##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No.: 0-27338
 ATARI, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-3689915(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 417 Fifth Avenue, New York, NY 10016
 Registrants telephone number, including area code: (212) 726-6500
 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.10 par value
 Securities registered pursuant to Section 12(g) of the Act: None
  o þ
  o þ
 þ o
 o
  o o þ
  o þ
  Documents Incorporated by Reference




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##### 



ATARI, INC. AND SUBSIDIARIES
MARCH 31, 2007 ANNUAL REPORT ON FORM 10-K
  
 TABLE OF CONTENTS
 PagePART IITEM 1. Business
    
    
    2ITEM 1A. Risk Factors
    
    
    13ITEM 1B. Unresolved Staff Comments
    
    
    21ITEM 2. Properties
    
    
    21ITEM 3. Legal Proceedings
    
    
    22ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    23PART IIITEM 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
    
    
    23ITEM 6. Selected Financial Data
    
    
    24ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    25ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45ITEM 8. Financial Statements and Supplementary Data
    
    
    45ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    46ITEM 9A. Controls and Procedures
    
    
    46ITEM 9B. Other Matters
    
    
    47PART IIIITEM 10. Directors, Executive Officers, and Corporate Governance
    
    
    50ITEM 11. Executive Compensation
    
    
    50ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    50ITEM 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    50ITEM 14. Principal Accountant Fees and Services
    
    
    50PART IVITEM 15. Exhibits and Financial Statement Schedules
    
    
    50SIGNATURES
    
    
    56CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1EXHIBIT INDEXEX-10.25: DESCRIPTION OF ANNUAL INCENTIVE PLANEX-10.58: AGREEMENT OF LEASEEX-21.1: LIST OF SUBSIDIARIESEX-23.1: CONSENT OF DELOITTE & TOUCHE LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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##### Table of Contents



This Annual Report contains forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. We caution readers regarding forward-looking statements
in this Report, press releases, securities filings, and other documents and communications. All
statements, other than statements of historical fact, including statements regarding industry
prospects and expected future results of operations or financial position, made in this Annual
Report on Form 10-K are forward looking. The words believe, expect, anticipate, intend and
similar expressions generally identify forward-looking statements. These forward-looking
statements are necessarily based upon estimates and assumptions that, while considered reasonable
by us, are inherently subject to significant business, economic and competitive uncertainties and
contingencies and known and unknown risks. As a result of such risks, our actual results could
differ materially from those anticipated by any forward-looking statements made by, or on behalf
of, us. We will not necessarily update information if it later turns out that what occurs is
different from what was anticipated in a forward-looking statement. For a discussion of some
factors that could cause our operating results or other matters not to be as anticipated by
forward-looking statements in this document, please see Item 1A entitled Risk Factors on pages 13
to 21.
 1




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##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 OVERVIEW
   Driver
  
    
    Dragon Ball Z(FUNimation),
    
    Alone in the Dark(IESA),
    
    Asteroids, PONG, Missile Command and Centipede(Atari Interactive),
    
    Dungeons and Dragons(Hasbro and Atari Interactive),
    
    Earthworm Jim(Interplay),
    
    RollerCoaster Tycoon(Chris Sawyer and Atari Interactive), and
    
    Godzilla(Sony Pictures).
    2




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##### Table of Contents



www.atari.com
 INDUSTRY OVERVIEW
   3




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##### Table of Contents



The Console and Handheld Market
     Personal Computers
  Online
  
    
    Online-only casual games that we make available on the Internet. These are made
available to consumers on our website, www.atari.com, and on certain online services
provided by third parties.
    
    Another type of online-only games is called massively multiplayer online games.
Players experience these games as interactive virtual worlds where thousands of other
players can interact with one another. We currently have one massively multiplayer online
game, Test Drive Unlimited.
    
    We include online capability features in certain of our console products, which enable
consumers to participate in online communities and play against one another via the
Internet.
  4




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##### Table of Contents



ESRB Ratings and Litigation
  Consolidation
  PRODUCTS
  
    
    Fiscal 2005  the Dragon Ball Zfranchise generated 28.3% of our publishing net product
revenues, driven by Dragon Ball Z: Budokai 3(PlayStation 2) and Dragon Ball Z: Sagas
(PlayStation 2, Xbox, and GameCube). Additionally, the Driverfranchise (which was sold in
August 2006) generated 14.0% of our publishing net revenues, lead by the release of DRIV3R
(PlayStation 2 and Xbox).
    
    Fiscal 2006  the Dragon Ball Zfranchise generated 28.6% of our publishing net product
revenues, driven by the October 2005 release of Dragon Ball Z: Budokai Tenkaichi
(PlayStation 2). Additionally, the Matrixfranchise generated 14.4% of our publishing net
revenues, lead by the November 2005 release of Matrix: Path of Neo(PlayStation 2, Xbox,
and PC). Other new releases in fiscal 2006 included Atari Flashback 2.0(plug and play),
Getting Up: Contents Under Pressure(PlayStation 2, Xbox, and PC), Dungeons & Dragons
Online: Stormreach(PC), Driver: Parallel Lines(PlayStation 2, and Xbox), and Indigo
Prophecy(PC, PlayStation 2, and Xbox).
    
    Fiscal 2007  the Dragon Ball Zfranchise generated 45.7% of our publishing net product
revenues, driven by the November 2006 release of Dragon Ball Z: Budokai Tenkaichi 2
(PlayStation 2 and Nintendo Wii). Additionally, the
 5




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Neverwinter Nightsfranchise generated
13.9% of our publishing net product revenues, lead by the October 2006
release of Neverwinter Nights 2(PC). Furthermore, the Test Drivefranchise generated 13.4%
of our publishing net product revenues, lead by the September 2006 release of Test Drive
Unlimitedon the Xbox 360 platform, followed by its March 2007 release on the PlayStation 2,
PSP, and PC platforms.
 PUBLISHING
    DEVELOPMENT
  External Development
  
    
    Crafts & Master (Super Dragon Ball Z);
 
    
    Frontier Development  Chris Sawyer (RollerCoaster Tycoonseries);
 
    
    Kuju Entertainment (Dungeons & Dragons Tactics);
 
    
    Obsidian (Neverwinter Nights); and
 
    
    Spike (Dragon Ball Z: Budokai Tenkaichi 2).
   6




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##### Table of Contents




    
    Eden Studios SASLyon, FranceEden Studios SAS, or Eden, developed the
successful V-Rallyseries, which, to date, has sold more than 3.8
million units worldwide, and Kya, which was released for the 2003
holiday season. Eden most recently developed Test Drive Unlimitedfor
Xbox 360 and PC, released during fiscal 2007, and is currently
developing Alone in the Darkfor Xbox 360 and PC, expected to be
released in fiscal 2008.
    SALES AND MARKETING
     
    
    Managing the life cycle of a catalog of new and existing products;
    
    Researching industry trends and customer needs to inform the production process,
advertising generation, forecasting, retail distribution, and pricing;
    
    Working with physical retail partners to maximize sales;
    
    Establishing online sales distribution systems for both boxed products and digitally distributed products;
    
    Fostering media and online community interest in products and properties;
    
    Leveraging and strengthening the Atari brand; and
    
    Exploiting the marketability of our intellectual property and products through licensing
arrangements that expand application into other gaming platforms and consumer product
categories and bring in new revenue streams such as advertising and product placement.
  7




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##### Table of Contents




    
    Understanding our consumers through professional qualitative and quantitative research;
    
    Examining competitive product launches to help determine optimal marketing budgets;
    
    Promoting product publicity via enthusiast and mass market outlets, including
broadcast television, internet, newspapers, specialty magazines, and theater;
    
    Retail marketing and in-store promotions and displays;
    
    Online marketing and two way online conversations with gamers;
    
    Underground marketing techniques, in which marketing materials are placed in
physical and online locations which are frequented by targeted groups of consumers;
    
    Strategic partnerships and cross-promotions with other consumer product companies
and third-parties; and
    
    Working with first-party console manufacturers to exploit their marketing
opportunities, including presence on their websites, retail exposure and public
relations events.
     INTELLECTUAL PROPERTY
 Licenses
 Licensed properties
   8




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##### Table of Contents



In-Game Advertising
  Hardware licenses
   Manufacturer
    
    Platform
    
    Agreement
    
    Territory*
    
    Expiration DateMicrosoft
    
    Xbox
    
    Publisher License
Agreement, dated
April 18, 2000
    
    Determined on a
title-by-title basis
    
    November 15, 2007Microsoft
    
    Xbox 360
    
    Publisher License
Agreement, dated
February 17, 2006
    
    Determined on a
title-by-title basis
    
    November 21, 2008Nintendo
    
    DS
    
    License Agreement,
dated October 14,
2005
    
    Western
Hemisphere
    
    February 16, 2008Nintendo
    
    Game Boy
Advance
    
    License Agreement,
dated September 24,
2001
    
    Western
Hemisphere
    
    September 23, 2007Nintendo
    
    GameCube
    
    License Agreement
dated March 29, 2002
    
    Western
Hemisphere
    
    March 29, 2008Nintendo
    
    Wii
    
    In negotiation
    
    Western
Hemisphere
    
    In negotiationSony
    
    PlayStation 2
    
    Licensed Publisher
Agreement, dated June
6, 2000
    
    US and Canada
    
    March 31, 2008, with
automatic 1 year
renewalsSony
    
    PlayStation
Portable
    
    Licensed Publisher
Agreement, dated
March 23, 2005
    
    US and Canada
    
    March 31, 2008, with
automatic 1 year
renewalsSony
    
    PlayStation 3
    
    In negotiation
    
    US and Canada
    
    In negotiation
 9




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##### Table of Contents



*
    
    IESA, our majority stockholder and the distributor of our products in Europe, has entered into
similar agreements (directly or through its subsidiaries) with each of the manufacturers for
applicable European territories.  Protection
  DISTRIBUTION
 United States, Canada, and Mexico
  
    
    efficient and accurate processing of orders and payments;
 
    
    expedited order turnaround time; and
 
    
    prompt delivery.
    10




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##### Table of Contents



Europe, Asia and Other Regions
  Backlog
  MANUFACTURING
   EMPLOYEES
 Development Development
 RELATIONSHIP WITH IESA
  11




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COMPETITION
   12




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Test Drive RollerCoaster Tycoon, Dragon Ball Z Dungeons & Dragons
  SEASONALITY
  SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
   
 ITEM 1A. RISK FACTORS
 RISKS RELATED TO OUR BUSINESS
 Our business has contracted significantly.
  We
need to raise additional funds.
  13




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##### Table of Contents



Our revenues will decline and our competitive position will be adversely affected if we are unable
to introduce successful new products on a timely basis.
  Our rights to use the Atari name are limited.
  Lack of funds and limits on our license rights may limit our ability to expand into new business
activities.
  The loss of Wal-Mart, GameStop, Target, or Best Buy as key customers could negatively affect our
business.
  
    
    we lost any of these retailers as a customer;
    
    any of these retailers purchased significantly fewer products from us;
    
    we were unable to collect receivables from any of these retailers on a timely basis or at all;
or
    
    we experienced any other adverse change in our relationship with any of these retailers.
 14




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Our results of operations and competitive position may be adversely affected if we are unable to
anticipate and adapt to rapidly changing technology, including new console technology.
  We may be unable to develop and publish new products if we are unable to secure or maintain
relationships with leading independent video game software developers.
  If we are unable to maintain or acquire licenses to intellectual property, our operating results
will be adversely impacted.
  Termination or modification of our agreements with hardware manufacturers will adversely affect our
business.
  15




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##### Table of Contents




    
    terminating a project for which we have expended significant resources;
 
    
    leaving us unable to have our products manufactured and shipped to customers;
 
    
    increasing manufacturing lead times and expense to us over the lead times and costs we could
achieve if we were able to manufacture our products independently;
 
    
    delaying the manufacture and, in turn, the shipment of products; and
 
    
    requiring us to take significant risks in prepaying for and holding an inventory of products.
 16




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The loss of our senior management and skilled personnel could negatively affect our business.
  If returns and other concessions given to our customers exceed our reserves, our business may be
negatively affected.
  Significant competition in our industry could adversely affect our business.
  
    
    respond more quickly than we can to new or emerging technologies or changes in customer preferences;
 
    
    carry larger inventories than we do;
 
    
    undertake more extensive marketing campaigns than we do;
 
    
    adopt more aggressive pricing policies than we can; and
 
    
    make higher offers or guarantees to software developers and licensors than we can.
   17




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##### Table of Contents



If our distribution arrangements with IESA are adversely modified or terminated, we may lose
revenue or incur disruption in the distribution of our products.
  
    
    obtain new distribution arrangements for our products which may be on less favorable terms;
 
    
    lose revenue from the distribution of IESAs products;
 
    
    experience difficulties or other delays in the distribution of our products outside the United States, Canada, and Mexico;
 
    
    incur an increase in the cost of distributing our products outside the United States, Canada, and Mexico; or
 
    
    incur problems with retailers to whom we distribute IESAs products or to whom IESA distributes our products.
 Revenues from our distribution business may decline as competition increases and Internet
technology improves.
  Revenues from our distribution business may decline if the products which we distribute for IESA
are reduced or products we distribute for third-party developers become unavailable to us.
  We may face increased competition and downward price pressure if we are unable to protect our
intellectual property rights.
  18




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##### Table of Contents



We may face intellectual property infringement claims which would be costly to resolve.
  We may be burdened with payment defaults and uncollectible accounts if our customers do not or
cannot satisfy their payment obligations.
  Our software is subject to governmental restrictions or rating systems.
   We may become subject to litigation which could be expensive or disruptive.
  RISKS RELATED TO OUR CORPORATE STRUCTURE AND FINANCING ARRANGEMENTS
 Our performance may be affected by IESAs performance and financial stability.
  19




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IESA controls us and could prevent a transaction favorable to our other stockholders.
  Our affiliates retain considerable control over the Atari trademarks, and their oversight or
exploitation of such trademarks could affect our business.
  Our restructuring efforts will create short term costs that may not be offset by increased
efficiencies.
  Our credit facility could be terminated.
  20




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##### Table of Contents



RISKS RELATED TO OUR COMMON STOCK
 The price of our common stock is very low.
  IESA is in a position to prevent us from selling stock.
  AVAILABLE INFORMATION
  
 ITEM
1B. UNRESOLVED STAFF COMMENTS
  
 ITEM
2. PROPERTIES
  North America
    
    Europe
    
    TotalNew York
    
    
    70,000
    
    
    
    
    
    
    
    70,000California
    
    
    20,476
    
    
    
    
    
    
    
    20,476Washington
    
    
    65,500
    
    
    
    
    
    
    
    65,500Massachusetts
    
    
    53,184
    
    
    
    
    
    
    
    53,184Newcastle, UK
    
    
    
    
    
    
    14,576
    
    
    
    14,576Total
    
    
    209,160
    
    
    
    14,576
    
    
    
    223,736
 21




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##### Table of Contents



New York
 California Development
 Washington
 Massachusetts .
 Europe . Development
 
 ITEM 3. LEGAL PROCEEDINGS
  Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  22




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Ernst & Young, Inc. v. Atari, Inc.
  Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.
  
 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
  Proposal 1
 Broker Non-For
    
    Against
    
    Abstain
    
    Votes114,048,433
    
    1,247,847
    
    281,462
    
    0
  23




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##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
 
 High
    
    LowFiscal 2006First Quarter
    
    $
    31.80
    
    
    $
    23.00Second Quarter
    
    $
    29.40
    
    
    $
    11.50Third Quarter
    
    $
    14.60
    
    
    $
    9.79Fourth Quarter
    
    $
    11.80
    
    
    $
    5.61Fiscal 2007First Quarter
    
    $
    9.70
    
    
    $
    4.70Second Quarter
    
    $
    7.90
    
    
    $
    4.75Third Quarter
    
    $
    6.00
    
    
    $
    4.60Fourth Quarter
    
    $
    6.50
    
    
    $
    2.94
   Securities Authorized for Issuance under Equity Compensation Plans
  Recent Sales of Unregistered Securities
  Purchase of Equity Securities by the Issuer and Affiliated Purchases.
  
 ITEM 6. SELECTED FINANCIAL DATA
  Driver Driver
 24




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##### Table of Contents



NineMonths
    
    
    YearsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2003
    
    
    2004
    
    
    2005 (1)
    
    
    2006 (1)(2)
    
    
    2007 (1)(2)(3)Statement of Operations Data:Net revenues
    
    $
    393,529
    
    
    $
    465,639
    
    
    $
    343,837
    
    
    $
    206,796
    
    
    $
    122,285Operating income (loss)
    
    
    32,258
    
    
    
    20,840
    
    
    
    (23,970
    )
    
    
    (62,977
    )
    
    
    (77,644
    )Income (loss) from continuing operations
    
    
    22,908
    
    
    
    13,606
    
    
    
    (14,855
    )
    
    
    (63,375
    )
    
    
    (66,586
    )(Loss) income from discontinued operations of Reflections
Interactive Ltd, net of tax provision of $0, $0,
$9,352, $0, and
$7,559, respectively
    
    
    (4,838
    )
    
    
    (12,840
    )
    
    
    20,547
    
    
    
    (5,611
    )
    
    
    (3,125
    )Net income (loss)
    
    
    18,070
    
    
    
    766
    
    
    
    5,692
    
    
    
    (68,986
    )
    
    
    (69,711
    )Dividend to parent
    
    
    
    
    
    
    (39,351
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) attributable to common stockholders
    
    $
    18,070
    
    
    $
    (38,585
    )
    
    $
    5,692
    
    
    $
    (68,986
    )
    
    $
    (69,711
    )Basic and diluted income (loss) per share attributable to
common stockholders (4):Income (loss) from continuing operations
    
    $
    3.28
    
    
    $
    1.40
    
    
    $
    (1.22
    )
    
    $
    (4.93
    )
    
    $
    (4.94
    )(Loss) income from discontinued operations of Reflections
Interactive Ltd, net of tax
    
    
    (0.69
    )
    
    
    (1.32
    )
    
    
    1.69
    
    
    
    (0.43
    )
    
    
    (0.23
    )Net income (loss)
    
    
    2.59
    
    
    
    0.08
    
    
    
    0.47
    
    
    
    (5.36
    )
    
    
    (5.17
    )Dividend to parent
    
    
    
    
    
    
    (4.06
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) attributable to common stockholders
    
    $
    2.59
    
    
    $
    (3.98
    )
    
    $
    0.47
    
    
    $
    (5.36
    )
    
    $
    (5.17
    )Basic weighted average shares outstanding (4)
    
    
    6,988
    
    
    
    9,699
    
    
    
    12,128
    
    
    
    12,863
    
    
    
    13,477Diluted weighted average shares outstanding (4)
    
    
    7,006
    
    
    
    9,699
    
    
    
    12,159
    
    
    
    12,863
    
    
    
    13,477
 
 (1)
    
    During fiscal 2005, 2006, and 2007, we recorded restructuring expenses of $4.9 million,
$8.9 million, and $0.7 million, respectively.(2)
    
    During fiscal 2006, we recorded a gain on sale of intellectual property of $6.2 million
and in fiscal 2007, we recorded a gain on sale of intellectual property of $9.0 million and
a gain on sale of development studio assets of $0.9 million. Additionally, in fiscal 2007
the gain on sale of Reflections of $11.5 million is included as a reduction of the loss
from discontinued operations.(3)
    
    During fiscal 2007, we recorded an impairment loss on our goodwill of $54.1 million,
which is included in the loss from continuing operations.(4)
    
    Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods
have been restated retroactively to reflect the reverse stock split. March 31,2003
    
    2004
    
    2005
    
    2006
    
    2007Balance Sheet Data:Cash
    
    $
    392
    
    
    $
    8,858
    
    
    $
    9,988
    
    
    $
    14,948
    
    
    $
    7,603Working capital (deficit)
    
    
    (90,260
    )
    
    
    25,844
    
    
    
    34,467
    
    
    
    (2,996
    )
    
    
    1,213Total assets
    
    
    232,082
    
    
    
    193,956
    
    
    
    190,039
    
    
    
    143,670
    
    
    
    42,819Total debt
    
    
    220,061
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity (deficit)
    
    
    (96,918
    )
    
    
    115,063
    
    
    
    120,667
    
    
    
    73,212
    
    
    
    3,094
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
 Going Concern
  Driver
  25




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Related party transactions
  Reverse Stock Split
  Business and Operating Segments
  26




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##### Table of Contents



Adoption of FASB Statement No. 123(R)
  Key Challenges
   27




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Critical Accounting Policies
   Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
     Inventories
  28




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##### Table of Contents



Research and product development expenses
   Licenses
  Atari Trademark License
  Goodwill and Acquired Intangible Assets
    29




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##### Table of Contents



Results of Operations
 Year ended March 31, 2006 versus year ended March 31, 2007
 Consolidated Statement of Operations (dollars in thousands):
 Year
    
    
    % of
    
    
    Year
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/March 31,
    
    
    Revenues
    
    
    March 31,
    
    
    Revenues
    
    
    Increase2006
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    $
    
    
    %Net revenues
    
    $
    206,796
    
    
    
    100.0
    %
    
    $
    122,285
    
    
    
    100.0
    %
    
    
    (84,511
    )
    
    
    (40.9
    )%Costs and expenses:Cost of goods sold
    
    
    133,604
    
    
    
    64.6
    %
    
    
    72,629
    
    
    
    59.4
    %
    
    
    (60,975
    )
    
    
    (45.6
    )%Research and product development expenses
    
    
    51,887
    
    
    
    25.1
    %
    
    
    30,077
    
    
    
    24.6
    %
    
    
    (21,810
    )
    
    
    (42.0
    )%Selling and distribution expenses
    
    
    42,985
    
    
    
    20.8
    %
    
    
    25,296
    
    
    
    20.7
    %
    
    
    (17,689
    )
    
    
    (41.2
    )%General and administrative expenses
    
    
    30,385
    
    
    
    14.7
    %
    
    
    21,788
    
    
    
    17.8
    %
    
    
    (8,597
    )
    
    
    (28.3
    )%Restructuring expenses
    
    
    8,867
    
    
    
    4.3
    %
    
    
    709
    
    
    
    0.6
    %
    
    
    (8,158
    )
    
    
    (92.0
    )%Impairment of goodwill
    
    
    
    
    
    
    0.0
    %
    
    
    54,129
    
    
    
    44.3
    %
    
    
    54,129
    
    
    
    100.0
    %Gain on sale of intellectual property
    
    
    (6,224
    )
    
    
    (3.0
    )%
    
    
    (9,000
    )
    
    
    (7.4
    )%
    
    
    2,776
    
    
    
    44.6
    %Gain on sale of development studio assets
    
    
    
    
    
    
    0.0
    %
    
    
    (885
    )
    
    
    (0.7
    )%
    
    
    885
    
    
    
    100.0
    %Atari trademark license expense
    
    
    3,067
    
    
    
    1.5
    %
    
    
    2,218
    
    
    
    1.8
    %
    
    
    (849
    )
    
    
    (27.7
    )%Depreciation and amortization
    
    
    5,202
    
    
    
    2.5
    %
    
    
    2,968
    
    
    
    2.4
    %
    
    
    (2,234
    )
    
    
    (42.9
    )%Total costs and expenses
    
    
    269,773
    
    
    
    130.5
    %
    
    
    199,929
    
    
    
    163.5
    %
    
    
    (69,844
    )
    
    
    (26.0
    )%Operating (loss)
    
    
    (62,977
    )
    
    
    (30.5
    )%
    
    
    (77,644
    )
    
    
    (63.5
    )%
    
    
    14,667
    
    
    
    23.3
    %Interest (expense) income, net
    
    
    (595
    )
    
    
    (0.2
    )%
    
    
    301
    
    
    
    0.2
    %
    
    
    (896
    )
    
    
    (150.6
    )%Other (expense) income
    
    
    (208
    )
    
    
    (0.1
    )%
    
    
    77
    
    
    
    0.1
    %
    
    
    (285
    )
    
    
    (137.0
    )%(Loss) before (benefit from) income taxes
    
    
    (63,780
    )
    
    
    (30.8
    )%
    
    
    (77,266
    )
    
    
    (63.2
    )%
    
    
    13,486
    
    
    
    21.2
    %(Benefit from) income taxes
    
    
    (405
    )
    
    
    (0.2
    )%
    
    
    (10,680
    )
    
    
    (8.8
    )%
    
    
    10,275
    
    
    
    2,537.0
    %(Loss) from continuing operations
    
    
    (63,375
    )
    
    
    (30.6
    )%
    
    
    (66,586
    )
    
    
    (54.4
    )%
    
    
    3,211
    
    
    
    5.1
    %(Loss) from discontinued operations of Reflections
Interactive Ltd, net of tax provision of $0 and
$7,559,
respectively
    
    
    (5,611
    )
    
    
    (2.8
    )%
    
    
    (3,125
    )
    
    
    (2.6
    )%
    
    
    (2,486
    )
    
    
    (44.3
    )%Net (loss)
    
    $
    (68,986
    )
    
    
    (33.4
    )%
    
    $
    (69,711
    )
    
    
    (57.0
    )%
    
    $
    725
    
    
    
    1.1
    %
 30




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##### Table of Contents



Net Revenues
  YearsEndedMarch 31,
    
    
    (Decrease)2006
    
    
    2007Publishing
    
    $
    153,598
    
    
    $
    104,650
    
    
    $
    (48,948
    )Distribution
    
    
    53,198
    
    
    
    17,635
    
    
    
    (35,563
    )Total
    
    $
    206,796
    
    
    $
    122,285
    
    
    $
    (84,511
    )
  Publishing Platform Mix2006
    
    2007PlayStation 2
    
    
    35.5
    %
    
    
    35.5
    %PC
    
    
    32.7
    %
    
    
    27.2
    %Xbox 360
    
    
    0.0
    %
    
    
    12.1
    %Nintendo Wii
    
    
    0.0
    %
    
    
    8.4
    %PlayStation Portable
    
    
    2.1
    %
    
    
    7.6
    %Game Boy Advance
    
    
    6.7
    %
    
    
    3.9
    %Plug and Play
    
    
    9.3
    %
    
    
    2.8
    %Nintendo DS
    
    
    2.1
    %
    
    
    2.0
    %Xbox
    
    
    9.8
    %
    
    
    0.3
    %Game Cube
    
    
    1.8
    %
    
    
    0.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  
    
    The fiscal 2007 net publishing revenues of $104.7 million include net product sales from
new releases of $61.8 million, driven by Dragon Ball Z: Budokai Tenkaichi 2(PlayStation 2
and Nintendo Wii), Neverwinter Nights 2(PC),and Test Drive Unlimited(Xbox 360,
PlayStation 2, PSP, and PC). Comparatively, in fiscal 2006, net publishing revenues of
$153.6 million were driven by new release sales of $95.1 million which included Dragon Ball
Z: Budokai Tenkaichi(PlayStation 2), Matrix: Path of Neo(PlayStation 2, Xbox, and PC),
Atari Flashback 2.0(plug and play), and Getting Up: Contents Under Pressure(PlayStation
2, Xbox, and PC).
    
    During the year ended March 31, 2007, back catalogue sales were 28% of our net product
revenues, compared with 24% of our net product revenues during fiscal 2006.
    
    Publishing net revenues include international royalty income earned on IESAs
international sales of our titles. International royalty income decreased by $8.3 million
from $13.5 million in fiscal 2006 to $5.2 million in fiscal 2007. The current year income
was driven by international sales of Test Drive Unlimited, while the prior years income
reflected international sales of Matrix: Path of Neo, Getting Up: Contents Under Pressure,
and Indigo Prophecy.
    
    Domestic licensing and other income, included in publishing net revenues, decreased
slightly to $12.0 million from $12.1 million in fiscal 2006. Included in this change are:
 o
    
    decreased domestic licensing income of $1.0 million in fiscal 2007 due to
an overall decrease in volume of licensing transactions, offset byo
    
    increased miscellaneous revenues of $0.9 million driven by increased
quality and assurance services (product testing) performed, and sponsorship and
in-game advertising revenue which did not exist in fiscal 2006.
 
    
    The overall average sales price (ASP) of the publishing business was relatively
consistent with fiscal 2006, increasing slightly from $20.50 to $20.80 in fiscal 2007.
Trends include:
 31




---



##### Table of Contents



o
    
    increase in the ASP for PC titles from $14.67 to $17.44, ando
    
    decrease in the ASP for console titles from $25.44 to $22.41. The
current year includes sales of Xbox 360 and Nintendo Wii titles, with ASPs of $31.04
and $36.37, respectively, that were not included in fiscal 2006; however, this is
offset by a decrease in the ASP for Xbox titles from $30.33 to $5.55, and in
PlayStation 2 titles from $29.28 to $21.05, as a result of the recent transition to
the newest generation consoles.
 
    
    Platform mix in fiscal 2007 consisted of 27.2% PC products and 72.8% console (including
plug and play) products, as compared with fiscal 2006s mix of 32.7% PC products and 67.3%
console (including plug and play) products.
    
    In the fourth quarter of fiscal 2006, we recorded additional price protection allowances
of $4.2 million in connection with our aggressive pricing program, which reduced console
and certain PC titles sold prior to March 31, 2006 to a retail price of $19.95.
  Cost of Goods Sold
  
    
    a lower mix of higher cost third-party distributed product sales as a percentage of net
revenues (14.4% in fiscal 2007 compared with 25.7% in fiscal 2006), and
    
    a lower mix of royalty bearing products (fiscal 2006 included sales of Matrix: Path of
Neoand Getting Up: Contents Under Pressure, both bearing a high amount of royalty
expense).
 Research and Product Development Expenses
  
    
    a decrease in expense incurred with external developers of $6.9 million from lack of
financial resources to invest in full-fledged development projects (however, we do expect
to see savings in research and product development cost in the future if we focus on casual
gaming, which has lower development costs),
    
    a decrease in spending of $10.0 million at our related party development studios due to
the sale of our Stuntmanfranchise and development project, in process at Paradigm in
fiscal 2006, as well as the completion of Test Drive Unlimitedon Xbox 360, released in
September 2006 and in process at Eden Studios and Atari Melbourne House (which was sold in
fiscal 2007) in fiscal 2006, and
    
    a decrease in salary and other related expenses of $7.9 million due to the closure of
the Beverly and Santa Monica publishing studios during fiscal 2006, the divestiture of the
Shiny studio in the second quarter of fiscal 2007, and other personnel reductions, offset
by
    
    the current period write-off of $2.4 million of website-related acquired intangible and
other assets previously capitalized that were determined during the fourth quarter not to
provide us with a future benefit, and
 32




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##### Table of Contents




    
    the allocated charge of $0.8 million related to the benefit we received from resignation
agreement entered into by IESA with our former Chief Creative Officer.
  Selling and Distribution Expenses
  
    
    significant savings in the current period on advertising ($12.9 million in fiscal 2007
as compared to $25.2 million in the prior period) due to fewer new releases as well as
managements focus on lower cost and more direct marketing (fiscal 2006 included
significant spend for Matrix: Path of Neotelevision campaigns),
    
    lower variable distribution costs, including freight, shipping and handling, of $2.4
million due to lower sales, and
    
    savings of $2.7 million in salaries and related overhead costs from the closure of the
Santa Monica and Beverly studios, as well as personnel reductions at our New York
headquarters.
 General and Administrative Expenses
  
    
    reduction in salaries of $6.2 million due to publishing studio closures and other
personnel reductions, as well as savings in rent and other overhead and administrative
costs, and
    
    decreased bad debt expense of $1.7 million due to lower sales.
 Restructuring Expenses
   Impairment of Goodwill
 Goodwill and
Acquired Intangible Assets
 33




---



##### Table of Contents



Gain on Sale of Intellectual Property
 Timeshift Stuntman
 Gain on Sale of Development Studio Assets
  Atari Trademark License Expense
  Depreciation and Amortization
  Interest (Expense) Income, net
  Other (Expense) Income
  Benefit From Income Taxes
  
    
    a tax refund of $1.0 million received in connection with our dormant UK subsidiary;
    
    a non-cash tax benefit of $2.1 million resulting from the reversal of a deferred tax
liability established for the deferred tax consequences of a temporary difference that
arose from a difference in the book and tax basis of goodwill in a prior period, upon the
impairment of our goodwill in the fourth quarter of fiscal 2007; and
    
    a non-cash tax benefit of $7.6 million which offsets a non-cash tax provision of the
same amount included in loss from discontinued operations, recorded in accordance with FASB
Statement No, 109, Accounting for Income Taxes, paragraph 140, which states that all
items should be considered for purposes of determining the amount of tax benefit that
results from a loss from continuing operations and that should be allocated to continuing
operations. The recording of a benefit is appropriate in this instance, under the
guidance of Paragraph 140, because such domestic loss offsets the domestic gain
generated in discontinued operations. The effect of this transaction on net loss for fiscal
2007 is zero, and it does not result in the receipt or payment of any cash.
 34




---



##### Table of Contents



Loss from Discontinued Operations of Reflections Interactive Ltd, net of tax
 Benefit from Income Taxes Driver
 Year ended March 31, 2005 versus year ended March 31, 2006
 Consolidated Statement of Operations (dollars in thousands):
 Year
    
    
    % of
    
    
    Year
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/March 31,
    
    
    Revenues
    
    
    March 31,
    
    
    Revenues
    
    
    Increase2005
    
    
    
    
    
    
    2006
    
    
    
    
    
    
    $
    
    
    %Net revenues
    
    $
    343,837
    
    
    
    100.0
    %
    
    $
    206,796
    
    
    
    100.0
    %
    
    $
    (137,041
    )
    
    
    (39.9
    )%Costs and expenses:Cost of goods sold
    
    
    200,244
    
    
    
    58.2
    %
    
    
    133,604
    
    
    
    64.6
    %
    
    
    (66,640
    )
    
    
    (33.3
    )%Research and product development expenses
    
    
    58,311
    
    
    
    17.0
    %
    
    
    51,887
    
    
    
    25.1
    %
    
    
    (6,424
    )
    
    
    (11.0
    )%Selling and distribution expenses
    
    
    58,220
    
    
    
    16.9
    %
    
    
    42,985
    
    
    
    20.8
    %
    
    
    (15,235
    )
    
    
    (26.2
    )%General and administrative expenses
    
    
    35,792
    
    
    
    10.5
    %
    
    
    30,385
    
    
    
    14.7
    %
    
    
    (5,407
    )
    
    
    (15.1
    )%Restructuring expenses
    
    
    4,932
    
    
    
    1.4
    %
    
    
    8,867
    
    
    
    4.3
    %
    
    
    3,935
    
    
    
    79.8
    %Gain on sale of intellectual property
    
    
    
    
    
    
    0.0
    %
    
    
    (6,224
    )
    
    
    (3.0
    )%
    
    
    6,224
    
    
    
    100.0
    %Atari trademark license expense
    
    
    3,350
    
    
    
    1.0
    %
    
    
    3,067
    
    
    
    1.5
    %
    
    
    (283
    )
    
    
    (8.4
    )%Depreciation and amortization
    
    
    6,958
    
    
    
    2.0
    %
    
    
    5,202
    
    
    
    2.5
    %
    
    
    (1,756
    )
    
    
    (25.2
    )%Total costs and expenses
    
    
    367,807
    
    
    
    107.0
    %
    
    
    269,773
    
    
    
    130.5
    %
    
    
    (98,034
    )
    
    
    (26.7
    )%Operating (loss)
    
    
    (23,970
    )
    
    
    (7.0
    )%
    
    
    (62,977
    )
    
    
    (30.5
    )%
    
    
    39,077
    
    
    
    162.7
    %Interest expense, net
    
    
    (459
    )
    
    
    (0.1
    )%
    
    
    (595
    )
    
    
    (0.2
    )%
    
    
    136
    
    
    
    29.6
    %Other income (expense)
    
    
    42
    
    
    
    0.0
    %
    
    
    (208
    )
    
    
    (0.1
    )%
    
    
    (250
    )
    
    
    (595.2
    )%(Loss) before (benefit from) income taxes
    
    
    (24,387
    )
    
    
    (7.1
    )%
    
    
    (63,780
    )
    
    
    (30.8
    )%
    
    
    39,393
    
    
    
    161.5
    %(Benefit from) income taxes
    
    
    (9,532
    )
    
    
    (2.8
    )%
    
    
    (405
    )
    
    
    (0.2
    )%
    
    
    (9,127
    )
    
    
    (95.8
    )%(Loss) from continuing operations
    
    
    (14,855
    )
    
    
    (4.3
    )%
    
    
    (63,375
    )
    
    
    (30.6
    )%
    
    
    48,520
    
    
    
    326.6
    %Income (loss) from discontinued operations of
Reflections Interactive Ltd, net of tax
provision of
$9,716 and $0, respectively
    
    
    20,547
    
    
    
    6.0
    %
    
    
    (5,611
    )
    
    
    (2.8
    )%
    
    
    (26,158
    )
    
    
    (127.3
    )%Net income (loss)
    
    $
    5,692
    
    
    
    1.7
    %
    
    $
    (68,986
    )
    
    
    (33.4
    )%
    
    $
    (74,678
    )
    
    
    (1,312.0
    )%
 Net Revenues
  YearsEndedMarch 31,
    
    
    (Decrease)2005
    
    
    2006Publishing
    
    $
    289,636
    
    
    $
    153,598
    
    
    $
    (136,038
    )Distribution
    
    
    54,201
    
    
    
    53,198
    
    
    
    (1,003
    )Total
    
    $
    343,837
    
    
    $
    206,796
    
    
    $
    (137,041
    )
  35




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##### Table of Contents



Publishing Platform Mix2005
    
    2006PlayStation 2
    
    
    36.6
    %
    
    
    35.5
    %PC
    
    
    28.7
    %
    
    
    32.7
    %Xbox
    
    
    8.7
    %
    
    
    9.8
    %Plug and Play
    
    
    5.8
    %
    
    
    9.3
    %Game Boy Advance
    
    
    13.0
    %
    
    
    6.7
    %Nintendo DS
    
    
    0.8
    %
    
    
    2.1
    %PlayStation Portable
    
    
    0.0
    %
    
    
    2.1
    %Game Cube
    
    
    5.3
    %
    
    
    1.8
    %PlayStation
    
    
    1.1
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  
    
    Fiscal 2006 net publishing revenues of $153.6 million include net product sales from new
releases of $95.1 million, which includes the top sellers of fiscal 2006: Dragon Ball Z:
Budokai Tenkaichi(PlayStation 2), Matrix: Path of Neo(PlayStation 2, Xbox, and PC), Atari
Flashback 2.0(plug and play), and Getting Up: Contents Under Pressure(PlayStation 2,
Xbox, and PC). Other new releases in fiscal 2006 included Dungeons and Dragons: Stormreach
(PC), Indigo Prophecy(PC, PlayStation 2, and Xbox), and Dragon Ball Z: Transformations
(Game Boy Advance). In fiscal 2005, net publishing revenues of $289.6 million were driven
by the Dragon Ball Zfranchise, which generated full year net product sales of $85.9
million, led by Budokai 3(PlayStation 2), Sagas(PlayStation 2, Xbox and GameCube), Buus
Fury(Game Boy Advance), and Super Sonic Warriors(Game Boy Advance).
    
    During the year ended March 31, 2006, back catalogue sales were 24.2% of our net product
revenues, which is comparable with 22.6% of our net product revenues during fiscal 2005.
    
    Publishing net revenues include international royalty income earned on IESAs
international sales of our titles. International royalty income increased by $11.0 million
from $2.5 million in fiscal 2005 to $13.5 million in fiscal 2006. The fiscal 2006 income
was driven by international sales of Matrix: Path of Neo, Getting Up: Contents Under
Pressure, and Indigo Prophecy. The 2006 revenues also include an unfavorable exchange rate
impact of approximately $1.0 million from the strengthening U.S. dollar against the Euro.
    
    Domestic licensing and other income, included in publishing net revenues, decreased
approximately 37.9% to $12.1 million from $19.5 million in fiscal 2005. The decrease was
driven by:
 o
    
    domestic licensing income of $8.2 million in fiscal 2006, compared with
$15.3 million in fiscal 2005, driven by fiscal 2005s recognition of the Duke Nukem
Royalty Advance Promissory Note of $4.3 million, offset byo
    
    fiscal 2006s recognition of production services revenue of $2.0 million
from Atari Interactive pursuant to an agreement signed in March 2006.
 
    
    The overall average sales price (ASP) of the publishing business increased from $18.98
in fiscal 2005, to $20.50 in fiscal 2006. Trends include:
 o
    
    fiscal 2006 inclusion of PlayStation Portable, with an ASP of $26.08,
increasing the overall console ASP from $21.59 in the fiscal 2005 to $25.44 in
fiscal 2006, offset byo
    
    a decrease in the ASP of the Atari Flashbackplug-and-play games from
$29.87 in fiscal 2005 to $19.90.
 
    
    Platform mix has shifted away from console product toward lower priced PC and
plug-and-play product. Fiscal 2006s year to date mix consisted of 58.0% console product,
32.7% PC product, and 9.3% Atari Flashbackproduct, compared with the fiscal 2005 mix of
65.5% console product, 28.7% PC product, and 5.8% Atari Flashbackproduct.
    
    Total distribution net revenues decreased $1.0 million due to increased competition;
however, the fiscal 2006 period includes net revenues of Humongous, Inc. as a distributed
party since August 2005.
 36




---



##### Table of Contents




    
    In the fourth quarter of fiscal 2006, we recorded additional price protection allowances
of $4.2 million in connection with our aggressive pricing program, which reduced console
and certain PC titles sold prior to March 31, 2006 to a retail price of $19.95.
 Cost of Goods Sold
  
    
    a higher mix of higher cost third-party distributed product sales as a percentage of net
revenues (25.7% in the 2006 year compared with 15.8% in the prior year),
    
    lower licensing and other income, on which we incur lower costs, and
    
    higher license expense in the current period due to higher mix of licensed product
sales, primarily Dragon Ball Zsales.
 Research and Product Development Expenses
  
    
    a decrease in expense incurred with external developers of $6.8 million due to fewer
titles in development,
    
    a decrease in salary and other related expenses of $3.1 million due to office closures
in Santa Monica and Beverly, offset by
    
    increased spending of $4.7 million for certain projects in development at our internal
studios.
  Selling and Distribution Expenses
  
    
    significant savings in the current period on advertising ($25.2 million in fiscal 2006
as compared to $31.6 million in the prior period) due to fewer new titles released,
    
    lower variable distribution costs, including freight, shipping and handling, on lower
sales, and
    
    savings in salaries and related overhead costs from the closure of the Santa Monica and
Beverly studios, as well as personnel reduction at our New York headquarters.
 General and Administrative Expenses
  
    
    reduction in salary and related costs due to reduced headcount,
    
    reduction in rent and other overhead costs due to the closure of Beverly and Santa
Monica studios (included in restructuring expense), offset by
    
    increased professional fees primarily due to increased use of outside legal and other
consulting services, and
 37




---



##### Table of Contents




    
    the prior years inclusion of a $0.9 million translation gain from the liquidation of
the dormant Australian subsidiary.
 Restructuring Expenses
  
    
    fiscal 2006 recognition of the present value of all future lease payments for offices
closed as part of the restructuring plan, as well as other lease related expenses, of $1.6
million,
    
    severance costs of $2.0 million related to headcount reductions in our New York office in February 2006,
    
    relocation expenses of $0.4 million recorded in fiscal 2006, and
    
    fixed asset write offs of $0.4 million recorded in fiscal 2006.
 Gain on Sale of Intellectual Property
 Timeshift
 Atari Trademark License Expense
  Depreciation and Amortization
  Interest Expense, net
  
    
    prior year recognition of interest income of $0.9 million earned on the various related
party notes receivable outstanding during the period, offset by
    
    lower credit facility interest of $0.7 million in the period due to lower outstanding borrowings, and
    
    interest income of $0.1 million earned on a prior period income tax refund.
 Other Income (Expense)
  Benefit from Income Taxes
  38




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Income (Loss) from Discontinued Operations of Reflections Interactive Ltd, net of tax
 Driver 3
 Liquidity and Capital Resources
 Overview
    Cash Flows
 March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2007Cash
    
    $
    14,948
    
    
    $
    7,603Working capital (deficit)
    
    $
    (2,996
    )
    
    $
    1,213
 39




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##### Table of Contents



Year
    
    
    YearEnded
    
    
    EndedMarch 31,
    
    
    March 31,2006
    
    
    2007Cash (used in) operating activities
    
    $
    (16,005
    )
    
    $
    (36,939
    )Cash provided by investing activities
    
    
    13,774
    
    
    
    29,757Cash provided by (used in) financing activities
    
    
    7,211
    
    
    
    (216
    )Effect of exchange rates on cash
    
    
    (20
    )
    
    
    53Net increase (decrease) in cash
    
    $
    4,960
    
    
    $
    (7,345
    )
   
    
    proceeds of $23.4 million received in connection with the sale of our Reflections studio,
    
    proceeds of $9.0 million from the sale of the Stuntmanintellectual property, and
    
    proceeds of $1.6 million from the sale of our Shiny studio in the current period.
        40




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##### Table of Contents



Selected Balance Sheet Accounts
 Accounts Receivable, net
  Inventories, net
  Goodwill
  Due from Related Parties/Due to Related Parties
  Accounts Payable, Accrued Liabilities, and Royalties Payable
  Long-term Liabilities
  Credit Facilities
 Guggenheim Credit Facility
   41




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##### Table of Contents



HSBC Loan and Security Agreement
   Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    Total2008
    
    $
    1,849
    
    
    $
    3,764
    
    
    $
    3,557
    
    
    $
    75
    
    
    $
    9,2452009
    
    
    
    
    
    
    
    
    
    
    3,024
    
    
    
    12
    
    
    
    3,0362010
    
    
    
    
    
    
    
    
    
    
    2,997
    
    
    
    
    
    
    
    2,9972011
    
    
    
    
    
    
    
    
    
    
    2,937
    
    
    
    
    
    
    
    2,9372012
    
    
    
    
    
    
    
    
    
    
    2,822
    
    
    
    
    
    
    
    2,822Thereafter
    
    
    
    
    
    
    
    
    
    
    24,465
    
    
    
    
    
    
    
    24,465Total
    
    $
    1,849
    
    
    $
    3,764
    
    
    $
    39,802
    
    
    $
    87
    
    
    $
    45,502
 
 (1)
    
    We have committed to pay advance payments under certain royalty and license
agreements. The payments of these obligations are dependent on the delivery of the
contracted services by the developers.(2)
    
    Milestone payments represent royalty advances to developers for products that are
currently in development. Although milestone payments are not guaranteed, we expect to
make these payments if all deliverables and milestones are met timely and accurately.
Included in the total contractual obligations of $3.8 million are payments of $0.3
million to be made to a related party development studio.(3)
    
    We account for our office leases as operating leases, with expiration dates ranging
from fiscal 2008 through fiscal 2022. There are future minimum annual rental payments
required under the leases, including a related party sub-lease with Atari Interactive,
net of $1.6 million of sublease income to be received in fiscal 2008 and fiscal 2009.
Leasehold improvements made at the beginning of or during a lease are amortized over the
shorter of the remaining lease term or the estimated useful lives of the assets.During June 2006, we entered into a new lease with our current landlord at our New York
headquarters for approximately 70,000 square feet of office space for our principal
offices. The term of this lease commenced on July 1, 2006 and is to expire on June 30,
2021. Upon entering into the new lease, our current lease, which was set to expire in
December 2006, was terminated. The rent under the new lease for the office space is
approximately $2.4 million per year for the first five years, increases to approximately
$2.7 million per year for the next five years, and increases to $2.9 million for the last
five years of the term. In addition, we must pay for electricity, increases in real estate
taxes and increases in porter wage rates over the term. The landlord is providing us with
a one year rent credit of $2.4 million and an allowance of $4.5 million to be used for
building out and furnishing the premises, of which $1.2 million has been recorded as a
deferred credit as of March 31, 2007; the remainder of the deferred credit will be recorded
as the improvements are completed, and will be amortized against rent expense 42




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##### Table of Contents



over the life of the lease. A nominal amount of amortization was recorded during the year ended March
31, 2007. We provided the landlord with a security deposit under the new lease in the form of a
letter of credit in the initial amount of $1.7 million, which has been cash collateralized
and is included in security deposits on our consolidated balance sheet. In August 2007, we
amended this lease to reduce the space we occupy by one-half, effective December 31, 2007.(4)
    
    We maintain several capital leases for computer equipment. Per FASB Statement No.
13, Accounting for Leases, we account for capital leases by recording them at the
present value of the total future lease payments. They are amortized using the
straight-line method over the minimum lease term. As of March 31, 2006, the net book
value of the assets, included within property and equipment on the balance sheet, was
$0.5 million, net of accumulated depreciation of $0.3 million. As of March 31, 2007, the
net book value of the assets was $0.1 million, net of accumulated depreciation of $0.5
million. Effect of Relationship with IESA on Liquidity
  Recent Accounting Pronouncements
       43




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Currency Exchange Rates
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  PAGEATARI, INC. AND SUBSIDIARIESReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of March 31, 2006 and March 31, 2007
    
    
    F-2Consolidated Statements of Operations for the Years Ended March 31, 2005, 2006, and 2007
    
    
    F-3Consolidated Statements of Cash Flows for the Years Ended March 31, 2005, 2006, and 2007
    
    
    F-4
 44




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##### Table of Contents



PAGEConsolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
for the Years Ended March 31, 2005, 2006, and 2007
    
    
    F-6Notes to the Consolidated Financial Statements
    
    F-7 to F-40FINANCIAL STATEMENT SCHEDULESchedule IIValuation and Qualifying Accounts for the Years Ended March 31, 2005, 2006, and 2007
    
    
    F-41
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
  
    
    Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;
    
    Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations
of our management and directors; and
    
    Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements.
 Internal
Control-Integrated Framework
  45




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##### Table of Contents




    
    There was a material weakness in the design and operation of the
Companys internal controls over financial reporting related to income taxes which
resulted in a more than remote likelihood that a material misstatement of the annual or
interim financial statements would not be prevented or detected. Management did not
maintain a sufficient number of technically qualified personnel during the year to
facilitate the identification of all issues associated with the Companys income tax
closing process or to appropriately prepare and review income tax related analysis. This
material weakness resulted in material adjustments to income tax accounts within the
current and prior period consolidated financial statements.
    
    There were material design and operational deficiencies related to the preparation
and review of financial information during the Companys year end closing process.
These items resulted in more than a remote likelihood that a material misstatement or lack
of disclosure within the annual or interim financial statements would not be prevented or
detected. The Company experienced significant turnover of senior financial management and
did not maintain a sufficient number of qualified personnel to support the Companys
financial reporting and close process. This has resulted in a significant workload for
the existing personnel who manage the financial reporting and closing process and reduced
the likelihood that such individuals could detect a material adjustment to the Companys
books and records or anticipate, identify, and resolve accounting issues in the normal
course of performing their assigned functions. This material weakness resulted in
material adjustments to the inventory, operating expenses, additional paid-in capital
accounts within the financial statements and financing activities
within the fiscal 2005 and 2006 consolidated statements of cash flows.
    
    There were material design and operational deficiencies in the Companys controls
over related party transactions, which, when aggregated, resulted in a more than remote
likelihood that a material misstatement or lack of disclosure in the annual or interim
financial statements would not be prevented or detected. The Company can be impacted by
certain financial transactions and operating decisions of IESA. Management determined
that an inadequate level of communication between the Company and IESA has resulted in an
increased likelihood that the accounting department would not detect a significant
transaction affecting the Company which would lead to a material adjustment to the
Companys books and records or a material change to the
disclosure in the footnotes to the financial statements. This material weakness resulted in adjustments to operating
expense and additional paid-in capital accounts and
related party disclosures in the current period consolidated financial statements
 Internal Control-Integrated Framework
  46




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
    
    We sold all our internal development studios; as a result, all payroll processes are
now centralized in the US in our corporate headquarters.
    
    We reorganized the review and approval process within our Information Technology group, including integrating our external service providers into the formal review process.
    
    We enhanced our general computer controls and internal procedures related to Information Technology operations, security and change control, so that we can rely on computer generated information.
   Report of Independent Registered Public Accounting Firm
 
 Internal ControlIntegrated Framework
     
    
    There was a material weakness in the design and operation of the Companys
internal controls over financial reporting related to income taxes which resulted in a
more than remote likelihood that a material misstatement of the annual or interim
financial statements would not be prevented or detected. The tax department did not
maintain a sufficient number of technically qualified personnel during the year to
facilitate the identification of all issues associated with the Companys income tax
closing process or to appropriately prepare and review income tax related analysis. This
material weakness resulted in material adjustments to income tax accounts within the
current and prior period consolidated financial statements.
 47




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##### Table of Contents




    
    There were material design and operational deficiencies related to the preparation
and review of financial information during the Companys year end closing process.
These items resulted in more than a remote likelihood that a material misstatement or lack
of disclosure within the annual or interim financial statements would not be prevented or
detected. The Company experienced significant turnover of senior financial management and
did not maintain a sufficient number of qualified personnel to support the Companys
financial reporting and close process. This has resulted in a significant workload for
the existing personnel who manage the financial reporting and closing process and reduced
the likelihood that such individuals could detect a material adjustment to the Companys
books and records or anticipate, identify, and resolve accounting issues in the normal
course of performing their assigned functions. This material weakness resulted in
material adjustments to the inventory, operating expenses, additional paid-in capital
accounts within the financial statements and financing activities
within the fiscal 2005 and 2006 consolidated statements of cash flows.
    
    There were material design and operational deficiencies in the Companys controls
over related party transactions, which, when aggregated, resulted in a more than remote
likelihood that a material misstatement or lack of disclosure in the annual or interim
financial statements would not be prevented or detected. The Company can be impacted by
certain financial transactions and operating decisions of Infogrames Entertainment S.A.
(the Parent Company). There is an inadequate level of communication between the Company
and the Parent Company which has resulted in an increased likelihood
that the accounting
department would not detect a significant transaction affecting the Company which would
lead to a material adjustment to the Companys books and records
or a material change to the disclosures in the footnotes to the
financial statements. This material weakness resulted in
adjustments to operating expense and additional paid-in capital
accounts and related party disclosures in the current period
consolidated financial statements.
  Internal ControlIntegrated Framework Internal ControlIntegrated Framework
   
 
 ITEM 9B. OTHER MATTERS
 Bruno
Bonnells Resignation
    Shareholders Meeting
  48




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14 . PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  (i)
    
    Financial Statements. See Index to Financial Statements at Item 8 of this Report.(ii)
    
    Financial Statement Schedule. See Index to Financial Statements at Item 8 of this
Report.(iii)
    
    Exhibits
 3.1
    
    Restated Certificate of Incorporation.3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation as filed with the Secretary
of State of the State of Delaware on January 3, 2007 is incorporated herein by reference to
Exhibit 99.1 to our Current Report on Form 8-K filed on January 9, 2007.3.3
    
    Amended and Restated By-laws are incorporated herein by reference to Exhibit 3.2 to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
 
 49




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##### Table of Contents



3.4
    
    Amendment No. 1 to Amended and Restated By-laws is incorporated by reference to Exhibit 3.2
to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.3.5
    
    Amendment No. 2 to Amended and Restated By-laws is incorporated by reference to Exhibit 3.1
to our Current Report on Form 8-K filed on July 28, 2005.4.1
    
    Specimen form of stock certificate of Common Stock is incorporated herein by reference to our
Registration Statement on Form S-1 (File No. 333-14441) initially filed with the SEC on
October 20, 1995, and all amendments thereto.4.2
    
    Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre,
Jack J. Cayre, the Trusts listed on Schedule I attached thereto and us is incorporated herein
by reference to an exhibit filed as a part of our Registration Statement on Form S-1 filed
October 20, 1995.4.3
    
    Second Amended and Restated Registration Rights Agreement, dated as of October 2, 2000,
between California U.S. Holdings, Inc. and us is incorporated herein by reference to Exhibit
4.6 of our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the
SEC on August 8, 2003, and all amendments thereto.10.1
    
    Distribution Agreement between Infogrames Entertainment SA, Infogrames Multimedia SA and us,
dated as of December 16, 1999, is incorporated herein by reference to Exhibit 7 to the
Schedule 13D filed by Infogrames Entertainment SA and California U.S. Holdings, Inc. on
January 10, 2000.10.2
    
    Addendum to Distribution Agreement between Infogrames Entertainment SA and us, dated as of
December 16, 1999, is incorporated herein by reference to Exhibit 10.26a to our Annual Report
on Form 10-K for the fiscal year ended June 30, 2001.10.3
    
    Amendment to Distribution Agreement between Infogrames Entertainment SA and us dated as of
July 1, 2000, is incorporated by reference to Exhibit 10.24a to our Transitional Report on
Form 10-K for the transition period March 31, 2000 to June 30, 2000.10.4
    
    Distribution Agreement between Infogrames Entertainment SA and us, dated October 2, 2000, as
supplemented on November 12, 2002 is incorporated by reference to Exhibit 10.4 to our Annual
Report on Form 10-K for the fiscal year ended March 31, 2005.10.5
    
    Agreement for Purchase and Sale of Assets, dated August 22, 2005, between us and Humongous,
Inc. is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005.10.6
    
    Stock Transfer Agreement, dated August 22, 2005, among us, Infogrames Entertainment S.A. and
Atari Interactive, Inc. (English Translation) is incorporated herein by reference to Exhibit
10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.10.7
    
    Liquidity Agreement, dated August 22, 2005, between us and Infogrames Entertainment S.A. by
reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended September
30, 2005.10.8
    
    Distribution Agreement, dated August 22, 2005, between us and Humongous, Inc. by reference to
Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.10.9
    
    Management and Services Agreement, dated as of March 31, 2006, between Infogrames
Entertainment S.A. and us, is incorporated herein by reference to Exhibit 10.9 to our Annual
Report on Form 10-K for the year ended March 31, 2006.10.10
    
    Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A.
and its subsidiaries, is incorporated herein by reference to Exhibit 10.10 to our Annual
Report on Form 10-K for the year ended March 31, 2006.
 50




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##### Table of Contents



10.11
    
    Production Services Agreement, dated as of March 31, 2006, between us and Infogrames
Entertainment S.A. and its subsidiaries, is incorporated herein by reference to Exhibit 10.11
to our Annual Report on Form 10-K for the year ended March 31, 2006.10.12
    
    Warehouse Services Contract, dated March 2, 1999, by and between us and Arnold
Transportation Services, Inc. t/d/b/a Arnold Logistics is incorporated herein by reference to
Exhibit 10.50 to our Annual Report on Form 10-K for the fiscal year ended March 31, 1999.10.13
    
    Loan and Security Agreement, dated as of May 13, 2005, among us, as Borrower, and HSBC
Business Credit (USA) Inc., as Lender is incorporated by reference to Exhibit 10.20 to our
Annual Report on Form 10-K for the year ended March 31, 2005.10.14
    
    First Amendment to Loan and Security Agreement, dated as of June 30, 2005, between us and
HSBC Business Credit (USA) Inc. is incorporated herein by reference Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.10.15*
    
    The 1995 Stock Incentive Plan (as amended on October 31, 1996) is incorporated herein by
reference to Exhibit 10.1 to Amendment No. 2 to our Registration Statement on Form S-1, filed
December 6, 1996.10.16*
    
    The 1997 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.3 to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.10.17*
    
    The 1997 Stock Incentive Plan (as amended on June 17, 1998) is incorporated herein by
reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.10.18*
    
    The 2000 Stock Incentive Plan is incorporated herein by reference to Appendix B to our proxy
statement dated June 29, 2000.10.19*
    
    Amendment No. 1 to 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit
A to our Information Statement dated November 27, 2000.10.20*
    
    Third Amendment to the Atari, Inc. 2000 Stock Incentive Plan is incorporated herein by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2004.10.21*
    
    Atari, Inc. 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.10 to our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.10.22*
    
    Form of 2005 Stock Incentive Plan Option Award Agreement is incorporated herein by reference
to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.10.23*
    
    Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement is incorporated herein by
reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended December
31, 2005.10.24*
    
    The 1998 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.6 to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.10.25*
    
    Description of Registrants Annual Incentive Plan for fiscal 2007.**10.26*
    
    Employment Agreement with Bruno Bonnell, dated as of July 1, 2004 and effective as of April
1, 2004, is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2004.10.27*
    
    Amendment No. 1 to Employment Agreement, dated as of November 23, 2005, between us and Bruno
Bonnell is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarter ended December 31, 2005.
 51




---



##### Table of Contents



10.28*
    
    Termination and General Release Agreement, dated October 15, 2004, by and between us and
Denis Guyennot is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on
Form 10-Q for the quarter ended December 31, 2004.10.29*
    
    Employment Agreement, dated September 1, 2006, by and between us and David R. Pierce is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006.10.31*
    
    Amendment to Employment Agreement, dated May 1, 2007, between David Pierce and Atari, Inc.,
is incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
May 2, 2007.10.32*
    
    Consulting Agreement between us and Ann Kronen, dated as of November 8, 2006, is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2006.10.33
    
    Compromise Agreement, dated August 12, 2005, by and among us, Reflections Interactive
Limited and Martin Lee Edmondson is incorporated herein by reference to Exhibit 10.1 to our
Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-129099).10.34
    
    Licensed Publisher Agreement between us and Sony Computer Entertainment America, Inc., dated
January 19, 2003, is incorporated herein by reference to Exhibit 10.62 to our Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003,
and all amendments thereto.10.35
    
    PlayStation® 2 Licensed Publisher Agreement between us and Sony Computer Entertainment
America, Inc., dated April 1, 2000, as amended is incorporated by reference to Exhibit 10.45
to our Annual Report on Form 10-K for the year ended March 31, 2005.10.36
    
    Xbox® Publisher License Agreement between us and Microsoft Corporation, dated April 18,
2000, is incorporated herein by reference to Exhibit 10.63 to our Registration Statement on
Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all
amendments thereto.***10.37
    
    Sublicense Agreement between us and Funimation Productions, Ltd., dated October 27, 1999, is
incorporated herein by reference to Exhibit 10.64 to our Registration Statement on Form S-2
(File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments
thereto.***10.38
    
    Amendment One to the Sublicense Agreement between us and Funimation Productions, Ltd., dated
April 20, 2002, is incorporated herein by reference to Exhibit 10.65 to our Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003,
and all amendments thereto.10.39
    
    Amendment Two to the Sublicense Agreement between us and Funimation Productions, Ltd., dated
June 15, 2002, is incorporated herein by reference to Exhibit 10.66 to our Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003,
and all amendments thereto.10.40
    
    Amendment Three to the Sublicense Agreement between us and Funimation Productions, Ltd.,
dated October 15, 2002, is incorporated herein by reference to Exhibit 10.67 to our
Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on
August 8, 2003, and all amendments thereto.10.41
    
    Amendment Four to the Sublicense Agreement between us and Funimation Productions, Ltd.,
dated November 13, 2002, is incorporated herein by reference to Exhibit 10.68 to our
Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on
August 8, 2003, and all amendments thereto.10.42
    
    Amendment Five to the Sublicense Agreement between us and Funimation Productions, Ltd.,
dated February 21, 2003, is incorporated herein by reference to Exhibit 10.69 to our
Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on
August 8, 2003, and all amendments thereto.10.43
    
    Amendment Six to the Sublicense Agreement between us and Funimation Productions, Ltd., dated
August 11, 2003, is incorporated herein by reference to Exhibit 10.83 to our Annual Report on
Form 10-K for the year ended March 31, 2004.
 52




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##### Table of Contents



10.44
    
    Agreement Regarding Satisfaction of Debt and License Amendment among us, Infogrames
Entertainment S.A. and California U.S. Holdings, Inc., dated September 4, 2003, is
incorporated herein by reference to Exhibit 10.70 to our Registration Statement on Form S-2
(File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments
thereto.10.45
    
    Amended Trademark License Agreement between us and Infogrames Entertainment S.A., dated
September 4, 2003, is incorporated herein by reference to Exhibit 10.71 to our Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003,
and all amendments thereto.10.46
    
    Amendment No. 1 Trademark License Agreement between us, Atari Interactive, Inc. and
Infogrames Entertainment S.A. is incorporated herein by reference to Exhibit 10.6 to our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.10.47
    
    Obligation Assignment and Securing Agreement, dated as of November 3, 2004, by and among us,
Infogrames Entertainment SA, Atari Interactive, Inc., Atari Europe SAS, and Paradigm
Entertainment, Inc. is incorporated herein by reference to Exhibit 10.1 of our Quarterly
Report on Form 10-Q for the quarter ended December 31, 2004.10.48
    
    Secured Promissory Note of Atari Interactive, Inc. in the aggregate amount of $23,058,997.19
payable us is incorporated herein by reference to Exhibit 10.2 of our Quarterly Report on Form
10-Q for the quarter ended December 31, 2004.10.49
    
    Promissory Note of Atari Interactive, Inc., in the aggregate amount of $5,122,625 payable to
us, is incorporated herein by reference to Exhibit 10.86 to our Annual Report on Form 10-K for
the year ended March 31, 2004.10.50
    
    Promissory Note of Atari Interactive, Inc., in the aggregate amount of $2,620,280 payable to
us, is incorporated herein by reference to Exhibit 10.87 to our Annual Report on Form 10-K for
the year ended March 31, 2004.10.51
    
    Promissory Note of Paradigm Entertainment, Inc., in the aggregate amount of $828,870 payable
to us, is incorporated herein by reference to Exhibit 10.88 to our Annual Report on Form 10-K
for the year ended March 31, 2004.10.52
    
    Agreement Regarding Issuance of Shares, dated September 15, 2005, between us and Infogrames
Entertainment S.A. is incorporated herein by reference to Exhibit 10.7 to our Quarterly Report
on Form 10-Q for the quarter ended September 30, 2005.10.53
    
    GT Interactive UK Settlement of Indebtedness Agreement, dated as of September 15, 2005,
between us and Atari UK, Infogrames Entertainment S.A. and all of its subsidiaries is
incorporated herein by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005.10.54
    
    Securities Purchase Agreement, dated September 15, 2005, between us and CCM Master Qualified
Fund, Ltd. is incorporated herein by reference to Exhibit 10.1 to our Amendment No. 1 to
Registration Statement on Form S-3 (File No. 333-129098) filed on November 18, 2005.10.55
    
    Securities Purchase Agreement, dated September 15, 2005, between us and Sark Master Fund,
Ltd. is incorporated herein by reference to Exhibit 10.2 to our Amendment No. 1 to
Registration Statement on Form S-3 (File No. 333-129098) filed on November 18, 2005.10.56
    
    Asset Purchase Agreement, dated July 13, 2006, between us and Reflections Interactive Ltd as
the sellers and Ubisoft Holdings, Inc. and Ubisoft Entertainment Ltd as the purchasers, as
amended by Amendment No. 1 dated August 3, 2006 is incorporated herein by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.10.57
    
    Credit Agreement, dated November 3, 2006, among Atari, Inc, the Lenders Party Hereto, and
Guggenheim Corporate Funding, LLC, as Administrative Agent is incorporated herein by reference
to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006.10.58
    
    Agreement of Lease, dated June 21, 2006, between us and Fifth and 38th LLC.**
 53




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##### Table of Contents



21.1
    
    List of Subsidiaries.**23.1
    
    Consent of Deloitte & Touche LLP.**31.1
    
    Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**31.2
    
    Acting Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**32.1
    
    Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification by the Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    Licensed PSP Publisher Agreement by and between us and Sony Computer Entertainment
America, Inc., dated March 23, 2005, for PlayStation® Portable is incorporated by reference to
Exhibit 99.1 to our Annual Report on Form 10-K for the year ended March 31, 2005.99.2
    
    Amendment to the Xbox® Publisher Licensing Agreement, dated March 1, 2005 is incorporated by
reference to Amendment No. 2 to our Annual Report on Form 10-K/A for the year ended March 31,
2005.99.3
    
    Confidential License Agreement for Nintendo GameCube, by and between Nintendo of America,
Inc. and us effective March 29, 2002 is incorporated by reference to Exhibit 99.3 to our
Annual Report on Form 10-K for the year ended March 31, 2005.99.4
    
    First Amendment to Confidential License Agreement for Nintendo GameCube, by and between
Nintendo of America, Inc. and us effective March 29, 2002 is incorporated herein by reference
to Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.99.5
    
    Xbox® 360 Publisher License Agreement between us and Microsoft Licensing GP, effective
February 17, 2006, is incorporated herein by reference to Exhibit 99.5 to our Annual Report on
Form 10-K for the year ended March 31, 2006.99.6
    
    Confidential License Agreement for Nintendo DS (Western Hemisphere), by and between Nintendo
of America, Inc. and us effective October 14, 2005, is incorporated herein by reference to
Exhibit 99.6 to our Annual Report on Form 10-K for the year ended March 31, 2006.
 
       54




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##### Table of Contents



SIGNATURES
  ATARI, INC.By:
    
    /s/ David R. PierceName: David R. PierceTitle: President and Chief Executive OfficerDate: September 18, 2007
  Signature
    
    Title(s)
    
    Date/s/ David R. Pierce
    
    President and Chief Executive Officer (principal
    
    September 18, 2007David R. Pierce
    
    executive
officer)/s/ Arturo Rodriguez
    
    Acting Chief Financial Officer, Vice President and
    
    September 18, 2007Arturo Rodriguez
    
    Controller
(principal financial and accounting officer)/s/ James Ackerly
    
    Director
    
    September 18, 2007James Ackerly/s/ Ronald C. Bernard
    
    Director
    
    September 18, 2007Ronald C. Bernard/s/ Evence-Charles Coppee
    
    Director
    
    September 18, 2007Evence-Charles Coppee/s/ Michael G. Corrigan
    
    Director
    
    September 18, 2007Michael G. Corrigan/s/ Denis Guyennot
    
    Director
    
    September 18, 2007Denis Guyennot/s/ Ann E. Kronen
    
    Director
    
    September 18, 2007Ann E. Kronen/s/ Jean-Michel Perbet
    
    Director
    
    September 13, 2007Jean-Michel Perbet/s/ Thomas Schmider
    
    Director
    
    September 18, 2007Thomas Schmider
 55




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 We have audited the accompanying consolidated balance sheets of Atari, Inc. and
subsidiaries (the Company) as of March 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders equity and comprehensive income
(loss) and cash flows for the three years in the period ended March 31, 2007. Our
audits also included the consolidated financial statement schedule listed at Item 15.
These consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements and the consolidated
financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at March 31,
2007 and 2006, and the results of its operations and its cash flows for the three
years in the period ended March 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.The accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has experienced significant operating losses. These
matters raise substantial doubt about the Companys ability to continue as a going
concern. Managements plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No.123(R),
Share Based Payment, as revised, effective April 1,
2006.  As discussed in Note 23 to the consolidated financial
statements, effective March 31, 2007, the Company elected application of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.As discussed in Note 24 to the consolidated financial
statements, the Company has restated its fiscal 2005 and 2006
consolidated statement of cash flows.We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Companys
internal control over financial reporting as of March 31, 2007, based on the criteria
established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report
dated September 18,
2007 expressed an unqualified opinion on managements assessment of the effectiveness
of the Companys internal control over financial reporting and an adverse opinion on
the effectiveness of the Companys internal control over financial reporting because
of material weaknesses.
  
 F-1




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 March 31,
    
    
    March 31,2006
    
    
    2007ASSETSCurrent assets:Cash
    
    $
    14,948
    
    
    $
    7,603Accounts receivable, net of allowances of $30,918 and $14,148 at March 31,
2006 and March 31, 2007, respectively
    
    
    12,072
    
    
    
    6,473Inventories, net
    
    
    20,787
    
    
    
    8,843Due from related parties (Note 13)
    
    
    4,692
    
    
    
    1,799Prepaid expenses and other current assets
    
    
    11,345
    
    
    
    10,229Assets of discontinued operations (Note 19)
    
    
    2,949
    
    
    
    645Total current assets
    
    
    66,793
    
    
    
    35,592Property and equipment, net of accumulated depreciation of $30,139 and
$30,945 at
March 31, 2006 and March 31, 2007, respectively
    
    
    6,113
    
    
    
    4,217Goodwill
    
    
    66,398
    
    
    
    Security deposits
    
    
    137
    
    
    
    1,940Other assets
    
    
    4,229
    
    
    
    1,070Total assets
    
    $
    143,670
    
    
    $
    42,819LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,935
    
    
    $
    11,013Accrued liabilities
    
    
    19,105
    
    
    
    13,381Royalties payable
    
    
    13,468
    
    
    
    4,282Due to related parties (Note 13)
    
    
    10,263
    
    
    
    5,703Liabilities of discontinued operations (Note 19)
    
    
    3,018
    
    
    
    Total current liabilities
    
    
    69,789
    
    
    
    34,379Due to related parties  long term (Note 13)
    
    
    
    
    
    
    1,912Long-term liabilities
    
    
    669
    
    
    
    3,434Total liabilities
    
    
    70,458
    
    
    
    39,725Commitments and contingencies (Note 15)Stockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued
or
outstanding
    
    
    
    
    
    
    Common stock, $0.10 par value, 30,000,000 shares authorized, 13,476,551 and
13,477,920 shares issued and outstanding at March 31, 2006 and March 31,
2007, respectively (1)
    
    
    1,348
    
    
    
    1,348Additional paid-in capital
    
    
    758,165
    
    
    
    760,527Accumulated deficit
    
    
    (688,730
    )
    
    
    (761,299
    )Accumulated other comprehensive income
    
    
    2,429
    
    
    
    2,518Total stockholders equity
    
    
    73,212
    
    
    
    3,094Total liabilities and stockholders equity
    
    $
    143,670
    
    
    $
    42,819
 
 (1)
    
    Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have
been restated to reflect the reverse stock split.
  F-2




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 YearsEnded March 31,2005
    
    
    2006
    
    
    2007Net revenues
    
    $
    343,837
    
    
    $
    206,796
    
    
    $
    122,285Costs, expenses, and income:Cost of goods sold
    
    
    200,244
    
    
    
    133,604
    
    
    
    72,629Research and product development expenses
    
    
    58,311
    
    
    
    51,887
    
    
    
    30,077Selling and distribution expenses
    
    
    58,220
    
    
    
    42,985
    
    
    
    25,296General and administrative expenses
    
    
    35,792
    
    
    
    30,385
    
    
    
    21,788Restructuring expenses
    
    
    4,932
    
    
    
    8,867
    
    
    
    709Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    54,129Gain on sale of intellectual property
    
    
    
    
    
    
    (6,224
    )
    
    
    (9,000
    )Gain on sale of development studio assets
    
    
    
    
    
    
    
    
    
    
    (885
    )Atari trademark license expense
    
    
    3,350
    
    
    
    3,067
    
    
    
    2,218Depreciation and amortization
    
    
    6,958
    
    
    
    5,202
    
    
    
    2,968Total costs, expenses, and income
    
    
    367,807
    
    
    
    269,773
    
    
    
    199,929Operating (loss)
    
    
    (23,970
    )
    
    
    (62,977
    )
    
    
    (77,644
    )Interest (expense) income, net
    
    
    (459
    )
    
    
    (595
    )
    
    
    301Other income (expense)
    
    
    42
    
    
    
    (208
    )
    
    
    77(Loss) before (benefit from) income taxes
    
    
    (24,387
    )
    
    
    (63,780
    )
    
    
    (77,266
    )(Benefit from) income taxes
    
    
    (9,532
    )
    
    
    (405
    )
    
    
    (10,680
    )(Loss) from continuing operations
    
    
    (14,855
    )
    
    
    (63,375
    )
    
    
    (66,586
    )Income (loss) from discontinued operations of Reflections
Interactive Ltd, net of tax provision of $9,716, $0, and
$7,559, respectively
    
    
    20,547
    
    
    
    (5,611
    )
    
    
    (3,125
    )Net income (loss)
    
    $
    5,692
    
    
    $
    (68,986
    )
    
    $
    (69,711
    )Basic and diluted net income (loss) per share (1):(Loss) from continuing operations
    
    $
    (1.22
    )
    
    $
    (4.93
    )
    
    $
    (4.94
    )Income (loss) from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    1.69
    
    
    
    (0.43
    )
    
    
    (0.23
    )Net income (loss)
    
    $
    0.47
    
    
    $
    (5.36
    )
    
    $
    (5.17
    )Basic weighted average shares outstanding (1)
    
    
    12,128
    
    
    
    12,863
    
    
    
    13,477Diluted weighted average shares outstanding (1)
    
    
    12,159
    
    
    
    12,863
    
    
    
    13,477
 (1)
    
    Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have
been restated to reflect the reverse stock split.
   F - 3




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 YearsEndedMarch 31,2005
    
    
    2006As restated,
    
    
    As restated,Note
24
    
    

Note
24
    
    

2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    5,692
    
    
    $
    (68,986
    )
    
    $
    (69,711
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:(Income) loss from discontinued operations of Reflections Interactive Ltd
    
    
    (20,547
    )
    
    
    5,611
    
    
    
    3,125Non-cash tax benefit included in continuing operations associated with tax
provision of discontinued operations of Reflections Interactive Ltd
    
    
    (9,716
    )
    
    
    
    
    
    
    (7,559
    )Escrow receivable associated with sale of Reflections Interactive Ltd
    
    
    
    
    
    
    
    
    
    
    626Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    54,129Write-off of acquired intangible and other web-related assets
    
    
    
    
    
    
    
    
    
    
    2,401Gain on sale of intellectual property
    
    
    
    
    
    
    (6,224
    )
    
    
    (9,000
    )Gain on sale of development studio assets
    
    
    
    
    
    
    
    
    
    
    (885
    )Adjustment for non-cash gain on sale of development studio assets
    
    
    
    
    
    
    
    
    
    
    200Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,587Atari trademark license expense
    
    
    3,350
    
    
    
    3,067
    
    
    
    2,218Depreciation and amortization
    
    
    6,958
    
    
    
    5,202
    
    
    
    2,968Related party allocation of executive resignation agreement
    
    
    
    
    
    
    
    
    
    
    771Modification of stock options
    
    
    139
    
    
    
    
    
    
    
    Non-cash restructuring charges
    
    
    596
    
    
    
    838
    
    
    
    Loss on sale of IESA shares
    
    
    
    
    
    
    239
    
    
    
    Recognition of cumulative translation adjustment from foreign subsidiary
    
    
    (859
    )
    
    
    
    
    
    
    Accrued interest
    
    
    23
    
    
    
    20
    
    
    
    1Amortization of deferred financing fees
    
    
    822
    
    
    
    514
    
    
    
    202Recognition of deferred income
    
    
    (107
    )
    
    
    (77
    )
    
    
    (328
    )Write-off of property and equipment
    
    
    206
    
    
    
    24
    
    
    
    Gain on sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    (74
    )Non-cash income on cash collateralized security deposit
    
    
    
    
    
    
    
    
    
    
    (11
    )Changes in operating assets and liabilities:Receivables, net
    
    
    (4,472
    )
    
    
    30,094
    
    
    
    5,616Inventories, net
    
    
    1,962
    
    
    
    3,681
    
    
    
    11,243Due from related parties
    
    
    (12,285
    )
    
    
    (4,126
    )
    
    
    2,893Due to related parties
    
    
    23,375
    
    
    
    12,807
    
    
    
    (4,561
    )Prepaid expenses and other current assets
    
    
    (5,531
    )
    
    
    8,860
    
    
    
    2,532Accounts payable
    
    
    (9,947
    )
    
    
    (4,199
    )
    
    
    (13,672
    )Accrued liabilities
    
    
    1,287
    
    
    
    (3,212
    )
    
    
    (7,316
    )Royalties payable
    
    
    (4,403
    )
    
    
    7,462
    
    
    
    (9,186
    )Long-term deferred tax liability
    
    
    
    
    
    
    
    
    
    
    (2,123
    )Other long-term liabilities
    
    
    (324
    )
    
    
    (319
    )
    
    
    1,852Other assets
    
    
    (5,215
    )
    
    
    1,688
    
    
    
    2,949Net cash (used in) continuing operating activities
    
    
    (28,996
    )
    
    
    (7,036
    )
    
    
    (29,113
    )Net cash provided by (used in) discontinued operations
    
    
    32,238
    
    
    
    (8,969
    )
    
    
    (7,826
    )Net cash provided by (used in) operating activities
    
    
    3,242
    
    
    
    (16,005
    )
    
    
    (36,939
    )
  F-4




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of intellectual property
    
    
    
    
    
    
    6,224
    
    
    
    9,000Proceeds from sale of development studio assets
    
    
    
    
    
    
    
    
    
    
    1,550Purchase of acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    (1,737
    )Increase in restricted security deposit collateralizing letter of credit
    
    
    
    
    
    
    
    
    
    
    (1,764
    )Proceeds from sale of IESA shares
    
    
    
    
    
    
    10,051
    
    
    
    Purchases of property and equipment
    
    
    (1,861
    )
    
    
    (2,305
    )
    
    
    (837
    )Proceeds from sale of property and equipment
    
    
    17
    
    
    
    28
    
    
    
    179Net cash (used in) provided by continuing investing activities
    
    
    (1,844
    )
    
    
    13,998
    
    
    
    6,391Net cash (used in) provided by discontinued operations
    
    
    (268
    )
    
    
    (224
    )
    
    
    23,366Net cash (used in) provided by investing activities
    
    
    (2,112
    )
    
    
    13,774
    
    
    
    29,757CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under third party credit facility
    
    
    263,281
    
    
    
    157,567
    
    
    
    15,000Payments under third party credit facility
    
    
    (263,281
    )
    
    
    (157,567
    )
    
    
    (15,000
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    7,264
    
    
    
    Proceeds from exercise of stock options
    
    
    92
    
    
    
    131
    
    
    
    4Payments under capitalized lease obligation
    
    
    (109
    )
    
    
    (184
    )
    
    
    (220
    )Net cash (used in) provided by continuing financing activities
    
    
    (17
    )
    
    
    7,211
    
    
    
    (216
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (17
    )
    
    
    7,211
    
    
    
    (216
    )Effect of exchange rates on cash
    
    
    17
    
    
    
    (20
    )
    
    
    53Net increase (decrease) in cash
    
    
    1,130
    
    
    
    4,960
    
    
    
    (7,345
    )Cash  beginning of fiscal year
    
    
    8,858
    
    
    
    9,988
    
    
    
    14,948Cash  end of fiscal year
    
    $
    9,988
    
    
    $
    14,948
    
    
    $
    7,603SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    450
    
    
    $
    319
    
    
    $
    249Cash paid for taxes
    
    $
    
    
    
    $
    
    
    
    $
    Income tax refunds
    
    $
    764
    
    
    $
    1,473
    
    
    $
    1,047SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Consideration accrued for purchase of capitalized licenses
    
    $
    3,198
    
    
    $
    2,012
    
    
    $
    1,816Consideration accrued for purchase of acquired intangible assets
    
    $
    
    
    
    $
    
    
    
    $
    554Capitalization of leasehold improvements funded by landlord
    
    $
    
    
    
    $
    
    
    
    $
    1,217Receipt of IESA stock for prepayment of Humongous, Inc. inventory and other
costs
    
    $
    
    
    
    $
    1,972
    
    
    $
    Issuance of 155,766 shares of common stock in lieu of partial royalty payment
(1)
    
    $
    
    
    
    $
    2,109
    
    
    $
    Sale of Humongous Entertainment in exchange for shares of IESA stock
    
    $
    
    
    
    $
    8,318
    
    
    $
    Issuance of 614,505 shares of common stock in lieu of payment of net related
party
payables (1)
    
    $
    
    
    
    $
    7,988
    
    
    $
    Capital lease obligation for computer equipment
    
    $
    452
    
    
    $
    337
    
    
    $
    Offset of certain related party trade payables against short-term notes
receivable from
related parties
    
    $
    1,317
    
    
    $
    
    
    
    $
    Offset and assignment of short-term notes receivable from related parties into a
secured promissory note
    
    $
    7,254
    
    
    $
    
    
    
    $
    Issuance of a secured promissory note in exchange for certain short-term notes
receivable and certain related party trade receivables
    
    $
    (23,059
    )
    
    $
    
    
    
    $
    Offset of certain related party trade payables against a secured promissory note
    
    $
    23,059
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have
been restated to reflect the reverse stock split.
  F-5




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31, 2005, 2006, AND 2007
(in thousands)
 AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    OtherStock
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares (1)
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance, March 31, 2004
    
    
    12,123
    
    
    $
    1,212
    
    
    $
    735,964
    
    
    $
    (625,436
    )
    
    $
    3,323
    
    
    $
    115,063Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,692
    
    
    
    
    
    
    
    5,692Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (56
    )Recognition of cumulative translation adjustment
from liquidation of a foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (859
    )
    
    
    (859
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,777Cashless exercise of warrants
    
    
    5
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    2
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44Issuance of stock options to related party
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48Modification of stock options
    
    
    
    
    
    
    
    
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    735Balance, March 31, 2005
    
    
    12,130
    
    
    
    1,213
    
    
    
    736,790
    
    
    
    (619,744
    )
    
    
    2,408
    
    
    
    120,667Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,986
    )
    
    
    
    
    
    
    (68,986
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    21Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,965
    )Exercise of stock options
    
    
    6
    
    
    
    1
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    132Modification of stock options
    
    
    
    
    
    
    
    
    
    
    404
    
    
    
    
    
    
    
    
    
    
    
    404Issuance of common stock in lieu of partial royalty
payment
    
    
    156
    
    
    
    16
    
    
    
    2,093
    
    
    
    
    
    
    
    
    
    
    
    2,109Sale of Humongous Entertainment
    
    
    
    
    
    
    
    
    
    
    3,613
    
    
    
    
    
    
    
    
    
    
    
    3,613Issuance of common stock in lieu of payment of net
related party payables (Note 13)
    
    
    615
    
    
    
    61
    
    
    
    7,927
    
    
    
    
    
    
    
    
    
    
    
    7,988Issuance of common stock (Note 4)
    
    
    570
    
    
    
    57
    
    
    
    7,207
    
    
    
    
    
    
    
    
    
    
    
    7,264Balance, March 31, 2006
    
    
    13,477
    
    
    
    1,348
    
    
    
    758,165
    
    
    
    (688,730
    )
    
    
    2,429
    
    
    
    73,212Adjustment to opening stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,858
    )
    
    
    
    
    
    
    (2,858
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,711
    )
    
    
    
    
    
    
    (69,711
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89
    
    
    
    89Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,622
    )Related party allocation of executive resignation
agreement
    
    
    
    
    
    
    
    
    
    
    771
    
    
    
    
    
    
    
    
    
    
    
    771Exercise of stock options
    
    
    1
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,587
    
    
    
    
    
    
    
    
    
    
    
    1,587Balance, March 31, 2007
    
    
    13,478
    
    
    $
    1,348
    
    
    $
    760,527
    
    
    $
    (761,299
    )
    
    $
    2,518
    
    
    $
    3,094
 
 (1)
    
    Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been
restated to reflect the reverse stock split.
  F-6




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
   Going Concern
  Driver
     F-7




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##### Table of Contents



Reverse Stock Split
  Principles of Consolidation
  Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
    F-8




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##### Table of Contents



Concentration of Credit Risk
  Use of Estimates
  Cash
  Inventories
  Property and Equipment
  Useful LivesComputer equipment
    
    3 yearsCapitalized computer software
    
    3-5 yearsFurniture and fixtures
    
    7 yearsMachinery and equipment
    
    5 years
  Fair Values of Financial Instruments
  F-9




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##### Table of Contents



Long-Lived Assets
  Research and Product Development Expenses
   Licenses
  Atari Trademark License
  Goodwill and Acquired Intangible Assets
   F-10




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##### Table of Contents



Advertising Expenses
  Income Taxes
  Foreign Currency Translation and Foreign Exchange Gains (Losses)
   Shipping, Handling and Warehousing Costs
  Recent Accounting Pronouncements
   F-11




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##### Table of Contents



F-12




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##### Table of Contents



NOTE 2  STOCK-BASED COMPENSATION
      Year EndedMarch 31,2007Research and product development expenses
    
    $
    865Selling and distribution expenses
    
    $
    88General and administrative expenses
    
    $
    634
  F-13




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##### Table of Contents



Year EndedMarch 31,2005
    
    2006
    
    2007Anticipated volatility
    
    
    95
    %
    
    
    92
    %
    
    
    81
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Remaining life in years
    
    
    4
    
    
    
    4
    
    
    
    4
    Years EndedMarch 31,2005
    
    
    2006(Loss) from continuing operations:Basic and diluted  as reported
    
    $
    (14,855
    )
    
    $
    (63,375
    )Add: Stock-based employee compensation expense included in
reported (loss) from continuing operations, net of related
tax effects (1)
    
    
    735
    
    
    
    404Less: Fair value of stock-based employee compensation expense,
net of related tax effects
    
    
    (5,535
    )
    
    
    (1,731
    )Basic and diluted  pro forma
    
    $
    (19,655
    )
    
    $
    (64,702
    )(Loss) from continuing operations per share:Basic and diluted  as reported
    
    $
    (1.22
    )
    
    $
    (4.93
    )Basic and diluted  pro forma
    
    $
    (1.62
    )
    
    $
    (5.03
    )Net income (loss):Basic and diluted  as reported
    
    $
    5,692
    
    
    $
    (68,986
    )Add: Stock-based employee compensation expense included in
reported net income (loss), net of related tax effects (1)
    
    
    735
    
    
    
    404Less: Fair value of stock-based employee compensation expense,
net of related tax effects
    
    
    (5,535
    )
    
    
    (1,731
    )Basic and diluted  pro forma
    
    $
    892
    
    
    $
    (70,313
    )Net income (loss) per share:Basic and diluted  as reported
    
    $
    0.47
    
    
    $
    (5.36
    )Basic and diluted  pro forma
    
    $
    0.07
    
    
    $
    (5.47
    )
 
 (1)
    
    For the year ended March 31, 2005 and 2006, we recorded $0.7 million and $0.4
million, respectively, of expense related to the modification of stock option agreements
for certain executives terminated during the respective years and in connection with
managements restructuring plan (Note 20).  F-14




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##### Table of Contents



Weighted AverageShares
    
    
    Exercise Price(in thousands)Options outstanding at March 31, 2004
    
    
    688
    
    
    $
    106.05Granted
    
    
    492
    
    
    $
    21.06Exercised
    
    
    (2
    )
    
    $
    4.61Forfeited
    
    
    (33
    )
    
    $
    46.15Expired
    
    
    (14
    )
    
    $
    106.97Options outstanding at March 31, 2005
    
    
    1,131
    
    
    $
    69.86Granted
    
    
    79
    
    
    $
    25.67Exercised
    
    
    (6
    )
    
    $
    13.30Forfeited
    
    
    (276
    )
    
    $
    21.59Expired
    
    
    (176
    )
    
    $
    97.88Options outstanding at March 31, 2006
    
    
    752
    
    
    $
    77.97Granted
    
    
    628
    
    
    $
    7.28Exercised
    
    
    (2
    )
    
    $
    3.40Forfeited
    
    
    (110
    )
    
    $
    13.57Expired
    
    
    (156
    )
    
    $
    157.27Options outstanding at March 31, 2007
    
    
    1,112
    
    
    $
    33.45Options exercisable at March 31, 2007
    
    
    473
    
    
    $
    65.79
   Weighted
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Average
    
    Average
    
    Number
    
    AverageExercise Price
    
    Number Outstanding
    
    Remaining Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$      3.40-7.40
    
    
    551
    
    
    
    9.4
    
    
    $
    7.26
    
    
    
    1
    
    
    $
    3.40$  13.80-76.00
    
    
    495
    
    
    
    6.0
    
    
    $
    39.88
    
    
    
    406
    
    
    $
    43.52$78.00-396.88
    
    
    66
    
    
    
    2.4
    
    
    $
    202.93
    
    
    
    66
    
    
    $
    202.931,112
    
    
    
    
    
    
    
    
    
    
    
    473
 NOTE 3  NET INCOME (LOSS) PER SHARE
  F-15




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##### Table of Contents



Years EndedMarch 31,2005
    
    
    2006
    
    
    2007Basic and diluted earnings per share calculation:(Loss) from continuing operations
    
    $
    (14,855
    )
    
    $
    (63,375
    )
    
    $
    (66,586
    )Income (loss) from discontinued operations of Reflections Interactive
Ltd, net of tax provision of $9,716, $0, and $7,559, respectively
    
    
    20,547
    
    
    
    (5,611
    )
    
    
    (3,125
    )Net income (loss)
    
    $
    5,692
    
    
    $
    (68,986
    )
    
    $
    (69,711
    )Basic weighted average shares outstanding
    
    
    12,128
    
    
    
    12,863
    
    
    
    13,477Dilutive effect of stock options and warrants
    
    
    31
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    12,159
    
    
    
    12,863
    
    
    
    13,477Basic and diluted net income (loss) per share:(Loss) from continuing operations
    
    $
    (1.22
    )
    
    $
    (4.94
    )
    
    $
    (4.94
    )Income (loss) from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    1.69
    
    
    
    (0.43
    )
    
    
    (0.23
    )Net income (loss)
    
    $
    0.47
    
    
    $
    (5.36
    )
    
    $
    (5.17
    )
  NOTE 4  STOCKHOLDERS EQUITY
 Reverse Stock Split
   Sale of common stock to third-party investors
  Sale of Humongous Entertainment
  F-16




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##### Table of Contents



Issuance of common stock as settlement of certain net related party balances
  Warrants
  NOTE 5  CONCENTRATION OF CREDIT RISK
  For the year endedMarch 31,
    
    March 31,2006
    
    2006% of Accounts Receivable
    

% of Net Revenues (1)Customer 1
    
    
    25
    %
    
    
    13
    %Customer 2
    
    
    15
    %
    
    
    13
    %Customer 3
    
    
    14
    %
    
    
    31
    %Customer 4
    
    
    11
    %
    
    
    9
    %65
    %
    
    
    66
    %
  For the year endedMarch 31,
    
    March 31,2007
    
    2007% of Accounts Receivable
    
    % of Net Revenues (1)Customer 1
    
    
    34
    %
    
    
    19
    %Customer 2
    
    
    20
    %
    
    
    9
    %54
    %
    
    
    28
    %
 
 (1)
    
    Excluding international royalty, licensing, and other income.   NOTE 6  GOODWILL AND ACQUIRED INTANGIBLE ASSETS
 Goodwill
  March 31,2006
    
    
    2007Beginning balance
    
    $
    70,224
    
    
    $
    66,398Sale of Humongous Entertainment studio
    
    
    (3,826
    )
    
    
    Sale of Reflections Interactive Ltd development studio
    
    
    
    
    
    
    (12,269
    )Impairment of goodwill
    
    
    
    
    
    
    (54,129
    )Ending balance
    
    $
    66,398
    
    
    $
    
 F-17




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##### Table of Contents



Driver
   Acquired Intangible Assets
  March 31,2006
    
    
    2007Beginning balance
    
    $
    731
    
    
    $
    Additions
    
    
    
    
    
    
    2,291Amortization
    
    
    (731
    )
    
    
    Write-off
    
    
    
    
    
    
    (2,151
    )Ending balance
    
    $
    
    
    
    $
    140
  F-18




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##### Table of Contents



NOTE 7  INVENTORIES, NET
  March 31,
    
    
    March 31,2006
    
    
    2007Finished
goods
    
    $
    18,608
    
    
    $
    8,226Return
inventory
    
    
    2,106
    
    
    
    615Raw
materials
    
    
    73
    
    
    
    2$
    20,787
    
    
    $
    8,843
 NOTE 8  PREPAID EXPENSES AND OTHER CURRENT ASSETS
  March 31,
    
    
    March 31,2006
    
    
    2007Licenses short-term
    
    $
    5,683
    
    
    $
    7,054Prepaid insurance
    
    
    872
    
    
    
    802Reflections escrow receivable
    
    
    
    
    
    
    626Royalties receivable
    
    
    2,118
    
    
    
    495Deferred financing fees
    
    
    33
    
    
    
    209Taxes receivable
    
    
    23
    
    
    
    90Atari trademark license
    
    
    305
    
    
    
    Prepaid broker fee
    
    
    81
    
    
    
    Other prepaid expenses and current assets
    
    
    2,230
    
    
    
    953$
    11,345
    
    
    $
    10,229
 NOTE 9  PROPERTY AND EQUIPMENT, NET
  March 31,
    
    
    March 31,2006
    
    
    2007Capitalized computer software
    
    $
    17,741
    
    
    $
    18,242Computer equipment
    
    
    10,801
    
    
    
    9,243Leasehold improvements
    
    
    5,362
    
    
    
    5,241Furniture and fixtures
    
    
    2,103
    
    
    
    2,195Machinery and equipment
    
    
    245
    
    
    
    24136,252
    
    
    
    35,162Less: accumulated depreciation
    
    
    (30,139
    )
    
    
    (30,945
    )$
    6,113
    
    
    $
    4,217
   F-19




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##### Table of Contents



NOTE 10  ACCRUED LIABILITIES
  March 31,
    
    
    March 31,2006
    
    
    2007Accrued third-party development expenses
    
    $
    1,411
    
    
    $
    2,660Accrued professional fees and other services
    
    
    1,665
    
    
    
    2,578Accrued distribution services
    
    
    3,713
    
    
    
    2,061Accrued salary and related costs
    
    
    1,943
    
    
    
    1,581Accrued advertising
    
    
    3,772
    
    
    
    1,222Accounts receivable credit balances
    
    
    381
    
    
    
    828Taxes payable
    
    
    205
    
    
    
    299Deferred income
    
    
    381
    
    
    
    231Accrued freight and handling fees
    
    
    1,029
    
    
    
    193Restructuring reserve (Note 20)
    
    
    2,163
    
    
    
    54Other
    
    
    2,442
    
    
    
    1,674$
    19,105
    
    
    $
    13,381
 NOTE 11  LONG-TERM LIABILITIES
  March 31,
    
    
    March 31,2006
    
    
    2007Deferred rent
    
    $
    25
    
    
    $
    1,880Landlord allowance
    
    
    
    
    
    
    1,213Deferred income  long-term
    
    
    402
    
    
    
    325Other long-term liabilities
    
    
    242
    
    
    
    16$
    669
    
    
    $
    3,434
 NOTE 12  INCOME TAXES
  Years EndedMarch 31,2005
    
    
    2006
    
    
    2007United States
    
    $
    (24,412
    )
    
    $
    (64,002
    )
    
    $
    (77,307
    )Foreign
    
    
    25
    
    
    
    222
    
    
    
    41(Loss) before (benefit from) income taxes
    
    $
    (24,387
    )
    
    $
    (63,780
    )
    
    $
    (77,266
    )
  Years EndedMarch 31,2005
    
    
    2006
    
    
    2007Current:Federal
    
    $
    100
    
    
    $
    (284
    )
    
    $
    State and local
    
    
    (134
    )
    
    
    76
    
    
    
    Foreign
    
    
    218
    
    
    
    (197
    )
    
    
    (998
    )Total
    
    
    184
    
    
    
    (405
    )
    
    
    (998
    )Deferred:Federal
    
    
    (7,848
    )
    
    
    
    
    
    
    (8,216
    )
 F-20




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##### Table of Contents



Years EndedMarch 31,2005
    
    
    2006
    
    
    2007State and local
    
    
    (1,868
    )
    
    
    
    
    
    
    (1,466
    )Foreign
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (9,716
    )
    
    
    
    
    
    
    (9,682
    )(Benefit from) income taxes
    
    $
    (9,532
    )
    
    $
    (405
    )
    
    $
    (10,680
    )
      Years EndedMarch 31,2005
    
    
    2006
    
    
    2007(Benefit from) income taxes computed at the federal
statutory rate
    
    $
    (8,536
    )
    
    $
    (22,323
    )
    
    $
    (27,043
    )(Benefit) expense from income taxes resulting from:Permanent differences and other
    
    
    43
    
    
    
    3,668
    
    
    
    4,273State and local taxes, net of federal tax effect
    
    
    (1,349
    )
    
    
    77
    
    
    
    (952
    )Difference between U.S. and foreign income tax rates
    
    
    217
    
    
    
    (1
    )
    
    
    (4
    )Reversal of reserves and settlement of tax examinations
    
    
    100
    
    
    
    (405
    )
    
    
    (999
    )Loss for which no benefit was received
    
    
    (7
    )
    
    
    18,579
    
    
    
    14,045(Benefit from) income taxes
    
    $
    (9,532
    )
    
    $
    (405
    )
    
    $
    (10,680
    )
  March 31,
    
    
    March 31,2006
    
    
    2007Deferred tax asset:Inventory valuation
    
    $
    1,333
    
    
    $
    843Deferred income
    
    
    121
    
    
    
    20Net operating loss carryforwards
    
    
    213,034
    
    
    
    209,659Restructuring reserve
    
    
    888
    
    
    
    22Allowances for bad debts, returns, price protection
and other customer promotional programs
    
    
    11,309
    
    
    
    5,471Depreciation and amortization
    
    
    676
    
    
    
    15,229Atari trademark license expense
    
    
    (122
    )
    
    
    736Research and development credit carryforwards
    
    
    6,410
    
    
    
    8,069
 F-21




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##### Table of Contents



March 31,
    
    
    March 31,2006
    
    
    2007233,649
    
    
    
    240,049Deferred tax liability:In process research and development
    
    
    (792
    )
    
    
    Other
    
    
    (12
    )
    
    
    (804
    )
    
    
    Subtotal
    
    
    232,845
    
    
    
    240,049Less: valuation allowance
    
    
    (232,845
    )
    
    
    (240,049
    )Net deferred tax asset
    
    $
    
    
    
    $
    
     NOTE 13  RELATED PARTY TRANSACTIONS
 Relationship with IESA
    F-22




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##### Table of Contents



Summary of Related Party Transactions
  Years EndedMarch 31,Income (expense)
    
    2005
    
    
    2006
    
    
    2007Net revenues
    
    $
    343,837
    
    
    $
    206,796
    
    
    $
    122,285Related party activity:Royalty income (1)
    
    
    2,520
    
    
    
    13,521
    
    
    
    5,243License income (1)
    
    
    31
    
    
    
    437
    
    
    
    2,464Sale of goods
    
    
    1,745
    
    
    
    1,120
    
    
    
    972Production, quality and assurance testing and other services
    
    
    2,438
    
    
    
    3,313
    
    
    
    3,576Total related party net revenues
    
    
    6,734
    
    
    
    18,391
    
    
    
    12,255Cost of goods sold
    
    
    (200,244
    )
    
    
    (133,604
    )
    
    
    (72,629
    )Related party activity:Distribution fee for Humongous, Inc. products (Note 19)
    
    
    
    
    
    
    (6,264
    )
    
    
    (5,318
    )Royalty expense (2)
    
    
    (30,339
    )
    
    
    (14,401
    )
    
    
    (11,365
    )Total related party cost of goods sold
    
    
    (30,339
    )
    
    
    (20,665
    )
    
    
    (16,683
    )Research and product development expenses
    
    
    (58,311
    )
    
    
    (51,887
    )
    
    
    (30,077
    )Related party activity:Development expenses (3)
    
    
    (12,578
    )
    
    
    (17,321
    )
    
    
    (7,224
    )Related
party allocation of executive resignation agreement
    
    
    
    
    
    
    
    
    
    
    (771
    )Other miscellaneous development expenses
    
    
    (61
    )
    
    
    (238
    )
    
    
    (229
    )Total related party research and product development
expenses
    
    
    (12,639
    )
    
    
    (17,559
    )
    
    
    (8,224
    )Selling and distribution expenses
    
    
    (58,220
    )
    
    
    (42,985
    )
    
    
    (25,296
    )Related party activity:Miscellaneous purchase of services
    
    
    (73
    )
    
    
    (87
    )
    
    
    (151
    )Total related party selling and distribution expenses
    
    
    (73
    )
    
    
    (87
    )
    
    
    (151
    )General and administrative expenses
    
    
    (35,792
    )
    
    
    (30,385
    )
    
    
    (21,788
    )Related party activity:Management fee revenue
    
    
    3,000
    
    
    
    3,073
    
    
    
    3,020Management fee expense
    
    
    (3,000
    )
    
    
    (3,000
    )
    
    
    (3,000
    )Office rental and other services (4)
    
    
    (366
    )
    
    
    89
    
    
    
    184Total related party general and administrative expenses
    
    
    (366
    )
    
    
    162
    
    
    
    204Restructuring expenses
    
    
    (4,932
    )
    
    
    (8,867
    )
    
    
    (709
    )Related party activity:Office rental (4)
    
    
    
    
    
    
    (639
    )
    
    
    (467
    )Total related party restructuring expenses
    
    
    
    
    
    
    (639
    )
    
    
    (467
    )Interest (expense) income, net
    
    
    (459
    )
    
    
    (595
    )
    
    
    301Related party activity:Interest income (5)
    
    
    887
    
    
    
    
    
    
    
    Total related party interest income, net
    
    
    887
    
    
    
    
    
    
    
    Income (loss) from discontinued operations of Reflections
Interactive Ltd, net of tax provision of $9,716, $0, and
$7,559, respectively
    
    
    20,547
    
    
    
    (5,611
    )
    
    
    (3,125
    )Related party activity:Royalty income (1)
    
    
    16,166
    
    
    
    4,750
    
    
    
    (1,871
    )License income (1)
    
    
    
    
    
    
    
    
    
    
    556Total related party income (loss) from discontinued
operations of Reflections Interactive Ltd, net of tax
    
    
    16,166
    
    
    
    4,750
    
    
    
    (1,315
    )
 F-23




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##### Table of Contents



(1)
    
    We have entered into a distribution agreement with IESA and Atari Europe which
provides for IESAs and Atari Europes distribution of our products across Europe, Asia, and
certain other regions pursuant to which IESA, Atari Europe, or any of their subsidiaries, as
applicable, will pay us 30.0% of the gross margin on such products or 130.0% of the royalty rate
due to the developer, whichever is greater. We recognize this amount as royalty income as part
of net revenues, net of returns. Additionally, we earn license income from related parties iFone
and Glu Mobile (see below).(2)
    
    We have also entered into a distribution agreement with IESA and Atari Europe, which
provides for our distribution of IESAs (or any of its subsidiaries) products in the United
States, Canada, and Mexico, pursuant to which we will pay IESA either 30.0% of the gross margin
on such products or 130.0% of the royalty rate due to the developer, whichever is greater. We
recognize this amount as royalty expense as part of cost of goods sold, net of returns.(3)
    
    We engage certain related party development studios to provide services such as product
development, design, and testing.(4)
    
    In July 2002, we negotiated a sale-leaseback transaction between Atari Interactive and an
unrelated party. As part of this transaction, we guaranteed the lease obligation of Atari
Interactive. The lease provides for minimum monthly rental payments of approximately $0.1
million escalating nominally over the ten year term of the lease. During fiscal 2006, when the
Beverly studio (which held the office space for Atari Interactive) was closed, rental payments
were recorded to restructuring expense. We also received indemnification from IESA from costs,
if any, that may be incurred by us as a result of the full guaranty.We received a $1.3 million payment for our efforts in connection with the sale-leaseback
transaction. Approximately $0.6 million, an amount equivalent to a third-party brokers
commission, was recognized during fiscal 2003 as other income, while the remaining balance of
$0.7 million was deferred and is being recognized over the life of the sub-lease. Accordingly,
during the years ended March 31, 2005, 2006, and 2007, approximately $0.1 million of income was
recognized in each period. As of March 31, 2006 and March 31, 2007, the remaining balances of
approximately $0.5 million and $0.4 million, respectively, is deferred and is being recognized
over the life of the sub-lease. Although the Beverly studio was closed as part of managements
restructuring plan (Note 20), the space has not been sublet to date.Additionally, we provide management information systems services to Atari Australia for which we
are reimbursed. The charge is calculated as a percentage of our costs, based on usage, which is
agreed upon by the parties.(5)
    
    During fiscal 2005, we recorded interest income of $0.9 million on related party notes
receivable prior to the notes being converted and then subsequently offset against related party
trade payables (see below). Balance Sheet
  March 31,2006
    
    
    2007Due from/(Due to)  currentIESA (1)
    
    $
    (743
    )
    
    $
    (1,494
    )Atari Europe (2)
    
    
    4,054
    
    
    
    280Eden Studios (3)
    
    
    (2,235
    )
    
    
    (595
    )Paradigm (3)
    
    
    (721
    )
    
    
    Atari Melbourne House (3)
    
    
    (434
    )
    
    
    Atari Studio Asia (3)
    
    
    
    
    
    
    (401
    )Humongous, Inc. (4)
    
    
    (2,341
    )
    
    
    (2,218
    )Atari Interactive (5)
    
    
    (3,704
    )
    
    
    (992
    )Other miscellaneous net receivables
    
    
    553
    
    
    
    1,516Net due to related parties  current
    
    $
    (5,571
    )
    
    $
    (3,904
    )Due from/(Due to)  long-termAtari Interactive (see Atari Trademark Licensebelow)
    
    
    
    
    
    
    (1,912
    )Net due to related parties
    
    $
    (5,571
    )
    
    $
    (5,816
    )
 F-24




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##### Table of Contents



March 31,2006
    
    
    2007Due from related parties
    
    $
    4,692
    
    
    $
    1,799Due to related parties
    
    
    (10,263
    )
    
    
    (5,703
    )Net due to related parties  current
    
    $
    (5,571
    )
    
    $
    (3,904
    )
 
 (1)
    
    Balances comprised primarily from the management fees charged to us by IESA and other
recharges of cost incurred on our behalf.(2)
    
    Balances comprised of royalty income or expense from our distribution agreements with
IESA and Atari Europe relating to properties owned or licensed by Atari Europe.(3)
    
    Represents net payables related to related party development activities. (Note:
Paradigm and Atari Melbourne House were sold to third parties in the first and third
quarters, respectively, of the current fiscal year. Balances due to Atari Melbourne House
as of March 31, 2007 were transferred to Atari Studio Asia.)(4)
    
    Represents distribution fees owed to Humongous, Inc., a related party, related to sale
of their product, as well as liabilities for inventory purchased.(5)
    
    Comprised primarily of royalties owed to Atari Interactive, offset by receivables
related to management fee revenue and production and quality and assurance testing services
revenue earned from Atari Interactive. Related Party Notes Receivable
  Atari Trademark License
  F-25




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##### Table of Contents



Issuance of Common Stock to Related Parties
  
    
    Related Party Payables
  
    
    Settlement of Indebtedness
  Related Party Transactions with Employees or Former Employees
 
    
    Compromise Agreement with Martin Lee Edmondson
 Driver: Parallel Lines
 
    
    Consultation Agreement with Ann Kronen
  
    
    Purchase of iFone by Glu Mobile
  F-26




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##### Table of Contents




    
    Related Party Allocation of Executive Resignation Agreement
  NOTE 14  DEBT
 Credit Facilities
 Guggenheim Credit Facility
    F-27




---



##### Table of Contents



HSBC Loan and Security Agreement
    GECC Senior Credit Facility
  NOTE 15  COMMITMENTS AND CONTINGENCIES
 Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    Total2008
    
    $
    1,849
    
    
    $
    3,764
    
    
    $
    3,557
    
    
    $
    75
    
    
    $
    9,2452009
    
    
    
    
    
    
    
    
    
    
    3,024
    
    
    
    12
    
    
    
    3,0362010
    
    
    
    
    
    
    
    
    
    
    2,997
    
    
    
    
    
    
    
    2,9972011
    
    
    
    
    
    
    
    
    
    
    2,937
    
    
    
    
    
    
    
    2,9372012
    
    
    
    
    
    
    
    
    
    
    2,822
    
    
    
    
    
    
    
    2,822Thereafter
    
    
    
    
    
    
    
    
    
    
    24,465
    
    
    
    
    
    
    
    24,465Total
    
    $
    1,849
    
    
    $
    3,764
    
    
    $
    39,802
    
    
    $
    87
    
    
    $
    45,502
 
 (1)
    
    We have committed to pay advance payments under certain royalty and
license agreements. The payments of these obligations are dependent on the delivery
of the contracted services by the developers. F-28




---



##### Table of Contents



(2)
    
    Milestone payments represent royalty advances to developers for products
that are currently in development. Although milestone payments are not guaranteed,
we expect to make these payments if all deliverables and milestones are met timely
and accurately. Included in the total contractual obligations of $3.8 million are
payments of $0.3 million to be made to a related party development studio.(3)
    
    We account for our office leases as operating leases, with expiration
dates ranging from fiscal 2008 through fiscal 2022. There are future minimum annual
rental payments required under the leases, including a related party sublease with
Atari Interactive, net of $1.6 million of sublease income to be received in fiscal
2008 and fiscal 2009. Leasehold improvements made at the beginning of or during a
lease are amortized over the shorter of the remaining lease term or the estimated
useful lives of the assets. Rent expense and sublease income for the years ended
March 31, 2005, 2006, and 2007 is as follows (in thousands): Year endedMarch 31,2005
    
    2006
    
    2007Rent expense
    
    $
    5,622
    
    
    $
    4,059
    
    
    $
    3,760Sublease income
    
    $
    (708
    )
    
    $
    (520
    )
    
    $
    (653
    )
 § Renewal of New York LeaseDuring June 2006, we entered into a new lease with our current landlord at our New
York headquarters for approximately 70,000 square feet of office space for our
principal offices. The term of this lease commenced on July 1, 2006 and is to
expire on June 30, 2021. Upon entering into the new lease, our current lease,
which was set to expire in December 2006, was terminated. The rent under the new
lease for the office space is approximately $2.4 million per year for the first
five years, increases to approximately $2.7 million per year for the next five
years, and increases to $2.9 million per year for the last five years of the term. In
addition, we must pay for electricity, increases in real estate taxes and
increases in porter wage rates over the term. The landlord is providing us with a
one year rent credit of $2.4 million and an allowance of $4.5 million to be used
for building out and furnishing the premises, of which $1.2 million has been
recorded as a deferred credit as of March 31, 2007; the remainder of the deferred
credit will be recorded as the improvements are completed, and will be amortized
against rent expense over the life of the lease. A nominal amount of amortization
was recorded during the year ended March 31, 2007. We provided the landlord with
a security deposit under the new lease in the form of a letter of credit in the
initial amount of $1.7 million, which has been cash collateralized and is included
in security deposits on our consolidated balance sheet.(4)
    
    We maintain several capital leases for computer equipment. Per FASB
Statement No. 13, Accounting for Leases, we account for capital leases by
recording them at the present value of the total future lease payments. They are
amortized using the straight-line method over the minimum lease term. As of March
31, 2006, the net book value of the assets, included within property and equipment
on the balance sheet, was $0.5 million, net of accumulated depreciation of $0.3
million. As of March 31, 2007, the net book value of the assets was $0.1 million,
net of accumulated depreciation of $0.5 million. Litigation
  Bouchat v. Champion Products, et al. (Accolade)
  F-29




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##### Table of Contents



Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  Ernst & Young, Inc. v. Atari, Inc.
  Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.
  NOTE 16  EMPLOYEE SAVINGS PLAN
  F-30




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##### Table of Contents



NOTE 17  GAIN ON SALE OF DEVELOPMENT STUDIO ASSETS
 Sale of Shiny Entertainment
  NOTE 18  SALE OF INTELLECTUAL PROPERTY
 Timeshift
 Stuntman
 NOTE 19  DISCONTINUED OPERATIONS
 Sale of Humongous and Discontinued Operations Treatment
     F-31




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##### Table of Contents



Sale of Reflections
 Driver Driver Driver: Parallel Lines
 
    
    Balance Sheets
 Driver
 March 31, 2006
    
    
    March 31, 2007Assets:Cash
    
    $
    438
    
    
    $
    Inventories, net
    
    
    574
    
    
    
    Prepaid expenses and other
current assets
    
    
    1,222
    
    
    
    310Property and equipment, net
    
    
    251
    
    
    
    Other assets
    
    
    464
    
    
    
    335Total assets
    
    $
    2,949
    
    
    $
    645Liabilities:Accounts payable
    
    $
    874
    
    
    $
    Accrued liabilities
    
    
    731
    
    
    
    Royalties payable
    
    
    1,413
    
    
    
    Total liabilities
    
    $
    3,018
    
    
    $
    
 
    
    Results of Operations
  Year EndedMarch 31,2005
    
    
    2006
    
    
    2007Net revenues
    
    $
    63,976
    
    
    $
    11,865
    
    
    $
    (630
    )Income (loss) from operations of Reflections
Interactive Ltd
    
    
    30,263
    
    
    
    (5,611
    )
    
    
    (7,038
    )Gain on sale of Reflections Interactive Ltd
    
    
    
    
    
    
    
    
    
    
    11,472Income (loss) before provision for income taxes
from discontinued operations of Reflections
Interactive Ltd
    
    
    30,263
    
    
    
    (5,611
    )
    
    
    4,434Provision for income taxes
    
    
    9,716
    
    
    
    
    
    
    
    7,559Income (loss) from discontinued operations of
Reflections Interactive Ltd
    
    $
    20,547
    
    
    $
    (5,611
    )
    
    $
    (3,125
    )
 F-32




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##### Table of Contents



NOTE 20  RESTRUCTURING
  Years EndedMarch 31,2005
    
    
    2006
    
    
    2007Severance and retention expenses
    
    $
    4,219
    
    
    $
    4,907
    
    
    $
    87Lease related costs
    
    
    
    
    
    
    1,615
    
    
    
    595Relocation
    
    
    
    
    
    
    447
    
    
    
    Fixed asset write offs
    
    
    
    
    
    
    434
    
    
    
    Modification of stock options
    
    
    596
    
    
    
    404
    
    
    
    Consultants
    
    
    
    
    
    
    358
    
    
    
    Miscellaneous costs
    
    
    117
    
    
    
    702
    
    
    
    27Total
    
    $
    4,932
    
    
    $
    8,867
    
    
    $
    709
   Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2004
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    net
    
    
    March 31, 2005Short termSeverance and retention
    
    $
    
    
    
    $
    4,167
    
    
    $
    
    
    
    $
    (2,362
    )
    
    $
    1,805Miscellaneous costs
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    (37
    )
    
    
    80Total
    
    
    
    
    
    
    4,284
    
    
    
    
    
    
    
    (2,399
    )
    
    
    1,885Long termSeverance and retention
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Total
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Total
    
    $
    
    
    
    $
    4,336
    
    
    $
    
    
    
    $
    (2,399
    )
    
    $
    1,937
 Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2005
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    net
    
    
    March 31, 2006Short termSeverance and retention
    
    $
    1,805
    
    
    $
    4,907
    
    
    $
    52
    
    
    $
    (4,878
    )
    
    $
    1,886Lease related costs
    
    
    
    
    
    
    1,615
    
    
    
    (56
    )
    
    
    (1,314
    )
    
    
    245Relocation
    
    
    
    
    
    
    447
    
    
    
    
    
    
    
    (447
    )
    
    
    
 F-33




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##### Table of Contents



Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2005
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    net
    
    
    March 31, 2006Consultants
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    (358
    )
    
    
    Miscellaneous costs
    
    
    80
    
    
    
    702
    
    
    
    
    
    
    
    (750
    )
    
    
    32Total
    
    
    1,885
    
    
    
    8,029
    
    
    
    (4
    )
    
    
    (7,747
    )
    
    
    2,163Long termSeverance and retention
    
    
    52
    
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    Lease related costs
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    56Total
    
    
    52
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    56Total
    
    $
    1,937
    
    
    $
    8,029
    
    
    $
    
    
    
    $
    (7,747
    )
    
    $
    2,219
 Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2006
    
    
    Accrued Amounts
    
    
    Reclasses
    
    
    net
    
    
    March 31, 2007Short termSeverance and retention
    
    $
    1,886
    
    
    $
    87
    
    
    $
    
    
    
    $
    (1,973
    )
    
    $
    Lease related costs
    
    
    245
    
    
    
    595
    
    
    
    53
    
    
    
    (839
    )
    
    
    54Miscellaneous costs
    
    
    32
    
    
    
    27
    
    
    
    
    
    
    
    (59
    )
    
    
    Total
    
    
    2,163
    
    
    
    709
    
    
    
    53
    
    
    
    (2,871
    )
    
    
    54Long termLease related costs
    
    
    56
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    3Total
    
    
    56
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    3Total
    
    $
    2,219
    
    
    $
    709
    
    
    $
    
    
    
    $
    (2,871
    )
    
    $
    57
  NOTE 21  OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREAS
     F-34




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##### Table of Contents



Publishing
    
    Distribution
    
    Corporate
    
    TotalYear ended March 31, 2005:Net revenues
    
    $
    289,636
    
    
    $
    54,201
    
    
    $
    
    
    
    $
    343,837Operating income (loss) (1)
    
    
    6,894
    
    
    
    13,150
    
    
    
    (39,082
    )
    
    
    (19,038
    )Depreciation and amortization
    
    
    (2,646
    )
    
    
    
    
    
    
    (4,312
    )
    
    
    (6,958
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (459
    )
    
    
    (459
    )Year ended March 31, 2006:Net revenues
    
    $
    153,598
    
    
    $
    53,198
    
    
    $
    
    
    
    
    206,796Operating (loss) income (1) (2)
    
    
    (22,054
    )
    
    
    2,052
    
    
    
    (34,108
    )
    
    
    (54,110
    )Depreciation and amortization
    
    
    (1,875
    )
    
    
    
    
    
    
    (3,327
    )
    
    
    (5,202
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (595
    )
    
    
    (595
    )Year ended March 31, 2007:Net revenues
    
    $
    104,650
    
    
    $
    17,635
    
    
    $
    
    
    
    $
    122,285Operating (loss) income (1) (2) (3)
    
    
    (52,003
    )
    
    
    1,145
    
    
    
    (26,077
    )
    
    
    (76,935
    )Depreciation and amortization
    
    
    (517
    )
    
    
    
    
    
    
    (2,451
    )
    
    
    (2,968
    )Interest income, net
    
    
    
    
    
    
    139
    
    
    
    162
    
    
    
    301
 
 (1)
    
    Operating (loss) for the Corporate segment for the years ended March 31, 2005, 2006,
and 2007 excludes restructuring charges of $4.9 million, $8.9 million, and $0.7 million,
respectively. Including restructuring charges, total operating loss for the years ended
March 31, 2005, 2006, and 2007 is $24.0 million,
$63.0 million, and $77.6 million,
respectively.(2)
    
    Operating (loss) for the publishing segment for the year ended March 31, 2006 includes
a gain on the sale of intellectual property of $6.2 million, and for the year ended March
31, 2007 includes a gain on the sale of intellectual property of $9.0 million and a gain on
the sale of development studio assets of $0.9 million.(3)
    
    Operating (loss) for the publishing segment for the year ended March 31, 2007 includes
impairment of goodwill of $54.1 million.  March 31,2005
    
    
    2006
    
    
    2007Publishing net product revenues:ConsolePlayStation 2
    
    $
    97,931
    
    
    $
    45,438
    
    
    $
    31,047Xbox 360
    
    
    
    
    
    
    
    
    
    
    10,582Nintendo Wii
    
    
    
    
    
    
    
    
    
    
    7,346Plug and play
    
    
    15,519
    
    
    
    11,904
    
    
    
    2,449Xbox
    
    
    23,279
    
    
    
    12,544
    
    
    
    262Game Cube
    
    
    14,181
    
    
    
    2,304
    
    
    
    175PlayStation
    
    
    2,943
    
    
    
    
    
    
    
    Total console
    
    
    153,853
    
    
    
    72,190
    
    
    
    51,861HandheldPlayStation Portable
    
    
    
    
    
    
    2,688
    
    
    
    6,647Game Boy Advance
    
    
    34,784
    
    
    
    8,576
    
    
    
    3,410Nintendo DS
    
    
    2,141
    
    
    
    2,688
    
    
    
    1,749
 F-35




---



##### Table of Contents



March 31,2005
    
    
    2006
    
    
    2007Game Boy Color
    
    
    
    
    
    
    
    
    
    
    Total handheld
    
    
    36,925
    
    
    
    13,952
    
    
    
    11,806PC
    
    
    76,792
    
    
    
    41,857
    
    
    
    23,788Total publishing net product revenues
    
    
    267,570
    
    
    
    127,999
    
    
    
    87,455International royalty income (Note 13)
    
    
    2,520
    
    
    
    13,521
    
    
    
    5,243Licensing and other income
    
    
    19,546
    
    
    
    12,078
    
    
    
    11,952Total publishing net revenues
    
    
    289,636
    
    
    
    153,598
    
    
    
    104,650Distribution net revenues
    
    
    54,201
    
    
    
    53,198
    
    
    
    17,635Total net revenues
    
    $
    343,837
    
    
    $
    206,796
    
    
    $
    122,285
  UnitedStates
    
    
    Europe
    
    
    TotalYear ended March 31, 2005:Net revenues (1)
    
    $
    343,837
    
    
    $
    
    
    
    $
    343,837Operating (loss) (2)
    
    
    (13,573
    )
    
    
    (10,397
    )
    
    
    (23,970
    )Capital expenditures (3)
    
    
    1,861
    
    
    
    268
    
    
    
    2,129Total assets (4)
    
    
    187,370
    
    
    
    2,669
    
    
    
    190,039Year ended March 31, 2006:Net revenues (1)
    
    $
    206,796
    
    
    
    
    
    
    $
    206,796Operating (loss) (2)
    
    
    (51,713
    )
    
    
    (11,264
    )
    
    
    (62,977
    )Capital expenditures (3)
    
    
    2,305
    
    
    
    224
    
    
    
    2,529Total assets (4)
    
    
    141,361
    
    
    
    2,309
    
    
    
    143,670Year ended March 31, 2007:Net revenues (1)
    
    $
    122,285
    
    
    
    
    
    
    $
    122,285Operating (loss) (2)
    
    
    (74,873
    )
    
    
    (2,771
    )
    
    
    (77,644
    )Capital expenditures (3)
    
    
    837
    
    
    
    8
    
    
    
    845Total assets (4)
    
    
    42,049
    
    
    
    770
    
    
    
    42,819
 
 (1)
    
    United States net revenues include royalties on sales of our product sold
internationally. For the years ended March 31, 2005, 2006, and 2007 the royalties
were $2.5 million, $13.5 million, and $5.2 million, respectively.(2)
    
    Operating income (loss) for Europe for the years ended March 31, 2005, 2006,
and 2007 includes operating expenses of $10.4 million, $11.5 million, and $4.7 million,
respectively, for the Reflections studio, which was sold to a third party in the second
quarter of fiscal 2007 (Note 19). These expenses are included in income (loss) from
discontinued operations for each period presented.(3)
    
    Capital expenditures for Europe for all periods presented are property and
equipment purchases for the Reflections studio, which is presented as a discontinued
operation for all periods presented, and was sold to a third party in the second
quarter of fiscal 2007 (Note 19).(4)
    
    Total assets for Europe for the years ended March 31, 2005, 2006, and 2007
include assets of $2.2 million, $2.1 million, and $0.6 million, respectively, for the
Reflections studio, which was sold to a third party in the second quarter of fiscal
2007 (Note 19). These assets are included in assets of discontinued operations for
each period presented. F-36




---



##### Table of Contents



NOTE 22  SUBSEQUENT EVENTS
 Restructuring
  NOTE 23  STAFF ACCOUNTING BULLETIN NO. 108
  
    
    Inventory Write-off related to the lower-of-cost or market
adjustmentDuring our year end financial closing, we determined that in previous periods we did not
properly record a lower-of-cost-or-market adjustment to our inventory. As such, we have
written off inventory based on facts and circumstances known and available at March 31, 2006
and prior. This inventory write-off of $0.7 million decreases the balances in opening
retained earnings and inventory as of April 1, 2006, as presented in the table below.
    
    Deferred Tax LiabilityDuring our year end financial closing, we determined that we had not established a deferred
tax liability for the deferred tax consequences of a temporary difference that arose from a
difference in the book and tax basis of goodwill. As such, we have adjusted our opening
retained earnings for fiscal 2007.
 Inventory
    
    Deferred TaxWrite-off
    
    Liability
    
    TotalCumulative effect on inventory as of April 1, 2006
    
    $
    (735
    )
    
    $
    
    
    
    $
    (735
    )Cumulative effect on long-term deferred tax liability as of April 1, 2006
    
    $
    
    
    
    $
    (2,123
    )
    
    $
    (2,123
    )Cumulative effect on retained earnings as of April 1, 2006
    
    $
    (735
    )
    
    $
    (2,123
    )
    
    $
    (2,858
    )
 NOTE 24  RESTATEMENT
  NOTE 25  UNAUDITED QUARTERLY FINANCIAL DATA AND RESTATEMENT
  June 30,
    
    September 30,
    
    December 31,
    
    March 31,2005
    
    2005
    
    2005
    
    2006Net revenues
    
    $
    23,877
    
    
    $
    38,358
    
    
    $
    99,982
    
    
    $
    44,579Operating (loss)
    
    
    (30,099
    )
    
    
    (22,072
    )
    
    
    (2,245
    )
    
    
    (8,561
    )(Loss) income from continuing operations
    
    
    (30,138
    )
    
    
    (22,331
    )
    
    
    (2,348
    )
    
    
    (8,558
    )(Loss) income from discontinued operations of
Reflections
Interactive Ltd, net of tax
    
    
    (2,679
    )
    
    
    (2,880
    )
    
    
    (2,413
    )
    
    
    2,361
 F-37




---



##### Table of Contents



June 30,
    
    September 30,
    
    December 31,
    
    March 31,2005
    
    2005
    
    2005
    
    2006Net (loss)
    
    
    (32,817
    )
    
    
    (25,211
    )
    
    
    (4,761
    )
    
    
    (6,197
    )Basic and diluted (loss) from continuing operations
per share
    
    $
    (2.49
    )
    
    $
    (1.81
    )
    
    $
    (0.17
    )
    
    $
    (0.66
    )Basic and diluted (loss) from discontinued operations
of
Reflections Interactive Ltd, net of tax, per share
    
    $
    (0.22
    )
    
    $
    (0.23
    )
    
    $
    (0.18
    )
    
    $
    0.18Basic and diluted net (loss) per share
    
    $
    (2.71
    )
    
    $
    (2.04
    )
    
    $
    (0.35
    )
    
    $
    (0.48
    )Weighted average shares outstanding  basic and diluted
    
    
    12,130
    
    
    
    12,377
    
    
    
    13,475
    
    
    
    13,476
  June 30,
    
    September 30,
    
    December 31,
    
    March 31,2006
    
    2006
    
    2006
    
    2007(Revised and
    
    (Revised and(Revised)
    
    Restated)
    
    Restated)Net revenues
    
    $
    19,474
    
    
    $
    28,588
    
    
    $
    47,277
    
    
    $
    26,946Operating (loss) income
    
    
    (4,713
    )
    
    
    (9,623
    )
    
    
    1,711
    
    
    
    (65,019
    )(Loss) income from continuing operations
    
    
    (4,759
    )
    
    
    (4,477
    )
    
    
    1,082
    
    
    
    (58,432
    )(Loss) income from discontinued operations of
Reflections Interactive Ltd, net of tax
    
    
    (2,537
    )
    
    
    4,410
    
    
    
    (1,727
    )
    
    
    (3,271
    )Net (loss)
    
    
    (7,296
    )
    
    
    (67
    )
    
    
    (645
    )
    
    
    (61,703
    )Basic and diluted (loss) income from continuing
operations per share
    
    $
    (0.35
    )
    
    $
    (0.33
    )
    
    $
    0.08
    
    
    $
    (4.33
    )Basic and diluted (loss) income from discontinued
operations of Reflections Interactive Ltd, net of
tax, per share
    
    $
    (0.19
    )
    
    $
    0.32
    
    
    $
    (0.13
    )
    
    $
    (0.24
    )Basic and diluted net (loss) per share
    
    $
    (0.54
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (4.57
    )Weighted average shares outstanding  basic and diluted
    
    
    13,477
    
    
    
    13,478
    
    
    
    13,478
    
    
    
    13,478
   Driver
   Restatement of Loss from Continuing Operations and (Loss) Income from Discontinued Operations
 F-38




---



##### Table of Contents



Restatement
    
    
    SAB No. 108
    
    
    As Revised andAs of and for the Three Months Ended June 30, 2006
    
    As Reported
    
    
    Adjustment
    
    
    Adjustment
    
    
    RestatedLong-term deferred tax liability
    
    $
    
    
    
    $
    
    
    
    $
    2,305
    
    
    $
    2,305(Loss) before provision for income taxes
    
    $
    (4,577
    )
    
    $
    
    
    
    $
    
    
    
    $
    (4,577
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    182(Loss) from continuing operations
    
    
    (4,577
    )
    
    
    
    
    
    
    182
    
    
    
    (4,759
    )(Loss) from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    (2,537
    )
    
    
    
    
    
    
    
    
    
    
    (2,537
    )Net (loss)
    
    $
    (7,114
    )
    
    $
    
    
    
    $
    182
    
    
    $
    (7,296
    )Basic and diluted net (loss) per share (1):(Loss) from continuing operations
    
    $
    (0.34
    )
    
    $
    
    
    
    $
    0.01
    
    
    $
    (0.35
    )(Loss) from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    (0.19
    )
    
    
    
    
    
    
    
    
    
    
    (0.19
    )Net (loss)
    
    $
    (0.53
    )
    
    $
    
    
    
    $
    0.01
    
    
    $
    (0.54
    )
 Restatement
    
    
    SAB No. 108
    
    
    As Revised andAs of and for the Three Months Ended September 30, 2006
    
    As Reported
    
    
    Adjustment
    
    
    Adjustment
    
    
    RestatedLong-term deferred tax liability
    
    $
    
    
    
    $
    
    
    
    $
    2,683
    
    
    $
    2,683(Loss) before (benefit from) provision for income taxes
    
    $
    (9,492
    )
    
    $
    
    
    
    $
    
    
    
    $
    (9,492
    )(Benefit from) provision for income taxes
    
    
    
    
    
    
    (5,393
    )
    
    
    378
    
    
    
    (5,015
    )(Loss) from continuing operations
    
    
    (9,492
    )
    
    
    (5,393
    )
    
    
    378
    
    
    
    (4,477
    )Income from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    9,803
    
    
    
    5,393
    
    
    
    
    
    
    
    4,410Net income
    
    $
    311
    
    
    $
    
    
    
    $
    378
    
    
    $
    67Basic and diluted net income per share (1):(Loss) from continuing operations
    
    $
    (0.70
    )
    
    $
    (0.40
    )
    
    $
    0.03
    
    
    $
    (0.33
    )Income from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    0.72
    
    
    
    0.40
    
    
    
    
    
    
    
    0.32Net income (loss)
    
    $
    0.02
    
    
    $
    
    
    
    $
    0.03
    
    
    $
    (0.01
    )
 F-39




---



##### Table of Contents



Restatement
    
    
    SAB No. 108
    
    
    As Revised andFor the Six Months Ended September 30, 2006
    
    As Reported
    
    
    Adjustment
    
    
    Adjustment
    
    
    Restated(Loss) before (benefit from) provision for income taxes
    
    $
    (14,069
    )
    
    $
    
    
    
    $
    
    
    
    $
    (14,069
    )(Benefit from) provision for income taxes
    
    
    
    
    
    
    (5,393
    )
    
    
    560
    
    
    
    (4,833
    )(Loss) from continuing operations
    
    
    (14,069
    )
    
    
    (5,393
    )
    
    
    560
    
    
    
    (9,236
    )Income from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    7,266
    
    
    
    5,393
    
    
    
    
    
    
    
    1,873Net (loss)
    
    $
    (6,803
    )
    
    $
    
    
    
    $
    560
    
    
    $
    (7,363
    )Basic and diluted net (loss) per share (1):(Loss) from continuing operations
    
    $
    (1.04
    )
    
    $
    (0.40
    )
    
    $
    0.04
    
    
    $
    (0.68
    )Income from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    0.54
    
    
    
    0.40
    
    
    
    
    
    
    
    0.14Net (loss)
    
    $
    (0.50
    )
    
    $
    
    
    
    $
    0.04
    
    
    $
    (0.54
    )
 Restatement
    
    
    SAB No. 108
    
    
    As Revised andAs of and for the Three Months Ended December 31, 2006
    
    As Reported
    
    
    Adjustment
    
    
    Adjustment
    
    
    RestatedLong-term deferred tax liability
    
    $
    
    
    
    $
    
    
    
    $
    2,613
    
    
    $
    2,613Income before provision for income taxes
    
    $
    1,689
    
    
    $
    
    
    
    $
    
    
    
    $
    1,689Provision for income taxes
    
    
    
    
    
    
    677
    
    
    
    (70
    )
    
    
    607Income from continuing operations
    
    
    1,689
    
    
    
    677
    
    
    
    (70
    )
    
    
    1,082(Loss) from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    (2,404
    )
    
    
    (677
    )
    
    
    
    
    
    
    (1,727
    )Net (loss)
    
    $
    (715
    )
    
    $
    
    
    
    $
    (70
    )
    
    $
    (645
    )Basic and diluted net (loss) per share (1):Income from continuing operations
    
    $
    0.13
    
    
    $
    0.05
    
    
    $
    (0.00
    )
    
    $
    0.08(Loss) from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    (0.18
    )
    
    
    (0.05
    )
    
    
    
    
    
    
    (0.13
    )Net (loss)
    
    $
    (0.05
    )
    
    $
    
    
    
    $
    0.00
    
    
    $
    (0.05
    )
 Restatement
    
    
    SAB No. 108
    
    
    As Revised andFor the Nine Months Ended December 31, 2006
    
    As Reported
    
    
    Adjustment
    
    
    Adjustment
    
    
    Restated(Loss) before (benefit from) provision for income taxes
    
    $
    (12,380
    )
    
    $
    
    
    
    $
    
    
    
    $
    (12,380
    )(Benefit from) provision for income taxes
    
    
    
    
    
    
    (4,716
    )
    
    
    490
    
    
    
    (4,226
    )(Loss) from continuing operations
    
    
    (12,380
    )
    
    
    (4,716
    )
    
    
    490
    
    
    
    (8,154
    )Income from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    4,862
    
    
    
    4,716
    
    
    
    
    
    
    
    146Net (loss)
    
    $
    (7,518
    )
    
    $
    
    
    
    $
    490
    
    
    $
    (8,008
    )Basic and diluted net (loss) per share (1):(Loss) from continuing operations
    
    $
    (0.92
    )
    
    $
    (0.35
    )
    
    $
    0.03
    
    
    $
    (0.60
    )Income from discontinued operations of Reflections Interactive
Ltd, net of tax
    
    
    0.36
    
    
    
    0.35
    
    
    
    
    
    
    
    0.01Net (loss)
    
    $
    (0.56
    )
    
    $
    
    
    
    $
    0.03
    
    
    $
    (0.59
    )
 
 (1)
    
    Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have
been restated to reflect the reverse stock split. F-40




---



##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS (in thousands)
 Additions
    
    
    AdditionsBalance
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    BalanceBeginning
    
    
    Net
    
    
    Operating
    
    
    
    
    
    
    EndDescription
    
    of Period
    
    
    Revenues
    
    
    Expenses
    
    
    Deductions
    
    
    of PeriodAllowance for bad debts, returns,
price protection
and other customer promotional programs:Year ended March 31, 2007
    
    $
    30,918
    
    
    $
    22,428
    
    
    $
    269
    
    
    $
    (39,467
    )
    
    $
    14,148Year ended March 31, 2006
    
    $
    24,285
    
    
    $
    54,964
    
    
    $
    1,919
    
    
    $
    (50,250
    )
    
    $
    30,918Year ended March 31, 2005
    
    $
    36,279
    
    
    $
    76,239
    
    
    $
    3,622
    
    
    $
    (91,855
    )
    
    $
    24,285
 Additions
    
    
    AdditionsBalance
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    BalanceBeginning
    
    
    Cost of
    
    
    Operating
    
    
    
    
    
    
    EndDescription
    
    of Period
    
    
    Goods Sold
    
    
    Expenses
    
    
    Deductions
    
    
    of PeriodReserve for obsolescence:Year ended March 31, 2007
    
    $
    2,427
    
    
    $
    2,486
    
    
    $
    
    
    
    $
    (3,054
    )
    
    $
    1,859Year ended March 31, 2006
    
    $
    2,489
    
    
    $
    3,678
    
    
    $
    
    
    
    $
    (3,740
    )
    
    $
    2,427Year ended March 31, 2005
    
    $
    2,035
    
    
    $
    2,645
    
    
    $
    
    
    
    $
    (2,191
    )
    
    $
    2,489
 F-41