##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission File No.: 0-27338
 ATARI, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    13-3689915
(I.R.S. Employer
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: None
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
 o þ
 o þ
 þ o
 o
  o þ o
  o þ
  Documents Incorporated by Reference




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##### 



ATARI, INC. AND SUBSIDIARIES
MARCH 31, 2006 ANNUAL REPORT ON FORM 10-K
 TABLE OF CONTENTS
 PagePART IITEM 1.
    
    Business
    
    
    2ITEM 1A.
    
    Risk Factors
    
    
    13ITEM 1B.
    
    Unresolved Staff Comments
    
    
    20ITEM 2.
    
    Properties
    
    
    20ITEM 3.
    
    Legal Proceedings
    
    
    21ITEM 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
    
    
    23ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25ITEM 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    40ITEM 8.
    
    Financial Statements and Supplementary Data
    
    
    40ITEM 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    40ITEM 9A.
    
    Controls and Procedures
    
    
    40ITEM 9B.
    
    Other Information
    
    
    42PART IIIITEM 10.
    
    Directors and
Executive Officers of the Registrant
    
    
    43ITEM 11.
    
    Executive Compensation
    
    
    43ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    43ITEM 13.
    
    Certain Relationships and Related Transactions
    
    
    43ITEM 14.
    
    Principal Accountant Fees and Services
    
    
    43PART IVITEM 15.
    
    Exhibits and Financial Statement Schedules
    
    
    44SIGNATURES
    
    
    50CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1EXHIBIT INDEXEX-3.1: RESTATED CERTIFICATE OF INCORPORATIONEX-10.9: MANAGEMENT AND SERVICES AGREEMENTEX-10.10: SERVICES AGREEMENTEX-10.11: PRODUCTION SERVICES AGREEMENTEX-10.38: DESCRIPTION OF ANNUAL INCENTIVE PLAN FOR FISCAL 2006EX-21.1: LIST OF SUBSIDIARIESEX-23.1: CONSENT OF DELOITTE & TOUCHE LLPEX-31.1: CERTIFICATIONEX-32.1: CERTIFICATIONEX-99.5: XBOX PUBLISHER LICENSE AGREEMENTEX-99.6: CONFIDENTIAL LICENSE AGREEMENT




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This Annual Report contains statements that may constitute forward-looking statements, as that term
is defined in the Private Securities Litigation Reform Act of 1995. We caution readers regarding
certain forward-looking statements in this Report, press releases, securities filings, and all
other documents and communications. All statements, other than statements of historical fact,
including statements regarding industry prospects and expected future results of operations or
financial position, made in this 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 any forward-looking statement later turns out to be inaccurate. 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 20.
 1




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##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 OVERVIEW
 Matrix: Path of Neo, Dragon Ball Z Atari Flashback 2.0
   §
    
    Dragon Ball Z (FUNimation);§
    
    Alone in the Dark (IESA);§
    
    Asteroids, PONG, Missile Command and Centipede (Atari Interactive);§
    
    Dungeons & Dragons(Hasbro and Atari Interactive);§
    
    Earthworm Jim (Interplay);§
    
    RollerCoaster Tycoon (Chris
Sawyer and Atari Interactive); and§
    
    Godzilla (Sony Pictures).
   
    
    In fiscal 2006, we completed the closure of our operations in Beverly, Massachusetts
and Santa Monica, California and either discontinued the activities we had been
conducting at those locations, or transferred them to our main office in New York City.
    
    In August 2005, we sold shares of IESA stock (acquired
in connection with the sale of the Humongous studio) into the market for approximately $10.1
million.
    
    As of June 2006, we sold the rights to Timeshift and Stuntman and certain other game
rights for approximately $15.2 million, of which $6.2 million was recorded in fiscal
2006.
    
    In February 2006, we terminated the employment of approximately 20% of the employees
in our New York City office, with an overall worldwide workforce reduction of
approximately 25%.
    
    We reduced our payments to external developers by $7.1 million compared with the
prior year by reducing the number of titles we were developing (although we increased
spending on products we were developing internally by $4.7 million).
   Driver
  Dungeons & Dragons
Online Dragon Ball Z: Budokai Tenkaichi Driver: Parallel Lines Getting Up: Contents Under
Pressure Indigo Prophecy
   2




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www.atari.com
 INDUSTRY OVERVIEW
  The Console and Handheld Market
  3




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##### Table of Contents



Personal Computers
  ESRB
Ratings and Litigation
  Consolidation
  PRODUCTS
  4




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##### Table of Contents




    
    Fiscal 2004  the Dragon Ball Zfranchise
generated 23.7% of our publishing net product revenues, driven by Dragon Ball Z: Budokai 2(PlayStation 2). Additionally, Enter the
Matrix(PC, PlayStation 2, Xbox, and GameCube) generated 25.0% of
our publishing net revenues.
    
    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 we are currently negotiating the sale of) 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 the current period include Atari Flashback 2.0(Retro plug
and play), Getting Up: Contents Under Pressure(PC, PlayStation 2, and Xbox), Dungeons &
Dragons Online: Stormreach(PC), Driver: Parallel Lines(PlayStation 2, and Xbox), and
Indigo Prophecy(PC, PlayStation 2, and Xbox).
 PUBLISHING
    DEVELOPMENT
 Internal and Related-Party Development
    
    
    Shiny EntertainmentNewport Beach, CaliforniaWe acquired Shiny in
April 2002, along with the rights to develop console and PC games
based on The Matrixfilm trilogy. Shiny developed Enter the Matrix,
which was released simultaneously with The Matrix Reloaded,the second
film in The Matrixtrilogy, in May 2003 and has sold in excess of 6
million units worldwide to date. In fiscal 2006, Shiny developed the
next installment of The Matrixfranchise, Matrix: Path of Neo,which
was released in November 2005. Currently, Shiny is working on
Earthworm Jimon the PSP platform.
    
    ReflectionsNewcastle, EnglandReflections is responsible for the
creation and development of our Driver
 5




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franchise, which has sold
more than 15 million units worldwide to date. During fiscal 2006,
Reflections developed the latest installment of the Driverfranchise,
Driver: Parallel Lines, which was released in March 2006. As of the
first quarter of fiscal 2007, we have formally adopted a plan to
divest ourselves of this asset.
  
    
    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 is currently developing Test Drive
Unlimitedfor Xbox 360 and PC, and Alone in the Darkfor Xbox 360,
PlayStation 3, and PC, both expected to be released in fiscal 2007.
    
    Atari Melbourne House Pty LtdMelbourne, AustraliaAtari Melbourne
House Pty Ltd is the studio behind TRANSFORMERS,released in May
2004. Previously, the studio had developed Grand Prix Challenge,
and is currently developing Test Drive Unlimitedfor PlayStation 2
and PSP, expected to be released in fiscal 2007.
    
    Paradigm Entertainment, Inc.Dallas, TexasParadigm Entertainment,
Inc., or Paradigm, is the studio behind the successful Pilot Wings
game, and also developed Mission Impossible: Operation Surmaand
Terminator 3: The Redemption. Currently, Paradigm is developing
Battlezonefor the PSP platform. In May 2006, a third
party publisher exercised an option to acquire the studio from
IESA.
 External Development
  
    
    Frontier Development  Chris Sawyer (RollerCoaster Tycoonseries);
    
    Obsidian (Neverwinter Nights);
    
    Quantic Dream (Indigo Prophecy);
    
    The Collective (Marc Eckos Getting Up: Contents Under Pressure);
    
    Webfoot Technologies (Dragon Ball Z: The Legacy of Goku);
    
    Eugen Systems (Act of War);
    
    ZSlide (Hot PXL);
    
    Spike (Dragon Ball Z: Budokai Tenkaichi 2);
    
    Crafts & Master (Super Dragon Ball Z);
    
    Mistic Software (Totally Spies, Arthur and the Minimoys);
    
    Etranges Libellules (Arthur and the Minimoys);
    
    Spellbound (Desperados);
    
    Kuju Entertainment (Dungeons & Dragons Tactics).
  6




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SALES AND MARKETING
  
    
    Managing the life cycle of an extensive 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.
 To achieve maximum benefit from our sales and marketing programs, we employ a wide range of
marketing techniques, including:
 
    
    Understanding our consumers through professional qualitative and quantitative
research;
    
    Promoting product publicity via enthusiast and mass market outlets, including
broadcast television, internet, newspapers, specialty magazines, radio, and theater;
    
    Retail marketing and in-store promotions and displays;
    
    On-line 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.
  7




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INTELLECTUAL PROPERTY
 Licenses
 Licensed properties
   Hardware licenses
   8




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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, 2008Sony
    
    PlayStation
    
    Licensed Publisher
Agreement, dated
January 19, 2003
    
    US, Canada, Mexico,
Latin America
    
    January 18, 2007Sony
    
    PlayStation 2
    
    Licensed Publisher
Agreement, dated
June 6, 2000
    
    US and Canada
    
    March 31, 2007,
with automatic 1
year renewalsSony
    
    PlayStation Portable
    
    Licensed Publisher
Agreement, dated
March 23, 2005
    
    US and Canada
    
    March 31, 2007,
with automatic 1
year renewals
    Protection
  9




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DISTRIBUTION
 United States, Canada and Mexico
  
    
    efficient and accurate processing of orders and payments;
 
    
    expedited order turnaround time; and
 
    
    prompt delivery.
  Backyard Sports
  Europe, Asia and Other Regions
  10




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Backlog
  MANUFACTURING
   EMPLOYEES
   RELATIONSHIP WITH IESA
   11




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COMPETITION
   Test Drive RollerCoaster Tycoon, The Matrix, Dragon Ball Z Dungeons & Dragons
  SEASONALITY
  SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
  12




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ITEM 1A. RISK FACTORS
 RISKS RELATED TO OUR BUSINESS
 Our business has contracted significantly.
  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.
  The loss of Wal-Mart, GameStop/Electronics Boutique, 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.
  13




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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 need to raise additional capital.
  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.
  14




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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.
  
    
    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.
 The loss of our senior management and skilled personnel could negatively affect our business.
  15




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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.
   Revenues from our distribution business may decline as competition increases and Internet
technology improves.
  16




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Revenues from our distribution business may decline if the products which we distribute for
third-party developers become unavailable to us.
  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.
 We may face increased competition and downward price pressure if we are unable to protect our
intellectual property rights.
  We may face intellectual property infringement claims which would be costly to resolve.
  17




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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.
   18




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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.
  We have no revolving credit facility.
  19




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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.
  We are not in compliance with the NASDAQ continued listing requirements.
  AVAILABLE INFORMATION
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  20




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North America
    
    
    Europe
    
    
    TotalNew York
    
    
    90,000
    
    
    
    
    
    
    
    90,000California
    
    
    17,400
    
    
    
    
    
    
    
    17,400Washington
    
    
    65,500
    
    
    
    
    
    
    
    65,500Minnesota
    
    
    14,291
    
    
    
    
    
    
    
    14,291Massachusetts
    
    
    53,184
    
    
    
    
    
    
    
    53,184Other
    
    
    25,000
    
    
    
    
    
    
    
    25,000Newcastle, UK
    
    
    
    
    
    
    23,285
    
    
    
    23,285Total
    
    
    265,375
    
    
    
    23,285
    
    
    
    288,660
 New York th
 California
 Washington
 Minnesota
 Massachusetts .
 Other States in the U.S .
 Europe .
 
 ITEM 3. LEGAL PROCEEDINGS
  21




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Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II , and
Chicago West Pullman LLC
     American Video Graphics, L.P., v. Electronic Arts, Inc. et al.
    iEntertainment Network, Inc. v. Epic Games, Inc., Atari, Inc. Valve Corporation, Sierra
Entertainment, Inc., Sony Corporation of Japan, Sony Corporation of America, Sony Computer
Entertainment America, Inc. and Sony Online Entertainment, Inc.
  22




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Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
  Rafael Curulla v. SAS Atari Europe and Atari, Inc.
  Thomas Licensing, LLC v. Atari Interactive, Inc. and Atari, Inc.
  23




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ITEM
4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
 
 High
    
    LowFiscal 2005First Quarter
    
    $
    3.66
    
    
    $
    2.10Second Quarter
    
    $
    2.51
    
    
    $
    1.35Third Quarter
    
    $
    2.94
    
    
    $
    1.10Fourth Quarter
    
    $
    3.40
    
    
    $
    2.10Fiscal 2006First Quarter
    
    $
    3.18
    
    
    $
    2.30Second Quarter
    
    $
    2.94
    
    
    $
    1.15Third Quarter
    
    $
    1.46
    
    
    $
    0.98Fourth Quarter
    
    $
    1.12
    
    
    $
    0.56
   Securities Authorized for Issuance under Equity Compensation Plans
  Recent Sales of Unregistered Securities
  24




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Purchase of Equity Securities by the Issuer and Affiliated Purchases.
  
 ITEM 6. SELECTED FINANCIAL DATA
    NineYear
    
    
    Months
    
    
    YearsEnded
    
    
    Ended
    
    
    EndedJune 30,
    
    
    March 31,
    
    
    March 31,2002
    
    
    2003
    
    
    2004
    
    
    2005 (1)
    
    
    2006 (1)(in thousands, except per share data)Statement of Operations Data:Net revenues
    
    $
    419,045
    
    
    $
    404,645
    
    
    $
    468,944
    
    
    $
    407,813
    
    
    $
    218,661Operating income (loss)
    
    
    916
    
    
    
    27,429
    
    
    
    7,573
    
    
    
    6,293
    
    
    
    (68,588
    )Net (loss) income
    
    
    (10,930
    )
    
    
    18,070
    
    
    
    766
    
    
    
    5,692
    
    
    
    (68,986
    )Dividend to parent
    
    
    
    
    
    
    
    
    
    
    (39,351
    )
    
    
    
    
    
    
    (Loss) income attributable to common stockholders
    
    $
    (10,930
    )
    
    $
    18,070
    
    
    $
    (38,585
    )
    
    $
    5,692
    
    
    $
    (68,986
    )Basic and diluted net (loss) income per share
    
    $
    (0.16
    )
    
    $
    0.26
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.54
    )Basic and diluted (loss) per share related to dividend to parent
    
    
    
    
    
    
    
    
    
    
    (0.41
    )
    
    
    
    
    
    
    Basic and diluted (loss) income per share attributable to
common stockholders
    
    $
    (0.16
    )
    
    $
    0.26
    
    
    $
    (0.40
    )
    
    $
    0.05
    
    
    $
    (0.54
    )Basic weighted average shares outstanding
    
    
    69,722
    
    
    
    69,878
    
    
    
    96,990
    
    
    
    121,276
    
    
    
    128,631Diluted weighted average shares outstanding
    
    
    69,722
    
    
    
    70,055
    
    
    
    96,990
    
    
    
    121,587
    
    
    
    128,631
 
 (1)
    
    During fiscal 2005 and fiscal 2006, we recorded restructuring expenses of $4.9 million and
$8.9 million, respectively. June 30,
    
    March 31,2002
    
    2003
    
    2004
    
    2005
    
    2006Balance Sheet Data:Cash
    
    $
    5,403
    
    
    $
    815
    
    
    $
    9,621
    
    
    $
    10,438
    
    
    $
    15,386Working (deficit) capital
    
    
    (51,547
    )
    
    
    (91,648
    )
    
    
    24,914
    
    
    
    33,655
    
    
    
    (3,711
    )Total assets
    
    
    241,863
    
    
    
    232,082
    
    
    
    193,956
    
    
    
    190,039
    
    
    
    143,670Total debt
    
    
    236,211
    
    
    
    220,061
    
    
    
    
    
    
    
    
    
    
    
    Stockholders (deficit) equity
    
    
    (115,329
    )
    
    
    (96,918
    )
    
    
    115,063
    
    
    
    120,667
    
    
    
    73,212
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
 Going Concern
  25




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Business and Operating Segments
   Humongous Discontinued Operations Treatment
  26




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##### Table of Contents



Key Challenges
   Critical Accounting Policies
   Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
   27




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##### Table of Contents



Inventories
  Research and product development costs
   Licenses
  Income taxes
  28




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Related party transactions
  Results of Operations
 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
    
    $
    407,813
    
    
    
    100.0
    %
    
    $
    218,661
    
    
    
    100.0
    %
    
    
    (189,152
    )
    
    
    (46.4
    )%Costs and expenses:Cost of goods sold
    
    
    217,065
    
    
    
    53.2
    %
    
    
    137,582
    
    
    
    62.9
    %
    
    
    (79,483
    )
    
    
    (36.6
    )%Research and product development
    
    
    68,592
    
    
    
    16.8
    %
    
    
    63,263
    
    
    
    29.0
    %
    
    
    (5,329
    )
    
    
    (7.8
    )%Selling and distribution expenses
    
    
    64,221
    
    
    
    15.7
    %
    
    
    44,846
    
    
    
    20.5
    %
    
    
    (19,375
    )
    
    
    (30.2
    )%General and administrative expenses
    
    
    35,792
    
    
    
    8.9
    %
    
    
    30,385
    
    
    
    13.9
    %
    
    
    (5,407
    )
    
    
    (15.1
    )%Restructuring expenses
    
    
    4,932
    
    
    
    1.2
    %
    
    
    8,867
    
    
    
    4.1
    %
    
    
    3,935
    
    
    
    79.8
    %Gain on sale of intellectual property
    
    
    
    
    
    
    0.0
    %
    
    
    (6,224
    )
    
    
    (2.9
    )%
    
    
    6,224
    
    
    
    100.0
    %Depreciation and amortization
    
    
    10,918
    
    
    
    2.7
    %
    
    
    8,530
    
    
    
    3.9
    %
    
    
    (2,388
    )
    
    
    (21.9
    )%Total costs and expenses
    
    
    401,520
    
    
    
    98.5
    %
    
    
    287,249
    
    
    
    131.4
    %
    
    
    (114,271
    )
    
    
    (28.5
    )%Operating income (loss)
    
    
    6,293
    
    
    
    1.5
    %
    
    
    (68,588
    )
    
    
    (31.4
    )%
    
    
    (74,881
    )
    
    
    (1,189.9
    )%Interest expense, net
    
    
    (459
    )
    
    
    (0.1
    )%
    
    
    (595
    )
    
    
    (0.2
    )%
    
    
    136
    
    
    
    29.6
    %Other income (expense)
    
    
    42
    
    
    
    0.0
    %
    
    
    (208
    )
    
    
    (0.1
    )%
    
    
    (250
    )
    
    
    (595.2
    )%Income (loss) before provision for (benefit from)
income taxes
    
    
    5,876
    
    
    
    1.4
    %
    
    
    (69,391
    )
    
    
    (31.7
    )%
    
    
    (75,267
    )
    
    
    (1,280.9
    )%Provision for (benefit from) income taxes
    
    
    184
    
    
    
    0.0
    %
    
    
    (405
    )
    
    
    (0.2
    )%
    
    
    (589
    )
    
    
    (320.1
    )%Net income (loss)
    
    $
    5,692
    
    
    
    1.4
    %
    
    $
    (68,986
    )
    
    
    (31.5
    )%
    
    $
    (74,678
    )
    
    
    (1,312.0
    )%
 Net Revenues
  YearsEndedMarch 31,
    
    
    (Decrease)2005
    
    
    2006Publishing
    
    $
    353,612
    
    
    $
    165,463
    
    
    $
    (188,149
    )Distribution
    
    
    54,201
    
    
    
    53,198
    
    
    
    (1,003
    )Total
    
    $
    407,813
    
    
    $
    218,661
    
    
    $
    (189,152
    )
  29




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##### Table of Contents



Publishing Platform Mix2005
    
    
    2006PlayStation 2
    
    
    39.4
    %
    
    
    36.6
    %PC
    
    
    25.9
    %
    
    
    31.2
    %Xbox
    
    
    11.9
    %
    
    
    10.9
    %Plug and Play
    
    
    4.8
    %
    
    
    8.7
    %Game Boy Advance
    
    
    12.0
    %
    
    
    7.0
    %Nintendo DS
    
    
    0.7
    %
    
    
    2.0
    %PlayStation Portable
    
    
    0.0
    %
    
    
    1.9
    %Game Cube
    
    
    4.3
    %
    
    
    1.7
    %PlayStation
    
    
    1.0
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  
    
    The current period net publishing revenues of $165.5 million include net product sales
of $59.3 million for the top sellers of fiscal 2006: Dragon Ball Z: Budokai Tenkaichi
(PlayStation 2), Matrix: Path of Neo(PC, PlayStation 2, and Xbox), Atari Flashback 2.0
(Plug and Play), and Getting Up: Contents Under Pressure(PC, PlayStation 2, and Xbox).
Other new releases in the current year included Dungeons and Dragons: Stormreach(PC),
Driver: Parallel Lines(PlayStation 2 and Xbox), Indigo Prophecy(PC, PlayStation 2, and
Xbox), and Dragon Ball Z: Transformations(Game Boy Advance). In the prior year, net
publishing revenues of $353.6 million were driven by the successful launch of DRIV3Rin
June 2004, which generated approximately $41.8 million in net product sales, and 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 22% of our net product
revenues, compared with 19% of our net product revenues during the prior year.
    
    Publishing net revenues include international royalty income earned on IESAs
international sales of our titles. International royalty income decreased slightly by $0.4
million from $18.7 million in the year ended March 31, 2005 to $18.3 million in the current
year. The current year income was driven by international sales of Matrix: Path of Neo,
Getting Up: Contents Under Pressure, and Indigo Prophecy, while the prior years income
included $16.0 million from DRIV3R. The current balance includes 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 49.4% to $13.0 million from $25.7 million in the prior year. The decrease
was driven by:
 °
    
    domestic licensing income of $9.2 million in the current year, compared
with $17.4 million in the prior year, driven by the prior years recognition of the
Duke Nukem Royalty Advance Promissory Note of $4.3 million, and°
    
    the prior years recognition of $4.0 million in fees paid by Microsoft to
develop DRIV3Rfor the Xbox platform, as well as $1.2 million in in-game advertising
revenues, offset by°
    
    the current year 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 $19.71
in the prior year, to $20.71 in the current year. Trends include:
 °
    
    slight increase in the ASP for PC titles from $14.06 to $14.65, and°
    
    current year inclusion of PlayStation Portable, with an ASP of $26.08,
increasing the overall console ASP from $22.94 in the prior year to $25.49 in the
current year, offset by°
    
    a decrease in the ASP of the Atari Flashbackplug-and-play games from
$29.87 in the prior year to $19.90.
 30




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##### Table of Contents




    
    Platform mix has shifted away from console product toward
lower priced PC and
plug-and-play product. The current year to date mix consisted of 60.1% console product,
31.2% PC product, and 8.7% Atari Flashbackproduct, compared with the prior year mix of
69.3% console product, 25.9% PC product, and 4.8% Atari Flashbackproduct.
    
    Total distribution net revenues decreased $1.0 million due to increased competition;
however, the current period includes net revenues of Humongous, Inc. as a distributed party
since August 2005.
    
    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 reduces existing 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 (24.3% in the current year compared with 13.3% 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 $7.1 million due to fewer
titles in development,
    
    a decrease in salary and other related expenses of $3.0 million due to office closures
in Santa Monica and Beverly, offset by
    
    increased spending of $4.7 million for certain projects currently in development at our
internal studios.
  Selling and Distribution Expenses
  
    
    significant savings in the current period on advertising ($26.8 million in the current
period as compared to $37.1 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.
 31




---



##### Table of Contents



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
    
    prior year inclusion of a $0.9 million translation gain from the liquidation of the dormant Australian subsidiary.
 Restructuring Expenses
  
    
    current period 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,
    
    current period 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 the current year.
 Gain on Sale of Intellectual Property
 Timeshift
 Depreciation and Amortization
  
    
    decrease in amortization expense of $0.3 million related to the Atari name license based
on revised expectations of future earnings, and
    
    asset write offs associated with the restructuring as well as assets becoming fully
depreciated during the year, offset by
    
    new assets placed into service during the current period.
 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
 32




---



##### Table of Contents




    
    lower credit facility interest of $0.7 million in the current period due to lower outstanding borrowings, and
    
    interest income of $0.1 million earned on a prior period income tax refund.
 Other Income (Expense)
  Provision for (Benefit from) Income Taxes
  Year ended March 31, 2004 versus year ended March 31, 2005
 Consolidated Statement of Operations (dollars in thousands):
 Year
    
    
    % of
    
    
    Year
    
    
    % ofEnded
    
    
    Net
    
    
    Ended
    
    
    Net
    
    
    (Decrease)/March 31,
    
    
    Revenues
    
    
    March 31,
    
    
    Revenues
    
    
    Increase2004
    
    
    
    
    
    
    2005Net revenues
    
    $
    468,944
    
    
    
    100.0
    %
    
    $
    407,813
    
    
    
    100.0
    %
    
    $
    (61,131
    )
    
    
    (13.0
    )%Costs and expenses:Cost of goods sold
    
    
    260,072
    
    
    
    55.5
    %
    
    
    217,065
    
    
    
    53.2
    %
    
    
    (43,007
    )
    
    
    (16.5
    )%Research and product development
    
    
    78,179
    
    
    
    16.7
    %
    
    
    68,592
    
    
    
    16.8
    %
    
    
    (9,587
    )
    
    
    (12.3
    )%Selling and distribution expenses
    
    
    85,606
    
    
    
    18.3
    %
    
    
    64,221
    
    
    
    15.7
    %
    
    
    (21,385
    )
    
    
    (25.0
    )%General and administrative expenses
    
    
    32,103
    
    
    
    6.7
    %
    
    
    35,792
    
    
    
    8.9
    %
    
    
    3,689
    
    
    
    11.5
    %Restructuring expenses
    
    
    
    
    
    
    0.0
    %
    
    
    4,932
    
    
    
    1.2
    %
    
    
    4,932
    
    
    
    100.0
    %Gain on sale of development project to a
related party
    
    
    (3,744
    )
    
    
    (0.8
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (3,744
    )
    
    
    (100.0
    )%Depreciation and amortization
    
    
    9,155
    
    
    
    2.0
    %
    
    
    10,918
    
    
    
    2.7
    %
    
    
    1,763
    
    
    
    19.3
    %Total costs and expenses
    
    
    461,371
    
    
    
    98.4
    %
    
    
    401,520
    
    
    
    98.5
    %
    
    
    (59,851
    )
    
    
    (13.0
    )%Operating income
    
    
    7,573
    
    
    
    1.6
    %
    
    
    6,293
    
    
    
    1.5
    %
    
    
    (1,280
    )
    
    
    (16.9
    )%Interest expense, net
    
    
    (7,658
    )
    
    
    (1.6
    )%
    
    
    (459
    )
    
    
    (0.1
    )%
    
    
    (7,199
    )
    
    
    (94.0
    )%Other (expense) income
    
    
    (2,068
    )
    
    
    (0.5
    )%
    
    
    42
    
    
    
    0.0
    %
    
    
    (2,110
    )
    
    
    (102.0
    )%(Loss)
income before (benefit from) provision for income taxes
    
    
    (2,153
    )
    
    
    (0.5
    )%
    
    
    5,876
    
    
    
    1.4
    %
    
    
    (8,029
    )
    
    
    (372.9
    )%(Benefit from) provision for income taxes
    
    
    (2,919
    )
    
    
    (0.7
    )%
    
    
    184
    
    
    
    0.0
    %
    
    
    (3,103
    )
    
    
    (106.3
    )%Net income
    
    
    766
    
    
    
    0.2
    %
    
    
    5,692
    
    
    
    1.4
    %
    
    
    4,926
    
    
    
    643.1
    %Dividend to parent
    
    
    (39,351
    )
    
    
    (8.4
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (39,351
    )
    
    
    (100.0
    )%(Loss) income attributable to common
stockholders
    
    $
    (38,585
    )
    
    
    (8.2
    )%
    
    $
    5,692
    
    
    
    1.4
    %
    
    $
    (44,277
    )
    
    
    (114.8
    )%
 Net Revenues
  YearsEndedMarch 31,
    
    
    (Decrease)2004
    
    
    2005Publishing
    
    $
    405,983
    
    
    $
    353,612
    
    
    $
    (52,371
    )Distribution
    
    
    62,961
    
    
    
    54,201
    
    
    
    (8,760
    )Total
    
    $
    468,944
    
    
    $
    407,813
    
    
    $
    (61,131
    )
  33




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##### Table of Contents



Publishing Platform Mix2004
    
    
    2005PlayStation 2
    
    
    35.2
    %
    
    
    39.4
    %PC
    
    
    29.2
    %
    
    
    25.9
    %Xbox
    
    
    13.5
    %
    
    
    11.9
    %Game Boy Advance
    
    
    12.1
    %
    
    
    12.0
    %Plug and Play
    
    
    0.0
    %
    
    
    4.8
    %Game Cube
    
    
    7.1
    %
    
    
    4.3
    %PlayStation
    
    
    2.7
    %
    
    
    1.0
    %Nintendo DS
    
    
    0.0
    %
    
    
    0.7
    %Game Boy Color
    
    
    0.2
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Enter the
Matrix DRIV3R
 
    
    The successful launch of DRIV3Rin June 2004 and the continued success of our Dragon
Ball Zfranchise have contributed to the generation of $353.6 million of net publishing
revenues for the year ended March 31, 2005. Full year domestic net revenues on DRIV3Rwere
approximately $41.8 million compared with full year domestic net revenues of Enter the
Matrixin the prior year of approximately $87.4 million. The Dragon Ball Zfranchise which
generated fiscal 2005 net revenues of $85.9 million was 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). The Dragon Ball Zfranchise generated $85.0 million in the
prior year primarily from sales of Budokai 2(PlayStation 2). Other new releases in fiscal
2005 included RollerCoaster Tycoon 3(PC), TRANSFORMERS(PlayStation 2), Duel Masters:
Sempai Legends(PlayStation 2 and Game Boy Advance), Atari Anthology(PlayStation 2 and
Xbox), and Atari Flashback, a plug and play classic game console.
    
    Publishing net revenues include international royalty income earned on IESAs
international sales of our titles. International royalty income decreased by $10.2 million
from $28.9 million in the year ended March 31, 2004 to $18.7 million in fiscal 2005, due to
higher international royalty income from Enter the Matrix, Unreal Tournament 2004, Mission
Impossible 2,and Terminator 3: Rise of the Machines, totaling $26.7 million in the prior
year compared with income from DRIV3Rof $16.0 million in the 2005 fiscal year. The
decrease included a favorable exchange rate impact in the 2005 fiscal year of approximately
$1.8 million from the weakening U.S. dollar against the euro.
    
    Domestic licensing and other income, included in publishing net revenues, increased
approximately $8.7 million or 51.2% to $25.7 million in fiscal 2005 from $17.0 million in
the prior year. We recognized $17.4 million in domestic licensing income, an increase of
$2.7 million or 18.4%, primarily from the recognition of the Duke Nukem Royalty Advance
Promissory Note of $4.3 million. Additionally, we recognized $4.0 million in fees paid by
Microsoft to develop DRIV3Rfor the Xbox platform; $1.2 million in in-game advertising
revenue; and $2.4 million in sales of quality and assurance services to Atari Interactive.
In fiscal 2004, we recognized $3.5 million of previously deferred revenue in sublicensing
income as a result of the termination of our sublicensing arrangement with Microsoft and
the retention of a previously collected nonrefundable advance.
    
    The overall ASP of the publishing business increased in fiscal 2005 by 10.0% over the
prior year from $17.92 to $19.71 due to:
 °
    
    sales of Atari Flashback, which had an average sales price of approximately $30.00 per unit, and°
    
    an improvement in the ASP of PC titles from $11.85 to $14.06,°
    
    a relatively flat console ASP (approximately $23.00), and°
    
    a relatively consistent platform mix. The 2005 year mix consisted of
69.3% console product, 25.9% PC product, and 4.8% Atari Flashback product. The
prior years mix consisted of 70.8% console product and 29.2% PC product.
 34




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##### Table of Contents




    
    Total distribution net revenues decreased $8.8 million due to increased competition.
 Cost of Goods Sold
  
    
    lower average unit costs as a percentage of ASPs on the console products within the
publishing business and
    
    a higher mix of international royalty income on which we incur lower costs, as well as
higher licensing and other revenue with lower associated royalty costs.
 Research and Product Development Expenses
  
    
    a planned reduction in the number of titles in development with external developers,
    
    bonus expense of $0.6 million in the fiscal 2005 period versus prior years expense of
$3.0 million (including a $1.5 million completion bonus related to Enter the Matrix), and
    
    savings over the prior year from the closure of the Legend and Minnesota studios in
fiscal 2004, partially offset by
    
    increased spending for certain projects in development at our internal studios.
  Selling and Distribution Expenses
  
    
    significant savings in fiscal 2005 on advertising ($37.1 million as compared to $53.6
million in the prior year) due to stricter rationalization of advertising funds and fewer
new titles released,
    
    lower variable distribution costs, including freight, shipping and handling, on lower
sales,
    
    reduced inventory warehousing costs due to increased inventory turn (5.4 in 2004 versus
6.7 in 2005) and a reduced number of active titles,
    
    bonus expense of $0.2 million in the current period versus $1.2 million in the prior period, and
    
    savings in salaries and related overhead costs from the closure of the Minnesota studio in fiscal 2004.
 General and Administrative Expenses
  
    
    bonus expense of $0.3 million in the current period compared with a reversal of $1.6 million in the 2004 year,
    
    increased external spending of approximately $1.1 million for Sarbanes-Oxley compliance work,
    
    increased professional and legal fees of approximately $0.7 million,
 35




---



##### Table of Contents




    
    general salary increases and the addition of fully salaried senior executives, offset by
    
    the recognition of a $0.9 million translation gain from the liquidation of the dormant
Australian subsidiary in the first quarter of the 2005 year.
 Restructuring Expenses
  Gain on Sale of Development Project
  Depreciation and Amortization
  Interest Expense, net
  
    
    our September 2003 recapitalization whereby all outstanding related party debt was
converted to equity (savings of $6.8 million in interest expense over the prior year), and
    
    interest income of $0.9 million earned on the various related party notes receivable
outstanding during the period.
  Other (Expense) Income
  (Benefit from) Provision for Income Taxes
  Dividend to Parent
  36




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##### Table of Contents



Liquidity and Capital Resources
 Overview
   Cash Flows
 (in thousands)
 March 31,
    
    March 31,2005
    
    2006Cash
    
    $
    10,438
    
    
    $
    15,386Working capital (deficit)
    
    $
    33,655
    
    
    $
    (3,711
    )
 Year
    
    
    YearEnded
    
    
    EndedMarch 31,
    
    
    March 31,2005
    
    
    2006Cash provided by (used in) operating activities
    
    $
    2,918
    
    
    $
    (15,982
    )Cash (used in) provided by investing activities
    
    
    (2,112
    )
    
    
    13,774Cash (used in) provided by financing activities
    
    
    (17
    )
    
    
    7,211Effect of exchange rates on cash
    
    
    28
    
    
    
    (55
    )Net increase in cash
    
    $
    817
    
    
    $
    4,948
     37




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##### Table of Contents



Selected Balance Sheet Accounts
 Receivables, net
 Dragon Ball Z: Sagas Getting Up:
Contents Under Pressure Driver: Parallel Lines
 Prepaid Expenses and Other Current Assets
  Due from Related Parties/Due to Related Parties
  Sale of Studio
 Driver
 Credit Facilities
 HSBC Loan and Security Agreement
   38




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##### Table of Contents



GECC Senior Credit Facility
  Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    Total2007
    
    $
    2,132
    
    
    $
    16,305
    
    
    $
    3,947
    
    
    $
    351
    
    
    $
    22,7352008
    
    
    100
    
    
    
    4,911
    
    
    
    1,509
    
    
    
    199
    
    
    
    6,7192009
    
    
    75
    
    
    
    4,630
    
    
    
    720
    
    
    
    13
    
    
    
    5,4382010
    
    
    75
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    7752011
    
    
    
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    700Thereafter
    
    
    
    
    
    
    
    
    
    
    292
    
    
    
    
    
    
    
    292Total
    
    $
    2,382
    
    
    $
    25,846
    
    
    $
    7,868
    
    
    $
    563
    
    
    $
    36,659
 
 (1)
    
    We have committed to pay advance payments under certain royalty and license
agreements. The payments of these obligations are dependent on the delivery of the
contracted services by the developers.(2)
    
    Milestone payments represent royalty advances to developers for products that are
currently in development. Although milestone payments are not guaranteed, we expect to
make these payments if all deliverables and milestones are met timely and accurately.(3)
    
    We account for our leases as operating leases, with expiration dates ranging from
fiscal 2007 through fiscal 2012. These are future minimum annual rental payments
required under the leases, inclding a related party sub-lease with
Atari Interactive, net of $2.1 million of sublease income to be
received from fiscal 2007 through fiscal 2009.As of June 2006, we entered into a new lease at our current headquarters in New York. The
lease commencement date will be July 1, 2006, and the term of the lease is 15 years. Upon
entering into the new lease, our existing lease, originally set to expire in December 2006,
was terminated. See Note 21 for further details.(4)
    
    We have entered into several capital leases for computer equipment. Per Financial
Accounting Standards Board, or 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, 2005, the net book value of the assets, included within property
and equipment on the balance sheet, was $0.3 million, net of accumulated depreciation of
$0.1 million. As of March 31, 2006, the net book value of the assets was $0.5 million,
net of accumulated depreciation of $0.3 million. Effect of Relationship with IESA on Liquidity
  39




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##### Table of Contents



Recent Accounting Pronouncements
        
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Currency Exchange Rates
  40




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##### Table of Contents



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, 2005 and March 31, 2006
    
    
    F-2Consolidated Statements of Operations for the
Years Ended March 31, 2004, 2005, and 2006
    
    
    F-3Consolidated Statements of Cash Flows for the Years Ended March 31, 2004, 2005, and 2006
    
    
    F-4Consolidated Statements of Stockholders Equity (Deficiency) and Comprehensive Income (Loss) for the
Years Ended March 31, 2004, 2005, and 2006
    
    
    F-6Notes to the Consolidated Financial Statements
    
    F-7 to F-34FINANCIAL STATEMENT SCHEDULESchedule IIValuation and Qualifying Accounts for the
Years Ended March 31, 2004, 2005, and 2006
    
    
    F-35
 
 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
  41




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##### Table of Contents




    
    During February 2006 prior to the filing of our December 31, 2005 Form 10-Q, we
determined that we needed to restate our consolidated statement of cash flows for the
nine months ended December 31, 2004 as a result of a material weakness in internal
controls over financial reporting. Specifically, the controls in
place as they relate to the financial close and reporting review
process failed to detect certain accounting errors. Further, during the
fourth quarter of March 31, 2006, the financial close and
reporting review process failed to
detect an accounting error related to license amortization expense. Accordingly,
management has determined that this control deficiency constitutes a material weakness.
 
    
    Certain of our internal controls were dependent upon computer-generated information
but were not designed to ensure the integrity of that information prior to its use. As
a result, we were not able to provide reasonable assurance that only valid orders
are recorded and processed and that credit notes and adjustments to revenue, accounts
receivable and cost of sales are accurately calculated and recorded. Accordingly,
management has determined that this control deficiency constitutes a material weakness.
    
    Certain of our internal controls were dependent upon computer-generated information
but were not designed to ensure the integrity of that information prior to its use. As
a result, we were not able to provide reasonable assurance that payments had been
properly approved and disbursed to the appropriate suppliers, nor that they were
recorded in the appropriate period. Accordingly, management has determined that this
control deficiency constitutes a material weakness.
    
    We did not maintain adequate controls over payroll records and related
reconciliations at one of our development studios. Specifically, the studio did not
effectively maintain required employee records. Further, the development studio did
not effectively perform formal monthly reconciliations related to its payroll accounts
and related bank statements. Accordingly, when aggregated, management has determined
that these control deficiencies constitute a material weakness.
    
    We did not maintain adequate controls over income tax
accounts and related disclosures. Specifically, these controls failed
to ensure the proper calculations and presentation of our required
income tax footnote disclosures. Accordingly, management has
determined that this control deficiency constitutes a material
weakness.
 Internal Control-Integrated Framework
   
 Changes in Internal Control over Financial Reporting
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
     Financial Closing and Reporting Process
  Revenue, Cost of Sales and Accounts Receivable Process
  Accounts Payable Process
  Payroll Controls  Reflections Development Studio
  Accounting for Income Taxes
   Internal
ControlIntegrated Framework Internal
ControlIntegrated Framework
   
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ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 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.
  
 ITEM 14 . PRINCIPAL ACCOUNTANT FEES AND SERVICES
  44




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##### Table of Contents



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
    
    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, 1998.3.3
    
    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, 2003.3.4
    
    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.
 45




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##### Table of Contents



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, 2005.10.7
    
    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. **10.10
    
    Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A.
and its subsidiaries. **10.11
    
    Production Services Agreement, dated as of March 31, 2006, between us and Infogrames
Entertainment S.A. and its subsidiaries. **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
    
    Credit Agreement, dated as of November 12, 2002, among us, as Borrower, the other credit
parties signatory thereto, the lenders signatory thereto from time to time, General Electric
Capital Corporation, as Administrative Agent, Agent and Lender, and GECC Capital Markets
Group, Inc., as Lead Arranger, is incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on November 19, 2002. ***10.14
    
    First Amendment and Consent to the Credit Agreement, dated as of March 28, 2003, among us,
as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from
time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender
is incorporated herein by reference to Exhibit 10.57a to our Transition Report on Form 10-K
for the fiscal year ended March 31, 2003.10.15
    
    Second Amendment and Consent to the Credit Agreement, dated as of April 15, 2003, among us,
as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from
time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender
is incorporated herein by reference to Exhibit 10.57b to our Transition Report on Form 10-K
for the fiscal year ended March 31, 2003.10.16
    
    Third Amendment and Waiver to the Credit Agreement, dated as of July 11, 2003, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.57c to our Transition Report on Form 10-K for
the fiscal year ended March 31, 2003.10.17
    
    Fourth Amendment and Consent to the Credit Agreement, dated as of September 12, 2003, among
us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto
from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and
Lender is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 2003.10.18
    
    Fifth Amendment to the Credit Agreement, dated as of October 15, 2003, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2003.
 46




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##### Table of Contents



10.19
    
    Sixth Amendment to the Credit Agreement, dated as of December 23, 2003, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 2003.10.20
    
    Seventh Amendment to the Credit Agreement, dated as of March 31, 2004, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender, is
incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the
year ended March 31, 2004.10.21
    
    Eighth Amendment to the Credit Agreement, dated as of May 20, 2004, among us, as Borrower,
the other credit parties signatory thereto, the lenders signatory thereto from time to time,
General Electric Capital Corporation, as Administrative Agent, Agent and Lender, is
incorporated herein by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the
year ended March 31, 2004.10.22
    
    Consent to Credit Agreement, dated as of July 15, 2004, among us, as Borrower, the other
credit parties signatory thereto, the lenders signatory thereto from time to time, and General
Electric Capital Corporation, as Administrative Agreement, Agent and Lender, is incorporated
herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004.10.23
    
    Intercreditor and Subordination Agreement, dated as of November 12, 2002, among Infogrames
Entertainment S.A, California U.S. Holdings, Inc., General Electric Capital Corporation and
the Credit Parties signatory thereto, is incorporated herein by reference to Exhibit 10.2 to
our Quarterly Report on Form 10-Q filed on February 14, 2003.10.24
    
    First Amendment to Intercreditor and Subordination Agreement, dated as of December 23, 2003,
among Infogrames Entertainment S.A, California U.S. Holdings, Inc., Atari Interactive, Inc.,
General Electric Capital Corporation and the Credit Parties signatory thereto is incorporated
herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 2003.10.25
    
    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, 2005.10.26
    
    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, 2005.10.27*
    
    Letter of Employment, dated as of April 23, 2002, between David Perry and us is incorporated
herein by reference to Exhibit 10.53 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2002.10.28*
    
    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, 1996.10.29*
    
    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, 1997.10.30*
    
    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,
1998.10.31*
    
    The 2000 Stock Incentive Plan is incorporated herein by reference to Appendix B to our proxy
statement dated June 29, 2000.10.32*
    
    Amendment No. 1 to 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit
A to our Information Statement dated November 27, 2000.10.33*
    
    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, 2004.10.34*
    
    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.
 47




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##### Table of Contents



10.35*
    
    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, 2005.10.36*
    
    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, 2005.10.37*
    
    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, 1998.10.38*
    
    Description of Registrants Annual Incentive Plan for
fiscal 2006. **10.39*
    
    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, 2004.10.40
    
    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, 2005.10.41*
    
    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, 2004.10.42*
    
    Employment Agreement, dated November 26, 2004, by and between us and James Caparro is
incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2004.10.43*
    
    Letter Agreement by and between us and Diane Price Baker, dated January 24, 2005 is
incorporated by reference to Exhibit 10.34 to our Annual Report on Form 10-K for the year
ended March 31, 2005.10.44*
    
    Consulting Agreement between us and Ann Kronen, dated as of November 22, 2005, is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2005.10.45
    
    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).10.46
    
    Agreement of Lease, dated as of December 12, 1996, by and between us and F.S. Realty Corp is
incorporated herein by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the
year ended December 31, 1996.10.47
    
    First Amendment of Lease dated July 1, 1997 by and between us and F.S. Realty Corporation is
incorporated by reference to Exhibit 10.37 to our Annual Report on Form 10-K for the year
ended March 31, 2005.10.48
    
    Lease Agreement between us and Netbreeders Realty LLC, dated November 1, 1999, is
incorporated herein by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
 48




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##### Table of Contents



10.49
    
    Sublease Agreement between us and SAVI Technology, Inc., dated May 30, 2001, is incorporated
herein by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2001.10.50
    
    Lease Agreement between us and Edward Silver, Co-Trustee of the Silver Trust and Paul
Weinstein, Co-Trustee of the Weinstein Trust (dba PTL Realty), dated May 7, 2001, is
incorporated herein by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.10.51
    
    Lease Agreement between us and MV 1997, L.L.C., dated November 24, 1997, is incorporated
herein by reference to Exhibit 10.16 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2001.10.52
    
    Lease Agreement between Parabola Estates Limited and Reflections Interactive Limited dated
September 10, 2001 is incorporated herein by reference to Exhibit 10.56 to our
Annual Report on Form 10-K for the fiscal year ended June 30, 2002.10.53
    
    Lease Agreement between Prima Development Corp. and us dated May 17, 2002 is incorporated
herein by reference to Exhibit 10.55 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2002.10.54
    
    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.10.55
    
    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, 2005.10.56
    
    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.***10.57
    
    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.***10.58
    
    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.10.59
    
    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.10.60
    
    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.10.61
    
    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.10.62
    
    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.10.63
    
    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, 2004.10.64
    
    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.10.65
    
    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.10.66
    
    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, 2005.10.67
    
    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.
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##### Table of Contents



10.68
    
    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, 2004.10.69
    
    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, 2004.10.70
    
    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, 2004.10.71
    
    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, 2004.10.72
    
    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, 2005.10.73
    
    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, 2005.10.74
    
    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, 2005.10.75
    
    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, 2005.21.1
    
    List of Subsidiaries. **23.1
    
    Consent of Deloitte & Touche LLP. **31.1
    
    Chief Executive Officer and Acting Chief Financial Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. **32.1
    
    Certification by the Chief Executive Officer and 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. **99.6
    
    Confidential License Agreement for Nintendo DS (Western Hemisphere), by and between Nintendo
of America, Inc. and us effective October 14, 2005. **
   
     50




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##### Table of Contents



SIGNATURE
  ATARI, INC.By:
    /s/ Bruno BonnellName:
    Bruno BonnellTitle:
    Chief Executive Officer and
Acting Chief Financial OfficerDate:
    June 29, 2006  Signature
    
    Title(s)
    
    Date/s/       Bruno Bonnell

Bruno Bonnell
    
    Chief Executive Officer (principal executive officer),
Acting Chief Financial Officer (principal financial
officer), and Director
    
    June 26, 2006/s/  Arturo Rodriguez

Arturo Rodriguez
    
    Vice President and Controller (principal
accounting officer)
    
    June 29, 2006/s/ James Ackerly

James Ackerly
    
    Director
    
    June 26, 2006/s/ Ronald Bernard

Ronald Bernard
    
    Director
    
    June 27, 2006/s/  Michael Corrigan

Michael Corrigan
    
    Director
    
    June 26, 2006/s/  Evence Charles Coppee

Evence Charles Coppee
    
    Director
    
    June 28, 2006/s/  Denis Guyennot

Denis Guyennot
    
    Director
    
    June 27, 2006/s/  Ann E. Kronen

Ann E. Kronen
    
    Director
    
    June 26, 2006/s/  Thomas Schmider

Thomas Schmider
    
    Director
    
    June 28, 2006
 51




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 F-1




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 March 31,
    
    
    March 31,2005
    
    
    2006ASSETSCurrent assets:Cash
    
    $
    10,438
    
    
    $
    15,386Receivables, net of allowances of $24,285 and $30,918, at March 31, 2005
and March 31, 2006, respectively
    
    
    42,179
    
    
    
    12,072Inventories, net
    
    
    26,313
    
    
    
    21,361Due from related parties (Note 12)
    
    
    248
    
    
    
    4,692Prepaid expenses and other current assets
    
    
    22,789
    
    
    
    12,567Total current assets
    
    
    101,967
    
    
    
    66,078Property and equipment, net
    
    
    8,741
    
    
    
    6,364Goodwill
    
    
    70,224
    
    
    
    66,398Other assets
    
    
    9,107
    
    
    
    4,830Total assets
    
    $
    190,039
    
    
    $
    143,670LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    27,787
    
    
    $
    24,809Accrued liabilities
    
    
    21,077
    
    
    
    19,836Royalties payable
    
    
    14,027
    
    
    
    14,881Due to related parties (Note 12)
    
    
    5,421
    
    
    
    10,263Total current liabilities
    
    
    68,312
    
    
    
    69,789Long-term liabilities
    
    
    1,060
    
    
    
    669Total liabilities
    
    
    69,372
    
    
    
    70,458Commitments and contingencies (Note 14)Stockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 300,000,000 shares authorized, 121,296,092
and 134,765,510 shares issued and outstanding at March 31, 2005 and
March 31, 2006, respectively
    
    
    1,213
    
    
    
    1,348Additional paid-in capital
    
    
    736,790
    
    
    
    758,165Accumulated deficit
    
    
    (619,744
    )
    
    
    (688,730
    )Accumulated other comprehensive income
    
    
    2,408
    
    
    
    2,429Total stockholders equity
    
    
    120,667
    
    
    
    73,212Total liabilities and stockholders equity
    
    $
    190,039
    
    
    $
    143,670
  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 31,2004
    
    
    2005
    
    
    2006Net revenues
    
    $
    468,944
    
    
    $
    407,813
    
    
    $
    218,661Costs and expenses:Cost of goods sold
    
    
    260,072
    
    
    
    217,065
    
    
    
    137,582Research and product development
    
    
    78,179
    
    
    
    68,592
    
    
    
    63,263Selling and distribution expenses
    
    
    85,606
    
    
    
    64,221
    
    
    
    44,846General and administrative expenses
    
    
    32,103
    
    
    
    35,792
    
    
    
    30,385Restructuring expenses
    
    
    
    
    
    
    4,932
    
    
    
    8,867Gain on sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    (6,224
    )Gain on sale of development project to a related party
    
    
    (3,744
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    9,155
    
    
    
    10,918
    
    
    
    8,530Total costs and expenses
    
    
    461,371
    
    
    
    401,520
    
    
    
    287,249Operating income (loss)
    
    
    7,573
    
    
    
    6,293
    
    
    
    (68,588
    )Interest expense, net
    
    
    (7,658
    )
    
    
    (459
    )
    
    
    (595
    )Other (expense) income
    
    
    (2,068
    )
    
    
    42
    
    
    
    (208
    )(Loss) income before (benefit from) provision for
income taxes
    
    
    (2,153
    )
    
    
    5,876
    
    
    
    (69,391
    )(Benefit from) provision for income taxes
    
    
    (2,919
    )
    
    
    184
    
    
    
    (405
    )Net income (loss)
    
    
    766
    
    
    
    5,692
    
    
    
    (68,986
    )Dividend to parent
    
    
    (39,351
    )
    
    
    
    
    
    
    (Loss) income attributable to common stockholders
    
    $
    (38,585
    )
    
    $
    5,692
    
    
    $
    (68,986
    )Basic and diluted (loss) income per share:Net income (loss)
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.54
    )Dividend to parent
    
    
    (0.41
    )
    
    
    
    
    
    
    (Loss) income attributable to common stockholders
    
    $
    (0.40
    )
    
    $
    0.05
    
    
    $
    (0.54
    )Basic weighted average shares outstanding
    
    
    96,990
    
    
    
    121,276
    
    
    
    128,631Diluted weighted average shares outstanding
    
    
    96,990
    
    
    
    121,587
    
    
    
    128,631
   F-3




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 YearsEndedMarch 31,2004
    
    
    2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    766
    
    
    $
    5,692
    
    
    $
    (68,986
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    9,155
    
    
    
    10,918
    
    
    
    8,530Gain on sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    (6,224
    )Modification of stock options
    
    
    
    
    
    
    139
    
    
    
    Non-cash restructuring charges
    
    
    
    
    
    
    596
    
    
    
    834Loss on sale of IESA shares
    
    
    
    
    
    
    
    
    
    
    239Recognition of cumulative translation adjustment from foreign subsidiary
    
    
    
    
    
    
    (859
    )
    
    
    Loss on sale of investment
    
    
    1,750
    
    
    
    
    
    
    
    Amortization of discount on related party debt
    
    
    1,339
    
    
    
    
    
    
    
    Accrued interest
    
    
    1,903
    
    
    
    23
    
    
    
    20Amortization of deferred financing fees
    
    
    2,466
    
    
    
    822
    
    
    
    514Recognition of deferred income
    
    
    (3,577
    )
    
    
    (2,107
    )
    
    
    (77
    )Write-off of property and equipment
    
    
    38
    
    
    
    206
    
    
    
    24Changes in operating assets and liabilities:Receivables, net
    
    
    9,346
    
    
    
    (4,472
    )
    
    
    30,094Inventories, net
    
    
    10,307
    
    
    
    1,207
    
    
    
    4,061Due from related parties
    
    
    (9,364
    )
    
    
    (12,292
    )
    
    
    (4,120
    )Due to related parties
    
    
    (6,774
    )
    
    
    23,464
    
    
    
    12,662Prepaid expenses and other current assets
    
    
    4,320
    
    
    
    (8,619
    )
    
    
    6,460Accounts payable
    
    
    (1,840
    )
    
    
    (10,072
    )
    
    
    (2,875
    )Accrued liabilities
    
    
    (17,972
    )
    
    
    4,471
    
    
    
    (1,778
    )Royalties payable
    
    
    2,027
    
    
    
    (454
    )
    
    
    2,962Long-term liabilities
    
    
    (298
    )
    
    
    (529
    )
    
    
    (15
    )Other assets
    
    
    (286
    )
    
    
    (5,216
    )
    
    
    1,693Net cash provided by (used in) operating activities
    
    
    3,306
    
    
    
    2,918
    
    
    
    (15,982
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of IESA shares
    
    
    
    
    
    
    
    
    
    
    10,051Proceeds from sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    6,224Purchases of property and equipment
    
    
    (5,128
    )
    
    
    (2,129
    )
    
    
    (2,529
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    17
    
    
    
    28Advances to related parties
    
    
    (14,368
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (19,496
    )
    
    
    (2,112
    )
    
    
    13,774
  F-4




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##### Table of Contents



YearsEndedMarch 31,2004
    
    
    2005
    
    
    2006CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    7,264Payments under General Electric Capital Corporation Senior Credit Facility, net
    
    
    (10,651
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    518
    
    
    
    92
    
    
    
    132Payments under capitalized lease obligation
    
    
    
    
    
    
    (109
    )
    
    
    (185
    )Net proceeds from public stock offering
    
    
    34,875
    
    
    
    
    
    
    
    Proceeds from employee stock purchase plan
    
    
    104
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    24,846
    
    
    
    (17
    )
    
    
    7,211Effect of exchange rates on cash
    
    
    150
    
    
    
    28
    
    
    
    (55
    )Net increase in cash
    
    
    8,806
    
    
    
    817
    
    
    
    4,948Cash  beginning of fiscal year
    
    
    815
    
    
    
    9,621
    
    
    
    10,438Cash  end of fiscal year
    
    $
    9,621
    
    
    $
    10,438
    
    
    $
    15,386SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    
    5,984
    
    
    
    450
    
    
    
    319Cash paid for taxes
    
    
    739
    
    
    
    
    
    
    
    Income tax refunds
    
    
    18
    
    
    
    764
    
    
    
    1,473SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING,
INVESTING, AND FINANCING ACTIVITIES:Receipt of IESA stock for prepayment of Humongous, Inc. inventory and other costs
    
    
    
    
    
    
    
    
    
    
    1,972Issuance of shares of common stock in lieu of partial royalty payment
    
    
    1,199
    
    
    
    
    
    
    
    2,109Sale of Humongous Entertainment in exchange for shares of IESA stock
    
    
    
    
    
    
    
    
    
    
    8,318Issuance of 6,145,051 shares of common stock in lieu of payment of net related party
payables
    
    
    
    
    
    
    
    
    
    
    7,988Capital lease obligation for computer equipment
    
    
    
    
    
    
    452
    
    
    
    337Issuance of related party notes receivable
    
    
    (8,571
    )
    
    
    
    
    
    
    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
    
    
    
    Acquisition of Atari license for 2,000 shares of common stock
    
    
    8,500
    
    
    
    
    
    
    
    Net debt exchanged for 39,030 shares of common stock:Related party debt, revolving credit facility and related party medium-term loan prior
to recapitalization of debt
    
    $
    212,429
    
    
    $
    
    
    
    $
    Less: Offset of advances to related parties against related party debt
    
    
    (46,552
    )
    
    
    
    
    
    
    Net debt exchanged for common stock
    
    $
    165,877
    
    
    $
    
    
    
    $
    
  F-5




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY) AND
 COMPREHENSIVE INCOME (LOSS)
 FOR THE YEARS ENDED MARCH 31, 2004, 2005, AND 2006
 (in thousands)
 AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    OtherStock
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance, March 31, 2003
    
    
    69,920
    
    
    $
    699
    
    
    $
    486,053
    
    
    $
    (586,851
    )
    
    $
    3,181
    
    
    $
    (96,918
    )Issuance of common stock pursuant to employee stock
purchase plan
    
    
    47
    
    
    
    1
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    104Exercise of stock options
    
    
    120
    
    
    
    1
    
    
    
    517
    
    
    
    
    
    
    
    
    
    
    
    518Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    766
    
    
    
    
    
    
    
    766Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    142Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908Cashless exercise of warrants
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock in lieu of partial
royalty payment
    
    
    280
    
    
    
    3
    
    
    
    1,196
    
    
    
    
    
    
    
    
    
    
    
    1,199Issuance of 39,030 common shares as part of the
Companys recapitalization in exchange for
cancellation of related party debt, related party
credit
facility and related party medium-term loan
    
    
    39,030
    
    
    
    390
    
    
    
    165,487
    
    
    
    
    
    
    
    
    
    
    
    165,877Dividend to parent as part of the recapitalization of
related party debt to common shares
    
    
    
    
    
    
    
    
    
    
    39,351
    
    
    
    (39,351
    )
    
    
    
    
    
    
    Issuance of 2,000 common shares for license of the
Atari name
    
    
    2,000
    
    
    
    20
    
    
    
    8,480
    
    
    
    
    
    
    
    
    
    
    
    8,500Issuance of 9,821 common shares in secondary
offering, net of expenses
    
    
    9,821
    
    
    
    98
    
    
    
    34,777
    
    
    
    
    
    
    
    
    
    
    
    34,875Balance, March 31, 2004
    
    
    121,231
    
    
    
    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
    
    
    44
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    21
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44Issuance of stock options to related party
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48Modification of stock options
    
    
    
    
    
    
    
    
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    735Balance, March 31, 2005
    
    
    121,296
    
    
    
    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
    
    
    63
    
    
    
    1
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    132Modification of stock options
    
    
    
    
    
    
    
    
    
    
    404
    
    
    
    
    
    
    
    
    
    
    
    404Issuance of common stock in lieu of partial royalty
payment
    
    
    1,558
    
    
    
    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 12)
    
    
    6,145
    
    
    
    61
    
    
    
    7,927
    
    
    
    
    
    
    
    
    
    
    
    7,988Issuance of common stock (Note 2)
    
    
    5,703
    
    
    
    57
    
    
    
    7,207
    
    
    
    
    
    
    
    
    
    
    
    7,264Balance, March 31, 2006
    
    
    134,765
    
    
    $
    1,348
    
    
    $
    758,165
    
    
    $
    (688,730
    )
    
    $
    2,429
    
    
    $
    73,212
  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
     Principles of Consolidation
  F-7




---



##### Table of Contents



Reclassifications
  Revenue recognition, sales returns, price protection, other customer related allowances and
allowance for doubtful accounts
    Concentration of Credit Risk
  Use of Estimates
  Cash
  Inventories
  Property and Equipment
  F-8




---



##### Table of Contents



Useful LivesComputer equipment
    
    3 yearsCapitalized computer software
    
    3-5 yearsFurniture and fixtures
    
    7 yearsMachinery and equipment
    
    5 years
  Fair Values of Financial Instruments
  Long-Lived Assets
  Research and Product Development Costs
   Licenses
  F-9




---



##### Table of Contents



Atari Name License
  Advertising Expenses
  Goodwill and Other Intangible Assets
   Income Taxes
  Foreign Currency Translation and Foreign Exchange Gains (Losses)
   Shipping, Handling and Warehousing Costs
  Stock-Based Compensation
  F-10




---



##### Table of Contents



Years EndedMarch 31,2004
    
    
    2005
    
    
    2006Net income (loss)  as reported
    
    $
    766
    
    
    $
    5,692
    
    
    $
    (68,986
    )Add: Stock-based employee compensation expense
included in reported net income (loss), net of
related tax effects
    
    
    
    
    
    
    735
    
    
    
    404Less: Fair value of stock-based employee
compensation expense, net of related tax effects
    
    
    (5,962
    )
    
    
    (5,294
    )
    
    
    (1,731
    )Pro forma net (loss) income
    
    $
    (5,196
    )
    
    $
    1,133
    
    
    $
    (70,313
    )Dividend to parent
    
    
    (39,351
    )
    
    
    
    
    
    
    Pro forma (loss) income attributable to common stockholders
    
    $
    (44,547
    )
    
    $
    1,133
    
    
    $
    (70,313
    )Basic and diluted net income (loss) per share  as reported
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.54
    )Pro forma basic and diluted net (loss) income per share
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.55
    )Basic and diluted (loss) income per share attributable to
common stockholders  as reported
    
    $
    (0.40
    )
    
    $
    0.05
    
    
    $
    (0.54
    )Pro forma basic and diluted (loss) income per share
attributable to common stockholders
    
    $
    (0.46
    )
    
    $
    0.01
    
    
    $
    (0.55
    )
  Years EndedMarch 31,2004
    
    
    2005
    
    
    2006Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Anticipated volatility
    
    
    120
    %
    
    
    95
    %
    
    
    92
    %Expected lives
    
    4 years
    
    4 years
    
    4 years
  (Loss) Income Per Share Attributable to Common Stockholders
  F-11




---



##### Table of Contents



Years EndedMarch 31,2004
    
    
    2005
    
    
    2006Basic and diluted earnings per share calculation:Net income (loss)
    
    $
    766
    
    
    $
    5,692
    
    
    $
    (68,986
    )Dividend to parent
    
    
    (39,351
    )
    
    
    
    
    
    
    (Loss) income attributable to common stockholders
    
    $
    (38,585
    )
    
    $
    5,692
    
    
    $
    (69,986
    )Basic weighted average shares outstanding
    
    
    96,990
    
    
    
    121,276
    
    
    
    128,631Dilutive effect of stock options and warrants
    
    
    
    
    
    
    311
    
    
    
    Diluted weighted average shares outstanding
    
    
    96,990
    
    
    
    121,587
    
    
    
    128,631Basic and diluted net income (loss) per share
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.54
    )Basic and diluted (loss) per share  dividend to parent
    
    
    (0.41
    )
    
    
    
    
    
    
    Basic and diluted (loss) income per share attributable to common
Stockholders
    
    $
    (0.40
    )
    
    $
    0.05
    
    
    $
    (0.54
    )
  Recent Accounting Pronouncements
      F-12




---



##### Table of Contents



Note 2  Stockholders Equity
 Sale of common stock to third-party investors
  Sale of Humongous Entertainment
  Issuance of common stock as settlement of certain net related party balances
  Other equity matters
     Note 3  Concentration of Credit Risk
  F-13




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##### Table of Contents



For the year endedMarch 31,
    
    
    March 31,2005
    
    
    2005% of Accounts Receivable
    
    
    % of Net RevenuesCustomer 1
    
    
    23
    %
    
    
    26
    %Customer 2
    
    
    21
    %
    
    
    14
    %Customer 3
    
    
    10
    %
    
    
    12
    %54
    %
    
    
    52
    %
  For the year endedMarch 31,
    
    
    March 31,2006
    
    
    2006% of Accounts Receivable
    
    
    % of Net RevenuesCustomer 1
    
    
    25
    %
    
    
    13
    %Customer 2
    
    
    15
    %
    
    
    13
    %Customer 3
    
    
    14
    %
    
    
    31
    %Customer 4
    
    
    11
    %
    
    
    9
    %65
    %
    
    
    66
    %
  Note 4  Goodwill and Intangibles
  March 31,2005
    
    
    2006Beginning balance
    
    $
    70,224
    
    
    $
    70,224Sale of Humongous Entertainment studio (1)
    
    
    
    
    
    
    (3,826
    )Ending balance
    
    $
    70,224
    
    
    $
    66,398
 
 (1)
    
    As part of the sale transaction, $3.8 million of the goodwill associated with our
publishing business was allocated to Humongous, Inc., a related party (see Note 16).  Note 5  Inventories, net
  March 31,
    
    
    March 31,2005
    
    
    2006Finished
goods
    
    $
    22,830
    
    
    $
    19,182Return
inventory
    
    
    3,379
    
    
    
    2,106Raw
materials
    
    
    104
    
    
    
    73$
    26,313
    
    
    $
    21,361
 F-14




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##### Table of Contents



Note 6  Prepaid Expenses and Other Current Assets
  March 31,
    
    
    March 31,2005
    
    
    2006Licenses short-term
    
    $
    6,905
    
    
    $
    5,954Royalties receivable
    
    
    6,551
    
    
    
    2,118Prepaid insurance
    
    
    1,130
    
    
    
    872Atari name license
    
    
    3,350
    
    
    
    305Prepaid broker fee
    
    
    102
    
    
    
    81Deferred financing fees
    
    
    131
    
    
    
    33Income taxes receivable
    
    
    1,533
    
    
    
    23Other prepaid expenses and current assets
    
    
    3,087
    
    
    
    3,181$
    22,789
    
    
    $
    12,567
  Note 7  Oddworld Inhabitants, Inc.
   Note 8  Property and Equipment, net
  F-15




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##### Table of Contents



March 31,
    
    
    March 31,2005
    
    
    2006Capitalized computer software
    
    $
    16,355
    
    
    $
    17,741Computer equipment
    
    
    20,793
    
    
    
    14,206Leasehold improvements
    
    
    7,402
    
    
    
    6,418Furniture and fixtures
    
    
    4,417
    
    
    
    2,362Machinery and equipment
    
    
    309
    
    
    
    24549,276
    
    
    
    40,972Less: accumulated depreciation
    
    
    (40,535
    )
    
    
    (34,608
    )$
    8,741
    
    
    $
    6,364
  Note 9  Accrued Liabilities
  March 31,
    
    
    March 31,2005
    
    
    2006Accrued advertising
    
    $
    1,810
    
    
    $
    3,772Accrued distribution services
    
    
    3,332
    
    
    
    3,713Restructuring reserve (Note 17)
    
    
    1,885
    
    
    
    2,163Accrued salary and related costs
    
    
    3,505
    
    
    
    1,943Accrued third-party development expenses
    
    
    4,366
    
    
    
    1,808Accrued professional fees and other services
    
    
    1,418
    
    
    
    1,701Accrued freight and handling fees
    
    
    1,141
    
    
    
    1,029Deferred
income
    
    
    77
    
    
    
    381Income taxes payable
    
    
    500
    
    
    
    85Other
    
    
    3,043
    
    
    
    3,241$
    21,077
    
    
    $
    19,836
 Note 10  Income Taxes
  Years EndedMarch 31,2004
    
    
    2005
    
    
    2006United States
    
    $
    6,745
    
    
    $
    16,271
    
    
    $
    (58,127
    )Foreign
    
    
    (8,898
    )
    
    
    (10,395
    )
    
    
    (11,264
    )(Loss) income before (benefit from) provision for
income taxes
    
    $
    (2,153
    )
    
    $
    5,876
    
    
    $
    (69,391
    )
  Years EndedMarch 31,2004
    
    
    2005
    
    
    2006Current:Federal
    
    $
    (2,074
    )
    
    $
    100
    
    
    $
    (284
    )State and Local
    
    
    (422
    )
    
    
    (134
    )
    
    
    76Foreign
    
    
    (423
    )
    
    
    218
    
    
    
    (197
    )Total
    
    
    (2,919
    )
    
    
    184
    
    
    
    (405
    )Deferred
    
    
    
    
    
    
    
    
    
    
    (Benefit from) provision for income taxes
    
    $
    (2,919
    )
    
    $
    184
    
    
    $
    (405
    )
 F-16




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##### Table of Contents



Years EndedMarch 31,2004
    
    
    2005
    
    
    2006(Benefit from) provision for income taxes computed at the
federal statutory rate
    
    $
    (754
    )
    
    $
    2,056
    
    
    $
    (24,286
    )Expense (benefit) from income taxes resulting from:State and local taxes, net of federal tax effect
    
    
    (422
    )
    
    
    (134
    )
    
    
    76Difference between U.S. and foreign income tax rates
    
    
    (3,537
    )
    
    
    3,420
    
    
    
    3,744Other, net
    
    
    (55
    )
    
    
    99
    
    
    
    37(Decrease) increase to deferred tax asset valuation
allowance
    
    
    1,849
    
    
    
    (5,257
    )
    
    
    20,024(Benefit from) provision for income taxes
    
    $
    (2,919
    )
    
    $
    184
    
    
    $
    (405
    )
  March 31,
    
    
    March 31,2005
    
    

2006Deferred tax asset:Inventory valuation
    
    $
    1,886
    
    
    $
    1,333Deferred income
    
    
    
    
    
    
    121Tax loss carryforwards
    
    
    197,580
    
    
    
    213,034Restructuring reserve
    
    
    787
    
    
    
    888Allowances for bad debts, returns, price protection
and other customer promotional programs
    
    
    8,210
    
    
    
    11,309In process research and development
    
    
    294
    
    
    
    (792
    )Depreciation
    
    
    266
    
    
    
    676Research and development credit carryforwards
    
    
    6,319
    
    
    
    6,410Other
    
    
    574
    
    
    
    (12
    )215,916
    
    
    
    232,967Deferred tax liability:Atari name license
    
    
    (1,369
    )
    
    
    (122
    )Duke Nukem promissory note
    
    
    (1,726
    )
    
    
    (3,095
    )
    
    
    (122
    )Subtotal
    
    
    212,821
    
    
    
    232,845Less: valuation allowance
    
    
    (212,821
    )
    
    
    (232,845
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 F-17




---



##### Table of Contents



Note 11  Stock Options and Employee Stock Purchase Plan
    March 31, 2004
    
    
    March 31, 2005
    
    
    March 31, 2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price(in thousands)
    
    
    
    
    
    (in thousands)
    
    
    
    
    
    (in thousands)Outstanding at beginning of
the fiscal year
    
    
    6,350
    
    
    $
    11.88
    
    
    
    6,878
    
    
    $
    10.62
    
    
    
    11,313
    
    
    $
    6.94Granted
    
    
    1,332
    
    
    
    4.22
    
    
    
    4,925
    
    
    
    2.11
    
    
    
    791
    
    
    
    2.57Exercised
    
    
    (120
    )
    
    
    0.61
    
    
    
    (21
    )
    
    
    0.46
    
    
    
    (64
    )
    
    
    1.33Cancelled
    
    
    (684
    )
    
    
    11.54
    
    
    
    (469
    )
    
    
    10.07
    
    
    
    (4,522
    )
    
    
    4.80Outstanding at end of fiscal year
    
    
    6,878
    
    
    $
    10.62
    
    
    
    11,313
    
    
    $
    6.94
    
    
    
    7,518
    
    
    $
    7.80
  F-18




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##### Table of Contents



Weighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    Number
    
    
    AverageExercise Price
    
    
    Number Outstanding
    
    
    Remaining Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$
    0.34-2.24
    
    
    
    2,501
    
    
    
    8.3
    
    
    $
    2.14
    
    
    
    1,178
    
    
    $
    2.11$
    2.27-5.19
    
    
    
    1,988
    
    
    
    6.7
    
    
    $
    4.19
    
    
    
    1,382
    
    
    $
    4.61$
    5.44-7.80
    
    
    
    1,757
    
    
    
    4.9
    
    
    $
    6.84
    
    
    
    1,757
    
    
    $
    6.84$
    13.75-82.50
    
    
    
    1,272
    
    
    
    2.8
    
    
    $
    25.87
    
    
    
    1,272
    
    
    $
    25.877,518
    
    
    
    
    
    
    
    
    
    
    
    5,589
 Note 12  Related Party Transactions
 Relationship with IESA
     Summary of Related Party Transactions
  F-19




---



##### Table of Contents



Years EndedMarch 31,Income (expense)
    
    2004
    
    
    2005
    
    
    2006Net revenues
    
    $
    468,944
    
    
    $
    407,813
    
    
    $
    218,661Related party activity:Royalty income (1)
    
    
    28,850
    
    
    
    18,686
    
    
    
    18,272License income
    
    
    
    
    
    
    31
    
    
    
    437Sale of goods
    
    
    1,509
    
    
    
    1,745
    
    
    
    1,120Production, quality and assurance testing and other services
    
    
    1,234
    
    
    
    2,438
    
    
    
    3,313Total related party net revenues
    
    
    31,593
    
    
    
    22,900
    
    
    
    23,142Cost of goods sold
    
    
    (260,072
    )
    
    
    (217,065
    )
    
    
    (137,582
    )Related party activity:Distribution fee for Humongous, Inc. products (Note 16)
    
    
    
    
    
    
    
    
    
    
    (6,264
    )Royalty expense (2)
    
    
    (24,988
    )
    
    
    (30,339
    )
    
    
    (14,401
    )Total related party cost of goods sold
    
    
    (24,988
    )
    
    
    (30,339
    )
    
    
    (20,665
    )Research and product development
    
    
    (78,179
    )
    
    
    (68,592
    )
    
    
    (63,263
    )Related party activity:Development expenses (3)
    
    
    (11,122
    )
    
    
    (12,578
    )
    
    
    (17,321
    )Other miscellaneous development expenses
    
    
    (164
    )
    
    
    (61
    )
    
    
    (248
    )Total related party research and product development
    
    
    (11,286
    )
    
    
    (12,639
    )
    
    
    (17,569
    )Selling and distribution expenses
    
    
    (85,606
    )
    
    
    (64,221
    )
    
    
    (44,846
    )Related party activity:Miscellaneous purchase of services
    
    
    (58
    )
    
    
    (73
    )
    
    
    (87
    )Total related party selling and distribution expenses
    
    
    (58
    )
    
    
    (73
    )
    
    
    (87
    )General and administrative expenses
    
    
    (32,103
    )
    
    
    (35,792
    )
    
    
    (30,385
    )Related party activity:Management fee revenue
    
    
    3,000
    
    
    
    3,000
    
    
    
    3,073Management fee expense
    
    
    (3,000
    )
    
    
    (3,000
    )
    
    
    (3,000
    )Office rental and other services (4)
    
    
    (422
    )
    
    
    (366
    )
    
    
    99Total related party general and administrative expenses
    
    
    (422
    )
    
    
    (366
    )
    
    
    172Restructuring expenses
    
    
    
    
    
    
    (4,932
    )
    
    
    (8,867
    )Related party activity:Office rental (4)
    
    
    
    
    
    
    
    
    
    
    (639
    )Total related party restructuring expenses
    
    
    
    
    
    
    
    
    
    
    (639
    )Gain on sale of development project to a related party
    
    
    3,744
    
    
    
    
    
    
    
    Related party activity:Gain on sale (5)
    
    
    3,744
    
    
    
    
    
    
    
    Total related party gain on sale, net
    
    
    3,744
    
    
    
    
    
    
    
    Interest (expense), net
    
    
    (7,658
    )
    
    
    (459
    )
    
    
    (595
    )Related party activity:Interest (expense) income (6)
    
    
    (4,063
    )
    
    
    887
    
    
    
    Total related party interest (expense) income, net
    
    
    (4,063
    )
    
    
    887
    
    
    
    
 
 (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.(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 F-20




---



##### Table of Contents



Related Party Notes Receivable
  Years EndedMarch 31,2004
    
    
    2005
    
    
    2006Interest expense and facility fees on credit facilities and
medium term loan
    
    $
    (2,143
    )
    
    $
    
    
    
    $
    Interest expense on 5% subordinated convertible note
    
    
    (1,680
    )
    
    
    
    
    
    
    Interest expense on non-interest bearing subordinated
convertible notes
    
    
    (1,339
    )
    
    
    
    
    
    
    Interest income on related party advances
    
    
    1,099
    
    
    
    
    
    
    
    Interest income on related party notes receivable
    
    
    
    
    
    
    887
    
    
    
    Total related party interest (expense) income
    
    $
    (4,063
    )
    
    $
    887
    
    
    $
    
 F-21




---



##### Table of Contents



Balance Sheet
  March 31,
    
    
    March 31,2005
    
    
    2006Due from/(Due to)IESA (1)
    
    $
    
    
    
    $
    (743
    )Atari Europe (2)
    
    
    (1,431
    )
    
    
    4,054Atari UK (3)
    
    
    (1,696
    )
    
    
    Eden Studios (4)
    
    
    
    
    
    
    (2,235
    )Paradigm (4)
    
    
    (154
    )
    
    
    (721
    )Atari Melbourne House (4)
    
    
    
    
    
    
    (434
    )Humongous, Inc. (5)
    
    
    
    
    
    
    (2,341
    )Atari Interactive (6)
    
    
    (2,106
    )
    
    
    (3,704
    )Other miscellaneous net receivables
    
    
    214
    
    
    
    553Net due to related parties
    
    $
    (5,173
    )
    
    $
    (5,571
    )
  March 31,
    
    
    March 31,2005
    
    
    2006Due from related parties
    
    $
    248
    
    
    $
    4,692Due to related parties
    
    
    (5,421
    )
    
    
    (10,263
    )Net due to related parties
    
    $
    (5,173
    )
    
    $
    (5,571
    )
 
 (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)
    
    Balance at March 31, 2005 represents a loan owed by our dormant UK subsidiary to
another IESA subsidiary. This note was settled through the issuance of stock in September
2005 (see below).(4)
    
    Represents net payables related to related party development activities.(5)
    
    Represents primarily distribution fees owed to Humongous, Inc., a related party,
related to sale of their product. As of March 31, 2005, Humongous existed as a development
studio within Atari, Inc. (see Note 16).(6)
    
    Comprised primarily of payables related to royalty expense from our distribution
agreement with IESA relating to properties owned or licensed by Atari Interactive, offset
primarily by receivables related to management fee revenue earned from Atari Interactive. Recapitalization
  
    
    Credit Agreement we maintained a Credit Agreement which provided for an aggregate
commitment of $75.0 million which bore interest at LIBOR plus 2.5%. This agreement
required that we comply with certain financial covenants and, among other items, restricted
capital expenditures.
 F-22




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##### Table of Contents




    
    Medium-Term Loan in connection with the acquisition of Shiny Entertainment, Inc. in
2002, we obtained a $50.0 million medium-term loan from IESA. Interest was based on the
three month LIBOR rate plus 2.75% and payable on a quarterly basis, in arrears. An unused
commitment fee of 0.50% per annum was based on the aggregate amount of the facility less
outstanding loans.
    
    0% Notes in conjunction with the 1999 purchase of us by IESA, we issued to General
Atlantic Partners LLC (GAP) the 0% Notes in exchange for 600,000 shares of Series A
Preferred Stock and $20.0 million of subordinated notes of us. In fiscal 2002, IESA
assumed the 0% Notes from GAP in exchange for shares of IESA common stock. IESA did not
change any of the terms of the 0% Notes as they related to us.
    
    5% Notes in conjunction with the 1999 purchase of us by IESA, we issued to CUSH, 5%
subordinated convertible notes in exchange for $25.0 million in cash and $35.6 million in
debt and accrued interest.
 Related Party Notes Receivable
  
    
    Development rights and advances (Atari Interactive) this note was payable at the
earlier of the release of certain development projects to the public or December 31, 2004.
One project was released to the public on September 14, 2004. In September 2004, we
offset royalties due to Atari Interactive against the portion of the principal that was
past due. The outstanding balance was converted to a secured promissory note from Atari
Interactive on November 3, 2004.
    
    Customer deductions (Atari Interactive) and loans
(Paradigm) these notes were payable
on September 30, 2004. The Atari Interactive note of $2.6 million was converted to a
secured promissory note, and the Paradigm note of $0.8 million was assigned to Atari
Interactive and transferred to a secured promissory note from Atari Interactive on November
3, 2004.
    
    Secured promissory note on November 3, 2004, we entered into an agreement with IESA
and several of its subsidiaries under which we transferred the amounts due to us from IESA
and Paradigm to Atari Interactive in exchange for a secured promissory note (the Secured
Note) from Atari Interactive that also included the sums past due to us from Atari
Interactive and a note payment that would have been due from Atari Interactive on December
31, 2004, and interest on those amounts. Specifically, the Secured Note had a principal
amount of approximately $23.1 million, a maturity date of March 31, 2005, bore annual
interest at the prime rate plus 3.25%, and was secured by 2,000,000 shares of our common
stock owned and pledged as collateral by Atari Interactive and by the rights, as owner, to
the Atari trademark and the Fuji logo in North America. The Secured Note allowed for
the netting of sums currently due to us with IESA and several of its subsidiaries. During
fiscal 2005, the entire balance of the Secured Note was offset against certain related
party trade payables. As of March 31, 2005 and 2006, no balance remained on the Secured
Note and all rights to the collateral have been released.
 Issuance of Common Stock to Related Parties
  
    
    Related Party Payables
  
    
    Settlement of Indebtedness
 F-23




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##### Table of Contents



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
  Note
13  Debt
 Credit Facilities
 HSBC Loan and Security Agreement
  F-24




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##### Table of Contents



GECC Senior Credit Facility
  Note
14  Commitments and Contingencies
 Contractual Obligations
  Contractual ObligationsRoyalty andlicense
    
    
    Milestone
    
    
    Operating lease
    
    
    Capital leaseFiscal Year
    
    advances (1)
    
    
    payments (2)
    
    
    obligations (3)
    
    
    obligations (4)
    
    
    Total2007
    
    $
    2,132
    
    
    $
    16,305
    
    
    $
    3,947
    
    
    $
    351
    
    
    $
    22,7352008
    
    
    100
    
    
    
    4,911
    
    
    
    1,509
    
    
    
    199
    
    
    
    6,7192009
    
    
    75
    
    
    
    4,630
    
    
    
    720
    
    
    
    13
    
    
    
    5,4382010
    
    
    75
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    7752011
    
    
    
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    700Thereafter
    
    
    
    
    
    
    
    
    
    
    292
    
    
    
    
    
    
    
    292Total
    
    $
    2,382
    
    
    $
    25,846
    
    
    $
    7,868
    
    
    $
    563
    
    
    $
    36,659
 
 (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. F-25




---



##### Table of Contents



(3)
    
    We account for our leases as operating leases, with expiration dates
ranging from fiscal 2007 through fiscal 2012. These are future minimum annual
rental payments required under the leases, including a related party sublease with
Atari Interactive, net of $2.1 million of sublease income to be
received from fiscal 2007 through fiscal 2009. Rent expense and
sublease income for the years ended March 31, 2004, 2005, and 2006
is as follows (in thousands): Year endedMarch 31,2004
    
    
    2005
    
    
    2006Rent expense
    
    $
    7,266
    
    
    $
    6,558
    
    
    $
    4,951Sublease income
    
    
    (742
    )
    
    
    (708
    )
    
    
    (520
    )Total
    
    $
    6,524
    
    
    $
    5,850
    
    
    $
    4,431
  (4)
    
    We have entered into several capital leases for computer equipment. Per
FASB Statement No. 13, Accounting for Leases, we account for capital leases by
recording them at the present value of the total future lease payments. They are
amortized using the straight-line method over the minimum lease term. As of March
31, 2005, the net book value of the assets, included within property and equipment
on the balance sheet, was $0.3 million, net of accumulated depreciation of $0.1
million. As of March 31, 2006, the net book value of the assets was $0.5 million,
net of accumulated depreciation of $0.3 million. Litigation
  Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II , and
Chicago West Pullman LLC
    F-26




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##### Table of Contents



American Video Graphics, L.P., v. Electronic Arts, Inc. et al.
    iEntertainment Network, Inc. v. Epic Games, Inc., Atari, Inc. Valve Corporation, Sierra
Entertainment, Inc., Sony Corporation of Japan, Sony Corporation of America, Sony Computer
Entertainment America, Inc. and Sony Online Entertainment, Inc.
  Bouchat v. Champion Products, et al. (Accolade)
  Indigo Moon Productions, LLC v. Hasbro, Inc., et al.
 F-27




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##### Table of Contents



Rafael Curulla v. SAS Atari Europe and Atari, Inc.
  Thomas Licensing, LLC v. Atari Interactive, Inc. and Atari, Inc.
   Note 15  Employee Savings Plan
  F-28




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##### Table of Contents



Note 16  Sale of Humongous Studio
     Note 17  Restructuring
  Years EndedMarch 31,2005
    
    
    2006Severance and retention expenses
    
    $
    4,219
    
    
    $
    4,907Lease related costs
    
    
    
    
    
    
    1,615Relocation
    
    
    
    
    
    
    447Fixed asset write offs
    
    
    
    
    
    
    434Modification of stock options
    
    
    596
    
    
    
    404Consultants
    
    
    
    
    
    
    358Miscellaneous costs
    
    
    117
    
    
    
    702Total
    
    $
    4,932
    
    
    $
    8,867
 F-29




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##### Table of Contents



Balance at
    
    
    
    
    
    
    
    
    
    
    Cash payments,
    
    
    Balance atMarch 31, 2005
    
    
    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
    )
    
    
    Consultants
    
    
    
    
    
    
    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
  Note 18  Operations by Reportable Segments and Geographic Areas
  F-30




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##### Table of Contents



Publishing
    
    
    Distribution
    
    
    Corporate
    
    
    TotalYear ended March 31, 2004:Net revenues
    
    $
    405,983
    
    
    $
    62,961
    
    
    $
    
    
    
    $
    468,944Operating income (loss)
    
    
    24,670
    
    
    
    10,856
    
    
    
    (27,953
    )
    
    
    7,573Depreciation and amortization
    
    
    (3,611
    )
    
    
    (191
    )
    
    
    (5,353
    )
    
    
    (9,155
    )Interest income (expense)
    
    
    
    
    
    
    22
    
    
    
    (7,680
    )
    
    
    (7,658
    )Year ended March 31, 2005:Net revenues
    
    $
    353,612
    
    
    $
    54,201
    
    
    $
    
    
    
    $
    407,813Operating income (loss) (1)
    
    
    36,775
    
    
    
    13,531
    
    
    
    (39,081
    )
    
    
    11,225Depreciation and amortization
    
    
    (3,256
    )
    
    
    
    
    
    
    (7,662
    )
    
    
    (10,918
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (459
    )
    
    
    (459
    )Year ended March 31, 2006:Net revenues
    
    $
    165,463
    
    
    $
    53,198
    
    
    $
    
    
    
    $
    218,661Operating (loss) income (1)
    
    
    (27,807
    )
    
    
    2,195
    
    
    
    (34,109
    )
    
    
    (59,721
    )Depreciation and amortization
    
    
    (2,136
    )
    
    
    
    
    
    
    (6,394
    )
    
    
    (8,530
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (595
    )
    
    
    (595
    )
 
 (1)
    
    Operating (loss) for the Corporate segment for the years ended March 31, 2005 and 2006,
excludes restructuring charges of $4.9 million and $8.9 million, respectively. Including
restructuring charges, total operating income (loss) for the years ended March 31, 2005 and
2006 is $6.3 million income and $68.6 million loss, respectively.  March 31,2004
    
    
    2005
    
    
    2006Publishing net product revenues:ConsolePlayStation 2
    
    $
    126,772
    
    
    $
    121,833
    
    
    $
    49,109Xbox
    
    
    48,620
    
    
    
    36,797
    
    
    
    14,626Plug and play
    
    
    
    
    
    
    14,843
    
    
    
    11,674Game Cube
    
    
    25,570
    
    
    
    13,297
    
    
    
    2,281PlayStation
    
    
    9,724
    
    
    
    3,092
    
    
    
    Total console
    
    
    210,686
    
    
    
    189,862
    
    
    
    77,690HandheldGame Boy Advance
    
    
    43,578
    
    
    
    37,107
    
    
    
    9,393Nintendo DS
    
    
    
    
    
    
    2,165
    
    
    
    2,684PlayStation Portable
    
    
    
    
    
    
    
    
    
    
    2,549Game Boy Color
    
    
    720
    
    
    
    
    
    
    
    Total handheld
    
    
    44,298
    
    
    
    39,272
    
    
    
    14,626PC
    
    
    105,163
    
    
    
    80,088
    
    
    
    41,864
 F-31




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##### Table of Contents



March 31,2004
    
    
    2005
    
    
    2006Total publishing net product revenues
    
    
    360,147
    
    
    
    309,222
    
    
    
    134,180International royalty income
    
    
    28,850
    
    
    
    18,686
    
    
    
    18,272Licensing and other income
    
    
    16,986
    
    
    
    25,704
    
    
    
    13,011Total publishing net revenues
    
    
    405,983
    
    
    
    353,612
    
    
    
    165,463Distribution net revenues
    
    
    62,961
    
    
    
    54,201
    
    
    
    53,198Total net revenues
    
    $
    468,944
    
    
    $
    407,813
    
    
    $
    218,661
  OtherUnited
    
    
    
    
    
    
    GeographicStates
    
    
    Europe
    
    
    Locations
    
    
    TotalYear ended March 31, 2004:Net revenues
    
    $
    468,944
    
    
    $
    
    
    
    $
    
    
    
    $
    468,944Operating income (loss)
    
    
    16,524
    
    
    
    (8,808
    )
    
    
    (143
    )
    
    
    7,573Capital expenditures
    
    
    4,776
    
    
    
    352
    
    
    
    
    
    
    
    5,128Total assets
    
    
    190,607
    
    
    
    3,318
    
    
    
    31
    
    
    
    193,956Year ended March 31, 2005:Net revenues
    
    $
    407,813
    
    
    $
    
    
    
    $
    
    
    
    $
    407,813Operating income (loss)
    
    
    16,690
    
    
    
    (10,397
    )
    
    
    
    
    
    
    6,293Capital expenditures
    
    
    1,861
    
    
    
    268
    
    
    
    
    
    
    
    2,129Total assets
    
    
    187,370
    
    
    
    2,669
    
    
    
    
    
    
    
    190,039Year ended March 31, 2006:Net revenues
    
    $
    218,661
    
    
    
    
    
    
    
    
    
    
    $
    218,661Operating (loss)
    
    
    (57,324
    )
    
    
    (11,264
    )
    
    
    
    
    
    
    (68,588
    )Capital expenditures
    
    
    2,305
    
    
    
    224
    
    
    
    
    
    
    
    2,529Total assets
    
    
    141,361
    
    
    
    2,309
    
    
    
    
    
    
    
    143,670
  Note 19  Quarterly Financial Data (unaudited)
  June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,Net revenues
    
    $
    110,295
    
    
    $
    71,391
    
    
    $
    161,759
    
    
    $
    64,368Operating income (loss)
    
    
    12,821
    
    
    
    (16,606
    )
    
    
    19,899
    
    
    
    (9,821
    )Net income (loss)
    
    
    12,056
    
    
    
    (16,891
    )
    
    
    19,606
    
    
    
    (9,079
    )Basic and diluted net income (loss) per share
    
    
    0.10
    
    
    
    (0.14
    )
    
    
    0.16
    
    
    
    (0.07
    )Weighted average shares outstanding  basic
    
    
    121,249
    
    
    
    121,277
    
    
    
    121,283
    
    
    
    121,295Weighted average shares outstanding  diluted
    
    
    121,334
    
    
    
    121,277
    
    
    
    121,376
    
    
    
    121,295
  F-32




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##### Table of Contents



June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,Net revenues
    
    $
    24,461
    
    
    $
    38,720
    
    
    $
    100,784
    
    
    $
    54,696Operating (loss)
    
    
    (32,778
    )
    
    
    (24,952
    )
    
    
    (4,658
    )
    
    
    (6,200
    )Net (loss)
    
    
    (32,817
    )
    
    
    (25,211
    )
    
    
    (4,761
    )
    
    
    (6,197
    )Basic and diluted net (loss) per share
    
    
    (0.27
    )
    
    
    (0.20
    )
    
    
    (0.04
    )
    
    
    (0.05
    )Weighted
average shares outstanding  basic and diluted
    
    
    121,299
    
    
    
    123,773
    
    
    
    134,749
    
    
    
    134,756
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,2004
    
    
    2004
    
    
    2004
    
    
    2005Net revenues
 as reported
    
    $
    108,124
    
    
    $
    67,984
    
    
    $
    156,364
    
    
    $
    62,693Add back: net revenues of Humongous studio
    
    
    2,171
    
    
    
    3,407
    
    
    
    5,395
    
    
    
    1,675Net revenues
 adjusted
    
    $
    110,295
    
    
    $
    71,391
    
    
    $
    161,759
    
    
    $
    64,368Operating
income (loss)  as reported
    
    $
    14,839
    
    
    $
    (15,718
    )
    
    $
    19,534
    
    
    $
    (8,121
    )Add back:
(loss) income from discontinued operations of Humongous studio
    
    
    (2,018
    )
    
    
    (888
    )
    
    
    365
    
    
    
    (1,700
    )Operating income (loss)
    
    $
    12,821
    
    
    $
    (16,606
    )
    
    $
    19,899
    
    
    $
    (9,821
    )Income
(loss) from continuing operations  as reported
    
    $
    14,074
    
    
    $
    (16,003
    )
    
    $
    19,241
    
    
    $
    (7,379
    )Add back: (loss) income from discontinued operations
of Humongous studio
    
    
    (2,018
    )
    
    
    (888
    )
    
    
    365
    
    
    
    (1,700
    )Net income
(loss)  adjusted
    
    $
    12,056
    
    
    $
    (16,891
    )
    
    $
    19,606
    
    
    $
    (9,079
    )
 June 30,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2005
    
    
    2005Net revenues
 as reported
    
    $
    24,199
    
    
    $
    38,402
    
    
    $
    100,784Add back: net revenues of Humongous studio
    
    
    262
    
    
    
    318
    
    
    
    Net revenues
 adjusted
    
    $
    24,461
    
    
    $
    38,720
    
    
    $
    100,784Operating
(loss)  as reported
    
    $
    (30,456
    )
    
    $
    (23,540
    )
    
    $
    (4,388
    )Add back: (loss) from discontinued operations of
Humongous studio
    
    
    (2,322
    )
    
    
    (1,412
    )
    
    
    (270
    )Operating (loss)
    
    $
    (32,778
    )
    
    $
    (24,952
    )
    
    $
    (4,658
    )Income
(loss) from continuing operations  as reported
    
    $
    (30,495
    )
    
    $
    (23,799
    )
    
    $
    (4,491
    )Add back: (loss) from discontinued operations of
Humongous studio
    
    
    (2,322
    )
    
    
    (1,412
    )
    
    
    (270
    )Net (loss)  adjusted
    
    $
    (32,817
    )
    
    $
    (25,211
    )
    
    $
    (4,761
    )
 F-33




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##### Table of Contents



Note
20  Sale of Intellectual Property
 Timeshift
 Note
21  Subsequent Events
 Sale of Studio
 Driver
  March 31,
    
    
    March 31,2005
    
    
    2006AssetsCurrent assets:Cash
    
    $
    451
    
    
    $
    438Inventories, net
    
    
    954
    
    
    
    574Due from related parties
    
    
    7
    
    
    
    Prepaid expenses and other current assets
    
    
    906
    
    
    
    1,222Total current assets
    
    
    2,318
    
    
    
    2,234Property and equipment, net
    
    
    311
    
    
    
    251Other assets
    
    
    502
    
    
    
    464Total assets
    
    $
    3,131
    
    
    $
    2,949LiabilitiesAccounts payable
    
    $
    342
    
    
    $
    874Accrued liabilities
    
    
    276
    
    
    
    731Royalties payable
    
    
    5,913
    
    
    
    1,412Due to related parties
    
    
    153
    
    
    
    Total liabilities
    
    $
    6,684
    
    
    $
    3,017
 Renewal of New York Lease
  F-34




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##### 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, 2006
    
    $
    24,285
    
    
    $
    58,549
    
    
    $
    1,919
    
    
    $
    (53,835
    )
    
    $
    30,918Year ended March 31, 2005
    
    $
    36,279
    
    
    $
    85,282
    
    
    $
    3,622
    
    
    $
    (100,898
    )
    
    $
    24,285Year ended March 31, 2004
    
    $
    40,319
    
    
    $
    104,051
    
    
    $
    4,422
    
    
    $
    (112,513
    )
    
    $
    36,279
 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, 2006
    
    $
    2,671
    
    
    $
    3,678
    
    
    $
    
    
    
    $
    (3,736
    )
    
    $
    2,613Year ended March 31, 2005
    
    $
    2,145
    
    
    $
    2,645
    
    
    $
    
    
    
    $
    (2,119
    )
    
    $
    2,671Year ended March 31, 2004
    
    $
    4,903
    
    
    $
    1,713
    
    
    $
    
    
    
    $
    (4,471
    )
    
    $
    2,145
 F-35




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##### Table of Contents



EXHIBIT INDEX
 3.1
    
    Restated Certificate of Incorporation.**3.2
    
    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, 1998.3.3
    
    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, 2003.3.4
    
    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.




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##### Table of Contents



10.7
    
    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.**10.10
    
    Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A.
and its subsidiaries.**10.11
    
    Production Services Agreement, dated as of March 31, 2006, between us and Infogrames
Entertainment S.A. and its subsidiaries.**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
    
    Credit Agreement, dated as of November 12, 2002, among us, as Borrower, the other credit
parties signatory thereto, the lenders signatory thereto from time to time, General Electric
Capital Corporation, as Administrative Agent, Agent and Lender, and GECC Capital Markets
Group, Inc., as Lead Arranger, is incorporated herein by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on November 19, 2002.***10.14
    
    First Amendment and Consent to the Credit Agreement, dated as of March 28, 2003, among us,
as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from
time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender
is incorporated herein by reference to Exhibit 10.57a to our Transition Report on Form 10-K
for the fiscal year ended March 31, 2003.10.15
    
    Second Amendment and Consent to the Credit Agreement, dated as of April 15, 2003, among us,
as Borrower, the other credit parties signatory thereto, the lenders signatory thereto from
time to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender
is incorporated herein by reference to Exhibit 10.57b to our Transition Report on Form 10-K
for the fiscal year ended March 31, 2003.10.16
    
    Third Amendment and Waiver to the Credit Agreement, dated as of July 11, 2003, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.57c to our Transition Report on Form 10-K for
the fiscal year ended March 31, 2003.10.17
    
    Fourth Amendment and Consent to the Credit Agreement, dated as of September 12, 2003, among
us, as Borrower, the other credit parties signatory thereto, the lenders signatory thereto
from time to time, General Electric Capital Corporation, as Administrative Agent, Agent and
Lender is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 2003.10.18
    
    Fifth Amendment to the Credit Agreement, dated as of October 15, 2003, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2003.10.19
    
    Sixth Amendment to the Credit Agreement, dated as of December 23, 2003, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to




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##### Table of Contents



time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 2003.10.20
    
    Seventh Amendment to the Credit Agreement, dated as of March 31, 2004, among us, as
Borrower, the other credit parties signatory thereto, the lenders signatory thereto from time
to time, General Electric Capital Corporation, as Administrative Agent, Agent and Lender, is
incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form 10-K for the
year ended March 31, 2004.10.21
    
    Eighth Amendment to the Credit Agreement, dated as of May 20, 2004, among us, as Borrower,
the other credit parties signatory thereto, the lenders signatory thereto from time to time,
General Electric Capital Corporation, as Administrative Agent, Agent and Lender, is
incorporated herein by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the
year ended March 31, 2004.10.22
    
    Consent to Credit Agreement, dated as of July 15, 2004, among us, as Borrower, the other
credit parties signatory thereto, the lenders signatory thereto from time to time, and General
Electric Capital Corporation, as Administrative Agreement, Agent and Lender, is incorporated
herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004.10.23
    
    Intercreditor and Subordination Agreement, dated as of November 12, 2002, among Infogrames
Entertainment S.A, California U.S. Holdings, Inc., General Electric Capital Corporation and
the Credit Parties signatory thereto, is incorporated herein by reference to Exhibit 10.2 to
our Quarterly Report on Form 10-Q filed on February 14, 2003.10.24
    
    First Amendment to Intercreditor and Subordination Agreement, dated as of December 23, 2003,
among Infogrames Entertainment S.A, California U.S. Holdings, Inc., Atari Interactive, Inc.,
General Electric Capital Corporation and the Credit Parties signatory thereto is incorporated
herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 2003.10.25
    
    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, 2005.10.26
    
    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, 2005.10.27*
    
    Letter of Employment, dated as of April 23, 2002, between David Perry and us is incorporated
herein by reference to Exhibit 10.53 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2002.10.28*
    
    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, 1996.10.29*
    
    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, 1997.10.30*
    
    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.




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##### Table of Contents



10.31*
    
    The 2000 Stock Incentive Plan is incorporated herein by reference to Appendix B to our proxy
statement dated June 29, 2000.10.32*
    
    Amendment No. 1 to 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit
A to our Information Statement dated November 27, 2000.10.33*
    
    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, 2004.10.34*
    
    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, 2005.10.35*
    
    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, 2005.10.36*
    
    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, 2005.10.37*
    
    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, 1998.10.38*
    
    Description of Registrants Annual Incentive Plan for fiscal 2006.**10.39*
    
    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, 2004.10.40
    
    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, 2005.10.41*
    
    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, 2004.10.42*
    
    Employment Agreement, dated November 26, 2004, by and between us and James Caparro is
incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2004.10.43*
    
    Letter Agreement by and between us and Diane Price Baker, dated January 24, 2005 is
incorporated by reference to Exhibit 10.34 to our Annual Report on Form 10-K for the year
ended March 31, 2005.10.44*
    
    Consulting Agreement between us and Ann Kronen, dated as of November 22, 2005, is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2005.10.45
    
    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).




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##### Table of Contents



10.46
    
    Agreement of Lease, dated as of December 12, 1996, by and between us and F.S. Realty Corp is
incorporated herein by reference to Exhibit 10.29 to our Annual Report on Form 10-K for the
year ended December 31, 1996.10.47
    
    First Amendment of Lease dated July 1, 1997 by and between us and F.S. Realty Corporation is
incorporated by reference to Exhibit 10.37 to our Annual Report on Form 10-K for the year
ended March 31, 2005.10.48
    
    Lease Agreement between us and Netbreeders Realty LLC, dated November 1, 1999, is
incorporated herein by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.10.49
    
    Sublease Agreement between us and SAVI Technology, Inc., dated May 30, 2001, is incorporated
herein by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2001.10.50
    
    Lease Agreement between us and Edward Silver, Co-Trustee of the Silver Trust and Paul
Weinstein, Co-Trustee of the Weinstein Trust (dba PTL Realty), dated May 7, 2001, is
incorporated herein by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.10.51
    
    Lease Agreement between us and MV 1997, L.L.C., dated November 24, 1997, is incorporated
herein by reference to Exhibit 10.16 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2001.10.52
    
    Lease Agreement between Parabola Estates Limited and Reflections Interactive Limited dated
September 10, 2001 is incorporated herein by reference to Exhibit 10.56 to our
Annual Report on Form 10-K for the fiscal year ended June 30, 2002.10.53
    
    Lease Agreement between Prima Development Corp. and us dated May 17, 2002 is incorporated
herein by reference to Exhibit 10.55 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 2002.10.54
    
    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.10.55
    
    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, 2005.10.56
    
    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.***10.57
    
    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.***10.58
    
    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




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##### Table of Contents



Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8,
2003, and all amendments thereto.10.59
    
    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.10.60
    
    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.10.61
    
    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.10.62
    
    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.10.63
    
    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, 2004.10.64
    
    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.10.65
    
    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.10.66
    
    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, 2005.10.67
    
    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, 2004.10.68
    
    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, 2004.10.69
    
    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.




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##### Table of Contents



10.70
    
    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, 2004.10.71
    
    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, 2004.10.72
    
    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, 2005.10.73
    
    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, 2005.10.74
    
    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, 2005.10.75
    
    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, 2005.21.1
    
    List of Subsidiaries.**23.1
    
    Consent of Deloitte & Touche LLP.**31.1
    
    Chief Executive Officer and Acting Chief Financial Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.**32.1
    
    Certification by the Chief Executive Officer and 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.**




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##### Table of Contents



99.6
    
    Confidential License Agreement for Nintendo DS (Western Hemisphere), by and between Nintendo
of America, Inc. and us effective October 14, 2005.**