenses		—			4,932			8,867
Gain on sale of intellectual property		—			—			(6,224	)
Gain on sale of development project to a related party		(3,744	)		—			—
Depreciation and amortization		9,155			10,918			8,530
Total costs and expenses		461,371			401,520			287,249
Operating income (loss)		7,573			6,293			(68,588	)
Interest expense, net		(7,658	)		(459	)		(595	)
Other (expense) income		(2,068	)		42			(208	)
(Loss) income before (benefit from) provision for income taxes		(2,153	)		5,876			(69,391	)
(Benefit from) provision for income taxes		(2,919	)		184			(405	)
Net income (loss)		766			5,692			(68,986	)
Dividend to parent		(39,351	)		—			—
(Loss) income attributable to common stockholders	$	(38,585	)	$	5,692		$	(68,986	)
Basic and diluted (loss) income per share:
Net income (loss)	$	0.01		$	0.05		$	(0.54	)
Dividend to parent		(0.41	)		—			—
(Loss) income attributable to common stockholders	$	(0.40	)	$	0.05		$	(0.54	)
Basic weighted average shares outstanding		96,990			121,276			128,631
Diluted weighted average shares outstanding		96,990			121,587			128,631

See Note 13 for detail of related party amounts included within the line items above.

See Note 12 for detail of related party amounts included within the line items above.

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

F - 3

ATARI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

CONSOLIDATED STATEMENTS OF CASH FLOWS


				Years
				Ended
	March 31,
	2005			2006
	As restated,			As restated,
	Note 24			Note 24			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	5,692		$	(68,986	)	$	(69,711	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations of Reflections Interactive Ltd		(20,547	)		5,611			3,125
Non-cash tax benefit included in continuing operations associated with tax provision of discontinued operations of Reflections Interactive Ltd		(9,716	)		—			(7,559	)
Escrow receivable associated with sale of Reflections Interactive Ltd		—			—			626
Impairment of goodwill		—			—			54,129
Write-off of acquired intangible and other web-related assets		—			—			2,401
Gain on sale of intellectual property		—			(6,224	)		(9,000	)
Gain on sale of development studio assets		—			—			(885	)
Adjustment for non-cash gain on sale of development studio assets		—			—			200
Stock-based compensation expense		—			—			1,587
Atari trademark license expense		3,350			3,067			2,218
Depreciation and amortization		6,958			5,202			2,968
Related party allocation of executive resignation agreement		—			—			771
Modification of stock options		139			—			—
Non-cash restructuring charges		596			838			—
Loss on sale of IESA shares		—			239			—
Recognition of cumulative translation adjustment from foreign subsidiary		(859	)		—			—
Accrued interest		23			20			1
Amortization of deferred financing fees		822			514			202
Recognition of deferred income		(107	)		(77	)		(328	)
Write-off of property and equipment		206			24			—
Gain on sale of property and equipment		—			—			(74	)
Non-cash income on cash collateralized security deposit		—			—			(11	)
Changes in operating assets and liabilities:
Receivables, net		(4,472	)		30,094			5,616
Inventories, net		1,962			3,681			11,243
Due from related parties		(12,285	)		(4,126	)		2,893
Due to related parties		23,375			12,807			(4,561	)
Prepaid expenses and other current assets		(5,531	)		8,860			2,532
Accounts payable		(9,947	)		(4,199	)		(13,672	)
Accrued liabilities		1,287			(3,212	)		(7,316	)
Royalties payable		(4,403	)		7,462			(9,186	)
Long-term deferred tax liability		—			—			(2,123	)
Other long-term liabilities		(324	)		(319	)		1,852
Other assets		(5,215	)		1,688			2,949

Net cash (used in) continuing operating activities		(28,996	)		(7,036	)		(29,113	)
Net cash provided by (used in) discontinued operations		32,238			(8,969	)		(7,826	)

Net cash provided by (used in) operating activities		3,242			(16,005	)		(36,939	)

(in thousands)

	Years
	Ended
	March 31,
	2004			2005			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	766		$	5,692		$	(68,986	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		9,155			10,918			8,530
Gain on sale of intellectual property		—			—			(6,224	)
Modification of stock options		—			139			—
Non-cash restructuring charges		—			596			834
Loss on sale of IESA shares		—			—			239
Recognition of cumulative translation adjustment from foreign subsidiary		—			(859	)		—
Loss on sale of investment		1,750			—			—
Amortization of discount on related party debt		1,339			—			—
Accrued interest		1,903			23			20
Amortization of deferred financing fees		2,466			822			514
Recognition of deferred income		(3,577	)		(2,107	)		(77	)
Write-off of property and equipment		38			206			24
Changes in operating assets and liabilities:
Receivables, net		9,346			(4,472	)		30,094
Inventories, net		10,307			1,207			4,061
Due from related parties		(9,364	)		(12,292	)		(4,120	)
Due to related parties		(6,774	)		23,464			12,662
Prepaid expenses and other current assets		4,320			(8,619	)		6,460
Accounts payable		(1,840	)		(10,072	)		(2,875	)
Accrued liabilities		(17,972	)		4,471			(1,778	)
Royalties payable		2,027			(454	)		2,962
Long-term liabilities		(298	)		(529	)		(15	)
Other assets		(286	)		(5,216	)		1,693
Net cash provided by (used in) operating activities		3,306			2,918			(15,982	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of IESA shares		—			—			10,051
Proceeds from sale of intellectual property		—			—			6,224
Purchases of property and equipment		(5,128	)		(2,129	)		(2,529	)
Proceeds from sale of property and equipment		—			17			28
Advances to related parties		(14,368	)		—			—
Net cash (used in) provided by investing activities		(19,496	)		(2,112	)		13,774

(continued)

F-4

	Years
	Ended
	March 31,
	2004			2005			2006
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		—			—			7,264
Payments under General Electric Capital Corporation Senior Credit Facility, net		(10,651	)		—			—
Proceeds from exercise of stock options		518			92			132
Payments under capitalized lease obligation		—			(109	)		(185	)
Net proceeds from public stock offering		34,875			—			—
Proceeds from employee stock purchase plan		104			—			—
Net cash provided by (used in) financing activities		24,846			(17	)		7,211
Effect of exchange rates on cash		150			28			(55	)
Net increase in cash		8,806			817			4,948
Cash — beginning of fiscal year		815			9,621			10,438
Cash — end of fiscal year	$	9,621		$	10,438		$	15,386
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest		5,984			450			319
Cash paid for taxes		739			—			—
Income tax refunds		18			764			1,473
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING, INVESTING, AND FINANCING ACTIVITIES:
Receipt of IESA stock for prepayment of Humongous, Inc. inventory and other costs		—			—			1,972
Issuance of shares of common stock in lieu of partial royalty payment		1,199			—			2,109
Sale of Humongous Entertainment in exchange for shares of IESA stock		—			—			8,318
Issuance of 6,145,051 shares of common stock in lieu of payment of net related party payables		—			—			7,988
Capital lease obligation for computer equipment		—			452			337
Issuance of related party notes receivable		(8,571	)		—			—
Offset of certain related party trade payables against short-term notes receivable from related parties		—			1,317			—
Offset and assignment of short-term notes receivable from related parties into a secured promissory note		—			7,254			—
Issuance of a secured promissory note in exchange for certain short-term notes receivable and certain related party trade receivables		—			(23,059	)		—
Offset of certain related party trade payables against a secured promissory note		—			23,059			—
Acquisition of Atari license for 2,000 shares of common stock		8,500			—			—
Net debt exchanged for 39,030 shares of common stock:
Related party debt, revolving credit facility and related party medium-term loan prior to recapitalization of debt	$	212,429		$	—		$	—
Less: Offset of advances to related parties against related party debt		(46,552	)		—			—
Net debt exchanged for common stock	$	165,877		$	—		$	—

ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of intellectual property		—			6,224			9,000
Proceeds from sale of development studio assets		—			—			1,550
Purchase of acquired intangible assets		—			—			(1,737	)
Increase in restricted security deposit collateralizing letter of credit		—			—			(1,764	)
Proceeds from sale of IESA shares		—			10,051			—
Purchases of property and equipment		(1,861	)		(2,305	)		(837	)
Proceeds from sale of property and equipment		17			28			179

Net cash (used in) provided by continuing investing activities		(1,844	)		13,998			6,391
Net cash (used in) provided by discontinued operations		(268	)		(224	)		23,366

Net cash (used in) provided by investing activities		(2,112	)		13,774			29,757

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under third party credit facility		263,281			157,567			15,000
Payments under third party credit facility		(263,281	)		(157,567	)		(15,000	)
Proceeds from issuance of common stock		—			7,264			—
Proceeds from exercise of stock options		92			131			4
Payments under capitalized lease obligation		(109	)		(184	)		(220	)

Net cash (used in) provided by continuing financing activities		(17	)		7,211			(216	)
Net cash provided by discontinued operations		—			—			—

Net cash (used in) provided by financing activities		(17	)		7,211			(216	)
Effect of exchange rates on cash		17			(20	)		53

Net increase (decrease) in cash		1,130			4,960			(7,345	)
Cash — beginning of fiscal year		8,858			9,988			14,948

Cash — end of fiscal year	$	9,988		$	14,948		$	7,603


SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	450		$	319		$	249
Cash paid for taxes	$	—		$	—		$	—
Income tax refunds	$	764		$	1,473		$	1,047

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Consideration accrued for purchase of capitalized licenses	$	3,198		$	2,012		$	1,816
Consideration accrued for purchase of acquired intangible assets	$	—		$	—		$	554
Capitalization of leasehold improvements funded by landlord	$	—		$	—		$	1,217
Receipt of IESA stock for prepayment of Humongous, Inc. inventory and other costs	$	—		$	1,972		$	—
Issuance of 155,766 shares of common stock in lieu of partial royalty payment (1)	$	—		$	2,109		$	—
Sale of Humongous Entertainment in exchange for shares of IESA stock	$	—		$	8,318		$	—
Issuance of 614,505 shares of common stock in lieu of payment of net related party payables (1)	$	—		$	7,988		$	—
Capital lease obligation for computer equipment	$	452		$	337		$	—
Offset of certain related party trade payables against short-term notes receivable from related parties	$	1,317		$	—		$	—
Offset and assignment of short-term notes receivable from related parties into a secured promissory note	$	7,254		$	—		$	—
Issuance of a secured promissory note in exchange for certain short-term notes receivable and certain related party trade receivables	$	(23,059	)	$	—		$	—
Offset of certain related party trade payables against a secured promissory note	$	23,059		$	—		$	—


(1)		Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated to reflect the reverse stock split.

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

F-5

ATARI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED MARCH 31, 2005, 2006, AND 2007 (in thousands)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY) AND


											Accumulated
	Common				Additional						Other
	Stock		Common		Paid-In			Accumulated			Comprehensive
	Shares (1)		Stock		Capital			Deficit			Income			Total
Balance, March 31, 2004		12,123	$	1,212	$	735,964		$	(625,436	)	$	3,323		$	115,063
Comprehensive income:
Net income		—		—		—			5,692			—			5,692
Foreign currency translation adjustment		—		—		—			—			(56	)		(56	)
Recognition of cumulative translation adjustment from liquidation of a foreign subsidiary		—		—		—			—			(859	)		(859	)

Total comprehensive income															4,777

Cashless exercise of warrants		5		1		(1	)		—			—			—
Exercise of stock options		2		—		44			—			—			44
Issuance of stock options to related party		—		—		48			—			—			48
Modification of stock options		—		—		735			—			—			735


Balance, March 31, 2005		12,130		1,213		736,790			(619,744	)		2,408			120,667
Comprehensive loss:
Net loss		—		—		—			(68,986	)		—			(68,986	)
Foreign currency translation adjustment		—		—		—			—			21			21

Total comprehensive loss															(68,965	)

Exercise of stock options		6		1		131			—			—			132
Modification of stock options		—		—		404			—			—			404
Issuance of common stock in lieu of partial royalty payment		156		16		2,093			—			—			2,109
Sale of Humongous Entertainment		—		—		3,613			—			—			3,613
Issuance of common stock in lieu of payment of net related party payables (Note 13)		615		61		7,927			—			—			7,988
Issuance of common stock (Note 4)		570		57		7,207			—			—			7,264


Balance, March 31, 2006		13,477		1,348		758,165			(688,730	)		2,429			73,212
Adjustment to opening stockholders’ equity		—		—		—			(2,858	)		—			(2,858	)
Comprehensive loss:
Net loss		—		—		—			(69,711	)		—			(69,711	)
Foreign currency translation adjustment		—		—		—			—			89			89

Total comprehensive loss															(69,622	)

Related party allocation of executive resignation agreement		—		—		771			—			—			771
Exercise of stock options		1		—		4			—			—			4
Stock-based compensation expense		—		—		1,587			—			—			1,587


Balance, March 31, 2007		13,478	$	1,348	$	760,527		$	(761,299	)	$	2,518		$	3,094

~~COMPREHENSIVE INCOME~~ (~~LOSS~~1) Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated to reflect the reverse stock split.

FOR THE YEARS ENDED MARCH 31, 2004, 2005, AND 2006

(in thousands)

											Accumulated
	Common				Additional						Other
	Stock		Common		Paid-In			Accumulated			Comprehensive
	Shares		Stock		Capital			Deficit			Income			Total
Balance, March 31, 2003		69,920	$	699	$	486,053		$	(586,851	)	$	3,181		$	(96,918	)
Issuance of common stock pursuant to employee stock purchase plan		47		1		103			—			—			104
Exercise of stock options		120		1		517			—			—			518
Comprehensive income:
Net income		—		—		—			766			—			766
Foreign currency translation adjustment		—		—		—			—			142			142
Total comprehensive income															908
Cashless exercise of warrants		13		—		—			—			—			—
Issuance of common stock in lieu of partial royalty payment		280		3		1,196			—			—			1,199
Issuance of 39,030 common shares as part of the Company’s recapitalization in exchange for cancellation of related party debt, related party credit facility and related party medium-term loan		39,030		390		165,487			—			—			165,877
Dividend to parent as part of the recapitalization of related party debt to common shares		—		—		39,351			(39,351	)		—			—
Issuance of 2,000 common shares for license of the Atari name		2,000		20		8,480			—			—			8,500
Issuance of 9,821 common shares in secondary offering, net of expenses		9,821		98		34,777			—			—			34,875
Balance, March 31, 2004		121,231		1,212		735,964			(625,436	)		3,323			115,063
Comprehensive income:
Net income		—		—		—			5,692			—			5,692
Foreign currency translation adjustment		—		—		—			—			(56	)		(56	)
Recognition of cumulative translation adjustment from liquidation of a foreign subsidiary		—		—		—			—			(859	)		(859	)
Total comprehensive income															4,777
Cashless exercise of warrants		44		1		(1	)		—			—			—
Exercise of stock options		21		—		44			—			—			44
Issuance of stock options to related party		—		—		48			—			—			48
Modification of stock options		—		—		735			—			—			735
Balance, March 31, 2005		121,296		1,213		736,790			(619,744	)		2,408			120,667
Comprehensive loss:
Net loss		—		—		—			(68,986	)		—			(68,986	)
Foreign currency translation adjustment		—		—		—			—			21			21
Total comprehensive loss															(68,965	)
Exercise of stock options		63		1		131			—			—			132
Modification of stock options		—		—		404			—			—			404
Issuance of common stock in lieu of partial royalty payment		1,558		16		2,093			—			—			2,109
Sale of Humongous Entertainment		—		—		3,613			—			—			3,613
Issuance of common stock in lieu of payment of net related party payables (Note 12)		6,145		61		7,927			—			—			7,988
Issuance of common stock (Note 2)		5,703		57		7,207			—			—			7,264
Balance, March 31, 2006		134,765	$	1,348	$	758,165		$	(688,730	)	$	2,429		$	73,212

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

F-6

ATARI, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~NOTES~~NOTE TO1 ~~THE~~– ~~CONSOLIDATED~~OPERATIONS ~~FINANCIAL~~AND ~~STATEMENTS~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Note 1 — Operations and Summary of Significant Accounting Policies

Nature of Business

We are a ~~global~~ publisher ~~and developer~~ of video game software ~~for~~that ~~both~~is ~~gaming~~distributed ~~enthusiasts~~throughout ~~and~~ the ~~mass-market~~world ~~audience,~~and ~~as well as~~ a distributor of video game software in North America. We ~~develop,~~ publish, develop (through external resources), and distribute video games for all platforms, including Sony PlayStation, ~~PlayStation~~ 2, PlayStation 3, and PSP;, Nintendo Game Boy Advance, ~~GameCube~~Game Cube, Wii and DS, and ~~Wii;~~ Microsoft Xbox and Xbox 360~~; and personal computers~~, ~~referred~~as well to as ~~PCs. We also publish and sublicense games~~ for ~~the wireless,~~personal ~~internet~~computers, ~~and~~or ~~other~~PCs. ~~evolving~~The ~~platforms,~~products ~~an area to which~~ we ~~expect~~publish toor ~~devote~~distribute ~~increasing attention.~~extend ~~Our diverse portfolio of products extends~~ across ~~every~~ most major video game ~~genre~~genres, including action, adventure, strategy, role- playing, and racing.

Through our relationship with our majority stockholder, Infogrames Entertainment S.A., a French corporation (“IESA”), listed on Euronext, our products are distributed exclusively by IESA throughout Europe, Asia and certain other regions. Similarly, we exclusively distribute IESA’s products in the United States and Canada. Furthermore, we distribute product in Mexico through various non-exclusive agreements. At March 31, ~~2006~~2007, IESA owns approximately 51% of us, ~~both directly and~~ through its wholly-owned subsidiary California U.S. Holdings, Inc. (“CUSH”). ~~and~~As ~~its majority-owned~~a ~~subsidiary~~result ~~Atari~~of ~~Interactive~~this relationship, ~~Inc.~~we have significant related party transactions (~~“Atari~~Note ~~Interactive”~~13).

Going Concern

A Until ~~weak~~2005, ~~holiday~~we ~~season~~were ~~for~~actively ~~the~~involved ~~industry~~in ~~combined~~developing ~~with~~video ~~underperformance~~games ~~from new product launches~~ and ~~product~~in ~~launch~~financing ~~delays have contributed to fiscal year results substantially below our~~development ~~expectations.~~of ~~For~~video ~~the~~games ~~year~~by ~~ended~~independent ~~March 31~~developers, ~~2006,~~which we ~~generated net~~would ~~losses~~publish ~~of $69.0 million,~~ and~~, for~~ ~~the~~distribute ~~third~~under ~~and~~licenses ~~fourth~~from the ~~quarters~~developers. ~~of fiscal 2006~~However, ~~were~~beginning in ~~default~~2005, ofbecause ~~certain financial covenants on our credit facility with HSBC Business Credit (USA) Inc. (“HSBC”) which has expired as~~ of ~~the~~cash ~~date hereof. Historically~~constraints, we ~~have~~substantially ~~relied on IESA to provide limited financial support to us; however, as IESA~~reduced ~~continues~~our toinvolvement ~~address~~in ~~its~~development ~~own~~of ~~financial~~video ~~condition~~games, ~~its~~and ~~ability~~announced plans to ~~fund~~divest ~~its~~ourselves ~~subsidiaries’~~of ~~operations,~~our ~~including~~internal ~~ours,~~development ~~remains limited~~studios. ~~Therefore, there can be no assurance we will ultimately receive~~ ~~any funding from them.~~

~~The~~ During ~~uncertainties~~fiscal ~~caused~~2006 byand ~~these~~2007, ~~conditions~~we ~~raise~~sold ~~substantial~~a ~~doubt~~number ~~about~~of ~~our~~intellectual ~~ability~~properties toand development ~~continue~~facilities asin aorder ~~going~~to ~~concern~~obtain cash to fund our operations. ~~The~~During ~~consolidated~~2007, ~~financial~~we ~~statements~~raised doapproximately $35.0 million ~~not~~through ~~include~~the ~~any~~sale ~~adjustments~~of the rights to the Driver games and certain other intellectual property, and the sale of our Reflections ~~that~~Interactive ~~might~~Ltd ~~result~~(“Reflections”) ~~from~~and Shiny Entertainment (“Shiny”) studios. By the ~~outcome~~end of ~~this~~fiscal 2007, ~~uncertainty~~we did not own any development studios.

We The ~~are~~reduction ~~exploring~~in ~~various alternatives to improve~~ our ~~financial~~development ~~position~~ and ~~secure~~development ~~other sources of~~ financing. ~~Such~~activities ~~possibilities~~has ~~include a new credit facility, new arrangements to~~significantly ~~license~~reduced ~~intellectual property,~~ the ~~sale~~number of ~~selected~~games ~~intellectual~~we ~~property rights and sale of development studios~~publish. ToDuring ~~reduce~~fiscal ~~working capital requirements and further conserve cash we will need to take additional actions in the near-term~~2007, ~~which~~our ~~may~~revenues ~~include~~from ~~personnel reductions and suspension~~publishing ofactivities ~~certain~~were ~~development projects~~$104.7 million, ~~These~~compared ~~actions may or may not prove to be consistent~~ with ~~our long-term strategic objectives~~$153.6 million Weduring ~~cannot~~fiscal ~~guarantee~~2006 ~~the~~and ~~completion of these actions or that such~~$289.6 million ~~actions~~during ~~will~~fiscal ~~generate sufficient resources to fully address the uncertainties of our financial position~~2005.

As We ofare in the ~~date~~process of ~~this~~developing ~~filing,~~a westrategic ~~have~~plan ~~raised~~that ~~approximately~~would ~~$15.2 million,~~expand ofour ~~which~~activities ~~$6.2~~into ~~million~~new, ~~was~~emerging ~~recorded~~aspects inof ~~fiscal~~the ~~2006~~video game industry, ~~through~~including ~~sales~~casual ofgames, ~~certain~~online ~~intellectual~~sites, digital ~~properties;~~downloading, ~~however~~advergaming, ~~these~~and ~~amounts~~brand ~~are~~licensing. ~~insufficient~~However, our ability to ~~fully~~do ~~address~~those ~~the~~things ~~uncertainties~~will require that we have a source of ~~our financial~~funding ~~position.~~and Wesome ~~continue~~of them will require expansion and extension of our rights to ~~seek~~use ~~additional~~and ~~funding~~sublicense certain properties.

For the year ended March ~~Principles~~31, 2007, our net revenues were only $122.3 million, compared with $206.8 million in the prior year, and we had an operating loss of ~~Consolidation~~$77.6 million in fiscal 2007, which included a charge of $54.1 million for the impairment of our goodwill, which is related to our publishing unit. We have taken significant steps to reduce our costs. Our ability to deliver products on time depends in good part on developers’ ability to meet completion schedules. Further, our expected releases in fiscal 2008 are even fewer than our releases in fiscal 2007. In addition, most of our releases for fiscal 2008 are focused on the holiday season. As a result our cash needs have become more seasonal and we face significant cash requirements to fund our working capital needs during the second quarter of our fiscal year.

~~The~~ Currently, ~~consolidated~~our ~~financial~~only ~~statements~~borrowing ~~include~~facility is an asset-based secured credit facility that we established in November 2006 with a group of lenders for which Guggenheim Corporate Funding LLC (“Guggenheim”) is the ~~accounts~~administrative agent. The credit facility consists of ~~Atari~~a secured, ~~Inc~~committed, revolving line of credit in an amount up to $15.0 million ~~and~~(subject ~~its~~to ~~wholly-owned~~a borrowing base ~~subsidiaries~~calculation), which includes a $10.0 million ~~All~~sublimit ~~significant~~for ~~intercompany~~the issuance ~~transactions~~of letters of credit. However, the maximum borrowings we can make under the credit facility will not by themselves provide all the funding we will need for the calendar 2007 holiday season. Further, the credit facility may be terminated if we do not comply with financial and ~~balances~~other ~~have~~covenants ~~been~~prior ~~eliminated~~to our need for borrowing (i.e. NASDAQ delisting).

F-7

~~Reclassifications~~ Historically, we have relied on IESA to provide limited financial support to us, through loans or, in recent years, through purchases of assets. However, IESA has its own financial needs, and its ability to fund its subsidiaries’ operations, including ours, is limited. Therefore, there can be no assurance we will ultimately receive any funding from IESA.

We The ~~have~~uncertainty ~~made~~caused ~~certain~~by ~~reclassifications~~these onabove ~~our~~conditions ~~consolidated~~raises ~~statements~~substantial ofdoubt ~~operations~~about inour ~~order to~~ability ~~provide better insight into the results of operations and~~ to continue ~~align~~as ~~our~~a ~~presentation~~going ~~to certain industry competitors~~concern. WeOur ~~have~~consolidated ~~moved~~financial ~~license~~statements ~~amortization~~do ~~and~~not ~~license~~include ~~impairments~~any ~~related to~~adjustments ~~products~~that ~~released~~might orresult ~~previously sold~~ from ~~research and product development to cost of goods sold. Additionally, we have eliminated~~ the ~~gross~~outcome ~~profit line item and added a subtotal~~ of ~~total~~this ~~costs and expenses on our consolidated statements of operations~~uncertainty.

Reverse Stock Split

On January 3, 2007, we effected a one-for-ten reverse stock split. The number of shares we are authorized to issue was reduced from 300,000,000 to 30,000,000, and the par value was increased from $0.01 to $0.10 per share. Preferred stock shares remain at 5,000,000 authorized with a par value of $0.01 per share. All references to share data in this Annual Report on Form 10-K have been restated to reflect the split. See Note 4 for further details.

Principles of Consolidation

The consolidated financial statements include the accounts of Atari, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Revenue recognition, sales returns, price protection, other customer related allowances and allowance for doubtful accounts

Revenue is recognized when title and risk of loss transfer to the customer, provided that collection of the resulting receivable is deemed probable by management.

Sales are recorded net of estimated future returns, price protection and other customer related allowances. We are not contractually obligated to accept returns; however, based on facts and circumstances at the time a customer may request approval for a return, we may permit the return or exchange of products sold to certain customers. In addition, we may provide price protection, co-operative advertising and other allowances to certain customers in accordance with industry practice. These reserves are determined based on historical experience, market acceptance of products produced, retailer inventory levels, budgeted customer allowances, the nature of the title and existing commitments to customers. Although management believes it provides adequate reserves with respect to these items, actual activity could vary from management’s estimates and such variances could have a material impact on reported results.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments when due or within a reasonable period of time thereafter. If the financial condition of our customers were to deteriorate, resulting in an inability to make required payments, additional allowances may be required.

F-8

Concentration of Credit Risk

We extend credit to various companies in the retail and mass merchandising industry for the purchase of our merchandise which results in a concentration of credit risk. This concentration of credit risk may be affected by changes in economic or other industry conditions and may, accordingly, impact our overall credit risk. Although we generally do not require collateral, we perform ongoing credit evaluations of our customers and reserves for potential losses are maintained.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include allowances for bad debts, returns, price protection and other customer promotional programs, obsolescence expense, and goodwill impairment. Actual results could materially differ from those estimates. During the fourth quarter of fiscal 2007, we recorded an impairment charge in the amount of $54.1 million, and as of March 31, 2007, our goodwill balance is zero (see Note 6).

Cash

Cash consists of cash in banks. As of March 31, ~~2005~~2006 and March 31, ~~2006~~2007, we have no cash equivalents.

Inventories

Inventories are stated at the lower of cost (average cost method) or market. Allowances are established to reduce the recorded cost of obsolete inventory and slow moving inventory to its net realizable value.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:

F-8


		Useful Lives
Computer equipment		3 years
Capitalized computer software		3-5 years
Furniture and fixtures		7 years
Machinery and equipment		5 years

Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets.

Fair Values of Financial Instruments

Financial Accounting Standards Board (“FASB”) Statement No. 107, “Disclosures ~~about~~About Fair Value of Financial Instruments”,” requires ~~certain~~disclosure ~~disclosures~~of ~~regarding~~ the fair value of financial instruments for which it is practicable to estimate. ~~Cash~~We believe that the carrying amounts of our financial instruments, including cash, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, accrued liabilities, royalties payable, assets and liabilities of discontinued operations, and amounts due to and from related parties, reflected in the consolidated financial ~~statements~~ statements approximate fair value due to the short-term maturity and the denomination in U.S. dollars of these instruments.

F-9

Long-Lived Assets

We review long-lived assets, such as ~~fixed~~property ~~assets~~and ~~to be held~~equipment, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the estimated fair value of the asset is less than the carrying amount of the asset plus the cost to dispose, an impairment loss is recognized as the amount by which the carrying amount of the asset plus the cost to dispose exceeds its fair value, as defined in FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.”

Research and Product Development ~~Costs~~Expenses

Research and product development ~~costs~~expenses related to the design, development, and testing of ~~new~~ newly developed software products, ~~whether~~both ~~internally~~internal orand ~~externally developed~~external, are charged to expense as incurred. Research and product development ~~costs~~expenses also include ~~payments for~~ royalty ~~advances~~payments (milestone payments) to third-party developers for products that are currently in development. Once a product is sold, we may be obligated to make additional payments in the form of backend royalties to developers which are calculated based on contractual terms, typically a percentage of sales. Such payments are expensed and included in cost of goods sold in the period the sales are recorded.

Rapid technological innovation, shelf-space competition, shorter product life cycles and buyer selectivity have made it difficult to determine the likelihood of individual product acceptance and success. As a result, we follow the policy of expensing milestone payments as incurred, treating such costs as research and product development expenses. ~~Due to recently implemented enhancements~~ in our internal project planning and acceptance process and anticipated additional improvements in our ability to assess post-release consumer acceptance, we are currently considering a change from expensing such costs when incurred to a method of deferral and amortization, when appropriate over each product’s life cycle. Such change may be implemented prospectively as early as our next fiscal year. Management believes that the ability to amortize such costs over the product’s life cycle will result in a better matching of costs and revenues.

Licenses

~~F-9~~ Atari Trademark License

In connection with a recapitalization completed in fiscal 2004, Atari Interactive, Inc. (“Atari Interactive”), a wholly-owned subsidiary of IESA, extended the term of the license under which we use the Atari trademark to ten years expiring on December 31, 2013. We issued 200,000 shares of our common stock to Atari Interactive for the extended license and will pay a royalty equal to 1% of our net revenues during years six through ten of the extended license. We recorded a deferred charge of $8.5 million, representing the fair value of the shares issued, which was expensed monthly until it became fully expensed in the first quarter of fiscal 2007. The monthly expense was based on the total estimated cost to be incurred by us over the ten-year license period; upon the full expensing of the deferred charge, this expense is being recorded as a deferred liability owed to Atari Interactive, to be paid beginning in year six of the license.

Goodwill and Acquired Intangible Assets

Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies. Goodwill is not amortized, and is tested for impairment at the reporting unit level annually or when there are any indications of impairment, as required by FASB Statement No. 142, “Goodwill and Other Intangible Assets.” A reporting unit is an operating segment for which discrete financial information is available and is regularly reviewed by management. We only have one reporting unit, our publishing business, to which goodwill is assigned.

F-10

of each reporting unit. The determination of fair value for each reporting unit could be materially affected by changes in these estimates and assumptions. Such changes could trigger impairment. As of March ~~Atari~~31, ~~Name~~2007, ~~License~~we recorded a material impairment of our goodwill (Note 6).

In Intangible ~~connection~~assets ~~with~~are aassets ~~recapitalization~~that ~~completed~~lack inphysical substance. During fiscal ~~2004~~2007, ~~Atari~~we ~~Interactive~~recorded acquired ~~extended~~intangible ~~the term~~assets offor website development costs (related to the ~~license~~Atari ~~under~~Online website, including a URL), which weare ~~use~~accounted ~~the~~for ~~Atari~~in ~~name~~accordance towith ~~ten~~Emerging ~~years~~Issues ~~expiring~~Task onForce ~~December 31~~(“EITF”) 00-02, ~~2013~~“Accounting for Web Site Development Costs. We” ~~issued~~EITF ~~2,000,000~~00-02 ~~shares~~requires ofthat ~~our~~web ~~common~~site ~~stock~~development costs tobe ~~Atari~~treated ~~Interactive~~as ~~for~~computer ~~the~~software ~~extended~~developed ~~license~~for internal use, and that costs incurred in the ~~will~~application ~~pay~~and adevelopment ~~royalty~~stages ~~equal~~be tocapitalized in accordance with AICPA Statement of Position (“SOP”) 98-1%, “Accounting for the Costs of ~~our~~Computer ~~net~~Software ~~revenues~~Developed ~~during~~or ~~years~~Obtained ~~six~~for ~~through~~Internal Use.” ~~ten~~As of March 31, 2007, we determined that certain of the ~~extended~~acquired intangible assets ~~license.~~previously Wecapitalized ~~recorded~~no longer provided a ~~deferred~~future ~~charge~~benefit ofto ~~$8.5 million~~the company, ~~representing~~as ~~the~~management ~~fair~~decided ~~value~~at the end of the ~~shares issued,~~fourth ~~which~~quarter isto ~~being~~move ~~amortized~~to ~~monthly.~~an ~~The~~outsourced ~~monthly~~technology ~~amortization~~model; isthese ~~based~~costs onwere written off, and the ~~total~~charge ~~estimated cost~~is toincluded bein ~~incurred~~research byand usproduct ~~over~~development expenses for the ~~ten-~~year ~~license~~ended March 31, ~~period~~2007 (Note 6).

Advertising Expenses

Advertising costs are expensed as incurred. Advertising expenses for the years ended March 31, ~~2004~~2005, ~~2005~~2006, and ~~2006~~2007 amounted to approximately $5331.6 million, $3725.12 million, and $2612.89 million, respectively.

Goodwill and Other Intangible Assets

Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies. Intangible assets consist of a license related to certain intellectual property used by us. Intangible assets are amortized via a calculation that is based on future sales. Goodwill is not amortized.

As of March 31, 2005 and 2006, our annual fair-value based assessments, in accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets”, did not result in any impairment of goodwill or intangibles. During the years ended March 31, 2004, 2005, and 2006, we did not record any goodwill impairment.

Income Taxes

We account for income taxes using the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. We record an allowance to reduce tax assets to an estimated realizable amount. We monitor our tax liability on a quarterly basis and record the estimated tax obligation based on our current year-to-date ~~taxable~~results ~~income~~ and expectations of the full year results.

Foreign Currency Translation and Foreign Exchange Gains (Losses)

Assets and liabilities of foreign subsidiaries have been translated at year-end exchange rates, while revenues and expenses have been translated at average exchange rates in effect during the year. Cumulative translation adjustments have been reported as a component of accumulated other comprehensive income.

Foreign exchange gains or losses arise from exchange rate fluctuations on transactions denominated in currencies other than the functional currency. For the years ended March 31, ~~2004~~2005 and ~~2005~~March 31, 2007, foreign exchange losses were $0.3 million inand ~~each~~$0.4 million, ~~period~~respectively. For the year ended March 31, 2006, we recorded a foreign exchange gain of $0.1 million.

Shipping, Handling and Warehousing Costs

Shipping, handling and warehousing costs incurred to move product to the customer are charged to selling and distribution expense. For the years ended March 31, ~~2004~~2005, ~~2005~~2006, and ~~2006~~2007, these charges were approximately $1410.09 million, $117.54 million, and $75.60 million, respectively.

~~Stock-Based~~ Recent ~~Compensation~~Accounting Pronouncements

We Effective ~~account~~April 1, ~~for~~2006, ~~employee~~we ~~stock~~adopted ~~option~~FASB ~~plans~~Statement ~~under~~No. 123(R), ~~the~~“Share-Based ~~intrinsic~~Payments,” ~~value method prescribed by~~issued ~~Accounting~~in ~~Principles~~December 2004. ~~Board~~FASB Statement No. 123(~~“APB”~~R) ~~Opinion~~is a revision of FASB Statement No. 25123, “Accounting for Stock-Based ~~Issued to Employees~~Compensation,” and ~~related~~ ~~interpretations.~~supersedes ~~Any~~Accounting ~~equity~~Principal ~~instruments~~Board ~~issued,~~(“APB”) ~~other~~Opinion ~~than to employees~~No. 25, ~~for~~“Accounting ~~acquiring goods and services are accounted~~ for ~~using~~Stock ~~fair~~Issued ~~value at the date of grant~~to Employees.” WeSee ~~have~~Note ~~also~~2 ~~adopted the~~for ~~disclosure~~further ~~provisions~~information ofregarding ~~FASB~~this ~~Statement No~~adoption. ~~123, “Accounting for Stock-Based~~

F In October 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-102, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R).” The FASB provides companies with a “practical accommodation” when determining the grant date of an award subject to FASB Statement No. 123(R). If (1) the award is a

Compensation”, as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure — an Amendment of FASB Statement No. 123”.

At March 31, 2006, we had three stock option plans, which are described more fully in Note 11. All options granted under those plans generally have an exercise price equal to the market value of the underlying common stock on the date of grant; therefore, no compensation cost is recognized. The following table illustrates the effect on the net income (loss) per share and (loss) income per share attributable to common stockholders if we had applied the fair value recognition provisions of the FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation (in thousands, except per share data):

				Years Ended
				March 31,
	2004			2005			2006
Net income (loss) — as reported	$	766		$	5,692		$	(68,986	)
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects		—			735			404
Less: Fair value of stock-based employee compensation expense, net of related tax effects		(5,962	)		(5,294	)		(1,731	)
Pro forma net (loss) income	$	(5,196	)	$	1,133		$	(70,313	)
Dividend to parent		(39,351	)		—			—
Pro forma (loss) income attributable to common stockholders	$	(44,547	)	$	1,133		$	(70,313	)
Basic and diluted net income (loss) per share — as reported	$	0.01		$	0.05		$	(0.54	)
Pro forma basic and diluted net (loss) income per share	$	(0.05	)	$	0.01		$	(0.55	)
Basic and diluted (loss) income per share attributable to common stockholders — as reported	$	(0.40	)	$	0.05		$	(0.54	)
Pro forma basic and diluted (loss) income per share attributable to common stockholders	$	(0.46	)	$	0.01		$	(0.55	)

The fair value of options granted under the stock option plans during the years ended March 31, 2004, 2005, and 2006 was $3.33, $1.52, and $1.78, respectively. Amounts were determined using the Black-Scholes option pricing model utilizing the following assumptions:

				Years Ended
				March 31,
	2004			2005			2006
Dividend yield		0	%		0	%		0	%
Anticipated volatility		120	%		95	%		92	%
Expected lives	4 years			4 years			4 years

The weighted average risk-free interest rate for the years ended March 31, 2004, 2005, and 2006 was 2.44%, 3.69%, and 4.83%, respectively.

(Loss) Income Per Share Attributable to Common Stockholders

Basic (loss) income per share attributable to common stockholders is computed by dividing (loss) income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted (loss) income per share attributable to common stockholders reflects the potential dilution that could occur from shares of common stock issuable through stock-based compensation plans including stock options and warrants using the treasury stock method. The following is a reconciliation of basic and diluted (loss) income per share attributable to common stockholders (in thousands, except per share data):

F-11

				Years Ended
				March 31,
	2004			2005		2006
Basic and diluted earnings per share calculation:
Net income (loss)	$	766		$	5,692	$	(68,986	)
Dividend to parent		(39,351	)		—		—
(Loss) income attributable to common stockholders	$	(38,585	)	$	5,692	$	(69,986	)
Basic weighted average shares outstanding		96,990			121,276		128,631
Dilutive effect of stock options and warrants		—			311		—
Diluted weighted average shares outstanding		96,990			121,587		128,631
Basic and diluted net income (loss) per share	$	0.01		$	0.05	$	(0.54	)
Basic and diluted (loss) per share — dividend to parent		(0.41	)		—		—
Basic and diluted (loss) income per share attributable to common Stockholders	$	(0.40	)	$	0.05	$	(0.54	)

unilateral grant, that is, the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer, (2) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period, and (3) as long as all other criteria in the grant date definition have been met, then a mutual understanding of the key terms and conditions of an award is presumed to exist at the date the award is approved.

~~The~~ In ~~number~~November 2005, ~~of anti-dilutive shares that was excluded from~~ the ~~diluted earnings~~FASB ~~per~~issued ~~share~~FSP ~~calculation for the years ended March~~No. ~~31,~~FAS ~~2004~~123(R)-3, ~~2005,~~“Transition ~~and~~Election ~~2006~~Related ~~was approximately~~to ~~11,200,000,~~Accounting ~~6,500,000,~~for ~~and~~the ~~7,588,000,~~Tax ~~respectively.~~Effects ~~For~~of ~~the~~Share-Based ~~year~~Award ~~ended~~Payments.” ~~March~~FSP No. ~~31,~~FAS ~~2004~~123(R)-3 ~~and~~provides ~~March~~an ~~31,~~alternative ~~2006,~~method of calculating the ~~shares~~excess ~~were~~tax ~~antidilutive~~benefits ~~due~~available to ~~the~~absorb ~~loss~~tax ~~attributable~~deficiencies recognized subsequent to ~~common stockholders for~~ the ~~period.~~ ~~For~~adoption ~~the~~of ~~year~~FASB ~~ended~~Statement ~~March~~No. ~~31,~~123(R). ~~2005,~~The ~~the~~adoption ~~antidilutive~~of ~~shares~~this ~~are~~FSP ~~due to options and warrants~~did innot ~~which~~have ~~the~~a ~~exercise~~material ~~price~~impact ison ~~greater~~our ~~than~~results ~~the average market price~~ of ~~the~~operations ~~common~~or ~~shares~~financial ~~during the period~~condition.

In May ~~Recent~~2005, the FASB issued Statement No. 154, “Accounting ~~Pronouncements~~Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” FASB Statement No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application to prior periods’ financial statements as the required method for reporting a change in accounting principle and the reporting of a correction of an error. We have implemented this Statement in fiscal 2007 and it has impacted our consolidated financial statements; see Note 25 to our consolidated financial statements for the adoption of FASB Statement No. 154 and Note 23 for the implementation of the SEC Staff accounting Bulletin No. 108.

In ~~December~~June ~~2004~~2006, the FASB issued ~~Statement~~FASB Interpretation No. ~~153,~~ (“~~Exchanges~~FIN”) of48, ~~Nonmonetary~~“Accounting ~~Assets”.~~for ~~This~~Uncertainty ~~Statement~~in ~~requires~~Income ~~that~~Taxes—An ~~exchanges~~Interpretation of ~~nonmonetary~~FASB ~~assets~~Statement beNo. 109.” ~~measured~~FIN ~~based~~48 onclarifies the ~~fair~~accounting ~~value~~for uncertainty ofin ~~the assets~~income ~~exchanged.~~taxes ~~Statement~~recognized in financial statements in accordance with FASB Statement No. ~~153~~109, is“Accounting ~~effective~~for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for ~~nonmonetary~~the ~~asset~~financial ~~exchanges~~statement ~~occurring~~recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, ~~fiscal~~classification, ~~periods~~interest ~~beginning~~and ~~after~~penalties, ~~June 15~~accounting in interim periods, ~~2005~~disclosure, and transition. We Asare required to adopt the provisions of ~~March 31,~~FIN ~~2006,~~48 in the ~~adoption~~first quarter of ~~this~~fiscal ~~issue~~2008. ~~has~~We have not ~~had~~yet noevaluated ~~material~~the impact of this implementation on our consolidated financial statements.

In ~~December~~September ~~2004~~2006, the FASB issued FASB Statement No. ~~123-R~~157, “~~Share~~Fair ~~Based~~Value ~~Payments~~Measurements,”. ~~Statement No.~~which ~~123-R~~provides is a ~~revision~~single definition of ~~Statement~~fair ~~No. 123~~value, ~~“Accounting~~together with a framework for ~~Stock-Based~~measuring ~~Compensation”~~it, and ~~supersedes~~ ~~APB~~requires ~~Opinion~~additional ~~No. 25,~~disclosure ~~“Accounting~~about ~~for~~the ~~Stock~~use ~~Issued~~of fair value to ~~Employees”~~measure assets and liabilities. Furthermore, in February 2007, the FASB issued FASB Statement No. ~~123-R~~159, ~~eliminates~~“The ~~the~~Fair Value Option for ~~alternative~~Financial Assets and Liabilities,” which permits an entity to ~~use~~measure ~~the~~certain ~~intrinsic~~financial assets and financial liabilities at fair value, ~~method~~and ofreport ~~accounting~~unrealized ~~that~~gains ~~was~~and ~~provided~~losses in ~~Statement~~earnings ~~No. 123,~~at each ~~which~~subsequent ~~generally~~reporting ~~resulted~~date. inIts noobjective ~~compensation~~is ~~expense~~to ~~recorded~~improve infinancial ~~the~~reporting ~~financial~~by ~~statements~~allowing ~~related~~entities to mitigate volatility in reported earnings caused by the ~~issuance~~measurement of ~~equity~~related ~~awards~~assets and liabilities using different attributes without having to ~~employees.~~apply complex hedge accounting provisions. Statement No. ~~123-R~~159 ~~establishes~~is ~~fair~~effective ~~value~~for asfiscal ~~the~~years beginning after November 15, 2007, but early ~~measurement~~application ~~objective~~is inencouraged. ~~accounting~~The ~~for~~requirements ~~share-based~~of ~~payment~~Statement ~~arrangements~~No. 157 ~~and~~are ~~requires~~adopted ~~all~~concurrently ~~companies~~with or prior to ~~apply~~the aadoption ~~fair~~of ~~value~~Statement ~~based~~No. 159. ~~measurement~~We ~~method~~have innot ~~accounting~~yet ~~for~~evaluated ~~generally~~the ~~all~~impact ~~share-based~~of ~~payment~~this ~~transactions~~implementation on our consolidated financial statements.

We In ~~plan~~September 2006, tothe ~~adopt~~SEC ~~Statement~~issued Staff Accounting Bulletin (“SAB”) No. ~~123-R~~108, ~~using~~“Considering athe Effects ~~modified~~of ~~prospective~~Prior ~~application.~~Year ~~Under~~Misstatements ~~this~~when Quantifying Misstatements in Current Year Financial ~~application,~~Statements.” ~~companies~~SAB ~~are~~No. 108 ~~required~~addresses tohow ~~record~~the ~~compensation~~effects ~~expense~~of ~~for~~prior ~~all~~year ~~awards~~uncorrected ~~granted~~misstatements ~~after~~should be ~~the~~considered when quantifying misstatements in current year financial statements. SAB No. 108 ~~required~~requires ~~effective~~companies ~~date~~to ~~and~~quantify ~~for~~misstatements ~~the~~using ~~unvested~~both ~~portion~~a ofbalance ~~previously~~sheet ~~granted~~and ~~awards~~an ~~that~~income ~~remain~~statement ~~outstanding~~approach atand ~~the~~to ~~date~~evaluate ofwhether ~~adoption.~~either ~~The~~approach ~~provisions~~results in quantifying an error that is material in light of ~~Statement~~relevant Noquantitative and qualitative factors. ~~123-R~~ ~~are~~When ~~effective~~the aseffect of ~~the~~initial application ~~beginning~~is ofmaterial, ~~the~~companies ~~first~~will ~~annual~~record ~~reporting~~the ~~period~~effect ~~that~~as ~~begins~~a ~~after~~cumulative ~~June 15,~~effect ~~2005,~~adjustment ~~but~~to ~~early~~the ~~adoption~~beginning isbalance ~~encouraged~~of retained earnings. AsThe provisions of ~~March~~SAB No. ~~31,~~108 ~~2006,~~are ~~management~~effective isfor ~~currently~~us ~~reviewing~~for the ~~effect~~fiscal year ~~that~~ended ~~the adoption~~March 31, 2007. The implementation of ~~Statement~~SAB No. ~~123-R~~108 ~~will~~has ~~have~~impacted onour consolidated financial statements; see Note 23 to our consolidated financial statements.

In During ~~June 2005,~~ the ~~EITF~~year ~~Issue~~ended ~~No.~~March ~~05-6~~31, ~~“Determining~~2007, the ~~Amortization~~SEC ~~Period~~finalized ~~for~~Rule Release ~~Leasehold~~33-8732A regarding ~~Improvements~~disclosure ~~Purchased~~requirements ~~after~~for ~~Lease~~executive ~~Inception~~and ordirector ~~Acquired~~compensation. inThe afinal ~~Business~~rule ~~Combination”.~~increases ~~Issue No. 05-6~~the ~~states~~disclosure ~~that~~requirements ~~leasehold~~of ~~improvements~~total ~~that~~compensation ~~are~~for ~~placed~~the inprincipal ~~service~~executive ~~significantly~~officer, ~~after~~ the ~~beginning~~principal financial officer, and up to three of the ~~lease~~other ~~term~~most ~~should~~highly bepaid ~~amortized~~officers, ~~over~~and ~~the~~requires ~~shorter~~tabular presentation of ~~the~~all ~~useful~~director ~~life~~compensation. ofThe ~~the~~new ~~assets~~requirements orare aeffective ~~term~~in ~~that~~Forms 8-K for ~~includes~~triggering ~~required~~events ~~lease~~that ~~periods~~occur ~~and~~on ~~renewals~~or ~~that~~after ~~are~~November 7, ~~deemed~~2006, toand bein ~~reasonably~~Forms ~~assured~~10-K atfor ~~the~~fiscal ~~date~~years ~~the~~ending ~~leasehold~~on ~~improvements~~or ~~are~~after ~~purchased~~December 15, 2006. ~~The~~This ~~pronouncement~~information is ~~effective~~incorporated ~~for~~by ~~leasehold~~reference ~~improvements~~to our ~~that~~definitive ~~are~~Proxy ~~purchased~~Statement orfor ~~acquired~~our inAnnual ~~reporting~~Meeting ~~periods~~of ~~beginning~~Stockholders ~~after~~to ~~June 29,~~be ~~2005.~~held Asin offiscal ~~March 31~~2008, ~~2006,~~ ~~the~~to ~~adoption~~be filed ofwith ~~this~~the ~~issue~~SEC ~~has~~within ~~had~~120 days noafter ~~material~~the ~~impact~~end onof ~~our~~fiscal ~~consolidated financial statements~~2007.

In June 2005, the FASB issued FSP No. FAS 150-5. This FSP clarifies that freestanding warrants and other similar instruments on shares that are redeemable (either puttable or mandatorily redeemable) should be accounted for as liabilities

F-12

~~under~~NOTE ~~FASB~~2 ~~Statement~~– ~~No. 150,~~STOCK-BASED ~~“Accounting for Certain Financial Instruments with Characteristics of~~COMPENSATION Both Liabilities and Equity”, regardless of the timing of the redemption feature or price, even though the underlying shares may be classified as equity. This FSP is effective for the first reporting period beginning after June 30, 2005. As of March 31, 2006, the adoption of this issue has had no material impact on our consolidated financial statements.

In Effective ~~November~~April ~~2005~~1, ~~the~~2006, ~~FASB~~we ~~issued~~adopted FASB ~~Staff~~Statement ~~Position~~ No. ~~FAS~~ 123(R)-3, “~~Transition~~Share-Based ~~Election~~Payment,” which ~~Related~~requires tothe ~~Accounting~~measurement and recognition of compensation expense at fair value for employee stock awards. Through March 31, 2006, we accounted for employee stock option plans under the ~~Tax~~intrinsic value ~~Effects~~method ofprescribed ~~Share-Based~~by ~~Award~~APB ~~Payments”~~Opinion (No. 25, “~~FSP~~Accounting ~~123(R)-3~~for Stock Issued to Employees”) and related interpretations. ~~FSP~~Any equity instruments issued, other than ~~123(R)-3~~to ~~provides~~employees, anfor ~~alternative~~acquiring ~~method~~goods ofand ~~calculating~~services ~~the~~were ~~excess~~accounted ~~tax~~for ~~benefits~~using ~~available~~fair tovalue ~~absorb~~at the date of ~~tax~~grant. ~~deficiencies~~We ~~recognized~~also ~~subsequent~~previously toadopted the ~~adoption~~disclosure provisions of FASB Statement No. 123~~(R).~~, ~~We are~~“Accounting ~~currently~~for ~~evaluating~~Stock-Based ~~our~~Compensation,” ~~available~~as ~~alternatives~~amended ~~for~~by ~~the~~FASB ~~adoption~~Statement ofNo. 148, ~~FSP~~“Accounting ~~123(R)~~for Stock-3Based Compensation – Transition and ~~have~~Disclosure ~~until~~– ~~the earlier~~an Amendment of ~~November~~FASB Statement No. ~~2006~~123,” orwhich ~~one~~required us ~~year~~to ~~from~~disclose ~~adoption~~pro toforma ~~make~~information ~~our~~as ~~one-time~~if ~~election~~we had applied fair value recognition provisions.

~~Note~~ We 2have —adopted ~~Stockholders’~~FASB ~~Equity~~Statement No. 123(R) using the modified prospective method in which we are recognizing compensation expense for all awards granted after the required effective date and for the unvested portion of previously granted awards that remained outstanding at the date of adoption. Under this transition method, the measurement as well as our method of amortization of costs for share-based payments granted prior to, but not vested as of, April 1, 2006 would be based on the same estimate of the grant-date fair value and the same amortization method that was previously used in our FASB Statement No. 123 pro forma disclosure. Prior period results have not been restated, as provided for under the modified prospective method.

Broker Non-

Filing Compare · ATARI INC