10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended March 31, 2007

OR

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

For the transition period from                      to                     

Commission File No.: 0-27338

ATARI, INC.

(Exact name of registrant as specified in its charter)

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

417 Fifth Avenue, New York, NY 10016
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (212) 726-6500

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.10 par value

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o   No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o   No þ

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

                    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o           Accelerated filer o           Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

          The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant, based on the $5.80 closing sale price of the Common Stock on September 29, 2006 as reported on the NASDAQ Global Market (giving effect to a one-for-ten reverse stock split), was approximately $37,837,000. As of September 10, 2007, a total of 13,477,920 shares of the registrant’s Common Stock were outstanding.

Documents Incorporated by Reference

          Portions of Registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be held in 2007 are incorporated by reference into Part III hereof.

ATARI, INC. AND SUBSIDIARIES
MARCH 31, 2007 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

	Page
PART I
ITEM 1. Business		2
ITEM 1A. Risk Factors		13
ITEM 1B. Unresolved Staff Comments		21
ITEM 2. Properties		21
ITEM 3. Legal Proceedings		22
ITEM 4. Submission of Matters to a Vote of Security Holders		23
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		23
ITEM 6. Selected Financial Data		24
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk		45
ITEM 8. Financial Statements and Supplementary Data		45
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		46
ITEM 9A. Controls and Procedures		46
ITEM 9B. Other Matters		47
PART III
ITEM 10. Directors, Executive Officers, and Corporate Governance		50
ITEM 11. Executive Compensation		50
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50
ITEM 13. Certain Relationships and Related Transactions, and Director Independence		50
ITEM 14. Principal Accountant Fees and Services		50
PART IV
ITEM 15. Exhibits and Financial Statement Schedules		50
SIGNATURES		56
CONSOLIDATED FINANCIAL STATEMENTS		F-1
EXHIBIT INDEX
EX-10.25: DESCRIPTION OF ANNUAL INCENTIVE PLAN
EX-10.58: AGREEMENT OF LEASE
EX-21.1: LIST OF SUBSIDIARIES
EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

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

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PART I

ITEM 1. BUSINESS

OVERVIEW

          We are a publisher of video game software that is distributed throughout the world and a distributor of video game software in North America. We publish, develop (through external resources), and distribute video games for all platforms, including Sony PlayStation 2, PlayStation 3 and PSP, Nintendo Game Boy Advance, Game Cube, Wii and DS, and Microsoft Xbox and Xbox 360, as well as for personal computers, or PCs. The products we publish or distribute extend across most major video game genres, including action, adventure, strategy, role playing and racing. The games we distribute in North America include games we publish, games published by unrelated publishers and games published by our majority stockholder Infogrames Entertainment S.A., or IESA, a French corporation listed on Euronext, which owns approximately 51% of our stock. 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.

          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. 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 and Shiny studios. By the end of fiscal 2007, we did not own any development studios.

          The reduction in our development and development financing activities has significantly reduced the number of games we publish. During fiscal 2007, our revenues from publishing activities were $104.0 million, compared with $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:

• Dragon Ball Z (FUNimation),

• Alone in the Dark (IESA),

• Asteroids, PONG, Missile Command and Centipede (Atari Interactive),

• Dungeons and Dragons (Hasbro and Atari Interactive),

• Earthworm Jim (Interplay),

• RollerCoaster Tycoon (Chris Sawyer and Atari Interactive), and

• Godzilla (Sony Pictures).

          The reduction in our development and publishing activities has increased our focus on distribution activities. We maintain in North America distribution operations and systems that reach in excess of 30,000 retail outlets throughout the United States.

          We are in the process of developing a strategic plan that would expand our activities into new, emerging aspects of the video game industry, including casual games, online sites, digital downloading, advergaming, and brand licensing. However, our ability to do those things will require that we have a source of funding and some of them will require expansion and extension of our rights to use and sublicense certain properties, including our license to use the “Atari” name.

          For the year ended March 31, 2007, our net revenues were only $122.3 million, compared with $206.8 million in the prior year, and we had an operating loss of $77.6 million in fiscal 2007, which included a charge of $54.1 million for impairment of goodwill related to our publishing unit. We have taken significant steps to reduce our costs. 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 are even fewer than our releases in fiscal 2007. In addition, most of our releases for fiscal 2008 are

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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 during the second quarter of our fiscal year.

          Currently, our only borrowing facility is an asset-based secured credit facility that we established in November 2006 with a group of lenders for which Guggenheim Corporate Funding LLC, or Guggenheim, is the administrative agent. The credit facility consists of a revolving line of credit in an amount up to $15.0 million (subject to a borrowing base calculation), which includes a $10.0 million sublimit for the issuance of letters of credit. However, the maximum borrowings we can make under the credit facility will not by themselves provide all the funding we will need for the calendar 2007 holiday season. Further, the credit facility may be terminated if we do not comply with financial and other covenants prior to our need for borrowing (i.e. Nasdaq Delisting).

          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.

          The uncertainty caused by these above conditions raises substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

          We are still exploring various alternatives to improve our financial position and secure other sources of financing which could include raising equity, forming both operational and financial strategic partnerships, renegotiating or entering into a new credit facility, entering into new arrangements to license intellectual property, and selling selected owned intellectual property and licensed rights. Further, as we are contemplating various alternatives, we utilize a special committee of our board of directors, consisting of our independent board members, James Ackerly, Ronald Bernard, and Michael Corrigan, who are authorized to review significant and special transactions. 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 and suspension of certain development projects during fiscal 2008. In May of 2007, we announced a workforce reduction of approximately 20%.

          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 development activities and increased our focus on online and casual gaming, among other things. 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.

          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. and changed our trading symbol on the NASDAQ Global Market to “ATAR.” 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.

INDUSTRY OVERVIEW

          The video game industry primarily comprises software for dedicated game consoles or platforms (such as PlayStation 2, PlayStation 3, Xbox, Xbox 360, Wii, and GameCube), handhelds (such as Game Boy Advance, 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 2006 reached $15.0 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.

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The Console and Handheld Market

          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.

Personal Computers

          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. After 5 years of decline in the PC market, the PC returned to growth in 2006, with an increase in total gross sales of 2% from 2005. Much of the success of this PC growth has been due to the success of massively multiplayer online, or MMO, role playing games. Over 25 new MMO titles came online during 2006. 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.

Online

          Though in fiscal 2007 we derived limited revenue from online exploitation, there are three ways that we publish games that are playable by consumers online:

• Online-only casual games that we make available on the Internet. These are made available to consumers on our website, www.atari.com, and on certain online services provided by third parties.

• Another type of online-only games is called “massively multiplayer online” games. Players experience these games as interactive virtual worlds where thousands of other players can interact with one another. We currently have one massively multiplayer online game, Test Drive Unlimited.

• We include online capability features in certain of our console products, which enable consumers to participate in online communities and play against one another via the Internet.

In addition, online downloads are available for (1) certain PC games either from our atari.com site or third party sites such as Gametap, and (2) Microsoft’s Xbox Live service. We are also developing digital content, which we intend to sell online via microtransactions, for next-generation console-based games.

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          We are currently in the process of revamping our online strategy with a view toward increased forms of online casual gaming. The casual games market is a desirable target for us to pursue due to its revenue growth, diverse revenue streams, and extended reach beyond the historical demographics of the core gamer/console market. The designation ‘casual’ game is used to reference a type of electronic or computer game intended for a broad audience with a focus on reaching a consumer that typically does not play ‘hardcore’ console video games. The mass-market penetration of the casual games industry owes its appeal to the fact that casual games are designed with a low barrier to entry — making it easy for a new player to start playing a game within minutes. The primary distribution channel for casual games is the Internet, which allows the genre of casual gaming to benefit from the ever-growing advances in Internet technology and take advantage of varied online revenue streams. By 2010, the market for online games is expected to reach $4.4 billion in revenue, quadrupling in size from $1.1 billion in 2005. The appeal of casual games spans generations, with college students, teens, school-aged children and seniors all providing significant portions of the consumer makeup. However, the core demographic profile of casual gamers tends to skew older (35+). The largest audience for casual gaming remains women aged 35 to 50, although the overall gender break-down of casual gamers varies greatly depending on genre and game. Due to the rich nature of our intellectual property and brand legacy, we believe we are in a good position to capitalize on the casual games sector.

ESRB Ratings and Litigation

          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.

Consolidation

          We and other publishers have used acquisitions to obtain creative talent as well as independently developed intellectual properties. We believe economies of scale will be increasingly important as the complexity and costs associated with video game development continue to increase. 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.

PRODUCTS

          The following identifies games and franchises that generated the most significant portion of our publishing net product revenues during the years ended March 31, 2005, 2006, and 2007.

• Fiscal 2005 – the Dragon Ball Z franchise generated 28.3% of our publishing net product revenues, driven by Dragon Ball Z: Budokai 3 (PlayStation 2) and Dragon Ball Z: Sagas (PlayStation 2, Xbox, and GameCube). Additionally, the Driver franchise (which was sold in August 2006) generated 14.0% of our publishing net revenues, lead by the release of DRIV3R (PlayStation 2 and Xbox).

• Fiscal 2006 – the Dragon Ball Z franchise generated 28.6% of our publishing net product revenues, driven by the October 2005 release of Dragon Ball Z: Budokai Tenkaichi (PlayStation 2). Additionally, the Matrix franchise generated 14.4% of our publishing net revenues, lead by the November 2005 release of Matrix: Path of Neo (PlayStation 2, Xbox, and PC). Other new releases in fiscal 2006 included Atari Flashback 2.0 (plug and play), Getting Up: Contents Under Pressure (PlayStation 2, Xbox, and PC), Dungeons & Dragons Online: Stormreach (PC), Driver: Parallel Lines (PlayStation 2, and Xbox), and Indigo Prophecy (PC, PlayStation 2, and Xbox).

• Fiscal 2007 – the Dragon Ball Z franchise generated 45.7% of our publishing net product revenues, driven by the November 2006 release of Dragon Ball Z: Budokai Tenkaichi 2 (PlayStation 2 and Nintendo Wii). Additionally, the

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Neverwinter Nights franchise generated 13.9% of our publishing net product revenues, lead by the October 2006 release of Neverwinter Nights 2 (PC). Furthermore, the Test Drive franchise generated 13.4% of our publishing net product revenues, lead by the September 2006 release of Test Drive Unlimited on the Xbox 360 platform, followed by its March 2007 release on the PlayStation 2, PSP, and PC platforms.

PUBLISHING

          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, Game Boy Advance, Wii, and GameCube; Microsoft Xbox and Xbox 360; and PC.

          During the year ended March 31, 2007, we built upon the centralization of our publishing operations in our New York headquarters. In addition, we focused on increased outsourcing and cost management for our Quality Assurance and Production Support group based in California. Greater emphasis was also placed on publishing style activities leveraging products created outside of North America and then re-published by the organization, with a focus on reducing direct development costs and offering more launch predictability. Alliances with external partners and developers in lieu of solely internally developed product have increased in accordance with this transition and as such we have sold-off all of our internal development studios.

          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.

DEVELOPMENT

          During fiscal 2007, we sold all of our internal development studios and now leverage external resources in the development of our games, assessing each project independently to determine which development team is best suited to handle the product based on technical expertise and historical development experience, among other factors. We believe that through the use of independent developers it will be more cost efficient to publish certain of our games.

External Development

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

• Crafts & Master (Super Dragon Ball Z);

• Frontier Development — Chris Sawyer (RollerCoaster Tycoon series);

• Kuju Entertainment (Dungeons & Dragons Tactics);

• Obsidian (Neverwinter Nights); and

• Spike (Dragon Ball Z: Budokai Tenkaichi 2).

          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 agreements may grant us the right to publish sequels, enhancements and add-ons to the products originally developed and produced by the external developer. We pay the external developer a royalty based on sales of its products. A portion of this royalty may be in the form of advances against future royalties payable at the time of execution of the development agreement, with additional payments tied to the completion of detailed performance and development milestones by the developer.

          In addition to using external studios we also manage or will manage development of certain product at IESA’s development studio:

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• Eden Studios SAS—Lyon, France—Eden Studios SAS, or Eden, developed the successful V-Rally series, which, to date, has sold more than 3.8 million units worldwide, and Kya, which was released for the 2003 holiday season. Eden most recently developed Test Drive Unlimited for Xbox 360 and PC, released during fiscal 2007, and is currently developing Alone in the Dark for Xbox 360 and PC, expected to be released in fiscal 2008.

          We previously managed development of certain products at Paradigm Entertainment, Inc., or Paradigm, and Atari Melbourne House, both previously owned by IESA and sold to third parties during fiscal 2007.

          We manage external development projects by appointing a producer to oversee each product’s development and to work with the external developer to design, develop and test the product. The producer also helps ensure that development milestones are met in a timely manner. We generally have the right to suspend or terminate making payments to an external developer if the developer fails to meet its development milestones in a timely fashion. Also, we generally have the option to terminate these agreements at relatively low costs.

          We no longer internally develop games, nor do we have plans to do so in the future.

SALES AND MARKETING

          The sales team presently comprises 11 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 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:

• Managing the life cycle of a catalog of new and existing products;

• Researching industry trends and customer needs to inform the production process, advertising generation, forecasting, retail distribution, and pricing;

• Working with physical retail partners to maximize sales;

• Establishing online sales distribution systems for both boxed products and digitally distributed products;

• Fostering media and online community interest in products and properties;

• Leveraging and strengthening the Atari brand; and

• Exploiting the marketability of our intellectual property and products through licensing arrangements that expand application into other gaming platforms and consumer product categories and bring in new revenue streams such as advertising and product placement.

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

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• Understanding our consumers through professional qualitative and quantitative research;

• Examining competitive product launches to help determine optimal marketing budgets;

• Promoting product publicity via enthusiast and mass market outlets, including broadcast television, internet, newspapers, specialty magazines, and theater;

• Retail marketing and in-store promotions and displays;

• Online marketing and two way online “conversations” with gamers;

• “Underground” marketing techniques, in which marketing materials are placed in physical and online locations which are frequented by targeted groups of consumers;

• Strategic partnerships and cross-promotions with other consumer product companies and third-parties; and

• Working with “first-party” console manufacturers to exploit their marketing opportunities, including presence on their websites, retail exposure and public relations events.

          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.

INTELLECTUAL PROPERTY

Licenses

Licensed properties

          Our strategy includes the creation of games based on licensed properties that have attained a high level of consumer recognition or acceptance. We have entered into licensing agreements with a number of licensors, including FUNimation and Sony Pictures.

          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

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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.

In-Game Advertising

          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 brands to develop “advergames,” which are original, unique game experiences with highly customized brand integration. Advertisers are increasingly interested in reaching and engaging consumers, and interactive entertainment provides a unique medium in which to do so. As such, this is a line of business to which we plan to give increasing focus.

Hardware licenses

          We currently develop software for use with PlayStation 2, PlayStation 3, and PSP; GameCube, Game Boy Advance, Wii, and DS; and Xbox and Xbox 360, 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:

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

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* IESA, our majority stockholder and the distributor of our products in Europe, has entered into similar agreements (directly or through its subsidiaries) with each of the manufacturers for applicable European territories.

          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.

Protection

          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.

DISTRIBUTION

United States, Canada, and Mexico

          Throughout the United States, Canada, and Mexico, we distribute our own products, as well as the products of other publishers, 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. 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 efficiently 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:

• efficient and accurate processing of orders and payments;

• expedited order turnaround time; and

• prompt delivery.

          We are a distributor of video game software to mass merchants in the United States. We distribute our products 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. Wal-Mart, GameStop, and Target accounted for 25.1%, 19.2%, and 10.3%, respectively, of our net revenues for the year ended March 31, 2007. 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 are positioning ourselves to exploit this expansion of the marketplace.

          Other publishers also utilize our distribution capabilities. Their products are generally acquired by us and distributed under the name of the publisher of such products. Our agreements with these publishers typically grant us retail distribution rights in designated territories for specific periods of time, which are typically renewable. Under such agreements, the third party publisher is typically responsible for the publishing, packaging, marketing and customer support of such products.

          We outsource our warehouse operations in the United States to Arnold Logistics, which is located in Lancaster, Pennsylvania. The warehouse operations include the receipt and storage of inventory as well as the distribution of inventory to mass market and other retailing customers.

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Europe, Asia and Other Regions

          IESA distributes our products in Europe, Asia, and elsewhere outside of North America pursuant to a distribution agreement we entered into with IESA. We believe that 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; these retailers include Auchan, Carrefour, Mediamarket and Tesco. IESA has extensive access to retail outlets in these regions. See our risk factor regarding our dependence upon IESA. Under our distribution agreement with IESA, we are entitled to receive 30.0% of the gross margin of the products distributed by IESA, or 130.0% of the royalty rate due to the developer or licensor, whichever is greater.

Backlog

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

MANUFACTURING

          Disk duplication and the printing of user manuals and packaging materials 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 for the supply of our publishing needs, but a number of other outside vendors are also available as sources for these manufacturing and replication 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 GameCube and 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.

EMPLOYEES

          As of the end of fiscal 2007, we had 143 employees domestically, with 49 in product development, 28 in administration (i.e., senior management, human resources, legal, IT and facilities), 31 in finance, 19 in sales and operations, and 16 in marketing. During the fiscal year, we had domestic operations in New York, New York, and Sunnyvale and Santa Clara, California. We also had operations at our formerly wholly-owned Shiny studio in Newport Beach, California until Shiny was sold to a third party in September 2006 (see Development). During the year, we also had operations internationally at our formerly wholly-owned Reflections studio, which was sold in August 2006 (see Development). In May 2007, we announced a plan to reduce our total workforce by approximately 20%, primarily in general and administrative functions. Most of those reductions have been made as of the date of this filing.

RELATIONSHIP WITH IESA

          As of March 31, 2007, IESA beneficially owned approximately 51% of our common stock. IESA renders management services to us (systems and administrative support) and we render 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 in this respect. IESA also develops (through its subsidiaries) products which we distribute in the U.S., Canada, and Mexico and for which we pay royalties to IESA. Both IESA and Atari Interactive are material sources of products which we bring to market in the United States, Canada, and Mexico. During fiscal 2007, international royalties earned from IESA were the source of 4% of our net revenues. Additionally, IESA and its subsidiaries (primarily Atari Interactive) were the source of approximately 38% of our net publishing product revenue for the year ended March 31, 2007.

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          Historically, IESA has incurred significant continuing operating losses and has been highly leveraged. On September 12, 2006, IESA announced a multi-step debt restructuring plan, subject to its shareholders’ approval, which would significantly reduce its debt and provide liquidity to meet its operating needs. On November 15, 2006, IESA shareholders approved the debt restructuring plan, permitting IESA to execute on this plan. As of the date of this report, IESA has raised approximately 74 million Euros, of which approximately 45 million Euros has paid down outstanding short-term and long-term debt and has provided approximately 20 million Euro of liquidity for working capital needs. As of the date of this report, IESA has completed its debt restructuring plan; however, its current ability to fund, among other things, its subsidiaries’ operations remains limited. Our results of operations could be materially impaired if IESA fails to fund Atari Interactive, as any delay or cessation in product development could materially decrease our revenue from the distribution of Atari Interactive and IESA products. If the above contingencies occurred, we probably would be forced to take actions that could result in a significant further reduction in the size of our operations and could have a material adverse effect on our revenue and cash flows. Further, our ability to expand our activities into new areas will depend, among other things, on our ability to obtain funding from IESA or other sources.

          Additionally, although Atari is a separate and independent legal entity and we are not a party to, or a guarantor of, and have no obligations or liability in respect of IESA’s indebtedness (except that we have guaranteed the Beverly, MA lease obligation of Atari Interactive), because IESA owns the majority of our common stock, potential investors and current and potential business/trade partners may view IESA’s financial situation as relevant to an assessment of Atari. Therefore, if IESA has negative financial results, it may taint our relationship with our suppliers and distributors, damage our business reputation, affect our ability to generate business and enter into agreements on financially favorable terms, and otherwise impair our ability to raise and generate capital.

          On April 4, 2007, IESA entered into an agreement with Bruno Bonnell, its founder, CEO, and the Chairman of its Board, under which Mr. Bonnell agreed to resign from his duties as a Director and CEO of IESA and from all the offices he holds with subsidiaries of IESA, including Atari and its subsidiaries. Mr. Bonnell was also the Chairman of our Board, our Chief Creative Officer and our Acting Chief Financial Officer, and previously had been our Chief Executive Officer. IESA agreed to pay Mr. Bonnell a total of approximately 3.0 million Euros, including applicable foreign taxes. Neither our Board of Directors nor any member of our management was consulted about the agreement between IESA and Mr. Bonnell or at any time requested any of the things to which Mr. Bonnell agreed, and our management was not provided with a copy of the agreement until more than two months after it was signed. Mr. Bonnell resigned as a director and officer of Atari, Inc. and of our subsidiaries on April 4, 2007.

          Despite the fact that we did not participate in the preparation of, or know the terms of, the agreement between Mr. Bonnell and IESA, and that IESA, not we, made all the payments under that agreement, management has determined that we have benefited from this separation, and that approximately $0.8 million of the payments IESA made should be allocated to the benefit we received. Our consolidated statement of operations for the year ended March 31, 2007 reflects a charge in this amount. As we are not obligated to make any payments, this amount has been recorded as a capital contribution as of March 31, 2007.

COMPETITION

          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 companies are substantially larger than we are, and at least some of them have far greater financial resources than we currently have. In addition, we compete with first-party publishers such as Sony, Nintendo, and Microsoft, which in some instances publish their own products in competition with third-party publishers.

          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.

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          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.

SEASONALITY

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

SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

          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.

ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Our business has contracted significantly.

          Due primarily to our limited funds, during the past two years we have 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. This has materially reduced our revenues. Because of the reduction in available product, as well as unusually difficult market conditions, in fiscal 2007, our net revenues were only $122.3 million compared with net revenues of $206.8 million in the prior year and $343.8 million in the year before that. Because of this decrease in revenues, among other things including a $54.1 million charge for impairment of goodwill in fiscal 2007, we have had significant operating losses over the past several years. Further, we have substantially fewer titles available for release in fiscal 2008 than has historically been the case.

We need to raise additional funds.

          In recent years, our losses have been substantial. We currently have a credit facility that is limited to $15.0 million and, given our decrease in product sales, is further limited by a borrowing availability that ties to outstanding accounts receivable. Based on current assessments, we will need to raise funds in order to support our calendar 2007 holiday season cash needs and our on-going product development efforts and other operational needs. In order to complete a redirection of our product portfolio and to increase our slate of titles in fiscal 2008 and 2009, we will need to make a significant investment in product development. This investment is critical in order to maintain and grow our business, keep current with changing technology (including new hardware platforms), attract premier development partners, and secure profitable intellectual properties. We may raise funds in any number of ways, including through the issuance of debt or equity, or through other financing. If we borrow funds, we likely will be obligated to make periodic interest or other debt service payments, and the terms of this debt may impose burdensome restrictions on our ability to operate our business. If we seek financing through the sale of equity securities, our current stockholders will suffer significant dilution in their percentage ownership of common stock. Additionally, due to the relative size of Atari, our majority ownership by a financially challenged foreign entity and our history of significant losses, we are not certain as to our ability to raise additional funds in the future or under what terms funds would be available. If we are not successful in raising funds, we will have to take various actions that may include, but not be limited to, a reduction in our expenditures for internal and external new product development, further reduction in overhead expenses, and further sales of intellectual property. These actions,

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should they become necessary, will probably result in further reduction in our size of operations. Such fund raising needs are being discussed with our majority stockholder, among others, with respect to appropriate timing, structure, and amount of such funding.

Our revenues will decline and our competitive position will be adversely affected if we are unable to introduce successful new products on a timely basis.

          Our performance in the video game software publishing business depends on the timely introduction of successful new products, sequels or enhancements of existing products to replace declining revenues from older products. Our inability to introduce compelling new products, sequels or enhancements, or significant delays in their release, have materially and adversely affected the ultimate success of our products and, in turn, our business, results of operations and financial condition. Our product development activities over the last fiscal year and in the coming fiscal year have been and will be less robust than our historical product development, resulting in fewer product releases. This increases the adverse effects we suffer if particular products we release are not successful. The process of introducing new products, sequels or product enhancements is extremely complex, time consuming and expensive. Competitive factors in our industry demand that we create increasingly sophisticated products, which in turn makes it difficult to produce and release compelling products on a predictable schedule.

Our rights to use the “Atari” name are limited.

          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.

Lack of funds and limits on our license rights may limit our ability to expand into new business activities.

          Our management has been developing a strategic plan that would expand our activities into new, emerging aspects of the video game industry, including casual games, online sites, and digital downloading. In addition, they are considering having us try to license the “Atari” name for use in products other than video games. These activities would be used to replace some of the revenues we lost as we reduced our conventional video game development and publishing activities. However, our ability to do those things will require that we have a source of funding and some of them will require expansion and extension of our rights to use the “Atari” name. We do not have a source even of the funds we expect to need for our current operations, and we have no agreements or understandings regarding expansion or extension of licenses. Therefore, even if our Board were to approve a strategic plan that contemplates our expanding our activities into new areas (whether or not those currently contemplated by our management), there is a significant possibility we would not be able to implement that strategic plan.

The loss of Wal-Mart, GameStop, Target, or Best Buy as key customers could negatively affect our business.

          Our sales to Wal-Mart, GameStop, Target, and Best Buy accounted for approximately 25.1%, 19.2%, 10.3%, and 9.3%, respectively, of net revenues (excluding international royalty, licensing, and other income) for the year ended March 31, 2007. Our net accounts receivable from these retailers were approximately $0.2 million, $2.2 million, $0.2 million, and $1.3 million, respectively, as of March 31, 2007. Our business, results of operations and financial condition would be adversely affected if:

• we lost any of these retailers as a customer;

• any of these retailers purchased significantly fewer products from us;

• we were unable to collect receivables from any of these retailers on a timely basis or at all; or

• we experienced any other adverse change in our relationship with any of these retailers.

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          We cannot assure you that Wal-Mart, GameStop, Target, and Best Buy will continue to use us as a major supplier of video game software, or at all. We have experienced difficulties in collecting on certain accounts. We cannot guarantee that we will not continue to have such difficulties and, while we maintain a reserve for uncollectible receivables, the reserve may not be sufficient.

Our results of operations and competitive position may be adversely affected if we are unable to anticipate and adapt to rapidly changing technology, including new console technology.

          The video game software industry is characterized by rapidly changing technology. The introduction of new technologies can render our previously released products obsolete or unmarketable. Therefore, we must continually anticipate the emergence of, and adapt our products to, new technologies and systems. When we choose to publish or develop a product for a new system, we may need to make a substantial development investment one or two years in advance of when we actually ship products for that system. If we develop products for a new system that is ultimately unpopular, we may not be able to recoup our investment as quickly as anticipated, or at all. Conversely, if we choose not to publish products for a new system that is ultimately popular, our competitive position may be adversely affected.

We may be unable to develop and publish new products if we are unable to secure or maintain relationships with leading independent video game software developers.

          As we have discontinued our internal development operations in fiscal 2007, we are even more dependent than in prior years upon leading independent software developers. Consequently, our success depends on our continued ability to obtain or renew product development agreements with leading independent video game software developers. Particularly in view of our financial situation, we may not be able to obtain or renew product development agreements on favorable terms, or at all, including obtaining the rights to sequels of successful products which were originally developed for us by leading independent video game software developers. Many of our competitors have greater financial resources and access to capital than we do, which puts us at a competitive disadvantage when bidding to attract leading independent video game software developers to enter into publishing agreements with us. Among other things, we are severely limited in our ability to pay advance royalties or otherwise provide pre-development financing to developers. Also, many leading independent video game software developers are small companies with a few key individuals without whom a project may be difficult or impossible to complete. Consequently, we are exposed to the risk that these developers will go out of business before completing a project, or simply cease work on a project for which we have hired them.

If we are unable to maintain or acquire licenses to intellectual property, our operating results will be adversely impacted.

          Many of our products are based on or incorporate intellectual property owned by others. For example, some of our titles are based on key television and film licenses. We expect that many of the products we publish in the future will also be based on intellectual property owned by others. The rights we enjoy to licensed intellectual property may vary based on the agreement we have with the licensor. Competition for these licenses is intense and many of our competitors have greater resources to take advantage of opportunities for such licenses. If we are unable to maintain our current licenses and obtain additional licenses with significant commercial value, our sales will decline. In addition, obtaining licenses for popular franchises owned by others could require us to expend significant resources and the licenses may require us to pay relatively high royalty rates. If titles exploiting particular licenses are ultimately unpopular, we may not recoup investments we make to obtain such licenses. Furthermore, in many instances we do not have exclusive licenses for intellectual property owned by others. In these cases, we may face direct competition from other publishers holding similar licenses.

Termination or modification of our agreements with hardware manufacturers will adversely affect our business.

          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 Game Boy Advance, GameCube, and DS and from Microsoft to develop products for Xbox and Xbox 360. We are currently negotiating licenses for Nintendo Wii and 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:

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• terminating a project for which we have expended significant resources;

• leaving us unable to have our products manufactured and shipped to customers;

• increasing manufacturing lead times and expense to us over the lead times and costs we could achieve if we were able to manufacture our products independently;

• delaying the manufacture and, in turn, the shipment of products; and

• requiring us to take significant risks in prepaying for and holding an inventory of products.

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

          Our future success will depend to a significant degree upon the performance and contribution of our senior management team and upon our ability to attract, motivate and retain highly qualified employees with technical, management, marketing, sales, product development, creative and other skills. In the video game software industry, competition for highly skilled and creative employees is intense and costly. We expect this competition to continue for the foreseeable future, and we may experience increased costs in order to attract and retain skilled employees. We cannot provide any assurance that we will be successful in attracting and retaining skilled personnel. Our business, operating results and financial condition could be materially and adversely affected if we lost the services of senior management or key technical or creative employees or if we failed to attract additional highly qualified employees. This has become increasingly difficult, as we have reduced our workforce twice in the last eighteen months.

If returns and other concessions given to our customers exceed our reserves, our business may be negatively affected.

          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.

Significant competition in our industry could adversely affect our business.

          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:

• respond more quickly than we can to new or emerging technologies or changes in customer preferences;

• carry larger inventories than we do;

• undertake more extensive marketing campaigns than we do;

• adopt more aggressive pricing policies than we can; and

• make higher offers or guarantees to software developers and licensors than we can.

          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

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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.

If our distribution arrangements with IESA are adversely modified or terminated, we may lose revenue or incur disruption in the distribution of our products.

          Pursuant to agreements we have in place with IESA, we distribute products on their behalf in the United States, Canada, and Mexico, and IESA distributes products on our behalf in Europe, Asia and certain other regions throughout the world. If these agreements, or product licenses to which IESA is a party, are terminated or amended in a manner adverse to us, we may, as applicable:

• obtain new distribution arrangements for our products which may be on less favorable terms;

• lose revenue from the distribution of IESA’s products;

• experience difficulties or other delays in the distribution of our products outside the United States, Canada, and Mexico;

• incur an increase in the cost of distributing our products outside the United States, Canada, and Mexico; or

• incur problems with retailers to whom we distribute IESA’s products or to whom IESA distributes our products.

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

          During the years ended March 31, 2006 and March 31, 2007, net revenues from our distribution business were approximately 25.7% and 14.4%, respectively, of our total net revenues. Our distribution revenues as a percentage of net revenues is driven by the mix between publishing and distribution sales. Over the past three years our funding constraints have reduced our publishing and distribution activities, causing shifts in this mix.

Revenues from our distribution business may decline if the products which we distribute for IESA are reduced or products we distribute for third-party developers become unavailable to us.

          As part of our distribution business, we earn revenues by distributing to retailers our own products and products of others, including products published by IESA and by our competitors. We cannot assure you that IESA will not reduce the rate at which it develops or obtains rights with regard to video games or that our competitors will continue to provide us with their products for distribution to our mass merchant customers. Our inability to obtain software titles developed or published by IESA or by our competitors, coupled with our inability to obtain these titles from other distributors, could have a material adverse effect on our relationships with retailers and our ability to obtain shelf space for our own products, as well as reducing the revenues that we earn from our distribution activities. This, in turn, could have a material adverse effect on our business, results of operations and financial condition.

We may face increased competition and downward price pressure if we are unable to protect our intellectual property rights.

          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

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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.

We may face intellectual property infringement claims which would be costly to resolve.

          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.

We may be burdened with payment defaults and uncollectible accounts if our customers do not or cannot satisfy their payment obligations.

          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.

Our software is subject to governmental restrictions or rating systems.

          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.

We may become subject to litigation which could be expensive or disruptive.

          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.

RISKS RELATED TO OUR CORPORATE STRUCTURE AND FINANCING ARRANGEMENTS

Our performance may be affected by IESA’s performance and financial stability.

          Historically, IESA has incurred significant continuing operating losses and has been highly leveraged. On September 12, 2006, IESA announced a multi-step debt restructuring plan, subject to its shareholders’ approval, which would significantly reduce its debt and provide liquidity to meet its operating needs. On November 15, 2006, IESA shareholders approved the debt

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restructuring plan, permitting IESA to execute on this plan. As of the date of this report, IESA has raised approximately 74 million Euros, of which approximately 45 million Euros has paid down outstanding short-term and long-term debt and has provided approximately 20 million Euro of liquidity for working capital needs. As of the date of this report, IESA has completed its debt restructuring plan; however, its current ability to fund, among other things, its subsidiaries’ operations remains limited. Our results of operations could be materially impaired if IESA fails to fund Atari Interactive, as any delay or cessation in product development could materially decrease our revenue from the distribution of Atari Interactive and IESA products. If the above contingencies occurred, we probably would be forced to take actions that could result in a significant reduction in the size of our operations and could have a material adverse effect on our revenue and cash flows

          IESA distributes our products in Europe, Asia, and certain other regions, and pays us royalties in this respect. IESA also develops (through its subsidiaries) products which we distribute in the U.S., Canada, and Mexico and for which we pay royalties to IESA. Both IESA and Atari Interactive are material sources of products which we market in the United States, Canada, and Mexico. During fiscal 2007, international royalties earned from IESA were the source of 4% of our net revenues. Additionally, IESA and its subsidiaries (primarily Atari Interactive) were the source of approximately 38% of our net publishing product revenue for the year ended March 31, 2007.

          Additionally, although we are a separate and independent legal entity and we are not a party to, or a guarantor of, and have no obligations or liability in respect of IESA’s indebtedness (except that we have guaranteed the Beverly, MA lease obligation of Atari Interactive), because IESA owns the majority of our common stock, potential investors and current and potential business/trade partners may view IESA’s financial situation as relevant to an assessment of Atari. Therefore, if IESA has negative financial results, it may taint our relationship with our suppliers and distributors, damage our business reputation, affect our ability to generate business and enter into agreements on financially favorable terms, and otherwise impair our ability to raise and generate capital.

IESA controls us and could prevent a transaction favorable to our other stockholders.

          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. Currently, three of the eight members of our Board of Directors are directors, employees or former employees (within three years) of IESA or its affiliates. This concentration of control could be disadvantageous to other stockholders whose interests differ from those of IESA.

Our affiliates retain considerable control over the Atari trademarks, and their oversight or exploitation of such trademarks could affect our business.

          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.

Our restructuring efforts will create short term costs that may not be offset by increased efficiencies.

          We are incurring substantial costs in connection with our restructuring efforts, including severance obligations, advisor fees, and lease obligations for unused property. Though we anticipate that the restructuring will ultimately result in reduced general and administrative expenses and more efficient corporate operations, we can give no assurance that we will be successful in redefining our cost and operational structures in the near term. If we are not successful, we may not see cost savings that justify these measures, which may negatively impact our results of operations.

Our credit facility could be terminated.

          Since November 2006, we have utilized the proceeds of our credit facility with Guggenheim to fund our working capital needs, including the manufacturing and development of products. The credit documents which we entered into with Guggenheim to obtain this credit facility contain numerous covenants and conditions which may cause a default upon breach

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thereof by us. For the quarter ended March 31, 2007, we were not in compliance with certain financial covenants required by the credit facility; however, in May 2007, we received a waiver of the covenants effective March 31, 2007. There can be no assurance that we will be in compliance in future periods. If an event of default occurs under any credit document and Guggenheim opts not to waive such default, the credit facility may be terminated and any debt outstanding accelerated, in which case we will need to raise additional funds or seek other alternatives, many of which may adversely affect our stock price. Further, the credit facility may be terminated if we do not comply with financial and other covenants prior to our need for borrowing in the third quarter of fiscal 2008 (i.e. Nasdaq Delisting).

RISKS RELATED TO OUR COMMON STOCK

The price of our common stock is very low.

          At September 10, 2007, the last reported sale price of our common stock was $2.60 per share. This represents a sharp decline from the price at which it traded one, two, and three years earlier (adjusted for a one-for-ten reverse stock split in 2007). Because of that, a sale of stock, convertible debt, or other forms of stock-based securities in order to raise even a relatively moderate amount of funds would significantly dilute the percentage ownership of our existing stockholders.

IESA is in a position to prevent us from selling stock.

          It is likely that anyone who purchases from us a significant amount of our common stock will insist on receiving a discount even from the current very low market price of the stock. Under the rules of the NASDAQ Global Market, a sale of 20% or more of our stock for less than its market price (or its book value) must be approved by our stockholders. Because IESA owns a majority of our common stock, we will not be able to obtain stockholder approval of a sale of 20% or more of our common stock if IESA opposes it. IESA has historically desired to maintain its ownership of a majority of our outstanding stock. Because IESA currently owns only a little more than 50% of our common stock, unless IESA changes that position, we will not be able to sell stock or securities that are convertible into our common stock unless we simultaneously sell shares to IESA or otherwise enter into a transaction in which we issue shares to IESA.

AVAILABLE INFORMATION

          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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

          None.

ITEM 2. PROPERTIES

          The following table contains the detail of the square footage of our properties by geographic location as of March 31, 2007:

	North America		Europe		Total
New York		70,000		—		70,000
California		20,476		—		20,476
Washington		65,500		—		65,500
Massachusetts		53,184		—		53,184
Newcastle, UK		—		14,576		14,576
Total		209,160		14,576		223,736

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          New York. In fiscal 2007, 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. Upon entering into this lease, our previous lease was terminated. The previous lease of approximately 90,000 square feet of office space at the same location commenced in December 1996 and was to expire in December 2006 (see Item 7 for further details). We had subleased 10,000 square feet of such space for a period beginning in May 2003 and ending in December 2006; our obligations under this sublease were assigned to and assumed by the Landlord effective July 1, 2006. In August 2007, we agreed to surrender, effective December 31, 2007, one-half of square feet of the space we are leasing. We also lease corporate residences in the greater New York City area for use by our executive officers, directors, and consultants.

          California. During a portion of fiscal 2007, we leased approximately 17,400 square feet of office space in Santa Monica, California, under a lease which expired in May 2006. We also lease 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 has been subleased to the purchaser of Shiny; the lease expires in August 2007. Additionally, we had a lease for approximately 15,000 square feet of office space in Sunnyvale, California, which expired in December 2006. The occupants of this facility were relocated in December 2006 to 4,016 square feet of new office space that we leased in Santa Clara, California, which expires in December 2009.

          Washington. We lease approximately 65,500 square feet of office space in Bothell, Washington, under a lease which expires in May 2008. This office space was occupied by our Humongous studio, which was sold in August 2005. We now sublease parking lot space and the majority of the office space under seven subleases, one of which expires in April 2008 and six of which expire in May 2008.

          Massachusetts. In Beverly, Massachusetts, we sublease a portion of the 53,184 square feet of the office space leased by Atari Interactive. Our lease expires in June 2007. In June 2005, we ceased operations at this location; no sublease has been entered into.

          Europe. In Newcastle upon Tyne, United Kingdom, we lease approximately 14,576 square feet of office space, which was occupied by our formerly wholly-owned Reflections studio, which was sold in August 2006 (see Development). This lease expires in August 2011. The purchaser of Reflections currently subleases this space from us in a sublease which expires in August 2007. The sublease is expected to be renewed through fiscal 2008.

ITEM 3. LEGAL PROCEEDINGS

          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.

Bouchat v. Champion Products, et al. (Accolade)

          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.

Indigo Moon Productions, LLC v. Hasbro, Inc., et al.

          On August 12, 2005, Indigo Moon Productions, LLC, or Indigo Moon, filed a lawsuit against Hasbro, Inc., Hasbro Interactive, Atari Interactive, us and Infogrames, Inc. in the United States District Court in the Western District of Kentucky. Indigo Moon alleges that on or about June 28, 2000, Indigo Moon and Hasbro Interactive, Inc. (n/k/a Atari Interactive) entered into a Confidential Information Agreement for sharing information regarding the possibility of cooperating on the production or exploitation of interactive games. Indigo Moon alleges that it provided Atari Interactive with designs and concepts for a computerized version of Clue and that Atari Interactive represented that it would compensate Indigo Moon for its work, but did not. Indigo Moon further alleges that in October 2003 Hasbro, Atari Interactive and/or Infogrames, Inc. (n/k/a Atari) released a Clue FX Game and that in the Spring of 2005 Hasbro, Atari Interactive and/or Infogrames, Inc. released Clue Mysteries, each of which allegedly incorporates Indigo Moon’s work. Indigo Moon’s complaint alleges the

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following specific causes of action: breach of express contract, breach of implied contract, promissory estoppel, quasi-contract and unjust enrichment, breach of a confidential relationship and misappropriation of trade secret; and seeks unspecified damages. Plaintiff has agreed to dismiss us from this case without prejudice and to proceed against the remaining defendants. A Notice of Dismissal has been filed with the Court and Atari, Inc. has been dismissed from this case.

Ernst & Young, Inc. v. Atari, Inc.

          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. Our answer and counterclaim were filed in August of 2006 and we initiated discovery against Ernst & Young at the same time. Settlement discussions commenced in September 2006 and are currently on-going.

Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.

          On October 26, 2006, Research in Motion Limited, or RIM, filed a claim against us and Atari Interactive 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 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 appropriate. Breakout and Super Breakout are games owned by Atari Interactive. On January 19, 2007, RIM added claims to its case requesting a declaration that (i) its game Meteor Crusher does not infringe an Atari copyright for its game Asteroids in Canada, (ii) the audio-visual displays of Asteroids do not constitute a work protected under Canadian law, and (iii) Atari holds no right, title or interest in Asteroids under Canadian law. In August 2007, the Court ruled against Atari’s December 2006 motion to have the RIM claims dismissed on the grounds that there is no statutory relief available to RIM under Canadian law. Atari is in the process of appealing this decision.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

          A Special Meeting of Stockholders was held on January 3, 2007. Of the 134,779,670 shares of common stock outstanding and entitled to vote at the Special Meeting, 115,577,742 shares were present in person or by proxy, each entitled to one vote on each matter to come before the meeting. The matters acted upon at our Special Meeting of Stockholders, and the voting tabulation for each such matter is as follows:

Proposal 1. To approve amendments to our Restated Certificate of Incorporation that will (i) effectuate a one-for-ten reverse stock split, and (ii) decrease the number of shares that Atari is authorized to issue.

			Broker Non-
For	Against	Abstain	Votes
114,048,433	1,247,847	281,462	0

          As set forth above, at the Special Meeting, the stockholders of Atari approved the amendments of our Restated Certificate of Incorporation. On January 3, 2007, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Restated Certificate of Incorporation. The Certificate of Amendment was effective as of January 3, 2007, and affected a one-for-ten reverse stock split of our issued and outstanding shares of Common Stock, par value $0.01 and decreased the number of shares of Common Stock we are authorized to issue from 300,000,000 to 30,000,000. As of January 3, 2007, every 10 shares of our issued and outstanding Common Stock, $0.01 par value, automatically converted to one share of Common Stock, $0.10 par value. No fractional shares were issued in connection with the reverse split. Cash was paid in lieu of fractional shares. The Reverse Split did not alter any voting rights or other terms of our Common Stock. In accordance with the Reverse Split, the Compensation Committee of our Board of Directors adjusted the amount of shares reserved under, and all awards made pursuant to, the Atari, Inc. 2005 Stock Incentive Plan and all of our prior stock incentive plans, as applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

          Our Common Stock is quoted on the NASDAQ Global Market under the symbol “ATAR.” The high and low sale prices for our Common Stock as reported by the NASDAQ Global Market for the fiscal years ended March 31, 2006 and March 31, 2007 (adjusted to give effect to a one-for-ten reverse stock split that was effective on January 3, 2007) are summarized below.

	High		Low
Fiscal 2006
First Quarter	$	31.80	$	23.00
Second Quarter	$	29.40	$	11.50
Third Quarter	$	14.60	$	9.79
Fourth Quarter	$	11.80	$	5.61
Fiscal 2007
First Quarter	$	9.70	$	4.70
Second Quarter	$	7.90	$	4.75
Third Quarter	$	6.00	$	4.60
Fourth Quarter	$	6.50	$	2.94

          On September 10, 2007, the last reported sale price of our Common Stock on the NASDAQ Global Market was $2.60. As of September 10, 2007, there were approximately 358 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.

Securities Authorized for Issuance under Equity Compensation Plans

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

Recent Sales of Unregistered Securities

          None.

Purchase of Equity Securities by the Issuer and Affiliated Purchases.

          None.

ITEM 6. SELECTED FINANCIAL DATA

          The following tables set forth selected consolidated financial information which, for the nine months ended March 31, 2003, and the years ended March 31, 2004, 2005, 2006, and 2007, is derived from our audited consolidated financial statements. Effective March 28, 2003, we changed our fiscal year-end from June 30 to March 31.

          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.

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          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.”

	Nine
	Months			Years
	Ended			Ended
	March 31,			March 31,
	2003			2004			2005 (1)			2006 (1)(2)			2007 (1)(2)(3)
Statement of Operations Data:
Net revenues	$	393,529		$	465,639		$	343,837		$	206,796		$	122,285
Operating income (loss)		32,258			20,840			(23,970	)		(62,977	)		(77,644	)
Income (loss) from continuing operations		22,908			13,606			(14,855	)		(63,375	)		(66,586	)
(Loss) income from discontinued operations of Reflections Interactive Ltd, net of tax provision of $0, $0, $9,352, $0, and $7,559, respectively		(4,838	)		(12,840	)		20,547			(5,611	)		(3,125	)
Net income (loss)		18,070			766			5,692			(68,986	)		(69,711	)
Dividend to parent		—			(39,351	)		—			—			—
Income (loss) attributable to common stockholders	$	18,070		$	(38,585	)	$	5,692		$	(68,986	)	$	(69,711	)
Basic and diluted income (loss) per share attributable to common stockholders (4):
Income (loss) from continuing operations	$	3.28		$	1.40		$	(1.22	)	$	(4.93	)	$	(4.94	)
(Loss) income from discontinued operations of Reflections Interactive Ltd, net of tax		(0.69	)		(1.32	)		1.69			(0.43	)		(0.23	)
Net income (loss)		2.59			0.08			0.47			(5.36	)		(5.17	)
Dividend to parent		—			(4.06	)		—			—			—
Income (loss) attributable to common stockholders	$	2.59		$	(3.98	)	$	0.47		$	(5.36	)	$	(5.17	)
Basic weighted average shares outstanding (4)		6,988			9,699			12,128			12,863			13,477
Diluted weighted average shares outstanding (4)		7,006			9,699			12,159			12,863			13,477

(1)	During fiscal 2005, 2006, and 2007, we recorded restructuring expenses of $4.9 million, $8.9 million, and $0.7 million, respectively.
(2)	During fiscal 2006, we recorded a gain on sale of intellectual property of $6.2 million and in fiscal 2007, we recorded a gain on sale of intellectual property of $9.0 million and a gain on sale of development studio assets of $0.9 million. Additionally, in fiscal 2007 the gain on sale of Reflections of $11.5 million is included as a reduction of the loss from discontinued operations.
(3)	During fiscal 2007, we recorded an impairment loss on our goodwill of $54.1 million, which is included in the loss from continuing operations.
(4)	Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated retroactively to reflect the reverse stock split.

	March 31,
	2003			2004		2005		2006			2007
Balance Sheet Data:
Cash	$	392		$	8,858	$	9,988	$	14,948		$	7,603
Working capital (deficit)		(90,260	)		25,844		34,467		(2,996	)		1,213
Total assets		232,082			193,956		190,039		143,670			42,819
Total debt		220,061			—		—		—			—
Stockholders’ equity (deficit)		(96,918	)		115,063		120,667		73,212			3,094

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Going Concern

          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. 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 and Shiny studios. By the end of fiscal 2007, we did not own any development studios.

          The reduction in our development and development financing activities has significantly reduced the number of games we publish. During fiscal 2007, our revenues from publishing activities were $104.7 million, compared with $153.6 million during fiscal 2006 and $289.6 million during fiscal 2005.

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          We are in the process of developing a strategic plan that would expand our activities into new, emerging aspects of the video game industry, including casual games, online sites, digital downloading, advergaming, and brand licensing. However, our ability to do those things will require that we have a source of funding and some of them will require expansion and extension of our rights to use and sublicense certain properties, including our license to use the “Atari” name.

          For the year ended March 31, 2007, our net revenues were only $122.3 million, compared with $206.8 million in the prior year, and we had an operating loss of $77.6 million in fiscal 2007, which included a charge of $54.1 million for the impairment of our goodwill, which is related to our publishing unit. We have taken significant steps to reduce our costs. 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 are even fewer than our releases in fiscal 2007. In addition, most of our releases for fiscal 2008 are 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 during the second quarter of our fiscal year.

          Currently, our only borrowing facility is an asset-based secured credit facility that we established in November 2006 with a group of lenders for which Guggenheim is the administrative agent. The credit facility consists of a revolving line of credit in an amount up to $15.0 million (subject to a borrowing base calculation), which includes a $10.0 million sublimit for the issuance of letters of credit. However, the maximum borrowings we can make under the credit facility will not by themselves provide all the funding we will need for the calendar 2007 holiday season. Further, the credit facility may be terminated if we do not comply with financial and other covenants prior to our need for borrowing (i.e. Nasdaq Delisting).

          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.

          The uncertainty caused by these above conditions raises substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

          We are still exploring various alternatives to improve our financial position and secure other sources of financing which could include raising equity, forming both operational and financial strategic partnerships, renegotiating or entering into a new credit facility, entering into new arrangements to license intellectual property, and selling selected owned intellectual property and licensed rights. Further, as we are contemplating various alternatives, we utilize a special committee of our board of directors, consisting of our independent board members, James Ackerly, Ronald Bernard, and Michael Corrigan, who are authorized to review significant and special transactions. 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 and suspension of certain development projects during fiscal 2008. In May of 2007, we announced a workforce reduction of approximately 20%.

          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 development activities and increased our focus on online and casual gaming, among other things. 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.

Related party transactions

          We are involved in numerous related party transactions with IESA and its subsidiaries. These related party transactions include, but are not limited to, the purchase and sale of product, game development, administrative and support services and distribution agreements. In addition, we use the name “Atari” under a license from Atari Interactive (a wholly-owned subsidiary of IESA) that expires in 2013.

Reverse Stock Split

          On January 3, 2007, we effected a one-for-ten reverse stock split. The number of shares we are authorized to issue was reduced from 300,000,000 to 30,000,000, and the par value was increased from $0.01 to $0.10 per share. Preferred stock remain at 5,000,000 authorized shares with a par value of $0.01 per share, none of which are outstanding.

Business and Operating Segments

          We are a global publisher and developer of video game software for gaming enthusiasts and the mass-market audience, and a distributor of video game software in North America. We develop, publish, and distribute (both retail and digital) games for all platforms, including Sony PlayStation 2, PlayStation 3, and PSP; Nintendo Game Boy Advance,

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GameCube, 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, an area to which we have begun to devote increasing attention. 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. We leverage external resources in the development of our games, assessing each project independently to determine which development team is best suited to handle the product based on technical expertise and historical development experience, among other factors. During fiscal 2007, we sold our remaining internal development studios; we believe that through the use of independent developers it will be more cost efficient to publish certain of our games. Additionally, 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 have the rights to publish and sublicense in North America certain intellectual properties either owned or licensed by IESA or its subsidiaries, including Atari Interactive. We also manage the development of certain product at studios owned by IESA that focus solely on game development.

          In addition to our publishing and development activities, 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 key customers Wal-Mart, GameStop, and Target accounted for approximately 25.1%, 19.2%, and 10.3%, respectively, of net revenues (excluding international royalty, licensing, and other income) for the year ended March 31, 2007. No other customers had sales in excess of 10% of net product revenues. Additionally, our games are made available through various internet, online, and wireless networks.

Adoption of FASB Statement No. 123(R)

          Effective April 1, 2006, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment,” which requires the measurement and recognition of compensation expense at fair value for employee stock awards. Prior to fiscal 2007, we accounted for employee stock option plans under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Included in the fiscal 2007 net loss is $1.6 million of stock-based compensation expense, of which $0.9 million is included in research and product development expenses, $0.6 million is included in general and administrative expenses, and $0.1 million is included in selling and distribution expenses. No such expense was recorded in prior periods.

Key Challenges

          The video game 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 retail 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 2007 and 2006. 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. Further significant asset sales may not be practical if we are going to continue to engage in our current activities. However, we have both short and long term need for funds. Currently, our only credit line is an asset based secured credit line that is limited to $15.0 million (subject to a borrowing base calculation), and which the lenders will have the right to cancel if, as is likely, we fail to meet financial covenants at June 30, 2007 (the lenders waived defaults resulting from our failure to meet financial covenants at March 31, 2007). Even if the credit line remains in effect, it will not provide all the funds we will need to pay for inventory that will be needed for the calendar 2007 holiday season. Historically, IESA has sometimes provided funds we needed for our operations, but it is not certain that it will be able, or will be willing, to provide the funding we will need for fiscal 2008 or subsequent to that.

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          The “Atari” name (which we license) 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 has been working 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, online sites, and digital downloading. In addition, we are considering licensing the “Atari” name for use in products other than video games. However, our ability to do at least some of those things will require expansion and extension of our rights to use and sublicense others to use the “Atari” name. 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.

Critical Accounting Policies

          Our discussion and analysis of financial condition and results of operations relates to our 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 and notes 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 consolidated financial statements.

Revenue recognition, sales returns, price protection, other customer related allowances and allowance for doubtful accounts

          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 customers. In addition, we may provide price protection, co-operative advertising and other allowances to 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, 2005, 2006, and 2007, we recorded allowances for bad debts, returns, price protection and other customer promotional programs of approximately $79.9 million, $56.9 million, and $22.7 million, respectively. As of March 31, 2006 and March 31, 2007, the aggregate reserves against accounts receivable for bad debts, returns, price protection and other customer promotional programs were approximately $30.9 million and $14.1 million, respectively.

Inventories

          We write down our inventories for estimated slow-moving or obsolete inventories equal to the difference between the cost of inventories and estimated market value based upon assumed market conditions. If actual market conditions are less favorable than those assumed by management, additional inventory write-downs may be required. For the years ended March 31, 2005, 2006, and 2007, we recorded obsolescence expense of approximately $2.6 million, $3.7 million, and $2.5 million, respectively. As of March 31, 2006 and March 31, 2007, the aggregate reserve against inventories was approximately $2.4 million and $1.9 million, respectively.

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Research and product development expenses

          Research and product development expenses 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 expenses 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

          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. These licenses are amortized at the licensor’s royalty rate over unit sales to cost of goods sold. Management evaluates the carrying value of these capitalized licenses and records an impairment charge in the period management determines that such capitalized amounts are not expected to be realized. Such impairments are charged to cost of goods sold if the product has released or previously sold, and if the product has never released, these impairments are charged to research and product development expenses.

Atari Trademark License

          In connection with a recapitalization completed in fiscal 2004, Atari Interactive 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. 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. Based on these assumptions, a $100.0 million increase/decrease in the estimated total net revenues during years six through ten of the extended license period would result in a $0.2 million increase/decrease in this expense. During fiscal 2007, we recorded $2.2 million of expense related to this license.

Goodwill and Acquired Intangible Assets

          Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies. Goodwill is not amortized, and is tested for impairment at the reporting unit level annually or when there are any indications of impairment, as required by FASB Statement No. 142, “Goodwill and Other Intangible Assets.” A reporting unit is an operating segment for which discrete financial information is available and is regularly reviewed by management. We only have one reporting unit, our publishing business, to which goodwill is assigned.

          A two-step approach is required to test goodwill for impairment for each reporting unit. The first step tests for impairment by applying fair value-based tests (described below) to a reporting unit. The second step, if deemed necessary, measures the impairment by applying fair value-based tests to specific assets and liabilities within the reporting unit. Application of the goodwill impairment tests require judgment, including identification of reporting units, assignment of assets and liabilities to each reporting unit, assignment of goodwill to each reporting unit, and determination of the fair value of each reporting unit. The determination of fair value for each reporting unit could be materially affected by changes in these estimates and assumptions. Such changes could trigger impairment.

          In fiscal 2007, we completed the first step of the annual goodwill impairment testing as of December 31, 2006 with regard to the goodwill, which is all associated with our publishing business. As part of step one, we considered three methodologies to determine the fair-value of our reporting unit. The first, which we believe is our primary and most reliable approach, is a market capitalization approach. This aligns our market capitalization at the balance sheet date to our publishing business, as we believe this measure is a good indication of third-party determination of fair value. The second approach entails determining the fair value of the reporting unit using a discounted cash flow methodology, which requires

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significant judgment to estimate the future cash flows and to determine the appropriate discount rates, growth rates, and other assumptions. The third approach is an orderly sale of assets process, which values the publishing unit based on estimated sale price of assets and intellectual property, less any related liabilities. Due to our history of operating losses and diminishing financial performance, we do not place heavy reliance on the second approach. The third approach is not a commonly used analysis; therefore, we place minimal reliance on that approach as well. Pursuant to the analysis using the market capitalization approach, we found no indications of impairment of our recorded goodwill at December 31, 2006.

          However, during the fourth quarter ended March 31, 2007, our market capitalization declined significantly. As this measure is our primary indicator of the fair value of our publishing unit, management considered this decline to be a triggering event, requiring us to perform an impairment analysis. As of March 31, 2007, we completed this analysis and our management, with the concurrence of the Audit Committee of our Board of Directors, has concluded that an impairment charge of $54.1 million should be recognized. This is a non-cash charge and has been recorded in the fourth quarter of fiscal 2007.

          During fiscal 2007, we recorded acquired intangible assets for website development costs (related to the Atari Online website, including a URL), which are accounted for in accordance with Emerging Issues Task Force (“EITF”) 00-02, “Accounting for Web Site Development Costs.” EITF 00-02 requires that web site development costs be treated as computer software developed for internal use, and that costs incurred in the application and development stages be capitalized in accordance with AICPA Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” As of March 31, 2007, we determined that certain of the acquired intangible assets previously capitalized no longer provided a future benefit to the company, as management decided at the end of the fourth quarter to move to an outsourced technology model; these costs were written off, and the charge is included in research and product development expenses for the year ended March 31, 2007.

Results of Operations

Year ended March 31, 2006 versus year ended March 31, 2007

Consolidated Statement of Operations (dollars in thousands):

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

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Net Revenues

Net revenues by segment for the years ended March 31, 2006 and 2007 are as follows (in thousands):

	Years
	Ended
	March 31,				(Decrease)
	2006		2007
Publishing	$	153,598	$	104,650	$	(48,948	)
Distribution		53,198		17,635		(35,563	)
Total	$	206,796	$	122,285	$	(84,511	)

The platform mix for the years ended March 31, 2006 and 2007 for net publishing revenues from product sales is as follows:

	Publishing Platform Mix
	2006			2007
PlayStation 2		35.5	%		35.5	%
PC		32.7	%		27.2	%
Xbox 360		0.0	%		12.1	%
Nintendo Wii		0.0	%		8.4	%
PlayStation Portable		2.1	%		7.6	%
Game Boy Advance		6.7	%		3.9	%
Plug and Play		9.3	%		2.8	%
Nintendo DS		2.1	%		2.0	%
Xbox		9.8	%		0.3	%
Game Cube		1.8	%		0.2	%
Total		100.0	%		100.0	%

Net revenues for the year ended March 31, 2007 decreased approximately 40.9%, largely due to fewer successful new releases and product launch delays, compounded by decreased international royalty income.

• The fiscal 2007 net publishing revenues of $104.7 million include net product sales from new releases of $61.8 million, driven by Dragon Ball Z: Budokai Tenkaichi 2 (PlayStation 2 and Nintendo Wii), Neverwinter Nights 2 (PC), and Test Drive Unlimited (Xbox 360, PlayStation 2, PSP, and PC). Comparatively, in fiscal 2006, net publishing revenues of $153.6 million were driven by new release sales of $95.1 million which included Dragon Ball Z: Budokai Tenkaichi (PlayStation 2), Matrix: Path of Neo (PlayStation 2, Xbox, and PC), Atari Flashback 2.0 (plug and play), and Getting Up: Contents Under Pressure (PlayStation 2, Xbox, and PC).

• During the year ended March 31, 2007, back catalogue sales were 28% of our net product revenues, compared with 24% of our net product revenues during fiscal 2006.

• Publishing net revenues include international royalty income earned on IESA’s international sales of our titles. International royalty income decreased by $8.3 million from $13.5 million in fiscal 2006 to $5.2 million in fiscal 2007. The current year income was driven by international sales of Test Drive Unlimited, while the prior year’s income reflected international sales of Matrix: Path of Neo, Getting Up: Contents Under Pressure, and Indigo Prophecy.

• Domestic licensing and other income, included in publishing net revenues, decreased slightly to $12.0 million from $12.1 million in fiscal 2006. Included in this change are:

o decreased domestic licensing income of $1.0 million in fiscal 2007 due to an overall decrease in volume of licensing transactions, offset by

o increased miscellaneous revenues of $0.9 million driven by increased quality and assurance services (product testing) performed, and sponsorship and in-game advertising revenue which did not exist in fiscal 2006.

• The overall average sales price (“ASP”) of the publishing business was relatively consistent with fiscal 2006, increasing slightly from $20.50 to $20.80 in fiscal 2007. Trends include:

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o increase in the ASP for PC titles from $14.67 to $17.44, and

o decrease in the ASP for console titles from $25.44 to $22.41. The current year includes sales of Xbox 360 and Nintendo Wii titles, with ASPs of $31.04 and $36.37, respectively, that were not included in fiscal 2006; however, this is offset by a decrease in the ASP for Xbox titles from $30.33 to $5.55, and in PlayStation 2 titles from $29.28 to $21.05, as a result of the recent transition to the newest generation consoles.

• Platform mix in fiscal 2007 consisted of 27.2% PC products and 72.8% console (including plug and play) products, as compared with fiscal 2006’s mix of 32.7% PC products and 67.3% console (including plug and play) products.

• In the fourth quarter of fiscal 2006, we recorded additional price protection allowances of $4.2 million in connection with our aggressive pricing program, which reduced console and certain PC titles sold prior to March 31, 2006 to a retail price of $19.95.

Total distribution net revenues decreased by $35.6 million, or 66.9%, due to an 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. 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

          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 mix of licensed product. These expenses decreased by $61.0 million primarily from decreased sales volume. Cost of goods sold as a percentage of net revenues decreased from 64.6% to 59.4%, reflecting:

• a lower mix of higher cost third-party distributed product sales as a percentage of net revenues (14.4% in fiscal 2007 compared with 25.7% in fiscal 2006), and

• a lower mix of royalty bearing products (fiscal 2006 included sales of Matrix: Path of Neo and Getting Up: Contents Under Pressure, both bearing a high amount of royalty expense).

Research and Product Development Expenses

          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. These expenses for the year ended March 31, 2007 decreased approximately $21.8 million due to:

• a decrease in expense incurred with external developers of $6.9 million from lack of financial resources to invest in full-fledged development projects (however, we do expect to see savings in research and product development cost in the future if we focus on casual gaming, which has lower development costs),

• a decrease in spending of $10.0 million at our related party development studios due to the sale of our Stuntman franchise and development project, in process at Paradigm in fiscal 2006, as well as the completion of Test Drive Unlimited on Xbox 360, released in September 2006 and in process at Eden Studios and Atari Melbourne House (which was sold in fiscal 2007) in fiscal 2006, and

• a decrease in salary and other related expenses of $7.9 million due to the closure of the Beverly and Santa Monica publishing studios during fiscal 2006, the divestiture of the Shiny studio in the second quarter of fiscal 2007, and other personnel reductions, offset by

• the current period write-off of $2.4 million of website-related acquired intangible and other assets previously capitalized that were determined during the fourth quarter not to provide us with a future benefit, and

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• the allocated charge of $0.8 million related to the benefit we received from resignation agreement entered into by IESA with our former Chief Creative Officer.

          Internal research and product development expenses represented 43.6% and 51.0% of the total research and product development expenses for the years ended March 31, 2006 and 2007, respectively. As of March 31, 2007, we no longer own any internal development studios. Research and product development expenses, as a percentage of net revenues, decreased from 25.1% in fiscal 2006 to 24.6% in fiscal 2007.

Selling and Distribution Expenses

          Selling and distribution expenses primarily include shipping, personnel, advertising, promotions and distribution expenses. During the year ended March 31, 2007, selling and distribution expenses decreased approximately $17.7 million due to:

• significant savings in the current period on advertising ($12.9 million in fiscal 2007 as compared to $25.2 million in the prior period) due to fewer new releases as well as management’s focus on lower cost and more direct marketing (fiscal 2006 included significant spend for Matrix: Path of Neo television campaigns),

• lower variable distribution costs, including freight, shipping and handling, of $2.4 million due to lower sales, and

• savings of $2.7 million in salaries and related overhead costs from the closure of the Santa Monica and Beverly studios, as well as personnel reductions at our New York headquarters.

General and Administrative Expenses

          General and administrative expenses primarily include personnel expenses, facilities costs, professional expenses and other overhead charges. During the year ended March 31, 2007, general and administrative expenses decreased approximately $8.6 million due to:

• reduction in salaries of $6.2 million due to publishing studio closures and other personnel reductions, as well as savings in rent and other overhead and administrative costs, and

• decreased bad debt expense of $1.7 million due to lower sales.

Restructuring Expenses

          In the fourth quarter of fiscal 2005, management announced the planned closure of the Beverly, Massachusetts, and Santa Monica, California, publishing studios and the relocation of the functions previously provided by those studios to our corporate headquarters in New York. In fiscal 2006, we incurred $8.9 million in expenses related to this restructuring plan, and additionally we recorded expenses related to further headcount reduction in our corporate headquarters in New York, as well as other locations, and terminations at our Humongous studio which was sold in August of 2005. In fiscal 2007, we incurred $0.7 million of restructuring costs primarily related to our lease for the closed Beverly studio, as well as remaining severance costs.

          On May 1, 2007, we announced a plan to reduce our total workforce by approximately 20%, primarily in general and administrative functions. We anticipate recording a restructuring reserve during our fiscal 2008 first quarter to reflect severance packages of approximately $0.8 million to $1.1 million. We expect payments regarding the severance packages to extend through the first quarter of fiscal 2009. Most of these reductions have been made as of the date of this filing.

Impairment of Goodwill

          In the fourth quarter of fiscal 2007, our market capitalization declined significantly, which was considered by management to be a triggering event requiring us to perform a goodwill impairment analysis. As a result of this analysis, management concluded that an impairment charge of $54.1 million should be recognized. No such charge was recorded in fiscal 2006. See Goodwill and Acquired Intangible Assets above.

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Gain on Sale of Intellectual Property

          In the fourth quarter of fiscal 2006, we sold certain of our intellectual properties to a third party for approximately $6.2 million, which was recorded as a gain. The amount is primarily driven by the sale of our Timeshift property. In the first quarter of fiscal 2007, we sold the Stuntman intellectual property to a third party for $9.0 million, which was recorded as a gain.

Gain on Sale of Development Studio Assets

          In the second quarter of fiscal 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 will be held in escrow for nine months from the date of the sale), less the net book value of the assets sold of $0.9 million. No such gain was recorded in the prior comparable period.

Atari Trademark License Expense

          Atari trademark license expense is associated with the Atari name and logo which we use under a license from Atari Interactive, a wholly-owned subsidiary of IESA. The expense is based on the total estimated cost that will be incurred by us over the 10-year license period, which includes the fair value of 200,000 shares issued during fiscal 2004 (determined at that time to be $8.5 million) plus 1% of our net revenues during years six through ten of the license period. The expense decreased by $0.8 million in fiscal 2007 due to a change in the expected future earnings upon which this expense is based.

Depreciation and Amortization

          Depreciation and amortization for the year ended March 31, 2007 decreased by $2.2 million due to assets becoming fully depreciated as well as prior year inclusion of depreciation expense for assets from the Beverly and Santa Monica studios which were written off in the second quarter of fiscal 2006, offset by depreciation expense for new assets placed into service.

Interest (Expense) Income, net

          Interest (expense) income, net, decreased from expense of $0.6 million to income of $0.3 million. This decrease is due to the signing of our Guggenheim credit facility late in our fiscal year and minimal average borrowings as compared with the prior comparable period. Furthermore, in fiscal 2007, we recorded $0.4 million of interest income on our money market account as well as interest income on a tax refund recorded at our dormant UK subsidiary (see below). Fiscal 2006 expense consisted primarily of interest expense on our former HSBC credit facility, which expired in May 2006.

Other (Expense) Income

          In fiscal 2006, we recorded a loss of $0.2 million on the sale of IESA common shares received in connection with the sale of the Humongous studio. No significant items were recorded in fiscal 2007.

Benefit From Income Taxes

          During fiscal 2007, the benefit from income taxes of $10.7 million is the result of:

• a tax refund of $1.0 million received in connection with our dormant UK subsidiary;

• a non-cash tax benefit of $2.1 million resulting from the reversal of a deferred tax liability established for the deferred tax consequences of a temporary difference that arose from a difference in the book and tax basis of goodwill in a prior period, upon the impairment of our goodwill in the fourth quarter of fiscal 2007; and

• a non-cash tax benefit of $7.6 million which offsets a non-cash tax provision of the same amount included in loss from discontinued operations, recorded in accordance with FASB Statement No, 109, “Accounting for Income Taxes,” paragraph 140, which states that all items should be considered for purposes of determining the amount of tax benefit that results from a loss from continuing operations and that should be allocated to continuing operations. The recording of a benefit is appropriate in this instance, under the guidance of Paragraph 140, because such domestic loss offsets the domestic gain generated in discontinued operations. The effect of this transaction on net loss for fiscal 2007 is zero, and it does not result in the receipt or payment of any cash.

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          During fiscal 2006, the total benefit from income taxes of $0.4 million resulted from a reversal of a prior period tax reserve upon the successful conclusion ($0.3 million benefit) of an IRS examination of the tax year ended June 30, 2003 which was completed during the year, as well as the reversal of the $0.2 million UK tax reserve (benefit) recorded in fiscal 2005, pursuant to discussions with UK tax inspectors, offset by an additional state tax provision of $0.1 million recorded arising from a New York State tax audit.

Loss from Discontinued Operations of Reflections Interactive Ltd, net of tax

          Loss from discontinued operations of Reflections Interactive Ltd decreased from $5.6 million in fiscal 2006 to $3.1 million in fiscal 2007. The fiscal 2006 loss was driven by the operating costs of the Reflections studio, which was sold in August 2006. The fiscal 2007 loss results from the tax provision associated with discontinued operations of $7.6 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). Excluding this tax provision, we had income of $4.4 million, which is driven by the gain of $11.5 million on the sale of the Reflections studio and the related Driver property.

Year ended March 31, 2005 versus year ended March 31, 2006

Consolidated Statement of Operations (dollars in thousands):

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

Net Revenues

Net revenues by segment for the years ended March 31, 2005 and 2006 are as follows (in thousands):

	Years
	Ended
	March 31,				(Decrease)
	2005		2006
Publishing	$	289,636	$	153,598	$	(136,038	)
Distribution		54,201		53,198		(1,003	)
Total	$	343,837	$	206,796	$	(137,041	)

The platform mix for the years ended March 31, 2005 and 2006 for net publishing revenues from product sales is as follows:

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	Publishing Platform Mix
	2005			2006
PlayStation 2		36.6	%		35.5	%
PC		28.7	%		32.7	%
Xbox		8.7	%		9.8	%
Plug and Play		5.8	%		9.3	%
Game Boy Advance		13.0	%		6.7	%
Nintendo DS		0.8	%		2.1	%
PlayStation Portable		0.0	%		2.1	%
Game Cube		5.3	%		1.8	%
PlayStation		1.1	%		0.0	%
Total		100.0	%		100.0	%

Net revenues for the year ended March 31, 2006 decreased approximately 39.9%, largely due to underperformance from new product launches, product launch delays, and a weak holiday season, compounded by the transition to next generation consoles.

• Fiscal 2006 net publishing revenues of $153.6 million include net product sales from new releases of $95.1 million, which includes the top sellers of fiscal 2006: Dragon Ball Z: Budokai Tenkaichi (PlayStation 2), Matrix: Path of Neo (PlayStation 2, Xbox, and PC), Atari Flashback 2.0 (plug and play), and Getting Up: Contents Under Pressure (PlayStation 2, Xbox, and PC). Other new releases in fiscal 2006 included Dungeons and Dragons: Stormreach (PC), Indigo Prophecy (PC, PlayStation 2, and Xbox), and Dragon Ball Z: Transformations (Game Boy Advance). In fiscal 2005, net publishing revenues of $289.6 million were driven by the Dragon Ball Z franchise, which generated full year net product sales of $85.9 million, led by Budokai 3 (PlayStation 2), Sagas (PlayStation 2, Xbox and GameCube), Buu’s Fury (Game Boy Advance), and Super Sonic Warriors (Game Boy Advance).

• During the year ended March 31, 2006, back catalogue sales were 24.2% of our net product revenues, which is comparable with 22.6% of our net product revenues during fiscal 2005.

• Publishing net revenues include international royalty income earned on IESA’s international sales of our titles. International royalty income increased by $11.0 million from $2.5 million in fiscal 2005 to $13.5 million in fiscal 2006. The fiscal 2006 income was driven by international sales of Matrix: Path of Neo, Getting Up: Contents Under Pressure, and Indigo Prophecy. The 2006 revenues also include an unfavorable exchange rate impact of approximately $1.0 million from the strengthening U.S. dollar against the Euro.

• Domestic licensing and other income, included in publishing net revenues, decreased approximately 37.9% to $12.1 million from $19.5 million in fiscal 2005. The decrease was driven by:

o domestic licensing income of $8.2 million in fiscal 2006, compared with $15.3 million in fiscal 2005, driven by fiscal 2005’s recognition of the Duke Nukem Royalty Advance Promissory Note of $4.3 million, offset by

o fiscal 2006’s recognition of production services revenue of $2.0 million from Atari Interactive pursuant to an agreement signed in March 2006.

• The overall average sales price (“ASP”) of the publishing business increased from $18.98 in fiscal 2005, to $20.50 in fiscal 2006. Trends include:

o fiscal 2006 inclusion of PlayStation Portable, with an ASP of $26.08, increasing the overall console ASP from $21.59 in the fiscal 2005 to $25.44 in fiscal 2006, offset by

o a decrease in the ASP of the Atari Flashback plug-and-play games from $29.87 in fiscal 2005 to $19.90.

• Platform mix has shifted away from console product toward lower priced PC and plug-and-play product. Fiscal 2006’s year to date mix consisted of 58.0% console product, 32.7% PC product, and 9.3% Atari Flashback product, compared with the fiscal 2005 mix of 65.5% console product, 28.7% PC product, and 5.8% Atari Flashback product.

• Total distribution net revenues decreased $1.0 million due to increased competition; however, the fiscal 2006 period includes net revenues of Humongous, Inc. as a distributed party since August 2005.

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• In the fourth quarter of fiscal 2006, we recorded additional price protection allowances of $4.2 million in connection with our aggressive pricing program, which reduced console and certain PC titles sold prior to March 31, 2006 to a retail price of $19.95.

Cost of Goods Sold

          Cost of goods sold for the year ended March 31, 2006 decreased by $66.6 million primarily from decreased sales volume. Cost of goods sold as a percentage of net revenues increased from 58.2% to 64.6%, reflecting:

• a higher mix of higher cost third-party distributed product sales as a percentage of net revenues (25.7% in the 2006 year compared with 15.8% in the prior year),

• lower licensing and other income, on which we incur lower costs, and

• higher license expense in the current period due to higher mix of licensed product sales, primarily Dragon Ball Z sales.

Research and Product Development Expenses

          Research and product development expenses for the year ended March 31, 2006 decreased approximately $6.4 million due to:

• a decrease in expense incurred with external developers of $6.8 million due to fewer titles in development,

• a decrease in salary and other related expenses of $3.1 million due to office closures in Santa Monica and Beverly, offset by

• increased spending of $4.7 million for certain projects in development at our internal studios.

          Internal research and product development expenses represented 46.2% and 43.6% of the total research and product development expenses for the years ended March 31, 2005 and 2006, respectively. Research and product development expenses, as a percentage of net revenues, increased from 17.0% in the 2005 year to 25.1% in fiscal 2006 due to a general shortfall in sales.

Selling and Distribution Expenses

          Selling and distribution expenses for the year ended March 31, 2006 decreased approximately $15.2 million due to:

• significant savings in the current period on advertising ($25.2 million in fiscal 2006 as compared to $31.6 million in the prior period) due to fewer new titles released,

• lower variable distribution costs, including freight, shipping and handling, on lower sales, and

• savings in salaries and related overhead costs from the closure of the Santa Monica and Beverly studios, as well as personnel reduction at our New York headquarters.

General and Administrative Expenses

          General and administrative expenses for the year ended March 31, 2006 decreased approximately $5.4 million due to:

• reduction in salary and related costs due to reduced headcount,

• reduction in rent and other overhead costs due to the closure of Beverly and Santa Monica studios (included in restructuring expense), offset by

• increased professional fees primarily due to increased use of outside legal and other consulting services, and

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• the prior year’s inclusion of a $0.9 million translation gain from the liquidation of the dormant Australian subsidiary.

Restructuring Expenses

          In February 2005, management announced the planned closure of the Beverly, Massachusetts, and Santa Monica, California, publishing studios and the relocation of the functions previously provided by the studios to our corporate headquarters in New York. In fiscal 2006, restructuring activities continued with headcount reduction in our corporate headquarters in New York, as well as other locations, and terminations at our Humongous studio which was sold in August 2005. These costs increased by $3.9 million due to:

• fiscal 2006 recognition of the present value of all future lease payments for offices closed as part of the restructuring plan, as well as other lease related expenses, of $1.6 million,

• severance costs of $2.0 million related to headcount reductions in our New York office in February 2006,

• relocation expenses of $0.4 million recorded in fiscal 2006, and

• fixed asset write offs of $0.4 million recorded in fiscal 2006.

Gain on Sale of Intellectual Property

          In the fourth quarter of fiscal 2006, we sold certain of our intellectual properties to a third party for approximately $6.2 million. The amount is primarily driven by the sale of our Timeshift property.

Atari Trademark License Expense

          Atari trademark license expense decreased by $0.3 million due to a change made in the fourth quarter of fiscal 2006 in the expected future earnings upon which this expense is based.

Depreciation and Amortization

          Depreciation and amortization for year ended March 31, 2006 decreased by $1.8 million due to asset write offs associated with the restructuring as well as assets becoming fully depreciated during the year, offset by new assets placed into service during the period.

Interest Expense, net

          Interest expense, net, increased by $0.1 million as a result of:

• prior year recognition of interest income of $0.9 million earned on the various related party notes receivable outstanding during the period, offset by

• lower credit facility interest of $0.7 million in the period due to lower outstanding borrowings, and

• interest income of $0.1 million earned on a prior period income tax refund.

Other Income (Expense)

          In fiscal 2006, we recorded a loss of $0.2 million on the sale of IESA common shares received in connection with the sale of the Humongous studio. No significant items were recorded in the prior year.

Benefit from Income Taxes

          With regards to the year ended March 31, 2005, we recorded a benefit from income taxes of $9.5 million. This includes a non-cash tax benefit of $9.7 million which offsets a non-cash tax provision of the same amount included in loss from discontinued operations, recorded in accordance with FASB Statement No, 109, “Accounting for Income Taxes,” paragraph 140. Paragraph 140 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

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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. This is offset by approximately $0.2 million for foreign tax liabilities at our dormant UK subsidiary. In fiscal 2006, the total benefit from income taxes $0.4 million resulted from a reversal of a prior period tax reserve resulting from the successful conclusion ($0.3 million benefit) of an IRS examination of the tax year ended June 30, 2003 which was completed in fiscal 2006, as well as the reversal of the $0.2 million UK tax reserve (benefit) recorded in the prior year, pursuant to discussions with UK tax inspectors, offset by an additional state tax provision of $0.1 million recorded arising from a current New York State tax audit.

Income (Loss) from Discontinued Operations of Reflections Interactive Ltd, net of tax

     Income (loss) from discontinued operations of Reflections Interactive Ltd decreased from income of $20.5 million in fiscal 2005 to a loss of $5.6 million in fiscal 2006. The fiscal 2006 loss was driven by the operating costs of the Reflections studio, which was sold in August 2006. The fiscal 2005 income is driven by sales from the successful launch of Driver 3 in June 2004, offset by the operations of the Reflections studio and a tax provision of $9.7 million associated with discontinued operations (which is offset by a tax benefit of an equal amount in continuing operations; see Benefit from Income Taxes above).

Liquidity and Capital Resources

Overview

     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, as our business continues to be more seasonal, which creates a need for significant financing to fund the seasonal development and manufacturing activities, in addition to the financing we need throughout the year to fund our working capital requirements. Our only credit line is an asset based secured credit line that is limited to $15.0 million (subject to a borrowing base calculation), and which the lenders will have the right to cancel if we fail to meet financial covenants (the lenders waived defaults resulting from our failure to meet covenants at March 31, 2007). Further, the credit facility may be terminated if we do not comply with financial and other covenants prior to our need for borrowing (i.e. Nasdaq Delisting). Even if the credit line remains in effect, it will not provide all the funds we will need to pay for inventory that will be needed for the calendar 2007 holiday season. Historically, IESA has sometimes provided funds we needed for our operations, but it is not certain that it will be able, or will be willing to provide the funding we will need for fiscal 2008 or subsequent to that.

     Because of our funding difficulties, we have sharply reduced our expenditures for research and product development regarding new games. During the year ended March 31, 2007, our expenditures on research and product development decreased by 42.0%, to $30.1 million, compared with $51.9 million in fiscal 2006. This will reduce the flow of new games that will be available to us in fiscal 2008 and 2009, and possibly after that. Our lack of financial resources to fund a full product development program may reinforce our focus on casual gaming, which requires substantially less research and product investment.

     During fiscal 2007, we raised approximately $35.0 million through the sale of a 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. 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 general new sources of revenues and otherwise enable us to attain long-term strategic objectives. We continue to seek additional funding.

Cash Flows

	March 31,			March 31,
(in thousands)	2006			2007
Cash	$	14,948		$	7,603
Working capital (deficit)	$	(2,996	)	$	1,213

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	Year			Year
	Ended			Ended
	March 31,			March 31,
	2006			2007
Cash (used in) operating activities	$	(16,005	)	$	(36,939	)
Cash provided by investing activities		13,774			29,757
Cash provided by (used in) financing activities		7,211			(216	)
Effect of exchange rates on cash		(20	)		53
Net increase (decrease) in cash	$	4,960		$	(7,345	)

     During the year ended March 31, 2007, cash of $36.9 million was used in operating activities, driven by our loss from continuing operations of $66.6 million, compounded by payments made on trade and royalty payables and offset by a non-cash impairment charge on our goodwill of $54.1 million. In fiscal 2006, cash used in operating activities was driven by a net loss of $69.0 million, but was offset by a decrease of $30.1 million in accounts receivable from cash collections on balances on hand at March 2005.

     During fiscal 2007, investing activities provided cash of $29.8 million due to several sale transactions completed during the period:

• proceeds of $23.4 million received in connection with the sale of our Reflections studio,

• proceeds of $9.0 million from the sale of the Stuntman intellectual property, and

• proceeds of $1.6 million from the sale of our Shiny studio in the current period.

     The cash proceeds are partially offset by a restricted security deposit of $1.8 million to collateralize a letter of credit related to our new office lease, purchases of intangible assets of $1.7 million, and purchases of property and equipment of $0.8 million. Investing activities for the year ended March 31, 2006 provided approximately $13.8 million, driven by $10.1 million received from the sale of IESA shares obtained in connection with the sale of the Humongous studio in August 2005, as well as $6.2 million received from the sale of two of our intellectual properties.

     During fiscal 2007, net cash used in financing activities was $0.2 million due to payments under our capitalized lease obligations. During fiscal 2007, we borrowed approximately $15.0 million from our credit facility to fund our calendar 2006 holiday season. All borrowings were repaid prior to March 31, 2007. During fiscal 2006, our financing activities provided net cash of $7.2 million, driven by proceeds from an issuance of our common stock. Through out fiscal 2006, we borrowed approximately $157.6 million from our credit facility of which all borrowings have been repaid prior to March 31, 2006.

     We have a three-year revolving credit facility with Guggenheim to fund our working capital needs. For the quarter ended March 31, 2007, we were not in compliance with certain financial covenants required by the credit facility. In May 2007, we received a waiver of the covenants effective March 31, 2007. We are currently seeking additional sources of funding.

     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 March 31, 2007.

     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.

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

     We are also party to several litigations arising in the ordinary 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.

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Selected Balance Sheet Accounts

     Accounts Receivable, net

     Accounts receivable, net, decreased by $5.6 million from $12.1 million at March 31, 2006 to $6.5 million at March 31, 2007, driven by fewer new releases.

     Inventories, net

     Inventories, net, decreased by $12.0 million from $20.8 million at March 31, 2006 to $8.8 million at March 31, 2007, driven by an overall decrease in the distribution business as well as fewer planned new releases.

     Goodwill

     Goodwill decreased by $66.4 million due to an allocation of $12.3 million to the sale of Reflections, completed in the second quarter of fiscal 2007, and a non-cash impairment charge of $54.1 million recorded in the fourth quarter of fiscal 2007.

     Due from Related Parties/Due to Related Parties

     Due from related parties decreased by $2.9 million and due to related parties decreased by $4.6 million from March 31, 2006 to March 31, 2007. The decreases are driven by decreased royalty and development activity between related parties compounded by payments made during the fiscal year.

     Accounts Payable, Accrued Liabilities, and Royalties Payable

     Accounts payable, accrued liabilities, and royalties payable decreased by $12.9 million, $5.7 million, and $9.2 million, respectively, from March 31, 2006 to March 31, 2007. The decreases were driven by a lower volume of transactions in the current period, and fewer planned unit sales, which resulted in lower total manufacturing costs.

     Long-term Liabilities

     Long-term liabilities increased by $2.7 million from $0.7 million at March 31, 2006 to $3.4 million at March 31, 2007 due to the provisions of our new New York headquarters lease, which resulted in deferred rent of $1.9 million. Additionally, our lease provided for a landlord allowance for renovations of $4.5 million, of which $1.2 million has been completed as of March 31, 2007 and was recorded as a deferred credit that will be amortized against rent expense over the life of the lease.

Credit Facilities

Guggenheim Credit Facility

     On November 3, 2006, we established a secured credit facility with several lenders for which Guggenheim is the administrative agent. The Guggenheim credit facility will terminate and be payable in full on November 3, 2009. The credit facility consists of a secured, committed, revolving line of credit in an amount up to $15.0 million, which includes a $10.0 million sublimit for the issuance of letters of credit. Availability under the credit facility is determined by a formula based on a percentage of our eligible receivables. The proceeds may 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 bears 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 are 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. We may terminate or reduce the committed amount of the facility at any time, subject to payment satisfying certain requirements and payment of a prepayment fee. Obligations under the credit facility are 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 includes provisions for a possible term loan facility and an increased revolving credit facility line in the future. If such term loan is made, the early termination prepayment fee is no longer applicable. The credit facility also contains financial covenants that require us to maintain enumerated EBITDA, liquidity, and net debt minimums, and a capital

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expenditure maximum. As of March 31, 2007, we were not in compliance with all financial covenants; however, we have received a waiver as of that date. There were no borrowings outstanding under the facility as of March 31, 2007.

HSBC Loan and Security Agreement

     Until May 31, 2006, we had a one year $50.0 million revolving credit facility (“Revolving Credit Facility”) with HSBC to fund our working capital and general corporate needs. On January 18, 2006, HSBC notified us that as a result of our failure to meet certain financial covenants for the quarter ended December 31, 2005, they would not extend further credit under our revolving credit facility. The revolving credit facility expired on May 31, 2006 and was replaced by the Guggenheim revolving credit facility in November 2006 (see above).

     Availability under the Revolving Credit Facility was determined based on percentages of our eligible receivables and eligible inventory for certain seasonal peak periods. The Revolving Credit Facility bore interest at prime for daily borrowings or LIBOR plus 1.75% for borrowings with a maturity of 30 days or greater. We were required to pay a commitment fee of 0.25% on the average unused portion of the facility quarterly in arrears and closing costs of approximately $0.1 million.

Contractual Obligations

     As of March 31, 2007, royalty and license advance obligations, milestone payments and future minimum lease obligations under non-cancelable operating and capital leases were as follows (in thousands):

	Contractual Obligations
	Royalty and
	license		Milestone		Operating lease		Capital lease
Fiscal Year	advances (1)		payments (2)		obligations (3)		obligations (4)		Total
2008	$	1,849	$	3,764	$	3,557	$	75	$	9,245
2009		—		—		3,024		12		3,036
2010		—		—		2,997		—		2,997
2011		—		—		2,937		—		2,937
2012		—		—		2,822		—		2,822
Thereafter		—		—		24,465		—		24,465
Total	$	1,849	$	3,764	$	39,802	$	87	$	45,502

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

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over the life of the lease. A nominal amount of amortization was recorded during the year ended March 31, 2007. We provided the landlord with a security deposit under the new lease in the form of a letter of credit in the initial amount of $1.7 million, which has been cash collateralized and is included in security deposits on our consolidated balance sheet. In August 2007, we amended this lease to reduce the space we occupy by one-half, effective December 31, 2007.

(4)

We maintain several capital leases for computer equipment. Per FASB Statement No. 13, “Accounting for Leases,” we account for capital leases by recording them at the present value of the total future lease payments. They are amortized using the straight-line method over the minimum lease term. As of March 31, 2006, the net book value of the assets, included within property and equipment on the balance sheet, was $0.5 million, net of accumulated depreciation of $0.3 million. As of March 31, 2007, the net book value of the assets was $0.1 million, net of accumulated depreciation of $0.5 million.

Effect of Relationship with IESA on Liquidity

     Historically, we have relied on IESA to provide limited financial support to us; however, IESA has its own financial needs and, as it assesses its business operations/plan, its ability and willingness to fund its subsidiaries’ operations, including ours, is uncertain. See Item 1 for a discussion of our relationship with IESA, as well as our risk factors on page 13.

Recent Accounting Pronouncements

     Effective April 1, 2006, we adopted FASB Statement No. 123(R), “Share-Based Payments,” issued in December 2004. FASB Statement No. 123(R) is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” See Note 2 for further information regarding this adoption.

     In October 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R).” The FASB provides companies with a “practical accommodation” when determining the grant date of an award subject to FASB Statement No. 123(R). If (1) the award is a unilateral grant, that is, the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer, (2) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period, and (3) as long as all other criteria in the grant date definition have been met, then a mutual understanding of the key terms and conditions of an award is presumed to exist at the date the award is approved.

     In November 2005, the FASB issued FSP No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Award Payments.” FSP No. FAS 123(R)-3 provides an alternative method of calculating the excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FASB Statement No. 123(R). The adoption of this FSP did not have a material impact on our results of operations or financial condition.

     In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” FASB Statement No. 154 provides guidance on the accounting for and reporting of, accounting changes and error corrections. It establishes retrospective application to prior periods’ financial statements as the required method for reporting a change in accounting principle and the reporting of a correction of an error. We have implemented this Statement in fiscal 2007. See Note 25 in our audited consolidated financial statements for the fiscal year end March 31, 2007 for the adoption of FASB Statement No. 154 and Note 23 for the implementation of the SEC Staff accounting Bulletin No. 108.

     In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We are required to adopt the provisions of FIN 48 in the first quarter of fiscal 2008. We have not yet evaluated the impact of this implementation on our consolidated financial statements.

     In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements,” 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,” which permits an entity to measure certain financial assets and

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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 have not yet evaluated the impact of this implementation on our consolidated financial statements.

     In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using both a balance sheet and an income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial application is material, companies will record the effect as a cumulative effect adjustment to the beginning balance of retained earnings. The provisions of SAB No. 108 are effective for us for the fiscal year ended March 31, 2007. The implementation of SAB No. 108 has impacted our consolidated financial statements. See Note 23 in our audited consolidated financial statements for the fiscal year end March 31, 2007 for the adoption of SEC Staff accounting Bulletin No. 108.

     During the year ended March 31, 2007, the SEC finalized Rule Release 33-8732A regarding disclosure requirements for executive and director compensation. The final rule increases the disclosure requirements of total compensation for the principal executive officer, the principal financial officer, and up to three of the other most highly paid officers, and requires tabular presentation of all director compensation. The new requirements are effective in Forms 8-K for triggering events that occur on or after November 7, 2006, and in Forms 10-K for fiscal years ending on or after December 15, 2006. This information is incorporated by reference to our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in fiscal 2008, which we expect to be filed with the SEC within 120 days after the end of fiscal 2007.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     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.

Foreign Currency Exchange Rates

     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 $5.2 million of our revenue for the year ended March 31, 2007. 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, 2007, we did not have any net revenues earned by our foreign subsidiaries. These subsidiaries represented 1.8% 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 during the current period. We also recorded approximately $4.6 million in operating expenses attributed to the foreign operations of Reflections, which is included in income (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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     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:

	PAGE
ATARI, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of March 31, 2006 and March 31, 2007		F-2
Consolidated Statements of Operations for the Years Ended March 31, 2005, 2006, and 2007		F-3
Consolidated Statements of Cash Flows for the Years Ended March 31, 2005, 2006, and 2007		F-4

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	PAGE
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended March 31, 2005, 2006, and 2007		F-6
Notes to the Consolidated Financial Statements	F-7 to F-40
FINANCIAL STATEMENT SCHEDULE
Schedule II—Valuation and Qualifying Accounts for the Years Ended March 31, 2005, 2006, and 2007		F-41

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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, 2007. 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 identified 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, 2007. As a result, management has concluded that disclosure controls and procedures were ineffective.

Management’s Report on Internal Control over Financial Reporting

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:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2007. 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.

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In connection with management’s assessment of our internal control over financial reporting described above, management has identified the following material weaknesses in the Company’s internal control over financial reporting as of March 31, 2007:

• There was a material weakness in the design and operation of the Company’s internal controls over financial reporting related to income taxes which resulted in a more than remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. Management did not maintain a sufficient number of technically qualified personnel during the year to facilitate the identification of all issues associated with the Company’s income tax closing process or to appropriately prepare and review income tax related analysis. This material weakness resulted in material adjustments to income tax accounts within the current and prior period consolidated financial statements.

• There were material design and operational deficiencies related to the preparation and review of financial information during the Company’s year end closing process. These items resulted in more than a remote likelihood that a material misstatement or lack of disclosure within the annual or interim financial statements would not be prevented or detected. The Company experienced significant turnover of senior financial management and did not maintain a sufficient number of qualified personnel to support the Company’s financial reporting and close process. This has resulted in a significant workload for the existing personnel who manage the financial reporting and closing process and reduced the likelihood that such individuals could detect a material adjustment to the Company’s books and records or anticipate, identify, and resolve accounting issues in the normal course of performing their assigned functions. This material weakness resulted in material adjustments to the inventory, operating expenses, additional paid-in capital accounts within the financial statements and financing activities within the fiscal 2005 and 2006 consolidated statements of cash flows.

• There were material design and operational deficiencies in the Company’s controls over related party transactions, which, when aggregated, resulted in a more than remote likelihood that a material misstatement or lack of disclosure in the annual or interim financial statements would not be prevented or detected. The Company can be impacted by certain financial transactions and operating decisions of IESA. Management determined that an inadequate level of communication between the Company and IESA has resulted in an increased likelihood that the accounting department would not detect a significant transaction affecting the Company which would lead to a material adjustment to the Company’s books and records or a material change to the disclosure in the footnotes to the financial statements. This material weakness resulted in adjustments to operating expense and additional paid-in capital accounts and related party disclosures in the current period consolidated financial statements

Management has concluded that, as a result of these material weaknesses, the Company did not maintain effective internal control over financial reporting as of March 31, 2007, based on the criteria in Internal Control-Integrated Framework issued by COSO.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2007 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included on pages 47 through 48 of this Annual Report on Form 10-K.

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Changes in Internal Control over Financial Reporting

As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006, management determined that, as of March 31, 2006, there were material weaknesses in the Company’s internal control over financial reporting relating to (i) the financial close and reporting process (ii) control design deficiencies related to the reliance on computer generated information for accounts receivable and revenue (iii) control design deficiencies related to the reliance on computer generated information for cost of sales and payment approval and disbursements to suppliers (iv) payroll records and reconciliations at an internal development studio and (v) income tax accounts and related disclosures. As reported in the Annual Report for fiscal 2006, the Company initiated a number of changes in its internal controls to remediate these material weaknesses. As of March 31, 2007, the following measures to remediate the control deficiencies have been implemented:

• We sold all our internal development studios; as a result, all payroll processes are now centralized in the US in our corporate headquarters.

• We reorganized the review and approval process within our Information Technology group, including integrating our external service providers into the formal review process.

• We enhanced our general computer controls and internal procedures related to Information Technology operations, security and change control, so that we can rely on computer generated information.

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 (ii), (iii) and (iv) of the five material weaknesses identified at March 31, 2006 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, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Atari, Inc.
New York, New York

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Atari, Inc. and subsidiaries (the “Company”), did not maintain effective internal control over financial reporting as of March 31, 2007, because of the effect of the material weaknesses identified in management’s assessment based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

• There was a material weakness in the design and operation of the Company’s internal controls over financial reporting related to income taxes which resulted in a more than remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. The tax department did not maintain a sufficient number of technically qualified personnel during the year to facilitate the identification of all issues associated with the Company’s income tax closing process or to appropriately prepare and review income tax related analysis. This material weakness resulted in material adjustments to income tax accounts within the current and prior period consolidated financial statements.

47

• There were material design and operational deficiencies related to the preparation and review of financial information during the Company’s year end closing process. These items resulted in more than a remote likelihood that a material misstatement or lack of disclosure within the annual or interim financial statements would not be prevented or detected. The Company experienced significant turnover of senior financial management and did not maintain a sufficient number of qualified personnel to support the Company’s financial reporting and close process. This has resulted in a significant workload for the existing personnel who manage the financial reporting and closing process and reduced the likelihood that such individuals could detect a material adjustment to the Company’s books and records or anticipate, identify, and resolve accounting issues in the normal course of performing their assigned functions. This material weakness resulted in material adjustments to the inventory, operating expenses, additional paid-in capital accounts within the financial statements and financing activities within the fiscal 2005 and 2006 consolidated statements of cash flows.

• There were material design and operational deficiencies in the Company’s controls over related party transactions, which, when aggregated, resulted in a more than remote likelihood that a material misstatement or lack of disclosure in the annual or interim financial statements would not be prevented or detected. The Company can be impacted by certain financial transactions and operating decisions of Infogrames Entertainment S.A. (the “Parent Company”). There is an inadequate level of communication between the Company and the Parent Company which has resulted in an increased likelihood that the accounting department would not detect a significant transaction affecting the Company which would lead to a material adjustment to the Company’s books and records or a material change to the disclosures in the footnotes to the financial statements. This material weakness resulted in adjustments to operating expense and additional paid-in capital accounts and related party disclosures in the current period consolidated financial statements.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2007, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of March 31, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2007, of the Company and our report dated September 18, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule and includes an explanatory paragraph regarding the application of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements” and the Company’s adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, an explanatory paragraph regarding the restatements of the fiscal 2005 and 2006 consolidated statements of cash flows, and an explanatory paragraph relating to uncertainties which raise substantial doubt about the Company’s ability to continue as a going concern as discussed in Note 1 to the consolidated financial statements.

DELOITTE & TOUCHE LLP

New York, NY
September 18, 2007

ITEM 9B. OTHER MATTERS

Bruno Bonnell’s Resignation

     On April 4, 2007, IESA entered into an agreement with Bruno Bonnell, its founder, CEO, and the Chairman of its Board, under which Mr. Bonnell agreed to resign from his duties as a Director and CEO of IESA and from all the offices he holds with subsidiaries of IESA, including Atari and its subsidiaries. Mr. Bonnell was also the Chairman of our Board, our Chief Creative Officer and our Acting Chief Financial Officer, and previously had been our Chief Executive Officer. IESA agreed to pay Mr. Bonnell a total of approximately 3.0 million Euros ($4.0 million), including applicable foreign taxes. Neither our Board of Directors nor any member of our management was consulted about the agreement between IESA and Mr. Bonnell or at any time requested any of the things to which Mr. Bonnell agreed, and our management was not provided with a copy of the agreement until more than two months after it was signed. Mr. Bonnell resigned as a director and officer of Atari, Inc. and of our subsidiaries effective April 4, 2007.

     Despite the fact that we did not participate in the preparation of, or know the terms of, the agreement between Mr. Bonnell and IESA, and that IESA, not we, made all the payments under that agreement, management has determined that we have benefited from this separation, and that approximately $0.8 million of the payments IESA made should be allocated to the benefit we received. Our consolidated statement of operations for the year ended March 31, 2007 reflects a charge in this amount. As we are not obligated to make any payments, this amount has been recorded as a capital contribution as of March 31, 2007.

     This series of events has caused us to conclude that we have a material weakness in internal controls over related party transactions as disclosed in Item 9A. Specifically, IESA failed to provide us on a timely basis, after numerous attempts by management, the termination agreement between Bruno Bonnell and IESA. Further, this failure to deliver the contract on a timely basis is the primary reason for the significant filing delay of our Annual Report on Form 10-K for the year-end March 31, 2007 and the receipt of a delisting notice from NASDAQ.

Shareholders’ Meeting

     Our Annual Shareholders’ Meeting, to be held on November 6, 2007, has been delayed more than 30 days from the one-year anniversary of our last Annual Shareholders’ Meeting.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

     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 2007, entitled “Election of Directors” and “Executive Officers.” Our Definitive Proxy Statement has been filed with the Securities and Exchange Commission.

ITEM 11. EXECUTIVE COMPENSATION

     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 2007, entitled “Executive Compensation.” Our Definitive Proxy Statement has been filed with the Securities and Exchange Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

     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 2007, entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Our Definitive Proxy Statement has been filed with the Securities and Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

     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 2007, entitled “Certain Relationships and Related Transactions, and Director Independence.” Our Definitive Proxy Statement has been filed with the Securities and Exchange Commission.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     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 2007, entitled “Principal Accountant Fees and Services.” Our Definitive Proxy Statement has been filed with the Securities and Exchange Commission.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Report:

(i)	Financial Statements. See Index to Financial Statements at Item 8 of this Report.
(ii)	Financial Statement Schedule. See Index to Financial Statements at Item 8 of this Report.
(iii)	Exhibits

3.1	Restated Certificate of Incorporation.
3.2	Certificate of Amendment of Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on January 3, 2007 is incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K filed on January 9, 2007.
3.3	Amended and Restated By-laws are incorporated herein by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

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3.4	Amendment No. 1 to Amended and Restated By-laws is incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.
3.5	Amendment No. 2 to Amended and Restated By-laws is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on July 28, 2005.
4.1	Specimen form of stock certificate of Common Stock is incorporated herein by reference to our Registration Statement on Form S-1 (File No. 333-14441) initially filed with the SEC on October 20, 1995, and all amendments thereto.
4.2	Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and us is incorporated herein by reference to an exhibit filed as a part of our Registration Statement on Form S-1 filed October 20, 1995.
4.3	Second Amended and Restated Registration Rights Agreement, dated as of October 2, 2000, between California U.S. Holdings, Inc. and us is incorporated herein by reference to Exhibit 4.6 of our Registration Statement on Form S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003, and all amendments thereto.
10.1	Distribution Agreement between Infogrames Entertainment SA, Infogrames Multimedia SA and us, dated as of December 16, 1999, is incorporated herein by reference to Exhibit 7 to the Schedule 13D filed by Infogrames Entertainment SA and California U.S. Holdings, Inc. on January 10, 2000.
10.2	Addendum to Distribution Agreement between Infogrames Entertainment SA and us, dated as of December 16, 1999, is incorporated herein by reference to Exhibit 10.26a to our Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
10.3	Amendment to Distribution Agreement between Infogrames Entertainment SA and us dated as of July 1, 2000, is incorporated by reference to Exhibit 10.24a to our Transitional Report on Form 10-K for the transition period March 31, 2000 to June 30, 2000.
10.4	Distribution Agreement between Infogrames Entertainment SA and us, dated October 2, 2000, as supplemented on November 12, 2002 is incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the fiscal year ended March 31, 2005.
10.5	Agreement for Purchase and Sale of Assets, dated August 22, 2005, between us and Humongous, Inc. is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.6	Stock Transfer Agreement, dated August 22, 2005, among us, Infogrames Entertainment S.A. and Atari Interactive, Inc. (English Translation) is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.7	Liquidity Agreement, dated August 22, 2005, between us and Infogrames Entertainment S.A. by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.8	Distribution Agreement, dated August 22, 2005, between us and Humongous, Inc. by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.9	Management and Services Agreement, dated as of March 31, 2006, between Infogrames Entertainment S.A. and us, is incorporated herein by reference to Exhibit 10.9 to our Annual Report on Form 10-K for the year ended March 31, 2006.
10.10	Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A. and its subsidiaries, is incorporated herein by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the year ended March 31, 2006.

50

10.11	Production Services Agreement, dated as of March 31, 2006, between us and Infogrames Entertainment S.A. and its subsidiaries, is incorporated herein by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the year ended March 31, 2006.
10.12	Warehouse Services Contract, dated March 2, 1999, by and between us and Arnold Transportation Services, Inc. t/d/b/a Arnold Logistics is incorporated herein by reference to Exhibit 10.50 to our Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
10.13	Loan and Security Agreement, dated as of May 13, 2005, among us, as Borrower, and HSBC Business Credit (USA) Inc., as Lender is incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K for the year ended March 31, 2005.
10.14	First Amendment to Loan and Security Agreement, dated as of June 30, 2005, between us and HSBC Business Credit (USA) Inc. is incorporated herein by reference Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.15*	The 1995 Stock Incentive Plan (as amended on October 31, 1996) is incorporated herein by reference to Exhibit 10.1 to Amendment No. 2 to our Registration Statement on Form S-1, filed December 6, 1996.
10.16*	The 1997 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.17*	The 1997 Stock Incentive Plan (as amended on June 17, 1998) is incorporated herein by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.18*	The 2000 Stock Incentive Plan is incorporated herein by reference to Appendix B to our proxy statement dated June 29, 2000.
10.19*	Amendment No. 1 to 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit A to our Information Statement dated November 27, 2000.
10.20*	Third Amendment to the Atari, Inc. 2000 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004.
10.21*	Atari, Inc. 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.10 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
10.22*	Form of 2005 Stock Incentive Plan Option Award Agreement is incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.23*	Form of 2005 Stock Incentive Plan Restricted Stock Award Agreement is incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
10.24*	The 1998 Employee Stock Purchase Plan is incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.25*	Description of Registrant’s Annual Incentive Plan for fiscal 2007.**
10.26*	Employment Agreement with Bruno Bonnell, dated as of July 1, 2004 and effective as of April 1, 2004, is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004.
10.27*	Amendment No. 1 to Employment Agreement, dated as of November 23, 2005, between us and Bruno Bonnell is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.

51

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

52

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

53

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

Exhibit indicated with an * symbol is a management contract or compensatory plan or arrangement.

Exhibit indicated with an ** symbol is filed herewith.

*** All immaterial amendments/extensions to this agreement were filed as an exhibit 99 in our Quarterly Report for the respective period.

‡ Portions of this exhibit have been redacted pursuant to a confidential treatment request filed with the SEC.

Exhibit indicated with a ‡‡ is furnished herewith

A copy of any of the exhibits included in the Annual Report on Form 10-K as amended, may be obtained by written request to Atari, Inc. upon payment of a fee of $0.10 per page to cover costs. Requests should be sent to Atari, Inc. at the address set forth on the front cover, attention Director, Investor Relations.

54

SIGNATURES

     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.

ATARI, INC.
By:	/s/ David R. Pierce
	Name: David R. Pierce
	Title: President and Chief Executive Officer
	Date: September 18, 2007

     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.

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

55

ATARI, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Atari, Inc.
New York, New York

We have audited the accompanying consolidated balance sheets of Atari, Inc. and subsidiaries (the “Company”) as of March 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for the three years in the period ended March 31, 2007. Our audits also included the consolidated financial statement schedule listed at Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 2007 and 2006, and the results of its operations and its cash flows for the three years in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

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

As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No.123(R), “Share Based Payment”, as revised, effective April 1, 2006. As discussed in Note 23 to the consolidated financial statements, effective March 31, 2007, the Company elected application of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”.

As discussed in Note 24 to the consolidated financial statements, the Company has restated its fiscal 2005 and 2006 consolidated statement of cash flows.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of March 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 18, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses.

DELOITTE & TOUCHE LLP

New York, New York
September 18, 2007

F-1

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

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

(1) Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated to reflect the reverse stock split.

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

F-2

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

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

(1) Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated to reflect the reverse stock split.

See Note 13 for detail of related party amounts included within the line items above.

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

F - 3

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

				Years
				Ended
	March 31,
	2005			2006
	As restated,			As restated,
	Note 24			Note 24			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	5,692		$	(68,986	)	$	(69,711	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Income) loss from discontinued operations of Reflections Interactive Ltd		(20,547	)		5,611			3,125
Non-cash tax benefit included in continuing operations associated with tax provision of discontinued operations of Reflections Interactive Ltd		(9,716	)		—			(7,559	)
Escrow receivable associated with sale of Reflections Interactive Ltd		—			—			626
Impairment of goodwill		—			—			54,129
Write-off of acquired intangible and other web-related assets		—			—			2,401
Gain on sale of intellectual property		—			(6,224	)		(9,000	)
Gain on sale of development studio assets		—			—			(885	)
Adjustment for non-cash gain on sale of development studio assets		—			—			200
Stock-based compensation expense		—			—			1,587
Atari trademark license expense		3,350			3,067			2,218
Depreciation and amortization		6,958			5,202			2,968
Related party allocation of executive resignation agreement		—			—			771
Modification of stock options		139			—			—
Non-cash restructuring charges		596			838			—
Loss on sale of IESA shares		—			239			—
Recognition of cumulative translation adjustment from foreign subsidiary		(859	)		—			—
Accrued interest		23			20			1
Amortization of deferred financing fees		822			514			202
Recognition of deferred income		(107	)		(77	)		(328	)
Write-off of property and equipment		206			24			—
Gain on sale of property and equipment		—			—			(74	)
Non-cash income on cash collateralized security deposit		—			—			(11	)
Changes in operating assets and liabilities:
Receivables, net		(4,472	)		30,094			5,616
Inventories, net		1,962			3,681			11,243
Due from related parties		(12,285	)		(4,126	)		2,893
Due to related parties		23,375			12,807			(4,561	)
Prepaid expenses and other current assets		(5,531	)		8,860			2,532
Accounts payable		(9,947	)		(4,199	)		(13,672	)
Accrued liabilities		1,287			(3,212	)		(7,316	)
Royalties payable		(4,403	)		7,462			(9,186	)
Long-term deferred tax liability		—			—			(2,123	)
Other long-term liabilities		(324	)		(319	)		1,852
Other assets		(5,215	)		1,688			2,949
Net cash (used in) continuing operating activities		(28,996	)		(7,036	)		(29,113	)
Net cash provided by (used in) discontinued operations		32,238			(8,969	)		(7,826	)
Net cash provided by (used in) operating activities		3,242			(16,005	)		(36,939	)

(continued)

F-4

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

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

(1) Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated to reflect the reverse stock split.

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

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ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31, 2005, 2006, AND 2007
(in thousands)

											Accumulated
	Common				Additional						Other
	Stock		Common		Paid-In			Accumulated			Comprehensive
	Shares (1)		Stock		Capital			Deficit			Income			Total
Balance, March 31, 2004		12,123	$	1,212	$	735,964		$	(625,436	)	$	3,323		$	115,063
Comprehensive income:
Net income		—		—		—			5,692			—			5,692
Foreign currency translation adjustment		—		—		—			—			(56	)		(56	)
Recognition of cumulative translation adjustment from liquidation of a foreign subsidiary		—		—		—			—			(859	)		(859	)
Total comprehensive income															4,777
Cashless exercise of warrants		5		1		(1	)		—			—			—
Exercise of stock options		2		—		44			—			—			44
Issuance of stock options to related party		—		—		48			—			—			48
Modification of stock options		—		—		735			—			—			735
Balance, March 31, 2005		12,130		1,213		736,790			(619,744	)		2,408			120,667
Comprehensive loss:
Net loss		—		—		—			(68,986	)		—			(68,986	)
Foreign currency translation adjustment		—		—		—			—			21			21
Total comprehensive loss															(68,965	)
Exercise of stock options		6		1		131			—			—			132
Modification of stock options		—		—		404			—			—			404
Issuance of common stock in lieu of partial royalty payment		156		16		2,093			—			—			2,109
Sale of Humongous Entertainment		—		—		3,613			—			—			3,613
Issuance of common stock in lieu of payment of net related party payables (Note 13)		615		61		7,927			—			—			7,988
Issuance of common stock (Note 4)		570		57		7,207			—			—			7,264
Balance, March 31, 2006		13,477		1,348		758,165			(688,730	)		2,429			73,212
Adjustment to opening stockholders’ equity		—		—		—			(2,858	)		—			(2,858	)
Comprehensive loss:
Net loss		—		—		—			(69,711	)		—			(69,711	)
Foreign currency translation adjustment		—		—		—			—			89			89
Total comprehensive loss															(69,622	)
Related party allocation of executive resignation agreement		—		—		771			—			—			771
Exercise of stock options		1		—		4			—			—			4
Stock-based compensation expense		—		—		1,587			—			—			1,587
Balance, March 31, 2007		13,478	$	1,348	$	760,527		$	(761,299	)	$	2,518		$	3,094

(1) Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated to reflect the reverse stock split.

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

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

NOTE 1 – OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Business

               We are a publisher of video game software that is distributed throughout the world and a distributor of video game software in North America. We publish, develop (through external resources), and distribute video games for all platforms, including Sony PlayStation 2, PlayStation 3 and PSP, Nintendo Game Boy Advance, Game Cube, Wii and DS, and Microsoft Xbox and Xbox 360, as well as for personal computers, or PCs. The products we publish or distribute extend across most major video game genres, including action, adventure, strategy, role playing and racing.

               Through our relationship with our majority stockholder, Infogrames Entertainment S.A., a French corporation (“IESA”), listed on Euronext, our products are distributed exclusively by IESA throughout Europe, Asia and certain other regions. Similarly, we exclusively distribute IESA’s products in the United States and Canada. Furthermore, we distribute product in Mexico through various non-exclusive agreements. At March 31, 2007, IESA owns approximately 51% of us, through its wholly-owned subsidiary California U.S. Holdings, Inc. (“CUSH”). As a result of this relationship, we have significant related party transactions (Note 13).

     Going Concern

               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. 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 and development financing activities has significantly reduced the number of games we publish. During fiscal 2007, our revenues from publishing activities were $104.7 million, compared with $153.6 million during fiscal 2006 and $289.6 million during fiscal 2005.

               We are in the process of developing a strategic plan that would expand our activities into new, emerging aspects of the video game industry, including casual games, online sites, digital downloading, advergaming, and brand licensing. However, our ability to do those things will require that we have a source of funding and some of them will require expansion and extension of our rights to use and sublicense certain properties.

               For the year ended March 31, 2007, our net revenues were only $122.3 million, compared with $206.8 million in the prior year, and we had an operating loss of $77.6 million in fiscal 2007, which included a charge of $54.1 million for the impairment of our goodwill, which is related to our publishing unit. We have taken significant steps to reduce our costs. 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 are even fewer than our releases in fiscal 2007. In addition, most of our releases for fiscal 2008 are 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 during the second quarter of our fiscal year.

               Currently, our only borrowing facility is an asset-based secured credit facility that we established in November 2006 with a group of lenders for which Guggenheim Corporate Funding LLC (“Guggenheim”) is the administrative agent. The credit facility consists of a secured, committed, revolving line of credit in an amount up to $15.0 million (subject to a borrowing base calculation), which includes a $10.0 million sublimit for the issuance of letters of credit. However, the maximum borrowings we can make under the credit facility will not by themselves provide all the funding we will need for the calendar 2007 holiday season. Further, the credit facility may be terminated if we do not comply with financial and other covenants prior to our need for borrowing (i.e. NASDAQ delisting).

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               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.

               The uncertainty caused by these above conditions raises substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

               We are still exploring various alternatives to improve our financial position and secure other sources of financing which could include raising equity, forming both operational and financial strategic partnerships, renegotiating or entering into a new credit facility, entering into new arrangements to license intellectual property, and selling selected owned intellectual property and licensed rights. Further, as we are contemplating various alternatives, we utilize a special committee of our board of directors, consisting of our independent board members, James Ackerly, Ronald Bernard, and Michael Corrigan, who are authorized to review significant and special transactions. 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 and suspension of certain development projects during fiscal 2008. In May of 2007, we announced a workforce reduction of approximately 20%.

               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 development activities and increased our focus on online and casual gaming, among other things. 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.

     Reverse Stock Split

               On January 3, 2007, we effected a one-for-ten reverse stock split. The number of shares we are authorized to issue was reduced from 300,000,000 to 30,000,000, and the par value was increased from $0.01 to $0.10 per share. Preferred stock shares remain at 5,000,000 authorized with a par value of $0.01 per share. All references to share data in this Annual Report on Form 10-K have been restated to reflect the split. See Note 4 for further details.

     Principles of Consolidation

               The consolidated financial statements include the accounts of Atari, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

     Revenue recognition, sales returns, price protection, other customer related allowances and allowance for doubtful accounts

               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 inability 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.

F-8

     Concentration of Credit Risk

               We extend credit to various companies in the retail and mass merchandising industry for the purchase of our merchandise which results in a concentration of credit risk. This concentration of credit risk may be affected by changes in economic or other industry conditions and may, accordingly, impact our overall credit risk. Although we generally do not require collateral, we perform ongoing credit evaluations of our customers and reserves for potential losses are maintained.

     Use of Estimates

               The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include allowances for bad debts, returns, price protection and other customer promotional programs, obsolescence expense, and goodwill impairment. Actual results could materially differ from those estimates. During the fourth quarter of fiscal 2007, we recorded an impairment charge in the amount of $54.1 million, and as of March 31, 2007, our goodwill balance is zero (see Note 6).

     Cash

               Cash consists of cash in banks. As of March 31, 2006 and March 31, 2007, we have no cash equivalents.

     Inventories

               Inventories are stated at the lower of cost (average cost method) or market. Allowances are established to reduce the recorded cost of obsolete inventory and slow moving inventory to its net realizable value.

     Property and Equipment

               Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:

	Useful Lives
Computer equipment	3 years
Capitalized computer software	3-5 years
Furniture and fixtures	7 years
Machinery and equipment	5 years

               Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets.

     Fair Values of Financial Instruments

               Financial Accounting Standards Board (“FASB”) Statement No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of the fair value of financial instruments for which it is practicable to estimate. We believe that the carrying amounts of our financial instruments, including 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, reflected in the consolidated financial statements approximate fair value due to the short-term maturity and the denomination in U.S. dollars of these instruments.

F-9

     Long-Lived Assets

               We review long-lived assets, such as property and equipment, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the estimated fair value of the asset is less than the carrying amount of the asset plus the cost to dispose, an impairment loss is recognized as the amount by which the carrying amount of the asset plus the cost to dispose exceeds its fair value, as defined in FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

     Research and Product Development Expenses

               Research and product development expenses 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 expenses 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

               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. These licenses are amortized at the licensor’s royalty rate over unit sales to cost of goods sold. Management evaluates the carrying value of these capitalized licenses and records an impairment charge in the period management determines that such capitalized amounts are not expected to be realized. Such impairments are charged to cost of goods sold if the product has released or previously sold, and if the product has never released, these impairments are charged to research and product development expenses.

     Atari Trademark License

               In connection with a recapitalization completed in fiscal 2004, Atari Interactive, Inc. (“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. 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.

Goodwill and Acquired Intangible Assets

               Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies. Goodwill is not amortized, and is tested for impairment at the reporting unit level annually or when there are any indications of impairment, as required by FASB Statement No. 142, “Goodwill and Other Intangible Assets.” A reporting unit is an operating segment for which discrete financial information is available and is regularly reviewed by management. We only have one reporting unit, our publishing business, to which goodwill is assigned.

               A two-step approach is required to test goodwill for impairment for each reporting unit. The first step tests for impairment by applying fair value-based tests (described below) to a reporting unit. The second step, if deemed necessary, measures the impairment by applying fair value-based tests to specific assets and liabilities within the reporting unit. Application of the goodwill impairment tests require judgment, including identification of reporting units, assignment of assets and liabilities to each reporting unit, assignment of goodwill to each reporting unit, and determination of the fair value

F-10

of each reporting unit. The determination of fair value for each reporting unit could be materially affected by changes in these estimates and assumptions. Such changes could trigger impairment. As of March 31, 2007, we recorded a material impairment of our goodwill (Note 6).

          Intangible assets are assets that lack physical substance. During fiscal 2007, we recorded acquired intangible assets for website development costs (related to the Atari Online website, including a URL), which are accounted for in accordance with Emerging Issues Task Force (“EITF”) 00-02, “Accounting for Web Site Development Costs.” EITF 00-02 requires that web site development costs be treated as computer software developed for internal use, and that costs incurred in the application and development stages be capitalized in accordance with AICPA Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” As of March 31, 2007, we determined that certain of the acquired intangible assets previously capitalized no longer provided a future benefit to the company, as management decided at the end of the fourth quarter to move to an outsourced technology model; these costs were written off, and the charge is included in research and product development expenses for the year ended March 31, 2007 (Note 6).

     Advertising Expenses

          Advertising costs are expensed as incurred. Advertising expenses for the years ended March 31, 2005, 2006, and 2007 amounted to approximately $31.6 million, $25.2 million, and $12.9 million, respectively.

     Income Taxes

          We account for income taxes using the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. We record an allowance to reduce tax assets to an estimated realizable amount. We monitor our tax liability on a quarterly basis and record the estimated tax obligation based on our current year-to-date results and expectations of the full year results.

     Foreign Currency Translation and Foreign Exchange Gains (Losses)

          Assets and liabilities of foreign subsidiaries have been translated at year-end exchange rates, while revenues and expenses have been translated at average exchange rates in effect during the year. Cumulative translation adjustments have been reported as a component of accumulated other comprehensive income.

          Foreign exchange gains or losses arise from exchange rate fluctuations on transactions denominated in currencies other than the functional currency. For the years ended March 31, 2005 and March 31, 2007, foreign exchange losses were $0.3 million and $0.4 million, respectively. For the year ended March 31, 2006, we recorded a foreign exchange gain of $0.1 million.

     Shipping, Handling and Warehousing Costs

          Shipping, handling and warehousing costs incurred to move product to the customer are charged to selling and distribution expense. For the years ended March 31, 2005, 2006, and 2007, these charges were approximately $10.9 million, $7.4 million, and $5.0 million, respectively.

     Recent Accounting Pronouncements

          Effective April 1, 2006, we adopted FASB Statement No. 123(R), “Share-Based Payments,” issued in December 2004. FASB Statement No. 123(R) is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principal Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” See Note 2 for further information regarding this adoption.

          In October 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R).” The FASB provides companies with a “practical accommodation” when determining the grant date of an award subject to FASB Statement No. 123(R). If (1) the award is a

F-11

unilateral grant, that is, the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer, (2) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period, and (3) as long as all other criteria in the grant date definition have been met, then a mutual understanding of the key terms and conditions of an award is presumed to exist at the date the award is approved.

          In November 2005, the FASB issued FSP No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Award Payments.” FSP No. FAS 123(R)-3 provides an alternative method of calculating the excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FASB Statement No. 123(R). The adoption of this FSP did not have a material impact on our results of operations or financial condition.

          In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” FASB Statement No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application to prior periods’ financial statements as the required method for reporting a change in accounting principle and the reporting of a correction of an error. We have implemented this Statement in fiscal 2007 and it has impacted our consolidated financial statements; see Note 25 to our consolidated financial statements for the adoption of FASB Statement No. 154 and Note 23 for the implementation of the SEC Staff accounting Bulletin No. 108.

          In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We are required to adopt the provisions of FIN 48 in the first quarter of fiscal 2008. We have not yet evaluated the impact of this implementation on our consolidated financial statements.

          In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements,” 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,” 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 have not yet evaluated the impact of this implementation on our consolidated financial statements.

          In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using both a balance sheet and an income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial application is material, companies will record the effect as a cumulative effect adjustment to the beginning balance of retained earnings. The provisions of SAB No. 108 are effective for us for the fiscal year ended March 31, 2007. The implementation of SAB No. 108 has impacted our consolidated financial statements; see Note 23 to our consolidated financial statements.

          During the year ended March 31, 2007, the SEC finalized Rule Release 33-8732A regarding disclosure requirements for executive and director compensation. The final rule increases the disclosure requirements of total compensation for the principal executive officer, the principal financial officer, and up to three of the other most highly paid officers, and requires tabular presentation of all director compensation. The new requirements are effective in Forms 8-K for triggering events that occur on or after November 7, 2006, and in Forms 10-K for fiscal years ending on or after December 15, 2006. This information is incorporated by reference to our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in fiscal 2008, to be filed with the SEC within 120 days after the end of fiscal 2007.

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NOTE 2 – STOCK-BASED COMPENSATION

          Effective April 1, 2006, we adopted FASB Statement No. 123(R), “Share-Based Payment,” which requires the measurement and recognition of compensation expense at fair value for employee stock awards. Through March 31, 2006, we accounted for employee stock option plans under the intrinsic value method prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Any equity instruments issued, other than to employees, for acquiring goods and services were accounted for using fair value at the date of grant. We also previously adopted the disclosure provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123,” which required us to disclose pro forma information as if we had applied fair value recognition provisions.

          We have adopted FASB Statement No. 123(R) using the modified prospective method in which we are recognizing compensation expense for all awards granted after the required effective date and for the unvested portion of previously granted awards that remained outstanding at the date of adoption. Under this transition method, the measurement as well as our method of amortization of costs for share-based payments granted prior to, but not vested as of, April 1, 2006 would be based on the same estimate of the grant-date fair value and the same amortization method that was previously used in our FASB Statement No. 123 pro forma disclosure. Prior period results have not been restated, as provided for under the modified prospective method.

          At March 31, 2007, we had one stock incentive plan, under which we could issue a total of 1,500,000 shares of common stock as stock options or restricted stock, of which 872,490 were still available for grant as of March 31, 2007. Upon approval of this plan, our previous stock option plans were terminated, and we were no longer able to issue options under those plans; however, options originally issued under the previous plans continue to be outstanding. All options granted under our current or previous plans have an exercise price equal to or greater than the market value of the underlying common stock on the date of grant; options vest over four years and expire in ten years.

          The recognition of stock-based compensation expense increased our loss before benefit from income taxes, our loss from continuing operations, and our net loss by $1.6 million for the year ended March 31, 2007, and increased our basic or diluted loss per share amount by $0.12 for the year ended March 31, 2007. We have recorded a full valuation allowance against our net deferred tax asset, so the settlement of stock-based compensation awards will not result in tax deficiencies that could impact our consolidated statement of operations. Because the tax deduction from current period settlement of awards has not reduced taxes payable, the settlement of awards has no effect on our cash flow from operating and financing activities.

          The following table summarizes the classification of stock-based compensation expense in our consolidated statement of operations (in thousands):

	Year Ended
	March 31,
	2007
Research and product development expenses	$	865
Selling and distribution expenses	$	88
General and administrative expenses	$	634

          The weighted average fair value of options granted during the years ended March 31, 2005, 2006, and 2007 was $15.20, $17.80, and $4.62, respectively. The fair value of our options is estimated using the Black-Scholes option pricing model. This model requires assumptions regarding subjective variables that impact the estimate of fair value. Our policy for attributing the value of graded vest share-based payment is a single option straight-line approach. The following table summarizes the assumptions used to compute the weighted average fair value of option grants:

F-13

				Year Ended
				March 31,
	2005			2006			2007
Anticipated volatility		95	%		92	%		81	%
Dividend yield		0	%		0	%		0	%
Remaining life in years		4			4			4

          The weighted average risk-free interest rate for the years ended March 31, 2005, 2006, and 2007 was 3.40%, 4.19%, and 4.78%, respectively.

          FASB Statement No. 123(R) requires that we recognize stock-based compensation expense for the number of awards that are ultimately expected to vest. As a result, the expense recognized must be reduced for estimated forfeitures prior to vesting, based on a historical annual forfeiture rate, which is 10.1%. Estimated forfeitures shall be assessed at each balance sheet date and may change based on new facts and circumstances. Prior to the adoption of FASB Statement No. 123(R), forfeitures were accounted for as they occurred when included in required pro forma stock compensation disclosures.

          The following table illustrates the effect on (loss) from continuing operations and net income (loss) for the years ended March 31, 2005 and 2006 if we had applied the fair value recognition provisions of the FASB Statement No. 123(R), to stock-based employee compensation (in thousands, except per share data):

	Years Ended
	March 31,
	2005			2006
(Loss) from continuing operations:
Basic and diluted – as reported	$	(14,855	)	$	(63,375	)
Add: Stock-based employee compensation expense included in reported (loss) from continuing operations, net of related tax effects (1)		735			404
Less: Fair value of stock-based employee compensation expense, net of related tax effects		(5,535	)		(1,731	)
Basic and diluted – pro forma	$	(19,655	)	$	(64,702	)
(Loss) from continuing operations per share:
Basic and diluted – as reported	$	(1.22	)	$	(4.93	)
Basic and diluted – pro forma	$	(1.62	)	$	(5.03	)
Net income (loss):
Basic and diluted – as reported	$	5,692		$	(68,986	)
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects (1)		735			404
Less: Fair value of stock-based employee compensation expense, net of related tax effects		(5,535	)		(1,731	)
Basic and diluted – pro forma	$	892		$	(70,313	)
Net income (loss) per share:
Basic and diluted – as reported	$	0.47		$	(5.36	)
Basic and diluted – pro forma	$	0.07		$	(5.47	)

(1) For the year ended March 31, 2005 and 2006, we recorded $0.7 million and $0.4 million, respectively, of expense related to the modification of stock option agreements for certain executives terminated during the respective years and in connection with management’s restructuring plan (Note 20).

          The following table summarizes our option activity under our stock-based compensation plans for the years ended March 31, 2005, 2006, and 2007:

F-14

				Weighted Average
	Shares			Exercise Price
	(in thousands)
Options outstanding at March 31, 2004		688		$	106.05
Granted		492		$	21.06
Exercised		(2	)	$	4.61
Forfeited		(33	)	$	46.15
Expired		(14	)	$	106.97
Options outstanding at March 31, 2005		1,131		$	69.86
Granted		79		$	25.67
Exercised		(6	)	$	13.30
Forfeited		(276	)	$	21.59
Expired		(176	)	$	97.88
Options outstanding at March 31, 2006		752		$	77.97
Granted		628		$	7.28
Exercised		(2	)	$	3.40
Forfeited		(110	)	$	13.57
Expired		(156	)	$	157.27
Options outstanding at March 31, 2007		1,112		$	33.45
Options exercisable at March 31, 2007		473		$	65.79

          As of March 31, 2007, the weighted average remaining contractual term of options outstanding and exercisable was 7.4 years and 5.2 years, respectively, and there was no aggregate intrinsic value related to options outstanding and exercisable due to a market price lower than the exercise price of all options as of that date. As of March 31, 2007, the total future unrecognized compensation cost related to outstanding unvested options is $3.3 million, which will be recognized as compensation expense over the remaining weighted average vesting period of 1.6 years.

          The following table summarizes information concerning currently outstanding and exercisable options (shares in thousands):

			Weighted		Weighted				Weighted
Range of			Average		Average		Number		Average
Exercise Price	Number Outstanding		Remaining Life		Exercise Price		Exercisable		Exercise Price
$      3.40-7.40		551		9.4	$	7.26		1	$	3.40
$  13.80-76.00		495		6.0	$	39.88		406	$	43.52
$78.00-396.88		66		2.4	$	202.93		66	$	202.93
		1,112						473

NOTE 3 – NET INCOME (LOSS) PER SHARE

          Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur from shares of common stock issuable through stock-based compensation plans including stock options and warrants using the treasury stock method. The following is a reconciliation of basic and diluted loss from continuing operations and income (loss) per share (in thousands, except per share data):

F-15

	Years Ended
	March 31,
	2005			2006			2007
Basic and diluted earnings per share calculation:
(Loss) from continuing operations	$	(14,855	)	$	(63,375	)	$	(66,586	)
Income (loss) from discontinued operations of Reflections Interactive Ltd, net of tax provision of $9,716, $0, and $7,559, respectively		20,547			(5,611	)		(3,125	)
Net income (loss)	$	5,692		$	(68,986	)	$	(69,711	)
Basic weighted average shares outstanding		12,128			12,863			13,477
Dilutive effect of stock options and warrants		31			—			—
Diluted weighted average shares outstanding		12,159			12,863			13,477
Basic and diluted net income (loss) per share:
(Loss) from continuing operations	$	(1.22	)	$	(4.94	)	$	(4.94	)
Income (loss) from discontinued operations of Reflections Interactive Ltd, net of tax		1.69			(0.43	)		(0.23	)
Net income (loss)	$	0.47		$	(5.36	)	$	(5.17	)

          The number of antidilutive shares that was excluded from the diluted earnings per share calculation for the years ended March 31, 2005, 2006, and 2007 was approximately 650,000, 758,800, and 924,000 respectively. For the year ended March 31, 2005, the antidilutive shares are due to options and warrants in which the exercise price is greater than the average market price of the common shares during the period. For the years ended March 31, 2006 and March 31, 2007, the shares were antidilutive due to the net loss for the year.

NOTE 4 – STOCKHOLDERS’ EQUITY

          Reverse Stock Split

          On January 3, 2007, our stockholders approved a one-for-ten reverse stock split. As a result of the stock split, we filed with the Secretary of State of the State of Delaware a Certificate of Amendment to our Restated Certificate of Incorporation. The Certificate is effective as of January 3, 2007, and effects a one-for-ten reverse stock split of our issued and outstanding shares of common stock, par value $0.01 and decreases the number of shares of common stock we are authorized to issue from 300,000,000 to 30,000,000. As of the effective date of the split, every 10 shares of our issued and outstanding common stock, $0.01 par value, automatically converted to one share of common stock, $0.10 par value. No fractional shares were issued in connection with the split. Cash will be paid in lieu of fractional shares. The split did not alter any voting rights or other terms of our common stock.

          In accordance with the split, the Compensation Committee adjusted the amount of shares reserved under, and all awards made pursuant to, our stock incentive plans (see Note 2).

          Sale of common stock to third-party investors

          On September 15, 2005, we entered into a Securities Purchase Agreement, with each of Sark Master Fund Ltd (“SARK Fund”) and CCM Master Qualified Fund, Ltd., a current shareholder (“CCM Fund”), to issue them an aggregate of 570,259 shares of our common stock in private placement transactions. The shares were sold for cash at $13.00 per share for an aggregate offering price of $7.4 million. In connection with the sale, we paid a placement agent fee of approximately $0.1 million.

          Sale of Humongous Entertainment

          On August 22, 2005, we sold the Humongous Business (“Humongous”) to IESA in exchange for 4,720,771 of their shares valued at $8.3 million. The difference between the sale price and Humongous’ book value was recorded to additional paid-in capital, as no gain can be recorded on sales of businesses with entities under common control. See Note 19 for further details.

F-16

          Issuance of common stock as settlement of certain net related party balances

          In September 2005, we entered into two transactions with our majority stockholder, IESA, to settle certain outstanding net related party balances totaling $8.0 million through the issuance of an aggregate of 614,505 shares of our common stock. See Note 13 for further details.

          Warrants

          As of March 31, 2007, we had warrants, excluding warrants related to our purchase by IESA, outstanding to purchase an aggregate of approximately 19,249 shares of our common stock. The warrants have expiration dates ranging from May 2006 to November 2012. The exercise price of the warrants ranges from $24.20 to $1,000.00.

NOTE 5 – CONCENTRATION OF CREDIT RISK

          As of March 31, 2006, we had four customers whose accounts receivable exceeded 10% of total accounts receivable:

				For the year ended
	March 31,			March 31,
	2006			2006
	% of Accounts Receivable			% of Net Revenues (1)
Customer 1		25	%		13	%
Customer 2		15	%		13	%
Customer 3		14	%		31	%
Customer 4		11	%		9	%
		65	%		66	%

          As of March 31, 2007, we had two customers whose accounts receivable exceeded 10% of total accounts receivable:

				For the year ended
	March 31,			March 31,
	2007			2007
	% of Accounts Receivable			% of Net Revenues (1)
Customer 1		34	%		19	%
Customer 2		20	%		9	%
		54	%		28	%

(1) Excluding international royalty, licensing, and other income.

          Due to the timing of an aggressive pricing program which took effect for customers on June 1, 2006, combined with the timing of cash receipts and lower sales in the year, certain customers were in net credit balance positions within our accounts receivable. As a result, $0.8 million was reclassified to accrued liabilities to properly state our assets and liabilities as of March 31, 2007. As of March 31, 2006, we reclassified credit balances of $0.4 million.

          With the exception of the largest customers noted above, accounts receivable balances from all remaining individual customers were less than 10% of our total accounts receivable balance.

NOTE 6 – GOODWILL AND ACQUIRED INTANGIBLE ASSETS

Goodwill

          The change in goodwill for the years ended March 31, 2006 and March 31, 2007 is as follows (in thousands):

	March 31,
	2006			2007
Beginning balance	$	70,224		$	66,398
Sale of Humongous Entertainment studio		(3,826	)		—
Sale of Reflections Interactive Ltd development studio		—			(12,269	)
Impairment of goodwill		—			(54,129	)
Ending balance	$	66,398		$	—

F-17

          During the year ended March 31, 2006, $3.8 million of the goodwill associated with our publishing business was allocated to Humongous, Inc., a related party, as part of the sale transaction. Similarly, during the year ended March 31, 2007, we allocated $12.3 million of goodwill to the sale of our previously wholly-owned development studio Reflections and related Driver intellectual property. See Note 19.

          A two-step approach is required to test goodwill for impairment for each reporting unit (see Note 1). In fiscal 2007, we completed the first step of the annual goodwill impairment testing as of December 31, 2006 with regard to the goodwill associated with our publishing business. As part of step one, we considered three methodologies to determine the fair-value of our reporting unit. The first, which we believe is our primary and most reliable approach, is a market capitalization approach. This aligns our market capitalization at the balance sheet date to our publishing business, as we believe this measure is a good indication of third-party determination of fair value. The second approach entails determining the fair value of the reporting unit using a discounted cash flow methodology, which requires significant judgment to estimate the future cash flows and to determine the appropriate discount rates, growth rates, and other assumptions. The third approach is an orderly sale of assets process, which values the publishing unit based on estimated sale price of assets and intellectual property, less any related liabilities. Due to our history of operating losses and diminishing financial performance, we do not place heavy reliance on the second approach. The third approach is not a commonly used analysis; therefore, we place minimal reliance on that approach as well. Pursuant to the analysis using the market capitalization approach, we found no indications of impairment of our recorded goodwill at December 31, 2006.

          However, during the fourth quarter ended March 31, 2007, our market capitalization declined significantly. As this measure is our primary indicator of the fair value of our publishing unit, management considered this decline to be a triggering event, requiring us to perform an impairment analysis. As of March 31, 2007, we completed this analysis and our management, with the concurrence of the Audit Committee of our Board of Directors, has concluded that an impairment charge of $54.1 million should be recognized. This is a non-cash charge and has been recorded in the fourth quarter of fiscal 2007.

Acquired Intangible Assets

          The change in acquired intangible assets (included in other assets) for the years ended March 31, 2006 and March 31, 2007 is as follows (in thousands):

	March 31,
	2006			2007
Beginning balance	$	731		$	—
Additions		—			2,291
Amortization		(731	)		—
Write-off		—			(2,151	)
Ending balance	$	—		$	140

          During fiscal 2006, acquired intangible assets consisted of a license for the use of certain intellectual property. The intangible was amortized over the expected revenue stream associated with the use of the intellectual property, which was determined upon acquisition to be four years. Amortization expense for the years ended March 31, 2005 and 2006 was $0.7 million in each period. As of March 31, 2006, the intangible asset was fully amortized. During the year ended March 31, 2007, we capitalized as acquired intangible assets $2.3 million of costs incurred with several third party contractors in connection with the development of our Atari Online website, as well as costs incurred to purchase a URL. During the fourth quarter of fiscal 2007, it was determined that certain of the acquired intangible assets previously capitalized no longer provided a future benefit to the company, as management decided at the end of the fourth quarter to move to an outsourced technology model; these costs were written off, and the charge is included in research and product development expenses within our publishing segment. The remaining asset is related to the purchased URL and will not be amortized until the website is operational, which will occur in fiscal 2008. The balance is included in other assets on our consolidated balance sheet as of March 31, 2007.

F-18

NOTE 7 – INVENTORIES, NET

          Inventories consist of the following (in thousands):

	March 31,		March 31,
	2006		2007
Finished goods	$	18,608	$	8,226
Return inventory		2,106		615
Raw materials		73		2
	$	20,787	$	8,843

NOTE 8 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

          Prepaid expenses and other current assets consist of the following (in thousands):

	March 31,		March 31,
	2006		2007
Licenses short-term	$	5,683	$	7,054
Prepaid insurance		872		802
Reflections escrow receivable		—		626
Royalties receivable		2,118		495
Deferred financing fees		33		209
Taxes receivable		23		90
Atari trademark license		305		—
Prepaid broker fee		81		—
Other prepaid expenses and current assets		2,230		953
	$	11,345	$	10,229

NOTE 9 – PROPERTY AND EQUIPMENT, NET

          Property and equipment consists of the following (in thousands):

	March 31,			March 31,
	2006			2007
Capitalized computer software	$	17,741		$	18,242
Computer equipment		10,801			9,243
Leasehold improvements		5,362			5,241
Furniture and fixtures		2,103			2,195
Machinery and equipment		245			241
		36,252			35,162
Less: accumulated depreciation		(30,139	)		(30,945	)
	$	6,113		$	4,217

          Included in the balance of leasehold improvements is $1.2 million of improvements related to an on-going renovation of our New York office. These improvements have been funded by our landlord (see Note 15) and have been recorded as a deferred credit, which is being amortized against rent expense over the life of the lease. During fiscal 2007, we recorded a nominal amount of amortization of this credit.

          Depreciation expense for the years ended March 31, 2005, 2006, and 2007 amounted to approximately $6.3 million, $4.5 million, and $3.0 million, respectively.

F-19

NOTE 10 – ACCRUED LIABILITIES

          Accrued liabilities consist of the following (in thousands):

	March 31,		March 31,
	2006		2007
Accrued third-party development expenses	$	1,411	$	2,660
Accrued professional fees and other services		1,665		2,578
Accrued distribution services		3,713		2,061
Accrued salary and related costs		1,943		1,581
Accrued advertising		3,772		1,222
Accounts receivable credit balances		381		828
Taxes payable		205		299
Deferred income		381		231
Accrued freight and handling fees		1,029		193
Restructuring reserve (Note 20)		2,163		54
Other		2,442		1,674
	$	19,105	$	13,381

NOTE 11 – LONG-TERM LIABILITIES

          Long-term liabilities consist of the following (in thousands):

	March 31,		March 31,
	2006		2007
Deferred rent	$	25	$	1,880
Landlord allowance		—		1,213
Deferred income – long-term		402		325
Other long-term liabilities		242		16
	$	669	$	3,434

NOTE 12 – INCOME TAXES

          (Loss) before (benefit from) income taxes consisted of (in thousands):

				Years Ended
				March 31,
	2005			2006			2007
United States	$	(24,412	)	$	(64,002	)	$	(77,307	)
Foreign		25			222			41
(Loss) before (benefit from) income taxes	$	(24,387	)	$	(63,780	)	$	(77,266	)

          The components of the (benefit from) income taxes are as follows (in thousands):

				Years Ended
				March 31,
	2005			2006			2007
Current:
Federal	$	100		$	(284	)	$	—
State and local		(134	)		76			—
Foreign		218			(197	)		(998	)
Total		184			(405	)		(998	)
Deferred:
Federal		(7,848	)		—			(8,216	)

F-20

				Years Ended
				March 31,
	2005			2006			2007
State and local		(1,868	)		—			(1,466	)
Foreign		—			—			—
Total		(9,716	)		—			(9,682	)
(Benefit from) income taxes	$	(9,532	)	$	(405	)	$	(10,680	)

          We allocate income taxes between continuing and discontinued operations in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” particularly paragraph 140, which states that all items, including discontinued operations, 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. FASB Statement No. 109 is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations, tax expense is first allocated to the other sources of income, with a related benefit recorded in continuing operations.

          During the year ended March 31, 2005, we recorded a tax benefit of $9.7 million in accordance with paragraph 140 of FASB Statement No. 109 (see above), offset by a tax provision of approximately $0.2 million primarily from the increase in certain tax exposures of our dormant UK subsidiary.

          During the year ended March 31, 2006, we recorded a tax benefit of approximately $0.4 million, primarily from the favorable outcome of a federal income tax examination and the reduction of certain tax exposures of our dormant UK subsidiary.

          During the year ended March 31, 2007, we recorded a tax benefit of $7.6 million in accordance with paragraph 140 of FASB Statement No. 109 (see above), as well as a tax benefit from the reversal of a deferred tax liability of $2.1 million, associated with the impairment of our goodwill (Note 23), compounded by a tax benefit of approximately $1.0 million primarily from the favorable outcome of a tax examination of our dormant UK subsidiary.

          A reconciliation of the benefit from income taxes from continuing operations computed at the federal statutory rate to the reported benefit from income taxes is as follows (in thousands):

				Years Ended
				March 31,
	2005			2006			2007
(Benefit from) income taxes computed at the federal statutory rate	$	(8,536	)	$	(22,323	)	$	(27,043	)
(Benefit) expense from income taxes resulting from:
Permanent differences and other		43			3,668			4,273
State and local taxes, net of federal tax effect		(1,349	)		77			(952	)
Difference between U.S. and foreign income tax rates		217			(1	)		(4	)
Reversal of reserves and settlement of tax examinations		100			(405	)		(999	)
Loss for which no benefit was received		(7	)		18,579			14,045
(Benefit from) income taxes	$	(9,532	)	$	(405	)	$	(10,680	)

          Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of our net deferred tax asset are as follows (in thousands):

	March 31,			March 31,
	2006			2007
Deferred tax asset:
Inventory valuation	$	1,333		$	843
Deferred income		121			20
Net operating loss carryforwards		213,034			209,659
Restructuring reserve		888			22
Allowances for bad debts, returns, price protection and other customer promotional programs		11,309			5,471
Depreciation and amortization		676			15,229
Atari trademark license expense		(122	)		736
Research and development credit carryforwards		6,410			8,069

F-21

	March 31,			March 31,
	2006			2007
		233,649			240,049
Deferred tax liability:
In process research and development		(792	)		—
Other		(12	)		—
		(804	)		—
Subtotal		232,845			240,049
Less: valuation allowance		(232,845	)		(240,049	)
Net deferred tax asset	$	—		$	—

          The valuation allowance increased by approximately $7.0 million, primarily related to current year losses for which no benefit was provided.

          As of March 31, 2007, we had federal net operating loss carryforwards of approximately $544.6 million. The net operating loss carryforwards will expire beginning in 2012 through 2027 and may be subject to annual limitations provided by Section 382 of the Internal Revenue Code.

          As of March 31, 2007, we have federal research and development credits of approximately $6.8 million and state research and development credits of approximately $1.1 million. These credits will expire beginning in 2011. We also have $0.2 million in federal alternative minimum tax credits which can be carried forward indefinitely.

          As of March 31, 2007, there were no undistributed earnings for our 100% owned foreign subsidiaries.

NOTE 13 – RELATED PARTY TRANSACTIONS

Relationship with IESA

          As of March 31, 2007, IESA beneficially owned approximately 51% of our common stock. IESA renders management services to us (systems and administrative support) and we render 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 in this respect. IESA also develops (through its subsidiaries) products which we distribute in the United States, Canada, and Mexico and for which we pay royalties to IESA. Both IESA and Atari Interactive are material sources of products which we bring to market in the United States, Canada, and Mexico. During fiscal 2007, international royalties earned from IESA were the source of 4% of our net revenues. Additionally, IESA and its subsidiaries (primarily Atari Interactive) were the source of approximately 38% of our net publishing product revenue for the year ended March 31, 2007.

          Historically, IESA has incurred significant continuing operating losses and has been highly leveraged. On September 12, 2006, IESA announced a multi-step debt restructuring plan, subject to its shareholders’ approval, which would significantly reduce its debt and provide liquidity to meet its operating needs. On November 15, 2006, IESA shareholders approved the debt restructuring plan, permitting IESA to execute on this plan. As of the date of this report, IESA has raised approximately 74 million Euros, of which approximately 45 million Euros has paid down outstanding short-term and long-term debt and has provided approximately 20 million Euro of liquidity for working capital needs. As of the date of this report, IESA has completed its debt restructuring plan; however, its current ability to fund, among other things, its subsidiaries’ operations remains limited. Our results of operations could be materially impaired if IESA fails to fund Atari Interactive, as any delay or cessation in product development could materially decrease our revenue from the distribution of Atari Interactive and IESA products. If the above contingencies occurred, we probably would be forced to take actions that could result in a significant reduction in the size of our operations and could have a material adverse effect on our revenue and cash flows.

          Additionally, although Atari is a separate and independent legal entity and we are not a party to, or a guarantor of, and have no obligations or liability in respect of IESA’s indebtedness (except that we have guaranteed the Beverly, MA lease obligation of Atari Interactive), because IESA owns the majority of our common stock, potential investors and current and potential business/trade partners may view IESA’s financial situation as relevant to an assessment of Atari. Therefore, if IESA has negative financial results, it may taint our relationship with our suppliers and distributors, damage our business reputation, affect our ability to generate business and enter into agreements on financially favorable terms, and otherwise impair our ability to raise and generate capital.

F-22

Summary of Related Party Transactions

          The following table provides a detailed break out of related party amounts within each line of our consolidated statements of operations (in thousands):

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

F-23

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

Balance Sheet

          The following amounts are outstanding with respect to the related party activities described above (in thousands):

	March 31,
	2006			2007
Due from/(Due to) – current
IESA (1)	$	(743	)	$	(1,494	)
Atari Europe (2)		4,054			280
Eden Studios (3)		(2,235	)		(595	)
Paradigm (3)		(721	)		—
Atari Melbourne House (3)		(434	)		—
Atari Studio Asia (3)		—			(401	)
Humongous, Inc. (4)		(2,341	)		(2,218	)
Atari Interactive (5)		(3,704	)		(992	)
Other miscellaneous net receivables		553			1,516
Net due to related parties – current	$	(5,571	)	$	(3,904	)
Due from/(Due to) – long-term
Atari Interactive (see Atari Trademark License below)		—			(1,912	)
Net due to related parties	$	(5,571	)	$	(5,816	)

F-24

          The current balances reconcile to the balance sheet as follows (in thousands):

	March 31,
	2006			2007
Due from related parties	$	4,692		$	1,799
Due to related parties		(10,263	)		(5,703	)
Net due to related parties — current	$	(5,571	)	$	(3,904	)

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

Related Party Notes Receivable

          During fiscal 2005, we maintain several notes receivable from related parties on which we recorded interest income. In November 2004, the balance of the notes were transferred to a secured promissory note, which also bore interest at the prime rate plus 3.25% was secured by 200,000 shares of our common stock owned and pledged as collateral by Atari Interactive and by the rights, as owner, to the “Atari” trademark and the “Fuji” logo in North America. The secured promissory note allowed for the netting of sums currently due to us with IESA and several of its subsidiaries. During fiscal 2005, this right of offset was exercised, and as of March 31, 2005, there was no remaining balance on the Secured Note and all rights to the collateral had been released.

Atari Trademark License

          In May 2003, we changed our name to Atari, Inc. upon obtaining rights to use the Atari trademark through a license from IESA, which IESA acquired as a part of the acquisition of Hasbro Interactive Inc. (“Hasbro Interactive”). In connection with a debt recapitalization in September 2003, Atari Interactive extended the term of the license under which we use the Atari name and logo 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, which was being expensed monthly and which became fully expensed during the current period. The monthly expense was based on the total estimated cost to be incurred by us over the ten-year license period. Upon full amortization of the deferred charge, we began recording a long-term liability at $0.2 million per month, to be paid to Atari Interactive beginning in year six of the term of the license. During the years ended March 31, 2005 and 2006, we recorded expense of $3.3 million and $3.1 million, respectively, recorded against the deferred charge. During the year ended March 31, 2007, we recorded expense of $2.2 million, with $0.3 million expensed against the deferred charge that remained at March 31, 2006, and the remainder of the expense recorded in due to related party – long term. As of March 31, 2007, $1.9 million relating to this obligation is included in due to related party – long term.

F-25

Issuance of Common Stock to Related Parties

          In the second quarter of fiscal 2006, we entered into two transactions with our majority stockholder, IESA, to settle certain outstanding related party balances through the issuance of an aggregate of 614,505 shares of our common stock.

• Related Party Payables

          On September 15, 2005, we and IESA entered into an Agreement Regarding Issuance of Shares (“Related Party Share Issuance”) for 488,153 shares of our common stock. These shares represent payment for development costs incurred and other net trade payables that have been incurred in the ordinary course of business due to IESA and several of its subsidiaries. The common stock issued to IESA was valued at $13.00 (market price at the date of the agreement) per share and paid $6.4 million of related party invoices.

• Settlement of Indebtedness

          On September 15, 2005, we, IESA (and all of its subsidiaries) and Atari UK entered into the GT Interactive UK Settlement of Indebtedness Agreement (“Settlement of Indebtedness”) whereby we issued 126,351 shares of our common stock in payment of a $1.6 million loan owed by a dormant Atari subsidiary to an IESA subsidiary. The common stock issued to IESA was valued at $13.00 per share (market price at the date of the agreement).

Related Party Transactions with Employees or Former Employees

• Compromise Agreement with Martin Lee Edmondson

          On August 31, 2005, pursuant to a Compromise Agreement executed on August 12, 2005 between us, Reflections, and Martin Lee Edmondson, a former employee of Reflections, we issued 155,766 shares to Mr. Edmondson as part of the full and final settlement of a dismissal claim and any and all other claims that Mr. Edmondson had or may have had against us and Reflections, except for personal injury claims, accrued pension rights, non-waivable claims, claims to enforce rights under the Compromise Agreement, and claims for financial compensation for services rendered (if any) in connection with our game Driver: Parallel Lines. The share issuance was valued at $2.1 million and the issuance was recorded as a reduction of royalties payable. The Compromise Agreement also included a cash payment of $2.2 million paid in twelve equal installments beginning on September 1, 2005, as well as a one time payment of $0.4 million payable on September 1, 2005. The expense related to this settlement was fully recorded during fiscal 2005. As of March 31, 2006, the remaining liability due to Mr. Edmondson was $0.9 million and was included in liabilities of discontinued operations. During fiscal 2007, the remaining balance was fully paid, and Reflections was sold to a third party (Note 19). As of March 31, 2007, no balance remains outstanding related to this liability.

• Consultation Agreement with Ann Kronen

          On November 8, 2006, we entered into a Consulting Agreement with Ann E. Kronen, a member of our Board of Directors (the “Kronen Agreement”). The term of the Kronen Agreement commenced effective August 1, 2006 and ends on March 31, 2007, with automatic one year extensions unless terminated on thirty days notice prior to the end of the current term. Pursuant to the Consulting Agreement, Ms. Kronen will provide (i) product development, and (ii) business development and relationship management services on behalf of us, for which she will be compensated in monthly payments, and reimbursement for any reasonable and pre-approved expenses incurred in connection with such services. During fiscal 2007, we recorded approximately $0.1 million of expense related to this agreement.

• Purchase of iFone by Glu Mobile

          During fiscal 2006, we recorded license income from two parties, iFone and Glu Mobile. A member of our Board of Directors, Denis Guyennot, was a consultant for iFone, and a former member of our Board, David Ward, is the Chairman of the Board of iFone; therefore iFone was treated as a related party, with license income included in net revenues and royalties receivable included in due from related parties (see above). In April 2006, iFone was purchased by Glu Mobile, and additionally, Mr. Guyennot is now the Chief Executive Officer of Glu Mobile’s activities in Europe, the Middle East, and Africa. Therefore, Glu Mobile began to receive treatment as a related party in fiscal 2007. During the year ended March 31,

F-26

2006, license income recorded from iFone and Glu Mobile was $0.4 million and $1.1 million, respectively. During the year ended March 31, 2007, license income recorded from iFone/Glu Mobile was $3.0 million, of which $0.6 million is included in loss from discontinued operations of Reflections Interactive Ltd. As of March 31, 2006, royalties receivable from iFone and Glu Mobile were $0.4 million (included in due from related parties) and $0.5 million (included in prepaid expenses and other current assets), respectively. As of March 31, 2007, receivables from iFone/Glu Mobile were $1.3 million.

• Related Party Allocation of Executive Resignation Agreement

          On April 4, 2007, IESA entered into an agreement with Bruno Bonnell, its founder, CEO, and the Chairman of its Board, under which Mr. Bonnell agreed to resign from his duties as a Director and CEO of IESA and from all the offices he holds with subsidiaries of IESA, including Atari and its subsidiaries. Mr. Bonnell was also the Chairman of our Board, our Chief Creative Officer and our Acting Chief Financial Officer, and previously had been our Chief Executive Officer. IESA agreed to pay Mr. Bonnell a total of approximately 3.0 million Euros ($4.0 million), including applicable foreign taxes. Management has determined that we have benefited from this separation, and that approximately $0.8 million of the payments IESA made should be allocated to the benefit we received. Our consolidated statement of operations for the year ended March 31, 2007 reflects a charge in this amount. As we are not obligated to make any payments, this amount has been recorded as a capital contribution as of March 31, 2007.

NOTE 14 – DEBT

Credit Facilities

          Guggenheim Credit Facility

          On November 3, 2006, we established a secured credit facility with several lenders for which Guggenheim is the administrative agent. The Guggenheim credit facility will terminate and be payable in full on November 3, 2009. The credit facility consists of a secured, committed, revolving line of credit in an amount up to $15.0 million, which includes a $10.0 million sublimit for the issuance of letters of credit. Availability under the credit facility is determined by a formula based on a percentage of our eligible receivables. The proceeds may 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 bears 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 are 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. We may terminate or reduce the committed amount of the facility at any time, subject to payment satisfying certain requirements and payment of a prepayment fee. Obligations under the credit facility are 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 includes provisions for a possible term loan facility and an increased revolving credit facility line in the future. If such term loan is made, the early termination prepayment fee is no longer applicable. The credit facility also contains financial covenants that require us to maintain enumerated EBITDA, liquidity, and net debt minimums, and a capital expenditure maximum. As of March 31, 2007, we were not in compliance with all financial covenants; however, we have received a waiver as of that date.

          As of March 31, 2007, no borrowings were outstanding, and a nominal amount of interest was included in accrued liabilities.

F-27

          HSBC Loan and Security Agreement

          On May 13, 2005, we obtained a one year $50.0 million revolving credit facility (“Revolving Credit Facility”) with HSBC, pursuant to a Loan and Security Agreement, to fund our working capital and general corporate needs. Loans under the Revolving Credit Facility were determined based on percentages of our eligible receivables and eligible inventory for certain peak seasonal periods. The Revolving Credit Facility bore interest at prime for daily borrowings or LIBOR plus 1.75% for borrowings with a maturity of 30 days or greater. We were required to pay a commitment fee of 0.25% on the average unused portion of the facility quarterly in arrears and closing costs of approximately $0.1 million. The Revolving Credit Facility contained certain financial covenants that required us to maintain enumerated EBITDA, tangible net worth, and working capital minimums. In addition, amounts outstanding under the Revolving Credit Facility were secured by liens on substantially all of our present and future assets, including accounts receivable, inventory, general intangibles, fixtures, and equipment and excluding certain non-U.S. assets.

          On January 18, 2006, HSBC notified us that as a result of our default of certain financial covenants for the quarter ended December 31, 2005, they would not extend further credit under our revolving credit facility. HSBC stated that, without waiving any rights, it may in its sole discretion agree to review revised business plans or projections and make or not make future advances under the facility, however, it would not do so on the basis of our business plans at that time. As of March 31, 2006, we had no balance or letters of credit outstanding under the credit facility, and a nominal amount of interest payable was included in accrued liabilities.

          On May 31, 2006, the revolving credit facility with HSBC expired. As of such date, we had no obligations outstanding under the credit facility.

          GECC Senior Credit Facility

          On November 12, 2002, we obtained a 30-month $50.0 million secured revolving credit facility (“Senior Credit Facility”) with General Electric Capital Corporation (“GECC”) to fund our working capital and general corporate needs, as well as to fund advances to Atari Interactive and Paradigm. Loans under the Senior Credit Facility were based on a borrowing base comprised of the value of our accounts receivable and short-term marketable securities. The Senior Credit Facility bore interest at prime plus 1.25% for daily borrowings or LIBOR plus 3% for borrowings with a maturity of 30 days or greater. A commitment fee of 0.5% on the average unused portion of the facility is payable monthly and we paid $0.6 million as an initial commitment fee at closing. The Senior Credit Facility contained certain financial covenants and originally named certain related entities, such as Atari Interactive and Paradigm, as guarantors. In addition, amounts outstanding under the Senior Credit Facility were secured by our assets. The Senior Credit Facility expired on May 12, 2005.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Contractual Obligations

          As of March 31, 2007, royalty and license advance obligations, milestone payments and future minimum lease obligations under non-cancelable operating and capital lease obligations were as follows (in thousands):

	Contractual Obligations
	Royalty and
	license		Milestone		Operating lease		Capital lease
Fiscal Year	advances (1)		payments (2)		obligations (3)		obligations (4)		Total
2008	$	1,849	$	3,764	$	3,557	$	75	$	9,245
2009		—		—		3,024		12		3,036
2010		—		—		2,997		—		2,997
2011		—		—		2,937		—		2,937
2012		—		—		2,822		—		2,822
Thereafter		—		—		24,465		—		24,465
Total	$	1,849	$	3,764	$	39,802	$	87	$	45,502

(1) We have committed to pay advance payments under certain royalty and license agreements. The payments of these obligations are dependent on the delivery of the contracted services by the developers.

F-28

(2)

Milestone payments represent royalty advances to developers for products that are currently in development. Although milestone payments are not guaranteed, we expect to make these payments if all deliverables and milestones are met timely and accurately. Included in the total contractual obligations of $3.8 million are payments of $0.3 million to be made to a related party development studio.

(3)

We account for our office leases as operating leases, with expiration dates ranging from fiscal 2008 through fiscal 2022. There are future minimum annual rental payments required under the leases, including a related party sublease with Atari Interactive, net of $1.6 million of sublease income to be received in fiscal 2008 and fiscal 2009. Leasehold improvements made at the beginning of or during a lease are amortized over the shorter of the remaining lease term or the estimated useful lives of the assets. Rent expense and sublease income for the years ended March 31, 2005, 2006, and 2007 is as follows (in thousands):

	Year ended
	March 31,
	2005			2006			2007
Rent expense	$	5,622		$	4,059		$	3,760
Sublease income	$	(708	)	$	(520	)	$	(653	)

	§ Renewal of New York Lease
	During June 2006, we entered into a new lease with our current landlord at our New York headquarters for approximately 70,000 square feet of office space for our principal offices. The term of this lease commenced on July 1, 2006 and is to expire on June 30, 2021. Upon entering into the new lease, our current lease, which was set to expire in December 2006, was terminated. The rent under the new lease for the office space is approximately $2.4 million per year for the first five years, increases to approximately $2.7 million per year for the next five years, and increases to $2.9 million per year for the last five years of the term. In addition, we must pay for electricity, increases in real estate taxes and increases in porter wage rates over the term. The landlord is providing us with a one year rent credit of $2.4 million and an allowance of $4.5 million to be used for building out and furnishing the premises, of which $1.2 million has been recorded as a deferred credit as of March 31, 2007; the remainder of the deferred credit will be recorded as the improvements are completed, and will be amortized against rent expense over the life of the lease. A nominal amount of amortization was recorded during the year ended March 31, 2007. We provided the landlord with a security deposit under the new lease in the form of a letter of credit in the initial amount of $1.7 million, which has been cash collateralized and is included in security deposits on our consolidated balance sheet.
(4)	We maintain several capital leases for computer equipment. Per FASB Statement No. 13, “Accounting for Leases,” we account for capital leases by recording them at the present value of the total future lease payments. They are amortized using the straight-line method over the minimum lease term. As of March 31, 2006, the net book value of the assets, included within property and equipment on the balance sheet, was $0.5 million, net of accumulated depreciation of $0.3 million. As of March 31, 2007, the net book value of the assets was $0.1 million, net of accumulated depreciation of $0.5 million.

Litigation

          As of March 31, 2007, 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.

Bouchat v. Champion Products, et al. (Accolade)

          This suit involving Accolade, Inc. (a predecessor entity of Atari) 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

F-29

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.

Indigo Moon Productions, LLC v. Hasbro, Inc., et al.

          On August 12, 2005, Indigo Moon Productions, LLC (“Indigo Moon”) filed a lawsuit against Hasbro, Inc., Hasbro Interactive, Atari Interactive, us and Infogrames, Inc. in the United States District Court in the Western District of Kentucky. Indigo Moon alleges that on or about June 28, 2000, Indigo Moon and Hasbro Interactive, Inc. (n/k/a Atari Interactive) entered into a Confidential Information Agreement for sharing information regarding the possibility of cooperating on the production or exploitation of interactive games. Indigo Moon alleges that it provided Atari Interactive with designs and concepts for a computerized version of Clue and that Atari Interactive represented that it would compensate Indigo Moon for its work, but did not. Indigo Moon further alleges that in October 2003 Hasbro, Atari Interactive and/or Infogrames, Inc. (n/k/a Atari) released a Clue FX Game and that in the spring of 2005 Hasbro, Atari Interactive and/or Infogrames, Inc. released Clue Mysteries, each of which allegedly incorporates Indigo Moon’s work. Indigo Moon’s complaint alleges the following specific causes of action: breach of express contract, breach of implied contract, promissory estoppel, quasi-contract and unjust enrichment, breach of a confidential relationship and misappropriation of trade secret; and seeks unspecified damages. Plaintiff has agreed to dismiss us from this case without prejudice and to proceed against the remaining defendants. A Notice of Dismissal has been filed with the Court and Atari, Inc. has been dismissed from this case.

Ernst & Young, Inc. v. Atari, Inc.

          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. Our answer and counterclaim were filed in August of 2006 and we initiated discovery against Ernst & Young at the same time. Settlement discussions commenced in September 2006 and are currently on-going.

Research in Motion Limited v. Atari, Inc. and Atari Interactive, Inc.

          On October 26, 2006, Research in Motion Limited (“RIM”) filed a claim against us and Atari Interactive 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 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. On January 19, 2007, RIM added claims to its case requesting a declaration that (i) its game Meteor Crusher does not infringe Atari copyright for its game Asteroids in Canada, (ii) the audio-visual displays of Asteroids do not constitute a work protected under Canadian law, and (iii) Atari holds no right, title or interest in Asteroids under Canadian law. In August 2007, the Court ruled against Atari’s December 2006 motion to have the RIM claims dismissed on the grounds that there is no statutory relief available to RIM under Canadian law. Atari is in the process of appealing this decision.

NOTE 16 – EMPLOYEE SAVINGS PLAN

          We maintain an Employee Savings Plan (the “Plan”) which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The Plan is available to all United States employees who meet the eligibility requirements. Under the Plan, participating employees may elect to defer a portion of their pretax earnings, up to the maximum allowed by the Internal Revenue Service with matching of 100% of the first 3% and 50% of the next 6% of the employee’s contribution provided by us. Generally, the Plan’s assets in a participant’s account will be distributed to a participant or his or her beneficiaries upon termination of employment, retirement, disability or death. All Plan

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administrative fees are paid by us. Generally, we do not provide our employees any other post-retirement or post-employment benefits, except discretionary severance payments upon termination of employment. Plan expense approximated $1.1 million, $0.6 million, and $0.2 million, for the years ended March 31, 2005, 2006, and 2007, respectively.

NOTE 17 – GAIN ON SALE OF DEVELOPMENT STUDIO ASSETS

Sale of Shiny Entertainment

     In September 2006, we sold to a third party certain development assets of our Shiny studio for $1.8 million. We recorded a gain of $0.9 million, which represented the difference between the proceeds from the sale and the net book value of the property and equipment sold. There was no allocation of goodwill to Shiny as a result of this sale, as it has been determined that the Shiny studio did not constitute a business in accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The gain on sale is reflected on the face of our consolidated statements of operations for the year ended March 31, 2007.

NOTE 18 – SALE OF INTELLECTUAL PROPERTY

     In the fourth quarter of fiscal 2006, we entered into two separate Purchase and Sale Agreements with a third party to sell and assign all rights, title, and interest in the Timeshift franchise and other development projects in progress, along with the development agreements with the current external developers for the creation of these games. The third party paid us a total of $6.2 million as consideration for the sales. The amount was recorded as a gain on sale of intellectual property for the year ended March 31, 2006.

     In the first quarter of fiscal 2007, we entered into a Purchase and Sale Agreement with a third party to sell and assign all rights, title, and interest in the Stuntman franchise, along with a development agreement with the current developer for the creation of this game. The cash proceeds from the sale were $9.0 million, which was recorded as a gain on sale of intellectual property during the year ended March 31, 2007.

NOTE 19 – DISCONTINUED OPERATIONS

Sale of Humongous and Discontinued Operations Treatment

     In the fourth quarter of fiscal 2005, following the guidance established under FASB Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” management committed to a plan to divest of Humongous. During the second quarter of fiscal 2006, selected Humongous assets were sold to our majority stockholder, IESA in exchange for 4,720,771 of their shares valued at $8.3 million. Humongous’ book value approximated $4.7 million and consisted primarily of intellectual property, existing inventory, license rights, and an allocation of goodwill of $3.8 million. The difference of approximately $3.6 million between the sale price and the Humongous’ book value was recorded to additional paid-in capital, as no gain can be recorded on sales of businesses with entities under common control.

     Additionally, IESA advanced approximately $2.0 million, totaling 1,119,390 of their shares, for certain future costs related to platform royalty advances, manufacturing costs and milestone payments that we have subsequently paid on behalf of Humongous, Inc. In the aggregate, we received 5,840,161 shares of IESA (“IESA Shares”).

     In connection with the above transactions, on August 22, 2005, we and IESA entered into an agreement, pursuant to which we agreed to cooperate with regard to the sale of some or all of the IESA Shares received. Therefore, in September 2005, the IESA Shares were sold for $10.1 million and we realized a loss of $0.2 million included in other income (expense) as part of net loss in the nine months ended December 31, 2005. We did not incur any additional expenses in conjunction with this transaction.

     Immediately following the sale, we entered into a Distribution Agreement, dated as of August 22, 2005, (the “Humongous Distribution Agreement”), with Humongous, Inc. (formerly Humongous), a newly formed wholly-owned subsidiary of IESA, under which we were to be the sole distributor in the US, Canada, and Mexico of products developed by Humongous, Inc. This agreement had a term through March 31, 2006, with an option to extend through March 31, 2007, at the discretion of Humongous, Inc. Although this distribution agreement was expected to generate continuing cash flows from the distribution of their product, it was expected that IESA would have sold Humongous, Inc. to a third party within twelve months from the disposal date of August 22, 2005. During the current period, we have determined that, while

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Humongous is expected to be sold, the potential buyer has requested us to continue to distribute Humongous, Inc.’s products beyond the assessment period ending August 22, 2006, and therefore will not eliminate our significant continuing involvement. Therefore under guidance established under FASB Statement No. 144, we no longer qualify to consider Humongous a discontinued operation and have reclassified its results back to continuing operations and its assets and liabilities as held and used beginning in our Annual Report on Form 10-K for the year ended March 31, 2006.

Sale of Reflections

     In August 2006, we sold to a third party the Driver intellectual property and certain assets of Reflections for $24.0 million. We maintained sell-off rights for three months for all Driver products, excluding Driver: Parallel Lines, which we maintained until the end of the third quarter of the current fiscal year. The tangible assets included in the sale were property and equipment only. Goodwill allocated to Reflections was $12.3 million. During the second quarter of fiscal 2007, we recorded a gain in the amount of the difference between the proceeds from the sale and the net book value of Reflections’ property and equipment and the goodwill allocation. The gain recorded was approximately $11.5 million, and was included in (loss) from discontinued operations of Reflections (see below).

• Balance Sheets

     At March 31, 2006 and 2007, the assets and liabilities of Reflections are presented separately on our consolidated balance sheets. The balances at March 31, 2007 represent assets and liabilities associated with Reflections and the Driver franchise that were not included in the sale. Management’s intent is to divest itself of the remaining assets and liabilities associated with Reflections’ office lease over the next six months. The components of the assets and liabilities of discontinued operations are as follows (in thousands):

	March 31, 2006		March 31, 2007
Assets:
Cash	$	438	$	—
Inventories, net		574		—
Prepaid expenses and other current assets		1,222		310
Property and equipment, net		251		—
Other assets		464		335
Total assets	$	2,949	$	645
Liabilities:
Accounts payable	$	874	$	—
Accrued liabilities		731		—
Royalties payable		1,413		—
Total liabilities	$	3,018	$	—

• Results of Operations

     As Reflections represented a component of our business and its results of operations and cash flows can be separated from the rest of our operations, the results for the periods presented are disclosed as discontinued operations on the face of the consolidated statements of operations. Net revenues and income (loss) from discontinued operations, net of tax, for the year ended March 31, 2005, 2006, and 2007, respectively, are as follows (in thousands):

	Year Ended
	March 31,
	2005		2006			2007
Net revenues	$	63,976	$	11,865		$	(630	)
Income (loss) from operations of Reflections Interactive Ltd		30,263		(5,611	)		(7,038	)
Gain on sale of Reflections Interactive Ltd		—		—			11,472
Income (loss) before provision for income taxes from discontinued operations of Reflections Interactive Ltd		30,263		(5,611	)		4,434
Provision for income taxes		9,716		—			7,559
Income (loss) from discontinued operations of Reflections Interactive Ltd	$	20,547	$	(5,611	)	$	(3,125	)

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NOTE 20 – RESTRUCTURING

     During the fourth quarter of fiscal 2005, following the guidance established under FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” management announced a restructuring plan to strengthen our competitive position in the marketplace as well as enhance shareholder value. During the years ended March 31, 2005 and 2006, we recorded restructuring expenses of $4.9 million and $8.9 million, respectively, which include the termination of several key executives as well as severance and other charges related to the closing of the Beverly, MA, and Santa Monica, CA, publishing studios and the transfer of all publishing operations to the New York office. Also included in this charge for fiscal 2006, in accordance with FASB Statement No. 146, is the present value of all future lease payments, less the present value of expected sublease income to be recorded, primarily for the Beverly and Santa Monica offices, as well as costs related to employee terminations at our New York headquarters that took place in the fourth quarter of fiscal 2006. In fiscal 2007, restructuring expenses of $0.7 million consisted primarily of true ups to the present value of all future lease payments and sublease income recorded in fiscal 2006, as required by FASB Statement No. 146, as well as additional severance and miscellaneous charges. The charge for restructuring is comprised of the following (in thousands):

	Years Ended
	March 31,
	2005		2006		2007
Severance and retention expenses	$	4,219	$	4,907	$	87
Lease related costs		—		1,615		595
Relocation		—		447		—
Fixed asset write offs		—		434		—
Modification of stock options		596		404		—
Consultants		—		358		—
Miscellaneous costs		117		702		27
Total	$	4,932	$	8,867	$	709

     We expect to incur a nominal amount of costs in fiscal 2008 related to management’s 2005 restructuring plan, primarily related to the present value lease true ups. Additionally, in the first quarter of fiscal 2008, management announced a new plan to reduce our total workforce by 20%, primarily in general and administrative functions, which will result in a charge of approximately $0.8 million to $1.1 million to be recorded in fiscal 2008 (see Note 22).

     The following is a reconciliation of our restructuring reserve from inception through March 31, 2007 (in thousands):

	Balance at						Cash payments,			Balance at
	March 31, 2004		Accrued Amounts		Reclasses		net			March 31, 2005
Short term
Severance and retention	$	—	$	4,167	$	—	$	(2,362	)	$	1,805
Miscellaneous costs		—		117		—		(37	)		80
Total		—		4,284		—		(2,399	)		1,885
Long term
Severance and retention		—		52		—		—			52
Total		—		52		—		—			52
Total	$	—	$	4,336	$	—	$	(2,399	)	$	1,937

	Balance at							Cash payments,			Balance at
	March 31, 2005		Accrued Amounts		Reclasses			net			March 31, 2006
Short term
Severance and retention	$	1,805	$	4,907	$	52		$	(4,878	)	$	1,886
Lease related costs		—		1,615		(56	)		(1,314	)		245
Relocation		—		447		—			(447	)		—

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	Balance at							Cash payments,			Balance at
	March 31, 2005		Accrued Amounts		Reclasses			net			March 31, 2006
Consultants		—		358		—			(358	)		—
Miscellaneous costs		80		702		—			(750	)		32
Total		1,885		8,029		(4	)		(7,747	)		2,163
Long term
Severance and retention		52		—		(52	)		—			—
Lease related costs		—		—		56			—			56
Total		52		—		4			—			56
Total	$	1,937	$	8,029	$	—		$	(7,747	)	$	2,219

	Balance at							Cash payments,			Balance at
	March 31, 2006		Accrued Amounts		Reclasses			net			March 31, 2007
Short term
Severance and retention	$	1,886	$	87	$	—		$	(1,973	)	$	—
Lease related costs		245		595		53			(839	)		54
Miscellaneous costs		32		27		—			(59	)		—
Total		2,163		709		53			(2,871	)		54
Long term
Lease related costs		56		—		(53	)		—			3
Total		56		—		(53	)		—			3
Total	$	2,219	$	709	$	—		$	(2,871	)	$	57

     During the years ended March 31, 2005 and 2006, the charges of $0.6 million and $0.4 million, respectively, for the modification of stock options were recorded as part of the termination agreement with certain employees as an increase to additional paid-in capital, and during the year ended March 31, 2006, the charge of $0.4 million for fixed asset write offs was recorded as a decrease to property and equipment, net.

NOTE 21 – OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREAS

     We have three reportable segments: publishing, distribution and corporate. During the first quarter of the prior fiscal year, publishing was comprised of two studios located in Santa Monica, California, and Beverly, Massachusetts. As part of our restructuring plan, the Beverly studio was closed in the first quarter of fiscal 2006 and the Santa Monica studio was closed in the second quarter of fiscal 2006; all publishing operations have been transferred to the New York office. Distribution constitutes the sale of other publishers’ titles to various mass merchants and other retailers. Corporate includes the costs of senior executive management, legal, finance, and administration. The majority of depreciation expense for fixed assets is charged to the corporate segment and a portion is recorded in the publishing segment. This amount consists of depreciation on computers and office furniture in the publishing unit. Historically, we do not separately track or maintain records, other than those for goodwill (all attributable to the publishing segment during all periods presented, and fully impaired as of March 31, 2007) and a nominal amount of fixed assets, which identify assets by segment and, accordingly, such information is not available.

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on operating results of these segments. There are no intersegment revenues.

     The results of operations for Reflections are not included in our segment reporting below as they are classified as discontinued operations in our consolidated financial statements. Prior to its classification as discontinued operations, the results for Reflections were part of the publishing segment.

     Our reportable segments are strategic business units with different associated costs and profit margins. They are managed separately because each business unit requires different planning, and where appropriate, merchandising and marketing strategies.

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     The following summary represents the consolidated net revenues, operating income (loss), depreciation and amortization, and interest expense, net, by reportable segment for the years ended March 31, 2005, 2006, and 2007 (in thousands):

	Publishing			Distribution		Corporate			Total
Year ended March 31, 2005:
Net revenues	$	289,636		$	54,201	$	—		$	343,837
Operating income (loss) (1)		6,894			13,150		(39,082	)		(19,038	)
Depreciation and amortization		(2,646	)		—		(4,312	)		(6,958	)
Interest expense, net		—			—		(459	)		(459	)
Year ended March 31, 2006:
Net revenues	$	153,598		$	53,198	$	—			206,796
Operating (loss) income (1) (2)		(22,054	)		2,052		(34,108	)		(54,110	)
Depreciation and amortization		(1,875	)		—		(3,327	)		(5,202	)
Interest expense, net		—			—		(595	)		(595	)
Year ended March 31, 2007:
Net revenues	$	104,650		$	17,635	$	—		$	122,285
Operating (loss) income (1) (2) (3)		(52,003	)		1,145		(26,077	)		(76,935	)
Depreciation and amortization		(517	)		—		(2,451	)		(2,968	)
Interest income, net		—			139		162			301

(1)	Operating (loss) for the Corporate segment for the years ended March 31, 2005, 2006, and 2007 excludes restructuring charges of $4.9 million, $8.9 million, and $0.7 million, respectively. Including restructuring charges, total operating loss for the years ended March 31, 2005, 2006, and 2007 is $24.0 million, $63.0 million, and $77.6 million, respectively.
(2)	Operating (loss) for the publishing segment for the year ended March 31, 2006 includes a gain on the sale of intellectual property of $6.2 million, and for the year ended March 31, 2007 includes a gain on the sale of intellectual property of $9.0 million and a gain on the sale of development studio assets of $0.9 million.
(3)	Operating (loss) for the publishing segment for the year ended March 31, 2007 includes impairment of goodwill of $54.1 million.

Net revenues by product are as follows (in thousands):

	March 31,
	2005		2006		2007
Publishing net product revenues:
Console
PlayStation 2	$	97,931	$	45,438	$	31,047
Xbox 360		—		—		10,582
Nintendo Wii		—		—		7,346
Plug and play		15,519		11,904		2,449
Xbox		23,279		12,544		262
Game Cube		14,181		2,304		175
PlayStation		2,943		—		—
Total console		153,853		72,190		51,861
Handheld
PlayStation Portable		—		2,688		6,647
Game Boy Advance		34,784		8,576		3,410
Nintendo DS		2,141		2,688		1,749

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	March 31,
	2005		2006		2007
Game Boy Color		—		—		—
Total handheld		36,925		13,952		11,806
PC		76,792		41,857		23,788
Total publishing net product revenues		267,570		127,999		87,455
International royalty income (Note 13)		2,520		13,521		5,243
Licensing and other income		19,546		12,078		11,952
Total publishing net revenues		289,636		153,598		104,650
Distribution net revenues		54,201		53,198		17,635
Total net revenues	$	343,837	$	206,796	$	122,285

     Information about our operations in the United States and Europe (revenue based on location product is shipped from) for the years ended March 31, 2005, 2006, and 2007 are presented below (in thousands):

	United
	States			Europe			Total
Year ended March 31, 2005:
Net revenues (1)	$	343,837		$	—		$	343,837
Operating (loss) (2)		(13,573	)		(10,397	)		(23,970	)
Capital expenditures (3)		1,861			268			2,129
Total assets (4)		187,370			2,669			190,039
Year ended March 31, 2006:
Net revenues (1)	$	206,796			—		$	206,796
Operating (loss) (2)		(51,713	)		(11,264	)		(62,977	)
Capital expenditures (3)		2,305			224			2,529
Total assets (4)		141,361			2,309			143,670
Year ended March 31, 2007:
Net revenues (1)	$	122,285			—		$	122,285
Operating (loss) (2)		(74,873	)		(2,771	)		(77,644	)
Capital expenditures (3)		837			8			845
Total assets (4)		42,049			770			42,819

(1)	United States net revenues include royalties on sales of our product sold internationally. For the years ended March 31, 2005, 2006, and 2007 the royalties were $2.5 million, $13.5 million, and $5.2 million, respectively.
(2)	Operating income (loss) for Europe for the years ended March 31, 2005, 2006, and 2007 includes operating expenses of $10.4 million, $11.5 million, and $4.7 million, respectively, for the Reflections studio, which was sold to a third party in the second quarter of fiscal 2007 (Note 19). These expenses are included in income (loss) from discontinued operations for each period presented.
(3)	Capital expenditures for Europe for all periods presented are property and equipment purchases for the Reflections studio, which is presented as a discontinued operation for all periods presented, and was sold to a third party in the second quarter of fiscal 2007 (Note 19).
(4)	Total assets for Europe for the years ended March 31, 2005, 2006, and 2007 include assets of $2.2 million, $2.1 million, and $0.6 million, respectively, for the Reflections studio, which was sold to a third party in the second quarter of fiscal 2007 (Note 19). These assets are included in assets of discontinued operations for each period presented.

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NOTE 22 – SUBSEQUENT EVENTS

Restructuring

     On May 1, 2007, we announced a plan to reduce our total workforce by approximately 20%, primarily in general and administrative functions. This plan was approved by the Board of Directors on April 10, 2007 and communication to employees was completed on April 30, 2007. We expect to complete the workforce reductions by July 31, 2007. We anticipate recording a restructuring reserve during our fiscal 2008 first quarter to reflect severance packages of approximately $0.8 million to $1.1 million. We expect payments regarding the severance packages to extend through the first quarter of fiscal 2009.

NOTE 23 – STAFF ACCOUNTING BULLETIN NO. 108

     In September 2006, the SEC released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 permits us to adjust for the cumulative effect of errors relating to prior years, not previously identified, in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of implementation. SAB No. 108 also permits us to correct the immaterial effects of these errors on fiscal 2007 quarters the next time we file these prior period interim financial statements on Form 10-Q. As such, we do not intend to amend previously filed reports with the SEC. In accordance with SAB No. 108, we have adjusted our opening retained earnings for fiscal 2007 and the unaudited quarterly financial data for the first three quarters of fiscal 2007, presented in Note 25, for the effects of the errors described below. We consider these errors to be individually and collectively immaterial to prior periods.

•	Inventory Write-off related to the lower-of-cost or market adjustment
	During our year end financial closing, we determined that in previous periods we did not properly record a lower-of-cost-or-market adjustment to our inventory. As such, we have written off inventory based on facts and circumstances known and available at March 31, 2006 and prior. This inventory write-off of $0.7 million decreases the balances in opening retained earnings and inventory as of April 1, 2006, as presented in the table below.
•	Deferred Tax Liability
	During our year end financial closing, we determined that we had not established a deferred tax liability for the deferred tax consequences of a temporary difference that arose from a difference in the book and tax basis of goodwill. As such, we have adjusted our opening retained earnings for fiscal 2007.

	Inventory			Deferred Tax
	Write-off			Liability			Total
Cumulative effect on inventory as of April 1, 2006	$	(735	)	$	—		$	(735	)
Cumulative effect on long-term deferred tax liability as of April 1, 2006	$	—		$	(2,123	)	$	(2,123	)
Cumulative effect on retained earnings as of April 1, 2006	$	(735	)	$	(2,123	)	$	(2,858	)

NOTE 24 – RESTATEMENT

     We identified an error following the issuance of the fiscal 2005 and 2006 consolidated financial statements relating to the presentation of financing activities within our consolidated statements of cash flows. We failed to present separately the gross borrowings and repayments under third party credit facilities with maturities of greater than 3 months. The gross borrowings and repayments were $263,281 and $263,281, respectively in 2005 and $157,567 and $157,567, respectively in 2006.

NOTE 25 – UNAUDITED QUARTERLY FINANCIAL DATA AND RESTATEMENT

     Summarized unaudited quarterly financial data for the fiscal year ended March 31, 2006 is as follows (in thousands, except per share amounts):

	June 30,			September 30,			December 31,			March 31,
	2005			2005			2005			2006
Net revenues	$	23,877		$	38,358		$	99,982		$	44,579
Operating (loss)		(30,099	)		(22,072	)		(2,245	)		(8,561	)
(Loss) income from continuing operations		(30,138	)		(22,331	)		(2,348	)		(8,558	)
(Loss) income from discontinued operations of Reflections Interactive Ltd, net of tax		(2,679	)		(2,880	)		(2,413	)		2,361

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	June 30,			September 30,			December 31,			March 31,
	2005			2005			2005			2006
Net (loss)		(32,817	)		(25,211	)		(4,761	)		(6,197	)
Basic and diluted (loss) from continuing operations per share	$	(2.49	)	$	(1.81	)	$	(0.17	)	$	(0.66	)
Basic and diluted (loss) from discontinued operations of Reflections Interactive Ltd, net of tax, per share	$	(0.22	)	$	(0.23	)	$	(0.18	)	$	0.18
Basic and diluted net (loss) per share	$	(2.71	)	$	(2.04	)	$	(0.35	)	$	(0.48	)
Weighted average shares outstanding – basic and diluted		12,130			12,377			13,475			13,476

     Summarized unaudited quarterly financial data for the fiscal year ended March 31, 2007 is as follows (in thousands, except per share amounts):

	June 30,			September 30,			December 31,			March 31,
	2006			2006			2006			2007
				(Revised and			(Revised and
	(Revised)			Restated)			Restated)
Net revenues	$	19,474		$	28,588		$	47,277		$	26,946
Operating (loss) income		(4,713	)		(9,623	)		1,711			(65,019	)
(Loss) income from continuing operations		(4,759	)		(4,477	)		1,082			(58,432	)
(Loss) income from discontinued operations of Reflections Interactive Ltd, net of tax		(2,537	)		4,410			(1,727	)		(3,271	)
Net (loss)		(7,296	)		(67	)		(645	)		(61,703	)
Basic and diluted (loss) income from continuing operations per share	$	(0.35	)	$	(0.33	)	$	0.08		$	(4.33	)
Basic and diluted (loss) income from discontinued operations of Reflections Interactive Ltd, net of tax, per share	$	(0.19	)	$	0.32		$	(0.13	)	$	(0.24	)
Basic and diluted net (loss) per share	$	(0.54	)	$	(0.01	)	$	(0.05	)	$	(4.57	)
Weighted average shares outstanding – basic and diluted		13,477			13,478			13,478			13,478

     During the fourth quarter of fiscal 2006, we sold certain of our intellectual properties to a third party for a total of $6.2 million, which was recorded as a gain on sale (Note 18). Additionally, we recorded additional price protection allowances of $4.2 million in connection with an aggressive pricing plan implemented in the first quarter of fiscal 2007.

     During the first quarter of fiscal 2007, we sold a certain intellectual property to a third party for proceeds of $9.0 million, which was recorded as a gain on sale (Note 18).

     During the second quarter of fiscal 2007, we sold to a third party Driver intellectual property and certain assets of Reflections for $24.0 million, recording a gain of $11.5 million, included in income from discontinued operations of Reflections Interactive Ltd, net of tax (Note 19). Additionally, in the second quarter of fiscal 2007, we sold to a third party certain development assets of Shiny for $1.8 million and recorded a gain of $0.9 million, which represented the difference between the proceeds from the sale and the net book value of the property and equipment sold (Note 17).

     During the fourth quarter of fiscal 2007, we recorded an impairment charge on our goodwill of $54.1 million (Note 6).

     The per share amounts are calculated independently for each of the quarters presented. The sum of the quarters may not equal the full year per share amounts.

     Restatement of Loss from Continuing Operations and (Loss) Income from Discontinued Operations

F-38

     In the fourth quarter of fiscal 2007, we identified an error in the way we previously accounted for income taxes. Paragraph 38 of FASB Statement No. 109, “Accounting for Income Taxes,” provides guidance on the process by which an entity should allocate the total tax provision or benefit to the various components of the income statement, including continuing and discontinued operations. The method prescribed by Paragraph 38 computes the total tax provision or benefit for all items of income and expense and then separately computes the tax provision or benefit for continuing operations. The difference between these two computations is allocated among the remaining categories. Paragraph 140 provides an exception to the general rule under Paragraph 38 by stating that all categories 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. This analysis should be done on a jurisdictional basis to ensure that the loss from continuing operations can properly offset income or gain from other categories in compliance with the appropriate tax law.

     In our second quarter of fiscal 2007, we realized a gain from our domestic discontinued operations as a result of the sale of certain US intellectual property. We failed to consider the proper tax accounting consequences of this transaction by benefiting the cumulative second quarter of fiscal 2007 loss from continuing operations for the effect of the gain in domestic discontinued operations. The recording of a benefit would be appropriate in this instance, under the guidance of Paragraph 140, because such domestic loss would offset the domestic gain generated in discontinued operations. An adjustment to the third quarter fiscal 2007 tax accounts was also necessary as income and loss from the respective categories fluctuated during the third quarter and therefore impacted the cumulative tax benefit and detriment required to be accrued.

     Accordingly, our previously reported unaudited quarterly information has been revised and restated to reflect adjustments related to the errors in accounting for income taxes as discussed above and the adoption of SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” as discussed in Note 23.

     A summary of the effects is as follows (in thousands):

				Restatement		SAB No. 108		As Revised and
As of and for the Three Months Ended June 30, 2006	As Reported			Adjustment		Adjustment		Restated
Long-term deferred tax liability	$	—		$	—	$	2,305	$	2,305
(Loss) before provision for income taxes	$	(4,577	)	$	—	$	—	$	(4,577	)
Provision for income taxes		—			—		182		182
(Loss) from continuing operations		(4,577	)		—		182		(4,759	)
(Loss) from discontinued operations of Reflections Interactive Ltd, net of tax		(2,537	)		—		—		(2,537	)
Net (loss)	$	(7,114	)	$	—	$	182	$	(7,296	)
Basic and diluted net (loss) per share (1):
(Loss) from continuing operations	$	(0.34	)	$	—	$	0.01	$	(0.35	)
(Loss) from discontinued operations of Reflections Interactive Ltd, net of tax		(0.19	)		—		—		(0.19	)
Net (loss)	$	(0.53	)	$	—	$	0.01	$	(0.54	)

				Restatement			SAB No. 108		As Revised and
As of and for the Three Months Ended September 30, 2006	As Reported			Adjustment			Adjustment		Restated
Long-term deferred tax liability	$	—		$	—		$	2,683	$	2,683
(Loss) before (benefit from) provision for income taxes	$	(9,492	)	$	—		$	—	$	(9,492	)
(Benefit from) provision for income taxes		—			(5,393	)		378		(5,015	)
(Loss) from continuing operations		(9,492	)		(5,393	)		378		(4,477	)
Income from discontinued operations of Reflections Interactive Ltd, net of tax		9,803			5,393			—		4,410
Net income	$	311		$	—		$	378	$	67
Basic and diluted net income per share (1):
(Loss) from continuing operations	$	(0.70	)	$	(0.40	)	$	0.03	$	(0.33	)
Income from discontinued operations of Reflections Interactive Ltd, net of tax		0.72			0.40			—		0.32
Net income (loss)	$	0.02		$	—		$	0.03	$	(0.01	)

F-39

				Restatement			SAB No. 108		As Revised and
For the Six Months Ended September 30, 2006	As Reported			Adjustment			Adjustment		Restated
(Loss) before (benefit from) provision for income taxes	$	(14,069	)	$	—		$	—	$	(14,069	)
(Benefit from) provision for income taxes		—			(5,393	)		560		(4,833	)
(Loss) from continuing operations		(14,069	)		(5,393	)		560		(9,236	)
Income from discontinued operations of Reflections Interactive Ltd, net of tax		7,266			5,393			—		1,873
Net (loss)	$	(6,803	)	$	—		$	560	$	(7,363	)
Basic and diluted net (loss) per share (1):
(Loss) from continuing operations	$	(1.04	)	$	(0.40	)	$	0.04	$	(0.68	)
Income from discontinued operations of Reflections Interactive Ltd, net of tax		0.54			0.40			—		0.14
Net (loss)	$	(0.50	)	$	—		$	0.04	$	(0.54	)

				Restatement			SAB No. 108			As Revised and
As of and for the Three Months Ended December 31, 2006	As Reported			Adjustment			Adjustment			Restated
Long-term deferred tax liability	$	—		$	—		$	2,613		$	2,613
Income before provision for income taxes	$	1,689		$	—		$	—		$	1,689
Provision for income taxes		—			677			(70	)		607
Income from continuing operations		1,689			677			(70	)		1,082
(Loss) from discontinued operations of Reflections Interactive Ltd, net of tax		(2,404	)		(677	)		—			(1,727	)
Net (loss)	$	(715	)	$	—		$	(70	)	$	(645	)
Basic and diluted net (loss) per share (1):
Income from continuing operations	$	0.13		$	0.05		$	(0.00	)	$	0.08
(Loss) from discontinued operations of Reflections Interactive Ltd, net of tax		(0.18	)		(0.05	)		—			(0.13	)
Net (loss)	$	(0.05	)	$	—		$	0.00		$	(0.05	)

				Restatement			SAB No. 108		As Revised and
For the Nine Months Ended December 31, 2006	As Reported			Adjustment			Adjustment		Restated
(Loss) before (benefit from) provision for income taxes	$	(12,380	)	$	—		$	—	$	(12,380	)
(Benefit from) provision for income taxes		—			(4,716	)		490		(4,226	)
(Loss) from continuing operations		(12,380	)		(4,716	)		490		(8,154	)
Income from discontinued operations of Reflections Interactive Ltd, net of tax		4,862			4,716			—		146
Net (loss)	$	(7,518	)	$	—		$	490	$	(8,008	)
Basic and diluted net (loss) per share (1):
(Loss) from continuing operations	$	(0.92	)	$	(0.35	)	$	0.03	$	(0.60	)
Income from discontinued operations of Reflections Interactive Ltd, net of tax		0.36			0.35			—		0.01
Net (loss)	$	(0.56	)	$	—		$	0.03	$	(0.59	)

(1) Reflects the one-for-ten reverse stock split effected on January 3, 2007. All periods have been restated to reflect the reverse stock split.

F-40

ATARI, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS (in thousands)

			Additions		Additions
	Balance		Charged to		Charged to					Balance
	Beginning		Net		Operating					End
Description	of Period		Revenues		Expenses		Deductions			of Period
Allowance for bad debts, returns, price protection and other customer promotional programs:
Year ended March 31, 2007	$	30,918	$	22,428	$	269	$	(39,467	)	$	14,148
Year ended March 31, 2006	$	24,285	$	54,964	$	1,919	$	(50,250	)	$	30,918
Year ended March 31, 2005	$	36,279	$	76,239	$	3,622	$	(91,855	)	$	24,285

			Additions		Additions
	Balance		Charged to		Charged to					Balance
	Beginning		Cost of		Operating					End
Description	of Period		Goods Sold		Expenses		Deductions			of Period
Reserve for obsolescence:
Year ended March 31, 2007	$	2,427	$	2,486	$	—	$	(3,054	)	$	1,859
Year ended March 31, 2006	$	2,489	$	3,678	$	—	$	(3,740	)	$	2,427
Year ended March 31, 2005	$	2,035	$	2,645	$	—	$	(2,191	)	$	2,489

F-41

EX-10.25

Exhibit 10.25

ATARI, INC.

DESCRIPTION OF REGISTRANT’S FISCAL
YEAR 2007 ANNUAL INCENTIVE PLAN

          Target annual bonuses are set for each eligible employee based upon a percentage of base salary. Bonuses are calculated based on three components, one of which relates to the U.S. Company’s and/or the business unit’s profit and revenue results, one of which is measured against worldwide cash flow, profit and revenue results, and in the case of production related employees, one of which is based on the timeliness of product delivery. If Atari, Inc.’s worldwide operating profit attainment for the fiscal year is less than 80% of the Company’s plan, no bonus is required to be paid for the fiscal year; bonuses then become discretionary. If profits and/or revenue exceed plan for the fiscal year the bonus rate is accelerated for the incremental profits and revenue above plan, with a maximum of 150% payout of the bonus target.

EX-10.58

STANDARD FORM OF OFFICE LEASE
The Real Estate Board of New York, Inc.

AGREEMENT OF LEASE, made as of this 21^st day of June 2006, between FIFTH AND 38TH LLC, a Delaware limited liability company having an office at c/o Murray Hill Properties LLC, 1140 Avenue of the Americas, New York, New York 10036, party of the first part, hereinafter referred to as OWNER, and ATARI, INC., having an address at 417 Fifth Avenue, New York, New York 10016, party of the second part, hereinafter referred to as TENANT,

WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner, (a) the entire seventh (7th) and eighth (8th) floors of the building (the “Building”) known as 417 Fifth Avenue in the Borough of Manhattan, City, County and State of New York, consisting of approximately 70,000 rentable square feet (the “Office Space”) and (b) certain portions of the basement of the Building, consisting initially of approximately 2,500 square feet but subject to increase pursuant to Section 49D hereof (the “Basement Space”), each as more particularly identified on Exhibit A attached hereto (but excluding elements of the Building that penetrate through the floor, all janitor or electrical closets and all mechanical/electrical rooms), hereinafter referred to collectively as the “Demised Premises” or the “demised premises”, together with the non-exclusive right to use, in common with other tenants of the Building, all appurtenances, areas and facilities intended generally for the common use of tenants in the Building, for a term (“Term”) to commence on the “Commencement Date” (as defined in Article 37) and to end on the “Expiration Date” (as defined in Article 37) (unless extended or sooner terminated as hereinafter provided), both dates inclusive, at an annual rental rate set forth in Article 37,

which Tenant agrees to pay in lawful money of the United States, which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, without previous demand therefor, at the office of Owner or such other place as Owner may designate, without any setoff or deduction whatsoever, (except as otherwise expressly set forth in this Lease).

     If the Expiration Date occurs on a day other than the last day of a calendar month, then the Fixed Annual Rent for such calendar month shall be prorated based on the applicable number of days.

     The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows:

Rent:

          1. Tenant shall pay the rent as above and as hereinafter provided.

Occupancy:

          2. Tenant shall use and occupy the demised premises only for general and executive offices and a product display room (the “Permitted Uses”). Subject to the other terms of this Lease, Permitted Uses shall also include uses reasonably and customarily ancillary to general and executive office use, including without limitation the following: (a) customary computer and other electronic and technological support systems, electronic data processing equipment and business machines, including computer networks and printing and duplicating equipment used in connection with administrative, executive and general office use; (b) file storage; (c) standard office-style kitchens (i.e., a coffee maker, microwave, small refrigerator and vending machines) solely for the use by Tenant’s and its permitted subtenant’s officers, directors, employees and guests; and (d) any private bathrooms or showers installed in the Demised Premises prior to the date hereof. In no event shall the Demised Premises be used for manufacturing or direct retail sales to the public. Notwithstanding the foregoing or any other provision of this Lease to the contrary, Tenant shall be responsible for complying with all Laws (as defined herein) applicable to its use of the Demised Premises (provided, however, that Tenant shall not be required to make any structural alterations to the Demised Premises or Building required by such Laws except as set forth in Article 50) and for obtaining, at Tenant’s sole cost and expense, all consents, approvals and permits (including, without limitation, any amendment to the certificate of occupancy for the Building and any public assembly permit) required by reason of any such use. Owner makes no representation to Tenant as to the suitability of the Demised Premises for any particular use, but Owner shall be responsible for maintaining a certificate of occupancy for the Building that permits the Demised Premises to be used for office use.

Tenant Alterations:

          3. Except as otherwise expressly set forth in this Lease, Tenant shall make no changes in or to the demised premises of any nature without Owner’s prior written consent. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof, and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner, and Tenant agrees to carry, and will cause Tenant’s contractors and sub-contractors to carry, such worker’s compensation, general liability, personal and property damage insurance as is specified in this Lease. If any mechanic’s lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days after notice thereof, at Tenant’s expense, by payment or filing a bond as permitted by law or otherwise. All fixtures and all paneling, partitions, railings and like installations, installed in the demised premises at any time, either by Tenant or by Owner on Tenant’s behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises. Nothing in this article shall be construed to give Owner title to, or to prevent Tenant’s removal of, trade fixtures, moveable office furniture and equipment, but upon removal of same from the demised premises or upon removal, of other installations as may be required by Owner pursuant to the terms hereof. Tenant shall immediately, and at its expense, repair any damage to the demised premises or the building due to such removal. Notwithstanding the foregoing, Tenant will (upon request of Owner given no more than ninety (90) days prior to the Expiration Date) be required to remove any safes, vaults, raised computer floors, library and file storage systems, antennas, dishes and internal stairways to the extent not existing in the Demised Premises as of the Commencement Date (collectively, the “Non-Standard Alterations”). Except for Non-Standard Alterations, Tenant shall have no obligation to remove any alterations or restore the Demised Premises. Tenant’s obligation to remove Non-Standard Alterations, if so requested by Owner, shall survive the termination of this Lease. All property permitted or required to be removed by Tenant at the end of the term remaining in the demised premises after Tenant’s removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner’s property or may be removed from the demised premises by Owner, at Tenant’s expense.

Maintenance and Repairs:

          4. Except as to those repair and replacement obligations which are the responsibility of Owner under this Lease, Tenant shall, throughout the term of this lease, take good care of the demised premises and the fixtures and appurtenances therein. Tenant shall be responsible for all damage or injury to the demised premises or any other part of the building and the systems and equipment thereof, whether requiring structural or nonstructural repairs caused by, or resulting from, carelessness, omission, neglect or improper conduct of Tenant, Tenant’s subtenants, agents, employees, invitees or licensees, or which arise out of any work, (except for work performed by Owner or its contractors or other agents) labor, service or equipment done for, or supplied to, Tenant or any subtenant, or arising out of the installation, use or operation of the property or equipment of Tenant or any subtenant. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant’s fixtures, furniture and equipment. Tenant shall promptly make, at Tenant’s expense, all repairs in and to the demised premises for which Tenant is responsible, and, if such repairs are structural or affect building systems, Tenant shall use only contractors approved by Owner (such consent not to be unreasonably withheld) for such repairs. Any other repairs in or to the building or the facilities and systems thereof, for which Tenant is responsible, shall be performed by Owner at the Tenant’s expense. Owner shall maintain in good working order and repair the exterior and the structural portions of the building, including the structural portions of the demised premises, and the public portions of the building interior and the building plumbing, electrical, heating and ventilating systems (to the extent such systems presently exist) serving the demised premises including, without limitation, the structural, exterior and curtain walls, common areas, sanitary, mechanical, plumbing, electrical, sprinkler and fire safety systems, and other base building systems of the Building. All such repairs shall be made in a good and workerlike manner and performed with reasonable diligence and in a manner reasonably intended to minimize interference with the conduct of Tenant’s business and access to the Demised Premises; provided that Owner shall not be required to employ contractors or labor at overtime or other premium pay rates unless Tenant, at Tenant’s request and expense, shall bear the cost thereof. Tenant agrees to give prompt notice of any defective condition in the demised premises for which Owner may be responsible hereunder. Except as expressly set forth in Section 41B, there shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or others making repairs, alterations, additions or improvements in or to any portion of the building or the demised premises, or in and to the fixtures, appurtenances or equipment thereof. Except as expressly set forth in Section 41B, it is specifically agreed that Tenant shall not be entitled to any setoff or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this lease. Except as expressly set forth in Section 41B, Tenant agrees that Tenant’s sole remedy at law in such instance will be by way of an action for damages for breach of contract. The provisions of this Article 4 shall not apply in the case of fire or other casualty, which are dealt with in Article 9 hereof.

Window Cleaning:

          5. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law, or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction.

Requirements of Law, Fire Insurance, Floor Loads:

          6. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant’s sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant’s particular use or manner of use thereof, (including Tenant’s permitted use) or, with respect to the building if arising out of Tenant’s particular use or manner of use of the demised premises or the building (as opposed to the mere use of the Demised Premises for office uses) as and to the extent provided in Article 50 hereof. Nothing herein shall require Tenant to make structural repairs or alterations or pay the cost of any unless Tenant has, by its particular (as opposed to the mere use of the Demised Premises for office uses) manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Owner to Owner’s reasonable satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorneys fees, by cash deposit or by surety bond in an amount and in a company satisfactory to Owner, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal offense, or constitute a default under any lease or mortgage under which Owner may be obligated, or cause the demised premises or any part thereof to be condemned or vacated, Tenant

shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the demised premises or the building of which the demised premises form a part, or which shall or might subject Owner to any liability or responsibility to any person, or for property damage, Tenant shall not keep anything in the demised premises, except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the demised premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant’s occupancy. Tenant shall pay all costs, expenses, fines, penalties, or damages, which may be imposed upon Owner by reason of Tenant’s failure to comply with the provisions of this article, and if by reason of such failure the fire insurance rate shall, at the beginning of this lease, or at any time thereafter, be higher than it otherwise would be, then, Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or “make-up” of rate for the building or the demised premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to reasonably prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant’s expense, in settings sufficient, in Owner’s reasonable judgement, to absorb and prevent vibration, noise and annoyance.

Subordination:

          7.

Property Loss, Damage Reimbursement Indemnity:

          8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by, or due to, the negligence or willful misconduct of Owner, its agents, servants or employees or contractors. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said building, or caused by operations in construction of any private, public or quasi public work. Except as expressly set forth in Section 41B, if at any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to, Owner’s own acts, Owner shall not be liable for any damage Tenant may sustain thereby, and Tenant shall not be entitled to any compensation therefor, nor abatement or diminution of rent, nor shall the same release Tenant from its obligations hereunder, nor constitute an eviction.

Destruction, Fire and Other Casualty:

          9. (a)  If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner, and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty or are rendered inaccessible or unusable in whole or in part for the normal conduct of Tenant’s business (including damage to building systems which materially and adversely affects access to or the tenantability of the Demised Premises), then (subject to the provisions of Section 41B), the damages thereto shall be repaired by, and at the expense of, Owner, and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty, according to the part of the demises premises which is usable and accessible (c) If the demised premises are totally damaged or rendered wholly unusable or inaccessible or unusable for the normal conduct of Tenant’s business (including damage to the building systems which materially and adversely affects access to or the tenantability of the Demised Premises) by fire or other casualty, then the rent and other items of additional rent, as hereinafter expressly provided, shall be proportionately paid up to the time of the casualty, and thenceforth shall cease until the date when the demised premises, building services and access to the Demised Premises shall have been repaired and restored by Owner (or if sooner reoccupied in part by Tenant for the conduct of its business then rent shall be apportioned as provided in subsection (b) above), subject to Owner’s right to elect not to restore the same as hereinafter provided and subject to the provisions of Section 41B, (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it and provided that Owner shall terminate all other office tenants of the Building then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within ninety (90) days after such fire or casualty, or thirty (30) days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the expiration of the lease, which date shall not be less than thirty (30) nor more than sixty (60) days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease, and Tenant shall forthwith quit, surrender and vacate the demised premises without prejudice however, to Landlord’s rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date, and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner’s control. After any such casualty, Tenant shall cooperate with Owner’s restoration by removing from the demised premises as promptly as reasonably possible, all of Tenant’s salvageable inventory and moveable equipment, furniture, and other property, Tenant’s liability for rent shall resume five (5) days after written notice from Owner that the demised premises are substantially ready for Tenant’s occupancy, (e) Nothing contained hereinabove shall relieve Tenant from liability, if any, that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, including Owner’s obligation to restore under subparagraph (b) above, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible, and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery with respect to subparagraphs (b), (d), and (e) above, against the other or any one claiming through or under each of them by way of subrogation or otherwise. The release and waiver herein referred to shall be deemed to include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and merchandise located therein. The foregoing release and waiver shall be in force only if both releasors’ insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, then the party benefiting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant’s furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant, and agrees that Owner will not be obligated to repair any damage thereto or replace the same, (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. If a casualty causing at least fifty percent (50%) of the Demised Premises to be untenantable or inaccessible shall occur and as a result thereof such portion of the Premises shall be unoccupied by Tenant or the permitted occupants thereof (a “Material Casualty”) and Owner shall not elect to terminate this Lease as provided in this Article 9, Owner shall send a notice to Tenant within sixty (60) days after such casualty setting forth Owner’s estimate of the length of time necessary to restore the Demised Premises to a tenantable and accessible condition (to the extent of Owner’s obligations therefor as set forth in Section 44F). If Owner’s estimate exceeds two hundred seventy (270) days from the date of the Material Casualty, then Tenant may elect to terminate this Lease upon written notice to Landlord within thirty (30) days after receipt of Landlord’s notice. If Tenant does not elect to terminate this Lease, and the Demised Premises is not so restored within such two hundred seventy (270) day period, then Tenant shall have the right to terminate this Lease upon notice to Landlord given at any time after such two hundred seventy (270) day period, provided the applicable restoration has not been substantially completed on the date of such notice. In addition, if during the last twelve (12) months of the Term a casualty causing at least thirty-three percent (33%) of the Demised Premises to be untenantable or inaccessible shall occur and as a result thereof such portion of the Premises shall be unoccupied by Tenant or the permitted occupants thereof, then Tenant shall have the right to terminate this Lease by written notice to Owner within thirty (30) days after such casualty.

Eminent Domain:

          10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then, and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding, and Tenant shall have no claim for the value of any unexpired term of said lease, and assigns to Owner, Tenant’s entire interest in any such award. Tenant shall have the right to make an independent claim to the condemning authority for the value of Tenant’s moving expenses and personal property, trade fixtures and equipment, provided Tenant is entitled pursuant to the terms of the lease to remove such property, trade fixture and equipment at the end of the term, and provided further such claim does not reduce Owner’s award.

Assignment, Mortgage, Etc.:

          11. Except as otherwise expressly provided in Article 48 below, Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, beyond applicable notice and cure periods collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, undertenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting when such consent is required under this Lease.

Electric Current:

          12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation, and Tenant may not use any electrical equipment which, in Owner’s opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain.

Access to Premises:

          13. Owner or Owner’s agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times, upon reasonable advance notice to examine the same and to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform. Tenant shall permit Owner, upon reasonable advance notice, to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein, provided they are concealed within the walls, floor, or ceiling. Subject to Section 41B, Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction, nor shall the Tenant be entitled to any abatement of rent while such work is in progress, nor to any damages by reason of loss or interruption of business or otherwise, and provided further that (a) Owner shall not unreasonably interfere with or interrupt the business operations of Tenant within the Demised Premises; (b) Owner shall not thereby reduce Tenant’s usable space (except to a de minimis extent); (c) Owner shall box in any of the same installed adjacent to existing walls, floors or ceilings, with construction materials substantially similar to those existing at the time in the affected areas of the Demised Premises; and (d) Owner shall repair all damage caused by the same and restore such areas of the Demised Premises to the prior existing condition except as provided in this sentence. Throughout the term hereof, Owner shall have the right to enter the demised premises at reasonable hours (provided Owner shall use commercially reasonable efforts to minimize the disruption of Tenant’s use or occupancy of the Demised Premises). for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term, for the purpose of showing the same to prospective tenants. If Tenant is not present to open and permit an entry into the demised premises, Owner or Owner’s agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly, and provided reasonable care is exercised to safeguard Tenant’s property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. In connection with any such entry, except in the case of an emergency, Owner shall give Tenant reasonable prior written notice and, if required by Tenant, Owner shall be accompanied by a representative of Tenant provided such representative is made available. All work done during the course of such entry must be done by Owner in a good and workerlike manner, with due diligence and in an manner reasonably intended to minimize the interference with Tenant’s ability to use the Demised Premises as contemplated by this Lease. If during the last month of the term Tenant shall have removed all or substantially all of Tenant’s property therefrom, Owner may immediately enter, alter, renovate or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation, and such act shall have no effect on this lease or Tenant’s obligations hereunder.

Vault, Vault Space, Area:

          14. No vaults, vault space or area, whether or not enclosed or covered, not within the property line of the building, is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability, nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant.

Occupancy:

          15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the demised premises and accepts them as is, subject to the riders annexed hereto with respect to Owner’s work, if any. In any event, Owner makes no representation as to the condition of the demised premises, except as expressly set forth in this Lease, and Tenant agrees to accept the same subject to violations, whether or not of record, that do not materially adversely affect Tenant’s use or occupancy of the Demised Premises. Owner shall not amend the certificate of occupancy during the term of this Lease to preclude the use of the Demised Premises for office use or to reduce the number of persons who may lawfully occupy the Demised Premises.

Bankruptcy:

          16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by the sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor (provided that, if same is involuntary, it is not dismissed within forty-five (45) days after the commencement of such proceeding) or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the demised premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant’s interest in this lease.

          (b) it is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages, an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination, and the fair and reasonable rental value of the demised premises for the period for which such installment was payable, shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such demised premises or any part thereof be re-let by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall be deemed to be the fair and reasonable rental value for the part or the whole of the demised premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages, by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than, the amount of the difference referred to above.

Default:

          17. (1) If Tenant defaults in fulfilling any of the covenants of this lease; or if any execution or attachment shall be issued against Tenant or any of Tenant’s property, whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if this lease be rejected under $365 of Title 11 of the U.S. Code (Bankruptcy Code); then, in any one or more of such events, upon Owner serving a written thirty (30) days (or, for any monetary default, five (5) days) notice upon Tenant specifying the nature of said default, and upon the expiration of said five (5) days in the case of a monetary default or thirty (30) days (as to non-monetary defaults), if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be a non-monetary default and of a nature that the same cannot be completely cured or remedied within said thirty (30) period, and if Tenant shall not have diligently commenced curing such default within such thirty (30) period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof, and Tenant shall then quit and surrender the demised premises to Owner, but Tenant shall remain liable as hereinafter provided.

          (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; then, and in any of such events, Owner may without notice, re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of the demised premises, and remove their effects and hold the demised premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice.

Remedies of Owner and Waiver of Redemption:

          18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or other wise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the demised premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner’s option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease, and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay to Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant’s covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the demised premises, or any part or parts thereof, shall not release or affect Tenant’s liability for damages. In computing such liquidated damages there shall be added to the said deficiency such reasonable expenses as Owner may incur in connection with re-letting, such, as legal expenses, reasonable attorneys fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease, and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner’s option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner’s sole judgement, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for, Mention in this lease of any particular remedy, shall not preclude Owner or Tenant from any other remedy, in law or in equity (except to the extent such remedy is expressly precluded by this Lease). Tenant hereby expressly waives any and all rights or redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Owner obtaining possession of the demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise.

Fees and Expenses:

          19. If Tenant shall default in the observance or performance of any term or covenant on Tenant’s part to be observed or performed under, or by virtue of, any of the terms or provisions in any article of this lease, after notice, if required, and upon expiration of any applicable grace period, if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately, or at any time thereafter and without notice, perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing, or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorneys’ fees, in instituting, prosecuting or defending any action or proceeding, and prevails in any such action or proceeding, then Tenant will reimburse Owner for such sums so paid, or obligations incurred, with interest and costs. The foregoing expenses incurred by reason of Tenant’s default shall be deemed to be additional rent hereunder, and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statement to Tenant therefor. If Tenant’s lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner, as damages.

Building Alterations and Management:

          20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor, to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts or the building, and to change the name, number or designation by which the building may be known provided Tenant’s access to the Demised Premises is not adversely affected thereby except to a de minimis extent. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenants making any repairs in the building or any such alterations, additions and improvements provided the same is performed with due diligence and in a manner reasonably intended to minimize interference with Tenant’s use and enjoyment of the Demised Premises, furthermore, Tenant shall not have any claim against Owner by reason of Owner’s imposition of such reasonable controls of the manner of access to the building by Tenant’s social or business visitors as the Owner may deem necessary for the security of the building and its occupants.

No Representations Owner:

          21. Neither Owner nor Owner’s agents have made any representations or promises with respect to the by physical condition of the building, the land upon which it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the demised premises, except as herein expressly set forth, and no rights, easements or licenses are acquired by Tenant by implication or otherwise, except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same “as-is”, and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant, and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought.

End of Term:

          22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, “broom-clean”, in good order and condition, damage by casualty or condemnation, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property to the extent required hereunder. Tenant’s obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday, unless it be a legal holiday, in which case it shall expire at noon on the preceding business day.

Quiet Enjoyment:

          23. Owner covenants and agrees with Tenant that as long as Tenant is not in default, beyond any applicable notice and grace periods, in observing and performing all the terms, covenants and conditions, on Tenant’s part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, never-

theless, to the terms and conditions of this lease including, but not limited to, Article 31 hereof, and to the ground leases, underlying leases and mortgages hereinbefore mentioned.

Failure to Give Possession:

          24. Tenant acknowledges that Tenant is currently in possession of the entirety of the Demised Premises pursuant to the Existing Lease (as defined in Article 63 below). The provisions of this article are intended to constitute “an express provision to the contrary” within the meaning of Section 223-a of the New York Real Property Law.

No Waiver:

          25. The failure of Owners or Tenant, as the case may be, to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner or the payment by Tenant of rent and/or additional rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach, and no provision of this lease shall be deemed to have been waived by Owner or Tenant, as the case may be, unless such waiver be in writing signed by Owner or Tenant, as the case may be. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner’s right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner’s agents during the term hereby demised shall be deemed an acceptance of a surrender of the demised premises, and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner’s agent shall have any power to accept the keys of said premises prior to the termination of the lease, and the delivery of the keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the demised premises.

Waiver of Trial by Jury:

          26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall, and they hereby do, waive trial by jury in any action proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of, or in any way connected with, this lease, the relationship of Owner and Tenant, Tenant’s use of, or occupancy of, the demised premises, and any emergency statutory or any other statutory remedy.

Inability to Perform:

          27. This Except as otherwise expressly provided in this Lease, this lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease, or to supply, or is delayed in supplying, any service expressly or impliedly to be supplied, or is unable to make, or is delayed in making, any repair, additions, alterations, or decorations, or is unable to supply, or is delayed in supplying, any equipment, fixtures, or other materials, if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but not limited to, government preemption or restrictions or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency, or by reason of the conditions which have been or are affected, either directly or indirectly, by war or other emergency.

Bills and Notices:

          28. (Intentionally Omitted)

Services Provided by Owners:

          29. As long as this lease shall be in full force and effect, Owner shall provide (at Owner’s cost and expense) (a) an adequate quantity of hot and cold water for cleaning, drinking, and core lavatory purposes (including the supply of water to pantry areas in the Demised Premises, but excluding any cafeteria or restaurant), 24 hours a day, 7 days a week, to the Demised Premises (it being understood and agreed that if Tenant requires water for any other purpose in the Demised Premises or in quantities in excess of that required for normal office occupancy and Owner (acting reasonably) consents to such use or if Tenant uses or consumes water for any other purposes or in unusual quantities (of which fact Owner shall be the sole judge), Owner may install a water meter at Tenant’s expense, which Tenant shall thereafter maintain at Tenant’s expense in good working order and repair, to register such water consumption, and Tenant shall pay for water consumed as shown on said meter as additional rent, but only to the extent of such excess water usage, within twenty (20) days after Tenant’s receipt of bills therefor, in an amount equal to 105% of the charge actually paid by Owner to the entity furnishing such quantities of water; and; (b) cleaning service for the demised premises on business days at Owner’s expense (including, but not limited to, trash removal and exterior window washing) as more particularly described in the Cleaning Specification annexed hereto as Exhibit B to this Lease (subject to Section 57B), and for the common areas of the Building, the Building’s exterior and the sidewalks; (c) Subject to Section 41B hereof, Owner reserves the right to stop services of the heating, elevators, plumbing, air-conditioning, electric, power systems or cleaning or other services, if any, when necessary by reason of accident, or for repairs, alterations, replacements or improvements necessary or desirable in the reasonable judgment of Owner, or by reason of fire, storm, explosion, strike, lockout, labor dispute, casualty, lack or failure of sources or supply of fuel, act of God, act of a public enemy, riot, interference by civil or military authorities, or by reason of any other cause beyond Owner’s control, or for emergency or for inspection or cleaning, for as long as may be reasonably required by reason thereof. If the building of which the demised premises are a part supplies manually operated elevator service, Owner at any time may substitute automatic control elevator service and proceed diligently with alterations necessary therefor without in any wise affecting this lease or the obligations of Tenant hereunder.

Captions:

          30. The Captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof.

Definitions:

          31. The term “office,” or “offices”, wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes, or for manufacturing. The term “Owner” means a landlord or lessor, and as used in this lease means only the owner, or the mortgagee in possession for the time being, of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building, or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be, and hereby is, entirely freed and relieved of all covenants and obligations of Owner hereunder, accruing after any such sale or lease of the entire Building or assignment of such lease and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words “re-enter” and “re-entry” as used in this lease are not restricted to their technical legal meaning. The term "Lease" whenever used in this Lease shall mean the pre-printed portion of this Lease together with these inserts and the Rider attached thereto.

Adjacent Excavation-Shoring:

          32. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made. Tenant shall afford to the person causing or authorized to cause such excavation, a license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building, of which demised premises from a part, from injury or damage, and to support the same by proper foundations, without any claim for damages or indemnity against Owner, or diminution or abatement of rent.

Rules and Regulations:

          33. Tenant and Tenant’s servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner or Owner’s agents may from time to time adopt. At least ten (10) days prior written notice in accordance with Article 58 of any additional Rules or Regulations shall be given. In case Tenant disputes the reasonableness of any additional Rules or Regulations hereafter made or adopted by Owner or Owner’s agents, the parties hereto agree to submit the question of the reasonableness of such Rules or Regulations for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rules or Regulations upon Tenant’s part shall be deemed waived unless the same shall be asserted by service of a notice, in writing, upon Owner, within fifteen (15) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant, and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. Owner shall enforce the Rules and Regulations against Tenant and the other occupants of the Building in a non-discriminatory manner. In the event of any conflict or inconsistency between the provisions of this Lease and of any of the Rules and Regulations, the provisions of this Lease shall control.

Security:

          34. Tenant has deposited with Owner the sum required by Article 59 as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults (beyond applicable notice and cure periods) in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent, or any other sum as to which Tenant is in default, or for any sum which Owner may expend or may be required to expend by reason of Tenant’s default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the re-letting of the demised premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant within forty-five (45) days after the date fixed as the end of the lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building, or leasing of the building, of which the demised premises form a part, Owner shall transfer the security to the vendee or lessee, and owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner

solely for the return of said security, and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Owner. Tenant further covenants that it will not assign or encumber, or attempt to assign or encumber, the monies deposited herein as security, and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.

Estoppel Certificates:

     35. (Intentionally Omitted)

Successors and Assigns:

     36. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. Tenant shall look only to Owner’s estate and interest in the land and building, for the satisfaction of Tenant’s remedies for the collection of a judgment (or other judicial process) against Owner in the event of any default by Owner hereunder, and no other property or assets of such Owner (or any partner, member, officer or director thereof, disclosed or undisclosed), shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies under, or with respect to, this lease, the relationship of Owner and Tenant hereunder, or Tenant’s use and occupancy of the demised premises.

[SEE ATTACHED RIDER HEREBY MADE A PART HEREOF]

          IN WITNESS WHEREOF the parties hereto have duly executed this Lease as of the day and year first above written.

LANDLORD:	FIFTH AND 38TH LLC, a Delaware limited liability      company
	By:	/s/ Michael Green
		Name:	Michael Green
		Title:	President
TENANT:	ATARI, INC.
	By:	/s/ BRUNO BONNELL
		Name:	BRUNO BONNELL
		Title:	Chairman, CEO & Chief Creative Officer

TENANT ACKNOWLEDGMENT:
STATE OF NEW YORK	)
	)	ss.:
COUNTY OF NEW YORK	)

     On the 20 day of June, in the year 2006, before me, the undersigned, a notary public in and for said State, personally appeared Bruno Bonnell, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

/s/ NANCY SEAMAN  

Notary Public
 

NANCY SEAMAN
Notary Public, State Of New York
No. 01SE6074886
Qualified in Nassau County
Commission Expires May 27, 2008  

IMPORTANT-PLEASE READ

RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE
IN ACCORDANCE WITH ARTICLE 33.

1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by Tenant or used for any purpose other than for ingress or egress from the demised premises, and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant’s expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish.

2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant, whether or not caused by the Tenant, or its clerks, agents, employees or visitors.

3. No carpet, rug or other article shall be hung or shaken out of any window of the building and Tenant shall not sweep or throw, or permit to be swept or thrown, from the demised premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building, and Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the building by reason of noise, odors, and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any bicycles, vehicles, animals, fish, or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited.

4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Owner.

5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the outside of the demised premises or the building, or on the inside of the demised premise if the same is visible from the outside of the demised premises, without the prior written consent of Owner, except that the name of Tenant may appear on the entrance door of the demised premises. In the event of the violation of the foregoing by Tenant, Owner may remove same without any liability, and may charge the expense incurred by such removal to Tenant. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for Tenant by Owner at the expense of Tenant, and shall be of a size, color and style acceptable to Owner.

6. Tenant shall not mark, paint, drill into, or in any way deface, any part of the demised premises or the building of which they form a part, except in connection with normal decoration of the Demised Premises or any Alteration permitted hereunder. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. Tenant shall not lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or other similar floor covering is desired to be used, an interlining of builder’s deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited.

7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by Tenant, nor shall any changes be made in existing locks or mechanism thereof. Tenant must, upon the termination of his tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, Tenant, and in the event of the loss of any keys, so furnished, Tenant shall pay to Owner the cost thereof.

8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the demised premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner reasonably approved by Owner. Owner reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations of the lease, or which these Rules and Regulations are a part.

9. Canvassing, soliciting and peddling in the building is prohibited and Tenant shall cooperate to prevent the same.

10. Owner reserves the right to exclude from the building all persons who do not present a pass to the building signed by Owner. Owner will furnish passes to persons for whom Tenant requests same in writing. Tenant shall be responsible for all persons for whom he requests such pass, and shall be liable to Owner for all acts of such persons. Tenant shall not have a claim against Owner by reason of Owner excluding from the building any person who does not present such pass.

11. Owner shall have the right to prohibit any advertising by Tenant which in Owner’s reasonable opinion tends to impair the reputation of the building or its desirability as a building for offices, and upon written notice from Owner, Tenant shall refrain from or discontinue such advertising.

12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible, explosive, or hazardous fluid, material, chemical or substance, except such ordinary quantities as are customarily maintained in office premises or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors, to permeate in, or emanate from, the demised premises.

13. If the building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by Owner with respect to such services. Tenant shall cooperate with Owner in obtaining maximum effectiveness of the cooling system by lowering and closing venetian blinds and/or drapes and curtains when the sun’s rays fall directly on the windows of the demised premises.

14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the building without Owner’s prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto, and shall be done during such hours as Owner may designate.

15. Refuse and Trash. (1) Compliance by Tenant. Tenant covenants and agrees, at its sole cost and expense, to comply with all present and future laws, orders, and regulations, of all state, federal, municipal, and local governments, departments, commissions and boards regarding the collection, sorting, separation and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as provided by law. Each separately sorted category of waste products, garbage, refuse and trash shall be placed in separate receptacles reasonably approved by Owner. Such separate receptacles may, at Owner’s option, be removed from the demised premises in accordance with a collection schedule prescribed by law. Tenant shall remove, or cause to be removed by a contractor acceptable to Owner, at Owner’s sole discretion, such items as Owner may expressly designate. (2) Owner’s Rights in Event of Noncompliance. Owner has the option to refuse to collect or accept from Tenant waste products, garbage, refuse or trash (a) that is not separated and sorted as required by law or (b) which consists of such items as Owner may expressly designate for Tenant’s removal, and to require Tenant to arrange for such collection at Tenant’s sole cost and expense, utilizing a contractor satisfactory to Owner. Tenant shall pay all costs, expenses, fines, penalties, or damages that may be imposed on Owner or Tenant by reason of Tenant’s failure to comply with the provisions of this Building Rule 15, and, at Tenant’s sole cost and expense, shall indemnity, defend and hold Owner harmless (including reasonable legal fees and expenses) from and against any actions, claims and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Owner.

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ADDITIONAL RULES AND REGULATIONS ATTACHED TO AND MADE A
PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 33

          No tenant shall obtain for use upon the demised premises ice, drinking water, towel and other similar services, or accept barbering or bootblacking services in the demised premises, except from persons reasonably approved by Owner and at hours and under regulations fixed by Owner. Canvassing, soliciting and peddling in the building is prohibited and each tenant shall cooperate to prevent the same.

          Any person whose presence in the building at any time shall, in the reasonable judgment of Owner, be prejudicial to the safety, character, security, reputation or interests of the building or the tenants of the building may be denied access to the building or may be ejected from the building. In the event of invasion, riot, public excitement or other commotion, Owner may prevent all access to the building during the continuance of the same by closing the doors or otherwise, for the safety of tenants and the protection of property in the building.

          The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the building shall not be covered or obstructed by any tenant, nor shall any bottles, parcels, or other articles be placed on the window sills.

          No showcases, merchandise, furniture or other articles shall be put in front of or affixed to any part of the exterior of the building, nor placed in the common halls, corridors or vestibules without the prior written consent of Owner.

          No bicycles, vehicles or animals, other than seeing-eye dogs, of any kind shall be brought into or kept in or about the building and/or the demised premises.

          No tenant shall engage or pay any employees on the demised premises, except those actually working for such tenant on the demised premises, nor advertise for laborers giving an address at the demised premises.

          Each tenant, before closing and leaving the demised premises at any time, shall close all windows in the demised premises.

          The demised premises shall not be used for lodging or sleeping or for any immoral or illegal purpose.

          The requirements of tenants will be attended to only upon application at the office of the building. Employees of Owner shall not perform any work or do anything outside of the regular duties, unless under special instructions from the office of Owner.

          Each tenant shall, at the expense of such tenant, provide light, power and water for the agents, contractors and employees of Owner, while doing janitor service or other cleaning in the demised premises and while making repairs or alterations in or to the demised premises.

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          Whenever any tenant shall submit to Owner any plan, agreement or other document for the consent or approval of Owner, such tenant shall pay to Owner, on demand, a processing fee in the amount of the reasonable third party out-of-pocket fees for the review thereof, including the services of any architect, engineer or attorney employed by Owner to review such plan, agreement or document.

          Owner reserves the right to rescind, alter, waive or add, as to one or more or all tenants, any reasonable rule or regulation at any time prescribed for the building when, in the reasonable judgment of Owner, Owner deems it necessary or desirable for the reputation, safety, character, security, care, appearance or interest of the building, or the preservation of good order therein, or the operation or maintenance of the building, or the equipment thereof, or the comfort of tenants or others in the building. No rescission, alteration, waiver or addition of any rule or regulation in respect of one tenant shall operate as a rescission, alteration or waiver in respect of any other tenant. However, Owner shall not enforce any of the Rules and Regulations in such manner as to discriminate against Tenant or anyone claiming under or through Tenant.

          No noise, including, but not limited to, music, the playing of musical instruments, recording, radio or television, which, in the reasonable judgment of Owner, might disturb other tenants in the building, shall be made or permitted by any tenant. Nothing shall be done or permitted by any tenant which would impair or interfere with the use or enjoyment by any other tenant or any other space in the building. Tenant shall not be precluded from customary and reasonable noise during reasonable periods of performance of alterations, provided Tenant shall cause its contractors to use their best efforts to minimize such noise during business hours on business days.

          In the event of any conflict between the Lease and these Rules and Regulations, the provisions of the Lease shall prevail.

RIDER TO AGREEMENT OF LEASE DATED AS OF JUNE 21, 2006 BETWEEN FIFTH AND 38TH LLC, AS OWNER, AND ATARI, INC., AS TENANT.

IN THE EVENT OF ANY CONFLICT OR INCONSISTENCY BETWEEN ANY PROVISION OF THIS RIDER AND ANY PROVISION OF THE PRINTED FORM OF LEASE TO WHICH THIS RIDER IS ATTACHED (OR THE INSERTS THERETO), THE PROVISION OF THIS RIDER SHALL GOVERN.

          37. Basic Provisions: The definitions set forth above, herein and in this Article 37 are an integral part of this Lease and all of the terms hereof are incorporated into this Lease. In addition to the other terms which are elsewhere defined in this Lease, the following capitalized terms, whenever used in this Lease, shall have the meanings set forth in this Article, and only such meanings, unless such meanings are expressly contradicted, limited or expanded elsewhere herein:

               A. “ADA” shall mean the Americans with Disabilities Act of 1990 (42 U.S.C. § 12101 et seq.), as amended from time to time.

               B. “Additional Insureds” shall mean Owner, Fifth and 38th Mezz LLC, Big Apple Funding LLC, MHP 417 Fifth Avenue LLC, GEBAM, Inc., Murray Hill Properties Real Estate Investment II L.P., Murray Hill GP, LLC and Murray Hill Properties LLC and any additional or other parties as Owner may designate from time to time upon not less than ten (10) Business Days prior written notice to Tenant.

               C. “Brokers” shall mean Murray Hill Properties LLC and CB Richard Ellis, Inc.

               D. “Business Day” shall mean any day excluding Saturdays, Sundays and all days observed as holidays by either the federal or New York State governments and/or any of the labor unions servicing the Building, from time to time.

               E. “Business Hours” shall mean 8:00 a.m. to 6:00 p.m. on Business Days.

               F. “Commencement Date” shall mean July 1, 2006.

               G. “CPI” shall mean the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor, New York, N.Y. — Northeastern N.J. Area, All Items (1982-84 = 100), or any successor or substitute index thereto, appropriately adjusted.

               H. “CPI Increase” shall mean the percent of increase, if any, in the CPI for the month in which the applicable date occurs over the CPI for the month in which the Commencement Date occurs.

               I. “Expiration Date” shall mean the day preceding the fifteen (15) year anniversary of the Commencement Date, or such other date upon which the

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Term shall cease and expire pursuant to the provisions of this Lease (pursuant to Article 17 or Article 60 or otherwise).

               J. “Fixed Annual Rent” (subject to the Credit, as set forth in Section 46C) shall be:

                    (i) With respect to the Office Space:

                         (1) from the Commencement Date through and including June 30, 2011, Two Million Three Hundred Eighty Thousand and 00/100 Dollars ($2,380,000.00) per annum ($198,333.33 per month);

                         (2) from July 1, 2011 through and including June 30, 2016, Two Million Six Hundred Sixty-six Thousand and 00/100 Dollars ($2,660,000.00) per annum ($221,666.67 per month); and

                         (3) from July 1, 2016 through and including the Expiration Date, Two Million Nine Hundred Forty Thousand and 00/100 Dollars ($2,940,000.00) per annum ($245,000.00 per month).

                    (ii) With respect to the Basement Space, from the Commencement Date through and including the Expiration Date, at a rate per annum equal to Ten Dollars ($10.00) per rentable square foot of Basement Space demised at such time.

               K. “Person” (whether or not capitalized) shall mean any individual, sole proprietorship, corporation, partnership, limited liability company, unincorporated organization, mutual company, joint stock company, trust, estate, union or other entity.

               L. “Rent Commencement Date” shall mean July 1, 2007.

               M. “Tenant’s Percentage” shall mean 17.00%.

          38. Escalation Payments.

               A. Real Estate Tax Increase Payment.

                    (1) For each Tax Year (hereinafter defined) during the Term after the Base Tax Year, Tenant shall pay, as Additional Rent (hereinafter defined), the Tax Payment (hereinafter defined) for such Tax Year.

                    (2) Tax Definitions:

                         (a) The term “Real Estate Taxes” shall mean (i) the sum of the real estate taxes and assessments, Business Improvement District taxes, charges and assessments, and special assessments imposed upon the Building and the plot of land on which the Building stands (the “Land”) and

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any rights or interests appurtenant thereto payable by Owner during any Tax Year and (ii) reasonable attorneys’ fees, court, or other administrative costs and disbursements incurred by Owner in connection with any reduction in Real Estate Taxes which is obtained prior to the date such Real Estate Taxes are payable. If at any time during the Term the methods of taxation prevailing at the time of the commencement thereof shall be altered so that in lieu of or as an addition to or as a substitute for the whole or any part of the real estate taxes, assessments, levies, impositions or charges now levied, assessed or imposed, there shall be levied, assessed or imposed a tax, assessment, levy, imposition or charge wholly or partially as a capital levy or on the rents, licenses or other charges received with respect to the Demised Premises, the Land or the Building, then all such taxes, assessments, levies, impositions or charges payable shall be deemed to be included within the term “Real Estate Taxes” for the purposes hereof. A copy of the tax bill of The City of New York or other taxing authority imposing Real Estate Taxes on the Land or the Building shall be sufficient evidence of the amount of Real Estate Taxes and (to the extent available to Owner) shall be delivered to Tenant together with the Tax Statement. Notwithstanding the fact that the aforesaid Additional Rent is measured by Real Estate Taxes, such amount is Additional Rent and shall be paid by Tenant as provided herein regardless of the fact that Tenant may be exempt, in whole or in part, from the payment of any Real Estate Taxes for any reason whatsoever. Real Estate Taxes also shall not include any penalties or interest that derive from Owner’s failure to pay Real Estate Taxes to the applicable governmental authority on a timely basis, except to the extent (if any) that Landlord incurred such penalties or interest because Tenant failed to make a Tax Payment hereunder when due.

                         (b) The term “Base Real Estate Taxes” shall mean the Real Estate Taxes for the Base Tax Year.

                         (c) The term “Base Tax Year” shall the twelve (12) month period commencing on July 1, 2007 and ending on June 30, 2008.

                         (d) The term “Tax Year” shall mean each twelve (12) month fiscal period commencing on July 1 and ending on June 30 of the following year, any portion of which fiscal period occurs during the Term.

                         (e) The term “Tax Payment” shall mean Tenant’s Percentage of the amount by which the Real Estate Taxes payable for a Tax Year exceed the Base Real Estate Taxes, whether such increase results from a higher tax rate or an increase in the assessed valuation of the Land or the Building, or both, or from any other cause or reason whatsoever.

                    (3) With respect to each Tax Year after the Base Tax Year occurring in whole or in part during the Term, Tenant shall pay to Owner the Tax Payment in the manner described in this Section 38A(3) and in accordance with Section 38C. At any time after the date which is sixty (60) days prior to the commencement of each such Tax Year, Owner may furnish to Tenant a written statement (a “Tax

4

Statement”) setting forth the amount of Real Estate Taxes for such Tax Year, the amount of Base Real Estate Taxes and the amount of the Tax Payment for such Tax Year. Tenant shall pay the Tax Payment for each such Tax Year to Owner as Additional Rent in two (2) semi-annual installments, the first (i.e., with respect to the first half of the Tax Year) within thirty (30) days after receipt by Tenant of such Tax Statement (together with a copy of the applicable tax bill) and the second (i.e., with respect to the second half of the Tax Year) not later than thirty (30) days prior to the date on which the payment of Real Estate Taxes with respect to the second half of the Tax Year is due to the taxing authority (it being understood that the second installment shall reflect any corrected amount of Real Estate Taxes set forth on any corrected Tax Statement, such that Tenant shall pay the entire Tax Payment, as so corrected, for the applicable Tax Year).

                    (4) Only Owner shall be entitled to institute tax reduction or other proceedings to reduce the assessed valuation of the Land or the Building. Should Owner be successful in any such reduction proceedings and obtain a rebate for any Tax Year for which Tenant has paid the Tax Payment, Owner, after deducting the expenses incurred in obtaining such rebate (but only to the extent not already included in Taxes) including, without limitation, attorneys’ fees, court, or other administrative costs and disbursements, shall credit Tenant’s Percentage of such rebate against the next monthly installments of the Fixed Annual Rent payable under this Lease (or, if this Lease shall terminate prior to the full application of such credit, then Owner shall pay any remaining portion of Tenant’s Percentage of such rebate to Tenant). In the event that the assessed valuation which had been utilized in computing the Base Real Estate Taxes is reduced (as a result of settlement, final determination of legal proceedings or otherwise) then (i) the Base Real Estate Taxes shall be retroactively adjusted to reflect such reduction, (ii) all Tax Payments theretofore made by Tenant shall be recalculated based on the reduced amount of Base Real Estate Taxes and (iii) all amounts due from Tenant to Owner by reason of such recalculation shall be payable by Tenant to Owner within thirty (30) days after the rendition of a bill therefor.

                    (5) If the Building or Land is subject to any tax abatement during the Base Tax Year or any succeeding Tax Year, the Taxes for the Base Tax Year and each succeeding Tax Year shall be determined as if such abatement were not applicable and the Building and Land were fully assessed.

                    (6) If any assessment may be paid in installments, only the installment(s) actually paid in a particular Tax Year shall be included in Real Estate Taxes for such Tax Year.

               B. Operating Expense Increase Payment.

                    (ii) For each Operating Year (as hereinafter defined) during the Term, Tenant shall pay, as Additional Rent, the Operating Payment (as hereinafter defined) for such Operating Year, in accordance with the further provisions of this Section 38B.

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                    (iii) For purposes hereof, the following definitions shall apply:

                         (1) The term “Operating Year” shall mean calendar year 2007 and each succeeding calendar year thereafter occurring in whole or in part during the Term.

                         (2) The term “Wage Rate” shall mean the undiscounted regular hourly wage rate (excluding, however, fringe benefits) payable to or in respect of Porters (as hereinafter defined) of Class A office buildings in New York County, in effect as of January 1 of the Operating Year in question, pursuant to agreement(s) (herein individually or collectively called “Agreement”) between the Real Estate Advisory Board on Labor Relations, Incorporated (“RAB”) and Local 32B-32J of the Service Employees International Union, AFL-CIO (“Local 32B-32J”) (or, if either or both of such entities is not in existence or acting in respect of such matters, then, by any successor(s) or substitute(s) performing similar functions).

                         (3) The term “Class A office buildings” shall mean the class of office buildings defined as such under the current Agreement with Local 32B-32J.

                         (4) The term “regular hourly wage rate” shall include all payments of every kind (excluding, however, fringe benefits) then payable to or in respect of Porters, computed on the basis of the total annual amount payable to or in respect of Porters pursuant to the Agreement, provided, however, if any union agreement shall require the regular employment of Porters on days or during hours when overtime or other premium pay rates are in effect, then the “regular hourly wage rate,” as used above and subject to the other adjustments provided for herein, shall be deemed to mean the actual weekly wage rate, divided by the actual hours in a calendar week during which Porters are required to be employed (if, for example, as of the Commencement Date, an agreement between RAB and Local 32B-32J shall require the regular employment of Porters for forty (40) hours during a calendar week at a minimum hourly wage rate of $3.00 for the first thirty (30) hours, and premium or overtime hourly wage rate of $4.50 for the remaining ten (10) hours, the minimum regular hourly wage rate under this Article, as of the Commencement Date, shall be deemed to be the total weekly wage rate of $135.00 divided by the total number of required hours of employment, forty (40), or $3.375). If no Agreement shall be in effect as of any such January 1 with reference to which the regular hourly wage rate for Porters is to be determined, then the applicable computations and payments under this Lease shall be made upon the basis of the regular hourly wage rate (determined in accordance with the preceding provisions of this Article) being paid by Owner or by the contractor performing the cleaning services for Owner on such January 1 to or in respect of Porters, and thereafter appropriate retroactive adjustment shall be made when the regular hourly wage rate payable to or in respect of such Porters is determined pursuant to Agreement. For the purposes hereof, if the regular hourly wage rate of Porters shall increase during any Operating Year the regular hourly wage rate “in effect as of January 1” of such Operating Year shall be adjusted for the

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portion of the year for which the increase shall be effective. The Wage Rate and Base Wage Rate shall be calculated by dividing the annual undiscounted cost for a Porter receiving the regular hourly wage rate, by 2,080 hours for each full calendar year involved. In calculating the regular hourly wage rate Owner shall apply such procedures and practices as are generally applied in such calculations by the owners of Class A office buildings in the midtown area of the County, City and State of New York, and any dispute or controversy as to or relating to the calculation of the “Wage Rate” shall be determined by arbitration, which arbitration shall be by three independent arbitrators each of whom shall have at least ten years’ experience in the supervision of the operation and management of Class A office buildings in New York County.

                         (5) The term “Porters” shall mean that classification of employee engaged in the general maintenance and operation of office buildings currently classified as “others” in the current Agreement, or failing such classification in any subsequent Agreement, the most nearly comparable classification in such Agreement.

                         (6) The term “Base Wage Rate” shall mean the Wage Rate in effect as of January 1, 2007.

                         (7) The term “Wage Rate Multiple” shall mean 70,000.

                         (8) In the event that the Wage Rate in effect as of January 1 of any Operating Year commencing January 1, 2008 shall exceed the Base Wage Rate, Tenant shall pay to Owner, as Additional Rent for such Operating Year, an amount (the “Operating Payment”) equal to the product obtained by multiplying (a) the number of cents (including any fraction of a cent) by which the Wage Rate exceeds the Base Wage Rate, by (b) the Wage Rate Multiple. By or after the start of the Operating Year commencing January 1, 2007 and by or after the start of each Operating Year thereafter, Owner shall furnish to Tenant a statement relating to such Operating Year and a statement of the Base Wage Rate, showing the escalation, if any, which shall be due hereunder from Tenant to Owner and the additional rent then payable by Tenant to Owner shall be paid as provided below (each such statement, an “Escalation Statement”). The obligation of Tenant to pay additional rent pursuant to this Section 38B is not predicated upon the rendition by Owner of any cleaning service to the Premises or upon the employment by Owner of Porters or cleaners or by the application to Owner or to the Building of the collective bargaining agreements referred to above. Tenant acknowledges that the payment of Additional Rent to Owner pursuant to the provisions of this Section 38B is intended to be an escalation payment to provide additional rent to Owner and is not a measurement of actual increased costs incurred by Owner in the operation of the Building.

                    (iv) Any such adjustment payable by reason of the provisions of this Section 38B shall commence to be payable in equal monthly installments, as of the first day of the period commencing on or after January 1, 2008 for which the Wage Rate shall exceed the Base Wage Rate, and after Owner shall furnish

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Tenant with an Escalation Statement relating to such Operating Year, all monthly installments of rental shall reflect one-twelfth (1/12) of the annual amount of such adjustment until a new adjustment becomes effective pursuant to the provisions of this Section 38B; provided, however, that if said Escalation Statement is furnished to Tenant after the commencement or effective date of any change in the Wage Rate, there shall be due from Tenant to Owner within thirty (30) days after such Escalation Statement, an amount equal to the portion of such adjustment allocable to the period prior to the date upon which said Escalation Statement is furnished to Tenant. In the event that the Wage Rate shall be changed or shall change more frequently than once a year, the adjustment hereunder shall similarly be made by Owner in a supplemental Escalation Statement furnished by Owner to Tenant, so as to reflect such change in the monthly installments due hereunder, and to reflect the effective date of each such change.

               C. All Escalation Payments.

                    (1) Subject to Tenant’s rights as set forth herein to dispute the correctness of any statement, bill or demand furnished by Owner with respect to any item of Additional Rent provided for in this Article 38, Tenant’s obligation to make any payment provided for in this Article 38 shall be absolute and not conditioned on the happening of any act, thing or occurrence, including without limitation the time or timeliness at or with which such statement, bill or demand is furnished to or made upon Tenant. Owner’s failure during the Term to prepare and deliver any statements or bills required to be delivered to Tenant hereunder, or Owner’s failure to make a demand under this Article 38 or under any other provisions of this Lease shall not in any way be deemed to be a waiver of, or cause Owner to forfeit or surrender its rights to collect, any Additional Rent which may have become due pursuant to this Article 38 during the Term. Except as otherwise expressly set forth above, Tenant’s liability for the Additional Rent due under this Article 38 and Owner’s obligation to make payments and refunds to Tenant hereunder, shall continue unabated during the remainder of the Term and shall survive the expiration or sooner termination of this Lease.

                    (2) In no event shall any adjustment of any payments payable by Tenant in accordance with the provisions of this Article 38 result in a decrease in Fixed Annual Rent nor shall any adjustment of any Additional Rent payable by Tenant pursuant to any provision of this Article 38 result in a decrease in any other Additional Rent payable by Tenant pursuant to any other provision of this Article 38 or any other provisions of this Lease, it being agreed and understood that the payment of Additional Rent under this Article 38 is an obligation supplemental to Tenant’s obligations to pay Fixed Annual Rent and any Additional Rent pursuant to any other provision of this Lease.

                    (3) Notwithstanding any provision hereof to the contrary, if a Tax Year or an Operating Year shall end after the expiration or termination of the Term, the Additional Rent payable by Tenant in respect thereof shall be prorated to correspond to that portion of such year occurring within the Term.

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                    (4) Owner’s failure to render any Tax Statement or Escalation Statement with respect to any Tax Year or Operating Year shall not prejudice Owner’s right to thereafter render a Tax Statement or Escalation Statement with respect thereto or with respect to any subsequent Tax Year or Operating Year, nor shall the rendering of a Tax Statement or Escalation Statement prejudice Owner’s right to thereafter render a corrected Tax Statement or Escalation Statement for that Tax Year or Operating Year. Nothing herein contained shall restrict Owner from issuing a Tax Statement at any time there is an increase in Real Estate Taxes during any Tax Year or any time thereafter. Notwithstanding any provision of this Article 38 to the contrary, if Owner renders a Tax Statement or Escalation Statement (or correction thereto) to Tenant with respect to any Tax Year or Operating Year more than twenty-four (24) months after the last day thereof (except with respect to any amounts for which Owner is first billed after the last day of such Operating Year or Tax Year and for which Owner bills Tenant within sixty (60) days after Owner’s receipt of such bill), then Tenant shall not be obligated to pay any such amounts (or corrected amounts) set forth therein that was not included in a previous Tax Statement or Escalation Statement (or correction thereto).

                    (5) Each Tax Statement and each Escalation Statement shall be conclusive and binding upon Tenant unless (i) Tenant shall notify Owner (on or before the date that is the later of (x) the date which is ninety (90) days after the end of the applicable fiscal or calendar year to which such Tax Statement relates and (y) the date which is ninety (90) days after Tenant’s receipt of such Escalation Statement, as applicable), that Tenant disputes the correctness thereof and stating in general terms how such statement is claimed to be incorrect. Pending the determination of such dispute, Tenant shall pay to Owner (as and when otherwise payable to Owner under this Article 38) all Tax Payments and operating payments (whether disputed or undisputed) in accordance with the applicable Tax Statement or Escalation Statement (and, promptly following the determination of such dispute, Owner shall refund or credit any overpayment by Tenant).

                    (6) At Tenant’s request, Owner shall provide Tenant with a copy of any tax bill in question, together with a copy of such backup information as shall be reasonably necessary so as to permit Tenant to determine the accuracy of Owner’s calculation of the Tax Statement. Tenant and its representatives shall agree to treat all such information in a confidential manner.

                    (7) Tenant shall pay to Owner upon demand, as Additional Rent, any occupancy tax or rent tax now in effect or hereafter enacted, which Owner is now or hereafter is required to pay with respect to the Demised Premises or this Lease.

          39. Electric Current.

               A. Tenant’s use of electric energy in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Demised Premises, as set forth in Section 39D. Should Owner consent to the installation of additional risers or other equipment required

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by Tenant above the present capacity of the connections, risers, switches, wiring installations or other electrical facilities serving the Demised Premises, which consent shall not be unreasonably withheld or delayed, same shall be provided by Owner and the reasonable cost of such installation thereof shall be paid by Tenant upon Owner’s demand. If Owner provides additional electricity above the capacity of the existing transformers serving the Demised Premises through a high voltage riser, Tenant shall pay a one-time reasonable fee reasonably determined by Owner for the right to each 200 additional amps. If Owner provides such additional electricity, Tenant shall, at its sole cost and expense, step down the voltage in the riser.

               B. For purposes of this Article 39:

                    (i) “Tenant’s consumption” shall mean the kilowatt hours of electric current consumed in the Office Space (exclusive of the HVAC System (as hereinafter defined)), as measured by submeters through which the electric current supplied to the Office Space is drawn, during the Term, commencing immediately upon the Commencement Date (or, if later, the installation and activation of the applicable submeter).

                    (ii) “Rate” shall mean the amount per kilowatt hour (including energy and demand) that is charged by the public utility company supplying electric current to the Building, at the average cost per kilowatt hour at which Owner then purchases electricity utilized in the Building for the same period from the utility company, taking into consideration time of day rates, volume and other applicable discounts. The Rate shall include taxes, energy charges, demand charges, fuel adjustment charges, rate adjustment charges and other charges actually imposed in connection therewith.

                    (iii) “Tenant’s Cost” shall mean one hundred three percent (103%) of an amount determined by applying the Rate to Tenant’s consumption demand and hours of use.

               C. (i) Submeters shall measure the supply of electrical energy furnished to the Office Space, exclusive of the HVAC System. Owner, at Owner’s sole cost and expense shall keep all such submeters in good working order and repair and if more than one (1) submeter is used then Tenant shall have the right to install, at its own sole cost and expense, a totalizer so that same approximates a single meter charge. Owner shall, from time to time, furnish Tenant with a statement indicating the appropriate period during which the Tenant’s consumption was measured and the amount of Tenant’s Cost payable by Tenant to Owner for furnishing electrical current. Within thirty (30) days after receipt of each such statement, Tenant shall pay the amount of Tenant’s Cost set forth thereon to Owner as Additional Rent. If any tax is imposed upon Owner’s receipts from the sale or resale of electrical energy to Tenant by any federal, state, city or local authority, the pro-rata share of such tax allocable to the electrical energy service received by Tenant shall be passed onto and paid by Tenant as Additional Rent if and to the extent permitted by law (but without duplication of the amounts payable pursuant to Section 39B above). If at any time any submeter is out of

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service or requires repair, Tenant shall pay for electricity with respect to the portion of the Demised Premises covered by such inoperable submeter at a charge reasonably estimated by an independent engineer designated by Owner and approved by Tenant (such approval not to be unreasonably withheld or delayed) based on prior readings of the particular inoperable submeter during comparable periods (or otherwise fairly and appropriately adjusted), provided that pending receipt of such estimate Tenant shall pay for electricity at a charge reasonably estimated by Owner (with credit or debit, as applicable, after receipt of the engineer’s estimate).

                    (ii) With respect to the Basement Space, Tenant shall pay to Owner an annual charge for electricity (the “Basement Electricity Fee”) using a factor of One Dollar ($1.00) per rentable square foot of such space, which factor was based on certain mutually-acceptable theoretical assumptions incorporating approximate estimates of the probable consumption of electrical energy in such space assuming the use thereof in accordance with this Lease and the cost of furnishing such electrical energy as of the date of this Lease. At any time and from time to time during the Term (but no more often than once per six (6) months), Owner may have the Basement Electricity Fee then in effect adjusted as reasonably determined by an independent engineer designated by Owner and approved by Tenant (such approval not to be unreasonably withheld or delayed) to take into account any increase in the rates charged by the public utility serving the Building or any increase in taxes based on the amounts charged by said public utility, since the effective date of the Basement Electricity Fee then in effect (taking into account any prior adjustments). Upon any determination of a new Basement Electricity Fee, Owner shall deliver to Tenant a statement in writing recomputing and adjusting the Basement Electricity Fee, which statement shall include reasonably sufficient detail to enable Tenant to verify the determination of the amount of the adjustment referred to therein. The new Basement Electricity Fee shall take effect on a day designated by Owner that is not less than thirty (30) days after the date of such statement. The parties shall cooperate in good faith to resolve any dispute regarding such adjustment to the Basement Electricity Fee. Notwithstanding the foregoing, each of Owner and Tenant shall have the right to install (at the sole cost and expense of the party pursuing such installation) a submeter to measure the use of electrical energy furnished to the Basement Space, in which event Tenant shall thereafter pay for electricity in the Basement Space in the manner set forth in Section 39C(i) instead of through the Basement Electricity Fee.

               D. Owner will provide a basic electric capacity of six (6) watts (demand load) per rentable square foot in the Office Space, exclusive of the floor air conditioning units servicing the Demised Premises as of the Commencement Date (such units and any replacements thereof, the “HVAC System”), and shall furnish electric capacity to the HVAC System.

               E. If either the quantity or character of electrical service is changed by the public utility corporation supplying electrical service to the Building, or is no longer available or suitable for Tenant’s requirements, no such change, unavailability or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its

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obligations under this Lease, or impose any liability upon Owner or Owner’s agents unless such change, unavailability or unsuitability (i) renders the Demised Premises untenantable or not reasonably usable for office use and (ii) is not due to acts or omissions of Tenant or Tenant’s contractors, licensees, invitees, agents and employees. Owner shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the Demised Premises unless resulting solely from the improper or wrongful acts or gross negligence of Owner.

               F. Owner’s failure during the Term to prepare and deliver any statements or bills under this Article 39, or Owner’s failure to make a demand under this Article 39 or any other provisions of this Lease, shall not in any way be deemed to be a waiver of, or cause Owner to forfeit or surrender its rights to collect, any amount of Additional Rent which may have become due pursuant to this Article 39 during the Term. Notwithstanding the foregoing, if Landlord renders a statement under this Article 39 with respect to any period of electrical use more than twenty-four (24) months after such period (unless Landlord is first billed for such electrical use thereafter and bills Tenant therefor within sixty (60) days of Landlord’s receipt of such bill), then Tenant shall not be obligated to pay amounts in such statement to the extent not included in a previous statement rendered to Tenant. Except as otherwise set forth herein, Tenant’s liability for any amounts due under this Article 39 shall continue unabated during the remainder of the Term and shall survive the expiration or sooner termination of this Lease.

               G. All determinations under this Article 39 which turn on the public utility rate shall be based on the rate schedule pursuant to which Owner purchases electric current for the Building in effect during the period for which Tenant is billed.

               H. Owner shall furnish and install all replacement lighting tubes, lamps, bulbs and ballasts required in the Demised Premises, at Tenant’s reasonable expense, unless Tenant elects to provide its own service using suppliers and installers approved by Owner, which approval shall not be unreasonably withheld.

          40. End of Term.

       Article 22 hereof is hereby amended to add the following: If Tenant remains in possession of all or any portion of the Demised Premises after the Expiration Date or sooner termination of the Term, then in addition to any other rights or remedies Owner may have hereunder or at law, and without in any manner limiting Owner’s right to demonstrate and collect any damages (excluding consequential damages except as expressly set forth below) suffered by Owner and arising from Tenant’s failure to surrender the Demised Premises as provided herein, Tenant shall pay to Owner as damages for each month or portion of a month during which Tenant holds over in all or any portion of the Demised Premises after the Expiration Date or sooner termination of this Lease, a sum equal to one hundred fifty percent (150%) (which percentage shall be increased, from and after the first thirty (30) days of any holdover, to one hundred seventy-five percent (175%), and, from and after the first sixty (60) days of any holdover, to two hundred percent (200%)) of the aggregate of that portion of the Fixed Annual Rent

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and Additional Rent which was payable under this Lease during the last month of the Term. Nothing herein contained shall be deemed to permit Tenant to retain possession of all or any portion of the Demised Premises after the Expiration Date or sooner termination of this Lease or to limit in any manner Owner’s right to regain possession of the Demised Premises through summary proceedings, or otherwise, and no acceptance by Owner of payments from Tenant after the Expiration Date or sooner termination of the Term shall be deemed to be other than on account of the amount to be paid by Tenant in accordance with the provisions of this Article. In addition, if such holdover exceeds thirty (30) days, Tenant agrees to indemnify and save Owner harmless from all costs, claims, losses or liability (including consequential damages) resulting from delay by Tenant in surrendering all or any portion of the Demised Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. The provisions of this Article 40 shall survive the Expiration Date or sooner termination of the Lease. The preceding shall be deemed to be an “agreement expressly providing otherwise” within the meaning of Section 232-c of the Real Property Law of the State of New York.

          41. Condition of Demised Premises.

               A. Supplementing the provisions of Articles 15 and 21 hereof, Tenant shall take possession of the Demised Premises “AS IS,” it being expressly agreed that Owner shall have no obligation to alter, improve, decorate or otherwise prepare the Demised Premises for Tenant’s occupancy other than (a) to demolish and slab over the staircase between the 8th and 9th floors of the Building and (b) to remove any friable asbestos and any other asbestos or asbestos-containing materials required by law to be removed or encapsulated, in each case to the extent discovered within the Demised Premises provided that (i) Tenant notifies Owner of such asbestos in writing promptly after the discovery thereof, (ii) Owner shall not be responsible for removing any floor tiles containing asbestos, (iii) the discovery of such asbestos did not occur in connection with the negligence, improper act or omission or violation of this Lease by Tenant or Tenant’s contractors or subcontractors or any other party claiming by, through or under Tenant, (iv) such asbestos-containing materials were not brought in to the Demised Premises by Tenant or any party claiming by, through or under Tenant and (v) Tenant shall cooperate as reasonably requested by Owner in connection with such removal (including by vacating such portions of the Demised Premises as shall be reasonably necessary therefor) (such items of work to be done by Owner pursuant to such clauses (a) and (b), collectively, “Owner’s Work”). Owner’s Work shall be done at Owner’s sole cost and expense, in a good and workerlike manner and in compliance with all applicable Laws, and to the extent Owner’s Work shall not be completed by the Commencement Date, Owner and Tenant shall cooperate reasonably and in good faith to coordinate the performance and completion of Owner’s Work and Tenant’s Changes (as hereinafter defined) such that one shall not unreasonably delay the other. If Owner’s Work is not substantially completed on or before the day that is ninety (90) days after Tenant’s written request to Owner to commence Owner’s Work (subject to Force Majeure (as hereinafter defined) and delays caused by the improper acts or omissions of Tenant) (the “Fixed Substantial Completion Date”), then the Rent Commencement Date shall be

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extended by one (1) day for each day (or portion of a day) from and after the Fixed Substantial Completion Date through and including the day Owner’s Work is substantially completed. As used herein, “substantially completed” shall mean achieving the stage of progress of Owner’s Work as shall not prevent or materially impair Tenant’s Initial Changes (as hereinafter defined) due to unfinished aspects of Owner’s Work. Tenant, at its sole cost and expense and in compliance with all applicable requirements of insurance bodies having jurisdiction and the provisions of this Lease (including, without limitation, Articles 3 and 42), may make such Tenant’s Changes in the Demised Premises as Tenant may consider necessary or desirable to prepare the same for Tenant’s occupancy.

               B. Notwithstanding anything to the contrary contained in any other provision of this Lease, in the event that at any time during the Term (a) Tenant is unable to use or have access to the Demised Premises or any portion thereof for the ordinary conduct of Tenant’s business solely due to (I) the failure by Owner to provide repairs, heat, air cooling, water, elevator, electric and/or other services expressly required to be furnished by Owner under this Lease, or to comply with Laws expressly required to be complied with by Owner under this Lease, or (II) Owner’s performance of any alterations, restorations, work, installations or repair in the Building or the Demised Premises (other than any such alteration, restoration, work, installation or repair that Owner performs at Tenant’s request or by reason of Tenant’s failure to perform such alteration, restoration, work, installation or repair) and any such condition continues for a period in excess of ten (10) consecutive days (or, if such condition is the result of Force Majeure, thirty (30) consecutive Business Days) after Tenant gives a notice to Owner (the “Abatement Notice”) stating that Tenant’s inability to use the Demised Premises or such portion thereof is solely due to such condition, (b) neither Tenant nor any party claiming by, through or under Tenant actually uses or occupies the Demised Premises or such portion thereof during such period, and (c) such condition has not resulted from a casualty or condemnation or from the default, negligence or willful misconduct of Tenant, Tenant’s agents or employees or any subtenant or other occupant of the Demised Premises, then Fixed Annual Rent and Additional Rent under Article 38 shall be abated as to the Demised Premises or affected portion (pro rata according to the proportion of the rentable square footage of the Demised Premises so affected) on a per diem basis for the period commencing on the eleventh (11th) day (or thirty-first (31st) Business Day, in the case of Force Majeure) after Tenant gives the Abatement Notice, and ending on the earlier of (i) the date Tenant or any party claiming by, through or under Tenant reoccupies the Demised Premises or such portion thereof for the ordinary conduct of its business, or (ii) the date on which such condition is substantially remedied such the Demised Premises can be reoccupied for the ordinary conduct of business. As used herein, “Force Majeure” shall mean strike, lockouts or other labor or industrial troubles, governmental pre-emption in connection with a national emergency, any enforcement or adoption of a Law in connection with an emergency or other catastrophic event, conditions of supply or demand that are affected by declared war or other national, state or municipal emergency, fire or other casualty, such as (by way of example) civil disturbance, acts of the public enemy, riot, sabotage, blockade, embargo, explosion or any other cause beyond a party’s reasonable control, whether or not similar to any of the

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causes hereinabove stated. Notwithstanding the foregoing, a party’s failure to make a payment of money, or any other event that derives from such party’s lack of funds, shall not constitute a “Force Majeure” event for purposes hereof.

          42. Tenant’s Changes.

               A. Tenant, at its sole cost and expense (but subject to Section 42F), shall cause any permitted alterations, decorations, installations, additions or improvements in or about the Demised Premises (“Tenant’s Changes”), including any changes which Tenant intends to make on or before the Commencement Date, to be performed in a good and workerlike manner and in compliance with all applicable legal and other requirements of insurance bodies having jurisdiction over the Building, the provisions of Article 3 hereof and this Article 42 and in such manner as not to interfere with, delay, or impose any additional expense upon Owner in the maintenance or operation of the Building or the performance of Owner’s Work. Tenant, at its expense, and with diligence and dispatch, but in any event within thirty (30) days after the receipt of notice thereof, shall procure the cancellation or discharge of all notices of violation arising from or otherwise connected with Tenant’s Changes which shall be issued by the Department of Buildings or any other public authority having or asserting jurisdiction over the Building; provided, however, that if the same cannot be reasonably cancelled or discharged within such thirty (30) day period, then Tenant shall not be in default of such requirement so long as Tenant commences diligent efforts to cancel or discharge the same within such thirty (30) day period and causes the same to be removed as promptly as reasonably practicable. Owner shall promptly forward notice of any such violations to Tenant received by Owner.

               B. Supplementing the provisions of Article 3 hereof, prior to making any proposed Tenant’s Changes, Tenant, at Tenant’s expense, (a) shall submit to Owner and shall obtain Owner’s approval (not to be unreasonably withheld, delayed or conditioned) of detailed plans and specifications (including scaled layout, architectural, mechanical and structural drawings) in three (3) hard copies and diskette form (except in the case of Tenant’s Changes that are purely cosmetic or decorative, do not affect the mechanical, electrical, plumbing, sanitary or other service systems of the Building and do not require filing of any plans with any governmental agency (collectively, “Cosmetic Changes”)), (b) shall obtain all permits, approvals and certifications required by any governmental authorities having jurisdiction (Owner hereby agreeing to execute such documents and applications as may be reasonably required to obtain the same, provided same is at no cost or obligation to Owner), and (c) shall furnish to Owner duplicate original policies or certificates thereof of worker’s compensation insurance (covering all persons to be employed by Tenant, and Tenant’s contractors and subcontractors, in connection with such Tenant’s Changes) and commercial general liability insurance (including premises operation, bodily injury, personal injury, death, independent contractors, products and completed operations, broad form contractual liability and broad form property damage coverages) in such form, with such companies, for such periods and in such amounts, as Owner may require, naming Owner and its agents, the other Additional Insureds, each Superior Lessor (as hereinafter defined) as to which

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Tenant has previously been notified in writing and each Superior Mortgagee (as hereinafter defined) as to which Tenant has previously been notified in writing, as additional insureds. Owner, prior to the granting of its consent to any Tenant’s Changes, may impose such conditions (in addition to those expressly provided in this Lease) as to such Tenant’s Changes as Owner may reasonably consider desirable (provided that no supervisory fee or surcharges and no bonding or other security shall be required for any Alterations). Owner shall have the right, in its sole discretion, to withhold consent to any Tenant’s Changes which would physically affect any part of the Building outside of the Demised Premises (other than standard connections to tap-in points, points of entry and roof rights granted to Tenant in this Lease, as to which Owner shall exercise reasonable discretion), would in Owner’s reasonable judgment materially and adversely affect the proper functioning of any of the mechanical, electrical, plumbing, sanitary or other service systems of the Building, or would require filing of any plans with any governmental agency (unless Tenant shall reimburse Owner for the cost of any such filing). Tenant shall reimburse Owner for any actual, reasonable out-of-pocket third party costs incurred by Owner in connection with any Tenant’s Changes, including, without limitation, costs incurred in connection with Owner’s review and/or approval of Tenant’s plans and specifications for any Tenant’s Changes. Owner shall provide Tenant with copies of supporting documentation for any such payments required by Owner from Tenant, promptly after Tenant’s request therefor. In the event Tenant shall employ any contractor to do any work in the Demised Premises permitted by this Lease, such contractor and any subcontractor shall agree to employ only such labor as will not result in jurisdictional disputes or strikes or result in causing disharmony with other workers employed at the Building. Owner and Tenant shall attempt (and shall endeavor to cause all affected parties to attempt) to resolve promptly any labor disputes in a commercially reasonable manner. In the event of any such dispute, strike or disharmony, Tenant, upon the demand of Owner, shall cause all contractors, subcontractors, mechanics or laborers causing same to vacate the Building immediately. Tenant shall inform Owner in writing of the names of any contractor or subcontractor(s) Tenant proposes to use in the Demised Premises at least fifteen (15) days prior to the beginning of work by such contractor or subcontractor and Owner shall have the right to approve any such contractor(s) or subcontractor(s) in Owner’s reasonable discretion (subject to Section 42D). Subject to the foregoing provisions of this Section 42B, Tenant shall be permitted to use non-union labor in the Demised Premises.

               C. Notwithstanding anything contained in this Article 42 or Article 3 to the contrary, Owner’s consent shall not be required with respect to Tenant’s Changes which (i) do not materially and adversely affect any part of the Building other than the Demised Premises and the building systems exclusively serving the Premises (the “Premises Systems”) or require any alterations, installations, improvements, additions or other physical changes to be performed in or made to any portion of the Building other than the Demised Premises and the Premises Systems, (ii) do not affect in any material and adverse respect the proper functioning of any other mechanical, electrical, plumbing, sanitary or other service systems of the Building, (iii) do not affect the structure of the Building, (iv) do not involve a perforation to a floor slab of the Premises, (v) do not violate or otherwise require an amendment to the certificate of

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occupancy for the Building, (vi) are not reasonably expected to have a cost for labor and materials of more than One Hundred Thousand Dollars ($100,000.00), either individually or in the aggregate with other reasonably related Tenant’s Changes constructed within any twelve (12) month period as part of the same project (other than for Cosmetic Changes, as to which no such dollar amount shall apply) and (vii) are performed by union labor and in accordance with all applicable Law. At least five (5) Business Days prior to making any such Tenant’s Changes, Tenant shall notify Owner thereof and submit to Owner (x) reasonable evidence that such Tenant’s Changes comply with the provisions of this Section 42C (including reasonable evidence of the projected project cost, except with respect to Cosmetic Changes) and (y) detailed plans and specifications for such Tenant’s Changes to the extent that any governmental authority requires such plans or specifications or Tenant otherwise prepares such plans and specifications. Any Tenant’s Changes described in this Section 42C shall otherwise be performed in compliance with the provisions of Article 3 and this Article 42.

               D. With respect to any item requiring Owner’s consent or approval pursuant to this Article 42, if Owner fails to grant or deny such consent or approval within ten (10) Business Days after submission (or seven (7) Business Days in the case of a resubmission), provided such submission complies with the requirements above, Tenant shall have the right to send Owner a second written request for consent or approval (a “Second Request”), which shall specifically identify the item(s) to which such request relates, and set forth in bold capital letters the following statement: “IF OWNER FAILS TO RESPOND WITHIN THREE (3) BUSINESS DAYS AFTER RECEIPT OF THIS NOTICE, THEN OWNER’S CONSENT OR APPROVAL SHALL BE DEEMED GRANTED.” In the event that Owner fails to grant or deny consent or approval to a Second Request within three (3) Business Days after receipt thereof by Owner, the item(s) for which the Second Request is submitted shall be deemed to be approved by Owner.

               E. Upon completion of any of Tenant’s Changes, Tenant, at Tenant’s expense, shall obtain any certificates of final approval of such Tenant’s Changes required by any governmental authority and shall furnish Owner with copies thereof, together with the “as-built” plans and specifications for such Tenant’s Changes (other than Cosmetic Changes), which “as-built” plans shall be in hard copy and diskette form. All Tenant’s Changes shall be made and performed substantially in accordance with the plans and specifications therefor as approved by Owner (if required), all applicable Law and the Rules and Regulations. All materials and equipment to be incorporated in the Demised Premises as a result of any Tenant’s Changes shall be of good quality and no such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage, title retention or security agreement.

               F. (i) Subject to the terms and conditions set forth below, Owner shall pay to or on behalf of Tenant up to a maximum amount of Four Million Four Hundred Eighty Thousand and 00/100 Dollars ($4,480,000.00) (“Owner’s Contribution”) for costs and expenses incurred by Tenant for goods, materials and labor in connection with the design, installation and construction of Tenant’s Changes in connection with

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Tenant’s occupancy of the Demised Premises promptly after the Commencement Date (“Tenant’s Initial Changes”), provided that Tenant shall have the right to use up to a maximum of Eight Hundred Ninety-six Thousand and 00/100 Dollars ($896,000.00) of Owner’s Contribution on account of so-called “soft costs” in connection with Tenant’s Initial Changes, including architectural, engineering, expediting and other consulting fees, office furniture and all necessary building department permits and approvals, but in no event shall Owner’s Contribution be applied to expenditures on personal property not constituting a permanent leasehold improvement (other than office furniture). Except with Owner’s prior written approval (not to be unreasonably withheld), Tenant shall not remove from the Demised Premises any Tenant’s Initial Changes or personalty made or purchased with Owner’s Contribution unless replaced with property of equal or greater value to the Tenant’s Initial Changes or personalty removed and which substituted property will be deemed to have been installed in the Demised Premises with Owner’s Contribution.

                    (ii) Owner shall disburse from time to time, but not more often than once in any thirty (30) day period, within ten (10) Business Days after receipt of Tenant’s requisition therefor, to or on behalf of Tenant and/or (at Tenant’s request) to its contractor, that portion of Owner’s Contribution equal to the amount set forth in Tenant’s requisition minus ten percent (10%) thereof (the “Holdback”); provided, however, that no such disbursement shall be made (a) if, and for so long as, Tenant shall be in non-monetary default under this Lease beyond any applicable notice and cure period or in any monetary default under this Lease and (b) until Owner’s receipt of (i) a requisition therefor from Tenant, (ii) a certification of performance (AIA G702 REQ form) from the architect of record and (ii) each of the following:

                         (x) A certificate signed by Tenant and Tenant’s architect dated not more than ten (10) days prior to such request setting forth (a) the sum then justly due to contractors, subcontractors, materialmen, engineers, architects and other persons who have rendered services or furnished materials in connection with Tenant’s Initial Changes, (b) a brief description of such services and materials and the amounts paid or to be paid from such requisition to each of such persons in respect thereof, (c) that to such architect’s knowledge, the work described in the certificate has been completed substantially in accordance with the final plans therefor previously approved by Owner (statement (c) need not be made by Tenant, but rather only by Tenant’s architect), (d) that to Tenant’s knowledge, there has not been filed with respect to the Demised Premises or the Building or any part thereof or any improvements thereon, any vendor’s, mechanic’s, laborer’s, materialmen’s or other like liens arising out of Tenant’s Initial Changes which has not been discharged of record and (e) that Tenant has complied with all of the conditions set forth in this Lease applicable to alterations, including the requirement that Tenant comply with all applicable legal requirements (statements (d) and (e) need not be made by Tenant’s architect, but rather only by Tenant). Upon request of Tenant, Owner shall make payments of Owner’s Contribution directly to Tenant’s contractors; and

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                         (y) Partial lien waivers, paid receipts or such other proof of payment as Owner shall reasonably require for all work done and materials supplied by all trade contractors, subcontractors and materialmen through the current requisition; it being agreed that Tenant need not have paid an expense in order to make a requisition therefor, and instead may requisition an advance from Owner which Tenant then uses to pay such expense;

provided, however, that in no event may any one (1) requisition by Tenant (other than the final requisition) cover more than twenty-five percent (25%) of Owner’s Contribution.

                    (iii) Notwithstanding anything in Article 3 or this Article 42 to the contrary, Owner shall not be required to disburse the Holdback to Tenant until Owner (a) has received from Tenant’s architect all certificates of final approval required by any governmental or quasi-governmental body in respect of Tenant’s Initial Changes and (b) has received final lien waivers, paid receipts or such other proof of payment as Owner shall reasonably require for all work done and materials supplied by all trade contractors, subcontractors and materialmen as part of Tenant’s Initial Changes. In the event Tenant (i) fails to obtain the certificates, approvals and proof of payment described above within six (6) months following the date Tenant has commenced occupancy of the Demised Premises for the conduct of its business, or (ii) fails to bond or discharge any mechanic’s lien filed against the Demised Premises or the Building or Owner’s interest therein for work claimed to have been done for or materials claimed to have been furnished to Tenant in connection with any portion of Tenant’s Changes within the time period provided therefor in Article 3 above, then and in either such event, Owner, upon ten (10) days prior notice to Tenant, shall have the right to hire its own contractors or expediters to obtain said certificates and/or approvals and/or to obtain such proof of payment and discharge such lien(s), by filing of the bond required by Law or otherwise, and, at Owner’s option, to use all or any portion of the Holdback in its reasonable attempt to do so, and Tenant, upon Owner’s demand, shall reimburse Owner for all unreimbursed costs so incurred in obtaining said certificates, approvals and/or proof of payment, and/or in canceling, bonding and/or discharging such liens, and to the extent Tenant so reimburses Owner the Holdback amount shall be restored.

                    (iv) Notwithstanding anything to the contrary contained in this Section 42D, if, at the time any payment by Owner to Tenant of all or any portion of Owner’s Contribution is required to be made, Tenant is in default in the payment of Fixed Annual Rent or any item of Additional Rent, Owner may offset the amount of such arrearages against the payment then due from Owner hereunder.

                    (v) Notwithstanding anything to the contrary contained in this Section 42D, Tenant’s right to request, and Owner’s obligation to disburse, Owner’s Contribution shall expire on the date that is twelve (12) months after the Rent Commencement Date, except to the extent that Tenant is reasonably delayed in requesting or obtaining same due to Owner’s wrongful acts or omissions.

               G. All Tenant’s personalty shall remain the property of Tenant and upon the Expiration Date, shall be removed from the Demised Premises by Tenant.

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               H. Any modifications, changes or alterations to the Class E fire safety system of the Demised Premises (the “Fire Safety System”), including without limitation, speakers, strobes and pull stations, are deemed to be a Tenant’s Change. Tenant may use only the contractor or contractors designated by Owner with respect to any Tenant’s Changes to the Fire Safety System. Subsequent to any Tenant’s Changes to the Fire Safety System, such system shall be repaired and maintained only by the contractors designated by Owner from time to time, at Tenant’s cost.

               I. Tenant shall have the right to install an internal security system, provided such installation complies in all respects with this Article 42.

               J. Notwithstanding any provision of this Lease to the contrary, only such window shades as are supplied or permitted by Owner shall be installed or used on the exterior windows of the Demised Premises.

               K. Owner shall not unreasonably withhold its approval of Tenant’s installation of an internal security system in the Demised Premises, provided same is installed as a Tenant’s Change in accordance with the applicable provisions of this Article 42.

          43. Subordination and Attornment.

               A. Subject to the further provisions of this Article 43 and to the terms of any agreement entered into pursuant to this Article 43, this Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to all ground and underlying leases now or hereafter existing (hereinafter collectively referred to as “Superior Leases” and the holder of the lessor’s interest therein shall be referred to as a “Superior Lessor”) and to all mortgages and building loan agreements including, without limitation, leasehold mortgages and building loan agreements, which may now or hereafter affect the Land or the Building or a Superior Lease (hereinafter collectively referred to as “Superior Mortgages” and the holder of the mortgagee’s interest therein shall be referred to as a “Superior Mortgagee”), to each and every advance made or hereafter to be made under Superior Mortgages and to all renewals, modifications, replacements and extensions of Superior Leases and Superior Mortgages. This Article shall be self-operative and no further instrument of subordination shall be required in confirmation of such subordination. Tenant shall promptly execute and deliver in recordable form any instrument that Owner, the lessor of any Superior Lease or the holder of any Superior Mortgage may reasonably request to evidence such subordination. Tenant covenants and agrees (subject to any applicable Non-Disturbance Agreement (as hereinafter defined)) that if by reason of a default under any Superior Mortgage or Superior Lease, such Superior Mortgage is foreclosed or such Superior Lease and the leasehold estate of the Owner in the Demised Premises is terminated, then at the election of the purchaser at the foreclosure sale or the then holder of the reversionary interest in the Demised Premises:

                    (i) Tenant will attorn and will recognize such purchaser or holder as the Tenant’s landlord under this Lease, and the holder of such

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Superior Mortgage or the lessor under such Superior Lease shall recognize such attornment and accept Tenant as a direct tenant upon all of the terms and provisions of this Lease. Tenant agrees to execute and deliver, at any time and from time to time, upon the request of Owner, the holder of any Superior Mortgage or the lessor under any such Superior Lease, any instrument which may be necessary or appropriate to evidence such attornment, except that such successor landlord shall not be (a) bound by any prepayment of rent more than one month in advance except pursuant to the provisions of this Lease, (b) bound to pay any portion of Owner’s Contribution, (c) bound by any modification of this Lease made without the consent of such Superior Mortgagee or Superior Lessor, of whose identity Tenant has received written notice or (d) subject to any offsets or defenses against or liable for any previous act or omission of any prior landlord (including Owner) under this Lease, except if such act or omission continues after the date of such succession and then only for so much as has accrued subsequent to the date of such succession, or

                    (ii) this Lease will be terminated.

Tenant further waives the provisions of any statute or rule of law now or hereafter in effect which may give or purport to give Tenant any right of election to terminate this Lease or to surrender possession of the Demised Premises in the event any proceeding is brought by (i) the holder of any Superior Mortgage to foreclose such Mortgage or (ii) by a Superior Lessor under any Superior Lease to terminate the same, and agrees that this Lease shall not be affected in any way whatsoever by any such proceeding unless such Superior Mortgagee or Superior Lessor elects to terminate this Lease.

               B. Notwithstanding anything in Section 43A above to the contrary, Owner shall use commercially reasonable efforts to obtain for Tenant’s benefit, from each current and future Superior Lessor and/or Superior Mortgagee, an agreement (hereinafter, a “Non-Disturbance Agreement”) in favor of Tenant, in reasonable and customary form, which provides generally that so long as this Lease shall be in full force and effect (a) Tenant shall not be named or joined in any action or proceeding to foreclose the Superior Mortgage or terminate the Superior Lease in question, or to otherwise enforce its rights thereunder, unless required by law, (b) no such foreclosure or termination, or any action or proceeding brought in pursuance thereof, shall result in a cancellation or termination of this Lease, nor shall Tenant’s possession or rights hereunder be disturbed, by enforcement of any rights given to the holder pursuant to the terms of such mortgage or lease by law or otherwise, nor by the termination or expiration of such lease, and this Lease shall continue in full force and effect, and in any of such events, such holder will accept the attornment by Tenant to such holder, and (c) if any such Superior Mortgagee or Superior Lessor shall become the owner of Owner’s interest in the Building, this Lease shall continue in full force and effect as a direct lease between Tenant and the then owner of Owner’s interest in the Building, upon all of the terms, provisions, conditions and obligations of this Lease, except that such successor landlord shall not be (i) bound by any prepayment of rent more than one month in advance, except to the extent that (x) such prepayment was expressly required under this Lease or (y) such Superior Mortgagee or Superior Lessor has actually received such prepayment, (ii) bound

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by any modification of this Lease made without the consent of such Superior Mortgagee or Superior Lessor, of whose identity Tenant has received written notice or (iii) subject to any offsets or defenses against or liable for any previous act or omission of any prior landlord (including Owner) under this Lease, except if such act or omission continues after the date of such succession and then only for so much as has accrued subsequent to the date of such succession. Tenant shall promptly execute and deliver any such Non-Disturbance Agreement described above reasonably requested by Owner, a Superior Lessor or Superior Mortgagee. The failure of Owner to obtain a Non-Disturbance Agreement from any Superior Lessor or Superior Mortgagee shall not constitute a default by Owner hereunder, so long as Owner shall have made commercially reasonable efforts to obtain the same as required by this Section 43B.

          C. If, in connection with the procurement, continuation or renewal of any financing for which the Land or the Building or the interest of the lessee under a Superior Lease represents collateral in whole or in part, any institutional lender shall request reasonable modifications of this Lease as a condition of such financing, Tenant will not withhold or delay its consent thereto and shall execute and deliver without charge such conforming documents therefor as such institutional lender may reasonably require, provided that such modifications do not increase the obligations of Tenant under this Lease (other than to a merely administrative or de minimis extent) or adversely affect any rights of Tenant under the Lease (other than to a merely administrative or de minimis extent).

          D. Supplementing Section 43 A and Section 43B above, Owner represents that, as of the date hereof, (i) there is no Superior Lessor and (ii) the only Superior Mortgagee is LaSalle Bank National Association, as Trustee for the Registered Holders of Bank of America Commercial Mortgage Inc. Commercial Mortgage Pass-through Certificates, Series 2005-5.

     44. Insurance.

          A. Tenant shall obtain and keep in full force and effect at all times during the Term, at Tenant’s sole cost and expense, (i) insurance against loss or damage by fire and other casualty to all betterments and improvements (including Tenant’s Changes) and all personal property of Tenant in the Demised Premises, under then available standard forms of “all-risk” insurance policies, in an amount equal to one hundred percent (100%) of the replacement value thereof, with commercially reasonable deductible(s), (ii) commercial general liability insurance with a broad form liability endorsement including coverage for contractual liability, (iii) worker’s compensation insurance as required by law and (iv) business income (interruption) insurance in an amount (x) until the Rent Commencement Date, not less than Two Million Dollars ($2,000,000) and (y) from and after the Rent Commencement Date, not less than twelve (12) months of Fixed Annual Rent and Additional Rent under Article 38. Said commercial general liability insurance shall provide coverage on an occurrence basis with a minimum limit of liability of (x) $10,000,000 per occurrence for bodily injury (including death), whether involving one or more persons and (y) $10,000,000 per

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occurrence in respect of property damage, is to be written without a policy annual aggregate limit of liability (unless umbrella coverage is in place), and without the inclusion of any defense costs within the limit of liability, and shall name the Additional Insureds as additional insureds against any claims. All of the aforesaid insurance coverage shall be written in form reasonably satisfactory to Owner by one or more good and solvent insurance companies of recognized standing admitted to do business in the State of New York, determined by A.M. Best Co., Inc., or any successor thereto, to have a rating of at least “A-” and a financial size of at least “Class XI.” Tenant shall pay all premiums and charges therefor and upon failure to do so after ten (10) days prior written notice, Owner may, but shall not be obligated to, make such payments, in which event Tenant agrees to pay the amount thereof to Owner within twenty (20) days after demand, as Additional Rent. A duplicate original insurance policy or appropriate certificate evidencing the aforesaid insurance coverage shall be delivered to Owner together with any endorsements thereto, on the Commencement Date and thereafter renewals or replacements thereof shall be delivered to Owner at least thirty (30) days prior to the expiration of any expiring policy. Such insurance policy or certificate shall contain a provision that no act or omission of Tenant will affect or limit the obligation of the insurance company to pay the amount of any loss sustained and that the insurance afforded thereunder shall not be canceled, nonrenewed, or coverage thereunder reduced except upon thirty (30) days’ prior written notice to Owner (or ten (10) days’ prior written to Owner in the case of cancellation by reason of non-payment of premiums). Such insurance policy shall also specifically provide coverage for Tenant’s indemnification and hold harmless obligations set forth in Article 45 hereof. Any certificate delivered to Owner shall also specifically reflect coverage of Tenant’s aforementioned indemnification obligation. The proceeds of policies providing “all risk” property insurance for Tenant’s property, betterments and improvements shall be payable to Tenant. In the event Tenant shall fail to obtain such insurance after ten (10) days’ prior written notice, Owner may, but shall not be obligated to, obtain the same, in which event the reasonable amount of the premium paid shall be paid by Tenant to Owner within twenty (20) days after demand as Additional Rent. The insurance limits described herein for liability coverage may be achieved using umbrella coverage reasonably approved by Owner. The insurance required hereunder may be carried under blanket policies covering the Demised Premises and other locations of Tenant, so long as such blanket policies otherwise comply with the provisions of this Lease and allocate to the Demised Premises the specified coverage, without possibility of reduction or coinsurance by reason of, or because of damage to, any other properties named therein. Notwithstanding any provision of this Article 44 to the contrary, Owner shall also have the right, at any time and from time to time during the Term on not less than thirty (30) days’ prior written notice to Tenant, to require that Tenant increase the amounts and/or kinds of coverage required to be maintained under this Article 44 to the amounts and/or kinds of coverages then required generally by other landlords of office space in comparable buildings in midtown Manhattan.

          B. Each party agrees to use commercially reasonable efforts to include in each of its policies insuring against loss, damage or destruction by fire, a waiver of the insurer’s right of subrogation against the other party in connection with any

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loss or damage covered by any such policy or permission to release third parties from liability resulting from such casualties. If such waiver or permission shall not be, or shall cease to be, obtainable without additional charge or at all, the insured party shall promptly so notify the other party. In any case in which such waiver or permission shall cease to be obtainable without additional charge, if the other party shall so elect and shall pay the insurer’s additional charge therefor, such waiver or permission shall be included in the policy.

          C. Each party hereby releases the other party, its partners, members, officers, agents and employees with respect to any claim (including a claim for negligence) which it might otherwise have against the other party, its partners, members, officers, agents or employees for loss, damage or destruction with respect to its property (including rental value or business interruption) occurring during the Term but only if and to the extent to which (assuming no deductibles) such party is covered under a policy of insurance containing a waiver of subrogation provision or permission as provided in Article 9 hereof or this Article 44 or would be insured if it complied with its obligations under this Article. If notwithstanding the recovery of insurance proceeds by either party for loss, damage or destruction of its property (or rental value or business interruption) the other party is liable to the first party with respect thereto or is obligated under this Lease to make replacement, repair or restoration, then provided the first party’s right of full recovery under its insurance policies is not thereby prejudiced or otherwise adversely affected, the amount of the net proceeds of the first party’s insurance against such loss, damage or destruction shall be offset against the second party’s liability to the first party therefor, or shall be made available to the second party to pay for replacement, repair or restoration, as the case may be.

          D. The waiver of subrogation or permission referred to in Sections B and C of this Article shall extend to the partners, members, agents and employees of each party and, in the case of Tenant, shall also extend to all other permitted occupants of the Demised Premises, but only if and to the extent that such waiver or permission can be obtained without additional charge (unless such party shall pay such charge). Nothing contained in this Article shall be deemed to relieve either party from any duty imposed elsewhere in this Lease to repair, restore or rebuild or to nullify any abatement of Fixed Annual Rent provided for elsewhere in this Lease.

          E. Any employee of the Building to whom property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant’s agent with respect to such property and neither Owner nor its agents shall be liable for any damage to such property nor for the loss of or damage to any property of Tenant by theft or otherwise.

          F. Notwithstanding anything in Sections 9(b) and (c) of this Lease to the contrary, Owner’s obligation to repair and restore the Demised Premises following a fire or other casualty shall mean and be limited to the mechanical systems and structural elements of the Building and the outer walls and windows, ceilings and floors of the Demised Premises, it being understood that (i) Tenant alone shall be

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required to repair and restore all betterments and improvements (including Tenant’s Changes) and all personal property of Tenant in the Demised Premises, with reasonable dispatch after any casualty, and (ii) any abatement of Fixed Annual Rent and Additional Rent provided for in this Lease following a casualty affecting the Demised Premises shall continue only until such time as Owner shall have repaired and restored the foregoing elements of the Demised Premises for which Owner is responsible to the limited extent hereinabove set forth.

          G. Owner, at its sole cost and expense, shall obtain and maintain in effect as long as this Lease remains in effect, property insurance insuring the Building (but not Tenant’s property) against those risks then generally encompassed in an “all risk” policy and providing for the payment of full replacement cost in the event of a casualty to the Building, with commercially reasonable deductibles.

          H. For avoidance of doubt, in the event of any conflict between the terms of this Article 44 and the terms of Article 9, the terms of this Article 44 shall govern and control.

     45. Indemnification.

          A. Subject to the applicable provisions of Sections 9 and 44 hereof, Tenant shall indemnify and save harmless Owner and Owner’s partners, members, officers, agents and employees and, at Owner’s option, defend Owner and/or Owner’s partners, members, officers, agents and employees against and from (i) any and all claims against Owner or its partners, members, officers, agents or employees directly or indirectly of whatever nature arising wholly or in part from any act, omission or negligence of any of Tenant, any subtenant or Tenant’s or any subtenant’s licensees, agents, servants, contractors, officers, employees, invitees or visitors; (ii) all claims against Owner or its partners, members, officers, agents or employees arising directly or indirectly from any accident, injury or damage whatsoever caused to any person or to the property of any person and occurring during the term of this Lease in or about the Demised Premises, or occurring outside of the Demised Premises but anywhere within or about the Land or the Building, where such accident, injury or damage results or is claimed to have resulted wholly or in part from any act, omission or negligence of any of Tenant, any subtenant or Tenant’s or any subtenant’s licensees, agents, servants, contractors, officers, employees, invitees or visitors (provided that, in the case of an omission, a duty to act existed at law or under this Lease); (iii) any breach, violation or non-performance of any covenant, condition or agreement in this Lease set forth and contained on the part of Tenant to be fulfilled, kept, observed and performed; and (iv) any cost, liability or responsibility for the payment of any sales tax with respect to any installations, furniture, furnishings, fixtures or other improvements located, installed or constructed in the Demised Premises, or the filing of any tax return in connection therewith (although Owner agrees to execute any such return if required by law) regardless of whether such tax is imposed upon Owner or Tenant. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs, damages and expenses of any kind or nature (including

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without limitation reasonable attorney’s and other professional fees and disbursements) incurred in or in connection with any such claims (including any settlement thereof) or proceeding brought thereon, and the defense thereof but specifically excludes any claims attributable wholly or in part from the negligence or willful misconduct of Owner, or its partners, members, officers, agents or employees.

          B. Owner shall indemnify and save harmless Tenant and Tenant’s partners, members, officers, agents and employees and, at Tenant’s option, defend Tenant and/or Tenant’s partners, members, officers, agents and employees against and from (i) any and all claims against Tenant or its partners, members, officers, agents or employees directly or indirectly of whatever nature arising wholly or in part from any gross negligence or willful misconduct of Owner, its contractors, licensees, agents, servants, officers, employees or invitees or (ii) any breach, violation or non-performance of any covenant, condition or agreement in this Lease expressly set forth and contained on the part of Owner to be fulfilled, kept, observed and performed. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs, damages and expenses of any kind or nature (including without limitation attorney’s and other professional fees and disbursements) incurred in or in connection with any such claims (including any settlement thereof) or proceeding brought thereon, and the defense thereof but specifically excludes any claims attributable wholly or in part from the negligence or willful misconduct of Tenant, or its partners, members, officers, agents or employees.

          C. In case of any action or proceeding is brought by reason of any claim for which indemnification is provided pursuant to this Lease, the indemnifying party (upon notice from the indemnified party) shall at the indemnifying party’s expense resist or defend such action or proceeding by counsel approved by the indemnified party in writing (such approval not to be unreasonably withheld, and with the indemnifying party’s insurer’s counsel being approved except in case of conflict).

          D. The provisions of this Article 45 shall survive the expiration or termination of this Lease. Nothing contained in this Article 45 shall entitle Owner or Tenant to consequential, punitive, special or indirect damages or lost profits.

     46. Additional Rent; Late Charges; Rent Credit.

          A. As used in this Lease, “Additional Rent” (whether capitalized or not) shall be and consist of all sums of money, costs, expenses, or charges of any kind or amount whatsoever (other than Fixed Annual Rent) which become due and payable by Tenant to Owner pursuant to this Lease. Except as otherwise expressly provided in this Lease with respect to the timing for specific payments of items of Additional Rent, Additional Rent shall be due and payable within thirty (30) days after Tenant’s receipt of an invoice therefor. If Tenant fails to pay any Additional Rent, Owner shall have the same rights and remedies under this Lease as in the case of non-payment of Fixed Annual Rent.

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          B. In every case in which Tenant is required by the terms of this Lease to pay to Owner a sum of money and payment is not made (i) within five (5) days after the same becomes due in the case of Fixed Annual Rent or payments under Article 38 or (ii) on the date the same becomes due in the case of any other amounts due under this Lease, Tenant shall pay to Owner interest on the amount outstanding from the date it initially becomes due until it is paid at an annual rate which shall be four (4) percentage points in excess of the prime or base rate set by the New York City office of Citibank, N.A. or any successor thereof, but in no event more than the highest rate of interest which at such time shall be permitted under the laws of the State of New York (hereinafter, the “Default Rate”). The foregoing provision for such payments shall not be construed to extend the date for payment of any sums required to be paid by Tenant hereunder or to relieve Tenant of its obligations to pay all such sums at the time or times herein stipulated and, accordingly, notwithstanding the imposition of such payments, Tenant shall be in default under this Lease if any or all payments required to be made by Tenant are not made at the time herein stipulated, and neither the demand for, nor collection by Owner of, such payments shall be construed as a curing of such default on the part of Tenant.

          C. Notwithstanding anything to the contrary set forth elsewhere in this Lease, provided that at the time of application no monetary default and no material non-monetary default on the part of Tenant shall have occurred and be continuing beyond applicable notice and cure periods, Owner will allow Tenant a credit against the Fixed Annual Rent with respect to the Office Space (but not against any other amounts payable under this Lease), in the aggregate amount of Two Million Three Hundred Eighty Thousand and 00/100 Dollars ($2,380,000.00) (the “Credit”), to be applied at the rate of One Hundred Ninety-eight Thousand Three Hundred Thirty-three and 33/100 Dollars ($198,333.33) per month until the Credit shall have been fully liquidated.

     47. Signage.

          Tenant shall have the right (at Tenant’s sole cost and expense) to install an identification sign in the 7th and 8th floor elevator lobbies, of a size and appearance reasonably satisfactory to Owner.

     48. Assignment, Mortgaging, Subletting, etc.

          A. Except as otherwise expressly provided in this Article 48, neither this Lease nor any part hereof nor the interest of Tenant hereunder or in any sublease or the rentals thereunder, shall, by operation of law or otherwise, be assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant, Tenant’s legal representatives or successors in interest and neither the Demised Premises nor any part thereof shall be encumbered in any manner by reason of any act or omission on the part of Tenant or anyone claiming under or through Tenant or shall be sublet or be used, occupied or utilized for desk space or for mailing privileges by anyone other than Tenant, without the prior consent of Owner in each instance. For purposes of this Article 48, (i)

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the issuance of interests in Tenant or any subtenant (whether stock, partnership interest or otherwise) to any person or group of related persons, whether in a single transaction or a series of related or unrelated transactions, in such quantities that after such issuance such person or group shall have control (as defined in Section 48C) of Tenant or such subtenant, shall be deemed an assignment of this Lease or such sublease, as the case may be, if such issuance of interests is intended to circumvent the restrictions on assignment and subletting set forth herein and does not have a valid primary independent business purpose, (ii) a transfer of more than 50% in interest of Tenant or any subtenant (whether stock, partnership interest or otherwise) by any party or parties in interest whether in a single transaction or a series of related or unrelated transactions shall be deemed an assignment of this Lease, or such sublease, as the case may be, if such transfer is intended to circumvent the restriction on assignment and subletting set forth herein and does not have a valid primary independent business purpose except that the transfer of the outstanding capital stock of any corporate Tenant, or subtenant, by persons or parties (other than persons or parties owning 5% or more of the voting stock of such corporation) through the “over-the-counter” market or any recognized national securities exchange, shall not be included in the calculation of such 50%, (iii) a “take-over agreement” pursuant to which any person or persons shall agree to assume the obligations of Tenant hereunder in consideration of Tenant (or any affiliate of Tenant) leasing space in another building, shall be deemed an assignment of this Lease, (iv) any person or legal representative of Tenant, to whom Tenant’s interest under this Lease passes by operation of law, or otherwise, shall be bound by the provisions of this Article 48, and (v) any modification or amendment of a sublease that changes a material term thereof, or any extension or assignment of a sublease, shall each be deemed a sublease. Any assignment, sublease, mortgage, pledge, encumbrance or transfer by Tenant in contravention of this Article 48 shall be void. Notwithstanding the generality of the foregoing, no assignment of a sublease or sub-subletting in violation of this Section 48A shall be a default under this Lease so long as Tenant has commenced and is diligently pursuing commercially reasonable steps (at Tenant’s sole cost and expense) to enforce the terms of this Section 48A against the subtenant.

          B. If this Lease shall be assigned, whether or not in violation of the terms of this Lease, Owner may collect rent from the assignee. If the Demised Premises or any part thereof shall be sublet or shall be used or occupied by anybody other than Tenant, whether or not in violation of this Lease, Owner may, after default by Tenant and expiration of Tenant’s time to cure such default, if any, collect rent from the subtenant or occupant. In either event Owner may apply the net amount collected to the Fixed Annual Rent and Additional Rent herein reserved. The consent by Owner to an assignment, transfer, encumbering or subletting pursuant to any provision of this Lease shall not in any way be considered to relieve Tenant from obtaining the express prior consent of Owner to any other or further assignment, transfer, encumbering or subletting if same is required hereunder. References in this Lease to use or occupancy by anyone other than Tenant shall not be construed as limited to subtenants and those claiming under or through subtenants, but as including also licensees and others claiming under Tenant, immediately or remotely. The listing of any name other than that of Tenant on any door of the Demised Premises or on any directory or in any elevator in the Building,

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or otherwise, shall not operate to vest in the person so named any right or interest in this Lease or the Demised Premises, or be deemed to constitute or serve as a substitute for, any consent of Owner required under this Article, and it is understood that any such listing (in the absence of such consent) shall constitute a privilege extended by Owner, revocable at Owner’s will by notice to Tenant. Tenant agrees to pay to or reimburse Owner for all actual, reasonable out-of-pocket third party costs which may be incurred by Owner in connection with any proposed assignment of this Lease or any proposed subletting of the Demised Premises or any part thereof, including reasonable attorneys’ fees and disbursements and, if applicable, the cost of making investigations as to the acceptability of a proposed subtenant or assignee. Neither any assignment of this Lease nor any subletting, occupancy or use of the Demised Premises or any part thereof by any person other than Tenant, nor any collection of rent by Owner from any person other than Tenant, nor any application of any such rent as provided in this Article, nor a direct dealing by Owner with any subtenant, occupant or assignee, shall under any circumstances be deemed a waiver of any of the provisions of this Article or, except as set forth in this Article 48, relieve, impair, release or discharge Tenant of its obligations fully to perform the terms of this Lease on Tenant’s part to be performed and Tenant shall remain fully and primarily liable therefor.

          C. Tenant may, without Owner’s consent and without complying with Section 48F or Section 48G, permit any corporations or other business entities which control, are controlled by, or are under common control with Tenant (each herein referred to as a “related entity”) to use or sublet all or part of the Demised Premises for any of the purposes permitted to Tenant, or Tenant may assign this Lease to a related entity without Owner’s consent, subject in each case however to compliance with Tenant’s obligations under this Lease and provided that (i) Tenant shall not then be in default in the performance of any of its obligations under this Lease beyond applicable periods of notice and grace, (ii) prior to such use, subletting or assignment Tenant furnishes Owner with the name of any such related entity, together with a certification of Tenant, and such other proof as Owner may reasonably request, that such user, sublessee or assignee is a related entity of Tenant, (iii) such use, subletting or assignment has a valid primary independent business purpose and is not intended to circumvent the restrictions on assignment and subletting set forth herein and (iv) the term of any such use or subletting shall terminate if at any time the sublessee shall no longer be a related entity. Such use, subletting or assignment shall not relieve, release, impair or discharge any of Tenant’s obligations hereunder. For the purposes hereof, “control” shall be deemed to mean ownership of not less than fifty percent (50%) of all of the voting stock of such corporation or not less than fifty percent (50%) of all of the legal and equitable interest in any other business entities.

          D. Tenant may, without Owner’s consent and without complying with Section 48F or Section 48G, assign or transfer its entire interest in this Lease and the leasehold estate hereby created to a successor entity of Tenant (as hereinafter defined), provided that Tenant shall not then be in default in the performance of any of its obligations under this Lease beyond applicable periods of notice and grace. A “successor entity”, as used in this Section, shall mean (i) an entity into which or with

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which Tenant, its successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions for the merger or consolidation of business or governmental entities, provided that by operation of law or by effective provisions contained in the instruments of merger or consolidation the obligations of the Tenant under this Lease are assumed by the entity surviving such merger or consolidation, (ii) an entity acquiring this Lease and the estate hereby granted and substantial other property and assets of Tenant, its corporate successors or assigns, and assuming substantial other liabilities of Tenant, its successors and assigns, including all obligations under this Lease, or (iii) any entity that purchases all or substantially all of the issued and outstanding shares of Tenant, or (iv) any successor to a successor entity becoming such by either of the methods described in subdivisions (i), (ii) and (iii) above, provided that, (a) such merger or consolidation, or such acquisition and assumption, or such purchase, as the case may be, is not principally for the purpose of transferring the leasehold estate created hereby, and (b) immediately after giving effect to any such merger or consolidation, or such acquisition and assumption, or such purchase, as the case may be, the entity surviving such merger or created by such consolidation or acquiring such shares or assets and assuming such liabilities, as the case may be, shall have a net worth (excluding goodwill), as determined in accordance with generally accepted accounting principles and certified to Owner by a reputable nationally-recognized independent certified public accounting firm having no less than twenty (20) partners, at least equal to those of Tenant immediately prior to such transaction. In addition, any entity that is then the Tenant may “go public” without same being deemed an assignment of this Lease.

          E. No assignment made pursuant to Section 48D and no assignment otherwise consented to by Owner shall be valid unless, within twenty (20) days after the execution thereof, Tenant shall deliver to Owner a duplicate original instrument of assignment and assumption in form and substance reasonably satisfactory to Owner, duly executed by Tenant, and by the assignee, in which such assignee shall assume performance of all terms of this Lease on Tenant’s part to be performed.

          F. (i) Notwithstanding anything contained in Sections 48A and 48B to the contrary, but subject to the rights of Tenant under Section 48C and 48D, in the event that at any time Tenant desires to sublet all or any part of the Demised Premises or to assign its interest in this Lease, Tenant:

               (a) shall submit to Owner (x) in the case of a sublease, the name and address of the proposed subtenant and a reasonably detailed description of such person’s business (but if such subtenant has not yet been identified, Tenant shall submit such name, address and description to Owner promptly after such identification) and (y) in the case of an assignment, the name and address of the proposed assignee, a reasonably detailed description of such person’s business, reasonably detailed business and financial references for such person (including its most recent balance sheet and income statements certified by its chief financial officer or a certified public accountant) and any other business information reasonably requested by Owner (but if such assignee has not yet been

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identified, Tenant shall submit such name, address, description and references to Owner promptly after such identification);

               (b) shall submit to Owner (1) either (x) a term sheet setting forth all the proposed terms of the proposed sublease or assignment, it being understood that Tenant may deliver such term sheet to Owner in advance of having identified a potential assignee or subtenant or (y) a conformed or photostatic copy of the proposed assignment or sublease, the effective date of which shall be at least thirty (30) days after the date of the giving of such notice and which shall be conditioned on Owner’s consent thereto, and (2) an agreement by Tenant to indemnify Owner against liability resulting from any claims that may be made against Owner by the proposed assignee or sublessee or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease, to the extent such claims are arising from the actions of Tenant;

               (c) in the case of a proposed sublease that (whether individually or together with any other subleases then in effect or submitted to Owner for Owner’s consent) demises more than fifty percent (50%) of the Demised Premises (except if such subletting is permitted without Owner’s consent pursuant to Section 48C), shall be deemed to have granted Owner the option, to be exercised within thirty (30) days after receipt of all items to be submitted by Tenant pursuant to this Section 48F(i) (other than, if applicable, the name, address, description and references that Tenant is permitted, pursuant to Section 48F(i)(a), to submit after the initial submission of information), to terminate this Lease with respect to the space that is the subject of such proposed sublease upon the terms and conditions hereinafter set forth (provided that if Owner shall elect to terminate this Lease pursuant to this clause (c), then Tenant shall have the right, not later than five (5) Business Days after Owner’s termination notice, to retract its request for consent and this Lease shall continue in full force and effect);

               (d) in the case of a proposed assignment of this Lease (except if such assignment is permitted without Owner’s consent pursuant to Section 48C or 48D), shall be deemed to have granted Owner the option, to be exercised within thirty (30) days after receipt of all items to be submitted by Tenant pursuant to this Section 48F(i) (other than, if applicable, the name, address, description and references that Tenant is permitted, pursuant to Section 48F(i)(a), to submit after the initial submission of information), to terminate this Lease upon the terms and conditions hereinafter set forth (provided that if Owner shall elect to terminate this Lease pursuant to this clause (d), then Tenant shall have the right, not later than five (5) Business Days after Owner’s termination notice, to retract its request for consent and this Lease shall continue in full force and effect); and

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               (e) shall not offer such space for assignment or subletting to anyone other than the proposed assignee or subtenant (unless no such proposed assignee or subtenant was identified and Tenant delivered a term sheet to Owner in advance of having identified a potential assignee or subtenant pursuant to Section 48F(i)(b)) until after thirty (30) days have elapsed after receipt by Owner of all items to be submitted by Tenant pursuant to this Section 48F(i).

               (iii) If Owner shall exercise an option to terminate this Lease in whole or in part (as applicable) pursuant to subsections (c) or (d) of Section 48F(i), such termination shall be effective as of the date specified in said notice (“termination date”) which shall be not earlier than one (1) day before the effective date of the proposed assignment or subletting nor later than ten (10) days after said proposed effective date. Tenant shall then vacate and surrender the part of the Demised Premises proposed to be sublet (in the case of a proposed sublease) or the entire Demised Premises (in the case of a proposed assignment), on or before the termination date and the Term of this Lease as to the part of the Demised Premises thereof proposed to be sublet (in the case of a proposed sublease) or as to the entire Demised Premises (in the case of a proposed assignment) shall end on the termination date as if that date were the Expiration Date. Owner shall be free to, and shall have no liability to Tenant if Owner should, lease the part of the Demised Premises proposed to be sublet or the entire Demised Premises, as the case may be, to Tenant’s prospective assignee or subtenant. If a part of the Demised Premises is surrendered to Owner pursuant hereto, Owner, at Tenant’s sole cost and expense, shall make such alterations as may be reasonably required physically to separate such surrendered space from the remainder of the Demised Premises and shall repair or restore to tenantable condition any part of the remainder of the Demised Premises which is physically affected by such separation (in each case, in compliance with all laws and ordinances and all requirements of mortgagees and insurance carriers); if necessary, Tenant shall afford Owner and its agents, tenants, under tenants or licensees reasonably appropriate means of ingress and egress to and from such surrendered space; and Owner and Tenant shall execute and deliver a supplementary agreement modifying this Lease, as of the day following such surrender, by eliminating such surrendered space from the Demised Premises, equitably reducing the rent allocable to the remaining portion of the Demised Premises and appropriately modifying the other terms of this Lease to reflect the elimination of such surrendered space from the Demised Premises. Failure by either party to execute such an agreement shall not affect the foregoing provisions of this subsection 48F(ii).

               (iv) In the event that Tenant shall have requested Owner’s consent to any such subletting or assignment and shall have submitted to Owner all items required by Section 48F(i), and Owner does not exercise its option to terminate this Lease, in whole or in part (as applicable), as referred to in Section 48F(i), or if Owner does not have such termination option, Owner’s consent to any such subletting or assignment, as the case may be, shall be granted or denied within thirty (30) days after Owner’s receipt from Tenant of all items to be submitted by Tenant pursuant to Section 48F(i) (other than, if applicable, the name, address, description and references that Tenant is permitted, pursuant to Section 48F(i)(a), to submit after the initial submission of

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information) and shall not be unreasonably withheld, provided that all of the following conditions have been satisfied:

               (a) In the reasonable judgment of Owner the proposed subtenant or assignee, as the case may be, is of a business character, and the proposed assignee has a financial worth, such as is in keeping with the standards of Owner for the Building, and the nature of the proposed subtenant’s or assignee’s business is in keeping with the character of the Building and its tenancies;

               (b) The purposes for which the proposed subtenant or assignee intends to use the Demised Premises or the applicable portion thereof are uses expressly permitted by and not prohibited by this Lease or by any other lease in the Building;

               (c) Tenant shall not have publicly advertised all or any part of the proposed premises for subletting or assignment, whether through a broker, agent, representative or otherwise, at a rental rate less than the rent at which Owner is then offering to lease comparable space in the Building; however, Tenant may negotiate and consummate a sublease or assignment at a lesser rate of rent (conditional on Owner’s consent);

               (d) The proposed occupancy shall not materially increase the office cleaning requirements or impose a material extra burden upon the Building equipment or building services beyond in each case the requirements of Tenant;

               (e) Any such subletting will result in there being no more than two (2) subtenants, in addition to Tenant and Tenant’s related corporations, on any single floor of the Demised Premises;

               (f) The proposed sublease or assignment shall prohibit any further assignment or subletting without Owner’s consent (which consent shall not be required if this Article states that such consent would not be required if such sublease or assignment were with respect to this Lease, and which consent shall not be unreasonably withheld if this Article states that such consent would not be unreasonably withheld if such sublease or assignment were with respect to this Lease) and without a true copy thereof having been submitted to Owner;

               (g) The proposed sublease shall be expressly subject and subordinate to all of the terms of this Lease;

               (h) Tenant shall not be in default beyond applicable notice and grace periods in the performance of any of its monetary or material non-monetary obligations under this lease at the time Owner’s consent to

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such subletting or assignment is requested or at the commencement of the term of any proposed sublease or upon the effective date of any such assignment;

               (i) Tenant shall reimburse Owner for any reasonable out-of-pocket third party costs that may be incurred by Owner in connection with said sublease or assignment as set forth in Section 48B;

               (j) The proposed subtenant or assignee shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity and shall be subject to the service of process in, and the jurisdiction of the courts of, New York State;

               (k) The proposed subtenant or assignee shall not be party who is negotiating or within the four (4) months immediately preceding Tenant’s request for Owner’s consent, has negotiated, with Owner or Owner’s agent (either directly or through a broker) for the rental of any space in the Building, unless Owner does not then have comparable space available for the proposed subtenant or assignee;

               (l) The term of any proposed sublease shall not be less than the shorter of (x) twelve (12) months or (y) substantially all the remainder of the Term;

               (m) Tenant or the subtenant, at its sole cost and expense, (x) shall provide to the subleased premises an independent means of access to and from the elevators and/or staircase on the floor as shall be necessary to comply with all applicable legal requirements and insurance requirements, and (y) shall be responsible for making any alterations to the Demised Premises to comply with the ADA as may be required as a result of such subletting; and

               (n) In the case of any proposed sublease for which Tenant has submitted a term sheet pursuant to Section 48F(i)(b)(l)(x), such sublease is entered into within six (6) months after such submission on substantially the same terms as set forth in such term sheet (provided that the net effective rental in such sublease shall be no less than ninety-three percent (93%) of the net effective rental set forth in such term sheet).

               (v) [Intentionally omitted.]

               (vi) With respect to each and every sublease or assignment authorized by the provisions of this Section, it is further agreed and understood between Owner and Tenant as follows:

               (a) No subletting shall be for a term ending later than one day prior to the Expiration Date and that part, if any, of the proposed term of any sublease or any renewal or extension thereof which shall extend

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beyond a date one day prior to the Expiration Date or the sooner termination of the Term shall be a nullity; and

               (b) There shall be delivered to Owner, within twenty (20) days after the effective date of the assignment or commencement of the term of the proposed sublease, as the case may be, notice of such commencement, in the case of a sublease, or notice of the effectiveness of such assignment, in the case of an assignment.

               (vii) In the event that (a) Owner fails to exercise any of its options under Section 48F(i) and 48F(ii) and consents to the proposed sublease or assignment and (b) the assignment or sublease to which Owner shall have consented does not become effective on or before the date which is ninety (90) days after the effective date set forth in the conformed or photostatic copy thereof furnished to Owner pursuant to Section 48F(i)(b), then Tenant shall again comply with all of the provisions and conditions of this Article 48 before assigning this Lease or subletting all or any part of the Demised Premises.

          G. Notwithstanding anything to the contrary contained herein, if Owner shall consent to any assignment or subletting and Tenant shall either (i) receive any consideration from its assignee for the assignment of this Lease, Tenant shall pay over to Owner fifty percent (50%) of such consideration (including, without limitation, sums designated by the assignee as paid for the purchase of Tenant’s property in the Demised Premises, including Tenant’s alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant’s federal income tax returns, or, if Tenant does not file such returns, on the same basis as carried on Tenant’s books) as shall exceed the reasonable brokerage commissions, free rent, tenant improvement costs and attorneys’ fees and disbursements actually incurred by Tenant for such assignment or (ii) sublet the Demised Premises or any portion thereof to anyone for rents, additional charges or other consideration (including, without limitation, sums designated by the subtenant as paid for the purchase of Tenant’s property in the Demised Premises, including Tenant’s alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant’s federal income tax returns or, if Tenant does not file such returns, on the same basis as carried on Tenant’s books) which for any period shall exceed the rents payable for the subleased space under this Lease for the same period, Tenant shall pay Owner, as Additional Rent, fifty percent (50%) of such excess less reasonable brokerage commissions, free rent, tenant improvement costs and attorneys’ fees and disbursements actually incurred by Tenant for such subletting, which shall be recouped from the first revenues received. All sums payable to Owner pursuant to clause (i) of this Section 48G shall be paid on the effective date of such assignment and all sums payable to Owner pursuant to clause (ii) of this Section 48G shall be paid on the date or dates such sums are paid to Tenant.

          H. If Owner shall recover or come into possession of the Demised Premises before the Expiration Date, Owner shall have the right, at its option, to take over any and all subleases of the Demised Premises or any part thereof made by

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Tenant and to succeed to all the rights of said subleases or such of them as it may elect to take over. Tenant hereby expressly assigns and transfers to Owner such of the subleases as Owner may elect to take over at the time of such recovery of possession, such assignment and transfer not to be effective until the termination of this Lease or reentry by Owner hereunder or if Owner shall otherwise succeed to Tenant’s estate in the Demised Premises, at which time Tenant shall upon request of Owner, execute, acknowledge and deliver to Owner such further assignments and transfers as may be necessary to vest in Owner the then existing subleases. Every sublease hereunder is subject to the condition that by its acceptance of and entry into a sublease, each subtenant thereunder shall be deemed conclusively to have thereby agreed from and after the termination of this Lease or reentry by Owner hereunder or if Owner shall otherwise succeed to Tenant’s estate in the Demised Premises, that such subtenant shall waive any right to surrender possession or to terminate the sublease and, at Owner’s election, such subtenant shall be bound to Owner for the balance of the term of such sublease and shall attorn to and recognize Owner, as its Owner, under all of the then executory terms of such sublease, except that Owner shall not (i) be liable for any previous act, omission or negligence of Tenant under such sublease, (ii) be subject to any counterclaim, defense or offset which theretofore accrued to such subtenant against Tenant, (iii) be bound by any previous modification or amendment of such sublease or by any previous prepayment of more than one month’s rent and additional rent which shall be payable as provided in the sublease, unless such modification or prepayment shall have been approved in writing by Owner, (iv) be obligated to repair the subleased space or the Building or any part thereof, in the event of total or substantial total damage beyond such repair as can reasonably be accomplished from the net proceeds of insurance actually made available to Owner, (v) be obligated to repair the subleased space or the Building or any part thereof, in the event of partial condemnation beyond such repair as can reasonably be accomplished from the net proceeds of any award actually made available to Owner as consequential damages allocable to the part of the subleased space or the Building not taken or (vi) be obligated to perform any work in the subleased space or the Building or to prepare them for occupancy beyond Owner’s obligations under this Lease, and the subtenant shall execute and deliver to Owner any instruments Owner may reasonably request to evidence and confirm such attornment. If Owner so elects to have such subtenant attorn to Owner, Tenant shall deliver to Owner any security deposit which Tenant is then holding under such sublease and such subtenant shall reimburse Owner for any costs that may be incurred by Owner in connection with such attornment, including reasonable attorneys’ fees and disbursements and the cost of making investigations as to the acceptability of such subtenant. Each subtenant or licensee of Tenant shall be deemed automatically upon, and as a condition of occupying or using the Demised Premises or any part thereof, to have given a waiver of the type described in, and to the extent and upon the conditions set forth in, Article 9(f).

          I. If, at any time after the Tenant named herein may have assigned its interest in this Lease, this Lease shall be disaffirmed or rejected in any proceeding of the types described in Article 16 or in any similar proceeding, or in the event of termination of this Lease by reason of any such proceeding or by reason of lapse of time following notice of termination given pursuant to Article 16 based upon any of

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the conditions of limitation set forth in said subdivisions, then (except to the extent the Tenant named herein has been expressly released from liability hereunder) the Tenant named herein upon request of Owner given within thirty (30) days after such disaffirmance, rejection or termination (and actual notice thereof to Owner in the event of a disaffirmance or rejection or in the event of termination other than by act of Owner), shall (i) pay to Owner all Fixed Annual Rent, Additional Rent and other charges due and owing by the assignee to Owner under this Lease to and including the date of such disaffirmance, rejection or termination, and (ii) as “tenant,” enter into a new lease with Owner of the Demised Premises for a term commencing on the effective date of such disaffirmance, rejection or termination and ending on the Expiration Date, unless sooner terminated as in such lease provided at the same Fixed Annual Rent and upon the then executory terms, covenants and conditions as are contained this Lease, except that (a) the rights of Tenant named herein under the new lease shall be subject to the possessory rights of the assignee under this Lease and the possessory rights of any persons claiming through or under such assignee or by virtue of any statute or of any order of any court, (b) such new lease shall require all defaults existing under this Lease to be cured by Tenant named herein with due diligence, and (c) such new lease shall require Tenant named herein to pay all additional rent which, had this Lease not been so disaffirmed, rejected or terminated, would have become due under the provisions of this Lease after the date of such disaffirmance, rejection or termination with respect to any period prior thereto at the time same would have been paid. In the event Tenant named herein shall default for a period of ten (10) days after Owner’s request in its obligations to enter into said new lease then, in addition to all other rights and remedies by reason of such default, either at law or in equity, Owner shall have the same rights and remedies against Tenant named herein as if it had entered into such new lease and such new lease had thereafter been terminated as at the commencement date thereof by reason of the default thereunder of Tenant named herein.

          J. Tenant shall indemnify and hold harmless Owner of and from any and all loss, costs, damage or expense (including, without limitation, reasonable attorneys’ fees and disbursements) incurred by Owner by reason of any claim of or liability to any real estate broker or other finder for a commission which may be due or payable on account of any proposed assignment or subletting.

     49. Services.

          A. HVAC. (i) Owner shall provide heating, ventilation and air conditioning to the Demised Premises during Business Hours through the HVAC System. The proper performance of the HVAC System is based upon a design to maintain interior conditions of 72 - 77 degrees Fahrenheit in the cooling season and 66 - 74 degrees Fahrenheit in the heating system, and to provide fresh air in a quantity not less than .14 (14/100) cubic feet per minute per square foot of floor area provided that in any given room the occupancy does not exceed one (1) person for each one hundred (100) square feet of usable area. Owner shall not be responsible if the normal operation of such systems shall fail to provide conditioned or heated air at reasonable temperatures, pressures or degrees of humidity or in reasonable volumes or velocities in any portions of

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the Demised Premises (a) which shall have an electrical load in excess of 4.5 watts per square foot of usable area for all purposes (including lighting and power), or which shall have a human occupancy factor in excess of one (1) person per one hundred (100) square feet of usable area or (b) if Tenant fails to abide by any of the provisions of this Article 49.

          (ii) Use of the Demised Premises, or any part thereof, in a manner exceeding the design conditions (including occupancy and connected electrical load) for air conditioning service in the Demised Premises, or the use of computer or data processing machines (other than desktop or personal computers or similar equipment), may require changes in the air conditioning system servicing the Demised Premises. Such changes so occasioned shall be made by Tenant, at its expense, as Tenant’s Changes pursuant to Article 3 and Article 42.

          (iii) Owner shall be responsible for the maintenance of the HVAC System and replacing the same at the end of each such unit’s useful life in accordance with generally accepted accounting principles (GAAP), consistently applied, or at such earlier time as the same shall require replacement in accordance with customary and prudent building management.

          (iv) Tenant agrees to keep and cause to be kept closed all windows in the Demised Premises whenever the air cooling system is in operation and Tenant at all times agrees to cooperate fully with Owner and to abide by all reasonable regulations and requirements which Owner may prescribe for the proper functioning and protection of its air conditioning system and Tenant agrees to keep the blinds closed at the appropriate times of day. Subject to the express provisions of this Lease governing Owner’s access rights in and to the Demised Premises, Owner shall have free access to any and all mechanical installations of Owner in the Demised Premises, including but not limited to air conditioning, fan ventilating and machine room and electrical closets. Tenant agrees that there shall be no construction or partitions or other obstructions which might interfere with Owner’s free access thereto, or interfere with the moving of Owner’s equipment to and from the enclosures containing said installations. Tenant agrees that neither Tenant, its agents, employees or contractors shall at any time enter the said enclosures or adjust, touch or otherwise in any manner tamper with Owner’s mechanical installations.

          (v) If Tenant shall have installed a supplemental cooling system to service the Premises, then said system shall be maintained in accordance with the terms and conditions set forth in Article 42 and at the sole cost and expense of Tenant, and Tenant shall pay to Owner, as Additional Rent, a per ton hook-up fee at Owner’s then-prevailing building standard charge therefor. In connection with any such system, Owner shall make available twenty-five (25) tons of condenser water per floor, on a 24/7 basis, and Owner’s condenser water system shall provide for wintertime waterside economizer operation.

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          (vi) So long as the same is at no cost to Owner (other than through the Owner’s Contribution) and does not materially adversely affect the operation of the HVAC System, the operation of any Building system or the Building, upon prior written notice to Owner Tenant shall have the right (a) to retrofit the HVAC System with variable speed controls for the fans to have VAV operation and (b) to install louvers, dampers and controls as may be required to provide adequate ventilation air to the Demised Premises.

          B. Access / Elevators.

          (i) Tenant shall have access to the Demised Premises seven (7) days a week, twenty-four (24) hours a day, three hundred sixty-five (365) days a year, subject to Owner’s reasonable rules regarding identification for access.

          (ii) Upon reasonable prior notice to Owner, Tenant shall have reasonable access to any and all installations or equipment of Tenant in the Building outside of the Demised Premises, including but not limited to the mechanical/electrical rooms on the 7th and 8th floors and any of Tenant’s telecommunications lines. All such access shall be made in a manner reasonably intended to minimize inconvenience to Owner, the Building and any other tenants or occupants of the Building, and that complies with then-existing security and safety policies. Tenant agrees that none of Tenant, its agents, employees or contractors shall at any time enter adjust, touch or otherwise in any manner tamper with Owner’s installations or property, and Tenant shall be responsible, at Tenant’s cost and expense, for avoiding and promptly remedying any and all damage resulting from or in connection with any access under this Section 49B(ii).

          (iii) Owner shall provide automatic operator-less passenger elevator service to the Office Space between the hours of 7:00 a.m. and 7:00 p.m. on Business Days. At all other times, at least one (1) elevator shall be in operation. Tenant understands that during construction, move-in and move-out times and in the event of other long usage periods, Tenant may be required to use the freight elevator before or after Business Hours. The use of freight elevator service during Business Hours is without additional charge, on a first-come first-served basis.

          C. Overtime Periods.

          (i) The Fixed Annual Rent does not reflect or include any charge to Tenant for the furnishing of any necessary freight elevator facilities or heating, ventilation and/or air-conditioning (“HVAC”) to the Demised Premises during periods (“Overtime Periods”) other than (a) during Business Hours, when seasonally required in respect of HVAC, and (b) from 9:00 a.m. to 12:00 noon and 1:00 p.m. to 5:00 p.m. in respect of freight elevator facilities. Accordingly, if Owner furnishes any such freight elevator facilities or HVAC to the Premises at the request of Tenant during Overtime Periods, Tenant shall pay Additional Rent to Owner for such services (except as otherwise provided in Section 49C(ii) below with respect to overtime HVAC), within thirty (30) days after demand, at Owner’s then established reasonable rates for the

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Building (which, as of the date hereof, are set forth in Exhibit E annexed hereto and made a part hereof, but such charges shall be subject to increase, from time to time, to reflect any increases in the then established rates charged by Owner to other tenants of the Building, provided, however that, in the case of freight elevator charges, such charges shall not exceed Ninety Dollars ($90.00) per hour (as adjusted by CPI from time to time)). Owner shall not be required to furnish any such services during any Overtime Periods unless Tenant shall notify Owner in writing of its requirement for such services prior to 2:00 p.m. of the day upon which such services are requested or by 2:00 p.m. of the last preceding Business Day if such Overtime Periods are to occur on a day other than a Business Day (but Owner will use reasonable efforts to accommodate Tenant’s requests if made after such time). If Tenant fails to give Owner such advance notice, then the failure by Owner to furnish or distribute any such services during such Overtime Periods shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rental, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant’s business or otherwise. Anything hereinabove to the contrary notwithstanding, Owner will not be required to provide any such services during Overtime Periods if Tenant is then in monetary default hereunder or in material non-monetary default hereunder beyond any applicable notice, grace and cure periods.

          (ii) If Tenant shall so request by written notice to Owner on or prior to November 30 of any calendar year during the Term, then for the following calendar year Owner shall provide heating, ventilation and air conditioning to one or both full floors of the Office Space (as directed by Tenant in such written notice) on a 24/7/365 basis. In consideration therefor, Tenant shall pay to Owner, as Additional Rent, an annual amount of Fifty Thousand and 00/100 Dollars ($50,000.00) per such floor, payable in equal monthly installments of $4,166.67 per such floor, commencing on the first day of such 24/7/365 service, and the overtime charge for HVAC set forth in Section 49C(i) shall no longer apply. After Tenant has made such request, unless Tenant shall notify Owner to the contrary by written notice prior to any succeeding November 30, then Tenant shall be deemed to have requested such 24/7/365 service for the following calendar year. Any request (or deemed request) by Tenant under this Section 49C(ii) shall be irrevocable with respect to the applicable calendar year. The charge set forth in this Section 49C(ii) shall be subject to CPI Increase on each five (5) year anniversary of the Commencement Date.

          D. Basement Space.

          (i) Tenant shall have one (1) option to lease an additional area of approximately 2,500 rentable square feet in the basement of the Building, provided that if Tenant shall so desire to lease such additional space Tenant shall so notify Owner on or prior to August 30, 2006. If Tenant shall so timely notify Owner, then this Lease shall be deemed amended as of the date that is five (5) Business Days after Owner’s receipt of such notice to increase the Basement Space, for all purposes of this Lease (including without limitation the Fixed Annual Rent payable therefor pursuant to Section

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37J(ii)), to include space in the basement, designated by Owner in a written notice to Tenant (which space may or may not be contiguous to the Basement Space denoted in the preamble to this Lease, and which space shall contain approximately 2,500 rentable square feet). Promptly thereafter, Owner and Tenant shall execute and deliver to each other a written agreement to confirm the same (but failure to execute and deliver such written agreement shall not vitiate the demise of such space).

          (ii) Notwithstanding any provision of this Lease to the contrary, Tenant’s occupancy of the Basement Space is subject to the following terms and conditions: (i) Tenant shall make no alterations, installations, additions or improvements of any kind in or to the Basement Space without Owner’s consent in each instance and except as otherwise is in accordance with the provisions of Article 42, (ii) Tenant shall use the Basement Space exclusively for storage and for no other purpose, (iii) Tenant shall in no event assign its rights with respect to the Basement Space or sublease the same or allow the same to be used by others without the prior written consent of Owner (except that such consent shall not be required for assignments or subleases undertaken as part of (and to the assignee or sublessee under) any assignment or sublease not requiring Owner’s consent pursuant to Article 48 or as to which Owner has provided consent pursuant to Article 48) and (iv) except for electricity for storage lighting purposes, Owner shall not be responsible for the rendition or delivery of any services or utilities to the Basement Space whatsoever, including without limitation electricity, water, heating, air cooling or cleaning. Tenant shall have no obligation to make repairs to the Basement Space unless (subject to Sections 9 and 44) Tenant or Tenant’s employees, contractors, agents, invitees or other representatives caused such damage.

          E. Directory. Owner, at Tenant’s request, shall maintain listings on any Building directory of the names of Tenant, permitted assignees or subtenants, and the names of any of Tenant’s officers and employees, provided, however, that the aggregate number of names so listed shall not exceed Tenant’s Proportionate Share of such directory (unless such directory is electronic). The reasonable charge of Owner for any changes in such listings requested by Tenant shall be paid by Tenant to Owner promptly after demand.

          F. Standards. Except to the extent that specific standards are set forth in this Lease, Owner shall operate, manage and maintain the Building, and provide services (including security) therein at a standard not less than that generally prevailing in the Building as of the date hereof.

     50. Compliance with Laws.

          Supplementing the provisions of Article 6 hereof, Tenant shall give prompt notice to Owner of any notice it receives of the violation of any law or requirement of any public authority with respect to the Demised Premises or the use or occupation thereof. Tenant shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments,

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departments, commissions and boards or any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters or any similar body which shall impose any violation, order or duty upon Owner or Tenant (any of the foregoing, a “Law”) with respect to the Demised Premises or any portion thereof, including any objection under the ADA (in any of which events Tenant shall effect such compliance at Tenant’s sole cost and expense), except that Tenant shall not be responsible for (i) any structural alterations required by any Law (other than the ADA) unless required by Tenant’s particular manner of use (as distinguished from general office use) or by reason of Tenant’s making any Tenant’s Changes or, subject to Section 9 or Section 44 hereof, Tenant’s default under this Lease, or (ii) the Building outside the Demised Premises (in which case, notwithstanding anything herein to the contrary, Owner shall effect such compliance at Owner’s sole cost and expense (except that Owner shall effect such compliance at the sole cost and expense of Tenant if and to the extent the need for such compliance arose out of Tenant’s particular use or manner of use of the Demised Premises or Tenant’s particular use or manner of use of the Building outside the Demised Premises)).

     51. Brokerage.

          Each of Owner and Tenant represents and warrants to the other that the sole brokers with whom it has dealt in connection with this Lease were the Brokers (as defined in Article 37), whose commission Owner agrees to pay, pursuant to separate agreement(s). Each of Owner and Tenant does hereby agree to indemnify and hold the other harmless of and from any and all loss, costs, damage or expense (including, without limitation, attorneys’ fees and disbursements) incurred by such other party by reason of any claim of or liability to any broker other than the Brokers who shall claim to have dealt with the indemnifying party in connection with the negotiation or consummation of this Lease.

     52. Miscellaneous.

          A. Tenant shall not at any time prior to or during the Term either directly or indirectly use any contractors or labor or materials whose use in Owner’s sole judgment would create or creates any difficulty with other contractors or labor employed by Tenant or Owner or others in the construction, maintenance or operation of the Demised Premises or the Building.

          B. If more than one person executes this Lease as Tenant, each of them understands and hereby agrees that the obligations of each of them under this Lease are and shall be joint and several, that the term “Tenant” as used in this Lease shall mean and include each of them jointly and severally and that the act of or notice from, or notice or refund to, or the signature of any one or more of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, expiration, termination or modification of this Lease shall be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of

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the persons executing this Lease had so acted or so given or received such notice or refund or so signed.

          C. Except with respect to the Existing Lease (as hereinafter defined), as to which the provisions of Article 63 shall apply, (i) this Lease supersedes all prior leases and agreements between Owner and Tenant with respect to space at the Building and (ii) all prior conversations or writings between the parties hereto or their representatives with respect to this Lease or the Demised Premises are merged herein and extinguished.

          D. Except as otherwise expressly set forth herein, this Lease may not be extended, renewed, terminated or otherwise modified except by an instrument in writing signed by the party against whom enforcement of any such modification is sought.

          E. Wherever in this Lease it is provided that either party shall not unreasonably withhold consent or approval or shall exercise its judgment reasonably, and if no specific time period is given, such consent or approval or exercise of judgment shall also not be unreasonably delayed or conditioned.

          F. This Lease is offered to Tenant for signature with the understanding that it shall not be binding upon Owner unless and until Owner shall have executed and unconditionally delivered to Tenant a fully executed copy of this Lease.

          G. Tenant hereby irrevocably waives any and all right(s) it may have in connection with any zoning lot merger or transfer or development rights with respect to the Demised Premises including, without limitation, any rights it may have to be a party to, to contest, or to execute, any Declaration of Restrictions (as such term is defined in Section 12-10 of the Zoning Resolution of the City of New York effective December 15, 1961, as amended) with respect to the Demised Premises, which would cause the Demised Premises to be merged with or unmerged from any other zoning lot pursuant to such Zoning Resolution or to any document of a similar nature and purpose, and Tenant agrees that this Lease shall be subject and subordinate to any Declaration of Restrictions or any other document of similar nature and purpose now or hereafter affecting the Land or the Building. In confirmation of such subordination and waiver, Tenant shall execute and deliver promptly any certificate or instrument that Owner may reasonably request.

          H. Nothing contained in Article 17 of the printed form shall be deemed to require Owner to give the notices therein provided for prior to the commencement of a summary proceeding for nonpayment of rent or a plenary action for the recovery of rent on account of any default in the payment of the same, it being intended that such notices are for the sole purpose of creating a conditional limitation hereunder pursuant to which this Lease shall terminate and if Tenant thereafter remains in possession or occupancy, it shall become a holdover tenant.

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          I. Subject to Section 41B, Owner reserves the right to suspend, delay or stop any of the services to be furnished and provided by Owner pursuant to the provisions of this Lease and/or extend the date for the performance by Owner of any obligation or undertaking provided for herein whenever necessary and for as long as reasonably required by reason of Force Majeure. Subject to Section 41B, Owner, from time to time, shall also have the right to interrupt the level of service provided by the Building systems to the extent reasonably necessary to accommodate the performance of repairs, additions, alternations, replacements or improvements that in Owner’s reasonable judgment are desirable or necessary. Owner shall use diligent efforts to give Tenant reasonable advance notice of any such interruption or curtailment and schedule any such interruption or curtailment at times that minimize, to the extent reasonably practicable, the effect of such interruption or curtailment on or curtailment on Tenant’s ability to conduct its business in the Demised Premises during Business Hours.

          J. In the event of a lease termination, default, re-entry or dispossess by summary proceedings pursuant to Article 17 of the printed form, the Owner may elect as damages, in lieu of liquidated damages under Section 18(c), accelerated rent (“Accelerated Rent”), discounted to present value as provided below:

               (a) Accelerated Rent shall be a sum equal to the aggregate of the Fixed Annual Rent and the Additional Rent payable hereunder which would have been payable by Tenant for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, had this Lease not so terminated or had Owner not so re-entered the Demised Premises, less the aggregate fair rental value of the Demised Premises for the same period.

               (b) The Accelerated Rent shall be discounted to the date payable at an annual interest rate equal to four percent (4%) per annum.

               (c) The amount of Additional Rent payable under clause (i) above shall be the Additional Rent payable pursuant to this Lease during the twelve month period immediately preceding the event of default, increased at the rate of 5% per annum for the balance of the Term.

               (d) If the Demised Premises or any part thereof be relet by Owner for the unexpired portion of the Term, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall, prima facie, be the fair rental value for the Demised Premises, or part thereof, so relet during the term of the reletting.

          K. This Lease shall not be modified except by a writing signed by the party to be charged, and which writing expressly refers to this Lease, nor (except as otherwise expressly provided herein) may this Lease be cancelled by Tenant or the Demised Premises surrendered except with the written express authorization of Owner.

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          L. The Article numbers, captions and table of contents appearing herein are inserted only as a matter of convenience and are not intended to define, limit, construe or describe the scope or intent of any Article, nor in any way affect this Lease.

          M. If any provision of this Lease or the application thereof to any person or circumstances shall to any extent be held void, unenforceable or invalid, then the remainder of this Lease or the application of such provisions to persons or circumstances other than those as to which it is held void, unenforceable or invalid shall not be affected thereby, and each provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.

          N. Words and phrases in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender.

          O. The rule of “ejusdem generis” shall not be applicable to limit a general statement following or referable to an enumeration of specific matters to matters similar to the matters specifically mentioned.

          P. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. In the event of any action, suit, dispute or proceeding affecting the terms of this Lease, no weight shall be given to any deletions or striking out of any of the terms of this Lease contained in any draft of this Lease and no such deletion or strike out shall be entered into evidence in any such action, suit, dispute or proceeding nor given any weight therein.

          Q. Tenant hereby acknowledges that (i) any statement of square footage set forth in this Lease is intended only as a reasonable approximation thereof and (ii) no representation is or shall in any way be deemed to have been made by Owner in this Lease with respect to any such statements.

          R. In the event any payment under this Lease shall be made in the form of a check from any person, firm or corporation other than the person, firm or corporation named in this Lease, the acceptance of same by Owner shall not, under any circumstances, be deemed recognition of a subletting or an assignment of this Lease, regardless of the number of times that such payment shall be made by such other person, firm or corporation.

          S. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions of this Lease, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this Lease of any particular remedy shall not preclude Owner or Tenant from any other remedy, at law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant’s being evicted or

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dispossessed, or in the event of Owner’s obtaining possession of the Demised Premises by reason of Tenant’s violation of the provision of this Lease. Tenant further agrees that it shall not interpose any counterclaim or counterclaims in a summary proceeding or in any other action or proceeding to evict the Tenant or otherwise recover possession of the Demised Premises and Tenant hereby waives the right to interpose any counterclaim or counterclaims in any such proceeding(s) except for statutory mandatory counterclaims.

          53. Estoppel Certificates.

               A. Tenant shall, without charge, at any time and from time to time, within ten (10) Business Days after request by Owner, the lessor under any Superior Lease and/or the holder of a Superior Mortgage, as the case may be, execute, acknowledge and deliver to Owner or any other person, firm or corporation reasonably specified by Owner, a written instrument (an “Estoppel Certificate”) in the form attached hereto as Exhibit C (with such changes as are reasonably necessary to make the provisions thereof true), having attached thereto a copy of this Lease and all amendments hereto, if any, or such other form as may be reasonably requested by Owner, the lessor under any such Superior Lease and/or the holder of any such Superior Mortgage.

               B. Owner shall, without charge, at any time and from time to time, within ten (10) Business Days after request by Tenant, execute, acknowledge and deliver to Tenant such estoppel certificate regarding this Lease as may be reasonably requested by Tenant.

          54. Legal Rent Restrictions.

               If any of the rents payable under the terms of this Lease shall be or become uncollectible, reduced or required to be refunded because of any applicable law, ordinance, order, rule, requirement or regulation, Tenant shall enter into such agreement(s) and take such other steps (without additional expense to Tenant) as Owner may request and as may be legally permissible to permit Owner to collect the maximum rents which from time to time during the continuance of such legal rent restriction may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (a) the rents shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination and (b) Tenant shall pay to Owner, to the maximum extent legally permissible, an amount equal to (i) the rents which would have been paid pursuant to this Lease but for such legal rent restriction less (ii) the rents paid by Tenant during the period such legal rent restriction was in effect.

          55. Right to Cure Defaults.

               If Tenant shall fail to comply fully with any of its obligations under this Lease (including, without limitation, its obligations to make repairs, maintain public liability and other insurance and comply with all legal requirements), Owner, without thereby waiving such default and without liability to Tenant, may, but shall not be obligated to, perform the same for the account and at the expense of Tenant without

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notice in case of emergency and upon five (5) days’ prior notice in all other cases. Owner may enter the Demised Premises at any time to cure any default. Bills for expenses incurred by Owner in connection with any such performance or involved in collecting or endeavoring to collect rent or enforcing or endeavoring to enforce any rights against Tenant under or in connection with this Lease or pursuant to law, including any costs, expense and disbursement involved in instituting and prosecuting summary proceedings, as well as bills for any property, material, labor or services provided, furnished or rendered, including reasonable attorneys’ fees and disbursements, together with interest on the amount of such costs, expenses and disbursements at the Default Rate, shall be paid by Tenant as Additional Rent upon demand.

          56. Consents.

               Wherever in this Lease Owner’s consent or approval is required and Owner agrees that such consent or approval shall not be unreasonably withheld, if Owner shall refuse such consent or approval Tenant in no event shall be entitled to and shall not make any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any assertion by Tenant that Owner unreasonably withheld or unreasonably delayed its consent or approval. Tenant’s sole remedy in such circumstance shall be an action or proceeding to enforce any such provision by way of specific performance, injunction or declaratory judgment (except that Tenant shall be entitled to recover its actual reasonable out-of-pocket legal fees from Owner if it is finally judicially determined that Owner withheld or delayed its consent or approval in bad faith).

          57. Cleaning.

               A. During the Term, Owner, at no additional charge to Tenant, shall provide janitorial and cleaning services to the Office Space substantially in accordance with the Cleaning Specifications set forth in Exhibit B annexed hereto and made a part hereof. Owner shall not be required to provide janitorial or cleaning services to the Basement Space.

               B. Owner reserves the right to charge Tenant for the cost of removal of any of Tenant’s refuse and rubbish in excess of that typically resulting from ordinary office use (including, but not limited to, wooden or metal packaging materials) from the Building.

               C. If Owner permits Tenant to store, prepare, serve or consume food or beverages in the Demised Premises other than in ordinary pantry use, Tenant, at Tenant’s expense, shall cause all portions of the Demised Premises used for such storage, preparation, service or consumption of food or beverages to be cleaned daily in a manner reasonably satisfactory to Owner, and to be exterminated against infestation by vermin, roaches or rodents regularly and, in addition, whenever there shall be evidence of any infestation. Any cleaning of the Demised Premises by Tenant, whether required by Owner or otherwise, shall be by Tenant’s own employees or by a

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contractor approved by Owner (not to be unreasonably withheld) in writing, and shall be at Tenant’s expense without any credit against Fixed Annual Rent or Additional Rent or contribution by Owner.

               D. Tenant acknowledges and is aware that any cleaning services required to be furnished by Owner pursuant to this Lease may be furnished by a contractor or contractors employed by Owner and agrees that Owner shall not be deemed in default of any of its obligations under this Article 57 unless such default shall continue for an unreasonable period of time after notice from Tenant to Owner setting forth the specific nature of such default.

          58. Notices.

               Except as otherwise expressly provided in this Lease, every notice, demand, consent, approval, request or other communication (collectively, “notices”) which may be or is required to be given under this Lease or by law shall be in writing and shall be personally delivered by hand, sent by United States certified or registered mail, postage prepaid, return receipt requested, or sent by nationally-recognized overnight courier service, and shall be addressed:

                    (ii) If intended for Owner, to Owner’s address set forth on the cover page hereof (or to such other address or addresses as may from time to time hereafter be designated by Owner by like notice) with a copy to Owner’s attorney at the following address:

Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019-6064
Attn: Allen M. Wieder, Esq.
Ref.: 15537-006

                    (iii) If intended for Tenant, to Tenant’s address set forth on the cover page hereof until the date that Tenant occupies the Demised Premises for the conduct of its business, and thereafter at the Demised Premises (or to such other address or addresses as may from time to time hereafter be designated by Tenant by like notice) with a copy to Tenant’s attorney at the following address:

Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154
Attn: Scott I. Schneider, Esq.

               B. Except as otherwise provided herein, all such notices shall be deemed to have been served or delivered on the date when personal delivery is made or refused, or on the next Business Day if sent by nationally-recognized overnight courier service, or three (3) Business Days after being deposited in the United States mail. A notice given by counsel for Owner shall be deemed a valid notice if addressed and sent in

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accordance with the provisions of this Article. Each of the parties hereto waives personal or any other service other than as provided for in this Article. Notwithstanding the foregoing, either party hereto may give the other party oral notice of the need for emergency repairs.

          59. Security Deposit.

               A. Supplementing Article 34, Tenant shall, immediately upon the execution of this Lease, deliver to Owner as and for the security described in such Article 34 and in this Article 59 (the “Security Deposit”) an irrevocable letter of credit (the “Letter of Credit”) issued or confirmed by (x) JPMorgan Chase Bank, N.A., (y) another bank that is a member of the Clearing House Association or (z) another commercial bank acceptable to Owner in Owner’s reasonable discretion, and in substantially the form of the letter of credit annexed hereto as Exhibit D, in the amount of One Million Six Hundred Eighty Thousand and 00/100 Dollars ($1,680,000.00) (which amount shall be subject to Section 59B). The Letter of Credit shall (i) initially expire not less than one (1) year from the date of issuance thereof, (ii) provide for automatic renewals for periods of not less than one (1) year unless notice of non-renewal is given to Owner at least sixty (60) days prior to the expiration date thereof, and (iii) have a final expiration date not less than four (4) months after the Expiration Date. Tenant shall pay to Owner, on demand and as Additional Rent hereunder, all fees and charges paid by Owner to the bank issuing the Letter of Credit in connection with the transfer of same to any future owner of the Building or of the lessee’s interest under any Superior Lease. In the event of a default by Tenant in the performance of any of the terms, provisions and conditions of this Lease which continues beyond applicable periods of notice and grace, Owner shall be permitted to draw down any portion or the entire amount of the Letter of Credit and apply the proceeds or any part thereof in accordance with Article 34 of this Lease and retain the balance for the Security Deposit. Owner shall also have the right to draw down any portion or the entire amount of the Letter of Credit if Owner receives notice that the date of expiration will not be extended by the issuing bank and if a replacement letter of credit meeting the requirements of this Article is not delivered by Tenant within ten (10) Business Days thereafter, and may retain the proceeds as and for the Security Deposit. If Owner draws down any portion of the whole amount of the Letter of Credit for the payment of any Fixed Annual Rent, Additional Rent or any other sums as to which Tenant is in default, or for any sum that Owner may expend or be required to expend by reason of any default by Tenant (including, without limitation, any damage or deficiency accrued before or after summary proceedings or other re-entry by Owner) as provided in this Lease, Tenant shall deliver to Owner, within seven (7) Business Days after Owner’s demand, a replacement Letter of Credit in the amount of the Security Deposit and otherwise complying with the requirements of this Article 59 or an amendment to the existing Letter of Credit reinstating same to the amount required hereby. Tenant’s failure to comply with the provisions of this Article 59 on a timely basis will entitle Owner to exercise all the same remedies as are available to Owner in the event of a default by Tenant in the payment of Fixed Annual Rent.

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               B. Notwithstanding any provision of Article 34 or this Article 59 to the contrary, Tenant will be permitted to reduce the amount of the Security Deposit to (i) One Million Two Hundred Sixty Thousand and 00/00 Dollars ($1,260,000.00) on or after July 1, 2009, (ii) to Eight Hundred Forty Thousand and 00/100 Dollars ($840,000.00) on or after July 1, 2012 and (iii) to Five Hundred Sixty Thousand and 00/100 Dollars ($560,000.00) on or after July 1, 2015; provided, however, that no such reduction in the Security Deposit shall be permitted if (x) on the date of the requested reduction any monetary default or material non-monetary default shall exist, (y) more than twice in the preceding twenty-four (24) months Owner shall have validly given Tenant written notice of default by Tenant in the payment of Fixed Annual Rent or of Additional Rent due under Section 38 or (z) Owner shall have previously drawn any portion of the Letter of Credit in accordance with the provisions of this Article 59 other than due to non-extension thereof by the issuing bank. Upon any such reduction, Owner will accept a replacement Letter of Credit in the reduced amount in exchange for the existing Letter of Credit, or, at the sole cost and expense of Tenant, will consent to an amendment of the Letter of Credit reducing the amount thereof to the proper reduced amount.

          60. Options to Extend Term.

               A. (i) Subject to the provisions of Sections 60E and 60I hereof, Tenant shall have the right to extend the term of this Lease, with respect to (at Tenant’s election) (x) the entire Demised Premises or (y) a portion of the Demised Premises consisting of one or more contiguous whole floors, for one (1) additional term of five (5) years (the “Extension Term”), commencing on the day immediately following the Expiration Date (the “Extension Term Commencement Date”) and ending on the day preceding the fifth (5th) anniversary of such Extension Term Commencement Date, provided that:

                    (a) Tenant shall give Owner written notice (hereinafter called the “Extension Notice”) of its election to extend the term of this Lease for an Extension Term at least twelve (12) months (but no more than twenty-four (24) months) prior to the then-applicable Expiration Date;

                    (b) The Extension Notice states Tenant’s irrevocable election of clause (x) or clause (y) above (but in no event any partial floors) and whether Tenant elects to include the Basement Space;

                    (c) Tenant is not in default under this Lease beyond the expiration of applicable notice and cure periods as of the time of the giving of the Extension Notice; and

                    (d) As of the Extension Term Commencement Date, the Tenant named herein or a related corporation or successor corporation thereof shall be the “Tenant” under this Lease and no portion of the Demised Premises for which the extension is elected shall be sublet (except to a related corporation or successor corporation of the Tenant named herein).

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                    (ii) The Fixed Annual Rent payable by Tenant to Owner during the Extension Term (the “Extension Term Fixed Rent”) shall be equal to ninety-five percent (95%) of the fair market rent for the applicable portion of the Demised Premises, determined as of the date occurring six (6) months prior to the Extension Term Commencement Date. The Extension Term Fixed Rent shall be determined initially by Owner in a notice to Tenant (herein called “Owner’s Rent Notice”), which notice shall contain Owner’s determination of the Extension Term Fixed Rent, and which notice shall be delivered to Tenant not later than sixty (60) days after Tenant’s giving of the Extension Notice.

                    (iii) In determining the Extension Term Fixed Rent (as well as for purposes of computing the amounts payable by Tenant under Article 38 during the Extension Term), Owner, Tenant and any arbitrator shall assume or take into consideration as appropriate all of the following: (A) Owner and Tenant are typically and similarly motivated; (B) Owner and Tenant are well informed and well advised and each is acting in what it considers its own best interest; (C) no time will be necessary for exposure of the applicable portion of the Demised Premises on the open market or for possible vacancy before the same is relet; (D) the rent is unaffected by special financing amounts and/or terms, or unusual services, fees, costs or credits in connection with the leasing transaction; (E) the applicable portion of the Demised Premises is fit for immediate occupancy and use “as is” and require no additional work or contribution by Owner; (F) in the event the Demised Premises have been destroyed or damaged by fire or other casualty, they have been fully restored to the extent required under this Lease; (G) that the applicable portion of the Demised Premises is to be let with vacant possession and subject to the provisions of this Lease (including without limitation, that the Base Real Estate Taxes and Base Wage Rate are the same as that set forth in Article 38 of the Lease), except that Tenant’s Percentage shall be appropriately adjusted to reflect the portion of the Demised Premises to be demised during the Extension Term; (H) market rents then being charged for comparable space in other similar office buildings in the same area; (I) that there will be no work allowance or other work concession, all as more particularly provided in Section 60D; and (J) all other relevant factors.

               B. (i) If Tenant fails to dispute the amount of the Extension Term Fixed Rent specified in Owner’s Rent Notice within forty-five (45) days after the giving of such notice, time being deemed of the essence, then Owner’s determination of Extension Term Fixed Rent set forth in Owner’s Rent Notice shall be conclusive. If Tenant shall duly and properly dispute the amount of the fair market rent specified in Owner’s Rent Notice by notice delivered to Owner (the “Notice of Dispute”) not later than forty-five (45) days after the giving to Tenant of Owner’s Rent Notice, then Owner and Tenant shall endeavor in good faith to agree as to the amount of the Extension Term Fixed Rent during the thirty (30) day period following the giving of Tenant’s Notice of Dispute. In the event that Owner and Tenant cannot agree as to such amount within such thirty (30) day period, then Owner or Tenant may initiate the arbitration process provided for herein by giving notice to that effect to the other (such initiating party hereinafter called the “Initiating Party”) and specifying in such notice the name and address of the arbitrator designated by the Initiating Party to act on its behalf. Within

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twenty (20) days after the designation of the arbitrator by the Initiating Party, the other party hereto shall give notice to the Initiating Party specifying the name and address of the arbitrator designated to act on its behalf. If the other party fails to notify the Initiating Party of the appointment of its arbitrator within such twenty (20) day period, the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator in the case where the two arbitrators appointed hereunder are unable to agree upon such appointment. The two arbitrators so chosen shall meet within ten (10) days after the second arbitrator is appointed and if, within thirty (30) days after the second arbitrator is appointed, the two arbitrators shall not agree upon a determination in accordance with Section 60B(iii) they shall together appoint a third arbitrator (which third arbitrator shall not have been employed by either party or their affiliates during the period of two (2) years prior to the date of the arbitration proceeding). If said two arbitrators cannot agree upon the appointment of a third arbitrator within ten (10) days after the expiration of such thirty (30) day period, the third arbitrator shall be selected by the parties themselves if they can agree thereon within a further period often (10) days. If the parties do not so agree, then either party, on behalf of both and on notice to the other, may request such appointment by the American Arbitration Association (or any successor organization) in accordance with its then prevailing rules. If the American Arbitration Association shall fail to appoint said third arbitrator within fifteen (15) days after such request is made, then either party may apply, on notice to the other, to the Supreme Court, New York County, New York (or any other court having jurisdiction and exercising functions similar to those now exercised by the foregoing court) for the appointment of such third arbitrator. Upon the appointment of the third arbitrator, the arbitrators shall give written notice thereof to Owner and Tenant.

                    (ii) Each of the arbitrators selected as herein provided shall have at least ten (10) years experience in the leasing and renting of first class office buildings in the Borough of Manhattan. Each party shall pay the fees and expenses of the arbitrator appointed by or for such party. The fees and expenses of the third arbitrator and all other expenses (not including the attorneys’ fees, witness fees and similar expenses of the parties which shall be borne separately by each of the parties) of the arbitration shall be borne equally by the parties hereto.

                    (iii) Within five (5) days after receiving notice of the appointment of the third arbitrator, each of Owner and Tenant shall submit to the arbitrators its written proposal of the Extension Term Fixed Rent (it being agreed that Owner’s submission may be more than, equal to or less than the amount set forth in Owner’s Rent Notice). Each arbitrator shall render its decision as to the Extension Term Fixed Rent (which may be only the proposal submitted by Owner or the proposal submitted by Tenant, and not any other amount) within twenty (20) days after the appointment of the third arbitrator and shall furnish a copy thereof to both Owner and Tenant. The decision of the majority of the arbitrators shall be conclusively determined to be the Extension Term Fixed Rent. In rendering such decision and award, the arbitrators shall not modify the provisions of this Lease (including, without limitation, the provisions of Section 60A(iii)). The decision and award of the arbitrators shall be in writing and be final and conclusive on all parties and counterpart copies thereof shall be

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delivered to each of said parties. Judgment in any court of competent jurisdiction may be had on the decision and award of the arbitrators so rendered.

               C. In the event Owner or Tenant initiates the arbitration process pursuant to Section 60B hereof and as of the applicable Extension Term Commencement Date the amount of the Extension Term Fixed Rent has not been determined, Tenant shall pay the amount of the Extension Term Fixed Rent originally set forth in Owner’s Rent Notice to Tenant, and promptly after such determination has been made, an appropriate retroactive adjustment, if necessary, shall be made as of the Extension Term Commencement Date.

               D. Except as provided in Section 60A hereof, Tenant’s occupancy of the applicable portion of the Demised Premises during the Extension Term shall be on the same terms and conditions as were in effect as of the day prior to the Extension Term Commencement Date, provided, however, that (a) Tenant shall have no right to extend the term of this Lease beyond the day preceding the twenty (20) year anniversary of the Commencement Date, (b) Tenant shall not be entitled to any free rent or concessions with respect to any Extension Term (but such fact shall be considered in connection with the fair market rent determination) and (c) Owner shall not be required to perform any work or furnish any materials to prepare the Demised Premises for Tenant’s occupancy during any Extension Term (but such fact shall be considered in connection with the determination of Extension Term Fixed Rent).

               E. If Tenant does not send an Extension Notice when and as required pursuant to the provisions of Section 60A hereof, this Article 60 shall have no further force or effect and shall be deemed deleted from this Lease. Time is of the essence as to the date for the giving of the Extension Notice. The termination of this Lease shall also terminate and render void any option or right on Tenant’s part to extend the term of this Lease, whether or not such option or right shall have theretofore been exercised.

               F. If Tenant exercises its right to extend the term of this Lease for the Extension Term pursuant to this Article 60, then from and after the commencement of the Extension Term the term “Expiration Date” shall be deemed to be extended to the last day of the Extension Term, the term “the Term” and the phrases “the term of this Lease” or “the term hereof” as used in this Lease, shall be construed to include the Extension Term, the term “Demised Premises” shall be construed to include only the portion of the Demised Premises elected by Tenant in the Extension Notice and, if less than that originally demised hereunder, the term “Tenant’s Percentage” shall be appropriately adjusted.

               G. If this Lease is renewed for the Extension Term, then, at the request of either party, each of Owner and Tenant agrees within ten (10) days after such request is made, to execute, acknowledge and deliver to the other an instrument in form and substance reasonably satisfactory thereto, confirming (i) the Extension Term Fixed Rent payable under this Lease pursuant to this Article 60, unless the Extension Term Fixed Rent is then being determined in accordance with the provisions of this Article 60,

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in which case each of Owner and Tenant agrees to execute, acknowledge and deliver a separate instrument confirming the Extension Term Fixed Rent as finally determined, (ii) the expiration date of the Extension Term, (iii) the portion of the Demised Premises demised during the Extension Term and the applicable new Tenant’s Percentage and (iv) the other modifications, if any, provided for in this Article 60, but no such instrument shall be required in order to make the provisions hereof effective.

               H. Tenant covenants and agrees that upon exercising the Extension Term it will identify the Brokers, and only the Brokers, as its brokers for the Extension Term. The Brokers are intended to be third party beneficiaries of this Section 60H.

               I. Notwithstanding any provision of this Article 60 to the contrary, if at any time prior to the delivery by Tenant to Owner of the Extension Notice Owner shall in good faith notify Tenant in writing that Owner intends to demolish the Building between the fifteen (15) and twenty (20) year anniversaries of the Commencement Date, then from and after receipt of such notice Tenant shall have no rights to extend the Term pursuant to this Article 60.

          61. Right of First Offer and Expansion Option.

               A. Owner agrees that, provided that Tenant is not then in monetary default or material non-monetary default under this Lease beyond the expiration of applicable notice and cure periods, prior to making an offer to any Person other than Tenant for the leasing for commercial occupancy of (i) any whole or partial floor of the Building contiguous to the then-existing Demised Premises at any time during the Term or (ii) the entire rentable space of one (1) whole floor of the Building not contiguous to the then-existing Demised Premises at any time between March 1, 2008 and June 30, 2017, Owner will first offer to Tenant the right to lease such space (the “Additional Space”) as set forth in this Article 61 (such offer, the “First Offer”). Notwithstanding the generality of the foregoing, Owner and Tenant hereby expressly acknowledge and agree that the right being granted to Tenant in this Article 61 shall not apply to any offer by Owner (x) to renew or extend the lease of, or enter into a new or replacement lease with, any tenant (on the date hereof or at any time in the future) of all or any portion of the Additional Space (whether or not such renewal or extension is provided for in the then-existing lease of such tenant), (y) to any tenant in the Building which on the date of this Lease has a right of first offer or right of first refusal with respect to, or has an option to lease any portion of, such Additional Space or (z) to lease any whole floor of the Buildings not contiguous to the then-existing Demised Premises after the first First Offer is made by Owner under clause 61 A(ii) above. The Fixed Annual Rent payable by Tenant to Owner with respect to the Additional Space (the “Additional Space Fixed Rent”) shall be equal to the fair market rent therefor determined as of the date occurring six (6) months prior to the Additional Space Commencement Date (as hereinafter defined), and shall otherwise be determined in the same manner as that set forth in Article 60 for determining the Extension Term Fixed Rent (including, without limitation, the arbitration process specified therein and Tenant’s obligation to pay

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an amount equal to Owner’s determination of the Additional Space Fixed Rent until a final determination thereof (subject to an appropriate retroactive adjustment, if necessary)).

               B. The First Offer shall be made, if and when applicable, by Owner notifying Tenant of the availability of the Additional Space prior to entering into binding negotiations with a third party in connection with the leasing thereof, which notice (the “Offer Notice”) shall state the rentable square footage of the Additional Space to be demised, the estimated date upon which such Additional Space will be ready for occupancy (the “Additional Space Commencement Date”) and Owner’s determination of Additional Space Fixed Rent. Notwithstanding anything herein to the contrary, the Additional Space Commencement Date for any Additional Space to be demised pursuant to clause (ii) of Section 61A shall in no event be less than one hundred (180) days after the date of the Offer Notice with respect thereto. Within ten (10) Business Days after the giving to Tenant of the Offer Notice, Tenant shall either (i) accept the First Offer by written notice to such effect given to Owner within such ten (10) Business Day period (“Tenant’s Acceptance Notice”), or (ii) waive any right to lease such Additional Space (subject to Section 61E), and Tenant’s failure duly to respond in writing within such ten (10) Business Day period shall be deemed a waiver of any rights to lease the Additional Space. Any exercise by Tenant of its option to lease the Additional Space shall be subject to the further limitation that Tenant shall have no right to exercise its option to lease less than the entirety of the Additional Space offered. Time shall be of the essence with respect to the delivery of Tenant’s Acceptance Notice to Owner’s First Offer within the ten (10) Business Day period above provided.

               C. If Tenant shall duly deliver Tenant’s Acceptance Notice as aforesaid, Tenant shall accept the Additional Space to be demised on the Additional Space Commencement Date, upon all of the terms and conditions of this Lease, except as the same have been modified pursuant to this Article 61 with respect to the Additional Space. As soon as is practicable following the Additional Space Commencement Date, Owner and Tenant each agree to execute and deliver to the other an amendment to this Lease specifying the changes to this Lease required by Tenant’s exercise of the First Offer but the obligation of Tenant to make payment to Owner for and on account of the Additional Space and to comply with all of the obligations of Tenant hereunder with respect thereto shall be and remain in effect notwithstanding any delay or failure to execute and deliver such agreement.

               D. If Owner is unable to give possession of the Additional Space to be demised pursuant to the Offer Notice on the Additional Space Commencement Date because of the holding over or retention of possession of any tenant, undertenant or occupant or for any other reason, Owner shall have no liability therefor and the validity of this Lease and the demise of the Additional Space shall not be impaired under such circumstances, nor shall the same be construed in any way to extend the term of this Lease or the term of Tenant’s occupancy of the Additional Space, but (i) the rent payable for such Additional Space shall be fully abated (provided Tenant is not responsible for the inability to obtain possession) until the date on which such Additional

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Space is available for Tenant’s occupancy and (ii) if Owner has not delivered possession of such Additional Space to Tenant on or before the date that is one hundred eighty (180) days after the Additional Space Commencement Date, then Tenant shall have the option to cancel Tenant’s acceptance of the First Offer upon thirty (30) days prior written notice to Owner given at any time prior to such delivery unless Owner shall have delivered possession to Tenant on or before the expiration of such thirty (30) day period. The provisions of this Article are intended to constitute “an express provision to the contrary” within the meaning of Section 223-a of the New York Real Property Law.

               E. If Tenant waives or is deemed to have waived (through failure to respond within the required time period) Tenant’s rights with respect to the Additional Space as set forth in this Article 61 or, in the event Tenant shall have exercised its right and Tenant shall not have executed an amendment to this Lease as aforesaid within thirty (30) days after the date of Tenant’s delivery of Tenant’s Acceptance Notice, then and in either such event, Owner shall be free to lease the Additional Space to others on generally comparable terms (except that the base rental rate may be as much as seven percent (7%) lower than that contained in the Offer Notice, taking into account any free rent, any landlord’s contributions and the base years for real estate taxes and operating expense escalations), in whole or in part or in conjunction with other space and Owner shall have no further obligations to Tenant under this Article 61. If Tenant so waives or is deemed to have waived any rights to lease the Additional Space, Tenant, upon Owner’s request, shall confirm such fact in writing to Owner as soon as practicable. Notwithstanding that Tenant has terminated, waived or is deemed to have waived any rights to lease Additional Space, the applicable provisions of Section 61A shall again apply to any subsequent offers by Owner to lease the same Additional Space for commercial occupancy (i) after the expiration or termination of any lease for such Additional Space entered into with another party pursuant to this Section 61E, (ii) after the date that is two hundred seventy (270) days after the date of such termination, waiver or deemed waiver or (iii) with a base rental rate more than seven percent (7%) lower than that contained in the Offer Notice.

               F. If Tenant exercises the option to lease Additional Space, then (upon Tenant’s reasonable request therefor) Owner shall use commercially reasonable efforts to reconfigure (or, at Owner’s option, to permit Tenant to reconfigure) the building systems to the extent reasonably possible to enable the building systems that serve the Additional Space to integrate with the building systems that serve the other portions of Demised Premises; provided, however, that Owner shall not have any obligation to use such reasonable efforts to reconfigure (or permit Tenant to reconfigure) building systems to the extent that such reconfiguration has a material and adverse effect on such building systems. Any work under this Section 61F shall comply with all applicable provisions of this Lease. Tenant shall reimburse Owner for any actual third party out-of-pocket costs that Owner incurs under this Section 61F, within thirty (30) days after Owner’s request therefor (together with reasonable supporting documentation for such costs).

          62. Riser, Shaft and Conduit Space; Roof Premises.

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               A. Owner shall continue to make available to Tenant during the Term the riser, shaft and conduit space currently used by Tenant with respect to the Office Space pursuant to the Existing Lease.

               B. (i) Owner hereby leases to Tenant, without charge, one hundred (100) square feet of space on the rooftop of the Building, as shown on Exhibit F attached hereto and hereby made a part hereof (the “Roof Premises”). Owner hereby agrees to cooperate with any request of Tenant to relocate the Roof Premises to another portion of the roof, at Tenant’s sole cost and expense, so long as such replacement space is available and is of comparable size, does not interfere with any other party’s use and occupancy of its premises or any other portion of the roof and does not interfere with any Building system.

                    (ii) Tenant shall use the Roof Premises only for the installation, operation and maintenance of telecommunications equipment, associated antennae, base stations, dishes, switches, power supplies, batteries and accessories (the “Installation”). The Installation or other property attached to or otherwise brought onto the Roof Premises shall at all times remain Tenant’s personal property and are not considered fixtures. Tenant, at its sole cost and expense, shall be responsible for obtaining electrical service for the Installation from the utility company servicing the Building and shall pay for such electricity, on a submetered basis, in accordance with the applicable provisions of this Lease. Tenant shall be responsible, at its own cost and expense, to install and maintain any submeters necessary for the metering of the electric consumption of the Installation. Owner, at Tenant’s sole cost and expense, shall make available to Tenant the panel boards, feeders, conduits and risers in the Building as may be necessary in order to bring electric energy to the Installation.

                    (iii) Any placement of the Installation on the Roof Premises shall be deemed to be a Tenant’s Change and shall be subject to all applicable provisions of this Lease. Tenant shall be responsible for obtaining and maintaining, at Tenant’s expense, any local, state, and federal licenses, permits and any other approvals which may be required to allow Tenant to use the Roof Premises and the Installations (and Owner shall cooperate therewith, so long as Tenant reimburses Owner for Owner’s actual, reasonable third-party out-of-pocket costs in connection therewith). Tenant shall employ due diligence to obtain and maintain said approvals within a timely manner.

                    (iv) Landlord agrees to provide Tenant, Tenant’s employees and authorized agents, at reasonable times and on reasonable notice (which may be oral), access to the Roof Premises.

                    (v) The Installation may be removed by Tenant at any time during the Term, and, in such event, Tenant shall be responsible, at its sole cost and expense, to repair any damage to the Roof Premises resulting from Tenant’s removal of the Installation. Furthermore, Tenant shall repair any damage to the Roof Premises

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caused by Tenant or the Installation during the Term, ordinary wear and tear and damage from the elements excepted, and said obligation shall survive the expiration or sooner termination of the Lease.

                    (vi) In the event that Landlord elects, in its sole discretion, to construct additional floors to the Building above the Roof Premises, Landlord shall provide Tenant with comparable square footage on the new roof of the Building (the “New Roof Premises”) promptly following the completion of any such addition and Tenant may, at its sole cost and expense, move the Installation to the New Roof Premises. If Tenant shall fail to so move the Installation, Tenant’s right to lease the New Roof Premises shall be deemed waived. Landlord shall not be responsible or liable in any manner whatsoever, for any costs, damages, abatements and/or set-offs (including, without limitation, due to lost profits) due to, or otherwise as a consequence of, an interruption in the use and occupancy of the Roof Premises during such construction period or the New Roof Premises not being adequate for Tenant’s uses.

                    (vii) Tenant agrees not to cause any unreasonable interference to the telecommunication operation of Landlord or any other tenants or service providers in the Building. Tenant shall operate the Installation in compliance with all applicable Federal Communications Commission (FCC) regulations. If Tenant shall fail to comply with the provisions of this Section 62B(vii) promptly after notice, Owner shall have the right to remove the Installation, and Tenant shall promptly after demand reimburse Owner for the actual and reasonable out-of-pocket third party costs incurred in connection therewith.

                    (viii) Notwithstanding any provision in this Lease to the contrary, Tenant may not sublet or assign any portion of the Roof Premises (except in connection with an assignment of this Lease in accordance with the terms hereof) without the prior written consent of Owner, which consent may be withheld by Owner in its sole discretion.

          63. Termination of Existing Lease.

               A. Owner and Tenant are parties to that certain Agreement of Lease dated as of December 12, 1996 initially between F.S. Realty Corporation, as landlord, and GT Interactive Software Corp., as tenant, as amended by that certain First Amendment of Lease dated as of July 1, 1997, with respect to the 7th, 8th and 9th floors of the Building (the “Existing Lease”). Notwithstanding any provision of the Existing Lease to the contrary:

(i) the Existing Lease shall terminate with respect to the 7th and 8th floors of the Building as of June 30, 2006;

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(ii)	the Existing Lease shall terminate with respect to that portion of the 9th floor of the Building depicted on Exhibit G attached hereto (the “Midtown Equities Space”) as of June 30, 2006;
(iii)	the Existing Lease will terminate with respect to the portion of the 9th floor of the Building other than the Midtown Equities Space (the “9th Floor Remainder Space”) as of the date (the “9th Floor Termination Date”) that is the earlier of (x) June 30, 2007 and (y) a date designated by Tenant upon not less than ninety (90) days’ prior written notice to Owner;
(iv)	from and after July 1, 2006, fixed rent (inclusive of electricity charges) for the 9th Floor Remainder Space under the Existing Lease shall be (x) $4,062.50 per month for the period from and after July 1, 2006 through and including December 31, 2006 and (y) $46,562.50 per month for the period from and after January 1, 2007 through and including the 9th Floor Termination Date (ratably determined for any partial month);
(v)	no Electrical Charge shall be due under the Existing Lease for the 9th Floor Remainder Space for the period from and after July 1, 2006;
(vi)	no additional rent shall be payable under Article 4 of the Existing Lease for the 9th Floor Remainder Space for the period from and after July 1, 2006 through and including December 31, 2006;
(vii)	so long as Midtown Equities Sublease (as hereinafter defined) is still in effect, the subtenant thereunder is not in default in performance or observance of any terms, covenants, provisions or conditions thereunder on its part to be performed or observed beyond the expiration of any applicable notice and/or cure period, Tenant assigns all of Tenant’s right, title and interest in and to the Midtown Equities Sublease (from and after July 1, 2006) to Owner by assignment document in form and substance reasonably acceptable to Owner, and such subtenant attorns to and recognizes Owner as the sublandlord thereunder, from and after July 1, 2006 Owner will recognize such subtenant under all of the then-executory terms of such sublease and will not disturb such subtenant in its possession of the Midtown Equities Space, except that Owner shall not (i) be liable for any previous act, omission or negligence of Tenant under such sublease, (ii) be subject to any counterclaim, defense or offset which theretofore accrued to such subtenant against Tenant or (iii) be bound by any previous modification or amendment of such sublease or by any previous prepayment of more than one month’s rent and additional rent which shall be payable as provided in the sublease, unless such modification or prepayment shall have been approved in writing by Owner; and
(viii)	notwithstanding the termination of the Existing Lease with respect to the Midtown Equities Space and the assignment of Tenant’s interest in the

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Midtown Equities Sublease, each as described above, for so long as the Existing Lease shall be in effect with respect to the 9th Floor Remainder Space, Tenant shall remain solely responsible for Section 27 of the Midtown Equities Sublease and Tenant shall continue to provide the subtenant with unrestricted access to the main elevator bank on the 9th floor of the Building.

               B. Tenant shall not be obligated to comply with the provisions of Article 28 of the Existing Lease with respect to the 9th Floor Remainder Space, but upon the 9th Floor Termination Date, Tenant shall quit and surrender the 9th Floor Remainder Space in full compliance with all applicable provisions of the Existing Lease (including, without limitation, Sections 28(a) and 28(b) thereof) as if the 9th Floor Termination Date were the expiration date initially set forth in the Existing Lease.

               C. Tenant hereby represents and warrants to Owner that attached hereto as Exhibit H is a true, correct and complete copy of the sublease for the Midtown Equities Space and any and all amendments thereto (the “Midtown Equities Sublease”).

               D. Owner agrees to cooperate with Tenant, as reasonably requested and at no unreimbursed cost to Owner, in segregating the service provided by the drycoolers on the 9th floor roof of the Building between the Demised Premises and the Midtown Equities Space and the 9th Floor Remainder Space, as applicable, and in continuing Tenant’s rights to use, maintain and access such drycoolers as reasonably necessary to service the Demised Premises (subject to the applicable provisions of this Lease).

[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]

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          IN WITNESS WHEREOF the parties hereto have duly executed this Lease as of the day and year first above written.

OWNER:	FIFTH AND 38TH LLC, a Delaware limited liability company
	By:	/s/ Michael Green
		Name: Michael Green
		Title: President
TENANT:	ATARI, INC.
	By:	/s/ Bruno Bonnell
		Name: Bruno Bonnell
		Title: Chairman, CEO & Chief Creative Officer
	Taxpayer Identification Number: 13-3689915

EX-21.1

Exhibit 21.1

LIST OF SUBSIDIARIES*

Name in Corporate Articles	Doing Business As	Jurisdiction
R-New UK Studio Limited	R-New UK Studio Limited	United Kingdom
GT Interactive Software France SARL	GT Interactive Software France SARL	France
GT Interactive Europe Holdings BV	GT Interactive Europe Holdings BV	Holland
ATARI Asia Pacific Pty Ltd. (in dissolution process)	ATARI Asia Pacific Pty Ltd.	Australia
GT Interactive Software GmbH**	GT Interactive Software GmbH	Germany
GT Interactive Software Europe Ltd.**	GT Interactive Software Europe Ltd.	United Kingdom

*	All entities, except for R-New UK Studio Limited, do not conduct business operations and R-New UK Studio Limited has very limited operations, consisting of transitioning matters related to the sale of its assets to Ubisoft Entertainment Limited (or its affiliated entities) and serving as a sub-landlord.
**	Denotes a direct subsidiary that itself has non-operating subsidiaries.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos.333-117136, 333-69531, 333-129098 and 333-129099 on Form S-3 and Registration Statement Nos. 333-54878, 333-88804, 333-62271, 333-61197, 333-39353 and 333-33353 on Form S-8 of our report dated September 18, 2007 on the financial statements and financial statement schedule, which expresses an unqualified opinion and includes explanatory paragraphs relating to uncertainties which raise substantial doubt about the Company’s ability to continue as a going concern as discussed in Note 1, the Company’s elected application of SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” as discussed in Note 23 and the adoption of FASB Statement No. 123(R), “Share Based Payment” as discussed in Note 1, and the Company's restatement of the fiscal 2005 and 2006 consolidated statement of cash flows as discussed in Note 24 and of our report on internal control over financial reporting dated September 18, 2007, which expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses, appearing in this Annual Report on Form 10-K of Atari, Inc. for the year ended March 31, 2007.

DELOITTE & TOUCHE LLP

New York, New York
September 18, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, David Pierce, certify that:

1. I have reviewed this annual report on Form 10-K for the period ended March 31, 2007, of Atari, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 18, 2007

By:	/s/ David R. Pierce
	Name:	David R. Pierce
	Title:	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Arturo Rodriguez, certify that:

1. I have reviewed this annual report on Form 10-K for the period ended March 31, 2007, of Atari, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 18, 2007

By:	/s/ Arturo Rodriguez
	Name:	Arturo Rodriguez
	Title:	Acting Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF THE CEO OF ATARI, INC. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Atari, Inc. (the “Company”) on Form 10-K for the fiscal year ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Pierce, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ David R. Pierce
	Name:	David R. Pierce
	Title:	Chief Executive Officer

Date: September 18, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION OF THE ACTING CFO OF ATARI, INC. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Atari, Inc. (the “Company”) on Form 10-K for the fiscal year ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Arturo Rodriguez, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ Arturo Rodriguez
	Name:	Arturo Rodriguez
	Title:	Acting Chief Financial Officer

Date: September 18, 2007