##### 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, 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
(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 þ o
 o þ




---



##### 



ATARI, INC. AND SUBSIDIARIES
JUNE 30, 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 June 30, 2006
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2005  and 2006
    
    
    4Condensed
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2005 and 2006
    
    
    5Condensed Consolidated Statement of Stockholders Equity and Comprehensive Income (Loss)  for the Three Months Ended June 30, 2006
    
    
    7Notes to the Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4.
    
    Controls and Procedures
    
    
    40PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    41Item 6.
    
    Exhibits
    
    
    43Signature
    
    
    
    
    44EX-31.1: CERTIFICATIONEX-32.1: CERTIFICATION




---



##### 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,
    
    
    June 30,2006
    
    
    2006ASSETSCurrent assets:Cash
    
    $
    14,948
    
    
    $
    6,687Receivables, net of allowances of $30,918 and $9,323, at March 31, 2006
and June 30, 2006, respectively
    
    
    12,072
    
    
    
    3,899Inventories, net
    
    
    20,787
    
    
    
    17,959Due from related parties (Note 7)
    
    
    4,692
    
    
    
    1,076Prepaid expenses and other current assets
    
    
    11,345
    
    
    
    14,313Assets of discontinued operations (Note 10)
    
    
    2,949
    
    
    
    2,436Total current assets
    
    
    66,793
    
    
    
    46,370Property and equipment, net
    
    
    6,113
    
    
    
    5,244Goodwill
    
    
    66,398
    
    
    
    66,398Other assets
    
    
    4,366
    
    
    
    5,356Total assets
    
    $
    143,670
    
    
    $
    123,368LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,935
    
    
    $
    16,087Accrued liabilities
    
    
    19,105
    
    
    
    21,671Royalties payable
    
    
    13,468
    
    
    
    8,087Due to related parties (Note 7)
    
    
    10,263
    
    
    
    8,586Liabilities of discontinued operations (Note 10)
    
    
    3,018
    
    
    
    1,720Total current liabilities
    
    
    69,789
    
    
    
    56,151Long-term liabilities
    
    
    669
    
    
    
    786Total liabilities
    
    
    70,458
    
    
    
    56,937Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 300,000,000 shares authorized, 134,765,510
shares issued and outstanding at March 31, 2006 and June 30, 2006
    
    
    1,348
    
    
    
    1,348Additional paid-in capital
    
    
    758,165
    
    
    
    758,506Accumulated deficit
    
    
    (688,730
    )
    
    
    (695,844
    )Accumulated other comprehensive income
    
    
    2,429
    
    
    
    2,421Total stockholders equity
    
    
    73,212
    
    
    
    66,431Total liabilities and stockholders equity
    
    $
    143,670
    
    
    $
    123,368
  Page 3




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (unaudited)
 Three MonthsEndedJune 30,2005
    
    
    2006Net revenues
    
    $
    23,877
    
    
    $
    19,474Costs and expenses:Cost of goods sold
    
    
    18,389
    
    
    
    13,927Research and product development
    
    
    15,675
    
    
    
    7,146Selling and distribution expenses
    
    
    7,034
    
    
    
    5,101General and administrative expenses
    
    
    7,943
    
    
    
    5,435Restructuring expenses
    
    
    2,703
    
    
    
    130Gain on sale of intellectual property
    
    
    
    
    
    
    (9,000
    )Depreciation and amortization
    
    
    2,232
    
    
    
    1,448Total costs and expenses
    
    
    53,976
    
    
    
    24,187Operating (loss)
    
    
    (30,099
    )
    
    
    (4,713
    )Interest (expense) income, net
    
    
    (48
    )
    
    
    117Other income
    
    
    9
    
    
    
    19(Loss) before provision for income taxes
    
    
    (30,138
    )
    
    
    (4,577
    )Provision for income taxes
    
    
    
    
    
    
    (Loss) from continuing operations
    
    
    (30,138
    )
    
    
    (4,577
    )(Loss) from discontinued operations of Reflections
Interactive Ltd, net of tax
    
    
    (2,679
    )
    
    
    (2,537
    )Net (loss)
    
    $
    (32,817
    )
    
    $
    (7,114
    )Basic and diluted net (loss) per share:(Loss) from continuing operations
    
    $
    (0.25
    )
    
    $
    (0.03
    )(Loss) from discontinued operations of Reflections
Interactive Ltd, net of tax
    
    
    (0.02
    )
    
    
    (0.02
    )Net (loss)
    
    $
    (0.27
    )
    
    $
    (0.05
    )Basic and diluted weighted average shares outstanding
    
    
    121,299
    
    
    
    134,765
   Page 4




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Three MonthsEndedJune 30,2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)
    
    $
    (32,817
    )
    
    $
    (7,114
    )Adjustments to reconcile net (loss) to net cash (used in)
operating activities:(Loss) from discontinued operations of Reflections
Interactive Ltd, net
of tax
    
    
    2,679
    
    
    
    2,537Stock-based compensation expense
    
    
    
    
    
    
    341Non-cash restructuring charges
    
    
    267
    
    
    
    Depreciation and amortization
    
    
    2,232
    
    
    
    1,448Gain on sale of intellectual property
    
    
    
    
    
    
    (9,000
    )Recognition of deferred income
    
    
    (19
    )
    
    
    (19
    )Amortization of deferred financing fees
    
    
    190
    
    
    
    115Other miscellaneous adjustments to net (loss)
    
    
    28
    
    
    
    Changes in operating assets and liabilities:Receivables, net
    
    
    27,094
    
    
    
    8,167Inventories, net
    
    
    5,943
    
    
    
    2,822Due from related parties
    
    
    (846
    )
    
    
    3,615Due to related parties
    
    
    428
    
    
    
    (1,678
    )Prepaid expenses and other current assets
    
    
    4,669
    
    
    
    (393
    )Accounts payable
    
    
    (8,639
    )
    
    
    (7,852
    )Accrued liabilities
    
    
    (1,270
    )
    
    
    2,556Royalties payable
    
    
    (189
    )
    
    
    (5,382
    )Long-term liabilities
    
    
    (71
    )
    
    
    (55
    )Other assets
    
    
    119
    
    
    
    768Net cash (used in) continuing operations
    
    
    (202
    )
    
    
    (9,124
    )Net cash (used in) discontinued operations
    
    
    (3,331
    )
    
    
    (3,263
    )Net cash (used in) operating activities
    
    
    (3,533
    )
    
    
    (12,387
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of intellectual property
    
    
    
    
    
    
    6,000Increase in
restricted cash collateralizing letter of credit
    
    
    
    
    
    
    (1,764
    )Purchases of property and equipment
    
    
    (679
    )
    
    
    (24
    )Proceeds from sale of property and equipment
    
    
    6
    
    
    
    Net cash (used in) provided by continuing operations
    
    
    (673
    )
    
    
    4,212Net cash (used in) discontinued operations
    
    
    (166
    )
    
    
    (7
    )Net cash (used in) provided by investing activities
    
    
    (839
    )
    
    
    4,205CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    30
    
    
    
    Payments under capitalized lease obligation
    
    
    (40
    )
    
    
    (88
    )Net cash (used in) financing activities
    
    
    (10
    )
    
    
    (88
    )Effect of exchange rates on cash
    
    
    (21
    )
    
    
    9Net (decrease) in cash
    
    
    (4,403
    )
    
    
    (8,261
    )Cash  beginning of fiscal period
    
    
    9,988
    
    
    
    14,948Cash  end of fiscal period
    
    $
    5,585
    
    
    $
    6,687SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    
    52
    
    
    
    43Income tax refunds
    
    
    1,403
    
    
    
    SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING,INVESTING, AND FINANCING ACTIVITIESReceivable
recorded from sale of intellectual property
    
    
    
    
    
    
    3,000
  Page 5




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND
 COMPREHENSIVE INCOME (LOSS)
 (in thousands)
 (unaudited)
 AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    OtherStock
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance, March 31, 2006
    
    
    134,765
    
    
    $
    1,348
    
    
    $
    758,165
    
    
    $
    (688,730
    )
    
    $
    2,429
    
    
    $
    73,212Comprehensive loss:Net (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,114
    )
    
    
    
    
    
    
    (7,114
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,122
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    341
    
    
    
    
    
    
    
    
    
    
    
    341Balance, June 30, 2006
    
    
    134,765
    
    
    $
    1,348
    
    
    $
    758,506
    
    
    $
    (695,844
    )
    
    $
    2,421
    
    
    $
    66,431
  Page 6




---



##### Table of Contents



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
 Basis of Presentation
  Page 7




---



##### Table of Contents



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 Costs
   Page 8




---



##### Table of Contents



Licenses
  Fair Values of Financial Instruments
  Long-Lived Assets
  Goodwill and Other Intangible Assets
   Income Taxes
  Recent Accounting Pronouncements
    Page 9




---



##### Table of Contents



NOTE 2  STOCK-BASED COMPENSATION
      Three MonthEndedJune
30, 2006Research and product development
    
    
    
    
    
    $
    39Selling and distribution expenses
    
    
    
    
    
    
    40General and administrative expenses
    
    
    
    
    
    
    262Total stock-based compensation expense
    
    
    
    
    
    $
    341
 Page 10




---



##### Table of Contents



Three Months EndedJune 30,2005
    
    2006Weighted average risk-free interest rate
    
    
    3.75
    %
    
    
    n/aAnticipated volatility
    
    
    92
    %
    
    
    n/aDividend yield
    
    
    0
    %
    
    
    n/aRemaining life in years
    
    
    4
    
    
    
    n/a
   Three MonthsEndedJune 30,2005(Loss) from continuing operations:Basic and diluted  as reported
    
    $
    (30,138
    )Add: Stock-based employee compensation expense
included in reported (loss) from continuing
operations, net of related tax effects
    
    
    267Less: Fair value of stock-based employee
compensation expense, net of related tax effects
    
    
    (450
    )Basic and diluted  pro forma (loss) from
continuing operations
    
    $
    (30,321
    )(Loss) from continuing operations per share:Basic and diluted  as reported
    
    $
    (0.25
    )Basic and diluted  pro forma
    
    $
    (0.25
    )
 Page 11




---



##### Table of Contents



Three MonthsEndedJune 30,2005Net (loss):Basic and diluted  as reported
    
    $
    (32,817
    )Add: Stock-based employee compensation expense
included in reported net (loss), net of related tax
effects
    
    
    267Less: Fair value of stock-based employee
compensation expense, net of related tax effects
    
    
    (450
    )Basic and diluted  pro forma net (loss)
    
    $
    (33,000
    )Net (loss) per share:Basic and diluted  as reported
    
    $
    (0.27
    )Basic and diluted  pro forma
    
    $
    (0.27
    )
  Weighted
    
    
    Weighted AverageAverage
    
    
    RemainingShares
    
    
    Exercise Price

    


    
    Contractual Term(in thousands)
    
    
    
    
    
    
    (years)Options outstanding at March 31, 2006
    
    
    7,518
    
    
    $
    7.80Granted
    
    
    
    
    
    
    0.00Exercised
    
    
    
    
    
    
    0.00Forfeited
    
    
    (90
    )
    
    
    2.39Expired
    
    
    (730
    )
    
    
    18.40Options outstanding at June 30, 2006
    
    
    6,698
    
    
    $
    6.71
    
    
    
    6.1Options exercisable at June 30, 2006
    
    
    5,057
    
    
    $
    8.09
    
    
    
    5.5
  NOTE 3  NET (LOSS) PER SHARE
  Three MonthsEndedJune 30,2005
    
    
    2006Basic and diluted earnings per share calculation:(Loss) from continuing operations
    
    $
    (30,138
    )
    
    $
    (4,577
    )(Loss) from discontinued operations of Reflections
Interactive Ltd, net of tax
    
    
    (2,679
    )
    
    
    (2,537
    )Net (loss)
    
    $
    (32,817
    )
    
    $
    (7,114
    )Basic and diluted weighted average shares outstanding
    
    
    121,299
    
    
    
    134,765Basic and diluted (loss) from continuing operation per
share
    
    $
    (0.25
    )
    
    $
    (0.03
    )Basic and diluted (loss) from discontinued operations
of Reflections Interactive Ltd, net of tax, per share
    
    
    (0.02
    )
    
    
    (0.02
    )Basic and diluted net (loss) per share
    
    $
    (0.27
    )
    
    $
    (0.05
    )
  NOTE 4  CONCENTRATION OF CREDIT RISK
  For the 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
    %
 Page 12




---



##### Table of Contents



For the three months endedJune 30,
    
    June 30,2006
    
    2006% of Accounts Receivable
    
    % of Net RevenuesCustomer 1
    
    
    61
    %
    
    
    8
    %Customer 2
    
    
    31
    %
    
    
    16
    %92
    %
    
    
    24
    %
   NOTE 5  BALANCE SHEET DETAILS
 Inventories
  March 31,
    
    
    June 30,2006
    
    
    2006Finished goods, net
    
    $
    18,608
    
    
    $
    15,784Return inventory, net
    
    
    2,106
    
    
    
    2,145Raw materials, net
    
    
    73
    
    
    
    30$
    20,787
    
    
    $
    17,959
 Prepaid Expenses and Other Current Assets
  March 31,
    
    
    June 30,2006
    
    
    2006Licenses short-term
    
    $
    5,683
    
    
    $
    6,760Short-term receivable for proceeds from sale of intellectual property
    
    
    
    
    
    
    3,000Royalties receivable
    
    
    2,118
    
    
    
    1,531Prepaid insurance
    
    
    872
    
    
    
    680Atari name license
    
    
    305
    
    
    
    Other prepaid expenses and current assets
    
    
    2,367
    
    
    
    2,342$
    11,345
    
    
    $
    14,313
 Accrued Liabilities
  March 31,
    
    
    June 30,2006
    
    
    2006Accounts receivable credit balances (Note 4)
    
    $
    31
    
    
    $
    7,895Accrued distribution services
    
    
    3,713
    
    
    
    3,632Accrued salary and related costs
    
    
    1,943
    
    
    
    2,117Accrued professional fees and other services
    
    
    1,665
    
    
    
    1,783Accrued third party development expenses
    
    
    1,411
    
    
    
    1,225Restructuring reserve (Note 11)
    
    
    2,163
    
    
    
    1,008Accrued advertising
    
    
    3,772
    
    
    
    932
 Page 13




---



##### Table of Contents



March 31,
    
    
    June 30,2006
    
    
    2006Accrued freight and handling fees
    
    
    1,029
    
    
    
    392Deferred income
    
    
    381
    
    
    
    331Other
    
    
    2,997
    
    
    
    2,356$
    19,105
    
    
    $
    21,671
 NOTE 6  INCOME TAXES
   NOTE 7  RELATED PARTY TRANSACTIONS
 Relationship with IESA
     Page 14




---



##### Table of Contents



Summary of Related Party Transactions
  Three MonthsEndedJune 30,Income (expense)
    
    2005
    
    
    2006Net revenues
    
    $
    23,877
    
    
    $
    19,474Related party activity:Royalty income and license income (1)
    
    
    328
    
    
    
    124Sale of goods
    
    
    111
    
    
    
    203Quality and assurance testing and other services
    
    
    375
    
    
    
    832Total related party net revenues
    
    
    814
    
    
    
    1,159Cost of goods sold
    
    
    (18,389
    )
    
    
    (13,927
    )Related party activity:Distribution fee for Humongous, Inc. product
    
    
    
    
    
    
    (1,213
    )Royalty expense (2)
    
    
    (617
    )
    
    
    (1,377
    )Total related party cost of goods sold
    
    
    (617
    )
    
    
    (2,590
    )Research and product development
    
    
    (15,675
    )
    
    
    (7,146
    )Related party activity:Development expenses (3)
    
    
    (4,043
    )
    
    
    (3,297
    )Other miscellaneous development services
    
    
    (22
    )
    
    
    5Total related party research and product development
    
    
    (4,065
    )
    
    
    (3,292
    )Selling and distribution expenses
    
    
    (7,034
    )
    
    
    (5,101
    )Related party activity:Miscellaneous purchase of services
    
    
    (8
    )
    
    
    Total related party selling and distribution expenses
    
    
    (8
    )
    
    
    General and administrative expenses
    
    
    (7,943
    )
    
    
    (5,435
    )Related party activity:Management fee revenue
    
    
    750
    
    
    
    780Management fee expense
    
    
    (750
    )
    
    
    (750
    )Office rental and other services (4)
    
    
    (93
    )
    
    
    46Total related party general and administrative expenses
    
    
    (93
    )
    
    
    76Restructuring expenses
    
    
    (2,703
    )
    
    
    (130
    )Related party activity:Related party rent expense (4)
    
    
    (293
    )
    
    
    (116
    )Total related party restructuring expenses
    
    
    (293
    )
    
    
    (116
    )Loss from discontinued operations of Reflections Interactive Ltd,
net of tax
    
    
    (2,679
    )
    
    
    (2,537
    )Related party activity:Royalty income
    
    
    215
    
    
    
    (392
    )Total related party loss from discontinued operations
    
    
    215
    
    
    
    (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 Page 15




---



##### Table of Contents



returns. Additionally, we pass back to Atari Europe worldwide licensing
income received by us, on which Atari Europe 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
the income pass back as a reduction of third party licensing income.(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.    March 31,
    
    
    June 30,2006
    
    
    2006Due
from/(Due to)  currentIESA (1)
    
    $
    (743
    )
    
    $
    (744
    )Atari Europe (2)
    
    
    4,054
    
    
    
    (3,483
    )Eden Studios (3)
    
    
    (2,235
    )
    
    
    (2,227
    )Paradigm (3)
    
    
    (721
    )
    
    
    (44
    )Atari Melbourne House (3)
    
    
    (434
    )
    
    
    (1,330
    )Humongous, Inc. (4)
    
    
    (2,341
    )
    
    
    (718
    )Atari Interactive (5)
    
    
    (3,704
    )
    
    
    861Other miscellaneous net receivables
    
    
    553
    
    
    
    175Net due to
related parties  current
    
    
    (5,571
    )
    
    
    (7,510
    )Due
from/(Due to)  long-termAtari Interactive (see Atari Licensebelow)
    
    
    
    
    
    
    (248
    )Net due to related parties
    
    $
    (5,571
    )
    
    $
    (7,758
    )
  March 31,
    
    
    June 30,2006
    
    
    2006Due from related parties
    
    $
    4,692
    
    
    $
    1,076Due to related parties
    
    
    (10,263
    )
    
    
    (8,586
    )Net due to
related parties  current
    
    $
    (5,571
    )
    
    $
    (7,510
    )
 
 (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. Page 16




---



##### Table of Contents



(3)
    
    Represents net payables for related party development activities.(4)
    
    Represents primarily distribution fees owed to Humongous, Inc., a related party,
related to sale of their product.(5)
    
    Comprised primarily of payables related to royalty expense from our distribution
agreement with IESA relating to properties owned or licensed by Atari Interactive, offset
primarily by receivables related to management fee revenue earned from Atari Interactive. Atari Name License
  Related Party Transactions with Employees or Former Employees
 
    
    Compromise Agreement with Martin Lee Edmondson
 Driver: Parallel Lines
 
    
    Purchase of iFone by Glu Mobile
  NOTE 8  COMMITMENTS AND CONTINGENCIES
 Contractual Obligations
  Page 17




---



##### Table of Contents



Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseThrough
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    TotalJune 30, 2007
    
    $
    1,052
    
    
    $
    6,448
    
    
    $
    2,411
    
    
    $
    327
    
    
    $
    10,238June 30, 2008
    
    
    100
    
    
    
    730
    
    
    
    3,560
    
    
    
    142
    
    
    
    4,532June 30, 2009
    
    
    75
    
    
    
    
    
    
    
    3,080
    
    
    
    3
    
    
    
    3,158June 30, 2010
    
    
    75
    
    
    
    
    
    
    
    3,080
    
    
    
    
    
    
    
    3,155June 30, 2011
    
    
    
    
    
    
    
    
    
    
    3,080
    
    
    
    
    
    
    
    3,080Thereafter
    
    
    
    
    
    
    
    
    
    
    28,117
    
    
    
    
    
    
    
    28,117Total
    
    $
    1,302
    
    
    $
    7,178
    
    
    $
    43,328
    
    
    $
    472
    
    
    $
    52,280
 
 (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 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 $1.7 million of sublease income to be received from fiscal
2007 through fiscal 2009. Rent expense and sublease income for the three months
ended June 30, 2005 and 2006 is as follows (in thousands): Three months endedJune 30,2005
    
    
    2006Rent expense
    
    $
    1,308
    
    
    $
    750Sublease income
    
    
    (129
    )
    
    
    (116
    )Total
    
    $
    1,179
    
    
    $
    634
 
    
    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. 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 have entered into 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 June 30, 2006, the net book value of the assets was $0.4 million, net of
accumulated depreciation of $0.4 million. Page 18




---



##### Table of Contents



Litigation
  Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II , and
Chicago West Pullman LLC
     Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  Page 19




---



##### Table of Contents



Rafael Curulla v. SAS Atari Europe and Atari, Inc.
  Thomas Licensing, LLC v. Atari Interactive, Inc. and Atari, Inc.
   Ernst & Young, Inc. v. Atari, Inc.
  NOTE 9  DEBT
 Credit Facilities
 HSBC Loan and Security Agreement
  Page 20




---



##### Table of Contents



NOTE 10  DISCONTINUED OPERATIONS
 Humongous Discontinued Operations Treatment
  Sale of Reflections
  Driver Driver Driver: Parallel
Lines
 Balance Sheets
  March 31, 2006
    
    
    June 30, 2006Assets:Cash
    
    $
    438
    
    
    $
    244Inventory, net
    
    
    574
    
    
    
    385Prepaid expenses and other
current assets
    
    
    1,222
    
    
    
    1,066Property and equipment, net
    
    
    251
    
    
    
    251Other non-current assets
    
    
    464
    
    
    
    490Total assets
    
    $
    2,949
    
    
    $
    2,436Liabilities:Accounts payable
    
    $
    874
    
    
    $
    499Accrued liabilities
    
    
    731
    
    
    
    509Royalty payable
    
    
    1,413
    
    
    
    706Due to related party
    
    
    
    
    
    
    6Total liabilities
    
    $
    3,018
    
    
    $
    1,720
 Results of Operations
  Page 21




---



##### Table of Contents



Three MonthsEndedJune 30,2005
    
    2006Net revenues
    
    $
    584
    
    
    $
    308(Loss) from discontinued operations, net of tax
    
    $
    (2,679
    )
    
    $
    (2,537
    )
 NOTE 11  RESTRUCTURING
  Three Months EndedJune 30,2005
    
    
    2006Severance and retention expenses
    
    $
    1,850
    
    
    $
    Lease related costs
    
    
    394
    
    
    
    112Modification of stock options
    
    
    267
    
    
    
    Miscellaneous costs
    
    
    192
    
    
    
    18Total
    
    $
    2,703
    
    
    $
    130
   Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2006
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    net
    
    
    June 30, 2006Short termSeverance and retention
    
    $
    1,886
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,065
    )
    
    $
    821Lease related costs
    
    
    245
    
    
    
    112
    
    
    
    40
    
    
    
    (235
    )
    
    
    162Miscellaneous costs
    
    
    32
    
    
    
    18
    
    
    
    
    
    
    
    (25
    )
    
    
    25Total
    
    
    2,163
    
    
    
    130
    
    
    
    40
    
    
    
    (1,325
    )
    
    
    1,008Long termSeverance and retention
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease related costs
    
    
    56
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    16Total
    
    
    56
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    16Total
    
    $
    2,219
    
    
    $
    130
    
    
    $
    
    
    
    $
    (1,325
    )
    
    $
    1,024
 NOTE 12  SALE OF INTELLECTUAL PROPERTY
 Stuntman
 Page 22




---



##### Table of Contents



NOTE 13  OPERATIONS BY REPORTABLE SEGMENTS
      Publishing
    
    Distribution
    
    Corporate
    
    TotalThree months ended June 30, 2005:Net revenues
    
    $
    12,437
    
    
    $
    11,440
    
    
    $
    
    
    
    $
    23,877Operating (loss) (1)
    
    
    (18,036
    )
    
    
    (728
    )
    
    
    (8,632
    )
    
    
    (27,396
    )Depreciation and amortization
    
    
    (497
    )
    
    
    
    
    
    
    (1,735
    )
    
    
    (2,232
    )Interest (expense), net
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (48
    )Three months ended June 30, 2006:Net revenues
    
    $
    9,764
    
    
    $
    9,710
    
    
    $
    
    
    
    $
    19,474Operating income (loss) (1)
    
    
    1,158
    
    
    
    759
    
    
    
    (6,500
    )
    
    
    (4,583
    )Depreciation and amortization
    
    
    (202
    )
    
    
    
    
    
    
    (1,246
    )
    
    
    (1,448
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    117
 
 (1)
    
    Operating loss for the Corporate segment for the three months ended June 30, 2005 and
2006, excludes restructuring charges of $2.7 million and $0.1 million, respectively.
Including restructuring charges, total operating loss for the three months ended June 30,
2005 and 2006 is $30.1 million and $4.7 million, respectively. 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, 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
    Driver
 Business and Operating Segments
  Page 24




---



##### Table of Contents



Key Challenges
   Critical Accounting Policies
   Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
   Page 25




---



##### Table of Contents



Liquidity and Capital
Resources
 Inventories
  Research and product development costs
   Licenses
  Income taxes
  Page 26




---



##### Table of Contents



Related party transactions
  Results of operations
 Three months ended June 30, 2005 versus the three months ended June 30, 2006
 Condensed
Consolidated Statements of Operations (dollars in thousands):
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net

    
    
    Ended
    
    
    Net


    (Decrease)/June 30,
    
    
    Revenues
    
    
    June 30,
    
    
    Revenues


    Increase2005
    
    
        
    
    
    2006
    
    
        
    
    
    $
    
    
    %Net revenues
    
    $
    23,877
    
    
    
    100.0
    %
    
    $
    19,474
    
    
    
    100.0
    %
    
    $
    (4,403
    )
    
    
    (18.4
    )%Costs and expenses:Cost of goods sold
    
    
    18,389
    
    
    
    77.0
    %
    
    
    13,927
    
    
    
    71.5
    %
    
    
    (4,462
    )
    
    
    (24.3
    )%Research and product development
    
    
    15,675
    
    
    
    65.6
    %
    
    
    7,146
    
    
    
    36.7
    %
    
    
    (8,529
    )
    
    
    (54.4
    )%Selling and distribution expenses
    
    
    7,034
    
    
    
    29.5
    %
    
    
    5,101
    
    
    
    26.2
    %
    
    
    (1,933
    )
    
    
    (27.5
    )%General and administrative
expenses
    
    
    7,943
    
    
    
    33.4
    %
    
    
    5,435
    
    
    
    27.9
    %
    
    
    (2,508
    )
    
    
    (31.6
    )%Restructuring expenses
    
    
    2,703
    
    
    
    11.3
    %
    
    
    130
    
    
    
    0.7
    %
    
    
    (2,573
    )
    
    
    (95.2
    )%Gain on sale of intellectual
property
    
    
    
    
    
    
    0.0
    %
    
    
    (9,000
    )
    
    
    (46.2
    )%
    
    
    9,000
    
    
    
    100.0
    %Depreciation and amortization
    
    
    2,232
    
    
    
    9.3
    %
    
    
    1,448
    
    
    
    7.4
    %
    
    
    (784
    )
    
    
    (35.1
    )%Total costs and expenses
    
    
    53,976
    
    
    
    226.1
    %
    
    
    24,187
    
    
    
    124.2
    %
    
    
    (29,789
    )
    
    
    (55.2
    )%Operating (loss)
    
    
    (30,099
    )
    
    
    (126.1
    )%
    
    
    (4,713
    )
    
    
    (24.2
    )%
    
    
    (25,386
    )
    
    
    (84.3
    )%Interest (expense) income, net
    
    
    (48
    )
    
    
    (0.1
    )%
    
    
    117
    
    
    
    0.6
    %
    
    
    (165
    )
    
    
    (343.8
    )%Other income
    
    
    9
    
    
    
    0.0
    %
    
    
    19
    
    
    
    0.1
    %
    
    
    10
    
    
    
    111.1
    %(Loss) before provision for
income
taxes
    
    
    (30,138
    )
    
    
    (126.2
    )%
    
    
    (4,577
    )
    
    
    (23.5
    )%
    
    
    (25,561
    )
    
    
    (84.8
    )%Provision for income taxes
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %(Loss) from continuing operations
    
    
    (30,138
    )
    
    
    (126.2
    )%
    
    
    (4,577
    )
    
    
    (23.5
    )%
    
    
    (25,561
    )
    
    
    (84.8
    )%(Loss) from discontinued
operations of
Reflections Interactive Ltd, net
of tax
    
    
    (2,679
    )
    
    
    (11.2
    )%
    
    
    (2,537
    )
    
    
    (13.0
    )%
    
    
    (142
    )
    
    
    (5.3
    )%Net (loss)
    
    $
    (32,817
    )
    
    
    (137.4
    )%
    
    $
    (7,114
    )
    
    
    (36.5
    )%
    
    $
    (25,703
    )
    
    
    (78.3
    )%
 Net Revenues
 Net Revenues by Segment (in thousands):
 Three MonthsEndedJune 30,2005
    
    
    2006
    
    
    (Decrease)Publishing
    
    $
    12,437
    
    
    $
    9,764
    
    
    $
    (2,673
    )Distribution
    
    
    11,440
    
    
    
    9,710
    
    
    
    (1,730
    )Total
    
    $
    23,877
    
    
    $
    19,474
    
    
    $
    (4,403
    )
 Page 27




---



##### Table of Contents



Publishing Sales Platform Mix
 Three MonthsEndedJune 30,2005
    
    2006PC
    
    
    61.1
    %
    
    
    41.1
    %PlayStation 2
    
    
    16.8
    %
    
    
    19.0
    %PSP
    
    
    0.0
    %
    
    
    18.4
    %Game Boy Advance
    
    
    4.9
    %
    
    
    12.5
    %Plug and Play
    
    
    0.0
    %
    
    
    5.4
    %Nintendo DS
    
    
    0.6
    %
    
    
    1.5
    %Xbox
    
    
    5.5
    %
    
    
    1.1
    %GameCube
    
    
    10.7
    %
    
    
    1.0
    %PlayStation
    
    
    0.4
    %
    
    
    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 decreased by $1.1 million from the comparable prior period
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 $15.37 in the prior comparable quarter to $15.69 in the current period. The increased
ASP is driven by the current period inclusion of PSP titles, with an ASP of $29.22.
However, this is partially offset by a decrease in the ASP for PlayStation 2, Nintendo DS,
and GameCube product from the prior comparable period.
  
    
    the overall decrease in product sales of third party publishers, offset by
    
    current period distribution net revenues from product sales of Humongous, Inc. (included
in publishing net revenues in the prior period before Humongous was sold to our majority
stockholder, IESA, in August 2005).
 Cost of Goods Sold
  
    
    higher average sales price for the current period as compared to the prior period, and
    
    improved margins on our third party product sales, which includes Humongous, Inc.
product in the current period.
 Research and Product Development Expenses
  Page 28




---



##### Table of Contents




    
    decreased spending with external developers due to fewer projects in development,
    
    decreased spending at our related party development studios due to the sale of our
Stuntmanfranchise in development at Paradigm Entertainment, and
    
    decreased salaries and other overhead of $1.3 million due to the closure of the Beverly
and Santa Monica publishing studios during fiscal 2006 and related personnel reductions.
  Selling and Distribution Expenses
  
    
    decreased spend on advertising of $1.1 million, and
    
    savings in salaries and related overhead costs due to reduced headcount resulting from
studio closure and personnel reductions.
 General and Administrative Expenses
  
    
    a reduction in salaries of $2.0 million due to studio closures and other personnel
reductions, as well as savings in rent and other overhead costs, and
    
    recognition of income of $0.6 million related to a litigation settlement, offset by
    
    recognition of expense of $0.3 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)).
 Gain
on Sale of Intellectual Property
 Stuntman
 Restructuring Expenses
  Depreciation and Amortization
  
    
    prior year inclusion of depreciation expense for assets from the Beverly and Santa
Monica studios which were written off later in fiscal 2006,
    
    assets becoming fully depreciated during the year, and
 Page 29




---



##### Table of Contents




    
    decrease in Atari name license amortization due to a change in the expected future
earnings on which this expense is based.
 Liquidity and Capital Resources
 Overview
   Driver
 Cash Flows
 (in thousands)
 March 31,
    
    June 30,2006
    
    2006Cash
    
    $
    14,948
    
    
    $
    6,687Working capital deficit
    
    $
    (2,996
    )
    
    $
    (9,781
    )
 Three Months EndedJune 30,2005
    
    
    2006Cash (used in) operating activities
    
    $
    (3,533
    )
    
    $
    (12,387
    )Cash (used in) provided by investing activities
    
    
    (839
    )
    
    
    4,205Cash (used in) financing activities
    
    
    (10
    )
    
    
    (88
    )Effect of exchange rates on cash
    
    
    (21
    )
    
    
    9Net (decrease) in cash
    
    $
    (4,403
    )
    
    $
    (8,261
    )
  Stuntman
  Page 30




---



##### Table of Contents



Selected Balance Sheet Accounts
 Receivables, net
  Prepaid Expenses and Other Current Assets
  Due from Related Parties/Due to Related Parties
  Accounts Payable and Royalties Payable
  Credit Facilities
 HSBC Loan and Security Agreement
  Page 31




---



##### Table of Contents



Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    TotalJune 30, 2007
    
    $
    1,052
    
    
    $
    6,448
    
    
    $
    2,411
    
    
    $
    327
    
    
    $
    10,238June 30, 2008
    
    
    100
    
    
    
    730
    
    
    
    3,560
    
    
    
    142
    
    
    
    4,532June 30, 2009
    
    
    75
    
    
    
    
    
    
    
    3,080
    
    
    
    3
    
    
    
    3,158June 30, 2010
    
    
    75
    
    
    
    
    
    
    
    3,080
    
    
    
    
    
    
    
    3,155June 30, 2011
    
    
    
    
    
    
    
    
    
    
    3,080
    
    
    
    
    
    
    
    3,080Thereafter
    
    
    
    
    
    
    
    
    
    
    28,117
    
    
    
    
    
    
    
    28,117Total
    
    $
    1,302
    
    
    $
    7,178
    
    
    $
    43,328
    
    
    $
    472
    
    
    $
    52,280
 
 (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 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 $1.7 million of sublease income to be received from fiscal 2007
through fiscal 2009.     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. 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 at June 30, 2006.(4)
    
    We have entered into 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 June 30,
2006, the net book value of the assets was $0.4 million, net of accumulated
depreciation of $0.4 million. Recent Accounting Pronouncements
    Page 32




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign Currency Exchange Rates
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
   Page 33




---



##### Table of Contents



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 34




---



##### Table of Contents



Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  Rafael Curulla v. SAS Atari Europe and Atari, Inc.
  Thomas Licensing, LLC v. Atari Interactive, Inc. and Atari, Inc.
   Page 35




---



##### Table of Contents



Ernst & Young, Inc. v. Atari, Inc.
  
 Item 6. Exhibits
  31.1
    
    Chief Executive Officer and Acting Chief Financial Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Chief Executive Officer and Acting Chief Financial Officer Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Page 36




---



##### Table of Contents



SIGNATURE
  ATARI, INC.By:
    
    /s/ Bruno BonnellBruno BonnellChief Executive Officer, Chief Creative Officer, Acting
  Chief Financial Officer and Chairman
(Principal Executive Officer and Duly
Authorized Officer)
  Page 37




---



##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description31.1
    
    Chief Executive Officer and Acting Chief Financial Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Chief Executive Officer and Acting Chief Financial Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 Page 38