##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

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


|                                                 |  |                            
|------------------------------------------------ |  | ---------------------------
|For the quarterly period ended December 31, 2003 |  | Commission File No. 0-27338

ATARI, INC.

(Exact name of registrant as specified in its charter)


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

417 FIFTH AVENUE, NEW YORK, NY 10016
(Address of principal executive offices)

REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 726-6500

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x No o


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yes x   No o

As of
February 12, 2004, there were 121,215,388 of the registrants Common
Stock outstanding.





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TABLE OF CONTENTS



|                                                   |                                                                                               |                                                                |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                     
|                                                   | Item 1. Financial Statements                                                                 
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS                                   
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)  
|                                                   |                                                                                               | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                                   | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                        
|                                                   | Item 1. Legal Proceedings                                                                    
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                         
|AMENDED AND RESTATED BY-LAWS                      
|AMENDMENT NO. 1 TO AMENDED AND RESTATED BY-LAWS   
|SIXTH AMENDMENT TO CREDIT AGREEMENT               
|1ST AMENDMENT TO INTERCREDITOR/SUBORDINATION  AGMT
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER          
|CERTIFICATION OF CHIEF FINANCIAL OFFICER          
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER          
|CERTIFICATION OF CHIEF FINANCIAL OFFICER          



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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
DECEMBER 31, 2003 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

|                               |                                                                                       |                                                                                                                                                                                                                       |    |      |   | 
|------------------------------ | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                               |                                                                                       |                                                                                                                                                                                                                       |    | Page
|                               |                                                                                       |                                                                                                                                                                                                                       |    |     
|PART I - FINANCIAL INFORMATION |                                                                                       |                                                                                                                                                                                                                       |    |     
|Item 1.                        | Financial Statements:                                                                 |                                                                                                                                                                                                                       |    |      |  
|                               |                                                                                       | Consolidated Balance Sheets as of March 31, 2003 and December 31, 2003 (unaudited)                                                                                                                                    |    |      | 3 | 
|                               |                                                                                       | Consolidated Statements of Operations and Comprehensive Income for the Three
Months and Nine Months Ended December 31, 2002 (unaudited), and for the Three
Months and Nine Months Ended December 31, 2003 (unaudited) |    |      | 4 | 
|                               |                                                                                       | Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2002
and 2003 (unaudited)                                                                                                                |    |      | 5 | 
|                               |                                                                                       | Consolidated Statements of Stockholders Equity (Deficiency) for the Nine Months
Ended March 31, 2003 and for the Nine Months Ended December 31, 2003 (unaudited)                                                     |    |      | 7 | 
|                               |                                                                                       | Notes to the Consolidated Financial Statements (unaudited)                                                                                                                                                            |    |      | 8 | 
|Item 2.                        | Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                                                                                                       |    | 21   |  
|Item 3.                        | Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                                                                                                                       |    | 35   |  
|Item 4.                        | Controls and Procedures                                                               |                                                                                                                                                                                                                       |    | 35   |  
|PART II - OTHER INFORMATION    |                                                                                       |                                                                                                                                                                                                                       |    |     
|Item 1.                        | Legal Proceedings                                                                     |                                                                                                                                                                                                                       |    | 36   |  
|Item 6.                        | Exhibits and Reports on Form 8-K                                                      |                                                                                                                                                                                                                       |    | 37   |  
|Signature                      |                                                                                       |                                                                                                                                                                                                                       | 38 |     





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##### Table of Contents












PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |              |         |             |         | 
|---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------- | ------------------------------------------------------- | ------ | --------- | ------- | ------------ | ------- | ----------- | ------- | 
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        | March 31, |         | December 31,
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        | 2003      |         | 2003        
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |              |         | (unaudited)
|ASSETS                                                                                                                             |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|Current assets:                                                                                                                    |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  | Cash                                              |         | $                                                       | 815    |           |         | $            | 9,040   |            
|                                                                                                                                   |                                                                                                                                                                  | Receivables, net                                  |         |                                                         | 47,053 |           |         |              | 100,377 |            
|                                                                                                                                   |                                                                                                                                                                  | Inventories, net                                  |         |                                                         | 37,827 |           |         |              | 42,875  |            
|                                                                                                                                   |                                                                                                                                                                  | Income taxes receivable                           |         |                                                         | 395    |           |         |              | 424     |            
|                                                                                                                                   |                                                                                                                                                                  | Due from related parties                          |         |                                                         | 2,656  |           |         |              | 10,999  |            
|                                                                                                                                   |                                                                                                                                                                  | Prepaid expenses and other current assets         |         |                                                         | 16,958 |           |         |              | 13,107  |            
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         | Total current assets                                    |        |           | 105,704 |              |         |             | 176,822 | 
|Advances to related parties                                                                                                        |                                                                                                                                                                  |                                                   | 32,184  |                                                         |        |           |        |             
|Property and equipment, net                                                                                                        |                                                                                                                                                                  |                                                   | 14,727  |                                                         |        |           | 13,507  |             
|Goodwill, net of accumulated amortization of $26,116 in both periods                                                               |                                                                                                                                                                  |                                                   | 70,224  |                                                         |        |           | 70,224  |             
|Other intangible assets, net of accumulated amortization of $619 and $1,125, at
March 31, 2003 and December 31, 2003, respectively |                                                                                                                                                                  |                                                   | 2,081   |                                                         |        |           | 1,575   |             
|Other assets                                                                                                                       |                                                                                                                                                                  |                                                   | 7,162   |                                                         |        |           | 8,125   |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         | Total assets                                            |        | $         | 232,082 |              |         | $           | 270,253 | 
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)                                                                                  |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|Current liabilities:                                                                                                               |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  | Accounts payable                                  |         | $                                                       | 39,587 |           |         | $            | 62,604  |            
|                                                                                                                                   |                                                                                                                                                                  | Accrued liabilities                               |         |                                                         | 31,872 |           |         |              | 35,058  |            
|                                                                                                                                   |                                                                                                                                                                  | Revolving credit facility                         |         |                                                         | 10,651 |           |         |              | 6,880   |            
|                                                                                                                                   |                                                                                                                                                                  | Current portion of related party medium-term loan |         |                                                         | 40,000 |           |         |              |        |            
|                                                                                                                                   |                                                                                                                                                                  | Related party credit facility                     |         |                                                         | 44,800 |           |         |              |        |            
|                                                                                                                                   |                                                                                                                                                                  | Royalties payable                                 |         |                                                         | 13,653 |           |         |              | 19,568  |            
|                                                                                                                                   |                                                                                                                                                                  | Income taxes payable                              |         |                                                         | 1,965  |           |         |              | 1,309   |            
|                                                                                                                                   |                                                                                                                                                                  | Short-term deferred income                        |         |                                                         | 2,077  |           |         |              | 2,077   |            
|                                                                                                                                   |                                                                                                                                                                  | Due to related parties                            |         |                                                         | 12,747 |           |         |              | 9,072   |            
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         | Total current liabilities                               |        |           | 197,352 |              |         |             | 136,568 | 
|Related party debt                                                                                                                 |                                                                                                                                                                  |                                                   | 124,610 |                                                         |        |           |        |             
|Deferred income                                                                                                                    |                                                                                                                                                                  |                                                   | 4,131   |                                                         |        |           | 574     |             
|Other long-term liabilities                                                                                                        |                                                                                                                                                                  |                                                   | 2,907   |                                                         |        |           | 936     |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         | Total liabilities                                       |        |           | 329,000 |              |         |             | 138,078 | 
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|Commitments and contingencies                                                                                                      |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                  
|Stockholders equity (deficiency):                                                                                                 |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   | Preferred stock, $0.01 par value, 5,000 shares authorized, none issued or
outstanding                                                                            |                                                   |         |                                                        |        |           |         |             |        
|                                                                                                                                   | Common stock, $0.01 par value, 300,000 shares authorized, 69,920 and 121,215
shares issued and outstanding at March 31, 2003 and December 31, 2003,
respectively |                                                   |         | 699                                                     |        |           |         | 1,212        |        
|                                                                                                                                   | Additional paid-in capital                                                                                                                                       |                                                   |         | 486,053                                                 |        |           |         | 735,912      |        
|                                                                                                                                   | Accumulated deficit                                                                                                                                              |                                                   |         | (586,851                                                | )      |           |         | (608,123     | )      
|                                                                                                                                   | Accumulated other comprehensive income                                                                                                                           |                                                   |         | 3,181                                                   |        |           |         | 3,174        |        
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         | Total stockholders (deficiency) equity                 |        |           | (96,918 | )            |         |             | 132,175 | 
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         | Total liabilities and stockholders (deficiency) equity |        | $         | 232,082 |              |         | $           | 270,253 | 
|                                                                                                                                   |                                                                                                                                                                  |                                                   |         |                                                         |        |           |         |             

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

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

|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |    |         |        | 
|----------------------------------------------------------------------- | ---------------------------------------- | ----------------------------------------------------- | -------------------- | --- | ------------ | ------ | ------------ | --- | ------ | ------ | ------- | --- | ------- | ------ | ------- | -- | ------- | ------ | 
|                                                                        |                                          |                                                       |                      |     | Three Months |        | Nine Months 
|                                                                        |                                          |                                                       |                      |     | Ended        |        | Ended       
|                                                                        |                                          |                                                       |                      |     | December 31, |        | December 31,
|                                                                        |                                          |                                                       |                      |     |              |        |             
|                                                                        |                                          |                                                       |                      |     | 2002         |        | 2003         |     | 2002   |        | 2003   
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |        
|Net revenues                                                            |                                          | $                                                     | 210,594              |     |              | $      | 190,607      |     |        | $      | 449,564 |     |         | $      | 402,540 |   
|Cost of goods sold                                                      |                                          |                                                       | 104,142              |     |              |        | 93,916       |     |        |        | 218,062 |     |         |        | 202,712 |   
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|                                                                        |                                          | Gross profit                                          |                      |     | 106,452      |        |              |     | 96,691 |        |         |     | 231,502 |        |         |    | 199,828 |       
|Selling and distribution expenses                                       |                                          |                                                       | 39,758               |     |              |        | 37,339       |     |        |        | 81,122  |     |         |        | 71,270  |   
|General and administrative expenses                                     |                                          |                                                       | 14,190               |     |              |        | 7,924        |     |        |        | 30,904  |     |         |        | 25,157  |   
|In-process research and development                                     |                                          |                                                       |                     |     |              |        |             |     |        |        | 7,400   |     |         |        |        |   
|Research and development                                                |                                          |                                                       | 16,976               |     |              |        | 26,928       |     |        |        | 60,461  |     |         |        | 72,734  |   
|Gain on sale of development project to a related
party                  |                                          |                                                       |                     |     |              |        | (3,744       | )   |        |        |        |     |         |        | (3,744  | ) 
|Depreciation and amortization                                           |                                          |                                                       | 1,856                |     |              |        | 2,811        |     |        |        | 5,850   |     |         |        | 6,757   |   
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|                                                                        |                                          | Operating income                                      |                      |     | 33,672       |        |              |     | 25,433 |        |         |     | 45,765  |        |         |    | 27,654  |       
|Interest expense, net                                                   |                                          |                                                       | 3,356                |     |              |        | 453          |     |        |        | 10,678  |     |         |        | 7,215   |   
|Other income (expense)                                                  |                                          |                                                       | 220                  |     |              |        | (1,880       | )   |        |        | (2,844  | )   |         |        | (2,297  | ) 
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|                                                                        |                                          | Income before provision for
income taxes              |                      |     | 30,536       |        |              |     | 23,100 |        |         |     | 32,243  |        |         |    | 18,142  |       
|Provision for income taxes                                              |                                          |                                                       | 482                  |     |              |        | 81           |     |        |        | 2,167   |     |         |        | 63      |   
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|                                                                        |                                          | Net income                                            |                      | $   | 30,054       |        |              | $   | 23,019 |        |         | $   | 30,076  |        |         | $  | 18,079  |       
|Dividend to parent                                                      |                                          |                                                       |                     |     |              |        |             |     |        |        |        |     |         |        | (39,351 | ) 
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|                                                                        |                                          | Net income (loss) attributable to common
stockholders |                      | $   | 30,054       |        |              | $   | 23,019 |        |         | $   | 30,076  |        |         | $  | (21,272 | )     
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|Basic net income (loss) per share attributable to
common stockholders   |                                          | $                                                     | 0.43                 |     |              | $      | 0.19         |     |        | $      | 0.43    |     |         | $      | (0.24   | ) 
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|Diluted net income (loss) per share attributable
to
common stockholders |                                          | $                                                     | 0.39                 |     |              | $      | 0.19         |     |        | $      | 0.43    |     |         | $      | (0.24   | ) 
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|Basic weighted average shares outstanding                               |                                          |                                                       | 69,891               |     |              |        | 121,170      |     |        |        | 69,847  |     |         |        | 88,981  |   
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|Diluted weighted average shares outstanding                             |                                          |                                                       | 80,103               |     |              |        | 121,325      |     |        |        | 80,078  |     |         |        | 88,981  |   
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|Net income                                                              |                                          | $                                                     | 30,054               |     |              | $      | 23,019       |     |        | $      | 30,076  |     |         | $      | 18,079  |   
|Other comprehensive income:                                             |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|                                                                        | Foreign currency translation adjustments |                                                       |                      | (22 | )            |        |              | (99 | )      |        |         | 266 |         |        |         | (7 | )      
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   
|                                                                        |                                          |                                                       | Comprehensive income |     | $            | 30,032 |              |     | $      | 22,920 |         |     | $       | 30,342 |         |    | $       | 18,072 | 
|                                                                        |                                          |                                                       |                      |     |              |        |              |     |        |        |         |     |         |        |         |   

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

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

|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |        |         |         |  
|------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | ----- | ------------ | ------- | ------------ | ------ | ------- | ------- | -
|                                                                                            |                                                                                         |                                           |                                                     |       | Nine Months  |         | Nine Months 
|                                                                                            |                                                                                         |                                           |                                                     |       | Ended        |         | Ended       
|                                                                                            |                                                                                         |                                           |                                                     |       | December 31, |         | December 31,
|                                                                                            |                                                                                         |                                           |                                                     |       | 2002         |         | 2003        
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |             
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |                                                                                         |                                           |                                                     |       |              |         |              |       
|Net income                                                                                  |                                                                                         | $                                         | 30,076                                              |       |              | $       | 18,079       |       
|Adjustments to reconcile net income to
net cash provided by (used in) operating activities: |                                                                                         |                                           |                                                     |       |              |         |              |       
|                                                                                            | Depreciation and amortization                                                           |                                           |                                                     | 5,850 |              |         |              | 6,757  |        
|                                                                                            | Loss on transfer of investment held at cost                                             |                                           |                                                     |      |              |         |              | 1,750  |        
|                                                                                            | Write-down of investment held at cost                                                   |                                           |                                                     | 3,622 |              |         |              |       |        
|                                                                                            | Amortization of discount on related party debt                                          |                                           |                                                     | 2,152 |              |         |              | 1,339  |        
|                                                                                            | Accrued interest                                                                        |                                           |                                                     | 6,287 |              |         |              | 1,860  |        
|                                                                                            | Accretion of interest on short-term promissory notes                                    |                                           |                                                     | 66    |              |         |              |       |        
|                                                                                            | Amortization of deferred financing fees                                                 |                                           |                                                     | 806   |              |         |              | 2,149  |        
|                                                                                            | Deferred income                                                                         |                                           |                                                     | 457   |              |         |              | (3,557 | )      
|                                                                                            | Write-off of property and equipment                                                     |                                           |                                                     | 858   |              |         |              | 37     |        
|                                                                                            | In-process research and development related to acquisition of
Shiny Entertainment, Inc. |                                           |                                                     | 7,400 |              |         |              |       |        
|Changes in operating assets and liabilities:                                                |                                                                                         |                                           |                                                     |       |              |         |              |       
|                                                                                            |                                                                                         | Receivables, net                          |                                                     |       | (61,359      | )       |              |        | (53,325 | )      
|                                                                                            |                                                                                         | Inventories, net                          |                                                     |       | (7,382       | )       |              |        | (5,048  | )      
|                                                                                            |                                                                                         | Due from related parties                  |                                                     |       | (1,566       | )       |              |        | (7,783  | )      
|                                                                                            |                                                                                         | Due to related parties                    |                                                     |       | 6,069        |         |              |        | (5,325  | )      
|                                                                                            |                                                                                         | Prepaid expenses and other current assets |                                                     |       | (5,079       | )       |              |        | 5,596   |        
|                                                                                            |                                                                                         | Accounts payable                          |                                                     |       | 13,534       |         |              |        | 23,979  |        
|                                                                                            |                                                                                         | Accrued liabilities                       |                                                     |       | 19,690       |         |              |        | 2,813   |        
|                                                                                            |                                                                                         | Royalties payable                         |                                                     |       | 18,465       |         |              |        | 7,114   |        
|                                                                                            |                                                                                         | Income taxes payable                      |                                                     |       | 1,362        |         |              |        | (711    | )      
|                                                                                            |                                                                                         | Income taxes receivable                   |                                                     |       | 5,364        |         |              |        | 2       |        
|                                                                                            |                                                                                         | Other long-term liabilities               |                                                     |       | 2,007        |         |              |        | (231    | )      
|                                                                                            |                                                                                         | Other assets                              |                                                     |       | 2,099        |         |              |        | (637    | )      
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |       
|                                                                                            |                                                                                         |                                           | Net cash provided by (used in) operating activities |       |              | 50,778  |              |        |         | (5,142  | )
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |                                                                                         |                                           |                                                     |       |              |         |              |       
|Purchases of property and equipment                                                         |                                                                                         |                                           | (4,867                                              | )     |              |         | (4,040       | )     
|Advances to related parties                                                                 |                                                                                         |                                           | (10,296                                             | )     |              |         | (14,368      | )     
|Acquisition of Shiny Entertainment, Inc., net of nominal cash acquired                      |                                                                                         |                                           | (34,010                                             | )     |              |         |             |       
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |       
|                                                                                            |                                                                                         |                                           | Net cash used in investing activities               |       |              | (49,173 | )            |        |         | (18,408 | )
|                                                                                            |                                                                                         |                                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |                                                                                         |                                           |                                                     |       |              |         |              |       
|Payment of related party credit facility, net                                               |                                                                                         |                                           | (18,260                                             | )     |              |         |             |       
|Borrowings from related party medium-term loan                                              |                                                                                         |                                           | 48,278                                              |       |              |         |             |       
|Payments under short-term promissory notes                                                  |                                                                                         |                                           | (16,157                                             | )     |              |         |             |       
|Payments of BNP Paribus revolving credit facility                                           |                                                                                         |                                           | (24,888                                             | )     |              |         |             |       
|Borrowings (payments) of General Electric Capital Corporation Senior
Credit Facility, net   |                                                                                         |                                           | 9,157                                               |       |              |         | (3,771       | )     
|Proceeds from exercise of stock options                                                     |                                                                                         |                                           | 103                                                 |       |              |         | 448          |       
|Proceeds from employee stock purchase plan                                                  |                                                                                         |                                           | 200                                                 |       |              |         | 103          |       
|Net proceeds from public stock offering                                                     |                                                                                         |                                           |                                                    |       |              |         | 34,894       |       
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |       
|                                                                                            |                                                                                         |                                           | Net cash (used in) provided by financing activities |       |              | (1,567  | )            |        |         | 31,674  |  
|Effect of exchange rates on cash                                                            |                                                                                         |                                           | 94                                                  |       |              |         | 101          |       
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |       
|Net increase in cash                                                                        |                                                                                         |                                           | 132                                                 |       |              |         | 8,225        |       
|Cash  beginning of fiscal period                                                           |                                                                                         |                                           | 4,685                                               |       |              |         | 815          |       
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |       
|Cash  end of fiscal period                                                                 |                                                                                         | $                                         | 4,817                                               |       |              | $       | 9,040        |       
|                                                                                            |                                                                                         |                                           |                                                     |       |              |         |              |       

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|                                                                                                                   |                             |   |              |     |              |   |         |   | 
|------------------------------------------------------------------------------------------------------------------ | --------------------------- | - | ------------ | --- | ------------ | - | ------- | - | 
|                                                                                                                   |                             |   | Nine Months  |     | Nine Months 
|                                                                                                                   |                             |   | Ended        |     | Ended       
|                                                                                                                   |                             |   | December 31, |     | December 31,
|                                                                                                                   |                             |   | 2002         |     | 2003        
|                                                                                                                   |                             |   |              |     |             
|SUPPLEMENTAL CASH FLOW INFORMATION                                                                                 |                             |   |              |     |              |   |         |  
|                                                                                                                   |                             |  
|SUPPLEMENTAL DISCLOSURE OF
OPERATING ACTIVITIES:                                                                   |                             |   |              |     |              |   |         |  
|Cash paid for interest                                                                                             |                             |   | 3,713        |     |              |   | 5,738   |  
|                                                                                                                  
|Cash paid for taxes                                                                                                |                             |   |             |     |              |   | 730     |  
|                                                                                                                   |                             |  
|                                                                                                                  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:                                                          |                             |   |              |     |              |   |         |  
|Acquisition of Shiny Entertainment, Inc.:                                                                          |                             |   |              |     |              |   |         |  
|Fair value of assets acquired                                                                                      |                             | $ | 50,776       |     |              | $ |        |  
|Less: Short-term promissory notes issued to seller and others                                                      |                             |   | 16,059       |     |              |   |        |  
|                                                                                                                   | Assumption of stock options |   |              | 672 |              |   |         |  | 
|                                                                                                                   | Other payments due seller   |   |              | 31  |              |   |         |  | 
|                                                                                                                   | Cash acquired               |   |              | 4   |              |   |         |  | 
|                                                                                                                   |                             |   |              |     |              |   |         |  
|Acquisition, net of cash acquired                                                                                  |                             | $ | 34,010       |     |              | $ |        |  
|                                                                                                                   |                             |   |              |     |              |   |         |  
|                                                                                                                  
|Acquisition of Atari license for 2,000 shares of common stock                                                      |                             |   |             |     |              |   | 8,500   |  
|                                                                                                                   |                             |  
|                                                                                                                  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:                                                          |                             |   |              |     |              |   |         |  
|Net debt exchanged for 39,030 shares of common stock:                                                              |                             |   |              |     |              |   |         |  
|Related party debt, revolving credit facility and related party
medium-term loan prior to recapitalization of debt |                             | $ |             |     |              | $ | 212,429 |  
|Less: Offset of advances to related parties against related party debt                                             |                             |   |             |     |              |   | 46,552  |  
|                                                                                                                   |                             |   |              |     |              |   |         |  
|Net debt exchanged for common stock                                                                                |                             | $ |             |     |              | $ | 165,877 |  
|                                                                                                                   |                             |   |              |     |              |   |         |  
|Issuance of shares in lieu of partial royalty payment                                                              |                             |   |             |     |              |   | 1,199   |  
|Assumption of Shiny Entertainment, Inc. employee stock purchase plan                                               |                             |   | 672          |     |              |   |        |  

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

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ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
(in thousands)

|                                                                                                                                                                                                |  |        |         |        |  |         |       |             |  |               |         |       |  |       |          |   |  |             |       |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ------- | ------ |  | ------- | ----- | ----------- |  | ------------- | ------- | ----- |  | ----- | -------- | - |  | ----------- | ----- | - |  | - | -------- | -
|                                                                                                                                                                                                |  |        |         |        |  |         |       |             |  |               |         |       |  |       |          |   |  | Accumulated |       |   |  |  
|                                                                                                                                                                                                |  | Common |         |        |  |         |       | Additional  |  |               |         |       |  | Other |          |   |  |            
|                                                                                                                                                                                                |  | Stock  |         | Common |  | Paid-In |       | Accumulated |  | Comprehensive |         |       |  |      
|                                                                                                                                                                                                |  | Shares |         | Stock  |  | Capital |       | (Deficit)   |  | Income        |         | Total
|                                                                                                                                                                                                |  |        |         |        |  |         |       |             |  |               |         |      
|Balance, July 1, 2002                                                                                                                                                                           |  |        | 69,826  |        |  | $       | 698   |             |  | $             | 485,759 |       |  | $     | (604,921 | ) |  | $           | 3,135 |   |  | $ | (115,329 | )
|Issuance of common stock pursuant to
employee stock purchase plan                                                                                                                               |  |        | 46      |        |  |         |      |             |  |               | 125     |       |  |       |         |   |  |             |      |   |  |   | 125      |  
|Exercise of stock options                                                                                                                                                                       |  |        | 48      |        |  |         | 1     |             |  |               | 115     |       |  |       |         |   |  |             |      |   |  |   | 116      |  
|Issuance of warrants to external developer                                                                                                                                                      |  |        |        |        |  |         |      |             |  |               | 54      |       |  |       |         |   |  |             |      |   |  |   | 54       |  
|Net income                                                                                                                                                                                      |  |        |        |        |  |         |      |             |  |               |        |       |  |       | 18,070   |   |  |             |      |   |  |   | 18,070   |  
|Foreign currency translation adjustment                                                                                                                                                         |  |        |        |        |  |         |      |             |  |               |        |       |  |       |         |   |  |             | 46    |   |  |   | 46       |  
|                                                                                                                                                                                                |  |        |         |        |  |         |       |             |  |               |         |       |  |       |          |   |  |             |       |   |  |   |          |  
|Balance, March 31, 2003                                                                                                                                                                         |  |        | 69,920  |        |  |         | 699   |             |  |               | 486,053 |       |  |       | (586,851 | ) |  |             | 3,181 |   |  |   | (96,918  | )
|Issuance of common stock pursuant to
employee stock purchase plan                                                                                                                               |  |        | 54      |        |  |         | 1     |             |  |               | 102     |       |  |       |         |   |  |             |      |   |  |   | 103      |  
|Exercise of stock options                                                                                                                                                                       |  |        | 97      |        |  |         | 1     |             |  |               | 447     |       |  |       |         |   |  |             |      |   |  |   | 448      |  
|Net income                                                                                                                                                                                      |  |        |        |        |  |         |      |             |  |               |        |       |  |       | 18,079   |   |  |             |      |   |  |   | 18,079   |  
|Foreign currency translation adjustment                                                                                                                                                         |  |        |        |        |  |         |      |             |  |               |        |       |  |       |         |   |  |             | (7    | ) |  |   | (7       | )
|Cashless exercise of warrants                                                                                                                                                                   |  |        | 13      |        |  |         |      |             |  |               |        |       |  |       |         |   |  |             |      |   |  |   |         |  
|Issuance of common stock in lieu of partial royalty
payment                                                                                                                                     |  |        | 280     |        |  |         | 3     |             |  |               | 1,196   |       |  |       |         |   |  |             |      |   |  |   | 1,199    |  
|Issuance of 39,030 common shares as part of the
Companys recapitalization in exchange for cancellation
of related party debt, related party credit facility and
related party medium-term loan |  |        | 39,030  |        |  |         | 390   |             |  |               | 165,487 |       |  |       |         |   |  |             |      |   |  |   | 165,877  |  
|Dividend to parent as part of the recapitalization
of related party debt to common shares                                                                                                       |  |        |        |        |  |         |      |             |  |               | 39,351  |       |  |       | (39,351  | ) |  |             |      |   |  |   |         |  
|Issuance of 2,000 common shares for license of the
Atari name                                                                                                                                   |  |        | 2,000   |        |  |         | 20    |             |  |               | 8,480   |       |  |       |         |   |  |             |      |   |  |   | 8,500    |  
|Issuance of 9,821 common shares in secondary
offering, net of expenses                                                                                                                          |  |        | 9,821   |        |  |         | 98    |             |  |               | 34,796  |       |  |       |         |   |  |             |      |   |  |   | 34,894   |  
|                                                                                                                                                                                                |  |        |         |        |  |         |       |             |  |               |         |       |  |       |          |   |  |             |       |   |  |   |          |  
|Balance, December 31, 2003 (unaudited)                                                                                                                                                          |  |        | 121,215 |        |  | $       | 1,212 |             |  | $             | 735,912 |       |  | $     | (608,123 | ) |  | $           | 3,174 |   |  | $ | 132,175  |  
|                                                                                                                                                                                                |  |        |         |        |  |         |       |             |  |               |         |       |  |       |          |   |  |             |       |   |  |   |          |  

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

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

Nature of Business and Other Matters

Atari, Inc., a Delaware corporation (the Company), is a leading
worldwide developer, publisher and distributor of interactive entertainment
software for use on various platforms, including personal computers (PCs),
Sonys PlayStation and PlayStation2, Microsofts Xbox and Nintendos GameCube,
Gameboy and Gameboy Advance. The Company derives its revenues primarily from
the sale of its created, published, licensed and purchased products to mass
merchants, specialty software stores, computer superstores and distributors
located throughout North America and also in various international locations.

In May 2003, the Company changed its name to Atari, Inc. and changed its
trading symbol on the NASDAQ National Market to ATAR. The Company obtained
rights to use the Atari name through a license from Infogrames
Entertainment SA, a French corporation (Infogrames SA) which
Infogrames SA acquired as part of the acquisition of Hasbro Interactive. The
Company believes that the Atari brand, which is largely credited with launching
the video game industry, continues to carry a level of respect, recognition and
legacy for innovation that will enhance the Companys reputation and improve
consumer recognition of its products. As of May 2003, all of the Companys
products are published, distributed and marketed under the Atari brand.

On November 12, 2002 (last amended December 23, 2003), the Company
obtained a 30-month $50.0 million secured revolving credit facility (Senior
Credit Facility) with General Electric Capital Corporation (GECC) (Note 8)
which was used to fund the Companys working capital and general corporate
needs and to provide funding to related parties which are wholly-owned by
Infogrames SA.
Infogrames SA owns approximately 67% of the Company, after the exercise of an
underwriters over-allotment option on October 21, 2003, directly and through
its wholly-owned subsidiaries California U.S. Holdings, Inc. (CUSH) and Atari
Interactive, Inc. (Atari Interactive). (See Offeringbelow.) As part of the
most recent amendment under the GECC Senior Credit Facility, the Company will
no longer provide funding to related parties.

During September 2003, the Company entered into a series of transactions
to restructure the Companys debt and equity through a recapitalization of debt
and an underwritten secondary public offering of common stock (Offering). In
conjunction with the recapitalization of debt, the Company secured long-term
rights to the Atari name (Atari License).

Recapitalization

In September 2003, the Company, Infogrames SA, and CUSH entered into an
agreement (Recapitalization Agreement) resulting in the exchange of all of
the Companys net related party debt with Infogrames SA and certain of its
wholly-owned subsidiaries totaling $165.9 million, into 39,029,877 shares of
the Companys common stock immediately prior to the Offering. The conversion
price was consistent with the Offering price of $4.25 per share. The converted
debt consisted of the following outstanding amounts at September 18, 2003:
$48.3 million of a medium-term loan, $44.8 million of a revolving credit
agreement with Infogrames SA, $46.3 million of non-interest bearing
subordinated convertible notes and $73.1 million of 5% subordinated convertible
notes. The Recapitalization Agreement provided for an offset of previously
provided advances to Atari Interactive and Atari Australia Pty. Ltd. (Atari
Australia) of $44.7 million and $1.9 million, respectively. Accordingly, at
December 31, 2003, no amounts remain outstanding in Advances to Related
Parties, Current Portion of Related Party Medium-Term Loan, Related Party
Credit Facility and Related Party Debt.

In connection with the Recapitalization Agreement, the Company issued
stock at a more favorable rate than was available, at the holders option,
under the original terms of the 5% subordinated convertible notes. The
incremental value of

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the additional stock issued was reported as a dividend to Infogrames SA for
$39.4 million, which had no impact on total stockholders equity and has been
reported as a charge in computing net income (loss) attributable to common
stockholders.

Atari License

In connection with the Recapitalization Agreement, Infogrames SA caused
Atari Interactive to extend the term of the license under which the Company
uses the Atari name to ten years expiring on December 31, 2013. The Company
issued 2,000,000 shares of its common stock to Atari Interactive for the
extended license and will pay a royalty equal to 1% of the Companys net
revenues during years six through ten of the extended license. The Company
recorded a deferred charge of $8.5 million, which is being amortized at the
rate of approximately $0.3 million per month. The monthly amortization is
based on the total estimated cost to be incurred by the Company over the
ten-year license period. At December 31, 2003, $3.4 million of this charge is
included in Prepaid Expenses and Other Current Assets with the remaining $4.2
million, net of $0.9 million of amortization, included in Other Assets.

Offering

On September 24, 2003, the Company offered to the public 9,820,588 new
shares of the Companys common stock at an offering price of $4.25 per share.
The net proceeds to the Company after all costs were $34.9 million.The
Company used $3.9 million of the net proceeds to repay indebtedness outstanding
under its credit facility with GECC. The remaining proceeds are being used to
pay costs of developing video game software and to meet general working capital
needs.

Additionally, on September 24, 2003, Infogrames SA sold 17,179,412 shares
of the Companys common stock as part of the Offering. The Company did not
receive any proceeds from the sale of Infogrames SAs common stock in the
Company and reimbursed Infogrames SA for the cost incurred to sell the shares.
Finally, on October 21, 2003, the underwriters exercised their over-allotment
option, purchasing 3,855,400 shares at a purchase price of $4.25 per share.
The option shares were purchased from Infogrames SA, reducing Infogrames SAs
direct and indirect ownership to approximately 67% of the Company. The
Company did not receive any of the proceeds from the exercise of the
over-allotment option.

Change in Fiscal Year-End

Effective March 28, 2003, the Company changed its fiscal year-end from
June 30 to March 31. Accordingly, the fiscal period ended December 31, 2003,
represents nine months of operations.

Basis of Presentation

The accompanying interim consolidated financial statements of the Company
are unaudited, but in the opinion of management, reflect all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the results for the interim period in accordance with instructions for Form
10-Q. Accordingly, they do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the period ended March 31, 2003. The
information for March 31, 2003 was derived from audited financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated.

Revenue Recognition

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

The Company is not contractually obligated to accept returns except for
defective product. However, the Company may permit its customers to return or
exchange product and provides allowances for estimated returns, price
concessions, or other allowances on a negotiated basis. The Company estimates
such returns and allowances based upon managements

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evaluation of historical experience, market acceptance of products
produced, retailer inventory levels, budgeted customer allowances, the nature
of the title and existing commitments to customers. Such estimates are
deducted from gross sales and provided for at the time revenue is recognized.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Goodwill and Other Intangible Assets

On June 30, 2001, the Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets was issued. SFAS No. 142
eliminates goodwill amortization over its estimated useful life. However,
goodwill is subject to at least an annual assessment for impairment by applying
a fair-value based test. Additionally, acquired intangible assets are
separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented or exchanged, regardless of the Companys
intent to do so. Intangible assets with finite lives are amortized over their
useful lives. The Company adopted SFAS No. 142 effective July 1, 2001. Such
adoption did not result in an impairment of goodwill, based on an assessment of
fair value performed by an independent appraisal company. As of March 31,
2003, the Company has performed its annual fair-value based assessment which
did not result in any impairment of goodwill and intangibles. As of December
31, 2003, the Company did not believe that there are any indications of
impairment of goodwill and intangibles. However, future changes in the facts
and circumstances relating to the Companys goodwill and other intangible
assets could result in an impairment of intangible assets in subsequent
periods.

Other intangible assets approximate $2.1 million and $1.6 million, net of
accumulated amortization of $0.6 million and $1.1 million at March 31, 2003 and
December 31, 2003, respectively.

Fair Values of Financial Instruments

SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires certain disclosures regarding the fair value of financial instruments.
Cash, accounts receivable, accounts payable, accrued liabilities, royalties
payable, revolving credit facility, related party credit facilities and amounts
due to and from related parties are reflected in the consolidated financial
statements at fair value because of the short-term maturity of these
instruments and that they are principally denominated in US dollars.

Long-Lived Assets

The Company reviews long-lived assets, such as fixed assets to be held,
for impairment annually or whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. If the
estimated fair market value of the asset is less than the carrying amount of
the asset plus the cost to dispose, an impairment loss is recognized as the
amount by which the carrying amount of the asset plus the cost to dispose
exceeds its fair value, as defined in SFAS No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

Research and Development Costs

Research and development costs related to the design, development and
testing of new software products are charged to expense as incurred. Research
and development costs also include payments for royalty advances (Milestone
Payments) to third-party developers for products that are currently in
development.

Rapid technological innovation, shelf-space competition, shorter product
life cycles and buyer selectivity have made it extremely difficult to determine
the likelihood of individual product acceptance and success. As a result, the
Company follows the policy of expensing Milestone Payments as incurred,
treating such costs as research and development expenses.

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Licenses

Payments made to third parties for licensing intellectual property are
capitalized and amortized over projected unit sales. Management evaluates the
carrying value of these capitalized licenses and records any impairment in
value, if any, as research and development expense.

Income Taxes

The Company accounts for income taxes using the asset and liability method
of accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax
rates in effect for the years in which the differences are expected to reverse.
The Company records a valuation to reduce tax assets to a realizable amount.
The Company monitors its tax liability on a quarterly basis and records the
estimated tax obligation based on the Companys current year-to-date taxable
income.

Net Income (Loss) Per Share Attributable to Common Stockholders

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

|                                        |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |         |   |   | 
|--------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------- | ------ | ------------ | --- | ------------ | ------- | ---- | - | ---- | ------ | ----- | ----- | - | ------- | - | - | 
|                                        |                                                                       |                                                                 |                                   |        | Three Months |     | Nine Months 
|                                        |                                                                       |                                                                 |                                   |        | Ended        |     | Ended       
|                                        |                                                                       |                                                                 |                                   |        | December 31, |     | December 31,
|                                        |                                                                       |                                                                 |                                   |        | 2002         |     | 2003         |         | 2002 |   | 2003
|                                        |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |     
|Basic earnings per share calculation:   |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |        
|                                        | Net income                                                            |                                                                 | $                                 | 30,054 |              |     | $            | 23,019  |      |   | $    | 30,076 |       |       | $ | 18,079  |  
|                                        | Dividend to parent                                                    |                                                                 |                                   |       |              |     |              |        |      |   |      |       |       |       |   | (39,351 | )
|                                        |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |        
|                                        | Net income (loss) attributable to common
stockholders                 |                                                                 | $                                 | 30,054 |              |     | $            | 23,019  |      |   | $    | 30,076 |       |       | $ | (21,272 | )
|                                        |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |        
|                                        | Basic weighted average shares outstanding                             |                                                                 |                                   | 69,891 |              |     |              | 121,170 |      |   |      | 69,847 |       |       |   | 88,981  |  
|                                        | Basic net income (loss) per share
attributable to
common stockholders |                                                                 | $                                 | 0.43   |              |     | $            | 0.19    |      |   | $    | 0.43   |       |       | $ | (0.24   | )
|                                        |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |        
|Diluted earnings per share calculation: |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |        
|                                        | Net income                                                            |                                                                 | $                                 | 30,054 |              |     | $            | 23,019  |      |   | $    | 30,076 |       |       | $ | 18,079  |  
|                                        |                                                                       | Interest
expense:
Infogrames SA 0% subordinate convertible
note |                                   |        | 718          |     |              |         |     |   |      |        | 2,580 |       |   |         |  |  
|                                        |                                                                       |                                                                 | 5% subordinated convertible notes |        |              | 867 |              |         |      |  |      |        |       | 2,153 |   |         |   |  | 
|                                        | Dividend to parent                                                    |                                                                 |                                   |       |              |     |              |        |      |   |      |       |       |       |   | (39,351 | )
|                                        |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |        
|                                        | Net income (loss) attributable to common
stockholders                 |                                                                 | $                                 | 31,639 |              |     | $            | 23,019  |      |   | $    | 34,809 |       |       | $ | (21,272 | )
|                                        |                                                                       |                                                                 |                                   |        |              |     |              |         |      |   |      |        |       |       |   |        

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|                                                                        |                                   |                                               |        |  |              |   |              |  |      |   |        |  |       |   |        |   |   |  | 
|----------------------------------------------------------------------- | --------------------------------- | --------------------------------------------- | ------ |  | ------------ | - | ------------ |  | ---- | - | ------ |  | ----- | - | ------ | - | - |  | 
|                                                                        |                                   |                                               |        |  | Three Months |   | Nine Months 
|                                                                        |                                   |                                               |        |  | Ended        |   | Ended       
|                                                                        |                                   |                                               |        |  | December 31, |   | December 31,
|                                                                        |                                   |                                               |        |  | 2002         |   | 2003         |  | 2002 |   | 2003  
|                                                                        |                                   |                                               |        |  |              |   |              |  |      |   |       
|Weighted average shares outstanding                                     |                                   |                                               | 69,891 |  |              |   | 121,170      |  |      |   | 69,847 |  |       |   | 88,981 |  
|                                                                        | Dilutive potential common shares: |                                               |        |  |              |   |              |  |      |   |        |  |       |   |        |   |  
|                                                                        |                                   | Infogrames SA 0% subordinate convertible
note |        |  | 7,619        |   |              |  |     |   |        |  | 7,620 |   |        |   |  | 
|                                                                        |                                   | 5% subordinated convertible notes             |        |  | 2,500        |   |              |  |     |   |        |  | 2,500 |   |        |   |  | 
|                                                                        |                                   | Employee stock options and warrants           |        |  | 93           |   |              |  | 155  |   |        |  | 111   |   |        |   |  | 
|                                                                        |                                   |                                               |        |  |              |   |              |  |      |   |        |  |       |   |        |  
|Diluted weighted average shares outstanding                             |                                   |                                               | 80,103 |  |              |   | 121,325      |  |      |   | 80,078 |  |       |   | 88,981 |  
|                                                                        |                                   |                                               |        |  |              |   |              |  |      |   |        |  |       |   |        |  
|Diluted net income (loss) per share
attributable to
common stockholders |                                   | $                                             | 0.39   |  |              | $ | 0.19         |  |      | $ | 0.43   |  |       | $ | (0.24  | )
|                                                                        |                                   |                                               |        |  |              |   |              |  |      |   |        |  |       |   |        |  

The number of antidilutive shares that were excluded from the diluted
weighted average share calculation for the three months ended December 31, 2003
was approximately 7,034,000 from stock options and warrants in which the
exercise price is greater than the average market price of the common shares
during the period. The nine months ended December 31, 2003, excludes 16,058,000
antidilutive shares representing all stock options, restricted stock awards and
warrants using the treasury stock method and other convertible securities since
the nine month results reflect a loss to common stockholders.

The number of antidilutive shares that were excluded from the diluted
weighted average share calculation for the three and nine months ended December
31, 2002 was approximately 6,200,000 and 6,180,000, respectively, from stock
options and warrants in which the exercise price is greater than the
average market price of the common shares during the respective periods.

Stock-Based Compensation

The Company accounts for employee stock option plans under the intrinsic
value method proscribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations. Any
equity instruments issued other than to employees for acquiring goods and
services are accounted for using fair value at the date of grant.

In fiscal 2003, the Company adopted the disclosure provisions of Financial
Accounting Standards Board (FASB) Statement No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an Amendment to FASB
Statement No. 123, which provides alternative methods of transition for a
voluntary change to the fair-value-based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements
of FASB No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
compensation and the effect of the methods used on reported results.

At December 31, 2003, the Company had three stock option plans. No
compensation cost is reflected in net income (loss), as all options granted
under those plans generally have an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on the net income (loss) and income (loss) per share if
the Company had applied the fair value recognition provisions of the FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation (in thousands, except per share data):

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|                             |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |         |  
|---------------------------- | ----------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------- | -
|                             |                                                                                           |  | Three Months |        | Nine Months 
|                             |                                                                                           |  | Ended        |        | Ended       
|                             |                                                                                           |  | December 31, |        | December 31,
|                             |                                                                                           |  | 2002         |        | 2003         |  | 2002 |        | 2003
|                             |                                                                                           |  |              |        |              |  |      |        |     
|Net income:                  |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|                             | Basic - as reported                                                                       |  | $            | 30,054 |              |  | $    | 23,019 |      |  | $ | 30,076 |  |  | $ | 18,079  |  
|                             | Less: Fair value of
stock-based employee
compensation expense, net of
related tax effects |  |              | 1,333  |              |  |      | 1,668  |      |  |   | 4,260  |  |  |   | 4,523   |  
|                             |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|                             | Basic - pro forma net income                                                              |  |              | 28,721 |              |  |      | 21,351 |      |  |   | 25,816 |  |  |   | 13,556  |  
|                             | Dividend to parent                                                                        |  |              |       |              |  |      |       |      |  |   |       |  |  |   | (39,351 | )
|                             |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|                             | Basic  pro forma net income
(loss) attributable to common
stockholders                   |  | $            | 28,721 |              |  | $    | 21,351 |      |  | $ | 25,816 |  |  | $ | (25,795 | )
|                             |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|                             | Diluted - as reported                                                                     |  | $            | 31,639 |              |  | $    | 23,019 |      |  | $ | 34,809 |  |  | $ | 18,079  |  
|                             | Less: Fair value of
stock-based employee
compensation expense, net of
related tax effects |  |              | 1,333  |              |  |      | 1,668  |      |  |   | 4,260  |  |  |   | 4,523   |  
|                             |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|                             | Diluted - pro forma net income                                                            |  |              | 30,306 |              |  |      | 21,351 |      |  |   | 30,549 |  |  |   | 13,556  |  
|                             | Dividend to parent                                                                        |  |              |       |              |  |      |       |      |  |   |       |  |  |   | (39,351 | )
|                             |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|                             | Diluted  pro forma net income
(loss) attributable to common
stockholders                 |  | $            | 30,306 |              |  | $    | 21,351 |      |  | $ | 30,549 |  |  | $ | (25,795 | )
|                             |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|Net income (loss) per share: |                                                                                           |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        
|                             | Basic attributable to common
stockholders  as reported                                   |  | $            | 0.43   |              |  | $    | 0.19   |      |  | $ | 0.43   |  |  | $ | (0.24   | )
|                             | Basic attributable to common
stockholders  pro forma                                     |  | $            | 0.41   |              |  | $    | 0.18   |      |  | $ | 0.37   |  |  | $ | (0.29   | )
|                             | Diluted attributable to common
stockholders - as reported                                 |  | $            | 0.39   |              |  | $    | 0.19   |      |  | $ | 0.43   |  |  | $ | (0.24   | )
|                             | Diluted attributable to common
stockholders  pro forma                                   |  | $            | 0.38   |              |  | $    | 0.18   |      |  | $ | 0.38   |  |  | $ | (0.29   | )

The fair market value of options granted under stock option plans during
the three months and nine months ended December 31, 2002 and 2003 was
determined using the Black-Scholes option pricing model utilizing the following
assumptions:

|                                         |  |              |         |              |  |      |         |      |  |  |         |   |  |  |         |  
|---------------------------------------- |  | ------------ | ------- | ------------ |  | ---- | ------- | ---- |  |  | ------- | - |  |  | ------- | -
|                                         |  | Three Months |         | Nine Months 
|                                         |  | Ended        |         | Ended       
|                                         |  | December 31, |         | December 31,
|                                         |  | 2002         |         | 2003         |  | 2002 |         | 2003
|                                         |  |              |         |              |  |      |         |     
|Dividend yield                           |  |              | 0       | %            |  |      | 0       | %    |  |  | 0       | % |  |  | 0       | %
|Anticipated volatility                   |  |              | 95      | %            |  |      | 123     | %    |  |  | 95      | % |  |  | 122     | %
|Weighted average risk-free interest rate |  |              | 4.51    | %            |  |      | 3.00    | %    |  |  | 4.51    | % |  |  | 2.78    | %
|Expected lives                           |  |              | 4 years |              |  |      | 4 years |      |  |  | 4 years |   |  |  | 4 years |  

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Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities. In December 2003, the FASB
issued FIN No. 46 (Revised) (FIN 46-R) to address certain FIN 46
implementation issues. This interpretation requires that the assets,
liabilities, and results of activities of a Variable Interest Entity (VIE) be
consolidated into the financial statements of the enterprise that has a
controlling interest in the VIE. FIN 46-R also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. For
entities acquired or created before February 1, 2003, this interpretation is
effective no later than the end of the first interim or reporting period ending
after March 15, 2004, except for those VIEs that are considered to be special
purpose entities, for which the effective date is no later than the end of the
first interim or annual reporting period ending after December 15, 2003. For
all entities that were acquired subsequent to January 31, 2003, this
interpretation is effective as of the first interim or annual period ending
after December 31, 2003. The adoption of the provisions of this interpretation
did not have a material effect on the Companys financial condition or results
of operations.

In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS No.
133, by requiring that contracts with comparable characteristics be accounted
for in a similar fashion. In particular, the Statement: (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133;
(2) clarifies when a derivative contains a financing component; (3) amends the
definition of an underlying to conform it to language used in FIN No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; and (4) amends certain other
existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The Company does not have any derivative instruments as
defined in SFAS No. 149. Accordingly, this pronouncement is currently not
applicable to the Company.

In May 2003, the FASB issued SFAS No. 150, Accounting for Financial
Instruments with the Characteristics of Both Liabilities and Equities. SFAS
No. 150 establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. Pursuant to SFAS No. 150, such
freestanding financial instruments (i.e., those entered into separately from an
entitys other financial instruments or equity transactions or that are legally
detachable and separately exercisable) must be classified as liabilities or, in
some cases, assets. In addition, SFAS No. 150 requires that financial
instruments containing obligations to repurchase the issuing entitys equity
shares and, under certain circumstances, obligations that are settled by
delivery of the issuers shares be classified as liabilities. The Statement is
effective for financial instruments entered into or modified after May 31, 2003
and for other instruments at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this new principle did not have
a material impact on the Companys financial condition or results of
operations.

NOTE 2  SHINY ACQUISITION

On April 30, 2002, the Company acquired all of the outstanding shares of
common stock of Shiny Entertainment, Inc. (Shiny), a videogame development
studio (the Shiny Acquisition). Total consideration, including acquisition
costs and assumption of employee stock options to purchase shares of common
stock of Shiny was approximately $50.8 million. The Shiny Acquisition was
accounted for as a purchase. The purchase price was allocated to net assets
acquired, in process research and development, other intangible assets and
goodwill. Accordingly, $7.4 million of in process research and development was
expensed in the year ended June 30, 2002. Furthermore, $2.7 million of the
purchase price was allocated to other intangible assets and the balance was
allocated to net liabilities and goodwill. Other intangible assets are being
amortized over four years.

The purchase price paid by the Company for the shares of Shiny consisted
of (i) $31.0 million in cash at closing, (ii) the issuance of short-term
promissory notes for an aggregate principal face amount of $16.2 million
payable by the Company in installments through July 31, 2002, (iii) $2.0
million paid to third-party licensors, (iv) assumption of employee stock
options granted to purchase shares of Shiny valued at $0.7 million and (v)
approximately $0.9 million in professional and legal costs. The Company
financed the purchase with borrowings from Infogrames SA, under a medium-term
loan (Note 8), which guaranteed repayments of the short-term promissory notes.
As of December 31, 2003, no amount remained outstanding of the medium-term loan
and the loan has been eliminated as part of the Recapitalization Agreement
(Notes 1 and 8).

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NOTE 3  RECEIVABLES, NET

Receivables consist of the following (in thousands):

|                                                                                                  |  |           |         |              |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | --------- | ------- | ------------ |  | - | ------- | -
|                                                                                                  |  | March 31, |         | December 31,
|                                                                                                  |  | 2003      |         | 2003        
|                                                                                                  |  |           |         |             
|Trade accounts receivable                                                                         |  | $         | 87,372  |              |  | $ | 151,090 |  
|Less: Allowances for bad debts, returns, price protection and other
customer promotional programs |  |           | (40,319 | )            |  |   | (50,713 | )
|                                                                                                  |  |           |         |              |  |   |         |  
|                                                                                                  |  | $         | 47,053  |              |  | $ | 100,377 |  
|                                                                                                  |  |           |         |              |  |   |         |  

NOTE 4  INVENTORIES, NET

Inventories consist of the following (in thousands):

|                           |  |           |        |              |  |   |        |  
|-------------------------- |  | --------- | ------ | ------------ |  | - | ------ | -
|                           |  | March 31, |        | December 31,
|                           |  | 2003      |        | 2003        
|                           |  |           |        |             
|Finished goods             |  | $         | 38,721 |              |  | $ | 40,481 |  
|Return inventory           |  |           | 2,786  |              |  |   | 3,697  |  
|Raw materials              |  |           | 1,223  |              |  |   | 1,260  |  
|                           |  |           |        |              |  |   |        |  
|                           |  |           | 42,730 |              |  |   | 45,438 |  
|Less: Obsolescence reserve |  |           | (4,903 | )            |  |   | (2,563 | )
|                           |  |           |        |              |  |   |        |  
|                           |  | $         | 37,827 |              |  | $ | 42,875 |  
|                           |  |           |        |              |  |   |        |  

NOTE 5 RELATED PARTY TRANSACTIONS

Royalty agreement

The Company and Infogrames SA have a distribution agreement in place,
which provides for the distribution by the Company of Infogrames SAs (or any
of it subsidiaries) products in the United States, Canada and their territories
and possessions, pursuant to which the Company will pay Infogrames SA either
30.0% of the gross profit on such products or 130.0% of the royalty rate due to
the developer, whichever is greater. The Company recognizes this amount as
royalty expense as part of cost of goods sold. For the three months ended
December 31, 2002 and 2003, the Company recorded approximately $17.5 million
and $13.7 million, respectively, of royalty expense. For the nine months ended
December 31, 2002 and 2003, the Company recorded approximately $29.0 million
and $23.3 million, respectively, of royalty expense.

The agreement also includes distribution rights by Infogrames SA of the
Companys products across Europe, pursuant to which Infogrames SA will pay the
Company 30.0% of the gross profit on such products or 130.0% of the royalty
rate due to the developer, whichever is greater. The Company recognizes this
amount as royalty income, included in net revenues. For the three months ended
December 31, 2002 and 2003, royalty income earned by the Company based on the
agreement amounted to approximately $7.0 million and $10.0 million,
respectively. For the nine months ended December 31, 2002 and 2003, royalty
income earned by the Company based on the agreement amounted to approximately
$17.2 million and $27.3 million, respectively.

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Advances to Related Parties

Atari Interactive

The GECC Senior Credit Facility allowed the Company to make advances (up
to a maximum of $45 million) to Atari Interactive through related party loans.
This related party loan bore interest at prime plus 150 basis points and, prior
to the Recapitalization Agreement, was repayable from distribution royalties
owed by the Company to Atari Interactive in the ordinary course of operations.
Additionally, normal trade payables to Atari Interactive were netted against
the loan balance outstanding when the invoices became due (generally in 45
days). At March 31, 2003, loans due from Atari Interactive were $30.5 million.

As part of the Recapitalization Agreement, Atari Interactive, Infogrames
SA and the Company agreed to offset the amount due from Atari Interactive for
advances, loans and current accounts receivable against amounts due under the
$50.0 million principal amount of non-interest bearing subordinated convertible
notes and the 5% subordinated convertible notes to Infogrames SA. As of
September 18, 2003, the Company had approximately $44.7 million due from Atari
Interactive that was offset against the balance outstanding of the $50.0
million principal amount of non-interest bearing subordinated convertible
notes. There are no advances outstanding as of December 31, 2003. (See Note 1,
Recapitalization.) For the nine months ended December 31, 2003, the Company
recognized interest income on the advances of approximately $1.1 million, of
which no amount remained outstanding at December 31, 2003.

As part of the most recent amendment under the GECC Senior Credit
Facility, dated December 23, 2003, the Company no longer makes advances to
Atari Interactive.

Atari Australia

The Companys Australian operations have earned distribution revenues and
incurred management fees from Atari Australia, a wholly-owned subsidiary of
Infogrames SA. As of March 31, 2003, the Company had approximately $1.7
million outstanding from Atari Australia.

As part of the Recapitalization Agreement, Infogrames SA and the Company
agreed to offset the outstanding receivable balance owed from Atari Australia
against amounts due under the $50.0 million principal amount of non-interest
bearing subordinated convertible notes and the 5% subordinated convertible
notes owed to Infogrames SA. As of September 18, 2003, the Company had
approximately $1.9 million outstanding from Atari Australia that was offset
against the outstanding balance of the $50.0 million principal amount of
non-interest bearing subordinated convertible notes and the 5% subordinated
convertible notes. No balance remains outstanding as of
December 31, 2003. (See
Note 1, Recapitalization.)

Gain on sale of development project to a related party

During the third quarter of fiscal 2004, the Company sold a development
project to Atari Interactive for $3.7 million resulting in a gain of an equal
amount. The project involved a license owned by Atari Interactive for which
development rights were transferred to the Company in the fourth quarter of
fiscal 2003 at no cost to the Company. Management believes that the value of
the development rights was minimal at the time of the transfer. The sales
price to Atari Interactive was equal to the development costs incurred by the
Company which were expensed during the period of development, principally in
the first six months of fiscal 2004. The sale was initiated as a result of
concerns expressed by the original third party licensor relating to the
Companys development efforts.

Please see the Related Party Transactions disclosure in the Companys
Registration Statement on Form S-2 on file with the Securities and Exchange
Commission for a description of all material related party transactions.

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NOTE 6  ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

|                                             |  |           |        |              |  |   |        | 
|-------------------------------------------- |  | --------- | ------ | ------------ |  | - | ------ | 
|                                             |  | March 31, |        | December 31,
|                                             |  | 2003      |        | 2003        
|                                             |  |           |        |             
|Accrued advertising                          |  | $         | 1,769  |              |  | $ | 14,633 | 
|Accrued professional fees and other services |  |           | 1,696  |              |  |   | 2,009  | 
|Accrued salary and related costs             |  |           | 8,944  |              |  |   | 4,034  | 
|Accrued freight and processing fees          |  |           | 1,207  |              |  |   | 1,890  | 
|Accrued third-party development expenses     |  |           | 4,826  |              |  |   | 4,345  | 
|Accrued distribution services                |  |           | 8,134  |              |  |   | 3,737  | 
|Other                                        |  |           | 5,296  |              |  |   | 4,410  | 
|                                             |  |           |        |              |  |   |        | 
|                                             |  | $         | 31,872 |              |  | $ | 35,058 | 
|                                             |  |           |        |              |  |   |        | 

NOTE 7  COMMITMENTS AND CONTINGENCIES

Litigation

During the nine months ended December 31, 2003, no significant claims were
asserted against or by the Company that in managements opinion the likely
resolution of which would have a material adverse affect on the Companys
liquidity, financial condition or results of operations, although the Company
is involved in various legal actions arising in the ordinary course of
business. The following litigation matters are still pending or were
terminated during the period. The Company continues to believe that, with
respective to pending matters, the underlying complaints are without merit and
intends to defend itself vigorously against these actions.

The Companys management believes that the ultimate resolution of any of
the actions summarized below or any other actions which are not specifically
described herein will not have a material adverse effect on the Companys
liquidity, financial condition or results of operations.

KBK

On September 16, 2002, Knight Bridging Korea Co. Ltd. (KBK), a
distributor of electronic games via the Internet and local area networks, filed
a lawsuit against Gamesonline.com, Inc. (Gamesonline), a subsidiary of
Interplay Entertainment Corp. (Interplay), and the Company in Superior Court
of California, Orange County. KBK alleges that on or about December 15, 2001,
KBK entered into a contract with Gamesonline to obtain the right to localize
(i.e., right to translate games into the local language of the country where
the games are distributed) and to electronically distribute in Korea,
Neverwinter Nights and certain other games which were previously released. The
complaint further alleges that Gamesonline and the Company conspired to prevent
KBK from entering the market with Neverwinter Nights or any previously released
games of Gamesonline. The complaint alleges the following causes of action
against the Company: misappropriation of trade secrets under the California
Uniform Trade Secrets Act; common law misappropriation; intentional
interference with contract; negligent interference with contract; intentional
interference with prospective economic advantage; negligent interference with
prospective economic advantage; and violation of Business & Professions Code
Section 17200 et seq. The complaint seeks $98.8 million for each of these
causes of action.

An amended complaint was filed on December 3, 2002, alleging all of the
foregoing against the Company, adding Atari Interactive (formerly known as
Infogrames Interactive, Inc.) as a named defendant, and alleging that the
Company managed and directed Atari Interactive to engage in the foregoing
alleged acts. The Company and Atari Interactive filed answers on January 9,
2003. On or about January 28, 2003, Gamesonline answered the original
complaint and served a cross-complaint against KBK. On April 29, 2003, KBK
named as defendants Infogrames Asia Pacific, Infogrames Korea, and
Interplay, Inc.. On October 29, 2003, Interplay filed a cross-complaint
against the Company, Atari Interactive,

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Inc., Infogrames Korea and Roes 101 through 200. The Company and Atari
Interactive filed an answer on December 3, 2003. Discovery is ongoing.

Interplay

On September 19, 2003, Interplay, commenced a wrongful termination and
breach of contract action (the Action) in New York State Supreme Court, New
York County in which it named Atari Interactive and the Company as defendants,
seeking, among other things, a judgment declaring that a computer game license
agreement between Interplay and Atari Interactive continues to be in full force
and effect.

On September 23, 2003, Interplay obtained a preliminary injunction that
prevents termination of the computer game license agreement. On October 9,
2003, Atari Interactive answered the complaint, denying all claims, asserting
several affirmative defenses and counterclaims for breach of contract and one
counterclaim for a judgment declaring the computer game license agreement
terminated. Atari Interactives answer also asserted that the Company was
incorrectly named as the defendant in this Action. Both sides sought damages in
an amount to be determined at trial.

The Company, Atari Interactive and Interplay reached an agreement with
respect to the scope and terms of the computer game license agreement and
accordingly, filed with the court a Stipulation of Dismissal, dated December
22, 2003. The court ordered dismissal of the matter on January 6, 2004.

NOTE 8  DEBT

Credit Facilities

GECC Senior Credit Facility

On November 12, 2002 (last amended December 23, 2003), the Company
obtained a 30-month $50.0 million Senior Credit Facility with GECC to fund the
Companys working capital and general corporate needs, as well as to fund
advances to Paradigm Entertainment Inc. (Paradigm) and Atari Interactive,
each a related party. Loans under the Senior Credit Facility are based on a
borrowing base comprised of the value of the Companys accounts receivable and
short term marketable securities. The Senior Credit Facility bears interest at
prime plus 1.25% for daily borrowings or LIBOR plus 3% for borrowings with a
maturity of 30 days or greater. A commitment fee of 0.5% on the average unused
portion of the facility is payable monthly and the Company paid $0.6 million as
an initial commitment fee at closing. The Senior Credit Facility contained
certain financial covenants and named certain related entities, such as Atari
Interactive and Paradigm, as guarantors. In addition, amounts outstanding
under the Senior Credit Facility are secured by the Companys assets. At
December 31, 2003, $6.9 million of borrowings remained outstanding and $12.5
million of letters of credit were outstanding. As of December 31, 2003,
accrued interest was $0.1 million and included in accrued liabilities. At
December 31, 2003, the Company was in compliance with all
financial covenants.

As part of the most recent amendment under the Senior Credit Facility,
dated December 23, 2003, Atari Interactive and Paradigm have been removed as
guarantors. Furthermore, under this amendment, the Company will no longer fund
advances to Atari Interactive and Paradigm through related party loans.

Infogrames SA credit facilities and debt with the Company

Credit Agreement

The Company maintained a revolving credit agreement with Infogrames SA
(the Credit Agreement) which provided for an aggregate commitment of $75.0
million which bore interest at LIBOR plus 2.5%. Effective December 31, 2002,
the maturity date of the Credit Agreement was extended to April 1, 2004. This
agreement required that the Company comply with certain financial covenants
and, among other items, restricted capital expenditures. As of September 30,
2003, all outstanding borrowings were exchanged for 10,541,105 newly issued
common shares under the terms of the Recapitalization Agreement. As of
December 31, 2003, accrued interest and fees that remain outstanding were
minimal and are included in current amounts due to related parties. (See Note 1, Recapitalization.)

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Medium-Term Loan

In connection with the Shiny Acquisition, the Company obtained a $50.0
million medium-term loan from Infogrames SA. Interest was based on the three
month LIBOR rate plus 2.75% and payable on a quarterly basis, in arrears. An
unused commitment fee of 0.50% per annum was based on the aggregate amount of
the facility less outstanding loans. As of September 30, 2003, all outstanding
borrowings have been exchanged for 11,359,319 newly issued common shares under
the terms of the Recapitalization Agreement. Additionally, as of December 31,
2003, accrued interest that remained outstanding was minimal and included in
current amounts due to related parties. (See Note 1,
Recapitalization.)

Long-Term Related Party Debt

0% Notes

In conjunction with the 1999 purchase of the Company by Infogrames SA, the
Company issued to General Atlantic Partners, LLC (GAP) the $50.0 million
principal amount of non-interest bearing subordinated convertible notes (0%
Notes) in exchange for 600,000 shares of Series A Preferred Stock and $20.0
million of subordinated notes of the Company. The 0% Notes mature in December
2004 and had a redemption value of $50.0 million at maturity. In lieu of
payment at maturity, the 0% Notes were convertible at any time, at the holders
option, into shares of the Companys common stock at $20.00 per share. On
December 28, 2001, Infogrames SA assumed the 0% Notes from GAP in exchange for
shares of Infogrames SA common stock. Infogrames SA did not change any of the
terms of the 0% Notes (renamed the Infogrames SA 0% subordinated convertible
note) as they relate to the Company. Interest on the Infogrames SA 0%
subordinated convertible note was accreted at the rate of 7% per annum.

Under the terms of the September 4, 2003 Recapitalization Agreement, the
Infogrames SA 0% subordinated convertible note has been fully offset against
the advances to related parties (Notes 1 and 5).

5% Notes

In conjunction with the 1999 purchase of the Company by Infogrames SA, the
Company issued to CUSH, 5% subordinated convertible notes (5% CUSH Notes) in
exchange for $25.0 million in cash and $35.6 million in debt and accrued
interest. The 5% CUSH Notes matured in December 2004 and have a principal
amount of $60.6 million. In lieu of payment at maturity, the 5% CUSH Notes
were convertible at any time, at the holders option, into shares of the
Companys common stock at $9.25 per share.

Under the terms of the September 4, 2003 Recapitalization Agreement, the
5% CUSH Notes, net of the remaining advances to related parties, have been
fully converted to 17,129,453 of the Companys newly issued common shares at a
fair-market value of $4.25 per share. The common shares issued by the Company
were at a more favorable rate than that available under the original terms of
the 5% CUSH Notes. The resulting incremental value of the additional stock
issued was recorded as a dividend to Infogrames SA of $39.4 million (Notes 1
and 5).

In September 2003, the Company expensed the full $1.3 million of remaining
deferred financing fees related to the Infogrames SA 0% subordinated
convertible note and the 5% CUSH Notes as a result of the Recapitalization
Agreement.

NOTE 9  OPERATIONS BY REPORTABLE SEGMENTS

The Company has three reportable segments: publishing, distribution and
corporate. Publishing is comprised principally of three studios located in
Santa Monica, California; Beverly, Massachusetts; and Minneapolis, Minnesota.
Distribution constitutes the sale of other publishers titles to various mass
merchants and other retailers. Corporate includes the costs of senior executive
management, legal, finance, and administration. The majority of depreciation
expense for fixed assets is charged to the Corporate segment and a portion is
recorded to the publishing segment. This amount consists of depreciation on
computers and office furniture at the publishing unit offices. Historically,
the Company does not separately track or maintain records, other than fixed
asset records, which identify assets by segment and, accordingly, such
information is not available.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating results of these segments.

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The Companys reportable segments are strategic business units with
different associated costs and profit margins. They are managed separately
because each business unit requires different planning, merchandising and
marketing strategies.

The following unaudited summary represents the consolidated net revenues,
operating income (loss), depreciation and amortization and interest by
reportable segment for the three months and nine months ended December 31, 2002
and 2003 (in thousands):

|                                      |                               |  |            |         |              |  |           |        |       |  |   |         |   |  |   |         |  
|------------------------------------- | ----------------------------- |  | ---------- | ------- | ------------ |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                                      |                               |  | Publishing |         | Distribution |  | Corporate |        | Total
|                                      |                               |  |            |         |              |  |           |        |      
|Three months ended December 31, 2002: |                               |  |            |         |              |  |           |        |       |  |   |         |   |  |   |        
|                                      | Net revenues                  |  | $          | 179,792 |              |  | $         | 30,802 |       |  | $ |        |   |  | $ | 210,594 |  
|                                      | Operating income (loss)       |  |            | 36,564  |              |  |           | 8,050  |       |  |   | (10,942 | ) |  |   | 33,672  |  
|                                      | Depreciation and amortization |  |            | (907    | )            |  |           | (144   | )     |  |   | (805    | ) |  |   | (1,856  | )
|                                      | Interest, net                 |  |            |        |              |  |           | 19     |       |  |   | (3,375  | ) |  |   | (3,356  | )
|Three months ended December 31, 2003: |                               |  |            |         |              |  |           |        |       |  |   |         |   |  |   |        
|                                      | Net revenues                  |  | $          | 174,368 |              |  | $         | 16,239 |       |  | $ |        |   |  | $ | 190,607 |  
|                                      | Operating income (loss)       |  |            | 28,729  |              |  |           | 2,906  |       |  |   | (6,202  | ) |  |   | 25,433  |  
|                                      | Depreciation and amortization |  |            | (1,001  | )            |  |           | (2     | )     |  |   | (1,808  | ) |  |   | (2,811  | )
|                                      | Interest, net                 |  |            |        |              |  |           | 1      |       |  |   | (454    | ) |  |   | (453    | )
|Nine months ended December 31, 2002:  |                               |  |            |         |              |  |           |        |       |  |   |         |   |  |   |        
|                                      | Net revenues                  |  | $          | 371,733 |              |  | $         | 77,831 |       |  | $ |        |   |  | $ | 449,564 |  
|                                      | Operating income (loss)       |  |            | 51,779  |              |  |           | 16,533 |       |  |   | (22,547 | ) |  |   | 45,765  |  
|                                      | Depreciation and amortization |  |            | (2,920  | )            |  |           | (430   | )     |  |   | (2,500  | ) |  |   | (5,850  | )
|                                      | Interest, net                 |  |            | (57     | )            |  |           | 65     |       |  |   | (10,686 | ) |  |   | (10,678 | )
|Nine months ended December 31, 2003:  |                               |  |            |         |              |  |           |        |       |  |   |         |   |  |   |        
|                                      | Net revenues                  |  | $          | 354,976 |              |  | $         | 47,564 |       |  | $ |        |   |  | $ | 402,540 |  
|                                      | Operating income (loss)       |  |            | 38,841  |              |  |           | 8,699  |       |  |   | (19,886 | ) |  |   | 27,654  |  
|                                      | Depreciation and amortization |  |            | (2,916  | )            |  |           | (185   | )     |  |   | (3,656  | ) |  |   | (6,757  | )
|                                      | Interest, net                 |  |            |        |              |  |           | 22     |       |  |   | (7,237  | ) |  |   | (7,215  | )

NOTE 10  ODDWORLD TRANSACTION

On December 19, 2003, the Company and Oddworld Inhabitants, Inc.
(Oddworld), a developer, entered into a Settlement and Release Agreement
(Oddworld Agreement), which provided for, among other things, the exchange of
the Companys licensed publishing rights and preferred stock investment
(carried at $3.5 million) in the developer in return for a release of
Oddworlds interest in $1.8 million in publishing royalties previously advanced
to the Company by Microsoft Corporation (Microsoft).

As part of the transaction, the Company amended its existing
Microsoft/Oddworld License Agreement, which, among other things, provides that
the Company retain, without any ongoing obligations, $3.5 million of
non-refundable publishing royalties previously advanced by Microsoft. This
amount is included in net revenues. The foregoing transactions resulted in the
recognition of $3.5 million of royalties which were previously deferred and an
impairment charge on the disposition of the Companys preferred stock
investment in Oddworld of $1.7 million. The charge is included in Other Income
(Expense) in the accompanying Consolidated Statement of Operations.

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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. The Company cautions 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 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. While the Company believes in
the veracity of all statements made herein, forward-looking statements are
necessarily based upon a number of estimates and assumptions that, while
considered reasonable by the Company, are inherently subject to significant
business, economic and competitive uncertainties and contingencies and known
and unknown risks. As a result of such risks, the Companys actual results
could differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company. The Company will not necessarily update
information if any forward-looking statement later turns out to be inaccurate.
Some of the factors that could cause actual results or future events to differ
materially or otherwise, include the following: the loss of key customers;
delays in product development and related product release schedules;
maintaining relationships with leading independent video game software
developers; adapting to the rapidly changing industry technology; maintaining
or acquiring licenses to intellectual property; the termination or modification
of our agreements with hardware manufacturers; an inability to maintain or find
debt financing on terms commercially reasonable to the Company; and pricing of
and demand for distributed products. Please see the Risk Factors in the
Companys Registration Statement on Form S-2 on file with the Securities and
Exchange Commission for a description of some, but not all, risks,
uncertainties and contingencies.

Overview

Business and Operating Segments

The Company is a leading global publisher and developer of video game
software for both gaming enthusiasts and the mass-market audience.

Development, publishing and distribution of video game software are the
Companys major activities. Development activities include development of
games by both internal and external development studios. Internal studios are
studios owned by the Company for the sole purpose of game development and
external development studios are independent studios with which the Company or
Infogrames SA and its subsidiaries have contracts for the development of
specific titles. The Companys publishing activities include overseeing
development, sales, marketing and packaging of video game software.
Distribution activities primarily include the sale of games produced by other
publishers (Third-Party Products).

The distribution channels for interactive software have expanded
significantly in recent years. Consumers have access to interactive software
through a variety of outlets, including mass-merchant retailers such as
Wal-Mart and Target; major retailers, such as Best Buy, CompUSA, and Toys R
Us; and specialty stores such as Electronics Boutique and GameStop.
Additionally, the Companys games are made available through various Internet
and on-line networks. The Companys sales to key customers Wal-Mart, Best Buy, and
Target accounted for approximately 23.5%, 11.2%, and 10.3%, respectively, of
net revenues for the nine months ended December 31, 2003.

Key Challenges

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

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Key Developments

Recapitalization and Offering

During the second quarter of fiscal 2004, the Company completed a
recapitalization through the issuance of new shares pursuant to an agreement
with its majority stockholder, Infogrames SA and a public offering. Per the
agreement with Infogrames SA, on September 18, 2003, the Company, among other
things, issued an aggregate of 39,029,877 shares of its common stock, valued at
$4.25 per share, to Infogrames SA and its wholly-owned subsidiary CUSH, in
satisfaction of approximately $165.9 million of the Companys net indebtedness
to Infogrames SA. On September 24, 2003, Infogrames SA sold 17,179,412 of such
shares at $4.25 per share in a public offering. The Company also sold 9,820,588
new shares of its common stock in the public offering at $4.25 per share,
generating net proceeds to the Company of approximately $34.9 million.

After these transactions and the exercise of the underwriters
over-allotment option on October 21, 2003, Infogrames SA owns approximately 67%
of the Company directly and through its wholly-owned subsidiaries CUSH and
Atari Interactive.

Atari License

In connection with the Recapitalization Agreement, Infogrames SA caused
Atari Interactive to extend the term of the license under which the Company
uses the Atari name to ten years expiring on December 31, 2013. The Company
issued 2,000,000 shares of its common stock to Atari Interactive for the
extended license and will pay a royalty equal to 1% of the Companys net
revenues during years six through ten of the extended license. The Company
recorded a deferred charge of $8.5 million, which is being amortized at the
rate of approximately $0.3 million per month. The monthly amortization is
based on the total estimated cost to be incurred by the Company over the
ten-year license period. At December 31, 2003, $3.4 million of this charge is
included in Prepaid Expenses and Other Current Assets with the remaining $4.2
million, net of $0.9 million of amortization, included in Other Assets.

Critical Accounting Policies

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

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Sales returns, price protection, other customer related allowances and
allowance for doubtful accounts

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

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The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make payments when due
or within a reasonable period of time thereafter. If the financial condition
of the Companys customers were to deteriorate, resulting in an impairment of
their ability to make required payments, additional allowances may be required.

For the three months ended December 31, 2002 and 2003, the Company
recorded allowances for bad debts, returns, price protection and other customer
promotional programs of approximately $41.6 million and $36.3 million,
respectively. For the nine months ended December 31, 2002 and 2003, the
Company recorded allowances for bad debts, returns, price protection and other
customer promotional programs of approximately $91.3 million and $87.2 million,
respectively. As of March 31, 2003 and December 31, 2003, the aggregate
reserves against accounts receivables for bad debts, returns, price protection
and other customer promotional programs were approximately $40.3 million and
$50.7 million, respectively.

Inventories

The Company writes down its inventories for estimated slow-moving or
obsolete inventories equal to the difference between the cost of inventories
and estimated market value based upon assumed market conditions. If actual
market conditions are less favorable than those assumed by management,
additional inventory write-downs may be required. For the three months ended
December 31, 2002 and 2003, the Company recorded obsolescence expense of
approximately $0.9 million and $0.3 million, respectively. For the nine months
ended December 31, 2002 and 2003, the Company recorded obsolescence expense of
approximately $3.1 million and $0.9 million, respectively. As of March 31, 2003
and December 31, 2003, the aggregate reserve against inventories was
approximately $4.9 million and $2.6 million, respectively.

External developer royalty advances and milestone payments

Rapid technological innovation, shelf-space competition, shorter product
life cycles and buyer selectivity have made it extremely difficult to determine
the likelihood of individual product acceptance and success. As a result, the
Company follows the policy of expensing external developer royalty advances
(also known as developer advances) as incurred, treating such costs as research
and development expenses. Generally, developers are paid an advance upon the
signing of a contract with the Company. Subsequent payments are due as the
specific contractual milestones are met by the developer and approved by the
Company. The timing of when these contracts are entered into and when
milestone payments are made could vary significantly from budgeted amounts and,
because these payments are expensed as incurred, they could have a material
impact on reported results in a given period.

Income taxes

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

As of December 31, 2003, the Company has combined net operating loss
carryforwards of approximately $427.8 million for federal tax purposes. These
loss carryforwards are available to offset future taxable income, if any, and
will expire beginning in the years 2011 through 2022. In addition, the amount
and expiration of net operation loss carryforwards may differ for state tax
purposes. The Company experienced an ownership change in 1999 as a result of
its acquisition by Infogrames SA. Under Section 382 of the Internal Revenue
Code, when there is an ownership change, the pre-ownership-change loss
carryforwards are subject to an annual limitation which could reduce or defer
the utilization of these losses. Pre-acquisition losses of approximately
$203.3 million are subject to an annual limitation (approximately $7.2
million). A full valuation allowance has been recorded against the net deferred
tax asset based on the Companys historical operating results and the
conclusion that such asset may not be realized. Management reassesses its
position with regard to the valuation allowance on a quarterly basis.

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Related Party Transactions

The Company is involved in numerous related party transactions with
Infogrames SA and its subsidiaries. These related party transactions include,
but are not limited to the purchase and sale of product, game development,
management and support services and royalty agreements. For a description of
all material related party transactions, please see the Companys Registration
Statement on Form S-2.

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Results of Operations

Three months ended December 31, 2003 versus the three months ended
December 31, 2002

Consolidated Statement of Operations (dollars in thousands):

|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        |  |       |    |      |   |         |   |        |  
|------------------------------------------------------ |  | ---------------------------------------------- | ------- | ------------ | ------- | -------- | ----- | ------------ | ---- | -------- | ------- | ---------- | ------ |  | ----- | -- | ---- | - | ------- | - | ------ | -
|                                                       |  |                                                |         | Three        |         |          |       |              |      | Three    |         |            |        |  |       |    |      |  
|                                                       |  |                                                |         | Months       |         | % of     |       | Months       |      | % of     |         |            |        | 
|                                                       |  |                                                |         | Ended        |         | Net      |       | Ended        |      | Net      |         | Increase/ 
|                                                       |  |                                                |         | December 31, |         | Revenues |       | December 31, |      | Revenues |         | (Decrease)
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |           
|                                                       |  |                                                |         | 2002         |         | 2002     |       | 2003         |      | 2003     |         |            |        | 
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        | 
|Net revenues                                           |  | $                                              | 210,594 |              |         |          | 100.0 | %            |      | $        | 190,607 |            |        |  | 100.0 | %  |      | $ | (19,987 | )
|Cost of goods sold                                     |  |                                                | 104,142 |              |         |          | 49.5  | %            |      |          | 93,916  |            |        |  | 49.3  | %  |      |   | (10,226 | )
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        |  |       |    |      |   |         |  
|                                                       |  | Gross profit                                   |         |              | 106,452 |          |       |              | 50.5 | %        |         |            | 96,691 |  |       |    | 50.7 | % |         |   | (9,761 | )
|Selling and distribution expenses                      |  |                                                | 39,758  |              |         |          | 18.9  | %            |      |          | 37,339  |            |        |  | 19.6  | %  |      |   | (2,419  | )
|General and administrative expenses                    |  |                                                | 14,190  |              |         |          | 6.6   | %            |      |          | 7,924   |            |        |  | 4.2   | %  |      |   | (6,266  | )
|Research and development                               |  |                                                | 16,976  |              |         |          | 8.1   | %            |      |          | 26,928  |            |        |  | 14.1  | %  |      |   | 9,952   |  
|Gain on sale of development
project to
a related party |  |                                                |        |              |         |          | 0.0   | %            |      |          | (3,744  | )          |        |  | (2.0  | %) |      |   | 3,744   |  
|Depreciation and amortization                          |  |                                                | 1,856   |              |         |          | 0.9   | %            |      |          | 2,811   |            |        |  | 1.5   | %  |      |   | 955     |  
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        |  |       |    |      |   |         |  
|                                                       |  | Operating income                               |         |              | 33,672  |          |       |              | 16.0 | %        |         |            | 25,433 |  |       |    | 13.3 | % |         |   | (8,239 | )
|Interest expense, net                                  |  |                                                | 3,356   |              |         |          | 1.6   | %            |      |          | 453     |            |        |  | 0.2   | %  |      |   | (2,903  | )
|Other income (expense)                                 |  |                                                | 220     |              |         |          | 0.1   | %            |      |          | (1,880  | )          |        |  | (1.0  | %) |      |   | (2,100  | )
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        |  |       |    |      |   |         |  
|                                                       |  | Income before provision for
income
taxes       |         |              | 30,536  |          |       |              | 14.5 | %        |         |            | 23,100 |  |       |    | 12.1 | % |         |   | (7,436 | )
|Provision for income taxes                             |  |                                                | 482     |              |         |          | 0.2   | %            |      |          | 81      |            |        |  | 0.0   | %  |      |   | (401    | )
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        |  |       |    |      |   |         |  
|                                                       |  | Net income                                     |         |              | 30,054  |          |       |              | 14.3 | %        |         |            | 23,019 |  |       |    | 12.1 | % |         |   | (7,035 | )
|Dividend to parent                                     |  |                                                |        |              |         |          | 0.0   | %            |      |          |        |            |        |  | 0.0   | %  |      |   |        |  
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        |  |       |    |      |   |         |  
|                                                       |  | Net income attributable to
common
stockholders |         | $            | 30,054  |          |       |              | 14.3 | %        |         | $          | 23,019 |  |       |    | 12.1 | % |         | $ | (7,035 | )
|                                                       |  |                                                |         |              |         |          |       |              |      |          |         |            |        |  |       |    |      |   |         |  

Net Revenues

Net Revenues by Segment (in thousands):

|                                     |  |            |         |              |  |           |        |       |  |   |   |  |  |   |         | 
|------------------------------------ |  | ---------- | ------- | ------------ |  | --------- | ------ | ----- |  | - | - |  |  | - | ------- | 
|                                     |  | Publishing |         | Distribution |  | Corporate |        | Total
|                                     |  |            |         |              |  |           |        |      
|Three months ended December 31, 2002 |  | $          | 179,792 |              |  | $         | 30,802 |       |  | $ |  |  |  | $ | 210,594 | 
|Three months ended December 31, 2003 |  | $          | 174,368 |              |  | $         | 16,239 |       |  | $ |  |  |  | $ | 190,607 | 

Net revenues for the three months ended December 31, 2003 decreased $20.0
million or 9.5% from $210.6 million to $190.6 million primarily due to:



| |  |  | The Companys publishing business experienced a 3.0% decline in
publishing net revenues to $174.4 million from $179.8 million in the
December 2002 quarter because of lower replenishment orders over the
holiday season. Top sellers in the current quarter include titles from
the Dragon Ball Zfranchise (DBZ: Budokai 2 (Playstation2), DBZ: Budokai
Greatest Hits (Playstation2)and DBZ: Taiketsu (Gameboy Advance)) as
well as new releases Yu Yu Hakusho: Spirit Detective (Gameboy Advance),
Backyard Basketball (Playstation2), Terminator 3: Rise
of the Machines (Playstation 2 and Xbox), Mission Impossible
 Operation Surma (Playstation 2 and Xbox), and Beyblades: Ultimate Blader Jam
(GBA).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Publishing net revenues in the 2003 period include nearly $10.0
million in royalty income earned from the sale of US product in Europe,
while the December 2002 period included $7.0 million in similar royalty
income. Approximately $1.7 million of the $3.0 million increase is a
benefit of the weakening dollar on revenues earned in euros. The
remainder of the increase is from strong international sales of December
2003 quarter releases, mainly of                                                                                                                                                                                                                                               

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| |   |  | Mission Impossible-Operation Surma(Playstation2 and Xbox) and Terminator
3: Rise of the Machines(Playstation2and Xbox), than of December 2002
quarter releases.                                                                                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Additionally, the Company recognized $3.5 million of previously
deferred revenue from sublicensing income as a result of a termination
of its sublicensing arrangement with Microsoft. See Note 10 of the
Notes of these Consolidated Financial Statements for additional
information related to this transaction.
|
| |  |  | Distribution net revenues decreased from $30.8 million to $16.2
million due primarily to the Companys decision to reduce its third
party distribution operations in the specific instances where margins are considered insufficient.                                                                            

Gross Profit

|                 |  |                         |       |      |  |  |       |  
|---------------- |  | ----------------------- | ----- | ---- |  |  | ----- | -
|                 |  | Publishing Platform Mix
|                 |  |                        
|                 |  | 2002                    |       | 2003
|                 |  |                         |       |     
|PC               |  |                         | 42.5  | %    |  |  | 27.9  | %
|Playstation2     |  |                         | 26.0  | %    |  |  | 40.4  | %
|Xbox             |  |                         | 11.6  | %    |  |  | 8.7   | %
|Game Cube        |  |                         | 9.0   | %    |  |  | 5.1   | %
|Gameboy Advanced |  |                         | 6.0   | %    |  |  | 16.5  | %
|Playstation      |  |                         | 2.7   | %    |  |  | 1.3   | %
|Gameboy Color    |  |                         | 2.2   | %    |  |  | 0.1   | %
|                 |  |                         |       |      |  |  |       |  
|Total            |  |                         | 100.0 | %    |  |  | 100.0 | %

Gross profit decreased to $96.7 million for the three months ended
December 31, 2003 from $106.5 million in the comparable 2002 period primarily
from decreased sales volume, while as a percentage of net revenues, gross
profit of 50.7% is in line with December 2002s rate of 50.5%. The benefit of
a sales mix shift out of the higher cost distribution business and into the
lower cost publishing business is largely being offset by a continuing sales
mix shift within the publishing business toward the more costly console product
and away from the less costly PC product, which is consistent with current
industry trends. Approximately 72.1% of the publishing business shipments were
console sales during the three months ended December 31, 2003, versus 57.5% in
the comparable 2002 period. For the three months ended December 31, 2003, the
distribution business accounted for 8.5% of the Companys net revenues as
compared to 14.6% for the comparable 2002 period.

Selling and Distribution Expenses`

Selling and distribution expenses primarily include shipping, personnel,
advertising, promotions and distribution expenses. During the three months
ended December 31, 2003, selling and distribution expenses decreased
approximately $2.5 million, or 6.3%, to $37.3 million from $39.8 million in the
comparable 2002 period due to lower advertising expense from fewer new product
releases as well as lower variable costs (mainly freight and handling) from
decreased net revenues. Advertising expenses decreased approximately $2.5
million or 8.0% as compared to the three months ended December 31, 2002.
Freight expenses were reduced by approximately $0.8 million as compared to the
2002 period. Variable selling and distribution costs as a percentage of net
revenues remained consistent from the prior December 2002 period as fixed costs
have generally been reduced in line with lower net revenues.

General and Administrative Expenses

General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses for the three months ended December 31, 2003 and 2002 decreased $6.3
million, or 44.4%, to $7.9 million from $14.2 million mainly because the
December 2002 bonus expense included a charge for one-time incentive
compensation. Slightly offsetting the decreased bonus expense is a $0.9 million
bad debt charge in the current quarter related to the recent KB Toys Inc.
bankruptcy filing; the December 2002 quarter included a $0.3 million charge for
that quarters FAO Inc. bankruptcy filing. Without the one-time incentive
compensation from the 2002 period, general and

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administrative expenses as a percentage of net revenues of 6.6% would have
been reduced to 4.7% in the 2002 period, consistent with the 2003 percentage of
4.2%.

Research and Development Expenses

Research and development expenses primarily include the payment of royalty
advances to third-party developers on products that are currently in
development and direct costs of internally developing and producing a title.
These expenses for the three months ended December 31, 2003 increased
approximately $9.9 million, or 58.2%, to $26.9 million from $17.0 million in
the comparable 2002 period, primarily from the increase of approximately $7.0
million in amortization and write-off of capitalized licenses and the timing of
milestone completions. In relation to total research and development expenses,
the internal costs without license amortization and write-off represented 45.9%
of the total research and development costs for the three months ended December
31, 2003, while internal costs were 59.3% of total research and development
costs for the comparable 2002 period.

Gain on Sale of a Development Project to a Related Party

During the third quarter of fiscal 2004, the Company sold a development
project to Atari Interactive for $3.7 million resulting in a gain of an equal
amount. The project involved a license owned by Atari Interactive for which
development rights were transferred to the Company in the fourth quarter of
fiscal 2003 at no cost to the Company. Management believes that the value of
the development rights was minimal at the time of the transfer. The sales
price to Atari Interactive was equal to the development costs incurred by the
Company which were expensed during the period of development, principally in
the first six months of fiscal 2004. The sale was initiated as a result of
concerns expressed by the original third party licensor relating to the
Companys development efforts.

Depreciation and Amortization

Depreciation and amortization for the three months ended December 31, 2003
increased by $0.9 million, or 47.4%, to $2.8 million from $1.9 million in the
comparable 2002 period, due to amortization expense of the Companys license
with Atari Interactive for the rights to the Atari name.

Interest Expense, net

Interest expense, net, decreased approximately $2.9 million to $0.5
million for the three months ended December 31, 2003 from $3.4 million in the
comparable 2002 period. The decrease is a result of the Companys September
2003 recapitalization whereby all outstanding related party debt was converted
to equity. Since the recapitalization, interest and financing fees have
consisted primarily of expenses incurred under the Companys credit facility
arrangement with GECC. Interest income generated from the proceeds of the
Companys secondary equity offering was minimal and is netted against the
current quarters interest expense.

Other Income (Expense)

Other income (expense) includes a $1.7 million write-down related to the
Oddworld transaction (see Note 10 of the Notes of these Consolidated Financial
Statements for additional information related to this transaction).

Provision for Income Taxes

During the three months ended December 31, 2002, the Company recorded
Federal Alterative Minimum Tax of approximately $0.4 million. During the three
months ended December 31, 2003, a nominal provision was recorded for
miscellaneous state and foreign taxes paid based on the overall expected tax
rate for the fiscal year.

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Nine months ended December 31, 2003 versus the nine months ended December
31, 2002

Consolidated Statement of Operations (dollars in thousands):

|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |   |  |       |      |    |  |         |         |  
|----------------------------------- | ------------------------------------------------------ | - | ------------ | ------- | -------- |  | ------------ | ---- | -------- | - | ---------- | ------- | - |  | ----- | ---- | -- |  | ------- | ------- | -
|                                    |                                                        |   | Nine         |         |          |  |              |      | Nine     |   |            |         |   |  |       |      |   
|                                    |                                                        |   | Months       |         | % of     |  | Months       |      | % of     |   |            |         |  
|                                    |                                                        |   | Ended        |         | Net      |  | Ended        |      | Net      |   | Increase/ 
|                                    |                                                        |   | December 31, |         | Revenues |  | December 31, |      | Revenues |   | (Decrease)
|                                    |                                                        |   |              |         |          |  |              |      |          |   |           
|                                    |                                                        |   | 2002         |         | 2002     |  | 2003         |      | 2003     |   |            |         |  
|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |  
|Net revenues                        |                                                        | $ | 449,564      |         |          |  | 100.0        | %    |          | $ | 402,540    |         |   |  | 100.0 | %    |    |  | (47,024 | )      
|Cost of goods sold                  |                                                        |   | 218,062      |         |          |  | 48.5         | %    |          |   | 202,712    |         |   |  | 50.4  | %    |    |  | (15,350 | )      
|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |   |  |       |      |    |  |         |         |  
|                                    | Gross profit                                           |   |              | 231,502 |          |  |              | 51.5 | %        |   |            | 199,828 |   |  |       | 49.6 | %  |  |         | (31,674 | )
|Selling and distribution expenses   |                                                        |   | 81,122       |         |          |  | 18.0         | %    |          |   | 71,270     |         |   |  | 17.7  | %    |    |  | (9,852  | )      
|General and administrative expenses |                                                        |   | 30,904       |         |          |  | 7.0          | %    |          |   | 25,157     |         |   |  | 6.1   | %    |    |  | (5,747  | )      
|In-process research and development |                                                        |   | 7,400        |         |          |  | 1.6          | %    |          |   |           |         |   |  |      |      |    |  | (7,400  | )      
|Research and development            |                                                        |   | 60,461       |         |          |  | 13.4         | %    |          |   | 72,734     |         |   |  | 18.1  | %    |    |  | 12,273  |        
|                                    | Gain on sale of development project
to a related party |   |              |        |          |  |              |     |          |   |            | (3,744  | ) |  |       | (0.9 | %) |  |         | 3,744   |  
|Depreciation and amortization       |                                                        |   | 5,850        |         |          |  | 1.3          | %    |          |   | 6,757      |         |   |  | 1.7   | %    |    |  | 907     |        
|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |   |  |       |      |    |  |         |         |  
|                                    | Operating income                                       |   |              | 45,765  |          |  |              | 10.2 | %        |   |            | 27,654  |   |  |       | 6.9  | %  |  |         | (18,111 | )
|Interest expense, net               |                                                        |   | 10,678       |         |          |  | 2.4          | %    |          |   | 7,215      |         |   |  | 1.8   | %    |    |  | (3,463  | )      
|Other expense                       |                                                        |   | (2,844       | )       |          |  | (0.6         | %)   |          |   | (2,297     | )       |   |  | (0.6  | %)   |    |  | (547    | )      
|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |   |  |       |      |    |  |         |         |  
|                                    | Income before provision for income
taxes               |   |              | 32,243  |          |  |              | 7.2  | %        |   |            | 18,142  |   |  |       | 4.5  | %  |  |         | (14,101 | )
|Provision for income taxes          |                                                        |   | 2,167        |         |          |  | 0.5          | %    |          |   | 63         |         |   |  |      |      |    |  | (2,104  | )      
|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |   |  |       |      |    |  |         |         |  
|                                    | Net income                                             |   |              | 30,076  |          |  |              | 6.7  | %        |   |            | 18,079  |   |  |       | 4.5  | %  |  |         | (11,997 | )
|Dividend to parent                  |                                                        |   |             |         |          |  | 0.0          | %    |          |   | (39,351    | )       |   |  | (9.8  | %)   |    |  | 39,351  |        
|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |   |  |       |      |    |  |         |         |  
|                                    | Net income (loss) attributable to
common stockholders  |   | $            | 30,076  |          |  |              | 6.7  | %        |   | $          | (21,272 | ) |  |       | (5.3 | %) |  | $       | (51,348 | )
|                                    |                                                        |   |              |         |          |  |              |      |          |   |            |         |   |  |       |      |    |  |         |         |  

Net Revenues

Net Revenues by Segment (in thousands):

|                                    |  |            |         |              |  |           |        |       |  |   |   |  |  |   |         | 
|----------------------------------- |  | ---------- | ------- | ------------ |  | --------- | ------ | ----- |  | - | - |  |  | - | ------- | 
|                                    |  | Publishing |         | Distribution |  | Corporate |        | Total
|                                    |  |            |         |              |  |           |        |      
|Nine months ended December 31, 2002 |  | $          | 371,733 |              |  | $         | 77,831 |       |  | $ |  |  |  | $ | 449,564 | 
|Nine months ended December 31, 2003 |  | $          | 354,976 |              |  | $         | 47,564 |       |  | $ |  |  |  | $ | 402,540 | 

Net revenues for the nine months ended December 31, 2003 decreased
approximately $47.1 million or 10.5% from $449.6 million to $402.5 million.



| |  |  | A 4.5% decline in publishing net revenues from $371.7 million in the
December 2002 period to $355.0 million in the December 2003 period is
the combined result of reduced replenishment orders in the current
quarter and a light schedule of new product releases in the prior
(September 2003) quarter, partially offset by stronger international
royalty income earned on Infogrames SAs international sales of the
Companys titles in the current year.                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Publishing revenues include international royalty income earned on
Infogrames SAs international sales of the Companys titles which is up
by $10.1 million from $17.2 million in 2002 to $27.3 million in 2003.
The increase includes a favorable exchange rate impact in the current
fiscal year of approximately $4.2 million from the weakening US dollar
against the euro and strong fiscal 2004 international sales of Enter the
Matrix (Playstation2, Xbox, PC and GameCube).

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| |  |  | Additionally, the Company recognized $3.5 million of previously
deferred revenue from sublicensing income of as a result of a
termination of its sublicensing arrangement with Microsoft. See Note 10
of the Notes of these Consolidated Financial Statements for additional
information related to this transaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Total distribution net revenues decreased 39.0% from $77.9 million to
$47.5 million from continued general industry softness in productivity
software and the Companys decision to reduce its third party
distribution operations in the specific instances where margins are considered insufficient.              

Gross Profit

|                 |  |                         |       |      |  |  |       |  
|---------------- |  | ----------------------- | ----- | ---- |  |  | ----- | -
|                 |  | Publishing Platform Mix
|                 |  |                        
|                 |  | 2002                    |       | 2003
|                 |  |                         |       |     
|PC               |  |                         | 38.6  | %    |  |  | 27.4  | %
|Playstation2     |  |                         | 31.1  | %    |  |  | 36.1  | %
|Xbox             |  |                         | 10.2  | %    |  |  | 13.3  | %
|Gameboy Advanced |  |                         | 11.2  | %    |  |  | 12.7  | %
|Game Cube        |  |                         | 4.5   | %    |  |  | 7.4   | %
|Playstation      |  |                         | 3.2   | %    |  |  | 2.9   | %
|Gameboy Color    |  |                         | 1.1   | %    |  |  | 0.2   | %
|Other            |  |                         | 0.1   | %    |  |  | 0.0   | %
|                 |  |                         |       |      |  |  |       |  
|Total            |  |                         | 100.0 | %    |  |  | 100.0 | %

Gross profit decreased to $199.8 million for the nine months ended
December 31, 2003 from $231.5 million in the comparable 2002 period primarily
from decreased sales volume, while, as a percentage of net revenues, gross
profit decreased from 51.5% to 49.6%. The benefit of a sales mix shift out of
the higher cost distribution business and into the lower cost publishing
business is largely being offset by a continuing sales mix shift within the
publishing business toward the more costly console product and away from the
less costly PC product, which is consistent with current industry trends.
Approximately 72.6% of the publishing businesses shipments were console sales
during the nine months ended December 31, 2003 versus 61.4% in the comparable
2002 period. For the nine months ended December 31, 2003, the distribution
business accounted for 11.8% of the Companys net revenues as compared to 17.3%
for the comparable 2002 period. Finally, a higher mix of royalty-bearing
products sold in the current period contributed to lower margins. In the nine
month period ended December 2003, royalty expense included in cost of goods
sold was 15.4% of net revenues while, in the 2002 period, royalty expense was
12.6% of net revenues.

Selling and Distribution Expenses

During the nine months ended December 31, 2003, selling and distribution
expenses decreased approximately $9.8 million, or 12.1%, to $71.3 million from
$81.1 million in the comparable 2002 period due to lower advertising expense
from fewer new product releases as well as lower variable costs (mainly freight
and handling) from decreased net revenues. Advertising expenses decreased $4.6
million or 8.8% and variable freight and distribution expenses decreased $2.9
million from the comparable 2002 period. The selling and distribution expenses
remained relatively unchanged as a percentage of net revenues at 17.7% for the
nine months ended December 31, 2003 from 18.0% in the comparable 2002.

General and Administrative Expenses

The general and administrative expenses of $25.2 million are significantly
below the December 2002 periods expenses of $30.9 million mainly because the
December 2002 bonus expense included a charge for one-time incentive
compensation. Slightly offsetting the decreased bonus expense is a $0.9
million bad debt charge in the current period related to the recent KB Toys
Inc. bankruptcy filing; the December 2002 period included a $0.3 million charge
for that periods FAO Inc. bankruptcy filing. Without the one-time incentive
compensation from the 2002 period, general and administrative expense as a
percentage of net revenues of 7.0% would have been reduced to 6.0% in the 2002
period, consistent with the 2003 percentage of 6.1%.

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In-Process Research and Development Expense

The $7.4 million of in-process research and development expense in the
December 2002 period represents a portion of the purchase price paid for the
Shiny development studio during that period. No such expense was recorded in
the current period.

Research and Development Expenses

Research and development expenses for the nine months ended December 31,
2003 increased approximately $12.2 million, or 20.2%, to $72.7 million from
$60.5 million in the comparable 2002 period, primarily from the increase of
approximately $7.2 million in amortization and write-off of capitalized
licenses and the timing of milestone completions upon which this expense is
based. In relation to total research and development expenses, the internal
costs without license amortization and write-off represented 44.6% of the total
research and development costs for the nine months ended December 31, 2003,
while internal costs were 50.2% of total research and development costs for the
comparable 2002 period.

Gain on Sale of a Development Project to a Related Party

During the third quarter of fiscal 2004, the Company sold a development
project to Atari Interactive for $3.7 million resulting in a gain of an equal
amount. The project involved a license owned by Atari Interactive for which
development rights were transferred to the Company in the fourth quarter of
fiscal 2003 at no cost to the Company. Management believes that the value of
the development rights was minimal at the time of the transfer. The sales
price to Atari Interactive was equal to the development costs incurred by the
Company which were expensed during the period of development, principally in
the first six months of fiscal 2004. The sale was initiated as a result of
concerns expressed by the original third party licensor relating to the
Companys development efforts.

Depreciation and Amortization

Depreciation and amortization for the nine months ended December 31, 2003,
increased by $0.9 million, or 15.3%, to $6.8 million from $5.9 million in the
comparable 2002 period due to amortization expense of the Companys license
with Atari Interactive for the rights to the Atari name.

Interest Expense, net

Interest expense, net, decreased approximately $3.5 million to $7.2
million for the nine months ended December 31, 2003 from $10.7 million in the
comparable 2002 period. The decrease is a result of the Companys September
2003 recapitalization whereby all outstanding related party debt was converted
to equity. Since the recapitalization, interest and financing fees have
consisted solely of expenses incurred under the Companys credit facility
arrangement with GECC. Furthermore, interest expense has been further reduced
by interest income received from advances to related parties of approximately
$1.1 million. Offsetting this decrease in interest expense, the Company
expensed the full $1.3 million remaining deferred financing fees outstanding as
a result of the conversion of all outstanding related party debt to equity in
the September 2003 quarter.

Other Expense

Other expense in the nine months ended December 31, 2003 included a $1.7
million write-down related to the Oddworld Transaction (see Note 10 of the
Notes of these Consolidated Financial Statements for additional information
related to this transaction). Other expense in comparable 2002 period included
an initial write-down of the Oddworld investment of approximately $3.6 million,
offset by $0.6 million of commission income recorded by the Company as
compensation for negotiating a sale-lease back transaction for a
related-party.

Provision for Income Taxes

During the nine months ended December 31, 2002, the Company recorded a
provision for taxes of $2.2 million, the majority of which related to foreign
tax liabilities of the Companys foreign operations. During the nine months
ended December 31, 2003, a nominal provision was recorded for miscellaneous
state and foreign taxes paid based on the overall expected tax rate for the
fiscal year.

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Liquidity and Capital Resources

Overview

As
of December 31, 2003, management believes that the Company has sufficient
capital resources to finance the Companys operational requirements for the next twelve
months, including the funding of the development, production, marketing and
sale of new products, the purchases of equipment, and the acquisition of
intellectual property rights for future products. On November 12, 2002, (last amended December 23, 2003), the Company obtained a 30-month $50.0 million
Senior Credit Facility with GECC which was used to fund the Companys working
capital and general corporate needs and to provide funding to certain related
parties which are wholly-owned by Infogrames SA. As part of the most recent
amendment under the GECC Senior Credit Facility, the Company will no longer
provide funding to related parties.

On September 4, 2003, the Company entered into a Recapitalization
Agreement exchanging all of the Companys related party debt, net of certain
advances, with Infogrames SA and certain of its wholly-owned subsidiaries into
shares of the Companys common stock. Subsequently, on September 24, 2003, the
Company issued new shares of its common stock in a secondary public offering
generating net proceeds of $34.9 million, of which $3.9 million was used to
repay the outstanding balance of the Senior Credit Facility with GECC. The
remaining proceeds from the Offering are being used to pay costs of developing
video game software and to meet general working capital needs.See the
Companys Registration Statement on Form S-2 for a discussion of Risk Factors
that could materially impact expected cash flows.

Cash Flows

Cash was $9.0 million at December 31, 2003 compared to $0.8 million at
March 31, 2003. As of December 31, 2003, the Company had working capital of
$40.3 million compared to a working capital deficit of $91.6 million at March
31, 2003.

During the nine months ended December 31, 2003, the cash used in operating
activities of $5.1 million and cash outflows from investing activities, mainly
advances to related parties, were funded from $31.7 million of cash from
financing activities. Since, September 30, 2003, however, approximately $23.9
million of the $34.9 million proceeds from the September 2003 equity offering
have been used for operating activities, primarily to fund the seasonal growth
in the Companys accounts receivables during the holiday season. The Company
also used proceeds from the equity offering to fund capital expenditures of
$0.9 million during the December 2003 quarter. During the nine
months ended December 31, 2003, the Company advanced Atari Interactive $14.4 million under the terms
of the GECC Senior Credit Facility in order to support its operations. Atari
Interactive develops games which the Company distributes in North America and,
consequently, the Company is dependent, in part, on Atari Interactives
development activities for growth in its publishing revenues. As part of the
most recent amendment under the GECC Senior Credit Facility, the Company no
longer provides funding to related parties.

The Company expects continued volatility in the use of cash due to
seasonality of the business, receivable payment cycles and quarterly working
capital needs to finance its publishing businesses and growth objectives.

The Companys outstanding accounts receivable balance varies significantly
on a quarterly basis due to the seasonality of its business and the timing of
new product releases. There were no significant changes in the credit terms
with customers during the nine month period.

The Company does not currently have any material commitments with respect
to any capital expenditures.

The Company is also party to various litigation arising in the course of
its business. Management believes that the ultimate resolution of these
matters will not have a material adverse effect on the Companys liquidity,
financial condition or results of operations.

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Credit Facilities

GECC Senior Credit Facility

On November 12, 2002 (last amended December 23, 2003), the Company
obtained a 30-month $50.0 million Senior Credit Facility with GECC to fund the
Companys working capital and general corporate needs, as well as to fund
advances to Paradigm and Atari Interactive, each a related party. Loans under
the Senior Credit Facility are based on a borrowing base comprised of the value
of the Companys accounts receivable and short term marketable securities. The
Senior Credit Facility bears interest at prime plus 1.25% for daily borrowings
or LIBOR plus 3% for borrowings with a maturity of 30 days or greater. A
commitment fee of 0.5% on the average unused portion of the facility is payable
monthly and the Company paid $0.6 million as an initial commitment fee at
closing. The Senior Credit Facility contained certain financial covenants and
named certain related entities, such as Atari Interactive and Paradigm, as
guarantors. In addition, amounts outstanding under the Senior Credit Facility
are secured by the Companys assets. At December 31, 2003, $6.9 million of
borrowings remained outstanding and $12.5 million of letters of credit were
outstanding. As of December 31, 2003, accrued interest was $0.1 million and
included in accrued liabilities. At December 31, 2003, the Company was in
compliance with all financial covenants.

As part of the most recent amendment under the Senior Credit Facility,
dated December 23, 2003, Atari Interactive and Paradigm have been removed as
guarantors. Furthermore, under this amendment, the Company will no longer fund
advances to Atari Interactive and Paradigm through related party loans.

Infogrames SA credit facilities and debt with the Company

Credit Agreement

The Company maintained the Credit Agreement with Infogrames SA which
provided for an aggregate commitment of $75.0 million which bore interest at
LIBOR plus 2.5%. Effective December 31, 2002, the maturity date of the Credit
Agreement was extended to April 1, 2004. This agreement required that the
Company comply with certain financial covenants and, among other items,
restricted capital expenditures. As of September 30, 2003, all outstanding
borrowings were exchanged for 10,541,105 newly issued common shares under the
terms of the Recapitalization Agreement. As of December 31, 2003, accrued
interest and fees that remain outstanding were minimal and are included in
current amounts due to related parties (See Note 1, Recapitalization,of the
Notes of these Consolidated Financial Statements).

Medium-Term Loan

In connection with the Shiny Acquisition, the Company obtained a $50.0
million medium-term loan from Infogrames SA. Interest was based on the three
month LIBOR rate plus 2.75% and payable on a quarterly basis, in arrears. An
unused commitment fee of 0.50% per annum was based on the aggregate amount of
the facility less outstanding loans. As of September 30, 2003, all outstanding
borrowings have been exchanged for 11,359,319 newly issued common shares under
the terms of the Recapitalization Agreement. Additionally, as of December 31,
2003, accrued interest that remained outstanding was minimal and included in
current amounts due to related parties (See Note 1, Recapitalization,of the
Notes of these Consolidated Financial Statements).

Long-Term Related Party Debt

0% Notes

In conjunction with the 1999 purchase of the Company by Infogrames SA, the
Company issued to GAP the 0% Notes in exchange for 600,000 shares of
Series A Preferred Stock and $20.0 million of subordinated notes of the
Company. The 0% Notes mature in December 2004 and had a redemption value of
$50.0 million at maturity. In lieu of payment at maturity, the 0% Notes were
convertible at any time, at holders option, into shares of the Companys
common stock at $20.00 per share. On December 28, 2001, Infogrames SA assumed
the 0% Notes from GAP in exchange for shares of Infogrames SA common stock.
Infogrames SA did not change any of the terms of the 0% Notes (renamed the
Infogrames SA 0% subordinated convertible note) as they relate to the
Company. Interest on the Infogrames SA 0% subordinated convertible note was
accreted at the rate of 7% per annum.

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Under the terms of the September 4, 2003 Recapitalization Agreement, the
Infogrames SA 0% subordinated convertible note has been fully offset against
the advances to related parties (Notes 1 and 5).

5% Notes

In conjunction with the 1999 purchase of the Company by Infogrames SA, the
Company issued to CUSH, 5% CUSH Notes in exchange for $25.0 million in cash and
$35.6 million in debt and accrued interest. The 5% CUSH Notes matured in
December 2004 and have a principal amount of $60.6 million. In lieu of payment
at maturity, the 5% CUSH Notes were convertible at any time, at holders
option, into shares of the Companys common stock at $9.25 per share.

Under the terms of the September 4, 2003 Recapitalization Agreement, the
5% CUSH Notes, net of the remaining advances to related parties, have been
fully converted to 17,129,453 of the Companys newly issued common shares at a
fair-market value of $4.25 per share. The common shares issued by the Company
were at a more favorable rate than that available under the original terms of
the 5% CUSH Notes. The resulting incremental value of the additional stock
issued was recorded as a dividend to Infogrames SA of $39.4 million (Notes 1
and 5).

In September 2003, the Company expensed $1.3 million of remaining deferred
financing fees related to the Infogrames SA 0% subordinated convertible note
and the 5% CUSH Notes as a result of the Recapitalization Agreement.

Contractual Obligations

As of December 31, 2003, royalty and license advance obligations and
future minimum lease obligations under non-cancelable operating leases are
summarized as follows (in thousands):

|                             |  |                                                |       |           |  |           |        |               |  |       |       |  |  |   |       |  |  |   |        | 
|---------------------------- |  | ---------------------------------------------- | ----- | --------- |  | --------- | ------ | ------------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                             |  | Contractual Obligations
Payments Due by Period
|                             |  | Within 1 Year                                  |       | 1-3 Years |  | 4-5 Years |        | After 5 Years |  | Total
|                             |  |                                                |       |           |  |           |        |               |  |      
|Royalty and license advances |  | $                                              | 1,329 |           |  | $         | 519    |               |  | $     |      |  |  | $ |      |  |  | $ | 1,848  | 
|Operating lease obligations  |  |                                                | 5,900 |           |  |           | 11,900 |               |  |       | 1,800 |  |  |   | 1,200 |  |  |   | 20,800 | 
|                             |  |                                                |       |           |  |           |        |               |  |       |       |  |  |   |       |  |  |   |        | 
|Total                        |  | $                                              | 7,229 |           |  | $         | 12,419 |               |  | $     | 1,800 |  |  | $ | 1,200 |  |  | $ | 22,648 | 
|                             |  |                                                |       |           |  |           |        |               |  |       |       |  |  |   |       |  |  |   |        | 

Recent Accounting Pronouncements

In
January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. In December 2003, the FASB issued FIN 46-R to address
certain FIN 46 implementation issues. This interpretation requires that the
assets, liabilities, and results of activities of a VIE be consolidated into
the financial statements of the enterprise that has a controlling interest in
the VIE. FIN 46-R also requires additional disclosures by primary beneficiaries
and other significant variable interest holders. For entities acquired or
created before February 1, 2003, this interpretation is effective no later than
the end of the first interim or reporting period ending after March 15, 2004,
except for those VIEs that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or
annual reporting period ending after December 15, 2003. For all entities that
were acquired subsequent to January 31, 2003, this interpretation is effective
as of the first interim or annual period ending after December 31, 2003. The
adoption of the provisions of this interpretation did not have a material
effect on the Companys financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS No.
133, by requiring that contracts with comparable characteristics be accounted
for in a similar fashion. In particular, the Statement: (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133;
(2) clarifies when a derivative contains a financing component; (3) amends the
definition of an underlying to conform it to language used in FIN No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; and (4) amends certain other
existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The Company

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does not have any derivative instruments as defined in SFAS No. 149.
Accordingly, this pronouncement is currently not applicable to the Company.

In May 2003, the FASB issued SFAS No. 150, Accounting for Financial
Instruments with the Characteristics of Both Liabilities and Equities. SFAS
No. 150 establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. Pursuant to SFAS No. 150, such
freestanding financial instruments (i.e., those entered into separately from an
entitys other financial instruments or equity transactions or that are legally
detachable and separately exercisable) must be classified as liabilities or, in
some cases, assets. In addition, SFAS No. 150 requires that financial
instruments containing obligations to repurchase the issuing entitys equity
shares and, under certain circumstances, obligations that are settled by
delivery of the issuers shares be classified as liabilities. The Statement is
effective for financial instruments entered into or modified after May 31, 2003
and for other instruments at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this new principle did not have
a material impact on the Companys financial condition or results of
operations.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Companys carrying value of cash, trade accounts receivable, accounts
payable, accrued liabilities, royalties payable and its existing lines of
credit are a reasonable approximation of their fair value.

Foreign Currency Exchange Rates

In recent years, the Company has restructured its foreign operations. As
of December 31, 2003, foreign operations represented 0.0% and 1.0% of
consolidated net revenues and total assets, respectively. The Company also
recorded approximately $6.6 million in operating expenses attributed to foreign
operations related primarily to a development studio located outside the United
States. Currently, substantially all of the Companys business is conducted in
the United States where its revenues and expenses are transacted in U.S.
dollars. As a result, the majority of the Companys results of operations are
not subject to foreign exchange rate fluctuations. The Company does not hedge
against foreign exchange rate fluctuations due to the limited financial
exposure it faces with respect to such risk. The Company purchases certain of
its inventories from foreign developers. The Company also pays royalties
primarily denominated in euros to Infogrames SA from the sale of Infogrames SA
products in North America. The Companys business in this regard is subject to
certain risks, including, but not limited to, differing economic conditions,
changes in political climate, differing tax structures, other regulations and
restrictions and foreign exchange rate volatility. The Companys future results
could be materially and adversely impacted by changes in these or other
factors.




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of December 31, 2003,
with the participation of the Companys management, the Chief Executive Officer
and Chief Financial Officer of the Company evaluated the Companys disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934 (the
Exchange Act) Rules 13a-15(e) and 15d-15(e)). In designing and evaluating
the Companys disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
Based on this evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that, except as set forth below, as of December 31,
2003, the Companys disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Companys Chief Executive
Officer and Chief Financial Officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. In connection with the
rules, we are continuing the process of reviewing and documenting our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, and may from time to time make changes
aimed at enhancing their effectiveness and to ensure that our systems evolve
with our business.

Based upon managements evaluation, the Companys procedures for ensuring that
directors, officers and ten percent (10%) beneficial owners file transaction
reports pursuant to Section 16 of the Securities Exchange Act of 1934, as
amended (and the rules thereunder) are not yet effective. The Company is in
the process of assessing and improving those procedures and expects that all
appropriate procedures shall be implemented prior to the date on which the
Company will file its Form 10-K for the fiscal year ending March 31, 2004.

Changes in Internal Controls. No change in the Companys internal control over
financial reporting (as defined in the Exchange Act Rules 13a-15(f) and
15d-15(f)) occurred during the fiscal quarter ended December 31, 2003, that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

During the nine months ended December 31, 2003, no significant claims were
asserted against or by the Company that in managements opinion the likely
resolution of which would have a material adverse affect on the Companys
liquidity, financial condition or results of operations, although the Company
is involved in various claims and legal actions arising in the ordinary course
of business. The following litigation matters are still pending or were
terminated during the period. The Company continues to believe, with
respective to pending matters, that the underlying complaints are without merit
and intends to defend itself vigorously against these actions.

The Companys management believes that the ultimate resolution of any of
the complaints summarized below and/or any other claims which are not stated
herein will not have a material adverse effect on the Companys liquidity,
financial condition or results of operations.

KBK

On September 16, 2002, KBK, a distributor of electronic games via the
Internet and local area networks, filed a lawsuit against Gamesonline, a
subsidiary of Interplay, and the Company in Superior Court of California,
Orange County. KBK alleges that on or about December 15, 2001, KBK entered
into a contract with Gamesonline to obtain the right to localize (i.e., right
to translate games into the local language of the country where the games are
distributed) and to electronically distribute in Korea, Neverwinter
Nights and certain other games which were previously released. The complaint further
alleges that Gamesonline and the Company conspired to prevent KBK from entering
the market with Neverwinter Nights or any previously released games of
Gamesonline. The complaint alleges the following causes of action against the
Company: misappropriation of trade secrets under the California Uniform Trade
Secrets Act; common law misappropriation; intentional interference with
contract; negligent interference with contract; intentional interference with
prospective economic advantage; negligent interference with prospective
economic advantage; and violation of Business & Professions Code Section 17200
et seq. The complaint seeks $98.8 million for each of these causes of action.

An amended complaint was filed on December 3, 2002, alleging all of the
foregoing against the Company, adding Atari Interactive (formerly known as
Infogrames Interactive, Inc.) as a named defendant, and alleging that the
Company managed and directed Atari Interactive to engage in the foregoing
alleged acts. The Company and Atari Interactive filed answers on January 9,
2003. On or about January 28, 2003, Gamesonline answered the original
complaint and served a cross-complaint against KBK. On April 29, 2003, KBK
named as defendants Infogrames Asia Pacific, Infogrames Korea, and
Interplay, Inc.. On October 29, 2003, Interplay filed a cross-complaint
against the Company, Atari Interactive, Inc., Infogrames Korea and Roes 101
through 200. The Company and Atari Interactive filed an answer on December 3,
2003. Discovery is ongoing.

Interplay

On September 19, 2003, Interplay commenced the Action in New York State
Supreme Court, New York County in which it named Atari Interactive and the
Company as defendants, seeking, among other things, a judgment declaring that a
computer game license agreement between Interplay and Atari Interactive
continues to be in full force and effect.

On September 23, 2003, Interplay obtained a preliminary injunction that
prevents termination of the computer game license agreement. On October 9,
2003, Atari Interactive answered the complaint, denying all claims, asserting
several affirmative defenses and counterclaims for breach of contract and one
counterclaim for a judgment declaring the computer game license agreement
terminated. Atari Interactives answer also asserted that the Company was
incorrectly named as the defendant in this Action. Both sides sought damages in
an amount to be determined at trial.

The Company, Atari Interactive and Interplay reached an agreement with
respect to the scope and terms of the computer game license agreement and
accordingly, filed with the court a Stipulation of Dismissal, dated December
22, 2003. The court ordered dismissal of the matter on January 6, 2004.

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Item 6. Exhibits and Reports on Form 8-K

|                        |  |                                                                                                                                                                                                                                                                                      
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) Exhibits           
|                       
|3.1                     |  | Amended and Restated By-Laws of Atari, Inc. (conformed)                                                                                                                                                                                                                              
|                        |  |                                                                                                                                                                                                                                                                                      
|3.2                     |  | Amendment No. 1 to the Amended and Restated By-Laws of Atari,
Inc., effective as of November 21, 2003.                                                                                                                                                                               
|                        |  |                                                                                                                                                                                                                                                                                      
|10.1                    |  | Sixth Amendment to Credit Agreement, dated as of December 23,
2003, among the Company, as Borrower, the other Credit Parties
signatory thereto, the Lenders signatory thereto from time to time,
and General Electric Capital Corporation, as Administrative Agent,
Agent and Lender.
|                        |  |                                                                                                                                                                                                                                                                                      
|10.2                    |  | First Amendment to Intercreditor and Subordination Agreement,
dated as of December 23, 2003, among Infogrames Entertainment S.A,
California U.S. Holdings, Inc., Atari Interactive, Inc., General
Electric Capital Corporation and the Credit Parties signatory
thereto.             
|                        |  |                                                                                                                                                                                                                                                                                      
|31.1                    |  | Certification by the Companys Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    
|                        |  |                                                                                                                                                                                                                                                                                      
|31.2                    |  | Certification by the Companys Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    
|                        |  |                                                                                                                                                                                                                                                                                      
|32.1                    |  | Certification by the Companys Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    
|                        |  |                                                                                                                                                                                                                                                                                      
|32.2                    |  | Certification by the Companys Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    
|                        |  |                                                                                                                                                                                                                                                                                      
|(b) Reports on Form 8-K

On November 3, 2003, the Company furnished a Current Report on Form 8-K
pursuant to Item 12 (Results of Operations and Financial Condition), containing
a copy of the Companys earnings release for the quarter ended September 30,
2003 (including financial information).

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

| |  |             |  |                                     
| |  | ----------- |  | ------------------------------------
| |  | ATARI, INC.
| |  |             |  |                                     
| |  | By:         |  | /s/ DAVID J. FREMED                 
| |  |             |  |                                     
| |  |             |  | David J. Fremed                     
| |  |             |  | Senior Vice President of Finance and
| |  |             |  | Chief Financial Officer             

Date: February 13, 2004

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