##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 0-27338
 ATARI, INC.
  DELAWARE
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    13-3689915
(I.R.S. Employer
Identification No.)
 417 FIFTH AVENUE, NEW YORK, NY 10016
 (212) 726-6500
 þ o
  o o þ
 o þ




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##### 



ATARI, INC. AND SUBSIDIARIES
JUNE 30, 2007 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of March 31, 2007 and June 30, 2007
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2006 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2006 and 2007
    
    
    5Condensed Consolidated Statement of Stockholders Equity (Deficiency) and Comprehensive Income (Loss) for the Three Months Ended June 30, 2007
    
    
    6Notes to the Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4T. Controls and Procedures
    
    
    40PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 6. Exhibits
    
    
    43Signature
    
    
    44EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 (unaudited)
 March 31,
    
    
    June 30,2007
    
    
    2007ASSETSCurrent assets:Cash
    
    $
    7,603
    
    
    $
    3,480Receivables, net of allowances of $14,148 and $1,254 at March 31, 2007
and June 30, 2007, respectively
    
    
    6,473
    
    
    
    572Inventories,
net (Note 5)
    
    
    8,843
    
    
    
    8,028Due from related parties (Note 7)
    
    
    1,799
    
    
    
    2,707Prepaid expenses and other current assets (Note 5)
    
    
    10,229
    
    
    
    9,701Assets of discontinued operations (Note 10)
    
    
    645
    
    
    
    708Total current assets
    
    
    35,592
    
    
    
    25,196Property and equipment, net of accumulated depreciation of $30,945 and
$31,359 at
March 31, 2007 and June 30, 2007, respectively
    
    
    4,217
    
    
    
    6,856Security deposits
    
    
    1,940
    
    
    
    1,918Other assets
    
    
    1,070
    
    
    
    1,018Total assets
    
    $
    42,819
    
    
    $
    34,988LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)Current liabilities:Accounts payable
    
    $
    11,013
    
    
    $
    10,748Accrued liabilities (Note 5)
    
    
    13,381
    
    
    
    16,686Royalties payable
    
    
    4,282
    
    
    
    4,556Due to related parties (Note 7)
    
    
    5,703
    
    
    
    2,160Total current liabilities
    
    
    34,379
    
    
    
    34,150Due to related parties  long-term (Note 7)
    
    
    1,912
    
    
    
    2,467Long-term
deferred  rent and related rental obligations
    
    
    3,093
    
    
    
    6,665Other long-term liabilities
    
    
    341
    
    
    
    354Total liabilities
    
    
    39,725
    
    
    
    43,636Commitments and contingencies (Note 8)Stockholders equity (deficiency):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, 13,477,920
shares issued and outstanding at March 31, 2007 and June 30, 2007
    
    
    1,348
    
    
    
    1,348Additional paid-in capital
    
    
    760,527
    
    
    
    760,732Accumulated deficit
    
    
    (761,299
    )
    
    
    (773,240
    )Accumulated other comprehensive income
    
    
    2,518
    
    
    
    2,512Total stockholders equity (deficiency)
    
    
    3,094
    
    
    
    (8,648
    )Total liabilities and stockholders equity (deficiency)
    
    $
    42,819
    
    
    $
    34,988
  Page 3




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ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (unaudited)
 Three MonthsEndedJune 30,2006
    
    
    2007Net revenues
    
    $
    19,474
    
    
    $
    10,420Costs and expenses:Cost of goods sold
    
    
    13,927
    
    
    
    6,766Research and product development
    
    
    7,146
    
    
    
    4,411Selling and distribution expenses
    
    
    5,101
    
    
    
    3,550General and administrative expenses
    
    
    5,435
    
    
    
    5,701Restructuring expenses
    
    
    130
    
    
    
    949Gain on sale of intellectual property
    
    
    (9,000
    )
    
    
    Atari trademark license expense
    
    
    555
    
    
    
    555Depreciation and amortization
    
    
    893
    
    
    
    414Total costs and expenses
    
    
    24,187
    
    
    
    22,346Operating (loss)
    
    
    (4,713
    )
    
    
    (11,926
    )Interest income (expense), net
    
    
    117
    
    
    
    (13
    )Other income
    
    
    19
    
    
    
    19(Loss) before provision for income taxes
    
    
    (4,577
    )
    
    
    (11,920
    )Provision for income taxes
    
    
    182
    
    
    
    (Loss) from continuing operations
    
    
    (4,759
    )
    
    
    (11,920
    )(Loss) from discontinued operations of Reflections
Interactive Ltd., net of tax
    
    
    (2,537
    )
    
    
    (21
    )Net loss
    
    $
    (7,296
    )
    
    $
    (11,941
    )Basic and diluted net loss per share:(Loss) from continuing operations
    
    $
    (0.35
    )
    
    $
    (0.88
    )(Loss) from discontinued operations of Reflections
Interactive Ltd., net of tax
    
    
    (0.19
    )
    
    
    (0.01
    )Net loss
    
    $
    (0.54
    )
    
    $
    (0.89
    )Basic and diluted weighted average common shares outstanding
    
    
    13,477
    
    
    
    13,478
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ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Three MonthsEndedJune 30,2006
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (7,296
    )
    
    $
    (11,941
    )Adjustments to reconcile net loss to net cash (used in)
operating activities:(Loss) from discontinued operations of Reflections
Interactive Ltd., net
of tax
    
    
    2,537
    
    
    
    21Stock-based compensation expense
    
    
    341
    
    
    
    205Atari trademark license expense
    
    
    555
    
    
    
    555Depreciation and amortization
    
    
    893
    
    
    
    414Gain on sale of intellectual property
    
    
    (9,000
    )
    
    
    Recognition of deferred income
    
    
    (19
    )
    
    
    (19
    )Non-income on cash collateralized security deposit
    
    
    
    
    
    
    23Accrued interest
    
    
    
    
    
    
    1Amortization of deferred financing fees
    
    
    115
    
    
    
    52Changes in operating assets and liabilities:Receivables, net
    
    
    8,167
    
    
    
    5,901Inventories, net
    
    
    2,822
    
    
    
    815Due from related parties
    
    
    3,615
    
    
    
    (3,543
    )Due to related parties
    
    
    (1,678
    )
    
    
    (908
    )Prepaid expenses and other current assets
    
    
    (406
    )
    
    
    1,514Other assets and security deposits
    
    
    782
    
    
    
    17Accounts payable
    
    
    (7,852
    )
    
    
    (269
    )Accrued liabilities
    
    
    2,506
    
    
    
    2,303Royalties payable
    
    
    (5,382
    )
    
    
    274Long-term liabilities
    
    
    176
    
    
    
    823Net cash used in continuing operations
    
    
    (9,124
    )
    
    
    (3,762
    )Net cash used in discontinued operations
    
    
    (3,263
    )
    
    
    (71
    )Net cash used in operating activities
    
    
    (12,387
    )
    
    
    (3,833
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of intellectual property
    
    
    6,000
    
    
    
    Increase in restricted cash collateralizing letter of credit
    
    
    (1,764
    )
    
    
    Purchases of property and equipment
    
    
    (24
    )
    
    
    (261
    )Net cash provided by (used in) continuing operations
    
    
    4,212
    
    
    
    (261
    )Net cash (used in) discontinued operations
    
    
    (7
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    4,205
    
    
    
    (261
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments under capital lease obligations
    
    
    (88
    )
    
    
    (31
    )Net cash
(used in) financing activities from continuing operations
    
    
    (88
    )
    
    
    (31
    )Effect of exchange rates on cash
    
    
    9
    
    
    
    2Net decrease in cash
    
    
    (8,261
    )
    
    
    (4,123
    )Cash  beginning of fiscal period
    
    
    14,948
    
    
    
    7,603Cash  end of fiscal period
    
    $
    6,687
    
    
    $
    3,480SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    
    43
    
    
    
    28Cash paid for taxes
    
    
    
    
    
    
    Income tax refunds
    
    
    
    
    
    
    SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING,
INVESTING, AND FINANCING ACTIVITIESReceivable recorded from sale of intellectual property
    
    
    3,000
    
    
    
    Consideration accrued for purchase of capitalized licenses
    
    
    
    
    
    
    1,005Capitalization of leasehold improvements funded by landlord
    
    
    
    
    
    
    2,792
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ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIENCY)
 AND COMPREHENSIVE INCOME (LOSS)
 (in thousands)
 (unaudited)
 AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    OtherStock
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance, March 31, 2007
    
    
    13,478
    
    
    $
    1,348
    
    
    $
    760,527
    
    
    $
    (761,299
    )
    
    $
    2,518
    
    
    $
    3,094Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,941
    )
    
    
    
    
    
    
    (11,941
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,947
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    205Balance, June 30, 2007
    
    
    13,478
    
    
    $
    1,348
    
    
    $
    760,732
    
    
    $
    (773,240
    )
    
    $
    2,512
    
    
    $
    (8,648
    )
  Page 6




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ATARI, INC. AND SUBSIDIARIES
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
 Nature of Business
   Going Concern
  Driver
  Page 7




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Basis of Presentation
  Principles of Consolidation
  Reclassifications
  Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
   Page 8




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Concentration of Credit Risk
  Use of Estimates
  Fair Values of Financial Instruments
  Long-Lived Assets
  Research and Product Development Expenses
   Page 9




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Licenses
  Atari Trademark License
  Recent Accounting Pronouncements
  Page 10




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NOTE 2  STOCK-BASED COMPENSATION
     Three Months EndedJune 30,2006
    
    2007Research and product development
    
    $
    39
    
    
    $
    85Selling and distribution expenses
    
    
    40
    
    
    
    29General and administrative expenses
    
    
    262
    
    
    
    91
  Three Months EndedJune 30,2006
    
    2007Expected volatility
    
    
    n/a
    
    
    
    68
    %Expected dividend yield
    
    
    n/a
    
    
    
    0
    %Expected term
    
    
    n/a
    
    
    
    4
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Weighted AverageShares
    
    
    Exercise Price(in thousands)Options outstanding at March 31, 2007
    
    
    1,112
    
    
    $
    33.45Granted
    
    
    14
    
    
    
    3.65Forfeited
    
    
    (253
    )
    
    
    11.95Expired
    
    
    (340
    )
    
    
    58.90Options outstanding at June 30, 2007
    
    
    533
    
    
    $
    26.64Options exercisable at June 30, 2007
    
    
    135
    
    
    $
    82.48
  NOTE 3  NET LOSS PER SHARE
  Three MonthsEndedJune 30,2006
    
    
    2007Basic and diluted earnings per share calculation:Loss from continuing operations
    
    $
    (4,759
    )
    
    $
    (11,920
    )Loss from discontinued operations of Reflections
Interactive Ltd., net of tax
    
    
    (2,537
    )
    
    
    (21
    )Net loss
    
    $
    (7,296
    )
    
    $
    (11,941
    )Basic and diluted weighted average shares outstanding
    
    
    13,477
    
    
    
    13,478Basic and diluted net loss per share:Loss from continuing operations
    
    $
    (0.35
    )
    
    $
    (0.88
    )Loss from discontinued operations of Reflections
Interactive
Ltd., net of tax, per share
    
    
    (0.19
    )
    
    
    (0.01
    )Net loss
    
    $
    (0.54
    )
    
    $
    (0.89
    )
  Page 12




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NOTE 4  CONCENTRATION OF CREDIT RISK
  For the year endedMarch 31,
    
    March 31,2007
    
    2007% of Accounts Receivable
    
    % of Net Revenues (1)Customer 1
    
    
    34
    %
    
    
    19
    %Customer 2
    
    
    20
    %
    
    
    9
    %54
    %
    
    
    28
    %
  For the three months endedJune 30,
    
    June 30,2007
    
    2007% of Accounts Receivable
    
    % of Net Revenues (1)Customer 1
    
    
    30
    %
    
    
    19
    %Customer 2
    
    
    16
    %
    
    
    7
    %Customer 3
    
    
    15
    %
    
    
    6
    %Customer 4
    
    
    12
    %
    
    
    12
    %Customer 5
    
    
    11
    %
    
    
    29
    %84
    %
    
    
    73
    %
 
 (1)
    
    Excluding international royalty, licensing, and other income.    NOTE 5  BALANCE SHEET DETAILS
 Inventories
  March 31,
    
    
    June 30,2007
    
    
    2007Finished goods, net
    
    $
    8,226
    
    
    $
    7,424Return inventory, net
    
    
    615
    
    
    
    603Raw materials, net
    
    
    2
    
    
    
    1$
    8,843
    
    
    $
    8,028
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Prepaid Expenses and Other Current Assets
  March 31,
    
    
    June 30,2007
    
    
    2007Licenses short-term
    
    $
    7,054
    
    
    $
    6,301Royalties receivable
    
    
    495
    
    
    
    444Reflections escrow receivable
    
    
    626
    
    
    
    626Deferred financing fees
    
    
    209
    
    
    
    209Taxes receivable
    
    
    90
    
    
    
    72Prepaid insurance
    
    
    802
    
    
    
    611Other prepaid expenses and current assets
    
    
    953
    
    
    
    1,438$
    10,229
    
    
    $
    9,701
 Accrued Liabilities
  March 31,
    
    
    June 30,2007
    
    
    2007Accounts receivable credit balances (Note 4)
    
    $
    828
    
    
    $
    4,507Accrued distribution services
    
    
    2,061
    
    
    
    2,019Accrued salary and related costs
    
    
    1,581
    
    
    
    1,054Accrued professional fees and other services
    
    
    2,578
    
    
    
    2,195Accrued third party development expenses
    
    
    2,660
    
    
    
    2,569Restructuring reserve (Note 11)
    
    
    54
    
    
    
    585Accrued advertising
    
    
    1,222
    
    
    
    758Taxes payable
    
    
    299
    
    
    
    353Accrued freight and handling fees
    
    
    193
    
    
    
    125Deferred income
    
    
    231
    
    
    
    219Other
    
    
    1,674
    
    
    
    2,302$
    13,381
    
    
    $
    16,686
 NOTE 6  INCOME TAXES
     Page 14




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NOTE 7  RELATED PARTY TRANSACTIONS
 Relationship with IESA
    Summary of Related Party Transactions
  Page 15




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Three MonthsEndedJune 30,Income (expense)
    
    2006
    
    
    2007Net revenues
    
    $
    19,474
    
    
    $
    10,420Related party activity:Royalty income and license income (1)
    
    
    124
    
    
    
    1,635Sale of goods
    
    
    203
    
    
    
    144Quality and assurance testing and other services
    
    
    832
    
    
    
    766Total related party net revenues
    
    
    1,159
    
    
    
    2,545Cost of goods sold
    
    
    (13,927
    )
    
    
    (6,766
    )Related party activity:Distribution fee for Humongous, Inc. product
    
    
    (1,213
    )
    
    
    (164
    )Royalty expense (2)
    
    
    (1,377
    )
    
    
    (865
    )Total related party cost of goods sold
    
    
    (2,590
    )
    
    
    (1,029
    )Research and product development
    
    
    (7,146
    )
    
    
    (4,411
    )Related party activity:Development expenses (3)
    
    
    (3,297
    )
    
    
    Other miscellaneous development services
    
    
    5
    
    
    
    5Total related party research and product development
    
    
    (3,292
    )
    
    
    5Selling and distribution expenses
    
    
    (5,101
    )
    
    
    (3,550
    )Related party activity:Miscellaneous purchase of services
    
    
    
    
    
    
    Total related party selling and distribution expenses
    
    
    
    
    
    
    General and administrative expenses
    
    
    (5,435
    )
    
    
    (5,701
    )Related party activity:Management fee revenue
    
    
    780
    
    
    
    750Management fee expense
    
    
    (750
    )
    
    
    (750
    )Office rental and other services (4)
    
    
    46
    
    
    
    46Total related party general and administrative expenses
    
    
    76
    
    
    
    46Restructuring expenses
    
    
    (130
    )
    
    
    (949
    )Related party activity:Related party rent expense (4)
    
    
    (116
    )
    
    
    Total related party restructuring expenses
    
    
    (116
    )
    
    
    Loss from
discontinued operations of Reflections Interactive Ltd.,
net of tax
    
    
    (2,537
    )
    
    
    (21
    )Related party activity:Royalty income
    
    
    (392
    )
    
    
    Total related party loss from discontinued operations
    
    
    (392
    )
    
    
    
 
 (1)
    
    We have entered into a distribution agreement with IESA and Atari Europe which provides for
IESAs and Atari Europes distribution of our products across Europe, Asia, and certain other
regions pursuant to which IESA, Atari Europe, or any of their subsidiaries, as applicable, will
pay us 30.0% of the gross margin on such products or 130.0% of the royalty rate due to the
developer, whichever is greater. We recognize this amount as royalty income as part of net
revenues, net of returns. Additionally, we earn license income from related parties iFone and
Glu Mobile (see below).(2)
    
    We have also entered into a distribution agreement with IESA and Atari Europe, which
provides for our distribution of IESAs (or any of its subsidiaries) products in the United
States, Canada and Mexico, pursuant to which we will pay IESA either 30.0% of the gross margin
on such products or 130.0% of the royalty rate due to the developer, whichever is greater. We
recognize this amount as royalty expense as part of cost of goods sold, net of returns.(3)
    
    We engage certain related party development studios to provide services such as product
development, design, and testing.(4)
    
    In July 2002, we negotiated a sale-leaseback transaction between Atari Interactive and an
unrelated party.   As part of this transaction, we guaranteed the lease obligation of Atari
Interactive. The lease provides for minimum monthly rental payments of approximately $0.1
million escalating nominally over the ten year term of the lease. During fiscal 2006, when the
Beverly studio (which held the office space for Atari Interactive) was closed, rental payments
were recorded to restructuring expense. We also received indemnification from IESA from costs,
if any, that may be incurred by us as a result of the full guarantee.We received a $1.3 million payment for our efforts in connection with the sale-leaseback
transaction. Approximately $0.6 million, an amount equivalent to a third party brokers
commission, was recognized during fiscal 2003 as other income, while the remaining balance of
$0.7 million was deferred and is being recognized over the life of the sub-lease. Page 16




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Accordingly, during the three months ended June 30, 2006 and 2007, a nominal amount of income
was recognized in each period. As of June 30, 2007, the remaining balance of approximately $0.4
million is deferred and is being recognized over the life of the sub-lease. Although the
Beverly studio was closed in fiscal 2006 as part of a restructuring plan (Note 11), the space
was not sublet; the lease expired June 30, 2007.Additionally, we provide management information systems services to Atari Australia for which we
are reimbursed. The charge is calculated as a percentage of our costs, based on usage, which is
agreed upon by the parties.  March 31,
    
    
    June 30,2007
    
    
    2007Due from/(Due to)  currentIESA (1)
    
    $
    (1,494
    )
    
    $
    (765
    )Atari Europe (2)
    
    
    280
    
    
    
    (621
    )Eden Studios (3)
    
    
    (595
    )
    
    
    Atari Studio Asia (3)
    
    
    (401
    )
    
    
    Humongous, Inc. (4)
    
    
    (2,218
    )
    
    
    (766
    )Atari Interactive (5)
    
    
    (992
    )
    
    
    239Glu Mobile/iFone (6)
    
    
    1,265
    
    
    
    2,277Other miscellaneous net receivables
    
    
    251
    
    
    
    183Net due to related parties  current
    
    
    (3,904
    )
    
    
    547Due from/(Due to)  long-termAtari Interactive (see Atari Licensebelow)
    
    
    (1,912
    )
    
    
    (2,467
    )Net due to related parties
    
    $
    (5,816
    )
    
    $
    (1,920
    )
  March 31,
    
    
    June 30,2007
    
    
    2007Due from related parties
    
    $
    1,799
    
    
    $
    2,707Due to related parties
    
    
    (5,703
    )
    
    
    (2,160
    )Net (due to) due from related parties  current
    
    $
    (3,904
    )
    
    $
    547
 
 (1)
    
    Balances comprised primarily of the management fees charged to us by IESA and other
charges of cost incurred on our behalf.(2)
    
    Balances comprised of royalty income or expense from our distribution agreements with
IESA and Atari Europe relating to properties owned or licensed by Atari Europe.(3)
    
    Represents net payables for related party development activities. (Note: Atari
Melbourne House, a related party development studio, was sold to a third party by IESA in
the third quarter of fiscal 2007. Balances due to Atari Melbourne House as of March 31,
2007 were transferred to Atari Studio Asia.)(4)
    
    Represents primarily distribution fees owed to Humongous, Inc., a related party,
related to sale of their product.(5)
    
    Comprised primarily of royalties owed to Atari Interactive, offset by receivables
related to management fee revenue and production and quality and assurance testing services
revenue earned from Atari Interactive.(6)
    
    Balances comprised of license income from our licensing agreements with Glu Mobile,
Inc. (merged with Ifone in 2006) relating to properties in which we own or hold rights to
publish and/or sub-license. Atari Name License
  Page 17




---



##### Table of Contents



Related Party Transactions with Employees or Former Employees
 
    
    License Revenue from Glu Mobile
  NOTE 8  COMMITMENTS AND CONTINGENCIES
 Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseThrough
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    TotalJune 30, 2008
    
    $
    4,885
    
    
    $
    2,516
    
    
    $
    3,390
    
    
    $
    50
    
    
    $
    10,841June 30, 2009
    
    
    74
    
    
    
    96
    
    
    
    3,041
    
    
    
    3
    
    
    
    3,214June 30, 2010
    
    
    6
    
    
    
    
    
    
    
    2,997
    
    
    
    
    
    
    
    3,003June 30, 2011
    
    
    
    
    
    
    
    
    
    
    2,958
    
    
    
    
    
    
    
    2,958June 30, 2012
    
    
    
    
    
    
    
    
    
    
    2,756
    
    
    
    
    
    
    
    2,756Thereafter
    
    
    
    
    
    
    
    
    
    
    25,340
    
    
    
    
    
    
    
    25,340Total
    
    $
    4,965
    
    
    $
    2,612
    
    
    $
    40,482
    
    
    $
    53
    
    
    $
    48,112
 
 (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.(3)
    
    We account for our office leases as operating leases, with expiration
dates ranging from fiscal 2008 through fiscal 2022. These are future minimum annual
rental payments required under the leases, including a related party sublease with
Atari Interactive, net of $1.1 million of sublease income to be received in fiscal
2008 and fiscal 2009. Rent expense and sublease income for the three months ended
June 30, 2006 and 2007 is as follows (in thousands): Three months endedJune 30,2006
    
    2007Rent expense
    
    $
    750
    
    
    $
    1,107Sublease income
    
    
    (116
    )
    
    
    (281
    )
 Page 18




---



##### Table of Contents




    
    Renewal of New York lease
 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 over the life
of the lease. A nominal amount of amortization was recorded during the year ended
March 31, 2007. For the three months ended June 30, 2007, we recorded a deferred
credit of $3.0 million and amortization against it of approximately $0.2 million.
Shortly after signing the new lease, 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 condensed consolidated balance sheet.(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, 2007, the net book value of the assets, included within property and equipment
on the balance sheet, was $0.1 million, net of accumulated depreciation of $0.5
million. As of June 30, 2007, the net book value of the assets was $0.1 million,
net of accumulated depreciation of $0.5 million.
 Litigation
  Bouchat v. Champion Products, et al. (Accolade)
  Ernst & Young, Inc. v. Atari, Inc.
  Page 19




---



##### Table of Contents



Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.
  NOTE 9  DEBT
 Credit Facilities
 Guggenheim Credit Facility
     NOTE 10  DISCONTINUED OPERATIONS
 Sale of Reflections
  Driver Driver Driver: Parallel Lines
 Page 20




---



##### Table of Contents



Balance Sheets
 Driver
 March 31, 2007
    
    
    June 30, 2007Assets:Prepaid
expenses and other current assets
    
    $
    310
    
    
    $
    366Other non-current assets
    
    
    335
    
    
    
    342Total assets
    
    $
    645
    
    
    $
    708
 Results of Operations
  Three MonthsEndedJune 30,2006
    
    2007Net revenues
    
    $
    308
    
    
    $
    (Loss) from discontinued operations, net of tax
    
    $
    (2,537
    )
    
    $
    (21
    )
 NOTE 11  RESTRUCTURING
  Three Months EndedJune 30,2006
    
    
    2007Severance and retention expenses (1)
    
    $
    
    
    
    $
    787Lease related costs (2)
    
    
    112
    
    
    
    162Miscellaneous costs
    
    
    18
    
    
    
    Total
    
    $
    130
    
    
    $
    949
 
 (1)
    
    In the first quarter of fiscal 2008, management announced a plan to reduce our total
workforce by 20%, primarily in general and administrative functions.(2)
    
    As part of a restructuring plan implemented in fiscal 2005, we recorded the present
value of all future lease payments, less the present value of expected sublease income to
be recorded, primarily for the Beverly and Santa Monica offices, in accordance with FASB
Statement No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. Through the remainder of the related leases, FASB Statement
No. 146 requires us to record expense to adjust the present value recorded in 2005 to the
actual expense and income recorded for the month. For the three months ended June 30, 2006,
we recorded $0.1 million for the present value adjustments related to the Beverly and Santa
Monica offices. The Santa Monica lease ended during the second quarter of fiscal 2007;
therefore the expense of $0.2 million for the three months ended June 30, 2007 relates to
the Beverly lease, which ended as of that date. No further expense will be recorded in
future periods. Page 21




---



##### Table of Contents



Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atMarch 31, 2007
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    Cash payments, net
    
    
    June 30, 2007Short termSeverance and retention
    
    $
    
    
    
    $
    787
    
    
    $
    
    
    
    $
    (217
    )
    
    $
    570Lease related costs
    
    
    54
    
    
    
    162
    
    
    
    3
    
    
    
    (204
    )
    
    
    15Total
    
    
    54
    
    
    
    949
    
    
    
    3
    
    
    
    (421
    )
    
    
    585Long termLease related costs
    
    
    3
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    Total
    
    
    3
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    Total
    
    $
    57
    
    
    $
    949
    
    
    $
    
    
    
    $
    (421
    )
    
    $
    585
 NOTE 12  SALE OF INTELLECTUAL PROPERTY
 Stuntman
 NOTE 13  OPERATIONS BY REPORTABLE SEGMENTS
      Publishing
    
    Distribution
    
    Corporate
    
    TotalThree months ended June 30, 2006:Net revenues
    
    $
    9,764
    
    
    $
    9,710
    
    
    $
    
    
    
    $
    19,474Operating income (loss) (1)
    
    
    1,134
    
    
    
    759
    
    
    
    (6,476
    )
    
    
    (4,583
    )Depreciation and amortization
    
    
    (201
    )
    
    
    
    
    
    
    (692
    )
    
    
    (893
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    117Three months ended June 30, 2007:Net revenues
    
    $
    9,733
    
    
    $
    687
    
    
    $
    
    
    
    $
    10,420Operating (loss) (1)
    
    
    (4,500
    )
    
    
    72
    
    
    
    (6,549
    )
    
    
    (10,977
    )Depreciation and amortization
    
    
    (70
    )
    
    
    
    
    
    
    (344
    )
    
    
    (414
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )
 Page 22




---



##### Table of Contents



(1)
    
    Operating loss for the Corporate segment for the three months ended June 30,
2006 and 2007, excludes restructuring charges of $0.1 million and $0.9 million,
respectively. Including restructuring charges, total operating loss for the three
months ended June 30, 2006 and 2007 is $4.7 million and $11.9 million, respectively. NOTE 14  SUBSEQUENT EVENTS
 Sale of Hasbro Licensing Rights
  Surrender of 8 th Floor
  FUNimation
License Agreement
  Page 23




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This document includes statements that may constitute forward-looking statements made pursuant
to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution
readers regarding certain forward-looking statements in this document, 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 Quarterly Report on Form 10-Q are forward looking. 
The words believe, expect, anticipate, intend and similar expressions generally identify
forward-looking statements. Forward-looking statements are necessarily based upon a number of
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
expressed in any forward-looking statements made by, or on behalf of, us.  Some of the factors
which could cause our results to differ materially include the following: the loss of key
customers, such as Wal-Mart, Best Buy, Target, and GameStop; delays in product development and
related product release schedules; inability to secure capital; loss of our credit facility;
inability to adapt to the rapidly changing industry technology, including new console technology;
inability to maintain relationships with leading independent video game software developers;
inability to maintain or acquire licenses to intellectual property; fluctuations in our quarterly
net revenues or results of operations based on the seasonality of our industry; and the termination
or modification of our agreements with hardware manufacturers. Please see the Risk Factors in
our Annual Report on Form 10-K for the year ended March 31, 2007, or in our other filings with the
Securities and Exchange Commission (SEC) for a description of some, but not all, risks,
uncertainties and contingencies. Except as otherwise required by the applicable securities laws,
we disclaim any intention or obligation publicly to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
 Overview
 Going Concern
  Driver
  Page 24




---



##### Table of Contents



Related party transactions
  Business and Operating Segments
   Page 25




---



##### Table of Contents



Key Challenges
     Critical Accounting Policies
   Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
 Page 26




---



##### Table of Contents



Inventories
  Research and product development costs
   Licenses
  Page 27




---



##### Table of Contents



Atari Trademark License
  Goodwill
    Stock-Based Compensation
  Results of operations
 Three months ended June 30, 2006 versus the three months ended June 30, 2007
 Condensed Consolidated Statements of Operations (dollars in thousands):
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/June 30,
    
    
    Revenues
    
    
    June 30,
    
    
    Revenues
    
    
    Increase2006
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    $
    
    
    %Net revenues
    
    $
    19,474
    
    
    
    100.0
    %
    
    $
    10,420
    
    
    
    100.0
    %
    
    $
    (9,054
    )
    
    
    -46.5
    %Costs and expenses:Cost of goods sold
    
    
    13,927
    
    
    
    71.5
    %
    
    
    6,766
    
    
    
    64.9
    %
    
    
    (7,161
    )
    
    
    -51.4
    %Research and product development
    
    
    7,146
    
    
    
    36.7
    %
    
    
    4,411
    
    
    
    42.3
    %
    
    
    (2,735
    )
    
    
    -38.3
    %Selling and distribution expenses
    
    
    5,101
    
    
    
    26.2
    %
    
    
    3,550
    
    
    
    34.1
    %
    
    
    (1,551
    )
    
    
    -30.4
    %General and administrative
expenses
    
    
    5,435
    
    
    
    27.9
    %
    
    
    5,701
    
    
    
    54.8
    %
    
    
    266
    
    
    
    4.9
    %Restructuring expenses
    
    
    130
    
    
    
    0.7
    %
    
    
    949
    
    
    
    9.1
    %
    
    
    819
    
    
    
    630.0
    %Gain on sale of intellectual
property
    
    
    (9,000
    )
    
    
    (46.2
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    9,000
    
    
    
    -100.0
    %Atari trademark license expense
    
    
    555
    
    
    
    2.8
    %
    
    
    555
    
    
    
    5.3
    %
    
    
    
    
    
    
    0.0
    %Depreciation and amortization
    
    
    893
    
    
    
    4.6
    %
    
    
    414
    
    
    
    4.0
    %
    
    
    (479
    )
    
    
    -53.6
    %
 Page 28




---



##### Table of Contents



Three
    
    
    
    
    
    
    ThreeMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/June 30,
    
    
    Revenues
    
    
    June 30,
    
    
    Revenues
    
    
    Increase2006
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    $
    
    
    %Total costs and expenses
    
    
    24,187
    
    
    
    124.2
    %
    
    
    22,346
    
    
    
    214.5
    %
    
    
    (1,841
    )
    
    
    -7.6
    %Operating (loss)
    
    
    (4,713
    )
    
    
    (24.2
    )%
    
    
    (11,926
    )
    
    
    (114.5
    )%
    
    
    (7,213
    )
    
    
    153.1
    %Interest (expense) income, net
    
    
    117
    
    
    
    0.6
    %
    
    
    (13
    )
    
    
    (0.1
    )%
    
    
    (130
    )
    
    
    -111.1
    %Other income
    
    
    19
    
    
    
    0.1
    %
    
    
    19
    
    
    
    0.2
    %
    
    
    
    
    
    
    0.0
    %(Loss) before provision for
income
taxes
    
    
    (4,577
    )
    
    
    (23.5
    )%
    
    
    (11,920
    )
    
    
    (114.4
    )%
    
    
    7,343
    
    
    
    160.5
    %Provision for income taxes
    
    
    182
    
    
    
    0.9
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (182
    )
    
    
    -100.0
    %(Loss) from continuing operations
    
    
    (4,759
    )
    
    
    (24.4
    )%
    
    
    (11,920
    )
    
    
    (114.4
    )%
    
    
    7,161
    
    
    
    150.5
    %(Loss) from discontinued
operations of 

Reflections Interactive Ltd., net
of tax
    
    
    (2,537
    )
    
    
    (13.1
    )%
    
    
    (21
    )
    
    
    (0.2
    )%
    
    
    2,516
    
    
    
    -99.2
    %Net loss
    
    $
    (7,296
    )
    
    
    (37.5
    )%
    
    $
    (11,941
    )
    
    
    (114.6
    )%
    
    $
    4,645
    
    
    
    63.7
    %
 Net Revenues
 Net Revenues by Segment (in thousands):
 Three MonthsEndedJune 30,2006
    
    
    2007
    
    
    (Decrease)Publishing
    
    $
    9,764
    
    
    $
    9,733
    
    
    $
    (31
    )Distribution
    
    
    9,710
    
    
    
    687
    
    
    
    (9,023
    )Total
    
    $
    19,474
    
    
    $
    10,420
    
    
    $
    (9,054
    )
 Publishing Sales Platform Mix
 Three MonthsEndedJune 30,2006
    
    2007PC
    
    
    41.1
    %
    
    
    36.2
    %PSP
    
    
    18.4
    %
    
    
    26.5
    %Nintendo DS
    
    
    1.5
    %
    
    
    17.0
    %PlayStation 2
    
    
    19.0
    %
    
    
    14.0
    %Xbox 360
    
    
    0.0
    %
    
    
    3.4
    %Nintendo Wii
    
    
    0.0
    %
    
    
    2.8
    %Game Boy Advance
    
    
    12.5
    %
    
    
    0.1
    %Plug and Play
    
    
    5.4
    %
    
    
    0.0
    %Xbox
    
    
    1.1
    %
    
    
    0.0
    %GameCube
    
    
    1.0
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  
    
    Net publishing product sales during the current quarter were driven by reorders of
catalogue titles, which made up 86% of sales. Sales from new releases in the quarter were
driven mainly by Dragon Ball Z: Advanced Adventure(Game Boy Advance). Similarly, reorders
comprised 89% of net publishing product sales in the prior years comparable quarter.
    
    International royalty income increased by $1.4 million as the prior period income
contained reductions due to larger than anticipated returns on international sales of
Matrix: Path of Neoand Getting Up: Contents Under Pressure, released in the third quarter
and fourth quarter, respectively, of fiscal 2006.
    
    The overall average unit sales price (ASP) of the publishing business has increased
from $15.69 in the prior comparable quarter to $18.19 in the current period. The increased
ASP is driven by the current period inclusion of Nintendo Wii and Xbox 360 titles, with
ASPs of $38.01 and $30.81, respectively. However, this is partially offset by a decrease
in the ASP for Xbox and Game Boy Advance product from the prior comparable period.
 Page 29




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##### Table of Contents



Cost of Goods Sold
  
    
    a lower mix of higher cost third-party distributed product sales as a percentage of net
revenues (6.6% in fiscal 2008 compared with 49.9% in fiscal 2007), and
    
    a higher average sales price on our publishing products in the current period due to the
inclusion of sales for the newest generation of console platforms.
 Research and Product Development Expenses
  
    
    decreased spending of $3.2 million at our related party development studios due to the
completion of Test Drive Unlimited, which was released in the second quarter of fiscal
2007, and
    
    decreased salaries and other overhead of $1.8 million due to the sale of our Shiny
studio in the second quarter of fiscal 2007, as well as additional executive and other
personnel reductions, offset by
    
    increased spending of $1.6 million for projects in development with external developers,
as we increase our focus on external development.
 Selling and Distribution Expenses
  
    
    decreased spend on advertising of $0.3 million, and
    
    savings in salaries and related overhead costs due to reduced headcount resulting from
studio closure and personnel reductions.
 General and Administrative Expenses
  Page 30




---



##### Table of Contents




    
    an increase in professional fees from audit and other consulting charges of
approximately $1.3 million. The fiscal 2007 first quarter contains the recognition of
income of $0.6 million related to a litigation settlement, offset by
    
    a reduction in salaries, rent and other overhead costs of $1.0 million due to studio
closures and other personnel reductions, as well as savings in rent and other overhead
costs.
 Restructuring Expenses
  Gain on Sale of Intellectual Property
 Stuntman
 Depreciation and Amortization
  
    
    savings in depreciation relate to the closure of offices and reduction of staffing and
associated overhead
 Loss
from Discontinued Operations of Reflections Interactive Ltd., net of tax
  Liquidity and Capital Resources
 Overview
    Page 31




---



##### Table of Contents



Cash Flows
 (in thousands)
 March 31,
    
    June 30,2007
    
    2007Cash
    
    $
    7,603
    
    
    $
    3,480Working capital
    
    $
    1,213
    
    
    $
    (8,954
    )
 Three Months EndedJune 30,2006
    
    
    2007Cash (used in) operating activities
    
    $
    (12,387
    )
    
    $
    (3,833
    )Cash provided by investing activities
    
    
    4,205
    
    
    
    (261
    )Cash (used in) financing activities
    
    
    (88
    )
    
    
    (31
    )Effect of exchange rates on cash
    
    
    9
    
    
    
    2Net (decrease) in cash
    
    $
    (8,261
    )
    
    $
    (4,123
    )
  Stuntman
       Page 32




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##### Table of Contents



Selected Balance Sheet Accounts
 Receivables, net
  Prepaid Expenses and Other Current Assets
  Due from Related Parties/Due to Related Parties
  Long-term liabilities and Property Plant and Equipment
 th
 Credit Facilities
 Guggenheim Credit Facility
  Page 33




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##### Table of Contents



Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    TotalJune 30, 2008
    
    $
    4,885
    
    
    $
    2,516
    
    
    $
    3,390
    
    
    $
    50
    
    
    $
    10,841June 30, 2009
    
    
    74
    
    
    
    96
    
    
    
    3,041
    
    
    
    3
    
    
    
    3,214June 30, 2010
    
    
    6
    
    
    
    
    
    
    
    2,997
    
    
    
    
    
    
    
    3,003June 30, 2011
    
    
    
    
    
    
    
    
    
    
    2,958
    
    
    
    
    
    
    
    2,958June 30, 2012
    
    
    
    
    
    
    
    
    
    
    2,756
    
    
    
    
    
    
    
    2,756Thereafter
    
    
    
    
    
    
    
    
    
    
    25,340
    
    
    
    
    
    
    
    25,340Total
    
    $
    4,965
    
    
    $
    2,612
    
    
    $
    40,482
    
    
    $
    53
    
    
    $
    48,112
 
 (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.(3)
    
    We account for our office leases as operating leases, with expiration dates
ranging from fiscal 2008 through fiscal 2022. There are future minimum annual rental
payments required under the leases, including a related party sublease with Atari
Interactive, net of $1.1 million of sublease income to be received in fiscal 2008 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.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 over the life of the lease. A nominal amount of amortization was recorded during
the year ended March 31, 2007. For the three months ended June 30, 2007, we recorded a
deferred credit of $3.0 million and amortization against of approximately $0.2 million.
Shortly after signing the new lease, 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
condensed consolidated balance sheet at June 30, 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, 2007, the net book
value of the assets, included within property and equipment on the balance sheet, was
$0.1 million, net of accumulated depreciation of $0.5 million. As of June 30, 2007,
the net book value of the assets was $0.1 million, net of accumulated depreciation of
$0.5 million. Page 34




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##### Table of Contents



Effect of Relationship with IESA on Liquidity
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign Currency Exchange Rates
  
 Item 4T. Controls and Procedures
 Evaluation of disclosure controls and procedures
   Managements Remediation Initiatives
  Page 35




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation
  Bouchat v. Champion Products, et al. (Accolade)
  Ernst & Young, Inc. v. Atari, Inc.
  Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.
  
 Item 6. Exhibits
 (a)
    
    Exhibits31.1
    
    Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 Page 36




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##### Table of Contents



31.2
    
    Acting Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Acting Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Page 37




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##### Table of Contents



SIGNATURE
  ATARI, INC.By:
    
    /s/
    
    David R. PierceName:
    
    David R. PierceTitle:
    
    President and Chief Executive OfficerDate:
    
    November 6, 2007
 
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description31.1
    
    Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Acting Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Acting Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Page 38