This Annual Report contains forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. We caution readers regarding forward-looking statements in this Report, press releases, securities filings, and other documents and communications. All statements, other than statements of historical fact, including statements regarding industry prospects and expected future results of operations or financial position, made in this Annual Report on Form 10-K are forward looking. The words “believe”, “expect”, “anticipate”, “intend” and similar expressions generally identify forward-looking statements. These forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies and known and unknown risks. As a result of such risks, our actual results could differ materially from those anticipated by any forward-looking statements made by, or on behalf of, us. We will not necessarily update information if it later turns out that what occurs is different from what was anticipated in a forward-looking statement. For a discussion of some factors that could cause our operating results or other matters not to be as anticipated by forward-looking statements in this document, please see Item 1A entitled “Risk Factors” on pages 13 to 18 .

We are a publisher of video game software that is distributed throughout the world and a distributor of video game software in North America. Most of the products we publish and distribute are games developed by or for Infogrames Entertainment S.A., or IESA, a French corporation listed on Euronext, which owns approximately 51% of our stock. However, we also publish and distribute in North America games developed or published by unrelated developers or publishers. IESA is the largest distributor of video games in Europe, and distributes the video games that we publish throughout the world, other than in North America.

On April 30, 2008, IESA and we entered into an Agreement and Plan of Merger under which a wholly-owned subsidiary of IESA will be merged into us in a transaction in which IESA, as the sole shareholder of the merger subsidiary, will acquire all the shares of the merged company, and our stockholders (other than IESA and its subsidiaries) will receive $1.68 per share in cash. That transaction must be approved by our stockholders. Because a wholly-owned subsidiary of IESA owns 51% of our shares, if it votes in favor of the merger, the merger will be approved even if no other stockholders vote in favor of it. The IESA subsidiary is not contractually obligated to vote in favor of the merger, however, it has stated that intends to vote in favor of the merger.

Until 2005, we were actively involved in developing video games and in financing development of video games by independent developers, which we would publish and distribute under licenses from the developers. However, beginning in 2005, because of cash constraints, we substantially reduced our involvement in development of video games, and announced plans to divest ourselves of our internal development studios.

During fiscal 2006 and 2007, we sold a number of intellectual properties and development facilities in order to obtain cash to fund our operations. By the end of fiscal 2007, we did not own any development studios.

During fiscal 2008, we stopped developing games, even through independent developers. During that year, we also focused an increasing percentage of our activities on marketing and distributing in North America products published by IESA. This included licensing IESA to develop and distribute for seven years games using the Test Drive and Test Drive Unlimited franchise and to distribute any versions of those games that we publish everyplace in the world except the U.S., Canada and Mexico and their possessions.

The steps described above significantly reduced the number of games we publish. During fiscal 2008, our revenues from publishing activities were $69.8 million, compared with $104.7 million during fiscal 2007, and $153.6 million during fiscal 2006 and $289.6 million during fiscal 2005. However, we continue to have a significant library of well-known properties that we license from IESA (directly or through its wholly-owned subsidiary Atari Interactive, Inc., or Atari, Interactive,) or unrelated companies, including:

We maintain in North America distribution operations and systems that reach in excess of approximately 30,000 retail outlets throughout the United States.

Our annual cash expenditures have for the last several years exceeded our cash revenues. Until 2008, we funded our cash shortfalls primarily with proceeds of sales of assets, supplemented by seasonal borrowings. By 2008, we had few salable assets, other than the Test Drive and Test Drive Unlimited franchise and possibly, licenses

The uncertainty caused by the conditions described above and existing historically raise substantial doubt about our ability to continue as a going concern, unless the merger with a subsidiary of IESA is completed. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Atari, Inc. (formerly known as Infogrames, Inc. and GT Interactive Software Corp.) was organized as a corporation in Delaware in 1992. In May 2003, we changed our name to Atari, Inc. Effective as of May 9, 2008 our Common Stock was delisted from the NASDAQ Global Market because the total market value of our shares that were not owned by an affiliate (i.e., IESA) was less than $15 million. Our common stock is now listed on the Pink Sheets. Our corporate office and U.S. headquarters is located at 417 Fifth Avenue, New York, New York 10016 (main telephone: (212) 726-6500). We maintain a worldwide website at www.atari.com. Information contained on the website is not part of this Annual Report.

The video game industry primarily comprises software for dedicated game consoles or platforms (such as PlayStation 2, PlayStation 3, Xbox, Xbox 360, and Wii), handhelds (such as Nintendo DS and Sony PSP) and PCs. Publishers of video game software include the console manufacturers, or “first-party publishers,” and third-party publishers, such as ourselves, whose primary role is the development, publishing and/or distribution of video game software. According to International Data Group (IDG), an independent technology, media, research, and event company, sales of PC, console, and handheld games (excluding wireless) in North America and Europe in calendar 2007 reached $19.9 billion. We anticipate an expanding market for interactive entertainment software over the next several years as a result of the success of the current/connected generation console platforms. We believe that greater online functionality and the expanded artificial intelligence capabilities of the new platforms improve game play and game accessibility, and will help our industry grow.

Additionally, the use of wireless devices (such as mobile phones and personal digital assistants) as a gaming platform, known as “mobile gaming,” is growing rapidly, as is online gaming such as casual gaming and massively multiplayer online games.

Console platforms as they exist today have made significant technological advances since the introduction of the first generation of modern consoles by Nintendo in 1985. Hardware manufacturers have historically introduced a new and more technologically advanced gaming console platform every four to five years. Handhelds have also made advances since their introduction. However, handhelds have typically experienced longer product cycles. With each new cycle, the customer base for video game software has expanded as gaming enthusiasts mature and advances in video game hardware and software technology engage new participants, generating greater numbers of console units purchased than the prior cycle. The beginning of each cycle is largely dominated by console sales as consumers upgrade to the current-generation technology. As the cycle matures, consumers’ focus shifts to software, resulting in a period of rapid growth for the video game software industry.

Sony was the first manufacturer to introduce the previous generation of console hardware with the introduction of the PlayStation 2 platform in 2000. Nintendo introduced its current generation platforms a year later, launching the GameCube and Game Boy Advance in 2001. This generation also saw the entrance of Microsoft into the industry with the introduction of the Xbox console.

In 2005, Microsoft initiated a new generation of console hardware when it introduced Xbox 360. Both Sony and Nintendo followed suit by launching PlayStation 3 and Nintendo Wii, respectively, in November 2006. The calendar 2006 year also saw the rapid expansion of the Nintendo DS in the handheld market, and the continuing longevity of the PlayStation 2 (Sony’s previous generation console).

Innovation also continues in the handheld market with manufacturers offering more sophisticated units, such as Sony’s PSP and Nintendo’s DS, each of which offer multiple features and capabilities in addition to game play functionality and wi-fi connectivity.

Advances in personal computer technology outpace advances in console and handheld technology. Advances in microprocessors, graphics chips, hard-drive capacity, operating systems and memory capacity have greatly enhanced the ability of the PC to serve as a video game platform. These technological advances have enabled developers to introduce video games for PCs with enhanced game play technology and superior graphics. The PC growth in the past two years has been due to the success of massively multiplayer online, or MMO, role playing games. However, PC shelf space has been declining in retail stores, and the demand for catalogue PC titles in jewel case format has drastically diminished in many retail environments.

The Entertainment Software Ratings Board, or ESRB, through its ratings system, requires game publishers to provide consumers with information relating to material that includes, but is not limited to, graphic violence, profanity or sexually explicit material contained in software titles. Consumer advocacy groups have opposed sales of interactive entertainment software containing graphic violence or sexually explicit material by pressing for legislation in these areas and by engaging in public demonstrations and media campaigns, and various governmental bodies have proposed regulation aimed at our industry to prohibit the sale of software containing such material to minors. Additionally, retailers may decline to sell interactive entertainment software containing graphic violence, sexually explicit, or other material that they deem inappropriate for their businesses. For example, if retailers decline to sell a publisher’s “M” rated (age 17 and over) products or if the “M” rated products are re-rated “AO” (age 18 and over), the publisher might be required to significantly change or discontinue particular titles.

Economies of scale have become increasingly important as the complexity and costs associated with video game development continue to increase, and we expect this trend to continue. In addition, the acquisition of proven intellectual properties has become increasingly important as publishers seek to diversify and expand their product portfolios, while limiting exposure to unsuccessful product development efforts. Acquisitions have also been used as a means of vertically integrating functions that are key to the business process. We expect consolidation within the video game software industry to continue. Recently, Atari has been a seller, not a buyer.

The following identifies games and franchises that generated the most significant portion of our publishing net product revenues during the years ended March 31, 2006, 2007 and 2008.

During fiscal 2007, we sold all of our internal development studios. By December 2007, we ceased developing any products or having any products developed for us by independent developers. Since then, our activities have consisted entirely of publishing and distributing in North America, products developed by or for IESA or unrelated developers or publishers.

Our publishing activities include the management of business development, strategic alliances, product development, marketing, packaging and sales of video game software for all platforms, including Sony PlayStation 2, PlayStation 3, and PSP; Nintendo DS, Wii, Microsoft Xbox and Xbox 360; and PC.

During the year ended March 31, 2008, an increased percentage of our publishing activities related to products developed by or for IESA. However, we continued to publish some products developed by independent developers. Our publication activities with regard to products developed by or for IESA involve primarily marketing and sales, although in some instances we also arrange the manufacture and packaging of products that will be distributed in North America. We then distribute those products in North America, as described below under the subcaption “Distribution.” Under a new Distribution Agreement entered into in December 2007, IESA reimburses us for our costs of marketing, and where applicable manufacturing and packaging, products published by IESA. When we publish independently developed products, we generally arrange, and pay for, the manufacturing, packaging and marketing of the products, and charge a distribution fee intended to, among other things, compensate us for bearing those costs.

The video game software we publish, or have contracts to publish in North America includes video game software developed by some of the industry’s most highly regarded independent external developers. These developers include, among others:

Products which are acquired from these external developers are marketed under the Atari name, as well as the name of the external developer. The agreements with external developers typically provide us with exclusive publishing and distribution rights for a specific period of time for specified platforms and territories. The

With a lineup that spans from games for hardcore enthusiasts through mass market titles, we publish games at various price points, ranging from value-priced titles to premium-priced products. Appropriate branding is selected and used to provide consumers with distinct offerings and different tiers. Pricing is affected by a variety of factors, including but not limited to: licensed or franchise property; single or multiple platform development; production costs and volumes; target audience; the distribution territory; quality level; and consumer trends.

The sales team presently comprises 10 positions:  sales management, senior sales executives, associate account managers, and customer service representatives. The sales team manages direct relationships with key accounts in the U.S., Canada, and Mexico. Accounts are assigned to sales team members by retailer and industry expertise.

The sell-in of new properties begins with research and marketing materials, and product specific meetings at which we present trailers, gameplay, and product highlights, among other things. The team manages and coordinates all MDF (Marketing Development Fund) decisions, secures the order, and is responsible for all day-to-day account management, and utilizes existing relationships to develop exclusive title programs and catalog opportunities.

At the store level, we utilize professional merchandising companies to promote hit releases, facilitate compliance of pricing, pre-sell programs, and stock. Our merchandising partners ensure compliance in over 10,000 retail locations to assure a quality and consistent consumer experience. The sales department manages reporting, forecasting, and analysis with state-of-the-art software.

The sales and marketing teams are aligned to ensure the development of programs with the interests of the customers (retailers) and consumers (gamers) in mind. The core functions of the product management team includes:

To achieve maximum benefit from our coordinated sales and marketing programs, we employ a wide range of marketing techniques, including:

Our marketing approach uses a product management system to evaluate, position, and try to improve our brands based on analyses of market trends, consumers, competition, core competencies, retail and “first-party” partner support, and other key factors. Actionable results of our analyses are provided to the product development team, which, in turn and when reasonable, adjusts product to maximize consumer appeal. This system is combined with entertainment marketing approaches and techniques to create consumer and trade anticipation, as well as demand for our products.

We monitor and measure the effectiveness of our marketing strategies throughout the life cycle of each product. To maximize our marketing efforts, we may deploy an integrated marketing program for a product more than a year in advance of its release. Historically, we have expended a substantial portion of the marketing resources we will devote to a game prior to the game’s retail availability, and we intend to do so in the future.

The Internet is an integral element of our marketing efforts. We use it, in part, to generate awareness of and “buzz” about titles months prior to their market debut. We incorporate the Internet into our marketing programs via video, screenshot, and other game asset distribution; product-dedicated mini-sites; and online promotions. We also use the Internet to establish ongoing communication with gamers to translate their commitment and interest in our products into word of mouth sales.

In the months leading up to the release of a new product, we provide extensive editorial material to publications that reach the product’s expected audience as a part of executing customized public relations programs designed to create awareness of our products with all relevant audiences, including core gamers and mass entertainment consumers. These public relations efforts have resulted in coverage in key computer and video gaming publications and websites, as well as major consumer sites, newspapers, magazines and broadcast outlets.

We have entered into licensing agreements with a number of licensors, including FUNimation.

We pay royalties to licensors at various rates based on our net sales of the corresponding titles. We frequently make advance payments against minimum guaranteed royalties over the license term. License fees tend to be higher for properties with proven popularity and less perceived risk of commercial failure. Licenses are of various durations and may in some instances be renewable upon payment of minimum royalties or the attainment of specified sales levels. Other licenses are not renewable upon expiration, and we cannot be sure that we will reach agreement with the licensor to extend the term of any particular license. Our property licenses usually grant us exclusive use of the property for the specified titles on specified platforms, worldwide or within a defined territory, during the license term. Licensors typically retain the right to exploit the property for all other purposes and to license to other developers with regard to other properties.

Working with external development teams and software providers, we incorporate two methods of advertising in certain of our games: static advertising (fixed content within our code executed during the product development stage) and dynamic advertising (real time messages executed on an on-going basis). In addition, we work with other

We currently publish software that is developed for use with PlayStation 2, PlayStation 3, and PSP; Wii, and DS; and Xbox and Xbox 360 hardware, pursuant to licensing agreements (some in negotiation) with each of the respective hardware developers. Each license allows us to create one or more products for the applicable system, subject to certain approval rights, which are reserved by each hardware licensor. Each license also requires us to pay the hardware licensor a per-unit license fee for the product produced.

The following table sets forth information with respect to our platform licenses:

IESA, our majority stockholder and the distributor of the products we publish throughout the world, other than in North America, has entered into similar agreements (directly or through its subsidiaries) with each of the manufacturers for applicable territories outside North America.

We currently are not required to obtain any license for the publishing of video game software for PCs. Accordingly, our per-unit manufacturing cost for such software products is less than the per-unit manufacturing cost for console products.

We develop proprietary software titles and have obtained the rights to publish and distribute software titles developed by third parties. Our products are susceptible to unauthorized copying. Unauthorized third parties may be able to copy or to reverse engineer our titles to obtain and use programming or production techniques that we regard as proprietary. In addition, our competitors could independently develop technologies substantially equivalent or superior to our technologies. We attempt to protect our software and production techniques under copyright, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution. Although we generally do not hold any patents, we seek to obtain trademark and copyright registrations for our products. In addition, each manufacturer incorporates security devices in its platform to prevent unlicensed use.

Throughout the United States, Canada, and Mexico, we distribute our own products, as well as the products of other publishers, to retail outlets, utilizing our distribution operations and systems. We are the exclusive distributor for the products of IESA and its subsidiaries, including Atari Interactive, in the United States and Canada for which we are paid 30% of net revenues, under our new distribution agreement for new product. Furthermore, we distribute product in Mexico through various non-exclusive agreements. Utilizing point-of-sale replenishment systems and electronic data interchange links with our largest customers, we are able to handle high sales volume and manage and replenish inventory on a store-by-store basis. We also utilize systems for our entire supply chain management, including manufacturing, EDI/order processing, inventory management, purchasing, and tracking of shipments. We believe these systems accomplish:

We distribute products we publish to a variety of outlets, including mass-merchant retailers such as Wal-Mart and Target; major retailers, such as Best Buy and Toys ’R’ Us; specialty stores such as GameStop; rental chains such as Blockbuster and Hollywood Video; and warehouse clubs such as Sam’s Club and Costco. GameStop, Wal-Mart and Best Buy accounted for 26.8%, 19.8%, and 11.9%, respectively, of our net revenues for the year ended March 31, 2008 (although Wal-Mart has announced it intends to reduce the shelf space available for packaged video games, and to focus more attention on online distribution of games). Additionally, our games are made available through various online retail and “e-tail” companies (e.g. Amazon.com), on our website atari.com, and through the emerging digital distribution/electronic software download marketplace. We believe that during the coming years, there will be a significant increase in digitally distributed titles and we have been trying to position ourselves to exploit this expansion of the marketplace.

Other publishers also utilize our distribution capabilities. Generally, we acquire their products and distribute them under the publishers’ names. Our agreements with these publishers typically grant us retail distribution rights in designated territories for specific periods of time, and typically are renewable. Under such agreements, the third party publisher is typically responsible for the publishing, packaging, marketing and customer support of the products.

We outsource our warehouse operations in the United States to Ditan Distribution, which is located in Plainfield, Indiana. The warehouse operations include the receipt and storage of inventory as well as the distribution of inventory to mass market and other retailing customers.

IESA distributes products we publish in Europe, Asia, and elsewhere outside of North America pursuant to a distribution arrangement we entered into in December 2007 (which replaced a prior agreement we had entered into in 1999 as to all product except back catalog product). IESA’s strong presence in Europe, Asia and certain other regions provides effective distribution in these regions of our titles while allowing us to focus our distribution efforts in the United States, Canada, and Mexico. IESA distributes our products to several major retailers in Europe, Asia and certain other regions; including Auchan, Carrefour, Mediamarket and Tesco. IESA has extensive access to retail outlets in these regions. Under our new distribution arrangement with IESA, we are entitled to receive 70.0% of the net revenues on our products that are distributed by IESA.

We typically ship products within three days of receipt of orders. As a result, backlog is not material to our business.

Disk duplication and the printing of user manuals and packaging materials with regard to games we publish are performed to our specifications by outside sources. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products, or material returns due to product defects. There is some concentration of the manufacture and packaging of games we publish, but a number of other outside vendors are also available as sources for these manufacturing and packaging services.

Sony, Nintendo and Microsoft, either directly or through an authorized third party, control the manufacture of our products that are compatible with their respective video game consoles, as well as the manuals and packaging for these products, and ship the finished products to us, either directly or through third party vendors, for distribution. Sony PlayStation 2, PlayStation 3, and PSP, Nintendo Wii, and Microsoft Xbox and Xbox 360 products consist of proprietary format CD- or DVD-ROMs and are typically delivered to us within a relatively short lead time (approximately 3-4 weeks). Manufacturers of other Nintendo products, which use a cartridge format, typically deliver these products to us within 45 to 60 days after receipt of a purchase order. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of products we distribute. However, manufacturers’ difficulties, which are beyond our control, could impair our ability to bring products to the marketplace in a timely manner.

The online department had three approaches in fiscal 2008. The purpose of these approaches was to monetize out online efforts; turning online into a revenue generating channel for us. The approaches were intended to ensure that we reach consumers where they are online both now and into the future. The three approaches were:

As of the end of fiscal 2008, we had 66 employees domestically, with 14 in publishing and product testing, 18 in administration (i.e., senior management, human resources, legal, IT and facilities), 12 in finance, 10 in sales and operations, and 12 in marketing. During the fiscal year, we had domestic operations in New York, New York, and Santa Clara, California.

Throughout fiscal 2008, IESA owned, through a wholly-owned subsidiary, approximately 51% of our common stock. IESA rendered management services to us (systems and administrative support) and we rendered management services and production services to Atari Interactive and other subsidiaries of IESA. Atari Interactive develops video games, and owns the name “Atari” and the Atari logo, which we use under a license. IESA distributes our products in Europe, Asia, and certain other regions, and pays us royalties with regard to its sales of our products. IESA also develops (through its subsidiaries) products which we distribute in the U.S., Canada, and

Prior to December 4, 2007, IESA and we had been parties to a number of agreements under which, among other things, (a) we were the exclusive distributor in North America of products developed or published by IESA or its subsidiaries, including Atari Interactive, (b) IESA was the exclusive distributor outside of North America of products we developed or published, (c) we paid an annual fee of $3 million to IESA for management services it was to render to us, and (d) IESA paid an annual fee of $3 million to us for management and other services we rendered to its subsidiaries, including Atari Interactive. In addition, in October 2007, BlueBay High Yield Investments (Luxembourg) S.A.R.L. assumed the rights and obligations of the lenders under a Credit Agreement between us and Guggenheim Corporate Funding LLC , or Guggenheim. Affiliates of BlueBay High Yield Investments own approximately 31.5% of the outstanding shares of IESA and hold options that, if exercised, would increase that ownership to approximately 54.9%.

On December 4, 2007, we entered into a group of agreements with IESA that replaced or modified then existing agreements, as follows:

The transactions in December 2007 followed our sale or other disposition of all our product development assets and a license we granted to IESA in October 2007 to develop and publish games under the Test Drive and Test Drive Unlimited franchise in return for the payment by IESA of royalties based on product sales, including a $5 million prepaid royalty to be applied, together with interest at 15% per annum, against royalties that become due.

Prior to April 4, 2007, Bruno Bonnell, who was one of the founders of IESA, was the Chief Executive Officer and the Chairman of the Board of IESA and held various positions with us, including being the Chairman of our Board and at times being our Chief Executive Officer, our acting Chief Financial Officer and our Chief Creative Officer. On April 4, 2007, IESA entered into an agreement with Mr. Bonnell, under which Mr. Bonnell agreed to

On October 5, 2007, the IESA subsidiary that owns approximately 51% of our shares delivered a written stockholder consent in which it removed five of our then seven directors, effective immediately. The two directors who were not removed were both employees of IESA or a subsidiary.

On October 10, 11 and 12, 2007, our Board of Directors elected Wendell H. Adair, Jr., Eugene I. Davis, James B. Schein and Bradley E. Scher to our Board of Directors. None of those four persons had or has any relationship with IESA.

On October 10, 2007, our Board of Directors also elected Curtis G. Solsvig III as our Chief Restructuring Officer. Mr. Solsvig was a Managing Director at AlixPartners, which we retained to assist us in evaluating and implementing strategic and tactical operations through a restructuring process. Mr. Solsvig continued in that position until April 2, 2008, shortly after Jim Wilson was elected to be our President and Chief Executive Officer.

On April 30, 2008, IESA and we entered into an Agreement and Plan of Merger under which a wholly-owned subsidiary of IESA will be merged into us in a transaction in which IESA, as the sole shareholder of the merger subsidiary, will acquire all the shares of the merged company, and our stockholders (other than IESA and its subsidiaries) will receive $1.68 per share in cash. That transaction must be approved by our stockholders. Because a wholly-owned subsidiary of IESA owns 51% of our shares, if it votes in favor of the merger, the merger will be approved even if no other stockholders vote in favor of it. The IESA subsidiary is not contractually obligated to vote in favor of the merger, however, it has stated that it intends to vote in favor of the merger. Either IESA or we will have the right to terminate the Merger Agreement if the Merger Agreement is submitted to our stockholders and is not approved by them, or if the transaction is not completed by October 31, 2008. The transaction was negotiated and approved by a Special Committee of our Board of Directors, consisting entirely of directors who are independent of IESA, after the Special Committee received an opinion from Duff & Phelps that the transaction would be fair to our stockholders, other than IESA and its subsidiaries, from a financial point of view.

In connection with the proposed merger, IESA entered into a new Credit Agreement with us under which it committed to provide up to an aggregate of $20 million in loan availability, which we could use to fund our operational cash requirements during the period between the date of the Merger Agreement and completion of the merger. Our obligations under that Credit Agreement are secured by liens on substantially all of our present and future assets. These liens are junior to liens on essentially the same collateral that secure our obligations to BlueBay High Yield Investments under the Credit Agreement that it assumed in October 2007. IESA has agreed that, so long as we have any continuing obligations to BlueBay High Yield Investments under the BlueBay Credit Agreement, IESA will not seek to exercise any rights or remedies with regard to the shared collateral for a period of 270 days and will not take action to hinder the exercise of remedies under the BlueBay Credit Facility or object to any steps BlueBay High Yield Investments may take to enforce or collect obligations under the BlueBay Credit Facility. BlueBay High Yield Investments consented to our entering into the new Credit Facility with IESA and gave waivers under, and agreed to amendments of, the BlueBay Credit Facility to permit the Merger Agreement to be signed.

The video game software publishing industry is intensely competitive, and relatively few products achieve market acceptance. The availability of significant financial resources has become a major competitive factor in the industry primarily as a result of the increasing development, acquisition, production and marketing, as well as potential licensing, costs required to publish quality titles. We compete with other third-party publishers of video game software, including Electronic Arts, Inc., THQ, Inc., Activision, Inc., Take Two Interactive, Inc., Midway Games, Inc., Sega Corporation, Ubisoft Entertainment, SA, and Vivendi SA, among others. Most of these

Atari Interactive has granted us a license to use the name “Atari” until 2013 for software video games in the United States, Canada, and Mexico. We believe that the Atari brand, which has a heritage deeply rooted in innovation and is largely credited with launching the video game industry, continues to carry a level of recognition that can provide a competitive advantage. Unlike many of our competitors, our Atari brand can be seen as three separate entities — a pop icon, a classic gaming original and a modern interactive entertainment company. This enhances our opportunities to attract partnerships, talent and other vehicles, providing a distinct advantage against our competitors.

We believe that a number of additional factors provide us with competitive opportunities in the industry, including our catalogue of multi-platform products, strength in the mass-market, and strong sales forces in the United States, Canada, and Mexico and, through IESA, in Europe, Asia and other regions. We believe that popular franchises such as Test Drive and RollerCoaster Tycoon, along with the catalog of classic Atari Games, as well as attractive licenses, such as Dragon Ball Z and Dungeons & Dragons, provide us with a solid competitive position in the marketing of our products.

In our distribution business, we compete with both large national distributors and smaller regional distributors. We also compete with the major entertainment software companies that distribute over the internet or directly to retailers. Most of our competitors have greater financial and other resources than we do, and are able to carry larger inventories and provide more comprehensive product selection than we can.

Our business is highly seasonal with sales typically significantly higher during the calendar year-end holiday season.

We operate in three reportable segments: publishing, distribution and corporate. Please see the discussion regarding segment reporting in Note 21 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report.

Please see Note 21 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report, for geographic information with respect to our revenues from external customers and our long-lived assets.

Due primarily to our limited funds, during fiscal 2006 and 2007, we reduced substantially our expenditures on product development and sold the intellectual property related to some game franchises that have generated substantial revenues for us in the past. During fiscal 2008, we completely terminated our product development activities and we granted IESA a seven year license to exploit our last remaining valuable game franchise. Further, we increasingly focused our efforts on distributing products published by IESA. These steps substantially reduced our revenues. In fiscal 2008, our net revenues were only $80.1 million, compared with net revenues of $122.3 million in fiscal 2007, $206.8 million in fiscal 2006 and $343.8 million in fiscal 2005. Because of this decrease in revenues, we have had significant operating losses in each of the past several years, and in fiscal 2007, we were required to take a $54.1 million charge for impairment of goodwill.

Prior to fiscal 2008, we financed our operating losses by selling assets. However, by fiscal 2008, we had few salable assets, other than the Test Drive and Test Drive Unlimited franchise, and in October 2007, we granted IESA a

Because we are no longer involved in the development of new video game products, and we are focusing a substantial portion of our efforts on distribution in North America of products developed or published by IESA, our business will depend to a great extent on IESA’s developing or obtaining access to products that are popular in the North American markets. Among other things, it is possible that some IESA products that do well globally will not be well accepted in the North American markets. While we will be distributing products developed or published by companies other than IESA, as our business currently is being conducted, it is unlikely that we could be successful if IESA does not provide products that are popular in North America.

The “Atari” name has been an important part of our branding strategy, and we believe it provides us with an important competitive advantage in dealing with video game developers and in distributing our products. However, the “Atari” name is owned by a subsidiary of IESA, which has licensed us to use the name with regard to video games in the United States, Canada, and Mexico until 2013. Therefore, we are limited both in how we can exploit the “Atari” name and how long we will be able to use it. We have no agreements or understandings that assure us that we will be able to expand the purposes for which we can use the “Atari” name or extend the period during which we will be able to use it.

We distribute packaged video game software. Currently, we are not significantly involved in online distribution of games. Among other things, IESA plans to control online distribution of the video games it publishes. To date, despite the convenience of acquiring games by downloading them electronically, there has been a substantial continuing market for packaged games sold through retail outlets. However, this may not continue to be the case indefinitely, particularly as internet download speeds increase. Unless we are able to become heavily involved in online distribution, our business may be seriously injured by a movement of purchasing preference from packaged games to online distribution.

Our sales to GameStop, Wal-Mart, and Best Buy accounted for approximately 26.8%, 19.8%, and 11.9%, respectively, of net revenues (excluding international royalty, licensing, and other income) for the year ended March 31, 2008. Our business, results of operations and financial condition would be adversely affected if:

Wal-Mart has announced that it intends to reduce the shelf space it devotes to packaged video games, and to focus more of its efforts on marketing video games through its online store. That alone could have a substantial adverse effect on our revenues.

We are required to obtain a license to develop and distribute software for each of the video game consoles. We currently have licenses from Sony to develop products for PlayStation 2 and PSP, from Nintendo to develop products for Wii and DS and from Microsoft to develop products for Xbox and Xbox 360. We are currently negotiating a license for Sony PlayStation 3. These licenses are non-exclusive, and as a result, many of our competitors also have licenses to develop and distribute video game software for these systems. These licenses must be periodically renewed, and if they are not, or if any of our licenses are terminated or adversely modified, we may not be able to publish games for the applicable platforms or we may be required to do so on less attractive terms. In addition, our contracts with these manufacturers often grant them approval rights over new products and control over the manufacturing of our products. In some circumstances, this could adversely affect our business, results of operations or financial condition by:

To cover returns and other concessions, we establish reserves at the time we ship our products. We estimate the potential for future returns and other concessions based on, among other factors, management’s evaluation of historical experience, market acceptance of products produced, retailer inventory levels, budgeted customer allowances, the nature of the title and existing commitments to customers. While we are able to recover the majority of our costs when third-party products we distribute are returned, we bear the full financial risk when our own products are returned. In addition, the license fees we pay Sony, Microsoft and Nintendo are non-refundable and we cannot recover these fees when our products are returned. Although we believe we maintain adequate reserves with respect to product returns and other concessions, we cannot be certain that actual returns and other concessions will not exceed our reserves, which could adversely affect our business, results of operations and financial condition.

The video game software market is highly competitive and relatively few products achieve significant market acceptance. Currently, we compete primarily with other publishers of video game software for both video game consoles and PCs. Our competitors include Activision, Inc., Electronic Arts, Inc., Midway Games, Inc., Take Two Interactive, Inc., THQ, Inc., Sega Corporation, Ubisoft Entertainment, SA, and Vivendi SA, among others. Most of these companies are substantially larger and have better access to funds than us. In addition, console manufacturers including Microsoft, Nintendo, and Sony publish products for their respective platforms. Media companies and film studios, such as Warner Bros., are increasing their focus on the video game software market and may become significant competitors and/or may increase the price of their outbound licenses. Current and future competitors may also gain access to wider distribution channels than we do. As a result, these current and future competitors may be able to:

We may not have the resources required for us to respond effectively to market or technological changes or to compete successfully with current and future competitors. Increased competition may also result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations or financial condition.

Retailers of our products typically have a limited amount of shelf space and promotional resources. Therefore, there is increased competition amongst the publishers to deliver a high quality product that merits retail acceptance. To the extent that the number of products and platforms increases, competition for shelf space may intensify and may require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers are in a strong position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. We cannot be certain that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support on acceptable terms. A prolonged failure in this regard may significantly harm our business and financial results.

Our business is heavily dependent upon our confidential and proprietary intellectual property. We sell a significant portion of our published software under licenses from independent software developers, and, in these cases, we do not acquire the copyrights for the underlying work. We rely primarily on a combination of confidentiality and non-disclosure agreements, patent, copyright, trademark and trade secret laws, as well as other proprietary rights laws and legal methods, to protect our proprietary rights and the intellectual property rights of our developers. However, current U.S. and international laws afford us only limited protection and amendments to such laws or newly enacted laws may weaken existing protections. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our products or franchises, or obtain and use information that we regard as proprietary. Software piracy is also a persistent problem in the video game software industry. Policing unauthorized use of our products is extremely difficult because video game software can be easily duplicated and disseminated. Furthermore, the laws of some foreign countries may not protect our proprietary rights to as great an extent as U.S. law. Our business, results of operations and financial condition could be adversely affected if a significant amount of unauthorized copying of our products were to occur or if other parties develop products substantially similar to our products. We cannot assure you that our attempts to protect our proprietary rights will be adequate or that our competitors will not independently develop similar or competitive products.

As the number of available video game software products increases, and their functionality overlaps, software developers and publishers may increasingly become subject to infringement claims. We are not aware that any of our products infringe on the proprietary rights of third parties. However, we cannot provide any assurance that third parties will not assert infringement claims against us in the future with respect to past, current or future products. There has been substantial litigation in the industry regarding copyright, trademark and other intellectual property rights. We have sometimes initiated litigation to assert our intellectual property rights. Whether brought by or against us, these claims can be time consuming, result in costly litigation and divert management’s attention from our day-to-day operations, which can have a material adverse effect on our business, operating results and financial condition.

Distributors and retailers in the video game software industry have, from time to time, experienced significant fluctuations in their businesses, and a number of them have become insolvent. The insolvency or business failure of any significant retailer or distributor of our products could materially harm our business, results of operations and financial condition. We typically make sales to most of our retailers and some distributors on unsecured credit, with terms that vary depending upon the customer’s credit history, solvency, credit limits and sales history. In addition, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could significantly harm our business and results of operations.

Legislation is periodically introduced at the local, state and federal levels in the United States and in foreign countries to establish systems for providing consumers with information about graphic violence and sexually explicit material contained in video game software. In addition, many foreign countries have laws that permit governmental entities to censor the content and advertising of video game software. We believe that mandatory government-run rating systems may eventually be adopted in many countries that are potential markets for our products. We may be required to modify our products or alter our marketing strategies to comply with new regulations, which could increase development costs and delay the release of our products in those countries. Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business.

In addition to such regulations, certain retailers have in the past declined to stock some of our and our competitors’ video game products because they believed that the content of the packaging artwork or the products would be offensive to the retailer’s customer base. Although to date these actions have not impacted our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business.

Similar to our competitors in the video game software industry, we have been and will likely become subject to litigation. Such litigation may be costly and time consuming and may divert management’s attention from our day-to-day operations. In addition, we cannot assure you that such litigation will be ultimately resolved in our favor or that an adverse outcome will not have a material adverse effect on our business, results of operations and financial condition.

IESA beneficially owns approximately 51% of our common stock, which gives it sufficient voting power to prevent any transaction that it finds unfavorable, including an acquisition, consolidation or sale of shares or assets that might be desirable to our other stockholders. Additionally, IESA could unilaterally approve certain transactions as a result of its majority position. IESA also has sufficient voting power to elect all of the members of our Board of Directors. On April 30, 2008, IESA and we entered into an Agreement and Plan of Merger under which a wholly-owned subsidiary of IESA will be merged into us in a transaction in which IESA, as the sole shareholder of the merger subsidiary, will acquire all the shares of the merged company, and our stockholders (other than IESA and its subsidiaries) will receive $1.68 per share in cash. That transaction must be approved by our stockholders. Because a wholly-owned subsidiary of IESA owns 51% of our shares, if it votes in favor of the merger, the merger will be approved even if no other stockholders vote in favor of it. The IESA subsidiary is not contractually obligated to vote in favor of the merger, however, it has stated that it intends to vote in favor of the merger. This concentration of control could be disadvantageous to other stockholders whose interests differ from those of IESA.

Atari Interactive, a wholly owned subsidiary of IESA, has granted us the right to use the Atari name for software video games in the United States, Canada, and Mexico until 2013. However, in addition to an initial upfront payment we made in 2003, we must pay a royalty equal to 1% of our net revenues during each of 2009 through 2013. We are subject to quality control oversight for our use of the Atari name. Any disputes over our performance under the trademark license agreement could materially affect our business. Furthermore, the use of the Atari mark by Atari Interactive or other subsidiaries of IESA could affect the reputation or value associated with the Atari mark, and therefore materially affect our business.

Effective May 9, 2008, our Common Stock was delisted from the NASDAQ Global Market because the total market value of our shares that were not owned by an affiliate (i.e., IESA) was less than $15 million. Since then, our Common Stock has been quoted on the Pink Sheets. One of the consequences of our Common Stock not being listed on the NASDAQ Global Market or a national stock exchange is that we are not subject to securities exchange rules regarding corporate governance and other matters. While we continue to maintain governance practices we adopted when we were subject to the rules of the NASDAQ Global Market, we are not required to do so. We have appealed the delisting of our Common Stock, but there is a strong likelihood that the delisting will not be reversed.

On March 5, 2008, we announced that we received a letter of intent from IESA expressing their nonbinding intent to enter into a transaction in which our shareholders, other than IESA and its subsidiaries, would receive $1.68 per share in cash with regard to their shares of our Common Stock. On April 30, 2008, we announced that we had entered into a Plan and Agreement of Merger with IESA under which our shareholders, other than IESA and its subsidiaries, would receive $1.68 per share in cash with regard to their shares of our stock. Since March 5, 2008, the price of our shares has ranged between $1.68 and $1.43. It is likely that the price of our shares during that period has been influenced by the announced transaction with IESA, and that price may not reflect what the price of our shares would have been in the absence of the proposed IESA transaction.

We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are available to the public free of charge over the Internet at our website at http://www.atari.com or at the SEC’s web site at http://www.sec.gov. Our SEC filings will be available on our website as soon as reasonably practicable after we have electronically filed or furnished them to the SEC. You may also read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

None.

The following table contains the detail of the square footage of our leased properties by geographic location as of March 31, 2008:

New York.  In fiscal 2008, our principal offices were located in approximately 70,000 square feet of office space at 417 Fifth Avenue in New York City. The term of this lease commenced on July 1, 2006 and is to expire on June 30, 2021. In August 2007, we agreed to surrender, effective December 31, 2007, one-half of the square feet of the space we are leasing. During fiscal 2008, we also leased corporate residences in the greater New York City area for use by our executive officers, directors, and consultants. All such leases have expired.

California.  During a portion of fiscal 2008, we leased approximately 16,460 square feet of office space in Newport Beach, California for use by Shiny, an internal development studio which was sold in September 2006 (see Development). This lease had been subleased to the purchaser of Shiny; the lease expired in August 2007. Since December 2006, we have leased approximately 4,016 square feet of office space in Santa Clara, California, which expires in December 2009. A portion of the rent is being billed back to IESA.

Washington.  During fiscal 2008, we leased approximately 65,500 square feet of office space in Bothell, Washington, under a lease which expired in May 2008.

Massachusetts.  For a portion of fiscal 2008, we subleased a portion of the 53,184 square feet of the office space leased by Atari Interactive in Beverly, Massachusetts. Our sublease expired in June 2007.

Europe.  In Newcastle upon Tyne, United Kingdom, we lease 14,576 square feet of office space, that was occupied by our formerly wholly-owned Reflections studio, which was sold in August 2006. This lease expires in August 2011. The purchaser of Reflections currently subleases this space from us in a sublease which expires in September 2008.

Our management believes that the ultimate resolution of any of the matters summarized below and/or any other claims which are not stated herein, if any, will not have a material adverse effect on our liquidity, financial condition or results of operations. With respect to matters in which we are the defendant, we believe that the underlying complaints are without merit and intend to defend ourselves vigorously.

This suit involving Accolade, Inc. (a predecessor entity of Atari, Inc.) was filed in 1999 in the District Court of Maryland. The plaintiff originally sued the NFL claiming copyright infringement of a logo being used by the Baltimore Ravens that plaintiff allegedly designed. The plaintiff then also sued nearly 500 other defendants, licensees of the NFL, on the same basis. The NFL hired White & Case to represent all the defendants. Plaintiff filed an amended complaint in 2002. In 2003, the District Court held that plaintiff was precluded from recovering actual damages, profits or statutory damages against the defendants, including Accolade. Plaintiff has appealed the District Court’s ruling to the Fourth Circuit Court of Appeals. White & Case continues to represent Accolade and the NFL continues to bear the cost of the defense.

On July 21, 2006 we were served with a complaint filed by Ernst & Young as Interim Receiver for HIP Interactive, Inc. This suit was filed in New York State Supreme Court, New York County. HIP is a Canadian company that has gone into bankruptcy. HIP contracted with us to have us act as its distributor for various software products in the U.S. HIP is alleging breach of contract claims; to wit, that we failed to pay HIP for product in the amount of $0.7 million. We will investigate filing counter claims against HIP, as HIP owes us, via our Canadian Agent, Hyperactive, for our product distributed in Canada. Atari Inc.’s answer and counterclaim was filed in August of 2006 and Atari, Inc. initiated discovery against Ernst & Young at the same time. The parties are currently in settlement discussions.

On October 26, 2006 Research in Motion Limited (“RIM”) filed a claim against Atari, Inc. and Atari Interactive, Inc. in the Ontario Superior Court of Justice. RIM is seeking a declaration that (i) the game BrickBreaker, as well as the copyright, distribution, sale and communication to the public of copies of the game in Canada and the United States, does not infringe any Atari copyright for Breakout or Super Breakout (together “Breakout”) in Canada or the United States, (ii) the audio-visual displays of Breakout do not constitute a work protected by copyright under Canadian law, and (iii) Atari holds no right, title or interest in Breakout under US or Canadian law. RIM is also requesting the costs of the action and such other relief as the court deems. Breakout and Super Breakout are games owned by Atari Interactive, Inc. On January 19, 2007, RIM added claims to its case

On April 18, 2008, Christian M. Stanley, a purported stockholder of Atari (“Plaintiff”), filed a Verified Class Action Complaint against us, certain of our directors and former directors, and Infogrames, in the Delaware Court of Chancery. In summary, the complaint alleges that our directors breached their fiduciary duties to our unaffiliated stockholders by entering into an agreement that allows Infogrames to acquire the outstanding shares of our common stock at an unfairly low price. An Amended Complaint was filed on May 20, 2008, updating the allegations of the initial complaint to challenge certain provisions of the definitive merger agreement. On the same day, Plaintiff filed motions to expedite the suit and to preliminarily enjoin the merger. Plaintiff filed a Second Amended Complaint on June 30, 2008, further amending the complaint to challenge the adequacy of the disclosures contained in the Preliminary Proxy Statement on Form PREM 14A submitted in support of the proposed merger and asserting a claim against us and Infogrames for aiding and abetting the directors’ and former directors’ breach of their fiduciary duties.

The Plaintiff alleges that the $1.68 per share offering price represents no premium over the closing price of our stock on March 5, 2008, the last day of trading before we announced the proposed merger transaction. Plaintiff alleges that in light of Infogrames’ approximately 51.6% ownership of us, our unaffiliated stockholders have no voice in deciding whether to accept the proposed merger transaction, and Plaintiff challenges certain of the “no shop” and termination fee provisions of the merger agreement. Plaintiff claims that the named directors are engaging in self-dealing and acting in furtherance of their own interests at the expense of those of our unaffiliated stockholders. Plaintiff also alleges that the disclosures in the Preliminary Proxy are deficient in that they fail to disclose material financial information and the information presented to and considered by the Board and its advisors. Plaintiff asks the court to enjoin the proposed merger transaction, or alternatively, to rescind it in the event that it is consummated. In addition, Plaintiff seeks damages suffered as a result of the directors’ alleged violation of their fiduciary duties. The parties have agreed to expedited proceedings contemplating a hearing in mid-August on Plaintiff’s motion for a preliminary injunction.

We believe the suit to be entirely without merit and intend to oppose the action vigorously.

None.

Until May 8, 2008, our Common Stock was quoted on the NASDAQ Global Market under the symbol “ATAR.” Since May 9, 2008, it has been quoted on the Pink Sheets under the symbol “ATAR.PK.” The high and low sale prices for our Common Stock as reported by the NASDAQ Global Market for the fiscal years ended March 31, 2007 and March 31, 2008 (adjusted to give effect to a one-for-ten reverse stock split that was effective on January 3, 2007) are summarized below.

On June 27, 2008, the last sale price of our Common Stock reported on the Pink Sheets was $1.64. On March 4, 2008, the last trading day before we announced a letter of intent regarding our being acquired by IESA in a transaction in which our shareholders other than IESA and its subsidiaries would receive $1.68 per share in cash, the last sale price of our Common Stock reported on the NASDAQ Global Market was $1.68. On April 29, 2008, the last trading day before we announced that we had entered into a Plan and Agreement of Merger under which we would become a wholly-owned subsidiary of IESA and our stockholders other than IESA and its subsidiaries would receive $1.68 per share in cash, the last sale price of our Common Stock reported on the NASDAQ Global Market was $1.58. As of June 27, 2008, there were approximately 362 record owners of our Common Stock.

We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business. We have not paid any cash dividends nor do we anticipate paying any cash dividends on our Common Stock in the foreseeable future. In addition, the payment of cash dividends may be limited by financing agreements entered into by us.

The following graph compares total shareholder return for the company at March 31, 2008 to the RDG Technology Composite, the NASDAQ Composite index and a peer group consisting of Electronic Arts Inc., Activision, Inc., THQ, Inc., TakeTwo Interactive Software, Inc., and Midway Games, Inc. We selected the RDG Technology Composite because it is a broad based index that includes companies with product mixes similar to ours (although it also includes companies with very different product offerings). We selected companies for inclusion in what we view as a peer group because they have offer products similar to those we offer. The graph assumes an investment of $100 on March 31, 2003.

The table setting forth this information is included in Part III — Item 12. Security Ownership of Certain Beneficial Owners and Management.

None.

None.

The following tables set forth selected consolidated financial information which the years ended March 31, 2004, 2005, 2006, 2007, and 2008, is derived from our audited consolidated financial statements.

In the first quarter of fiscal 2007, management committed to a plan to divest of our previously wholly-owned Reflections studio and its related Driver intellectual property, and in August 2006, we sold to a third party the Driver intellectual property as well as certain assets of Reflections. Therefore, beginning in the first quarter of fiscal 2007, we began to classify the results of Reflections as results of discontinued operations, and all prior period financial statements have been restated retroactively to reflect this classification.

These tables should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Form 10-K. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Until 2005, we were actively involved in developing video games and in financing development of video games by independent developers, which we would publish and distribute under licenses from the developers. However, beginning in 2005, because of cash constraints, we substantially reduced our involvement in development of video games, and announced plans to divest ourselves of our internal development studios.

During fiscal 2007, we sold a number of intellectual properties and development facilities in order to obtain cash to fund our operations. During 2007, we raised approximately $35.0 million through the sale of the rights to the Driver games and certain other intellectual property, and the sale of our Reflections Interactive Ltd (“Reflections”) and Shiny Entertainment (“Shiny”) studios. By the end of fiscal 2007, we did not own any development studios.

The reduction in our development activities has significantly reduced the number of games we publish. During fiscal 2008, our revenues from publishing activities were $69.8 million, compared with $104.7 million during fiscal 2007.

For the year ended March 31, 2007, we had an operating loss of $77.6 million, which included a charge of $54.1 million for the impairment of our goodwill, which is related to our publishing unit. For the year ended March 31, 2008, we incurred an operating loss of approximately $21.9 million. We have taken significant steps to reduce our costs such as our May 2007 and November 2007 workforce reduction of approximately 20% and 30%, respectively. Our ability to deliver products on time depends in good part on developers’ ability to meet completion schedules. Further, our expected releases in fiscal 2008 were even fewer than our releases in fiscal 2007. In addition, most of our releases for fiscal 2008 were focused on the holiday season. As a result our cash needs have become more seasonal and we face significant cash requirements to fund our working capital needs.

The following series of events and transactions which have occurred since September 30, 2007, have caused or are part of our current restructuring initiatives intended to allow us to devote more resources to focusing on our distribution business strategy, provide liquidity, and to mitigate our future cash requirements (for further description see Note 1 in our financial statement footnotes included in this Annual Report):

Although, the above transactions provided cash financing that should meet our need through our fiscal 2009 second quarter (the quarter ending September 30, 2008), management continues to pursue other options to meet our working capital cash requirements but there is no guarantee that we will be able to do so if the proposed transaction in which IESA would acquire us is not completed.

Historically, we have relied on IESA to provide limited financial support to us, through loans or, in recent years, through purchases of assets. However, IESA has its own financial needs, and its ability to fund its subsidiaries’ operations, including ours, is limited. Therefore, there can be no assurance we will ultimately receive any funding from IESA, if the proposed transaction in which IESA would acquire us is not completed.

The uncertainty caused by these above conditions raises substantial doubt about our ability to continue as a going concern, unless the proposed transaction in which IESA would acquire us is completed promptly. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We continue to explore various alternatives to improve our financial position and secure sources of financing which could include forming both operational and financial strategic partnerships, entering into new arrangements to license intellectual property, and selling, licensing or sub-licensing selected owned intellectual property and licensed rights. We continue to examine the reduction of working capital requirements to further conserve cash and may need to take additional actions in the near-term, which may include additional personnel reductions.

The above actions may or may not prove to be consistent with our long-term strategic objectives, which have been shifted in the last fiscal year, as we have discontinued our internal and external development activities. We cannot guarantee the completion of these actions or that such actions will generate sufficient resources to fully address the uncertainties of our financial position.

We are a global publisher of video game software for gaming enthusiasts and the mass-market audience, and a distributor of video game software in North America.

We publish and distribute (both retail and digital) games for all platforms, including Sony PlayStation 2, PlayStation 3, and PSP; Nintendo, DS, and Wii; Microsoft Xbox and Xbox 360; and personal computers, referred to as PCs. We also publish and sublicense games for the wireless, internet (casual games, MMOGs), and other evolving platforms. Our diverse portfolio of products extends across most major video game genres, including action, adventure, strategy, role-playing, and racing. Our products are based on intellectual properties that we have created internally and own or that have been licensed to us by third parties. During fiscal 2007 we sold our remaining internal development studios and during fiscal 2008, we stopped financing development of games by independent developers which we would publish and distribute. Through our relationship with IESA, our products are distributed exclusively by IESA throughout Europe, Asia and other regions. Through our distribution agreement with IESA, we publish and sublicense in North America games owned or licensed by IESA or its subsidiaries, including Atari Interactive. In 2009, we plan to increase our focus on North American publishing and distribution of IESA product.

In addition to our publishing, we also distribute video game software in North America for titles developed by third-party publishers with whom we have contracts. As a distributor of video game software throughout the U.S., we maintain distribution operations and systems that reach in excess of 30,000 retail outlets nationwide. Consumers have access to interactive software through a variety of outlets, including mass-merchant retailers such as Wal-Mart and Target; major retailers, such as Best Buy and Toys ’R’ Us; and specialty stores such as GameStop. Our sales to

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

We suffered large operating losses during fiscal 2006, 2007 and 2008. To fund these losses, we sold assets, including intellectual property rights related to game franchises that had generated substantial revenues for us and including our development studios. During 2008, we granted IESA an exclusive license with regard to the Test Drive franchise in consideration for a $5 million related party advance which shall accrue interest at a yearly rate of 15% throughout the term. We do not have significant additional assets we could sell, if we are going to continue to engage in our current activities. However, we have both short and long term need for funds. As of March 31, 2008, our only credit line was our $14.0 million Bluebay Credit Facility and it was fully drawn. In connection with the Merger Agreement with IESA, we obtained a $20 million interim credit line granted from IESA, which will terminate when the merger takes place or when the Merger Agreement terminates without the merger taking place. At June 12, 2008, we had borrowed $6.0 million under the IESA credit line. The funds available under the two credit lines may not be sufficient to enable us to meet anticipated seasonal cash needs if the merger does not take place before the fall 2008 holiday season inventory buildup. Management continues to pursue other options to meet the cash requirements for funding to meet our working capital cash requirements but there is no guarantee that we will be able to do so.

The “Atari” name, which we do not own, but license from an IESA subsidiary, has been an important part of our branding strategy, and we believe it provides us with an important competitive advantage in dealing with video game developers and in distributing products. Further, our management at times worked on a strategic plan to replace part of the revenues we lost in recent years by expanding into new emerging aspects of the video game industry, including casual games, on-line sites, and digital downloading. Among other things, we have considered licensing the “Atari” name for use in products other than video games. However, our ability to do at least some of those things would require expansion and extension of our rights to use and sublicense others to use the “Atari” name. IESA has indicated a reluctance to expand our rights with regard to the “Atari” name.

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

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

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

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

We maintain allowances for doubtful accounts for estimated losses resulting from the failure of our customers to make payments when due or within a reasonable period of time thereafter. If the financial condition of our customers were to deteriorate, resulting in an inability to make required payments, additional allowances may be required.

For the years ended March 31, 2007 and 2008, we recorded allowances for bad debts, returns, price protection and other customer promotional programs of approximately $22.7 million and $15.7 million, respectively. As of March 31, 2007 and March 31, 2008, the aggregate reserves against accounts receivable for bad debts, returns, price protection and other customer promotional programs were approximately $14.1 million and $1.9 million, respectively.

We write down our inventories for estimated slow-moving or obsolete inventories by the amount equal to the difference between the cost of inventories and estimated market value based upon assumed market conditions. If actual market conditions are less favorable than those assumed by management, additional inventory write-downs may be required. For the years ended March 31, 2007 and 2008 we recorded obsolescence expense of approximately $2.5 million and $1.5 million, respectively.

Research and product development costs related to the design, development, and testing of newly developed software products, both internal and external, are charged to expense as incurred. Research and product development costs also include royalty payments (milestone payments) to third party developers for products that are currently in development. Once a product is sold, we may be obligated to make additional payments in the form of backend royalties to developers which are calculated based on contractual terms, typically a percentage of sales. Such payments are expensed and included in cost of goods sold in the period the sales are recorded.

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

Licenses for intellectual property are capitalized as assets upon the execution of the contract when no significant obligation of performance remains with us or the third party. If significant obligations remain, the asset is capitalized when payments are due or when performance is completed as opposed to when the contract is executed.

In connection with a recapitalization completed in fiscal 2004, Atari Interactive, a wholly-owned subsidiary of IESA, extended the term of the license under which we use the Atari trademark to ten years expiring on December 31, 2013. We issued 200,000 shares of our common stock to Atari Interactive for the extended license and will pay a royalty equal to 1% of our net revenues during years six through ten of the extended license. We recorded a deferred charge of $8.5 million, representing the fair value of the shares issued, which was expensed monthly until it became fully expensed in the first quarter of fiscal 2007 ($8.5 million plus estimated royalty of 1% for years six through ten). The monthly expense was based on the total estimated cost to be incurred by us over the ten-year license period; upon the full expensing of the deferred charge, this expense is being recorded as a deferred liability owed to Atari Interactive, to be paid beginning in year six of the license.

On November 8, 2007, we entered into two separate license agreements with IESA pursuant to which we granted IESA the exclusive right and license, under its trademark and intellectual and property rights, to create, develop, distribute and otherwise exploit licensed products derived from the Test Drive Franchise for a term of seven years. IESA paid us a non-refundable advance, fully recoupable against royalties to be paid under each of the TDU Agreements, of (i) $4 million under the Trademark Agreement and (ii) $1 million under the IP Agreement, both advances accrue interest at a yearly rate of 15% throughout the term of the applicable agreement. As of March 31, 2008, the balance of this related party license advance is approximately $5.3 million of which $0.3 million relates to accrued interest.

Consolidated Statement of Operations (dollars in thousands):

Net revenues by segment for the years ended March 31, 2007 and 2008 are as follows (in thousands):

The platform mix for the years ended March 31, 2007 and 2008 for net publishing revenues from product sales is as follows:

As anticipated our overall revenue was down from $122.3 million to $80.1 million. This decrease is primarily driven by fewer new releases in our publishing business due to cash restrictions and our elimination of our internal studios. The year over year comparison includes the following trends:

Total distribution net revenues for the year ended March 31, 2008 decreased by 41.2% from the prior comparable period due to the overall decrease in product sales of third party publishers as a result of management’s decision to reduce our third party distribution operations in efforts to move away from lower margin products in fiscal 2006. Due to our financial constraints related to fully funding our product development program, we will attempt to increase our focus on higher-margin distribution in the future.

Cost of goods sold as a percentage of net revenues can vary primarily due to segment mix, platform mix within the publishing business, average unit sales prices, mix of royalty bearing products and the mix of licensed product. These expenses for the year ended March 31, 2008 decreased by 43.6%. As a percentage of net revenues, cost of goods sold decreased from 59.4% to 51.2% due to the following:

We expect our cost of goods sold to increase in the future as our reliance on IESA product grows as their product carries a higher distribution cost as compared to our current product mix.

Research and product development expenses consist of development costs relating to the design, development, and testing of new software products whether internally or externally developed, including the payment of royalty advances to third party developers on products that are currently in development and billings from related party developers. We expect to increase the use of external developers as we have sold all of our internal development studios. By leveraging external developers, we anticipate improvements in liquidity as we will no longer carry fixed studio overhead to support our development efforts. However, due to our cash constraints we have not been able to fully fund our development efforts. These expenses for the year ended March 31, 2008 decreased approximately 54.8%, due primarily to:

Selling and distribution expenses primarily include shipping, personnel, advertising, promotions and distribution expenses. During the year ended March 31, 2008, selling and distribution expenses decreased $5.9 million or approximately 23.3%, due to:

General and administrative expenses primarily include personnel expenses, facilities costs, professional expenses and other overhead charges. As a percentage of net revenues, these expenses decreased to 22.0% due to the decreased sales volume in the year ended March 31, 2008. During the year ended March 31, 2008, general and administrative expenses decreased by $4.1 million. Trends within general and administrative expenses related to the following:

In the first quarter of fiscal 2008, management announced a plan to reduce our total workforce by 20%, primarily in general and administrative functions. This restructuring resulted in restructuring charges of

During the third quarter of fiscal 2008, the Board of Directors announced a further reduction of our total workforce totaling an additional 30% primarily in the production and general and administrative functions. This resulted in a charge of approximately $5.5 million for the remainder of fiscal 2008 of which $1.2 million related to severance arrangements. The remaining charge relates to restructuring consulting and legal fees.

In the fiscal 2007 first quarter, we sold the Stuntman intellectual property to a third party for $9.0 million, which was recorded as a gain. No such gain was recorded in the current period.

During the year ended March 31, 2007, we sold certain development studio assets of Shiny to a third party for a gain of $0.9 million. The gain represents the proceeds of $1.8 million (of which $0.2 million is held in escrow for nine months), less the net book value of the development studio assets sold of $0.9 million.

Depreciation and amortization for the year ended March 31, 2008 decreased 47.3% due to:

Interest income (expense), net, decreased from income of $0.3 million to expense of $1.5 million. The increase in expense relates to our use and outstanding borrowings through-out the period of our credit facilities. In fiscal 2007, we borrowed and repaid approximately $15.0 million from our credit facilities and had no outstanding balance as of March 31, 2007. As of March 31, 2008, we have approximately $14.0 million outstanding of which the majority has been outstanding since October 2007.

During the year ended March 31, 2007, a $4.2 million benefit from income taxes primarily results from a noncash tax benefit of $4.7 million, which offsets a noncash tax provision of the same amount included in loss from discontinued operations, recorded in accordance with FASB Statement No, 109, “Accounting for Income Taxes,” paragraph 140, which states that all items should be considered for purposes of determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. The recording of a benefit is appropriate in this instance, under the guidance of Paragraph 140, because such domestic loss offsets the domestic gain generated in discontinued operations. The effect of this transaction on net loss for fiscal 2007 is zero, and it does not result in the receipt or payment of any cash. This noncash tax benefit is offset by $0.5 million of deferred tax liability recorded due to a temporary difference that arose from a difference in the book and tax basis of goodwill.

During the year ended March 31, 2008, we recorded $0.1 million of tax expense due to certain state and local minimum income tax requirements.

(Loss) from discontinued operations of Reflections Interactive Ltd. decreased $2.8 million from $3.1 million during the year ended March 31, 2007 to $0.3 million in fiscal 2008, which relates to remaining lease costs. The fiscal 2007 gain was driven by the gain of sale of Reflections of $11.4 million (sold in August 2006) offset by the operating costs of the Reflections studio of $6.6 million and a tax provision associated with discontinued operations of $4.7 million, recorded in accordance with FASB Statement No, 109, “Accounting for Income Taxes,” paragraph 140, and offset by a tax benefit of an equal amount in continuing operations (see Benefit from Income Taxes above).

A need for increased investment in development and increased need to spend advertising dollars to support product launches, caused in part by “hit-driven” consumer taste, have created a significant increase in the amount of financing required to sustain operations, while negatively impacting margins. Further, our business continues to be more seasonal, which creates a need for significant financing to fund manufacturing activities for our working capital requirements. Our Bluebay Credit Facility is limited to $14.0 million and is fully drawn. Further, at March 31, 2008, the lender had the right to cancel the credit facility as we failed to meet financial and other covenants, the violation of which was waived on April 30, 2008. On April 30, 2008, we obtained a $20 million interim credit line granted by IESA when we entered into the Merger Agreement relating to its acquisition of us, which will terminate when the merger takes place or when the Merger Agreement terminates without the merger taking place. As of June 12, 2008, we continue to have $14.0 million outstanding under the Bluebay credit line and have borrowed approximately $6.0 million from the IESA credit line. The funds available under the two credit lines may not be sufficient to enable us to meet anticipated seasonal cash needs if IESA does not acquire us before the fall 2008 holiday season inventory buildup. Historically, IESA has sometimes provided funds we needed for our operations, but it is not certain that it will be able, or willing to provide the funding we will need for our working capital requirements if IESA does not acquire us.

Because of our funding difficulties, we have sharply reduced our expenditures for research and product development. During the year ended March 31, 2008, our expenditures on research and product development decreased by 54.8%, to $13.6 million, compared with $30.1 million in fiscal 2007. This will reduce the flow of new games that will be available to us in fiscal 2009, and possibly after that. Our lack of financial resources to fund a full product development program has led us to focus on distribution and acquisition of finished goods. As such, we have exited all internal development activities and have stopped investing in development by independent developers.

During fiscal 2007, we raised approximately $35.0 million through the sale of certain intellectual property and the divestiture of our internal development studios. In May 2007, we announced a plan to reduce our total workforce by approximately 20% as a cost cutting initiative. Further in November 2007, we announced a plan to reduce our total workforce by an additional 30%. To reduce working capital requirements and further conserve cash we will need to take additional actions in the near-term, which may include additional personnel reductions and suspension of additional development projects. However, these steps may not fully resolve the problems with our financial position. Also, lack of funds will make it difficult for us to undertake a strategic plan to generate new sources of revenues and otherwise enable us to attain long-term strategic objectives. Management continues to pursue other options to meet our working capital cash requirements but there is no guarantee that we will be able to do so.

During the year ended March 31, 2008, our operations used cash of approximately $15.9 million to support our net loss of $23.6 million for the period. During the year ended March 31, 2007, our operations used cash of approximately $36.9 million driven by the net loss of $69.7 million for the period, compounded by increased payments of trade payables and royalties payable and timing of accounts receivable collections.

During the year ended March 31, 2008, cash provided by investing activities of $0.5 million was due to a refund from our New York office security deposit of $0.9 million offset by purchases of property and equipment. During the year ended March 31, 2007, investing activities provided cash of $29.8 million due to several sale transactions completed during the period:

The cash proceeds are partially offset by the increase in restricted cash of $1.8 million for the collateralizing of a letter of credit related to our new office lease and the purchase of assets (intangibles and property and equipment) of $2.1 million.

During the year ended March 31, 2007 and 2008, our financing activities provided cash primarily from borrowings from our credit facilities. During the year ended March 31, 2008, we also received $5.0 million in cash proceeds from the related party license advance. During fiscal 2007, we paid down all outstanding borrowings and had no outstanding balance at March 31, 2007.

Our Senior Credit Facility with BlueBay matures on December 31, 2009, charges an interest rate of the applicable LIBOR rate plus 7% per year. In connection with the Global Memorandum of Understanding regarding our relationship with IESA, which we entered into on December 4, 2007, we signed a Waiver Consent and Third Amendment to the Credit Facility in which BlueBay raised the maximum borrowings of the Senior Credit Facility to $14.0 million.

The maximum borrowings we can make under the Senior Credit Facility will not by themselves provide all the funding we will need for our working capital needs. Further, the Senior Credit Facility may be terminated if we do not comply with financial and other covenants.

As of March 31, 2008, we were in violation of our covenants. In conjunction with the Merger Agreement, we entered into a Waiver, Consent and Fourth Amendment to our BlueBay Credit Facility under which, among other things, (i) BlueBay agreed to waive our non-compliance with certain representations and covenants under the Credit Agreement, (ii) BlueBay agreed to consent to us entering into the a credit facility with IESA, (iii) BlueBay agreed to provide us consent in entering into the Merger Agreement with IESA, and (iv) BlueBay and we agreed to certain amendments to the Existing Credit Facility.

Management continues to pursue other options to meet the cash requirements for funding our working capital cash requirements but there is no guarantee that we will be able to do so.

Our outstanding accounts receivable balance varies significantly on a quarterly basis due to the seasonality of our business and the timing of new product releases. There were no significant changes in the credit terms with customers during the twelve month period ended on March 31, 2008.

Due to our reduced product releases, our business has become increasingly seasonal. This increased seasonality has put significant pressure on our liquidity prior to our holiday season as financing requirements to build inventory are high. During fiscal 2007, our third quarter (which includes the holiday season) represented approximately 38.7% of our net revenues for the entire year. In fiscal 2008, our third quarter represented approximately 51.3% of our net revenues for the year.

We do not currently have any material commitments with respect to any capital expenditures. However, we do have commitments to pay royalty and license advances, milestone payments, and operating and capital lease obligations.

Our ability to maintain sufficient levels of cash could be affected by various risks and uncertainties including, but not limited to, customer demand and acceptance of our new versions of our titles on existing platforms and our titles on new platforms, our ability to collect our receivables as they become due, risks of product returns, successfully achieving our product release schedules and attaining our forecasted sales goals, seasonality in operating results, fluctuations in market conditions and the other risks described in the “Risk Factors” as noted in this Annual Report.

We are also party to various litigations arising in the normal course of our business. Management believes that the ultimate resolution of these matters will not have a material adverse effect on our liquidity, financial condition or results of operations.

Accounts receivable, net, decreased by $5.9 million from $6.5 million at March 31, 2007 to $0.6 million at March 31, 2008, driven by fewer new releases and the timing of our release schedule and retail payment terms.

Inventories, net, decreased by $4.5 million from $8.8 million at March 31, 2007 to $4.3 million at March 31, 2008, driven by an overall decrease in the distribution business as well as fewer planned new releases.

Due from related parties decreased by $0.9 million and due to related parties decreased by $4.5 million from March 31, 2007 to March 31, 2008 driven by balances between parties being settled by netting during the year.

Prepaid and other current assets decreased approximately $2.0 million from March 31, 2007 to March 31, 2008 primarily from the amortization of licenses at the licensor’s royalty rate over unit sales. This decrease is primarily due to the write-off of licenses which we will no longer exploit and have been charged to research and development expense during the year ended March 31, 2008.

Accounts payable decreased by $5.6 million from March 31, 2007 to March 31, 2008. The decreases were driven by an overall decrease in the distribution business, a lower volume of transactions in the current period, and fewer planned unit sales which resulted in lower total manufacturing liabilities.

Long-term liabilities and property and equipment increased during the year ended March 31, 2008 approximately $3.7 million and $2.1 million, respectively, primarily due to the capitalization of assets and deferred effect of landlord contributions related to our corporate headquarters located at 417 5th Avenue, New York, New York.

On December 21, 2007, we received a notice from NASDAQ advising that in accordance with NASDAQ Marketplace Rule 4450(e)(1), we had 90 calendar days, or until March 20, 2008, to regain compliance with the minimum market value of our publicly held shares required for continued listing on the NASDAQ Global Market, as set forth in NASDAQ Marketplace Rule 4450(b)(3). We received this notice because the market value of our publicly held shares (which is calculated by reference to our total shares outstanding, less any shares held by officers, directors or beneficial owners of 10% or more) was less than $15.0 million for 30 consecutive business days prior to December 21, 2007.

On March 24, 2008, we received a NASDAQ Staff Determination Letter from the NASDAQ Listing Qualifications Department stating that we had failed to regain compliance with the Rule during the required period, and that the NASDAQ Staff had therefore determined that our securities were subject to delisting, with trading in our securities to be suspended on April 2, 2008 unless we requested a hearing before a NASDAQ Listing Qualifications Panel (the “Panel”).

On March 27, 2008, we requested a hearing, which stayed the suspension of trading and delisting until the Panel issued a decision following the hearing. The hearing was held on May 1, 2008.

On May 7, 2008, we received a letter from The NASDAQ Stock Market advising us that the Panel had determined to delist our securities from The NASDAQ Stock Market, and had suspended trading in our securities effective with the open of business on Friday, May 9, 2008. We have to request that the NASDAQ Listing and Hearing Review Council review the Panel’s decision. Requesting a review does not by itself stay the trading suspension action.

Following the delisting of our securities, our Common Stock beginning trading on the Pink Sheets^®, a real-time quotation service maintained by Pink Sheets LLC.

On November 3, 2006, we established a secured credit facility with several lenders for which Guggenheim was the administrative agent. The Guggenheim credit facility was to terminate and be payable in full on November 3, 2009. The credit facility consisted of a secured, committed, revolving line of credit in an initial amount up to $15.0 million, which included a $10.0 million sublimit for the issuance of letters of credit. Availability under the credit facility was determined by a formula based on a percentage of our eligible receivables. The proceeds could be used for general corporate purposes and working capital needs in the ordinary course of business and to finance acquisitions subject to limitations in the Credit Agreement. The credit facility bore interest at our choice of (i) LIBOR plus 5% per year, or (ii) the greater of (a) the prime rate in effect, or (b) the Federal Funds Effective Rate in effect plus 2.25% per year. Additionally, we were required to pay a commitment fee on the undrawn portions of the credit facility at the rate of 0.75% per year and we paid to Guggenheim a closing fee of $0.2 million. Obligations under the credit facility were secured by liens on substantially all of our present and future assets, including accounts receivable, inventory, general intangibles, fixtures, and equipment, but excluding the stock of our subsidiaries and certain assets located outside of the U.S.

The credit facility included provisions for a possible term loan facility and an increased revolving credit facility line in the future. The credit facility also contained financial covenants that required us to maintain enumerated EBITDA, liquidity, and net debt minimums, and a capital expenditure maximum. As of June 30, 2007, we were not in compliance with all financial covenants. On October 1, 2007, the lenders provided a waiver of covenant defaults as of June 30, 2007 and reduced the aggregate availability under the revolving line of credit to $3.0 million.

On October 18, 2007, we consented to the transfer of the loans outstanding ($3.0 million) under the Guggenheim credit facility to funds affiliated with BlueBay Asset Management plc and to the appointment of BlueBay High Yield Investments (Luxembourg) S.A.R.L. (“BlueBay”), as successor administrative agent. BlueBay Asset Management plc is a significant shareholder of IESA. On October 23, 2007, we entered into a waiver and amendment with BlueBay which created a $10.0 million Senior Secured Credit Facility (“Senior Credit Facility”). The Senior Credit Facility matures on December 31, 2009, and bears interest at the applicable LIBOR rate plus 7% per year, and eliminates certain financial covenants. On December 4, 2007, under the Waiver Consent and Third Amendment to the Credit Facility, as part of entering the Global Memorandum of Understanding, BlueBay raised the maximum borrowings of the Senior Credit Facility to $14.0 million. The maximum borrowings we can make under the Senior Credit Facility will not by themselves provide all the funding we will need. As of March 31, 2008, we were in violation of our weekly cash flow covenants (see Waiver, Consent and Fourth Amendment below). Management continues to seek additional financing and is pursuing other options to meet the cash requirements for funding our working capital cash requirements but there is no guarantee that we will be able to do so.

As of March 31, 2008, we have drawn the full $14.0 million on the Senior Credit Facility.

In conjunction with the Merger Agreement, we entered into a Waiver, Consent and Fourth Amendment to our BlueBay Credit Facility under which, among other things, (i) BlueBay agreed to waive our non-compliance with certain representations and covenants under the Credit Agreement, (ii) BlueBay agreed to consent to us entering into the a credit facility with IESA, (iii) BlueBay agreed to provide us consent in entering into the Merger Agreement with IESA, and (iv) BlueBay and us agreed to certain amendments to the Existing Credit Facility.

With the Fourth Amendment, as of April 30, 2008 and through June 24, 2008, we are in compliance with our BlueBay credit facility.

On April 30, 2008, we entered into the IESA Credit Agreement under which IESA committed to provide up to an aggregate of $20 million in loan availability at an interest rate equal to the applicable LIBOR rate plus 7% per year, subject to the terms and conditions of the IESA Credit Agreement (the “New Financing Facility”). The New Financing Facility will terminate when we are acquired by IESA or when the Merger Agreement terminates without the transaction’s taking place. We will use borrowings under the New Financing Facility to fund our operational cash requirements during the period between the date of the Merger Agreement and the closing of the Merger. The obligations under the New Financing Facility are secured by second liens (Bluebay secured the first liens) on substantially all of our present and future assets, including accounts receivable, inventory, general intangibles, fixtures, and equipment. We have agreed that we will make monthly prepayments on amounts borrowed under the New Financing Facility of our excess cash. We will not be able to reborrow any loan amounts paid back under the New Financing Facility other than loan amounts prepaid from excess cash. Also, we are required to deliver to IESA a budget, which is subject to approval by IESA in its commercially reasonable discretion, and which we must supplement from time to time.

Without the New Financing Facility from IESA, we would not be able to finance our current operations. Even with that facility, we will probably not have the funds we will need for the holiday season inventory buildup if IESA does not acquire us before that buildup has to take place. The New Financing Facility will terminate if the Merger Agreement terminates without the transaction taking place. An IESA subsidiary owns 51% of our common stock. If votes in favor of the transaction, it will be approved. However, the IESA subsidiary is not contractually obligated to vote in favor of the transaction. Also see Item 1 for a discussion of our relationship with IESA, as well as our risk factors on page 13.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements,” (“Statement No. 157”) which provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. Furthermore, in February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Liabilities,” (“Statement No. 159”) which permits an entity to measure certain financial assets and financial liabilities at fair value, and report unrealized gains and losses in earnings at each subsequent reporting date. Its objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes without having to apply complex hedge accounting provisions. Statement No. 159 is effective for fiscal years beginning after November 15, 2007, but early application is encouraged. The requirements of Statement No. 157 are adopted concurrently with or prior to the adoption of Statement No. 159. We do not anticipate the adoption of these statements to have a material effect on our financial statements.

See Note 12 of our financial statements for the year-ended March 31, 2008, included in this Annual Report, regarding the Company’s adoption of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)” which is effective for fiscal years beginning after December 15, 2006.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are evaluating the impact, if any, the adoption of this statement will have on our results of operations, financial position or cash flows.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. We do not expect the adoption of this statement to have a material impact on our results of operations, financial position or cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. We are evaluating the impact, if any, the adoption of this statement will have on our results of operations, financial position or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). This Statement changes the disclosure requirements for derivative instruments and hedging activities. Under SFAS 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are evaluating the impact, if any, the adoption of this statement will have on our results of operations, financial position or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect the adoption of this statement to have a material impact on our results of operations, financial position or cash flows.

In December 2007, the FASB ratified the Emerging Issues Task Force’s (“EITF”) consensus on EITF Issue No 07-1, “Accounting for Collaborative Arrangements” that discusses how parties to a collaborative arrangement (which does not establish a legal entity within such arrangement) should account for various activities. The consensus indicates that costs incurred and revenues generated from transactions with third parties (i.e. parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their income statements pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent”. Additionally, the consensus provides that income statement characterization of payments between the participation in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy

Our carrying values of cash, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, accrued liabilities, royalties payable, assets and liabilities of discontinued operations, and amounts due to and from related parties are a reasonable approximation of their fair value.

We earn royalties on sales of our product sold internationally. These revenues, which are based on various foreign currencies and are billed and paid in U.S. dollars, represented $2.6 million of our revenue for the year ended March 31, 2008. We also purchase certain of our inventories from foreign developers and pay royalties primarily denominated in euros to IESA with regards to the sales of IESA products in North America. We do not hedge against foreign exchange rate fluctuations. Therefore, our business in this regard is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Our future results could be materially and adversely impacted by changes in these or other factors. As of March 31, 2008, we did not have any net revenues earned by our foreign subsidiaries. These subsidiaries represented 1.3% of total assets; of these foreign assets, $0.6 million was associated with the Reflections development studio located outside the United States, which was sold in fiscal 2007. We also recorded approximately $0.3 million in operating expenses attributed to the foreign operations, of which $0.3 million related to remaining operations related to the closing of Reflections, which is included in (loss) from discontinued operations on our consolidated statements of operations. Currently, substantially all of our business is conducted in the United States where revenues and expenses are transacted in U.S. dollars. As a result, the majority of our results of operations are not subject to foreign exchange rate fluctuations.

Our Consolidated Financial Statements, and notes thereto, and our Financial Statement Schedule, are presented on pages F-1 through F-45 hereof as set forth below:

None.

Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. As described below under Management’s Report on Internal Control over Financial Reporting, we did not identify any material weaknesses in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of March 31, 2008. As a result, management has concluded that disclosure controls and procedures were effective.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2008. In making this assessment, management used the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO”).

A material weakness is a control deficiency, or a combination of control deficiencies, that result in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Management has concluded that, we did maintain an effective internal control over financial reporting as of March 31, 2008, based on the criteria in Internal Control — Integrated Framework issued by COSO.

As previously reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007, management determined that, as of March 31, 2007, there were material weaknesses in our internal control over

Based on the implementation of the additional internal controls discussed above and the subsequent testing of those internal controls for a sufficient period of time, management has concluded that items (i), (ii) and (iii) material weaknesses identified at March 31, 2008 and discussed above have been remediated.

There have been no other changes in our internal control over financial reporting that occurred during the fourth quarter of the fiscal year ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On May 17, 2008 we entered into an Employment Agreement with Timothy J. Flynn (the “Agreement”). Pursuant to the Agreement, commencing on June 9, 2008, Mr. Flynn is to serve as the Senior Vice President of Sales, reporting to our President and Chief Executive Officer. The Agreement may be terminated at any time by either party with or without cause.

Under the Agreement, Mr. Flynn receives an annual salary of $250,000 with a one-time sign-on bonus of $25,000 which must be repaid if Mr. Flynn terminates his employment within one year of the date of hire. Mr. Flynn is eligible to receive an annual bonus with a target amount of 40% of his base salary, which will be based both upon achievements by us of specified financial objectives and his attainment of individual objectives.

Effective June 9, 2008, Mr. Flynn was granted stock options to purchase 20,000 shares of our common stock with an exercise price equal to the last sales price of our common stock on the Pink Sheets on such date. The options vest 25% on June 9, 2009 and 6.25% each calendar quarter end thereafter commencing with the calendar quarter ending June 30, 2009, subject to his continued employment with us as of each applicable vesting date. All stock options expire on the tenth anniversary of the grant date.

Under the Agreement, if IESA successfully completes the merger with us, our Board of Directors has agreed to use its best efforts to cause IESA to agree to grant to Mr. Flynn a stock option with respect to the stock of IESA, in substitution for and cancellation of our option as described in the previous paragraph.

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2008, entitled “Election of Directors” and “Executive Officers,” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2008, entitled “Executive Compensation,” to be

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2008, entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2008, entitled “Certain Relationships and Related Transactions, and Director Independence,” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

The information required by this Item is incorporated by reference to the sections of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2008, entitled “Principal Accountant Fees and Services,” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

We have audited the accompanying consolidated balance sheet of Atari, Inc. and subsidiaries (the “Company”) as of March 31, 2008, and the related consolidated statement of operations, stockholders’ equity and comprehensive income (loss) and cash flows for the year then ended. Our audit also included the consolidated financial statement schedule listed at Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 2008, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth as of March 31, 2008 and for the year then ended therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced significant operating losses. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have audited the accompanying consolidated balance sheet of Atari, Inc. and subsidiaries (the “Company”) as of March 31, 2007, and the related consolidated statement of operations, stockholders’ equity and comprehensive income (loss) and cash flows for the year in the period ended March 31, 2007. Our audits also included the consolidated financial statement schedule listed at Item 15. These consolidated financial statements and the consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 2007, and the results of its operations and its cash flows for the year in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced significant operating losses. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 123(R), “Share Based Payment”, as revised, effective April 1, 2006. As discussed in Note 1 to the consolidated financial statements, effective March 31, 2007, the Company elected application of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”.