##### 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 December 31, 2006
 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
    
    13-3689915(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 417 FIFTH AVENUE, NEW YORK, NY 10016
 (212) 726-6500
 þ o
  o þ o
 o þ




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##### 



ATARI, INC. AND SUBSIDIARIES
DECEMBER 31, 2006 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, 2006 and December 31, 2006
    
    3Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 2005 and 2006
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2005 and 2006
    
    5Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss for the Nine Months Ended December 31, 2006
    
    7Notes to the Condensed Consolidated Financial Statements
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    29Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    43Item 4.
    
    Controls and Procedures
    
    44PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    45Item 6.
    
    Exhibits
    
    48Signature
    
    
    
    49EX-10.1: CREDIT AGREEMENTEX-10.2: CONSULTING AGREEMENTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2006ASSETSCurrent assets:Cash
    
    $
    14,948
    
    
    $
    3,630Accounts receivable, net of allowances of
$30,918 and $16,502 at March 31, 2006
and December 31, 2006, respectively
    
    
    12,072
    
    
    
    23,161Inventories, net
    
    
    20,787
    
    
    
    13,402Due from related parties (Note 7)
    
    
    4,692
    
    
    
    1,717Prepaid expenses and other current assets
    
    
    11,345
    
    
    
    13,873Assets of discontinued operations (Note 11)
    
    
    2,949
    
    
    
    698Total current assets
    
    
    66,793
    
    
    
    56,481Property and
equipment, net of accumulated depreciation of $30,139 and $30,205 at
March 31, 2006 and December 31, 2006, respectively
    
    
    6,113
    
    
    
    3,800Goodwill
    
    
    66,398
    
    
    
    54,129Acquired intangible assets
    
    
    
    
    
    
    1,212Other assets
    
    
    4,366
    
    
    
    3,885Total assets
    
    $
    143,670
    
    
    $
    119,507LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,935
    
    
    $
    13,319Accrued liabilities
    
    
    19,105
    
    
    
    15,441Royalties payable
    
    
    13,468
    
    
    
    3,250Due to related parties (Note 7)
    
    
    10,263
    
    
    
    9,907Revolving credit facility
    
    
    
    
    
    
    7,000Liabilities of discontinued operations (Note 11)
    
    
    3,018
    
    
    
    375Total current liabilities
    
    
    69,789
    
    
    
    49,292Due to related parties  long term (Note 7)
    
    
    
    
    
    
    1,358Long-term liabilities
    
    
    669
    
    
    
    2,015Total liabilities
    
    
    70,458
    
    
    
    52,665Commitments and contingencies (Note 8)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
13,477,967 shares issued and outstanding at
March 31, 2006 and December
31, 2006, respectively (1)
    
    
    1,348
    
    
    
    1,348Additional paid-in capital
    
    
    758,165
    
    
    
    759,304Accumulated deficit
    
    
    (688,730
    )
    
    
    (696,248
    )Accumulated other comprehensive income
    
    
    2,429
    
    
    
    2,438Total stockholders equity
    
    
    73,212
    
    
    
    66,842Total liabilities and stockholders equity
    
    $
    143,670
    
    
    $
    119,507
   Page 3




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2005
    
    
    2006
    
    
    2005
    
    
    2006Net revenues
    
    $
    99,982
    
    
    $
    47,277
    
    
    $
    162,217
    
    
    $
    95,339Costs, expenses, and income:Cost of goods sold
    
    
    60,270
    
    
    
    27,118
    
    
    
    103,439
    
    
    
    56,296Research and product development expenses
    
    
    10,267
    
    
    
    5,521
    
    
    
    41,230
    
    
    
    19,988Selling and distribution expenses
    
    
    19,553
    
    
    
    6,377
    
    
    
    34,338
    
    
    
    20,795General and administrative expenses
    
    
    8,688
    
    
    
    5,206
    
    
    
    24,852
    
    
    
    16,321Restructuring expenses
    
    
    1,402
    
    
    
    224
    
    
    
    6,332
    
    
    
    558Gain on sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,000
    )Gain on sale of development studio assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (885
    )Depreciation and amortization
    
    
    2,047
    
    
    
    1,120
    
    
    
    6,442
    
    
    
    3,891Total costs, expenses, and income
    
    
    102,227
    
    
    
    45,566
    
    
    
    216,633
    
    
    
    107,964Operating (loss) income
    
    
    (2,245
    )
    
    
    1,711
    
    
    
    (54,416
    )
    
    
    (12,625
    )Interest (expense) income, net
    
    
    (244
    )
    
    
    (46
    )
    
    
    (589
    )
    
    
    187Other income (expense)
    
    
    19
    
    
    
    24
    
    
    
    (217
    )
    
    
    58(Loss) income before (benefit from) income taxes
    
    
    (2,470
    )
    
    
    1,689
    
    
    
    (55,222
    )
    
    
    (12,380
    )(Benefit from) income taxes
    
    
    (122
    )
    
    
    
    
    
    
    (405
    )
    
    
    (Loss) income from continuing operations
    
    
    (2,348
    )
    
    
    1,689
    
    
    
    (54,817
    )
    
    
    (12,380
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (2,413
    )
    
    
    (2,404
    )
    
    
    (7,972
    )
    
    
    4,862Net (loss)
    
    $
    (4,761
    )
    
    $
    (715
    )
    
    $
    (62,789
    )
    
    $
    (7,518
    )Basic and diluted net (loss) per share (1):(Loss) income from continuing operations
    
    $
    (0.17
    )
    
    $
    0.13
    
    
    $
    (4.33
    )
    
    $
    (0.92
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (0.18
    )
    
    
    (0.18
    )
    
    
    (0.63
    )
    
    
    0.36Net (loss)
    
    $
    (0.35
    )
    
    $
    (0.05
    )
    
    $
    (4.96
    )
    
    $
    (0.56
    )Basic and diluted weighted average shares
outstanding (1)
    
    
    13,475
    
    
    
    13,478
    
    
    
    12,663
    
    
    
    13,477
 
 (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.   Page 4




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ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine MonthsEndedDecember 31,2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)
    
    $
    (62,789
    )
    
    $
    (7,518
    )Adjustments to reconcile net (loss) to net cash (used in) operating activities:Loss from discontinued operations of Reflections Interactive Ltd, net of tax
    
    
    7,972
    
    
    
    6,610Gain on sale of Reflections Interactive Ltd
    
    
    
    
    
    
    (11,472
    )Adjustment for non-cash gain on sale of Reflections Interactive Ltd
    
    
    
    
    
    
    2,400Gain on sale of intellectual property
    
    
    
    
    
    
    (9,000
    )Gain on sale of development studio assets
    
    
    
    
    
    
    (885
    )Adjustment for non-cash gain on sale of development studio assets
    
    
    
    
    
    
    200Stock-based compensation expense
    
    
    
    
    
    
    1,135Loss on sale of IESA shares
    
    
    239
    
    
    
    Non-cash restructuring charges
    
    
    847
    
    
    
    Depreciation and amortization
    
    
    6,442
    
    
    
    3,891Amortization of deferred financing fees
    
    
    375
    
    
    
    149Gain on sale of property and equipment
    
    
    
    
    
    
    (74
    )Recognition of deferred income
    
    
    (57
    )
    
    
    (309
    )Other miscellaneous adjustments to net (loss)
    
    
    74
    
    
    
    (23
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    10,487
    
    
    
    (11,091
    )Inventories, net
    
    
    (3,834
    )
    
    
    7,382Due from related parties
    
    
    (10,643
    )
    
    
    2,975Due to related parties
    
    
    15,863
    
    
    
    (357
    )Prepaid expenses and other current assets
    
    
    9,010
    
    
    
    (1,978
    )Accounts payable
    
    
    406
    
    
    
    (10,756
    )Accrued liabilities
    
    
    2,001
    
    
    
    (4,212
    )Royalties payable
    
    
    7,962
    
    
    
    (10,219
    )Long-term liabilities
    
    
    (188
    )
    
    
    1,468Other assets
    
    
    1,064
    
    
    
    2,237Net cash (used in) continuing operating activities
    
    
    (14,769
    )
    
    
    (39,447
    )Net cash (used in) discontinued operations
    
    
    (11,848
    )
    
    
    (7,163
    )Net cash (used in) operating activities
    
    
    (26,617
    )
    
    
    (46,610
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of intellectual property
    
    
    
    
    
    
    9,000Increase in restricted security deposit collateralizing letter of credit
    
    
    
    
    
    
    (1,764
    )Proceeds from sale of development studio assets
    
    
    
    
    
    
    1,550Proceeds from sale of IESA shares
    
    
    10,051
    
    
    
    Purchases of acquired intangible assets
    
    
    
    
    
    
    (1,212
    )Purchases of property and equipment
    
    
    (1,875
    )
    
    
    (897
    )Proceeds from sale of property and equipment
    
    
    27
    
    
    
    179Net cash provided by continuing investing activities
    
    
    8,203
    
    
    
    6,856Net cash (used in) provided by discontinued operations
    
    
    (223
    )
    
    
    21,592Net cash provided by investing activities
    
    
    7,980
    
    
    
    28,448CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under third party revolving credit facility
    
    
    121,100
    
    
    
    15,000(Payments)
under third party revolving credit facility
    
    
 (116,701)
    
    
    
 (8,000)Proceeds from issuance of common stock
    
    
    7,267
    
    
    
    Proceeds from exercise of stock options
    
    
    115
    
    
    
    4Payments under capitalized lease obligation
    
    
    (129
    )
    
    
    (173
    )Net cash provided by continuing financing activities
    
    
    11,652
    
    
    
    6,831Effect of foreign exchange rates on cash
    
    
    (24
    )
    
    
    13Net (decrease) in cash
    
    
    (7,009
    )
    
    
    (11,318
    )Cash  beginning of fiscal period
    
    
    9,988
    
    
    
    14,948Cash  end of fiscal period
    
    $
    2,979
    
    
    $
    3,630
  Page 5




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ATARI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(unaudited)
 Nine MonthsEndedDecember 31,2005
    
    
    2006SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    247
    
    
    $
    120Income tax refunds
    
    $
    1,403
    
    
    $
    Income tax payments
    
    $
    
    
    
    $
    SUPPLEMENTAL
DISCLOSURE OF NON-CASH OPERATING,INVESTING, AND FINANCING ACTIVITIESEscrow receivable in connection with sale of Reflections Interactive Ltd
    
    $
    
    
    
    $
    2,400Escrow receivable in connection with sale of development studio assets
    
    $
    
    
    
    $
    200Consideration accrued for purchase of capitalized licenses
    
    $
    461
    
    
    $
    970Receipt of IESA stock for prepayment of Humongous, Inc. inventory and other costs
    
    $
    1,972
    
    
    $
    Capital lease obligation for computer equipment
    
    $
    107
    
    
    $
    Issuance of 155,766 shares of common stock in lieu of partial royalty payment (1)
    
    $
    2,113
    
    
    $
    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
    
    
    $
    
 
 (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.  Page 6




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ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    OtherStock
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares (1)
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance, March 31, 2006
    
    
    13,477
    
    
    $
    1,348
    
    
    $
    758,165
    
    
    $
    (688,730
    )
    
    $
    2,429
    
    
    $
    73,212Comprehensive loss:Net (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,518
    )
    
    
    
    
    
    
    (7,518
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,509
    )Exercise of stock options
    
    
    1
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,135
    
    
    
    
    
    
    
    
    
    
    
    1,135Balance, December 31, 2006
    
    
    13,478
    
    
    $
    1,348
    
    
    $
    759,304
    
    
    $
    (696,248
    )
    
    $
    2,438
    
    
    $
    66,842
 
 (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.  Page 7




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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
     Basis of Presentation
  Page 8




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Principles of Consolidation
  Reclassifications
  Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
    Concentration of Credit Risk
  Use of Estimates
  Research and Product Development Expenses
  Page 9




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Licenses
  Fair Values of Financial Instruments
  Long-Lived Assets
  Goodwill and Acquired Intangible Assets
   Page 10




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Income Taxes
  Recent Accounting Pronouncements
        Page 11




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NOTE 2  STOCK-BASED COMPENSATION
      Page 12




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Three Months
    
    Nine MonthsEnded
    
    EndedDecember 31, 2006
    
    December 31, 2006Research and product development expenses
    
    $
    433
    
    
    $
    542Selling and distribution expenses
    
    $
    26
    
    
    $
    55General and administrative expenses
    
    $
    (22
    )
    
    $
    538
  Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2005
    
    2006
    
    2005
    
    2006Weighted average risk-free interest rate
    
    
    4.30
    %
    
    
    4.63
    %
    
    
    4.30
    %
    
    
    4.63
    %Anticipated volatility
    
    
    92
    %
    
    
    79
    %
    
    
    92
    %
    
    
    79
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Remaining life in years
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2005
    
    
    2005(Loss) from continuing operations:Basic and diluted  as reported
    
    $
    (2,348
    )
    
    $
    (54,817
    )Add: Stock-based employee compensation expense
included in reported (loss) from continuing
operations, net of related tax effects
    
    
    
    
    
    
    404Less: Fair value of stock-based employee
compensation expense, net of related tax effects
    
    
    (422
    )
    
    
    (1,390
    )Basic and diluted  pro forma (loss) from
continuing operations
    
    $
    (2,770
    )
    
    $
    (55,803
    )(Loss) from continuing operations per share:Basic and diluted  as reported
    
    $
    (0.17
    )
    
    $
    (4.33
    )Basic and diluted  pro forma
    
    $
    (0.21
    )
    
    $
    (4.41
    )Net (loss):Basic and diluted  as reported
    
    $
    (4,761
    )
    
    $
    (62,789
    )Add: Stock-based employee compensation expense
included in reported net (loss), net of related tax
effects
    
    
    
    
    
    
    404
 Page 13




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2005
    
    
    2005Less: Fair value of stock-based employee
compensation expense, net of related tax effects
    
    
    (422
    )
    
    
    (1,390
    )Basic and diluted  pro forma net (loss)
    
    $
    (5,183
    )
    
    $
    (63,775
    )Net (loss) per share:Basic and diluted  as reported
    
    $
    (0.35
    )
    
    $
    (4.96
    )Basic and diluted  pro forma
    
    $
    (0.38
    )
    
    $
    (5.04
    )
  Weighted AverageWeighted Average
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contractual Term(in thousands)
    
    
    
    
    
    
    (years)Options outstanding at March 31, 2006
    
    
    752
    
    
    $
    78.00Granted
    
    
    614
    
    
    
    7.30Exercised
    
    
    (2
    )
    
    
    3.40Forfeited
    
    
    (90
    )
    
    
    14.90Expired
    
    
    (147
    )
    
    
    133.10Options outstanding at December 31, 2006
    
    
    1,127
    
    
    $
    37.40
    
    
    
    7.6Options exercisable at December 31, 2006
    
    
    466
    
    
    $
    76.50
    
    
    
    5.3
  NOTE 3  NET LOSS PER SHARE
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2005
    
    
    2006
    
    
    2005
    
    
    2006Basic and diluted earnings per share calculation:(Loss) income from continuing operations
    
    $
    (2,348
    )
    
    $
    1,689
    
    
    $
    (54,817
    )
    
    $
    (12,380
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (2,413
    )
    
    
    (2,404
    )
    
    
    (7,972
    )
    
    
    4,862Net (loss)
    
    $
    (4,761
    )
    
    $
    (715
    )
    
    $
    (62,789
    )
    
    $
    (7,518
    )Basic and diluted weighted average shares
outstanding
    
    
    13,475
    
    
    
    13,478
    
    
    
    12,663
    
    
    
    13,477Basic and diluted (loss) income from continuing
operations per share
    
    $
    (0.17
    )
    
    $
    0.13
    
    
    $
    (4.33
    )
    
    $
    (0.92
    )Basic and diluted (loss) income from discontinued
operations of Reflections Interactive Ltd, net
of
tax, per share
    
    
    (0.18
    )
    
    
    (0.18
    )
    
    
    (0.63
    )
    
    
    0.36Basic and diluted net (loss) per share
    
    $
    (0.35
    )
    
    $
    (0.05
    )
    
    $
    (4.96
    )
    
    $
    (0.56
    )
 Page 14




---



##### Table of Contents



NOTE 4  CONCENTRATION OF CREDIT RISK
  Year EndedMarch 31,
    
    
    March 31,2006
    
    
    2006% of Accounts Receivable
    
    
    % of Net RevenuesCustomer 1
    
    
    25
    %
    
    
    13
    %Customer 2
    
    
    15
    %
    
    
    13
    %Customer 3
    
    
    14
    %
    
    
    31
    %Customer 4
    
    
    11
    %
    
    
    9
    %65
    %
    
    
    66
    %
  Nine Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2006% of Accounts Receivable
    
    
    % of Net RevenuesCustomer 1
    
    
    43
    %
    
    
    20
    %Customer 2
    
    
    19
    %
    
    
    9
    %Customer 3
    
    
    12
    %
    
    
    12
    %74
    %
    
    
    41
    %
   NOTE 5  BALANCE SHEET DETAILS
 Inventories
  March 31,
    
    
    December 31,2006
    
    
    2006Finished goods, net
    
    $
    18,608
    
    
    $
    12,580Return inventory, net
    
    
    2,106
    
    
    
    700Raw materials, net
    
    
    73
    
    
    
    122$
    20,787
    
    
    $
    13,402
 Prepaid Expenses and Other Current Assets
  Page 15




---



##### Table of Contents



March 31,
    
    
    December 31,2006
    
    
    2006Licenses short-term
    
    $
    5,683
    
    
    $
    5,917Escrow
receivable in connection with sale of Reflections Interactive Ltd
    
    
    
    
    
    
    2,400Royalties receivable
    
    
    2,118
    
    
    
    1,656Prepaid insurance
    
    
    872
    
    
    
    1,111Atari name license
    
    
    305
    
    
    
    Other prepaid expenses and current assets
    
    
    2,367
    
    
    
    2,789$
    11,345
    
    
    $
    13,873
 Goodwill and Acquired Intangible Assets
  Balance at
    
    
    
    
    
    
    
    
    
    Balance atMarch 31,
    
    
    
    
    
    
    
    
    
    December 31,2006
    
    Additions
    
    Dispositions
    
    2006Goodwill
    
    $
    66,398
    
    
    $
    
    
    
    $
    (12,269
    )
    
    $
    54,129Acquired intangible assets
    
    $
    
    
    
    $
    1,212
    
    
    $
    
    
    
    $
    1,212
 Driver
 Other Assets
  March 31,
    
    
    December 31,2006
    
    
    2006Restricted security deposit
    
    $
    
    
    
    $
    1,764Licenses long-term
    
    
    3,832
    
    
    
    1,294Security and deposits
    
    
    137
    
    
    
    195Capitalized fees
    
    
    
    
    
    
    382Other assets
    
    
    397
    
    
    
    250$
    4,366
    
    
    $
    3,885
 Accrued Liabilities
  March 31,
    
    
    December 31,2006
    
    
    2006Accrued advertising
    
    $
    3,772
    
    
    $
    2,990Accrued distribution services
    
    
    3,713
    
    
    
    2,485Accounts receivable credit balances (Note 4)
    
    
    381
    
    
    
    2,035Accrued professional fees and other services
    
    
    1,665
    
    
    
    1,742Accrued third party development expenses
    
    
    1,411
    
    
    
    1,466Accrued salary and related costs
    
    
    1,943
    
    
    
    1,345Accrued freight and handling fees
    
    
    1,029
    
    
    
    502Restructuring reserve (Note 12)
    
    
    2,163
    
    
    
    240Deferred income
    
    
    381
    
    
    
    191Other
    
    
    2,647
    
    
    
    2,445$
    19,105
    
    
    $
    15,441
 Page 16




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##### Table of Contents



NOTE 6  INCOME TAXES
    NOTE 7  RELATED PARTY TRANSACTIONS
 Relationship with IESA
     Page 17




---



##### Table of Contents



Summary of Related Party Transactions
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31Income (expense)
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006Net revenues
    
    $
    99,982
    
    
    $
    47,277
    
    
    $
    162,217
    
    
    $
    95,339Related party activity:Royalty income (1)
    
    
    8,777
    
    
    
    909
    
    
    
    12,773
    
    
    
    1,886License income (1)
    
    
    98
    
    
    
    285
    
    
    
    282
    
    
    
    1,394Sale of goods
    
    
    531
    
    
    
    287
    
    
    
    793
    
    
    
    677Production and quality and assurance testing
services
    
    
    260
    
    
    
    1,472
    
    
    
    947
    
    
    
    3,762Total related party net revenues
    
    
    9,666
    
    
    
    2,953
    
    
    
    14,795
    
    
    
    7,719Cost of goods sold
    
    
    (60,270
    )
    
    
    (27,118
    )
    
    
    (103,439
    )
    
    
    (56,296
    )Related party activity:Distribution fee for Humongous, Inc. product
    
    
    (3,830
    )
    
    
    (694
    )
    
    
    (5,057
    )
    
    
    (3,939
    )Royalty expense (2)
    
    
    (4,611
    )
    
    
    (7,394
    )
    
    
    (6,784
    )
    
    
    (9,106
    )Total related party cost of goods sold
    
    
    (8,441
    )
    
    
    (8,088
    )
    
    
    (11,841
    )
    
    
    (13,045
    )Research and product development expenses
    
    
    (10,267
    )
    
    
    (5,521
    )
    
    
    (41,230
    )
    
    
    (19,988
    )Related party activity:Development expenses (3)
    
    
    (4,368
    )
    
    
    (1,190
    )
    
    
    (12,650
    )
    
    
    (6,517
    )Other miscellaneous development services
    
    
    (8
    )
    
    
    5
    
    
    
    (77
    )
    
    
    14Total related party research and product
development expenses
    
    
    (4,376
    )
    
    
    (1,185
    )
    
    
    (12,727
    )
    
    
    (6,503
    )Selling and distribution expenses
    
    
    (19,553
    )
    
    
    (6,377
    )
    
    
    (34,338
    )
    
    
    (20,795
    )Related party activity:Miscellaneous purchase of services
    
    
    
    
    
    
    (3
    )
    
    
    (8
    )
    
    
    (82
    )Total related party selling and distribution
expenses
    
    
    
    
    
    
    (3
    )
    
    
    (8
    )
    
    
    (82
    )General and administrative expenses
    
    
    (8,688
    )
    
    
    (5,206
    )
    
    
    (24,852
    )
    
    
    (16,321
    )Related party activity:Management fee revenue
    
    
    480
    
    
    
    750
    
    
    
    1,693
    
    
    
    2,270Management fee expense
    
    
    (750
    )
    
    
    (750
    )
    
    
    (2,250
    )
    
    
    (2,250
    )Office rental and other services (4)
    
    
    60
    
    
    
    46
    
    
    
    28
    
    
    
    138Total related party general and
administrative
expenses
    
    
    (210
    )
    
    
    46
    
    
    
    (529
    )
    
    
    158Restructuring expenses
    
    
    (1,402
    )
    
    
    (224
    )
    
    
    (6,332
    )
    
    
    (558
    )Related party activity:Related party rent expense (4)
    
    
    (115
    )
    
    
    (116
    )
    
    
    (523
    )
    
    
    (349
    )Total related party restructuring expenses
    
    
    (115
    )
    
    
    (116
    )
    
    
    (523
    )
    
    
    (349
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (2,413
    )
    
    
    (2,404
    )
    
    
    (7,972
    )
    
    
    4,862Related party activity:Royalty income (1)
    
    
    188
    
    
    
    (864
    )
    
    
    (138
    )
    
    
    (1,570
    )License income (1)
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    525Total related party income (loss) from
discontinued operations of Reflections Interactive Ltd
    
    
    188
    
    
    
    (730
    )
    
    
    (138
    )
    
    
    (1,045
    )
 Page 18




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##### Table of Contents



(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 guaranty.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. Accordingly,
during the nine months ended December 31, 2005 and 2006, $0.1 million of income
was recognized in each period. As of December 31, 2006, 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 as part of managements restructuring plan (Note 12), the space has
not been sublet to date.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,
    
    
    December 31,2006
    
    
    2006Due from/(Due to)  currentIESA (1)
    
    $
    (743
    )
    
    $
    (738
    )Atari Europe (2)
    
    
    4,054
    
    
    
    (6,630
    )Eden Studios (3)
    
    
    (2,235
    )
    
    
    (963
    )Paradigm (3)
    
    
    (721
    )
    
    
    Atari Melbourne House (3)
    
    
    (434
    )
    
    
    Humongous, Inc. (4)
    
    
    (2,341
    )
    
    
    (1,570
    )Atari Interactive (5)
    
    
    (3,704
    )
    
    
    1,370Other miscellaneous net receivables
    
    
    553
    
    
    
    341Net due to related parties  current
    
    
    (5,571
    )
    
    
    (8,190
    )Due from/(Due to)  long-termAtari Interactive (see Atari Name Licensebelow)
    
    
    
    
    
    
    (1,358
    )Net due to related parties
    
    $
    (5,571
    )
    
    $
    (9,548
    )
  March 31,
    
    
    December 31,2006
    
    
    2006Due from related parties
    
    $
    4,692
    
    
    $
    1,717Due to related parties
    
    
    (10,263
    )
    
    
    (9,907
    )Net due to related parties  current
    
    $
    (5,571
    )
    
    $
    (8,190
    )
 Page 19




---



##### Table of Contents



(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.
Additionally, we pass back to Atari Europe worldwide licensing income received by us, which
is recorded as a reduction of third party licensing income.(3)
    
    Represents net payables for related party development activities. (Note: Paradigm and
Atari Melbourne House were sold to third parties in the first and third quarters,
respectively, of the current fiscal year.)(4)
    
    Represents distribution fees owed to Humongous, Inc., a related party, related to sale
of their product, as well as liabilities for inventory purchased.(5)
    
    Comprised in current period primarily of receivables related to management fee revenue
and production and quality and assurance testing services revenue earned from Atari
Interactive, offset by royalties owed. As of March 31, 2006, the large payable balance was
driven by royalties owed to Atari Interactive. Atari Name License
  Issuance of Common Stock to Related Parties
 Related Party Payables Settlement of
Indebtedness
 
    
    Related Party Payables
  
    
    Settlement of Indebtedness
  Page 20




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##### Table of Contents



Related Party Transactions with Employees or Former Employees
 
    
    Consulting Agreement with Ann Kronen
  
    
    Compromise Agreement with Martin Lee Edmondson
 Driver: Parallel Lines
 
    
    Purchase of iFone by 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)
    
    
    TotalDecember 31, 2007
    
    $
    545
    
    
    $
    3,905
    
    
    $
    3,674
    
    
    $
    114
    
    
    $
    8,238December 31, 2008
    
    
    
    
    
    
    
    
    
    
    3,145
    
    
    
    21
    
    
    
    3,166December 31, 2009
    
    
    
    
    
    
    
    
    
    
    3,018
    
    
    
    
    
    
    
    3,018December 31, 2010
    
    
    
    
    
    
    
    
    
    
    2,937
    
    
    
    
    
    
    
    2,937December 31, 2011
    
    
    
    
    
    
    
    
    
    
    2,892
    
    
    
    
    
    
    
    2,892Thereafter
    
    
    
    
    
    
    
    
    
    
    25,200
    
    
    
    
    
    
    
    25,200Total
    
    $
    545
    
    
    $
    3,905
    
    
    $
    40,866
    
    
    $
    135
    
    
    $
    45,451
 Page 21




---



##### Table of Contents



(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 $3.9 million are
payments of $0.8 million to be made to related party development studios.(3)
    
    We account for our office leases as operating leases, with expiration
dates ranging from fiscal 2007 through fiscal 2022. These are future minimum annual
rental payments required under the leases, including a related party sublease with
Atari Interactive, net of $2.0 million of sublease income to be received from fiscal
2007 through fiscal 2009. Rent expense and sublease income for the three months and
nine months ended December 31, 2005 and 2006 is as follows (in thousands): Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2005
    
    2006
    
    2005
    
    2006Rent expense
    
    $
    864
    
    
    $
    1,052
    
    
    $
    3,213
    
    
    $
    2,682Sublease income
    
    $
    (116
    )
    
    $
    (225
    )
    
    $
    (403
    )
    
    $
    (403
    )
 
    
    Renewal of New York leaseDuring 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, which will be recorded as a deferred credit as the
improvements are recorded, and will be amortized against rent expense over the life
of the 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 other assets 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, 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 December 31, 2006, the net book value of the assets was $0.1
million, net of accumulated depreciation of $0.5 million. Litigation
  Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II , and
Chicago West Pullman LLC
  Page 22




---



##### Table of Contents



Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  Page 23




---



##### Table of Contents



Thomas Licensing, LLC v. Atari Interactive, Inc. and Atari, Inc.
   st
 Ernst & Young, Inc. v. Atari, Inc.
  Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.
  Page 24




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##### Table of Contents



NOTE 9  DEBT
 Credit Facilities
 Guggenheim Credit Facility
   HSBC Loan and Security Agreement
   NOTE 10  GAIN ON SALE OF DEVELOPMENT STUDIO ASSETS
 Sale of Shiny Entertainment
  Page 25




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##### Table of Contents



NOTE 11  DISCONTINUED OPERATIONS
 Sale of Humongous and Discontinued Operations Treatment
     Sale of Reflections
 Driver Driver Driver: Parallel Lines
 
    
    Balance Sheets
 Driver
 March 31, 2006
    
    
    December 31, 2006Assets:Cash
    
    $
    438
    
    
    $
    137Inventories, net
    
    
    574
    
    
    
    Prepaid expenses and other
current assets
    
    
    1,222
    
    
    
    226Property and equipment, net
    
    
    251
    
    
    
    
 Page 26




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##### Table of Contents



March 31, 2006
    
    
    December 31, 2006Other assets
    
    
    464
    
    
    
    335Total assets
    
    $
    2,949
    
    
    $
    698Liabilities:Accounts payable
    
    $
    874
    
    
    $
    151Accrued liabilities
    
    
    731
    
    
    
    224Royalties payable
    
    
    1,413
    
    
    
    Total liabilities
    
    $
    3,018
    
    
    $
    375
 
    
    Results of Operations
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2005
    
    
    2006
    
    
    2005
    
    
    2006Net revenues
    
    $
    802
    
    
    $
    (563
    )
    
    $
    1,748
    
    
    $
    (360
    )(Loss) from operations of Reflections
Interactive
Ltd
    
    
    (2,413
    )
    
    
    (2,404
    )
    
    
    (7,972
    )
    
    
    (6,610
    )Gain on sale of Reflections Interactive Ltd
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,472(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    $
    (2,413
    )
    
    $
    (2,404
    )
    
    $
    (7,972
    )
    
    $
    4,862
 NOTE 12  RESTRUCTURING
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2006
    
    
    2005
    
    
    2006Lease related costs
    
    $
    529
    
    
    $
    161
    
    
    $
    1,258
    
    
    $
    434Severance and retention expenses
    
    
    111
    
    
    
    60
    
    
    
    2,855
    
    
    
    101Consultants
    
    
    358
    
    
    
    
    
    
    
    358
    
    
    
    Relocation
    
    
    254
    
    
    
    
    
    
    
    418
    
    
    
    Modification of stock options
    
    
    
    
    
    
    
    
    
    
    404
    
    
    
    Property and equipment write offs
    
    
    
    
    
    
    
    
    
    
    443
    
    
    
    Miscellaneous costs
    
    
    150
    
    
    
    3
    
    
    
    596
    
    
    
    23Total
    
    $
    1,402
    
    
    $
    224
    
    
    $
    6,332
    
    
    $
    558
  Page 27




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##### Table of Contents



Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2006
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    net
    
    
    December 31,2006Short termSeverance and retention
    
    $
    1,886
    
    
    $
    101
    
    
    $
    
    
    
    $
    (1,837
    )
    
    $
    150Lease related costs
    
    
    245
    
    
    
    434
    
    
    
    49
    
    
    
    (638
    )
    
    
    90Miscellaneous costs
    
    
    32
    
    
    
    23
    
    
    
    
    
    
    
    (55
    )
    
    
    Total
    
    
    2,163
    
    
    
    558
    
    
    
    49
    
    
    
    (2,530
    )
    
    
    240Long termSeverance and retention
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease related costs
    
    
    56
    
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    7Total
    
    
    56
    
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    7Total
    
    $
    2,219
    
    
    $
    558
    
    
    $
    
    
    
    $
    (2,530
    )
    
    $
    247
 NOTE 13  SALE OF INTELLECTUAL PROPERTY
 Stuntman
 NOTE 14  OPERATIONS BY REPORTABLE SEGMENTS




---



##### Table of Contents



Publishing
    
    Distribution
    
    Corporate
    
    TotalThree months ended December 31, 2005:Net revenues
    
    $
    81,625
    
    
    $
    18,357
    
    
    $
    
    
    
    $
    99,982Operating income (loss) (1)
    
    
    6,600
    
    
    
    2,049
    
    
    
    (9,492
    )
    
    
    (843
    )Depreciation and amortization
    
    
    (374
    )
    
    
    
    
    
    
    (1,673
    )
    
    
    (2,047
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (244
    )
    
    
    (244
    )Nine months ended December 31, 2005:Net revenues
    
    $
    116,630
    
    
    $
    45,587
    
    
    $
    
    
    
    $
    162,217Operating (loss) income (1)
    
    
    (25,270
    )
    
    
    4,598
    
    
    
    (27,412
    )
    
    
    (48,084
    )Depreciation and amortization
    
    
    (1,328
    )
    
    
    
    
    
    
    (5,114
    )
    
    
    (6,442
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (589
    )
    
    
    (589
    )Three months ended December 31, 2006:Net revenues
    
    $
    45,954
    
    
    $
    1,323
    
    
    $
    
    
    
    $
    47,277Operating income (loss) (1)
    
    
    8,983
    
    
    
    (979
    )
    
    
    (6,069
    )
    
    
    1,935Depreciation and amortization
    
    
    (74
    )
    
    
    
    
    
    
    (1,046
    )
    
    
    (1,120
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    (46
    )Nine months ended December 31, 2006:Net revenues
    
    $
    78,848
    
    
    $
    16,491
    
    
    $
    
    
    
    $
    95,339Operating income (loss) (1)
    
    
    5,536
    
    
    
    1,858
    
    
    
    (19,461
    )
    
    
    (12,067
    )Depreciation and amortization
    
    
    (446
    )
    
    
    
    
    
    
    (3,445
    )
    
    
    (3,891
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    187
    
    
    
    187
 
 (1)
    
    Operating loss for the Corporate segment for the three months ended December 31, 2005
and 2006, excludes restructuring charges of $1.4 million and $0.2 million, respectively,
and for the nine months ended December 31, 2005 and 2006 excludes $6.3 million and $0.6
million, respectively. Including restructuring charges, total operating (loss) income for
the three months ended December 31, 2005 and 2006 is a loss of $2.2 million and income of
$1.7 million, respectively, and for the nine months ended December 31, 2005 and 2006 is a
loss of $54.4 million and a loss of $12.6 million, respectively.
 NOTE 15  SUBSEQUENT EVENTS
 Reverse Stock Split
   Page 29




---



##### 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; 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, 2006, 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
     Reverse Stock Split
  Page 30




---



##### Table of Contents



Related party transactions
  Business and Operating Segments
   Key Challenges
   Critical Accounting Policies
  Page 31




---



##### Table of Contents



Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
     Inventories
  Research and product development expenses
   Page 32




---



##### Table of Contents



Licenses
  Goodwill and Acquired Intangible Assets
   Income taxes
    Page 33




---



##### Table of Contents



Results of operations
 Three months ended December 31, 2005 versus the three months ended December 31, 2006
 Condensed Consolidated Statements of Operations (dollars in thousands):
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/December 31,
    
    
    Revenues
    
    
    December 31,
    
    
    Revenues
    
    
    Increase2005
    
    
    
    
    
    

    2006
    
    
    
    
    
    
    
    $
    
    
    
    %Net revenues
    
    $
    99,982
    
    
    
    100.0
    %
    
    $
    47,277
    
    
    
    100.0
    %
    
    $
    (52,705
    )
    
    
    (52.7
    )%Costs, expenses and income:Cost of goods sold
    
    
    60,270
    
    
    
    60.3
    %
    
    
    27,118
    
    
    
    57.4
    %
    
    
    (33,152
    )
    
    
    (55.0
    )%Research and product development
expenses
    
    
    10,267
    
    
    
    10.3
    %
    
    
    5,521
    
    
    
    11.7
    %
    
    
    (4,746
    )
    
    
    (46.2
    )%Selling and distribution expenses
    
    
    19,553
    
    
    
    19.6
    %
    
    
    6,377
    
    
    
    13.5
    %
    
    
    (13,176
    )
    
    
    (67.4
    )%General and administrative expenses
    
    
    8,688
    
    
    
    8.6
    %
    
    
    5,206
    
    
    
    10.9
    %
    
    
    (3,482
    )
    
    
    (40.1
    )%Restructuring expenses
    
    
    1,402
    
    
    
    1.4
    %
    
    
    224
    
    
    
    0.5
    %
    
    
    (1,178
    )
    
    
    (84.0
    )%Depreciation and amortization
    
    
    2,047
    
    
    
    2.0
    %
    
    
    1,120
    
    
    
    2.4
    %
    
    
    (927
    )
    
    
    (45.3
    )%Total costs, expenses, and income
    
    
    102,227
    
    
    
    102.2
    %
    
    
    45,566
    
    
    
    96.4
    %
    
    
    (56,661
    )
    
    
    (55.4
    )%Operating (loss) income
    
    
    (2,245
    )
    
    
    (2.2
    )%
    
    
    1,711
    
    
    
    3.6
    %
    
    
    (3,956
    )
    
    
    (176.2
    )%Interest (expense), net
    
    
    (244
    )
    
    
    (0.3
    )%
    
    
    (46
    )
    
    
    (0.1
    )%
    
    
    (198
    )
    
    
    (81.1
    )%Other income
    
    
    19
    
    
    
    (0.0
    )%
    
    
    24
    
    
    
    0.1
    %
    
    
    5
    
    
    
    26.3
    %(Loss) income before (benefit
from)
income taxes
    
    
    (2,470
    )
    
    
    (2.5
    )%
    
    
    1,689
    
    
    
    3.6
    %
    
    
    (4,159
    )
    
    
    (168.4
    )%(Benefit from) income taxes
    
    
    (122
    )
    
    
    (0.1
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (122
    )
    
    
    (100.0
    )%(Loss) income from continuing
operations
    
    
    (2,348
    )
    
    
    (2.4
    )%
    
    
    1,689
    
    
    
    3.6
    %
    
    
    (4,037
    )
    
    
    (171.9
    )%(Loss) from discontinued operations of
Reflections Interactive Ltd, net of
tax
    
    
    (2,413
    )
    
    
    (2.4
    )%
    
    
    (2,404
    )
    
    
    (5.1
    )%
    
    
    (9
    )
    
    
    (0.4
    )%Net (loss)
    
    $
    (4,761
    )
    
    
    (4.8
    )%
    
    $
    (715
    )
    
    
    (1.5
    )%
    
    $
    (4,046
    )
    
    
    (85.0
    )%
 Net Revenues
 Net Revenues by Segment (in thousands):
 Three MonthsEndedDecember 31,2005
    
    
    2006
    
    
    (Decrease)Publishing
    
    $
    81,625
    
    
    $
    45,954
    
    
    $
    (35,671
    )Distribution
    
    
    18,357
    
    
    
    1,323
    
    
    
    (17,034
    )Total
    
    $
    99,982
    
    
    $
    47,277
    
    
    $
    (52,705
    )
 Publishing Sales Platform Mix
 Three MonthsEndedDecember 31,2005
    
    2006PlayStation 2
    
    
    49.8
    %
    
    
    39.8
    %PC
    
    
    20.8
    %
    
    
    31.5
    %Nintendo Wii
    
    
    0.0
    %
    
    
    15.0
    %Plug and Play
    
    
    9.0
    %
    
    
    3.6
    %Xbox 360
    
    
    0.0
    %
    
    
    3.6
    %Game Boy Advance
    
    
    5.4
    %
    
    
    2.6
    %Nintendo DS
    
    
    3.5
    %
    
    
    2.0
    %PSP
    
    
    0.0
    %
    
    
    1.8
    %Xbox
    
    
    11.0
    %
    
    
    0.1
    %GameCube
    
    
    0.5
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Page 34




---



##### Table of Contents




    
    Net publishing product sales during the current quarter were driven by new release sales
of $31.1 million, which included sales for Dragon Ball Z: Budokai Tenkaichi 2(PlayStation
2 and Nintendo Wii) and Neverwinter Nights 2(PC). In the prior comparable quarter, new
releases contributed $46.2 million of publishing product sales and were driven by sales of
Dragon Ball Z: Budokai Tenkaichi(PlayStation 2) and Matrix: Path of Neo(PlayStation 2,
Xbox, and PC), and we had reorders of $5.1 million of Atari Flashback 2.0(plug and play),
which was released in the second quarter of fiscal 2006. The decrease in sales results
from fewer new releases in the current period.
    
    International royalty income decreased by $7.9 million from the comparable prior period
due to lower international sales of new releases in the current period, compared with
higher international sales of Matrix: Path of Neoin the prior period, compounded by larger
than anticipated returns on international sales of that title in the current period.
    
    Current period includes $1.0 million in revenue earned from Atari Interactive for
production management, support, and administrative services rendered, pursuant to the
production services agreement executed in March 2006. No such revenue was recorded in the
prior period.
    
    The overall average unit sales price (ASP) of the publishing business has increased
slightly from $23.65 in the prior comparable quarter to $24.85 in the current period. The
increased ASP is driven by the current period inclusion of Nintento Wii and Xbox 360
titles, with ASPs of $36.45 and $31.10, respectively. However, this is offset by a
decrease in the ASPs of previous generation console product from the prior comparable
period, due to the current console transition.
  Cost of Goods Sold
  
    
    lower mix of royalty bearing products in the current period, compounded by lower royalty
rates on those products, and
    
    a lower mix of third party sales in the current year which have higher costs (18.4%
third party net revenues in the prior year versus 2.8% third party net revenues in the
current year).
 Research and Product Development Expenses
  
    
    decreased spending of $3.1 million at our related party development studios due to the
sale of our Stuntmanfranchise in development at Paradigm Entertainment, as well as the
completion of Test Drive Unlimited(Xbox 360), in development in the prior years
comparable quarter and released in September 2006, and
    
    decreased salaries and other overhead of $1.7 million due to the divestiture of the
Shiny studio in the second quarter of fiscal 2007, as well as company-wide personnel
reductions.
  Page 35




---



##### Table of Contents



Selling and Distribution Expenses
  
    
    decreased spend on advertising of $11.2 million, primarily due to lower spend in the
current year for television ad purchases as management focuses on lower cost and more
direct marketing (prior period included significant spend for Matrix: Path of Neo
television campaigns),
    
    savings in salaries and related employee costs due to reduced headcount, and
    
    savings in freight and handling costs on lower sales.
 General and Administrative Expenses
  
    
    a reduction in salaries of $1.5 million due to personnel reductions, as well as savings
in rent and other overhead costs, and
    
    decreased consulting and professional fees of $1.0 million.
 Restructuring Expenses
  
    
    lease related costs associated with closed offices of $0.5 million,
    
    consultant expenses of $0.4 million,
    
    relocation costs of $0.2 million,
    
    severance and retention expense of $0.1 million, and
    
    other miscellaneous costs associated with the restructuring and office transition of $0.2 million.
  Depreciation and Amortization
  Interest (Expense), net
  Page 36




---



##### Table of Contents



Benefit from Income Taxes
  Loss from Discontinued Operations of Reflections Interactive Ltd, net of tax
 Driver
 Nine months ended December 31, 2005 versus the nine months ended December 31, 2006
 Condensed Consolidated Statements of Operations (dollars in thousands):
 Nine
    
    
    
    
    
    
    NineMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/December 31,
    
    
    Revenues
    
    
    December 31,
    
    
    Revenues
    
    
    Increase2005
    
    
    
    
    
    

    2006
    
    
    
    
    
    
    
    $
    
    
    
    %Net revenues
    
    $
    162,217
    
    
    
    100.0
    %
    
    $
    95,339
    
    
    
    100.0
    %
    
    $
    (66,878
    )
    
    
    (41.2
    )%Costs, expenses, and income:Cost of goods sold
    
    
    103,439
    
    
    
    63.8
    %
    
    
    56,296
    
    
    
    59.0
    %
    
    
    (47,143
    )
    
    
    (45.6
    )%Research and product development
expenses
    
    
    41,230
    
    
    
    25.4
    %
    
    
    19,988
    
    
    
    21.0
    %
    
    
    (21,242
    )
    
    
    (51.5
    )%Selling and distribution expenses
    
    
    34,338
    
    
    
    21.2
    %
    
    
    20,795
    
    
    
    21.8
    %
    
    
    (13,543
    )
    
    
    (39.4
    )%General and administrative
expenses
    
    
    24,852
    
    
    
    15.2
    %
    
    
    16,321
    
    
    
    17.0
    %
    
    
    (8,531
    )
    
    
    (34.3
    )%Restructuring expenses
    
    
    6,332
    
    
    
    3.9
    %
    
    
    558
    
    
    
    0.6
    %
    
    
    (5,774
    )
    
    
    (91.2
    )%Gain on sale of intellectual
property
    
    
    
    
    
    
    0.0
    %
    
    
    (9,000
    )
    
    
    (9.4
    )%
    
    
    9,000
    
    
    
    100.0
    %Gain on sale of development
studio
assets
    
    
    
    
    
    
    0.0
    %
    
    
    (885
    )
    
    
    (0.9
    )%
    
    
    885
    
    
    
    100.0
    %Depreciation and amortization
    
    
    6,442
    
    
    
    4.0
    %
    
    
    3,891
    
    
    
    4.1
    %
    
    
    (2,551
    )
    
    
    (39.6
    )%Total costs, expenses, and income
    
    
    216,633
    
    
    
    133.5
    %
    
    
    107,964
    
    
    
    113.2
    %
    
    
    (108,669
    )
    
    
    (50.2
    )%Operating (loss)
    
    
    (54,416
    )
    
    
    (33.5
    )%
    
    
    (12,625
    )
    
    
    (13.2
    )%
    
    
    (41,791
    )
    
    
    (76.8
    )%Interest (expense) income, net
    
    
    (589
    )
    
    
    (0.4
    )%
    
    
    187
    
    
    
    0.2
    %
    
    
    (776
    )
    
    
    (131.7
    )%Other (expense) income
    
    
    (217
    )
    
    
    (0.1
    )%
    
    
    58
    
    
    
    0.0
    %
    
    
    (275
    )
    
    
    (126.7
    )%(Loss) before (benefit from)
income
taxes
    
    
    (55,222
    )
    
    
    (34.0
    )%
    
    
    (12,380
    )
    
    
    (13.0
    )%
    
    
    (42,842
    )
    
    
    (77.6
    )%(Benefit from) income taxes
    
    
    (405
    )
    
    
    (0.2
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (405
    )
    
    
    (100.0
    )%(Loss) from continuing operations
    
    
    (54,817
    )
    
    
    (33.8
    )%
    
    
    (12,380
    )
    
    
    (13.0
    )%
    
    
    (42,437
    )
    
    
    (77.4
    )%(Loss) income from discontinued
operations of Reflections
Interactive
Ltd, net of tax
    
    
    (7,972
    )
    
    
    (4.9
    )%
    
    
    4,862
    
    
    
    5.1
    %
    
    
    (12,834
    )
    
    
    (161.0
    )%Net (loss)
    
    $
    (62,789
    )
    
    
    (38.7
    )%
    
    $
    (7,518
    )
    
    
    (7.9
    )%
    
    $
    (55,271
    )
    
    
    (88.0
    )%
 Net Revenues
 Net Revenues by Segment (in thousands):
 Nine MonthsEndedDecember 31,2005
    
    
    2006
    
    
    (Decrease)Publishing
    
    $
    116,630
    
    
    $
    78,848
    
    
    $
    (37,782
    )Distribution
    
    
    45,587
    
    
    
    16,491
    
    
    
    (29,096
    )Total
    
    $
    162,217
    
    
    $
    95,339
    
    
    $
    (66,878
    )
 Page 37




---



##### Table of Contents



Publishing Sales Platform Mix
 Nine MonthsEndedDecember 31,2005
    
    2006PlayStation 2
    
    
    38.3
    %
    
    
    36.9
    %PC
    
    
    29.0
    %
    
    
    28.5
    %Xbox 360
    
    
    0.0
    %
    
    
    10.6
    %Nintendo Wii
    
    
    0.0
    %
    
    
    9.0
    %PSP
    
    
    0.0
    %
    
    
    5.4
    %Game Boy Advance
    
    
    7.3
    %
    
    
    3.8
    %Plug and Play
    
    
    11.3
    %
    
    
    3.6
    %Nintendo DS
    
    
    2.5
    %
    
    
    1.8
    %Xbox
    
    
    9.6
    %
    
    
    0.2
    %GameCube
    
    
    1.9
    %
    
    
    0.2
    %PlayStation
    
    
    0.1
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  
    
    Net publishing product sales during the period were driven by new release sales of $45.0
million, which included sales for Dragon Ball Z: Budokai Tenkaichi 2(PlayStation 2 and
Nintendo Wii), Test Drive Unlimited(Xbox 360), Super Dragon Ball Z(PlayStation 2), and
Neverwinter Nights 2(PC). In the prior comparable period, sales from new releases were
$70.4 million and included sales of Dragon Ball Z: Budokai Tenkaichi(PlayStation 2),
Matrix: Path of Neo(PlayStation 2, Xbox, and PC), Atari Flashback 2.0(plug and play),
Indigo Prophecy(PlayStation 2, Xbox, and PC), Dragon Ball Z: Transformations(Game Boy
Advance), RollerCoaster Tycoon 3: Soaked!(PC), and Dragonshard(PC). The decrease in
sales results from fewer new releases.
    
    International royalty income decreased by $10.9 million from the comparable prior period
due to lower international sales of new releases in the current period, compared with
higher international sales of Matrix: Path of Neoin the prior period, compounded by larger
than anticipated returns on international sales of that title in the current period.
    
    Current period includes $2.6 million in revenue earned from Atari Interactive for
production management, support, and administrative services rendered, pursuant to the
production services agreement executed in March 2006. No such revenue was recorded in the
prior comparable period.
    
    The overall ASP of the publishing business has increased slightly from $20.63 in the
prior comparable period to $21.61 in the current period. The increased ASP is driven by
the current period inclusion of Nintento Wii and Xbox 360 titles, with ASPs of $36.45 and
$29.38, respectively. However, this is offset by a decrease in the ASPs of previous
generation console product from the prior comparable period.
  Cost of Goods Sold
  
    
    a lower mix of royalty bearing product sales in the current period, compounded by lower
royalty rates on those products, and
    
    a lower mix of our third party product sales in the current period.
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Research and Product Development Expenses
  
    
    decreased spending with external developers of $8.5 million due to delays in
commencement on certain development projects,
    
    decreased spending of $6.1 million at our related party development studios due to the
sale of our Stuntmanfranchise and development project, in process at Paradigm
Entertainment, as well as the completion of Test Drive Unlimited(Xbox 360), released in
September 2006, and
    
    savings in salaries and other overhead of $6.7 million due to the closure of the Beverly
and Santa Monica publishing studios during fiscal 2006, the divestiture of the Shiny studio
in the second quarter of fiscal 2007, and other personnel reductions.
  Selling and Distribution Expenses
  
    
    decreased advertising spend of $9.6 million due to fewer new releases in the current
period, compounded by managements focus on lower cost and more direct marketing (prior
period included significant spend for Matrix: Path of Neotelevision campaigns),
    
    savings in salaries and related overhead costs of $3.5 million due to reduced headcount
resulting from publishing studio closure and personnel reductions, and
    
    savings in freight and handling costs on lower sales.
 General and Administrative Expenses
  
    
    a 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 costs, offset by
    
    recognition of expense of $0.5 million of stock-based compensation expense related to
the implementation of FASB Statement No. 123(R) (see Note 2 to the condensed consolidated
financial statements for details about the implementation of Statement No. 123(R)).
 Restructuring Expenses
  
    
    severance and retention expense of $2.9 million,
    
    lease related costs associated with closed offices of $1.3 million,
    
    property and equipment write offs of $0.4 million,
    
    costs associated with the modification of stock options for terminated executives of $0.4 million, and
    
    consultant, relocation, and other miscellaneous costs associated with the restructuring
and office transition of $1.3 million.
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##### Table of Contents



Gain on Sale of Intellectual Property
 Stuntman
 Gain on Sale of Development Studio Assets
  Depreciation and Amortization
  
    
    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, and
    
    decrease in Atari name license amortization due to a change in the expected future
earnings on which this expense is based, offset by
    
    depreciation expense for new assets placed into service.
 Interest (Expense) Income, net
  Other (Expense) Income
  Benefit from Income Taxes
  (Loss) Income from Discontinued Operations of Reflections Interactive Ltd, net of tax
  Page 40




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Liquidity and Capital Resources
 Overview
    Cash Flows
 (in thousands)
 March 31,
    
    December 31,2006
    
    2006Cash
    
    $
    14,948
    
    
    $
    3,630Working capital (deficit)
    
    $
    (2,996
    )
    
    $
    7,189
 Nine Months EndedDecember 31,2005
    
    
    2006Cash (used in) operating activities
    
    $
    (26,617
    )
    
    $
    (46,610
    )Cash provided by investing activities
    
    
    7,980
    
    
    
    28,448Cash provided by financing activities
    
    
    11,652
    
    
    
    6,831Effect of foreign exchange rates on cash
    
    
    (24
    )
    
    
    13Net (decrease) in cash
    
    $
    (7,009
    )
    
    $
    (11,318
    )
   
    
    proceeds of $21.6 million received in connection with the sale of our Reflections studio,
    
    proceeds of $9.0 million from the sale of the Stuntmanintellectual property,
    
    and proceeds of $1.6 million from the sale of our Shiny
studio in the current period.
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Selected Balance Sheet Accounts
 Accounts receivable, net
  Inventories, net
  Due from Related Parties
  Assets
and Liabilities of Discontinued Operations
  Page 42




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##### Table of Contents



Accounts Payable
  Royalties Payable
 Matrix: Path of Neo
 Credit Facilities
 Guggenheim Credit Facility
   HSBC Loan and Security Agreement
  Contractual Obligations
  Royalty and
    
    
    
    
    
    
    Contractual Obligationslicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments(2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    TotalDecember 31, 2007
    
    $
    545
    
    
    $
    3,905
    
    
    $
    3,674
    
    
    $
    114
    
    
    $
    8,238December 31, 2008
    
    
    
    
    
    
    
    
    
    
    3,145
    
    
    
    21
    
    
    
    3,166December 31, 2009
    
    
    
    
    
    
    
    
    
    
    3,018
    
    
    
    
    
    
    
    3,018December 31, 2010
    
    
    
    
    
    
    
    
    
    
    2,937
    
    
    
    
    
    
    
    2,937December 31, 2011
    
    
    
    
    
    
    
    
    
    
    2,892
    
    
    
    
    
    
    
    2,892Thereafter
    
    
    
    
    
    
    
    
    
    
    25,200
    
    
    
    
    
    
    
    25,200Total
    
    $
    545
    
    
    $
    3,905
    
    
    $
    40,866
    
    
    $
    135
    
    
    $
    45,451
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##### Table of Contents



(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 $3.9 million are payments
of $0.8 million to be made to related party development studios.
 (3)
    
    We account for our office leases as operating leases, with expiration dates
ranging from fiscal 2007 through fiscal 2022. These are future minimum annual rental
payments required under the leases, including a related party sublease with Atari
Interactive, net of $2.0 million of sublease income to be received from fiscal 2007
through fiscal 2009.
 
    
    Renewal of New York lease
  (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 December 31,
2006, the net book value of the assets was $0.1 million, net of accumulated
depreciation of $0.5 million.
 Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign Currency Exchange Rates
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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
   Managements Remediation Initiatives
  Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Litigation
  Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II , and
Chicago West Pullman LLC
  Page 45




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##### Table of Contents



Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  Page 46




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##### Table of Contents



Thomas Licensing, LLC v. Atari Interactive, Inc. and Atari, Inc.
   st
 Ernst & Young, Inc. v. Atari, Inc.
  Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.
  Page 47




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##### Table of Contents



Item 6. Exhibits
  10.1
    
    Credit Agreement, dated November 3, 2006, among Atari, Inc, the Lenders Party
Hereto, and Guggenheim Corporate Funding, LLC, as Administrative Agent.
 10.2
    
    Consulting Agreement between us and Ann Kronen, dated November 8, 2006.
 31.1
    
    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.
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##### Table of Contents



SIGNATURE
  ATARI, INC.By:
    /s/ David R. PierceDavid R. PiercePresident and Chief Executive Officer
(Duly Authorized Officer)By:
    /s/ Bruno BonnellBruno BonnellActing Chief Financial Officer
(Principal Financial Officer)  Page 49




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INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Credit Agreement, dated November 3, 2006, among Atari, Inc, the Lenders Party
Hereto, and Guggenheim Corporate Funding, LLC, as Administrative Agent.10.2
    
    Consulting Agreement between us and Ann Kronen, dated November 8, 2006.31.1
    
    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.