##### 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 September 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
    
    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




---



##### 



ATARI, INC. AND SUBSIDIARIES
SEPTEMBER 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 September 30, 2006
    
    
    3Condensed Consolidated Statements of Operations for the Three Months and Six
Months Ended September 30, 2005 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 2005 and 2006
    
    
    5Condensed Consolidated Statement of Stockholders Equity and Comprehensive Loss
for the Six Months Ended September 30, 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 4. Submission of Matters to a Vote of Security Holders
    
    
    46Item 5. Other Information
    
    
    47Item 6. Exhibits
    
    
    48Signature
    
    
    49EX-10.1: ASSET PURCHASE AGREEMENTEX-10.2: EMPLOYMENT AGREEMENT WITH DAVID R. PIERCEEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: 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,
    
    
    September 30,2006
    
    
    2006ASSETSCurrent assets:Cash
    
    $
    14,948
    
    
    $
    10,224Receivables, net of allowances of $30,918 and $19,249, at March 31, 2006
and September 30, 2006, respectively
    
    
    12,072
    
    
    
    7,239Inventories, net
    
    
    20,787
    
    
    
    16,756Due from related parties (Note 7)
    
    
    4,692
    
    
    
    2,579Prepaid expenses and other current assets
    
    
    11,345
    
    
    
    13,601Assets of discontinued operations (Note 11)
    
    
    2,949
    
    
    
    1,356Total current assets
    
    
    66,793
    
    
    
    51,755Property and equipment, net
    
    
    6,113
    
    
    
    3,935Goodwill
    
    
    66,398
    
    
    
    54,129Acquired intangible assets
    
    
    
    
    
    
    695Other assets
    
    
    4,366
    
    
    
    5,736Total assets
    
    $
    143,670
    
    
    $
    116,250LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,935
    
    
    $
    16,764Accrued liabilities
    
    
    19,105
    
    
    
    21,676Royalties payable
    
    
    13,468
    
    
    
    3,439Due to related parties (Note 7)
    
    
    10,263
    
    
    
    5,175Liabilities of discontinued operations (Note 11)
    
    
    3,018
    
    
    
    300Total current liabilities
    
    
    69,789
    
    
    
    47,354Due to related parties  long term (Note 7)
    
    
    
    
    
    
    803Long-term liabilities
    
    
    669
    
    
    
    979Total liabilities
    
    
    70,458
    
    
    
    49,136Commitments 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 and
134,779,670 shares issued and outstanding at March 31, 2006 and
September
30, 2006, respectively
    
    
    1,348
    
    
    
    1,348Additional paid-in capital
    
    
    758,165
    
    
    
    758,871Accumulated deficit
    
    
    (688,730
    )
    
    
    (695,533
    )Accumulated other comprehensive income
    
    
    2,429
    
    
    
    2,428Total stockholders equity
    
    
    73,212
    
    
    
    67,114Total liabilities and stockholders equity
    
    $
    143,670
    
    
    $
    116,250
  Page 3




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Net revenues
    
    $
    38,358
    
    
    $
    28,588
    
    
    $
    62,235
    
    
    $
    48,062Costs, expenses, and income:Cost of goods sold
    
    
    24,780
    
    
    
    15,251
    
    
    
    43,169
    
    
    
    29,178Research and product development
    
    
    15,288
    
    
    
    7,321
    
    
    
    30,963
    
    
    
    14,467Selling and distribution expenses
    
    
    7,751
    
    
    
    9,317
    
    
    
    14,785
    
    
    
    14,418General and administrative expenses
    
    
    8,221
    
    
    
    5,680
    
    
    
    16,164
    
    
    
    11,115Restructuring expenses
    
    
    2,227
    
    
    
    204
    
    
    
    4,930
    
    
    
    334Gain on sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,000
    )Gain on sale of development studio assets
    
    
    
    
    
    
    (885
    )
    
    
    
    
    
    
    (885
    )Depreciation and amortization
    
    
    2,163
    
    
    
    1,323
    
    
    
    4,395
    
    
    
    2,771Total costs, expenses, and income
    
    
    60,430
    
    
    
    38,211
    
    
    
    114,406
    
    
    
    62,398Operating (loss)
    
    
    (22,072
    )
    
    
    (9,623
    )
    
    
    (52,171
    )
    
    
    (14,336
    )Interest (expense) income, net
    
    
    (297
    )
    
    
    116
    
    
    
    (345
    )
    
    
    233Other (expense) income
    
    
    (245
    )
    
    
    15
    
    
    
    (236
    )
    
    
    34(Loss) before (benefit from) income taxes
    
    
    (22,614
    )
    
    
    (9,492
    )
    
    
    (52,752
    )
    
    
    (14,069
    )(Benefit from) income taxes
    
    
    (283
    )
    
    
    
    
    
    
    (283
    )
    
    
    (Loss) from continuing operations
    
    
    (22,331
    )
    
    
    (9,492
    )
    
    
    (52,469
    )
    
    
    (14,069
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (2,880
    )
    
    
    9,803
    
    
    
    (5,559
    )
    
    
    7,266Net (loss) income
    
    $
    (25,211
    )
    
    $
    311
    
    
    $
    (58,028
    )
    
    $
    (6,803
    )Basic and diluted net (loss) income per share:(Loss) from continuing operations
    
    $
    (0.18
    )
    
    $
    (0.07
    )
    
    $
    (0.43
    )
    
    $
    (0.10
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (0.02
    )
    
    
    0.07
    
    
    
    (0.04
    )
    
    
    0.05Net (loss) income
    
    $
    (0.20
    )
    
    $
    0.00
    
    
    $
    (0.47
    )
    
    $
    (0.05
    )Basic weighted average shares outstanding
    
    
    123,773
    
    
    
    134,772
    
    
    
    122,543
    
    
    
    134,769Diluted weighted average shares outstanding
    
    
    123,773
    
    
    
    134,782
    
    
    
    122,543
    
    
    
    134,769
   Page 4




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six MonthsEndedSeptember 30,2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)
    
    $
    (58,028
    )
    
    $
    (6,803
    )Adjustments to reconcile net (loss) to net cash (used in) operating activities:Loss from discontinued operations of Reflections Interactive Ltd, net of tax
    
    
    5,559
    
    
    
    4,206Gain 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
    
    
    
    
    
    
    698Loss on sale of IESA shares
    
    
    239
    
    
    
    Non-cash restructuring charges
    
    
    701
    
    
    
    Depreciation and amortization
    
    
    4,395
    
    
    
    2,771Amortization of deferred financing fees
    
    
    282
    
    
    
    115Gain on sale of property and equipment
    
    
    
    
    
    
    (74
    )Other miscellaneous adjustments to net (loss)
    
    
    165
    
    
    
    (38
    )Changes in operating assets and liabilities:Receivables, net
    
    
    26,135
    
    
    
    4,826Inventories, net
    
    
    (9,095
    )
    
    
    4,024Due from related parties
    
    
    (3,452
    )
    
    
    2,112Due to related parties
    
    
    9,162
    
    
    
    (5,088
    )Prepaid expenses and other current assets
    
    
    4,751
    
    
    
    (615)Accounts payable
    
    
    6,924
    
    
    
    (7,781
    )Accrued liabilities
    
    
    (1,758
    )
    
    
    964Royalties payable
    
    
    (1,190
    )
    
    
    (10,030
    )Long-term liabilities
    
    
    (135
    )
    
    
    443Other assets
    
    
    703
    
    
    
    386Net cash (used in) continuing operating activities
    
    
    (14,642
    )
    
    
    (28,641
    )Net cash (used in) discontinued operations
    
    
    (8,549
    )
    
    
    (5,514
    )Net cash (used in) operating activities
    
    
    (23,191
    )
    
    
    (34,155
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of intellectual property
    
    
    
    
    
    
    9,000Increase in restricted cash 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
    
    
    
    
    
    
    (350
    )Purchases of property and equipment
    
    
    (1,565
    )
    
    
    (455
    )Proceeds from sale of property and equipment
    
    
    6
    
    
    
    Net cash provided by continuing investing activities
    
    
    8,492
    
    
    
    7,981Net cash (used in) provided by discontinued operations
    
    
    (193
    )
    
    
    21,593Net cash provided by investing activities
    
    
    8,299
    
    
    
    29,574CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    7,268
    
    
    
    Proceeds from exercise of stock options
    
    
    115
    
    
    
    8Payments under capitalized lease obligation
    
    
    (90
    )
    
    
    (160
    )Net cash provided by (used in) continuing financing activities
    
    
    7,293
    
    
    
    (152
    )Effect of foreign exchange rates on cash
    
    
    (18
    )
    
    
    9Net (decrease) in cash
    
    
    (7,617
    )
    
    
    (4,724
    )Cash  beginning of fiscal period
    
    
    9,988
    
    
    
    14,948Cash  end of fiscal period
    
    $
    2,371
    
    
    $
    10,224
  Page 5




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(unaudited)
 SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    125
    
    
    $
    43Income 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
    
    $
    
    
    
    $
    200Additional consideration accrued for purchase of acquired intangible assets
    
    $
    
    
    
    $
    345Consideration accrued for purchase of capitalized licenses
    
    $
    2,060
    
    
    $
    1,887Receivable from third party for sale of property and equipment
    
    $
    
    
    
    $
    179Receipt of IESA stock for prepayment of Humongous, Inc. inventory and other costs
    
    $
    1,972
    
    
    $
    Issuance of 1,557,668 shares of common stock in lieu of partial royalty payment
    
    $
    2,113
    
    
    $
    Sale of Humongous Entertainment in exchange for shares of IESA stock
    
    $
    8,318
    
    
    $
    Issuance of 6,145,051 shares of common stock in lieu of payment of net related
party payables
    
    $
    7,988
    
    
    $
    
  Page 6




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE 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)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,803
    )
    
    
    
    
    
    
    (6,803
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,804
    )Exercise of stock options
    
    
    14
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    698Balance, September 30, 2006
    
    
    134,779
    
    
    $
    1,348
    
    
    $
    758,871
    
    
    $
    (695,533
    )
    
    $
    2,428
    
    
    $
    67,114
  Page 7




---



##### 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
     Basis of Presentation
  Page 8




---



##### 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 9




---



##### Table of Contents



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




---



##### Table of Contents



Recent Accounting Pronouncements
         Page 11




---



##### Table of Contents



NOTE 2
 STOCK-BASED COMPENSATION
      Three Months
    
    Six MonthsEnded
    
    EndedSeptember 30, 2006
    
    September 30, 2006Research and product development
    
    $
    70
    
    
    $
    109Selling and distribution expenses
    
    
    (11
    )
    
    
    29General and administrative expenses
    
    
    298
    
    
    
    560
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006Weighted average risk-free interest rate
    
    
    4.00
    %
    
    
    4.60
    %
    
    
    4.00
    %
    
    
    4.60
    %Anticipated volatility
    
    
    97
    %
    
    
    85
    %
    
    
    97
    %
    
    
    85
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Remaining life in years
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4
 Page 12




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005(Loss) from continuing operations:Basic and diluted  as reported
    
    $
    (22,331
    )
    
    $
    (52,469
    )Add: Stock-based employee compensation expense included
in reported (loss) from continuing operations, net of
related tax effects
    
    
    434
    
    
    
    701Less: Fair value of stock-based employee compensation
expense, net of related tax effects
    
    
    (518
    )
    
    
    (968
    )Basic and diluted  pro forma (loss) from continuing operations
    
    $
    (22,415
    )
    
    $
    (52,736
    )(Loss) from continuing operations per share:Basic and
diluted  as reported
    
    $
    (0.18
    )
    
    $
    (0.43
    )Basic and
diluted  pro forma
    
    $
    (0.18
    )
    
    $
    (0.43
    )Net (loss):Basic and diluted  as reported
    
    $
    (25,211
    )
    
    $
    (58,028
    )Add: Stock-based employee compensation expense included
in reported net (loss), net of related tax effects
    
    
    434
    
    
    
    701Less: Fair value of stock-based employee compensation
expense, net of related tax effects
    
    
    (518
    )
    
    
    (968
    )Basic and diluted  pro forma net (loss)
    
    $
    (25,295
    )
    
    $
    (58,295
    )Net (loss) per share:Basic and diluted  as reported
    
    $
    (0.20
    )
    
    $
    (0.47
    )Basic and diluted  pro forma
    
    $
    (0.20
    )
    
    $
    (0.48
    )
  Weighted
    
    
    Weighted AverageAverage
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contractual Term(in thousands)
    
    
    
    
    
    
    (years)Options outstanding at March 31, 2006
    
    
    7,518
    
    
    $
    7.80Granted
    
    
    6,056
    
    
    
    0.73Exercised
    
    
    (14
    )
    
    
    0.34Forfeited
    
    
    (622
    )
    
    
    1.54Expired
    
    
    (1,408
    )
    
    
    13.63Options outstanding at September 30, 2006
    
    
    11,530
    
    
    $
    3.72
    
    
    
    7.9Options exercisable at September 30, 2006
    
    
    4,552
    
    
    $
    7.82
    
    
    
    5.4
 Page 13




---



##### Table of Contents



NOTE 3  NET (LOSS) INCOME PER SHARE
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Basic and diluted earnings per share
calculation:(Loss) from continuing operations
    
    $
    (22,331
    )
    
    $
    (9,492
    )
    
    $
    (52,469
    )
    
    $
    (14,069
    )(Loss) income from discontinued operations
of Reflections Interactive Ltd, net of tax
    
    
    (2,880
    )
    
    
    9,803
    
    
    
    (5,559
    )
    
    
    7,266Net (loss) income
    
    $
    (25,211
    )
    
    $
    311
    
    
    $
    (58,028
    )
    
    $
    (6,803
    )Basic weighted average shares outstanding
    
    
    123,773
    
    
    
    134,772
    
    
    
    122,543
    
    
    
    134,769Diluted weighted average shares outstanding
    
    
    123,773
    
    
    
    134,782
    
    
    
    122,543
    
    
    
    134,769Basic and diluted (loss) from continuing
operations per share
    
    $
    (0.18
    )
    
    $
    (0.07
    )
    
    $
    (0.43
    )
    
    $
    (0.10
    )Basic and diluted (loss) income from
discontinued operations of Reflections
Interactive Ltd, net of tax, per share
    
    
    (0.02
    )
    
    
    0.07
    
    
    
    (0.04
    )
    
    
    0.05Basic and diluted net (loss) income per share
    
    $
    (0.20
    )
    
    $
    0.00
    
    
    $
    (0.47
    )
    
    $
    (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 14




---



##### Table of Contents



For the six months endedSeptember 30,
    
    September 30,2006
    
    2006% of Accounts Receivable
    
    % of Net RevenuesCustomer 1
    
    
    53
    %
    
    
    13
    %Customer 2
    
    
    11
    %
    
    
    7
    %64
    %
    
    
    20
    %
   NOTE 5  BALANCE SHEET DETAILS
 Inventories
  March 31,
    
    
    September 30,2006
    
    
    2006Finished goods, net
    
    $
    18,608
    
    
    $
    14,569Return inventory, net
    
    
    2,106
    
    
    
    2,178Raw materials, net
    
    
    73
    
    
    
    9$
    20,787
    
    
    $
    16,756
 Prepaid Expenses and Other Current Assets
  March 31,
    
    
    September 30,2006
    
    
    2006Licenses short-term
    
    $
    5,683
    
    
    $
    7,194Escrow
receivable in connection with sale of Reflections
    
    
    
    
    
    
    2,400Royalties receivable
    
    
    2,118
    
    
    
    1,393Prepaid insurance
    
    
    872
    
    
    
    360Atari name license
    
    
    305
    
    
    
    Other prepaid expenses and current assets
    
    
    2,367
    
    
    
    2,254$
    11,345
    
    
    $
    13,601
 Goodwill and Acquired Intangible Assets
  Balance at
    
    
    
    
    
    
    
    
    
    Balance atMarch 31,
    
    
    
    
    
    
    
    
    
    September 30,2006
    
    Additions
    
    Dispositions
    
    2006Goodwill
    
    $
    66,398
    
    
    $
    
    
    
    $
    (12,269
    )
    
    $
    54,129Acquired intangible assets
    
    
    
    
    
    
    695
    
    
    
    
    
    
    
    695




---



##### Table of Contents



Driver
 Accrued Liabilities
  March 31,
    
    
    September 30,2006
    
    
    2006Accrued advertising
    
    $
    3,772
    
    
    $
    4,597Accounts receivable credit balances (Note 4)
    
    
    381
    
    
    
    4,492Accrued distribution services
    
    
    3,713
    
    
    
    2,924Accrued third party development expenses
    
    
    1,411
    
    
    
    2,596Accrued professional fees and other services
    
    
    1,665
    
    
    
    1,984Accrued salary and related costs
    
    
    1,943
    
    
    
    1,782Restructuring reserve (Note 12)
    
    
    2,163
    
    
    
    442Accrued freight and handling fees
    
    
    1,029
    
    
    
    408Deferred income
    
    
    381
    
    
    
    262Other
    
    
    2,647
    
    
    
    2,189$
    19,105
    
    
    $
    21,676
 NOTE 6  INCOME TAXES
   NOTE 7  RELATED PARTY TRANSACTIONS
 Relationship with IESA




---



##### Table of Contents



Summary of Related Party Transactions
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30Income (expense)
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006Net revenues
    
    $
    38,358
    
    
    $
    28,588
    
    
    $
    62,235
    
    
    $
    48,062Related party activity:Royalty income (1)
    
    
    3,780
    
    
    
    1,868
    
    
    
    3,997
    
    
    
    977License income (1)
    
    
    74
    
    
    
    485
    
    
    
    184
    
    
    
    1,499Sale of goods
    
    
    151
    
    
    
    188
    
    
    
    262
    
    
    
    390Production and quality and assurance testing
services
    
    
    313
    
    
    
    1,458
    
    
    
    687
    
    
    
    2,290Total related party net revenues
    
    
    4,318
    
    
    
    3,999
    
    
    
    5,130
    
    
    
    5,156Cost of goods sold
    
    
    (24,780
    )
    
    
    (15,251
    )
    
    
    (43,169
    )
    
    
    (29,178
    )Related party activity:Distribution fee for Humongous, Inc. product
    
    
    (1,227
    )
    
    
    (2,033
    )
    
    
    (1,227
    )
    
    
    (3,245
    )Royalty expense (2)
    
    
    (1,557
    )
    
    
    (335
    )
    
    
    (2,173
    )
    
    
    (1,712
    )Total related party cost of goods sold
    
    
    (2,784
    )
    
    
    (2,368
    )
    
    
    (3,400
    )
    
    
    (4,957
    )Research and product development
    
    
    (15,288
    )
    
    
    (7,321
    )
    
    
    (30,963
    )
    
    
    (14,467
    )Related party activity:Development expenses (3)
    
    
    (4,239
    )
    
    
    (2,031
    )
    
    
    (8,283
    )
    
    
    (5,327
    )Other miscellaneous development services
    
    
    (47
    )
    
    
    4
    
    
    
    (69
    )
    
    
    9Total related party research and product
development
    
    
    (4,286
    )
    
    
    (2,027
    )
    
    
    (8,352
    )
    
    
    (5,318
    )Selling and distribution expenses
    
    
    (7,751
    )
    
    
    (9,317
    )
    
    
    (14,785
    )
    
    
    (14,418
    )Related party activity:Miscellaneous purchase of services
    
    
    
    
    
    
    (79
    )
    
    
    (8
    )
    
    
    (79
    )Total related party selling and distribution
expenses
    
    
    
    
    
    
    (79
    )
    
    
    (8
    )
    
    
    (79
    )General and administrative expenses
    
    
    (8,221
    )
    
    
    (5,680
    )
    
    
    (16,164
    )
    
    
    (11,115
    )Related party activity:Management fee revenue
    
    
    463
    
    
    
    740
    
    
    
    1,213
    
    
    
    1,520Management fee expense
    
    
    (750
    )
    
    
    (750
    )
    
    
    (1,500
    )
    
    
    (1,500
    )Office rental and other services (4)
    
    
    60
    
    
    
    46
    
    
    
    (32
    )
    
    
    92Total related party general and
administrative
expenses
    
    
    (227
    )
    
    
    36
    
    
    
    (319
    )
    
    
    112
 Page 17




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30Income (expense)
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006Restructuring expenses
    
    
    (2,227
    )
    
    
    (204
    )
    
    
    (4,930
    )
    
    
    (334
    )Related party activity:Related party rent expense (4)
    
    
    (115
    )
    
    
    (116
    )
    
    
    (408
    )
    
    
    (233
    )Total related party restructuring expenses
    
    
    (115
    )
    
    
    (116
    )
    
    
    (408
    )
    
    
    (233
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (2,880
    )
    
    
    9,803
    
    
    
    (5,559
    )
    
    
    7,266Related party activity:Royalty income (1)
    
    
    (111
    )
    
    
    (314
    )
    
    
    (326
    )
    
    
    (706
    )Total related party loss from discontinued
operations
    
    
    (111
    )
    
    
    (314
    )
    
    
    (326
    )
    
    
    (706
    )
 
 (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.
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,
    
    
    September 30,2006
    
    
    2006Due from/(Due to)  currentIESA (1)
    
    $
    (743
    )
    
    $
    (703
    )Atari Europe (2)
    
    
    4,054
    
    
    
    (125
    )Eden Studios (3)
    
    
    (2,235
    )
    
    
    (632
    )Paradigm (3)
    
    
    (721
    )
    
    
    Atari Melbourne House (3)
    
    
    (434
    )
    
    
    (853
    )Humongous, Inc. (4)
    
    
    (2,341
    )
    
    
    (2,736
    )
 Page 18




---



##### Table of Contents



March 31,
    
    
    September 30,2006
    
    
    2006Atari Interactive (5)
    
    
    (3,704
    )
    
    
    2,239Other miscellaneous net receivables
    
    
    553
    
    
    
    214Net due to related parties  current
    
    
    (5,571
    )
    
    
    (2,596
    )Due from/(Due to)  long-termAtari Interactive (see Atari Name Licensebelow)
    
    
    
    
    
    
    (803
    )Net due to related parties
    
    $
    (5,571
    )
    
    $
    (3,399
    )
  March 31,
    
    
    September 30,2006
    
    
    2006Due from related parties
    
    $
    4,692
    
    
    $
    2,579Due to related parties
    
    
    (10,263
    )
    
    
    (5,175
    )Net due to related parties  current
    
    $
    (5,571
    )
    
    $
    (2,596
    )
 
 (1)
    
    Balances comprised primarily of the management fees charged to us by IESA and other
charges of cost incurred on our behalf.(2)
    
    Balances comprised of royalty income or expense from our distribution agreements with
IESA and Atari Europe relating to properties owned or licensed by Atari Europe.(3)
    
    Represents net payables for related party development activities. (Note: Paradigm was
sold to a third party in the first quarter 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 primarily of receivables related to management fee revenue and production and
quality and assurance testing services revenue earned from Atari Interactive. Atari Name License
  Issuance of Common Stock to Related Parties
 Related Party Payables Settlement of
Indebtedness
 
    
    Related Party Payables
  Page 19




---



##### Table of Contents




    
    Settlement of Indebtedness
  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
  Page 20




---



##### Table of Contents



Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseThrough
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    TotalSeptember 30,
2007
    
    $
    1,428
    
    
    $
    5,290
    
    
    $
    1,910
    
    
    $
    298
    
    
    $
    8,926September 30, 2008
    
    
    100
    
    
    
    105
    
    
    
    3,601
    
    
    
    91
    
    
    
    3,897September 30, 2009
    
    
    75
    
    
    
    
    
    
    
    3,312
    
    
    
    
    
    
    
    3,387September 30, 2010
    
    
    75
    
    
    
    
    
    
    
    3,246
    
    
    
    
    
    
    
    3,321September 30, 2011
    
    
    
    
    
    
    
    
    
    
    3,228
    
    
    
    
    
    
    
    3,228Thereafter
    
    
    
    
    
    
    
    
    
    
    26,600
    
    
    
    
    
    
    
    26,600Total
    
    $
    1,678
    
    
    $
    5,395
    
    
    $
    41,897
    
    
    $
    389
    
    
    $
    49,359
 
 (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 $5.4 million are
payments of $2.3 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 $2.5 million of sublease income to be received from fiscal
2007 through fiscal 2009. Rent expense and sublease income for the three months and
six months ended September 30, 2005 and 2006 is as follows (in thousands): Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006Rent expense
    
    $
    1,041
    
    
    $
    880
    
    
    $
    2,349
    
    
    $
    1,630Sublease income
    
    
    (158
    )
    
    
    (62
    )
    
    
    (287
    )
    
    
    (178
    )
 
      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 $1.8 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 September 30, 2006, the net book value of the assets was $0.2
million, net of accumulated depreciation of $0.4 million. Page 21




---



##### 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 22




---



##### 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 23
    Table of Contents     NOTE 10  GAIN ON SALE OF DEVELOPMENT STUDIO ASSETS
 Sale of Shiny Entertainment
  NOTE 11  DISCONTINUED OPERATIONS
 Sale of Humongous and Discontinued Operations Treatment
     Page 24    Table of Contents  Sale of Reflections
 Driver Driver Driver: Parallel Lines
 
    
    Balance Sheets
 Driver
 March 31, 2006
    
    
    September 30, 2006Assets:Cash
    
    $
    438
    
    
    $
    19Inventory, net
    
    
    574
    
    
    
    160Prepaid expenses and other
current assets
    
    
    1,222
    
    
    
    679Property and equipment, net
    
    
    251
    
    
    
    Other non-current assets
    
    
    464
    
    
    
    498Total assets
    
    $
    2,949
    
    
    $
    1,356Liabilities:Accounts payable
    
    $
    874
    
    
    $
    135Accrued liabilities
    
    
    731
    
    
    
    165Royalty payable
    
    
    1,413
    
    
    
    Total liabilities
    
    $
    3,018
    
    
    $
    300
 
    
    Results of Operations
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Net revenues
    
    $
    362
    
    
    $
    (105
    )
    
    $
    946
    
    
    $
    203(Loss) from operations of Reflections
Interactive
Ltd
    
    
    (2,880
    )
    
    
    (1,669
    )
    
    
    (5,559
    )
    
    
    (4,206
    )Gain on sale of Reflections Interactive Ltd
    
    
    
    
    
    
    11,472
    
    
    
    
    
    
    
    11,472(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    $
    (2,880
    )
    
    $
    9,803
    
    
    $
    (5,559
    )
    
    $
    7,266
 NOTE 12  RESTRUCTURING
  Page 25
    Table of Contents    Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Severance and retention expenses
    
    $
    1,057
    
    
    $
    41
    
    
    $
    2,907
    
    
    $
    41Lease related costs
    
    
    335
    
    
    
    160
    
    
    
    728
    
    
    
    273Modification of stock options
    
    
    137
    
    
    
    
    
    
    
    404
    
    
    
    Fixed asset write offs
    
    
    443
    
    
    
    
    
    
    
    443
    
    
    
    Miscellaneous costs
    
    
    255
    
    
    
    3
    
    
    
    448
    
    
    
    20Total
    
    $
    2,227
    
    
    $
    204
    
    
    $
    4,930
    
    
    $
    334
   Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2006
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    net
    
    
    September 30, 2006Short termSeverance and retention
    
    $
    1,886
    
    
    $
    41
    
    
    $
    
    
    
    $
    (1,611
    )
    
    $
    316Lease related costs
    
    
    245
    
    
    
    273
    
    
    
    44
    
    
    
    (436
    )
    
    
    126Miscellaneous costs
    
    
    32
    
    
    
    20
    
    
    
    
    
    
    
    (52
    )
    
    
    Total
    
    
    2,163
    
    
    
    334
    
    
    
    44
    
    
    
    (2,099
    )
    
    
    442Long termSeverance and retention
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease related costs
    
    
    56
    
    
    
    
    
    
    
    (44
    )
    
    
    
    
    
    
    12Total
    
    
    56
    
    
    
    
    
    
    
    (44
    )
    
    
    
    
    
    
    12Total
    
    $
    2,219
    
    
    $
    334
    
    
    $
    
    
    
    $
    (2,099
    )
    
    $
    454
 NOTE 13  SALE OF INTELLECTUAL PROPERTY
 Stuntman
 NOTE 14  OPERATIONS BY REPORTABLE SEGMENTS
 Page 26
    Table of Contents  Publishing
    
    Distribution
    
    Corporate
    
    TotalThree months ended September 30, 2005:Net revenues
    
    $
    22,568
    
    
    $
    15,790
    
    
    $
    
    
    
    $
    38,358Operating (loss) income (1)
    
    
    (13,203
    )
    
    
    2,646
    
    
    
    (9,288
    )
    
    
    (19,845
    )Depreciation and amortization
    
    
    (457
    )
    
    
    
    
    
    
    (1,706
    )
    
    
    (2,163
    )Interest (expense), net
    
    
    
    
    
    
    
    
    
    
    (297
    )
    
    
    (297
    )Six months ended September 30, 2005:Net revenues
    
    $
    35,005
    
    
    $
    27,230
    
    
    $
    
    
    
    $
    62,235Operating (loss) income (1)
    
    
    (31,267
    )
    
    
    1,947
    
    
    
    (17,921
    )
    
    
    (47,241
    )Depreciation and amortization
    
    
    (954
    )
    
    
    
    
    
    
    (3,441
    )
    
    
    (4,395
    )Interest (expense), net
    
    
    
    
    
    
    
    
    
    
    (345
    )
    
    
    (345
    )Three months ended September 30, 2006:Net revenues
    
    $
    23,130
    
    
    $
    5,458
    
    
    $
    
    
    
    $
    28,588Operating (loss) income (1)
    
    
    (3,994
    )
    
    
    1,466
    
    
    
    (6,891
    )
    
    
    (9,419
    )Depreciation and amortization
    
    
    (171
    )
    
    
    
    
    
    
    (1,152
    )
    
    
    (1,323
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    116Six months ended September 30, 2006:Net revenues
    
    $
    32,894
    
    
    $
    15,168
    
    
    $
    
    
    
    $
    48,062Operating (loss) income (1)
    
    
    (3,057
    )
    
    
    2,446
    
    
    
    (13,391
    )
    
    
    (14,002
    )Depreciation and amortization
    
    
    (373
    )
    
    
    
    
    
    
    (2,398
    )
    
    
    (2,771
    )Interest income, net
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    233
 
 (1)
    
    Operating loss for the Corporate segment for the three months ended September 30, 2005
and 2006, excludes restructuring charges of $2.2 million and $0.2 million, respectively,
and for the six months ended September 30, 2005 and 2006 excludes $4.9 million and $0.3
million, respectively. Including restructuring charges, total operating loss for the three
months ended September 30, 2005 and 2006 is $22.1 million and $9.6 million, respectively,
and for the six months ended September 30, 2005 and 2006 is $52.2 million and $14.3
million, respectively. NOTE 15  SUBSEQUENT EVENTS
 Guggenheim Financing
  Page 27
    Table of Contents  Reverse Stock Split
  Page 28
    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
     Related party transactions
  Page 29
    Table of Contents  Business and Operating Segments
   Key Challenges
   Critical Accounting Policies
   Page 30
    Table of Contents  Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
     Inventories
  Research and product development costs
   Licenses
  Page 31
    Table of Contents  Goodwill and Acquired Intangible Assets
   Income taxes
   Results of operations
 Three months ended September 30, 2005 versus the three months ended September 30, 2006
 Condensed Consolidated Statements of Operations (dollars in thousands):
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/September 30,
    
    
    Revenues
    
    
    September 30,
    
    
    Revenues
    
    
    Increase2005
    
    
    
    
    
    
    2006
    
    
    
    
    
    
    $
    
    
    %Net revenues
    
    $
    38,358
    
    
    
    100.0
    %
    
    $
    28,588
    
    
    
    100.0
    %
    
    $
    (9,770
    )
    
    
    (25.5
    )%Costs, expenses and income:Cost of goods sold
    
    
    24,780
    
    
    
    64.6
    %
    
    
    15,251
    
    
    
    53.3
    %
    
    
    (9,529
    )
    
    
    (38.5
    )%Research and product development
    
    
    15,288
    
    
    
    39.9
    %
    
    
    7,321
    
    
    
    25.6
    %
    
    
    (7,967
    )
    
    
    (52.1
    )%Selling and distribution expenses
    
    
    7,751
    
    
    
    20.2
    %
    
    
    9,317
    
    
    
    32.6
    %
    
    
    1,566
    
    
    
    20.2
    %General and administrative
expenses
    
    
    8,221
    
    
    
    21.4
    %
    
    
    5,680
    
    
    
    20.0
    %
    
    
    (2,541
    )
    
    
    (30.9
    )%Restructuring expenses
    
    
    2,227
    
    
    
    5.8
    %
    
    
    204
    
    
    
    0.7
    %
    
    
    (2,023
    )
    
    
    (90.8
    )%Gain on sale
of development studio assets
    
    
    
    
    
    
    0.0
    %
    
    
    (885
    )
    
    
    (3.1
    )%
    
    
    885
    
    
    
    100.0
    %
 Page 32
    Table of Contents  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/September 30,
    
    
    Revenues
    
    
    September 30,
    
    
    Revenues
    
    
    Increase2005
    
    
    
    
    
    
    2006
    
    
    
    
    
    
    $
    
    
    %Depreciation and amortization
    
    
    2,163
    
    
    
    5.6
    %
    
    
    1,323
    
    
    
    4.6
    %
    
    
    (840
    )
    
    
    (38.8
    )%Total costs, expenses, and income
    
    
    60,430
    
    
    
    157.5
    %
    
    
    38,211
    
    
    
    133.7
    %
    
    
    (22,219
    )
    
    
    (36.8
    )%Operating (loss)
    
    
    (22,072
    )
    
    
    (57.5
    )%
    
    
    (9,623
    )
    
    
    (33.7
    )%
    
    
    (12,449
    )
    
    
    (56.4
    )%Interest (expense) income, net
    
    
    (297
    )
    
    
    (0.8
    )%
    
    
    116
    
    
    
    0.4
    %
    
    
    (413
    )
    
    
    (139.1
    )%Other (expense) income
    
    
    (245
    )
    
    
    (0.7
    )%
    
    
    15
    
    
    
    0.1
    %
    
    
    (260
    )
    
    
    (106.1
    )%(Loss) before (benefit from)
income
taxes
    
    
    (22,614
    )
    
    
    (59.0
    )%
    
    
    (9,492
    )
    
    
    (33.2
    )%
    
    
    (13,122
    )
    
    
    (58.0
    )%(Benefit from) income taxes
    
    
    (283
    )
    
    
    (0.8
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (283
    )
    
    
    100.0
    %(Loss) from continuing operations
    
    
    (22,331
    )
    
    
    (58.2
    )%
    
    
    (9,492
    )
    
    
    (33.2
    )%
    
    
    (12,839
    )
    
    
    (57.5
    )%(Loss) income from discontinued
operations of Reflections
Interactive
Ltd, net of tax
    
    
    (2,880
    )
    
    
    (7.5
    )%
    
    
    9,803
    
    
    
    34.3
    %
    
    
    (12,683
    )
    
    
    (440.4
    )%Net (loss) income
    
    $
    (25,211
    )
    
    
    (65.7
    )%
    
    $
    311
    
    
    
    1.1
    %
    
    $
    (25,522
    )
    
    
    (101.2
    )%
 Net Revenues
 Net Revenues by Segment (in thousands):
 Three MonthsEndedSeptember 30,
    
    
    Increase/2005
    
    
    2006
    
    
    (Decrease)Publishing
    
    $
    22,568
    
    
    $
    23,130
    
    
    $
    562Distribution
    
    
    15,790
    
    
    
    5,458
    
    
    
    (10,332
    )Total
    
    $
    38,358
    
    
    $
    28,588
    
    
    $
    (9,770
    )
 Publishing Sales Platform Mix
 Three MonthsEndedSeptember 30,2005
    
    
    2006PlayStation 2
    
    
    13.3
    %
    
    
    39.4
    %Xbox 360
    
    
    0.0
    %
    
    
    32.6
    %PC
    
    
    37.6
    %
    
    
    15.6
    %PSP
    
    
    0.0
    %
    
    
    6.3
    %Plug and Play
    
    
    24.8
    %
    
    
    2.5
    %Game Boy Advance
    
    
    14.9
    %
    
    
    2.0
    %Nintendo DS
    
    
    0.6
    %
    
    
    1.4
    %Xbox
    
    
    7.4
    %
    
    
    0.1
    %GameCube
    
    
    1.4
    %
    
    
    0.1
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  
    
    Net publishing product sales during the current quarter were driven by new release sales
of Test Drive Unlimited(Xbox 360) and Super Dragon Ball Z(PlayStation 2), which comprised
approximately 55% of publishing product sales. In the prior comparable quarter, new
releases made up 63% of publishing product sales and were driven by sales of Atari
Flashback 2.0(plug and play), Indigo Prophecy(PC, PlayStation 2, and Xbox), and Dragon
Ball Z: Transformations(Game Boy Advance).
    
    International royalty income decreased by $1.9 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.
    
    Current period includes $1.1 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
from $17.00 in the prior comparable quarter to $19.59 in the current period. The increased
ASP is driven by the current period inclusion
 Page 33
    Table of Contents  of PSP and Xbox 360 titles, with ASPs
of $30.71 and $28.97, respectively. However, this is partially offset by a decrease in the
ASP for PlayStation 2 and Xbox product from the prior comparable period, due to the current
console transition.
  Cost of Goods Sold
  
    
    higher average sales price for the current period as compared to the prior period, and
    
    a higher mix of third party sales in the prior year which have higher costs (41.2% third
party net revenues in the prior year versus 19.1% third party net revenues in the current
year).
 Research and Product Development Expenses
  
    
    decreased spending at our related party development studios due to the sale of our
Stuntmanfranchise in development at Paradigm Entertainment,
    
    decreased salaries and other overhead of $2.1 million due to the closure of the Beverly
and Santa Monica publishing studios during fiscal 2006 and related personnel reductions,
and
    
    decreased spending with external developers due to delays in the commencement of
development projects.
  Selling and Distribution Expenses
  
    
    increased spend on advertising of $2.8 million, primarily related to media ad purchases
for Test Drive Unlimited, released in September 2006,
offset by
    
    savings in salaries and related employee costs due to reduced headcount resulting from
publishing studio closure and personnel reductions.
 General and Administrative Expenses
  Page 34
    Table of Contents  
    
    a reduction in salaries of $2.4 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 $0.3 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)).
 Restructuring Expenses
  
    
    severance and retention expense of $1.1 million,
    
    lease related costs associated with closed offices of $0.3 million,
    
    property and equipment write offs of $0.4 million,
    
    costs associated with the modification of stock options for terminated executives of $0.1 million, and
    
    other miscellaneous costs associated with the restructuring and office transition of $0.3 million.
  Gain on Sale of Development Studio Assets
  Depreciation and Amortization
  
    
    prior year inclusion of depreciation expense for assets from the Beverly and Santa
Monica publishing studios which were written off during the second quarter of fiscal 2006,
    
    assets becoming fully depreciated during the year, and
    
    decrease in Atari name license amortization due to a change in the expected future
earnings on which this expense is based.
 Interest (Expense) Income, net
  Other (Expense) Income
  Page 35
    Table of Contents  Benefit from Income Taxes
  Loss (Income) from Discontinued Operations of Reflections Interactive Ltd, net of tax
  Six months ended September 30, 2005 versus the six months ended September 30, 2006
 Condensed Consolidated Statements of Operations (dollars in thousands):
 Six
    
    
    
    
    
    
    SixMonths
    
    
    % of
    
    
    Months
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/September 30,
    
    
    Revenues
    
    
    September 30,
    
    
    Revenues
    
    
    Increase2005
    
    
    
    
    
    
    2006
    
    
    
    
    
    
    $
    
    
    %Net revenues
    
    $
    62,235
    
    
    
    100.0
    %
    
    $
    48,062
    
    
    
    100.0
    %
    
    $
    (14,173
    )
    
    
    (22.8
    )%Costs, expenses, and income:Cost of goods sold
    
    
    43,169
    
    
    
    69.3
    %
    
    
    29,178
    
    
    
    60.7
    %
    
    
    (13,991
    )
    
    
    (32.4
    )%Research and product development
    
    
    30,963
    
    
    
    49.8
    %
    
    
    14,467
    
    
    
    30.1
    %
    
    
    (16,496
    )
    
    
    (53.3
    )%Selling and distribution expenses
    
    
    14,785
    
    
    
    23.8
    %
    
    
    14,418
    
    
    
    30.0
    %
    
    
    (367
    )
    
    
    (2.5
    )%General and administrative expenses
    
    
    16,164
    
    
    
    25.9
    %
    
    
    11,115
    
    
    
    23.0
    %
    
    
    (5,049
    )
    
    
    (31.2
    )%Restructuring expenses
    
    
    4,930
    
    
    
    7.9
    %
    
    
    334
    
    
    
    0.7
    %
    
    
    (4,596
    )
    
    
    (93.2
    )%Gain on sale of intellectual property
    
    
    
    
    
    
    0.0
    %
    
    
    (9,000
    )
    
    
    (18.7
    )%
    
    
    9,000
    
    
    
    100.0
    %Gain on sale
of development studio assets
    
    
    
    
    
    
    0.0
    %
    
    
    (885
    )
    
    
    (1.8
    )%
    
    
    885
    
    
    
    100.0
    %Depreciation and amortization
    
    
    4,395
    
    
    
    7.1
    %
    
    
    2,771
    
    
    
    5.8
    %
    
    
    (1,624
    )
    
    
    (37.0
    )%Total costs, expenses, and income
    
    
    114,406
    
    
    
    183.8
    %
    
    
    62,398
    
    
    
    129.8
    %
    
    
    (52,008
    )
    
    
    (45.5
    )%Operating (loss)
    
    
    (52,171
    )
    
    
    (83.8
    )%
    
    
    (14,336
    )
    
    
    (29.8
    )%
    
    
    (37,835
    )
    
    
    (72.5
    )%Interest (expense) income, net
    
    
    (345
    )
    
    
    (0.6
    )%
    
    
    233
    
    
    
    0.4
    %
    
    
    (578
    )
    
    
    (167.5
    )%Other (expense) income
    
    
    (236
    )
    
    
    (0.4
    )%
    
    
    34
    
    
    
    0.1
    %
    
    
    (270
    )
    
    
    (114.4
    )%(Loss) before (benefit from) income taxes
    
    
    (52,752
    )
    
    
    (84.8
    )%
    
    
    (14,069
    )
    
    
    (29.3
    )%
    
    
    (38,683
    )
    
    
    (73.3
    )%(Benefit from) income taxes
    
    
    (283
    )
    
    
    (0.5
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (283
    )
    
    
    (100.0
    )%(Loss) from continuing operations
    
    
    (52,469
    )
    
    
    (84.3
    )%
    
    
    (14,069
    )
    
    
    (29.3
    )%
    
    
    (38,400
    )
    
    
    (73.2
    )%(Loss) income from discontinued
operations of Reflections Interactive
Ltd, net of tax
    
    
    (5,559
    )
    
    
    (8.9
    )%
    
    
    7,266
    
    
    
    15.1
    %
    
    
    (12,825
    )
    
    
    (230.7
    )%Net (loss)
    
    $
    (58,028
    )
    
    
    (93.2
    )%
    
    $
    (6,803
    )
    
    
    (14.2
    )%
    
    $
    (51,225
    )
    
    
    (88.3
    )%
 Net Revenues
 Net Revenues by Segment (in thousands):
 Six MonthsEndedSeptember 30,2005
    
    
    2006
    
    
    (Decrease)Publishing
    
    $
    35,005
    
    
    $
    32,894
    
    
    $
    (2,111
    )Distribution
    
    
    27,230
    
    
    
    15,168
    
    
    
    (12,062
    )Total
    
    $
    62,235
    
    
    $
    48,062
    
    
    $
    (14,173
    )
 Page 36
    Table of Contents  Publishing Sales Platform Mix
 Six MonthsEndedSeptember 30,2005
    
    2006PlayStation 2
    
    
    14.7
    %
    
    
    32.3
    %PC
    
    
    45.8
    %
    
    
    24.4
    %Xbox 360
    
    
    0.0
    %
    
    
    21.2
    %PSP
    
    
    0.0
    %
    
    
    10.6
    %Game Boy Advance
    
    
    11.3
    %
    
    
    5.7
    %Plug and Play
    
    
    15.9
    %
    
    
    3.5
    %Nintendo DS
    
    
    0.6
    %
    
    
    1.5
    %Xbox
    
    
    6.7
    %
    
    
    0.4
    %GameCube
    
    
    4.8
    %
    
    
    0.4
    %PlayStation
    
    
    0.2
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  
    
    Net publishing product sales from new releases Test Drive Unlimited(Xbox 360), Super
Dragon Ball Z(PlayStation 2), and Dragon Ball Z: Advanced Adventure(Game Boy Advance)
comprised approximately 42% of our total net publishing product sales. Sales from reorders
made up 56% of the current periods publishing product sales. In the prior comparable
period, sales from new releases included Atari Flashback 2.0(plug and play), Indigo
Prophecy(PC, PlayStation 2, and Xbox), Dragon Ball Z: Transformations(Game Boy Advance),
RollerCoaster Tycoon 3: Soaked!(PC), and Dragonshard(PC). Similarly to the current
period, reorders comprised 53% of net publishing product sales.
    
    International royalty income decreased by $3.0 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.
    
    Current period includes $1.7 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 ASP of the publishing business has increased from $16.37 in the prior
comparable period to $18.03 in the current period. The increased ASP is driven by the
current period inclusion of PSP and Xbox 360 titles, with ASPs of $29.78 and $28.97,
respectively. However, this is partially offset by a decrease in the ASP for PlayStation
2, Xbox, and GameCube product from the prior comparable period.
  
    
    the overall decrease in product sales of third party publishers as a result of
managements decision to reduce our third party distribution operations in efforts to move
away from lower margin products, offset by
    
    current full 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
    
    a lower mix of our third party product sales, which includes Humongous, Inc. product in
the current full period.
 Page 37
    Table of Contents  Research and Product Development Expenses
  
    
    decreased spending with external developers due to our strategic increase in focus on
core intellectual property, compounded by delays in commencement on certain development
projects,
    
    decreased spending at our related party development studios due to the sale of our
Stuntmanfranchise and development project, in process at Paradigm Entertainment,
    
    decreased salaries and other overhead of $3.7 million due to the closure of the Beverly
and Santa Monica publishing studios during fiscal 2006 and related personnel reductions,
and
    
    savings in game development consulting costs due to current period divestiture of
internal development studios.
  Selling and Distribution Expenses
  
    
    savings in salaries and related overhead costs of $1.9 million due to reduced headcount
resulting from publishing studio closure and personnel reductions, offset by
    
    increased spend on advertising of $1.6 million primarily related to media ad purchases
for Test Drive Unlimited, released in September 2006.
 General and Administrative Expenses
  
    
    a reduction in salaries of $4.8 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 $0.6 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 $0.7 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
    
    other miscellaneous costs associated with the restructuring and office transition of $0.5 million.
 Page 38
    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.
 Interest (Expense) Income, net
  Other (Expense) Income
  Benefit from Income Taxes
  Loss (Income) from Discontinued Operations of Reflections Interactive Ltd, net of tax
  Liquidity and Capital Resources
 Overview
  Page 39
    Table of Contents  Cash Flows
 (in thousands)
 March 31,
    
    
    September 30,2006
    
    
    2006Cash
    
    $
    14,948
    
    
    $
    10,224Working capital (deficit)
    
    $
    (2,996
    )
    
    $
    4,401
 Six Months EndedSeptember 30,2005
    
    
    2006Cash (used in) operating activities
    
    $
    (23,191
    )
    
    $
    (34,155
    )Cash provided by investing activities
    
    
    8,299
    
    
    
    29,574Cash provided by (used in) financing activities
    
    
    7,293
    
    
    
    (152
    )Effect of
foreign exchange rates on cash
    
    
    (18
    )
    
    
    9Net (decrease) in cash
    
    $
    (7,617
    )
    
    $
    (4,724
    )
   
    
    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
  Page 40
    Table of Contents  Selected Balance Sheet Accounts
 Receivables, net
  Due from Related Parties/Due to Related Parties
  Accounts Payable and Royalties Payable
  Credit Facilities
 HSBC Loan and Security Agreement
  Page 41
    Table of Contents  Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    TotalSeptember 30, 2007
    
    $
    1,428
    
    
    $
    5,290
    
    
    $
    1,910
    
    
    $
    298
    
    
    $
    8,926September 30, 2008
    
    
    100
    
    
    
    105
    
    
    
    3,601
    
    
    
    91
    
    
    
    3,897September 30, 2009
    
    
    75
    
    
    
    
    
    
    
    3,312
    
    
    
    
    
    
    
    3,387September 30, 2010
    
    
    75
    
    
    
    
    
    
    
    3,246
    
    
    
    
    
    
    
    3,321September 30, 2011
    
    
    
    
    
    
    
    
    
    
    3,228
    
    
    
    
    
    
    
    3,228Thereafter
    
    
    
    
    
    
    
    
    
    
    26,600
    
    
    
    
    
    
    
    26,600Total
    
    $
    1,678
    
    
    $
    5,395
    
    
    $
    41,897
    
    
    $
    389
    
    
    $
    49,359
 
 (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 $5.4 million are payments
of $2.3 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 $2.5 million of sublease income to be received from fiscal 2007
through fiscal 2009. 
    
    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, 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 $1.8 million, which has
been cash collateralized and is included in other assets on our condensed consolidated
balance sheet at September 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 September 30,
2006, the net book value of the assets was $0.2 million, net of accumulated
depreciation of $0.4 million.
 Recent Accounting Pronouncements
  Page 42
    Table of Contents  Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign Currency Exchange Rates
  Page 43
    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
  Page 44
    Table of Contents  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
     Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  Page 45
    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.
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Page 46
    Table of Contents  Proposal 1
 CLASS II
    
    For
    
    WithheldJames Ackerly
    
    
    120,106,782
    
    
    
    2,798,699Denis Guyennot
    
    
    117,888,417
    
    
    
    5,017,064Ann E. Kronen
    
    
    117,727,417
    
    
    
    5,178,064
 
 *
    
    With respect to the election of directors, there were no abstentions or broker non-votes
because, pursuant to the terms of the Notice of Annual Meeting and Proxy Statement, proxies
received were voted, unless authority was withheld, in favor of the election of the nominees named. Proposal 2
 For
    
    Against
    
    Abstain
    
    Non-Votes91,038,334
    
    5,370,727
    
    126,895
    
    26,369,525
 Proposal 3
 For
    
    Against
    
    Abstain
    
    Non-Votes122,417,143
    
    399,437
    
    88,865
    
    36
     
 Item 5. Other Information
 Consulting Agreement with Ann Kronen
  Page 47
    Table of Contents  Item 6. Exhibits
  10.1
    
    Asset Purchase Agreement, dated July 13, 2006, between us and Reflections
Interactive Ltd as the sellers and Ubisoft Holdings, Inc. and Ubisoft Entertainment Ltd
as the purchasers, as amended by Amendment No. 1 dated
August 3, 2006.10.2
    
    Employment Agreement, dated September 1, 2006, by and between us and David R.
Pierce.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.
 Page 48
    Table of Contents  SIGNATURE
  ATARI, INC.By:
    /s/ David PierceDavid PierceChief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)  Page 49
    Table of Contents  INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Asset Purchase Agreement, dated July 13, 2006, between us and Reflections Interactive Ltd as the
sellers and Ubisoft Holdings, Inc. and Ubisoft Entertainment Ltd as
the purchasers, as amended by Amendment No. 1 dated August 3, 2006.10.2
    
    Employment Agreement, dated September 1, 2006, by and between us and David R. Pierce.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.