PART I

     For the year ended March 31, 2005, we reported net revenues of $395.2 million and net income of $5.7 million. During this twelve month period, on the strength of several of our key releases, particularly DRIV3R, several Dragon Ball Z titles, and Atari Flashback , we ranked fourth among PC game publishers and seventh among third-party video game publishers in market share based on video game software dollar sales, according to data provided by NPD Group, Inc. (NPD), an independent market research company.

     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 National 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.

RECENT DEVELOPMENTS

     On June 6, 2005, James Caparro resigned his position as our President and Chief Executive Officer, effective immediately. Our Board of Directors has appointed Bruno Bonnell, our Chairman and Chief Creative Officer, to act as Chief Executive Officer on an interim basis. Our Board has instituted an immediate search for a permanent President and Chief Executive Officer. Our compensation committee is reviewing our and Mr. Caparro’s rights, if any, relating to Mr. Caparro’s resignation.

     Effective June 3, 2005, IESA sold back to Hasbro, Inc. certain of its rights under its then existing license agreement with Hasbro. Specifically, Hasbro reacquired the digital gaming rights for its properties for $65.0 million. We did not receive any of the $65.0 million in proceeds. As part of the transaction, IESA and Hasbro have entered into a new licensing agreement that provides IESA with the rights for ten Hasbro franchises, including Dungeons and Dragons and Monopoly , at a slightly higher royalty rate and for a shorter period of time. Our rights under our distribution agreement with IESA to exploit the Hasbro properties that IESA licenses are not diminished.

     Recently, we announced transactions which we believe better position us in the interactive entertainment marketplace. These transactions include an agreement with FUNimation extending the Dragon Ball Z license on an exclusive basis over a multi-year period and an exclusive long-term agreement with Spark Unlimited™ to develop new intellectual properties. In addition, we have entered into a new secured revolving credit facility with HSBC Business Credit (USA) Inc., or HSBC, the asset-based lending unit of HSBC Bank USA, N.A., which provides up to $50.0 million of credit availability.

INDUSTRY OVERVIEW

     The video game software industry primarily comprises software for dedicated game consoles or platforms (such as PlayStation 2, Xbox and GameCube), handhelds (such as Game Boy Advance, Nintendo DS and Sony PlayStation Portable, or PSP) and PCs. Publishers of video game software include the console manufacturers, or “first-party publishers”, and third-party publishers such as ourselves whose sole role is the development, publishing and distribution of video game software. 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. According to International Data Group (IDG), an independent technology, media, research, and event company, the combined U.S. and European video game software and hardware market is expected to be $20.5 billion in 2005. Additionally, we believe growth in the video game industry will be accelerated by strong expansion in new geographic regions, as well as the continued adoption and further penetration of the current generation of gaming consoles into new demographics. The latest PricewaterhouseCoopers report (Global Entertainment and Media Outlook: 2004-2008) on the video game industry predicts that the world’s fastest and largest video game growth will come from the Asia/Pacific region, and that female gamers are becoming an increasingly large demographic. Finally, access to the expanding geographic regions and a larger demographic is aided by digital distribution channels, which are being used with increasing frequency within the industry.

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 next-generation technology. As the cycle matures, consumers’ focus shifts to software, resulting in a period of rapid growth for the video game software industry.

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     Sony was the first manufacturer to introduce the current 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. PlayStation 2’s early introduction helped establish it as the leading hardware platform, with a projected installed base in North America of 33.1 million households in 2005, compared to 11.4 million and 15.4 million households for GameCube and Xbox, respectively, according to IDG.

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

     The existing first-party publishers have announced their plans to launch the next generation of console game systems within the next two years. Specifically, Microsoft is expected to launch Xbox 360 for the 2005 holiday season and Sony is expected to launch PlayStation 3 in 2006. Recently, Nintendo announced that its next generation system, Revolution, will launch in the near future. These systems will represent a significant advance in gaming technology, with the potential eventually to reach broader audiences after a console “transition” period.

     Innovation also continues in the handheld market with manufacturers offering more sophisticated units, such as Sony’s PSP, that offer multiple features and capabilities in addition to game play functionality.

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. The PC market has typically not been subject to video game industry cycles and, coupled with the fact that publishers are not required to pay hardware royalties and high manufacturing costs for PC products, this is an attractive market for video game publishers. Though retailers have been allocating diminished shelf space to PC products, this trend may be offset by demand for Massively Multiplayer Online Games, or MMOG.

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 portfolio, 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. Given these facts, coupled with the fact that financial performance within the industry indicates that the more successful companies are those that are the most vertically integrated, we expect consolidation within the video game software industry to continue.

CORPORATE RESTRUCTURING

     Historically, our sales growth and profitability have not been at the same level as our more successful competitors. During the fourth quarter of fiscal 2005, we announced that, as part of an overall strategic plan, we would implement financial and restructuring initiatives with the goal of improving our profitability and competitive position.

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Specifically, we and our majority stockholder are considering ways to simplify our corporate structure. Financially, we have begun taking steps to streamline our U.S. operations, including the closing of our studios in Santa Monica, California and Beverly, Massachusetts. The functions handled by those studios are being primarily relocated to our New York headquarters. Additionally, we have assessed our assets and resources and have determined that certain operations are not consistent with our strategic vision or creative direction. We plan to dispose of those non-core assets. One such divestiture will be our Humongous Entertainment studio assets and operations, which we anticipate will occur prior to the end of fiscal 2006.

     The potential sale of Humongous Entertainment is also evidence of our creative restructuring and re-focus of our product portfolio on, among other things, the action and adventure genre (including driving games) and products which are best suited to cross-media exploitation and diverse revenue streams. Creatively, we have also taken steps to expand our development relationships in order to facilitate the introduction of new franchises and to maximize catalogue properties.

RELATIONSHIP WITH IESA

     As of March 31, 2005, IESA beneficially owns, directly and indirectly, approximately 52% of our stock. IESA renders management services to us (systems and administrative support) and through June 30, 2005, we rendered management services to Atari Interactive, a subsidiary 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. Atari Interactive is the source of approximately 38% of our net revenue and we generate approximately 5% of our net revenue from royalties on IESA’s distribution of our products in Europe, Asia, and certain other regions.

     IESA has incurred significant continuing operating losses and is highly leveraged. IESA has taken steps to improve its financial situation, including, (i) restructuring its outstanding debt obligations such that the debt amount is reduced and the debt maturity schedule is more favorable, (ii) reducing operating expenses, (iii) raising capital by selling (through California U.S. Holdings, Inc., or CUSH) 11,000,000 of its shares in Atari, pursuant to a registration statement, (iv) entering into banking arrangements to fund operations and position itself for the new hardware cycle, (v) selling assets, such as its rights in the Civilization franchise and certain of its rights under its previous license with Hasbro, and (vi) entering into production fund agreements to finance certain game development projects. However, IESA has not yet completed all of the actions it plans to take in order to improve its operations and reduce its debt. As a result, IESA’s current ability to fund, among other things, its subsidiaries’ operations is diminished. There can be no assurance that IESA will complete sufficient actions to assure its future financial stability.

     If IESA is unable to complete its action plan and address its liquidity problems and fund its working capital needs, IESA would likely be unable to fund its and its subsidiaries’ video game development operations, including that of Atari Interactive. 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. Such a reduction of our revenues, among other things, could result in a breach of one or more of the covenants contained in our revolving credit facility with HSBC. If the above contingencies occurred, we probably would be forced to take actions that could include, but would not necessarily be limited to, a significant reduction in our expenditures for internal and external new product development and the implementation of a comprehensive cost reduction program to reduce our overhead expenses. These actions, should they become necessary, 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. At present, there can be no assurance regarding any of the foregoing contingencies and management will continue to monitor these developments closely.

     Additionally, though 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 stock, potential

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investors and current and potential business/trade partners may view IESA’s financial situation as relevant to an assessment of Atari. Therefore, if IESA is unable to address its financial issues, 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. We understand that IESA continues to focus on ways to address and improve its financial situation.

PRODUCTS

     Our core strength has typically been in titles for the action, adventure, strategy, and driving genres. We have developed a number of successful game franchises based on proven television and movie franchises, and have created and fostered new internally owned and developed intellectual properties. We continually seek to expand our product portfolio with proven intellectual properties and through the creation of sequels and expansions of successful titles.

     The following table lists our 25 top selling titles (based on dollar sales) during the year ended March 31, 2005.

GBA = Game Boy Advance
GC = GameCube
PS2 = PlayStation 2

     For fiscal 2005, we had one title, DRIV3R , published on three different platforms, which represented approximately 10.6% of our publishing net revenues.

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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 PlayStation, PlayStation 2, PSP, Nintendo DS, Game Boy, Game Boy Advance, GameCube, Xbox, PC and the next generation of consoles scheduled to be released by Sony, Microsoft and Nintendo. During the year ended March 31, 2005, on the strength of several of our key releases, particularly DRIV3R, several Dragon Ball Z titles, RollerCoaster Tycoon 3 , Unreal Tournament 2004 , and Sid Meier’s Pirates! , we ranked fourth among PC game publishers and seventh among third-party video game publishers in market share based on video game software dollar sales, according to data provided by NPD.

     During the year ended March 31, 2005, our publishing operations were located in Santa Monica, CA and Beverly, MA. Our Santa Monica studio focused on action, adventure, and driving titles, and published titles that were developed both internally and externally. Key titles published by the Santa Monica studio during fiscal 2005 included DRIV3R , Demon Stone, and Terminator 3: The Redemption , among others . Our Beverly studio focused on developing and publishing a range of products, from interactive entertainment for children and the mass market to strategy and adventure games for more seasoned gamers. The Beverly studio’s publishing lineup included those titles previously published under the Hasbro Interactive label, which was acquired by IESA in 2001 and is now named Atari Interactive. Key titles published by the Beverly studio during fiscal 2005 included all titles within the Dragon Ball Z and Backyard Sports franchises, RollerCoaster Tycoon 3 , Sid Meier’s Pirates!, and TRANSFORMERS , among others. Recently, we elected to centralize our publishing operations in our New York headquarters and closed our publishing studios in Santa Monica, CA and Beverly, MA in order to capitalize on managerial and cost efficiencies.

     With a lineup that spans from hardcore games through mass market titles, we publish games at various price points, ranging from value-priced titles to premium-priced products. Pricing is determined by a variety of factors, including but not limited to: licensed or franchise property; internal or external development; single or multiple platform development; production costs and volumes; target audience; and distribution territory.

DEVELOPMENT

Internal and Related-Party Development

     We leverage both internal and 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.

     In addition to our publishing operations described above, we own studios and manage the development of product at studios owned by IESA that focus solely on game development. Titles from these locations range in genre and are published for various audiences on the full array of gaming platforms.

     Development studios owned by Atari include:

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     In addition to the studios we own, we also manage or will manage development of product at several studios owned by IESA:

External Development

     In addition to developing products ourselves or through IESA wholly-owned subsidiaries, we publish or have contracts to publish video game software developed by some of the industry’s most highly regarded independent external developers. These developers include, among others:

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

     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

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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.

SALES AND MARKETING

     Our sales and marketing programs emphasize a number of key areas:

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

     Our marketing approach uses a brand management system to evaluate and improve our brands based on analyses of market trends, consumers, competition, core competencies, retail and “first-party” partner support, and other key factors. This brand management system is combined with entertainment marketing approaches and techniques to create consumer and trade anticipation and 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 begin to deploy an integrated marketing program for a product more than a year in advance of its release. Historically, we have devoted a substantial portion of our marketing resources to support our key products and intend to do so in the future. We believe that integrated marketing strategies for our key products are essential for other product successes and brand-name loyalty.

     We believe 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 by creating product-dedicated mini-sites and on-line promotions. In addition, in the months leading up to the release of a new product, we provide extensive editorial material to on-line publications that reach the core gaming audience.

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     In addition, central to supporting all marketing, promotions and sales efforts for each title are 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 our coverage in key computer and video gaming publications, as well as major consumer newspapers, magazines and broadcast outlets.

     In order to improve efficiency, our sales efforts are handled by a single internal sales organization. We currently have two sales regions, one which encompasses our North American retail sales business, and the other which encompasses the licensing of our intellectual property and products. The two regions are comprised of 14 sales/licensing directors who serve as the primary contacts with our approximately 35 largest retail and licensing customers.

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 Warner Bros., Viacom/Nickelodeon, Sony Pictures, and FUNimation.

     We pay royalties at variable rates based on our net sales of the corresponding title. 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 variable duration and may in some instances be renewable upon payment of minimum royalties or the attainment of specified sales levels. Other licenses are not renewable upon expiration, and we cannot be sure that we will reach agreement with the licensor to extend the term of any particular license. Our property licenses usually grant us exclusive use of the property for the specified titles, on specified platforms, worldwide or within a defined territory, during the license term. Licensors typically retain the right to exploit the property for all other purposes and to license other developers with regard to other properties.

Hardware licenses

     We currently develop software for use with PlayStation and PlayStation 2, GameCube, Game Boy and Game Boy Advance, Xbox and other video game consoles pursuant to licensing agreements 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:

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*   IESA, our majority stockholder and the distributor of our products in Europe, has entered into similar agreements with each of the manufactures for applicable European territories.

**   The renewal of this contract is currently being negotiated. In the interim, we are operating in accordance with the historical terms of the License Agreement.

     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 our 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 what we believe to be state-of-the-art systems for our entire supply chain management, including manufacturing, EDI/order processing, inventory management, purchasing, and tracking of shipments. We believe these systems accomplish:

     We are one of the largest distributors of video game software to mass merchants in the United States. Our strength in distribution ensures access to favorable shelf space for our products. 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, Circuit City, and Toys ‘R’ Us; specialty stores such as Electronics Boutique and GameStop; rental chains such as Blockbuster and Hollywood Video; and warehouse clubs such as Sam’s Club and Costco. Wal-Mart and Target accounted for 25.7% and 12.3%, respectively, of our net revenues for the year ended March 31, 2005. Additionally, our games are made available through various on-line retail and “e-tail” companies (e.g. Amazon.com), and through the emerging digital distribution/electronic software download marketplace.

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     Based on the strength of our distribution operations, we have successfully attracted other publishers to utilize our distribution capabilities. Other publishers’ products are generally acquired by us and distributed under the name of the publisher of such products. Our agreements with these publishers typically provide for retail distribution rights in designated territories for a specific period 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. Our sales and distribution programs for other publishers’ products are an integral part of our overall approach to the marketplace, providing value-added services to both publishers and retailers alike and an additional source of revenue for us.

     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.

Europe, Asia and Other Regions

     IESA distributes our products in these regions 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 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 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 and PlayStation 2, Nintendo GameCube and Microsoft Xbox products consist of proprietary format CD-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 our products. 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 2005, we had 400 employees domestically, with 195 in product development, 82 in administration (i.e., senior management, human resources, legal, IT and facilities), 52 in finance, 48 in sales and 23 in marketing. During the fiscal year, we had operations in New York, New York; Beverly, Massachusetts; Seattle, Washington; Sunnyvale, California; Santa Monica, California; and Newport Beach, California. We also have operations internationally at our Reflections studio located in Newcastle, England, which has 92 employees.

     In February 2005, we announced the closing of our operations in Beverly, Massachusetts and Santa Monica, California. As a result, by August 2005 most of the employees located in those offices will cease employment with us and we will be re-staffing most of the functions handled by such departing employees in our New York headquarters.

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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., and Midway Games, Inc., among others. 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 Atari’s competitors, the Atari brand can be seen as three separate entities—a pop icon, a classic gaming original and a modern interactive entertainment company. We believe that no other interactive entertainment company can match this signature of authenticity or unique ability to sell both lifestyle and product. Atari’s opportunities to attract partnerships, talent and other vehicles which uphold its legendary status are unbounded, providing a distinct advantage among its competitors.

     We believe that a number of additional factors provide us with competitive opportunities in the industry, including our extensive 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 Driver, Test Drive and RollerCoaster Tycoon, along with the catalog of classic Atari Games, as well as attractive licenses, such as The Matrix, Dragon Ball Z and Dungeons & Dragons , provide us with a competitive advantage in the marketing of our products.

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 22 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report.

     Please see Note 22 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report, for information related to geographic information with respect to our revenues from external customers and our long-lived assets.

RISK FACTORS

RISKS RELATED TO OUR BUSINESS

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, could materially and adversely affect 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. The process of introducing new products, sequels or product enhancements is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge. 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. If we introduce a relatively limited number of products in any period, the failure of such products to achieve market acceptance could adversely affect our results of operations.

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

     Our sales to Wal-Mart, Target, Best Buy, GameStop, and Electronics Boutique accounted for approximately 25.7%, 12.3%, 9.8%, 7.4%, and 6.5% respectively, of net revenues for the year ended March 31, 2005. Our gross accounts receivable from these retailers were approximately $15.7 million, $6.9 million, $4.8 million, $6.4 million, and $8.1 million, respectively, as of March 31, 2005. Our business, results of operations and financial condition would be adversely affected if:

     We cannot assure you that Wal-Mart, Target, Best Buy, GameStop, and Electronics Boutique 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, including new console technology, software media formats, and delivery channels could render our previously released products obsolete or unmarketable. We are continuing to devote significant development resources to products for PlayStation 2 and Xbox. If consumer demand for those platforms declines as a result of the next generation of console games systems, or generally, we may experience lower than expected sales from products designed for those platforms.

     We must continually anticipate the emergence of, and adapt our products to, new technologies and systems. In addition, the development cycle for products designed to operate on new systems has been defined by an increased rate of change and complexity in the technological innovations of video game hardware and software. 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, our net revenues from that product may be less than expected and we may not be able to recoup our investment as quickly as anticipated, if at all. Conversely, if we choose not to publish products for a new system that is ultimately popular, our revenue growth and competitive position may be adversely affected.

We will need to secure additional capital.

     We have in the past generated significant financial losses. In recent years, our profits have been minimal compared to the profits reported by our industry competitors. If we generate significant financial losses in the future, our cash resources and revolving credit facility may not be adequate to fund our operations. Based on current assessments, we will need to raise capital in order to support our product development efforts and other operational needs. In order to complete the redirection of our product portfolio and to increase our slate of titles in fiscal 2006 and 2007, 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 additional capital 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 may suffer 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 capital in the future or under what terms capital would be available. If we are unable to raise capital on terms that are favorable to us, our business will be negatively affected, which could cause our stock price to decline. Specifically, if we are not successful in raising capital, 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 and further reduction in overhead expenses. These actions, should they become necessary, will probably result in a significant reduction in our size of operations. Such capital raising needs are discussed with our majority stockholder with respect to appropriate timing and structure of such funding.

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.

     Although we have substantially increased our internal video game software development capabilities over the last five years, we are still dependent, to a meaningful degree, upon leading independent software developers. Consequently, our success depends in part on our continued ability to obtain or renew product development agreements with leading independent video game software developers. However, we cannot assure you that we will be able to obtain or renew these product development agreements on favorable terms, or at all, nor can we assure you that we will be able to obtain 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. We may be unable to secure or maintain relationships with leading independent video game software developers if our competitors can offer them better shelf access, better marketing support, more development funding, higher royalty rates, or other advantages. Usually, our agreements with independent software developers are easily terminable, often without notice, if either party declares bankruptcy, becomes insolvent, ceases operations or materially breaches its agreement and fails to cure that breach within a designated time frame. In addition, many leading independent video game software developers have limited financial resources. Many 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.

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Fluctuations in our quarterly net revenues and results of operations may lead to reduced prices for our stock.

     Our quarterly net revenues and results of operations have varied in the past and can be expected to vary in the future. Our business experiences substantial seasonality, and typically, our net revenue is significantly higher during our third fiscal quarter (which ends on December 31) than during our other quarters because of increased consumer demand during the calendar year-end holiday season. Other factors that cause fluctuations include:

     In other particular fiscal quarters, our net revenues may be lower and may vary significantly. As a result, we cannot assure you that our results of operations will be consistent on a quarterly or annual basis. If our results of operations in a quarter fall below our expectations and/or fall below the expectations of market analysts or investors, the price of our common stock will likely decrease.

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 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, we believe 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 these titles are ultimately unpopular, we may not recoup our investment made 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 a similar license. Additionally, many of the products we distribute are products that are published by IESA or its subsidiaries, such as certain Hasbro games. Recently, IESA has sold off properties that we historically distributed, such as Civilization and Sid Meier’s Pirates! If IESA continues to dispose of properties, we will lose revenue.

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, PlayStation 2, and PSP, from Nintendo to develop products for Game Boy Advance and GameCube, and from Microsoft to develop products for Xbox. 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

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adversely modified, we may not be able to publish games for such 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:

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 assure you 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.

     James Caparro, who had been our President and Chief Executive Officer since November 2004, had assembled our new senior management team, and had initialized our strategic restructuring, resigned on June 6, 2005, and will take a position with a company in another industry. Bruno Bonnell, who is the Chief Executive Officer of IESA and is our Chairman of the Board and Chief Creative Officer, has assumed the functions of Chief Executive Officer until we hire a replacement for Mr. Caparro. We could be significantly affected by the length of time it takes to hire a new chief executive officer and by changes a new chief executive officer might make after he or she is hired and takes office.

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 assure you 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., and THQ, Inc., among others. 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 to competitors. These 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:

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     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. We cannot assure you that we will be able to compete successfully against our current or future competitors or that competitive pressures will not have a material adverse effect on our business, results of operations and financial condition.

     Retailers of our products typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer interactive entertainment software products for high quality retail shelf space and promotional support from retailers. 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 and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. We cannot be certain that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support on acceptable terms. A prolonged failure in this regard may significantly harm our business and financial results.

We may face limitations on our ability to integrate additional acquired businesses or to find suitable acquisition opportunities.

     We intend to pursue additional acquisitions of companies, properties and other assets which we believe can be operated profitably, which may include companies, properties, and assets held by IESA and its subsidiaries. Some of these transactions could be material in size and scope. Although we continue to search for additional acquisition opportunities, we may not be successful in identifying suitable acquisition opportunities. As the video game software industry continues to consolidate, we face significant competition in seeking and consummating acquisition opportunities. We may not be able to consummate potential acquisitions or an acquisition that is consummated may not enhance our profitability. In the future, we may issue additional shares of our common stock in connection with one or more acquisitions, which may dilute our existing stockholders. Future acquisitions could also divert substantial management time and result in short-term reductions in earnings or special transaction or other charges. In addition, we cannot guarantee that we will be able to successfully integrate the businesses that we may acquire into our existing business. Our stockholders may also not have the opportunity to review, vote on or evaluate future acquisitions.

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

     During the years ended March 31, 2004 and March 31, 2005, net revenues from our distribution business were approximately 14.1% and 13.7%, respectively, of our total net revenues. This decrease as a percentage of net revenues is primarily a result of increased competition. New video game systems and electronic delivery systems may also be introduced into the software market and potential new competitors may enter the software development and distribution market, resulting in greater competition. Revenues from our distribution business may be adversely affected as Internet technology is improved to enable consumers to purchase and download full-version software products or order products directly from publishers or from unauthorized or illegal sources over the Internet.

Revenues from our distribution business may decline if the products which 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 our competitors. We cannot assure you that these 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 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 our own 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.

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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:

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 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 assure you 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 also 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.

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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 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.

     IESA has incurred significant continuing operating losses and is highly leveraged. IESA has taken steps to improve its financial situation, including (i) restructuring its outstanding debt obligations such that the debt amount is reduced and the debt maturity schedule is more favorable, (ii) reducing operating expenses, (iii) raising capital by selling (through CUSH) 11,000,000 of its shares in Atari, pursuant to a registration statement, (iv) entering into banking arrangements to fund operations and position itself for the new hardware cycle, (v) selling assets, such as its rights in the Civilization franchise and certain of its rights under its previous license with Hasbro, and (vi) entering into production fund agreements to finance certain game development projects. However, IESA has not yet completed all of the actions it plans to take in order to improve its operations and reduce its debt. As a result, IESA’s current ability to fund, among other things, its subsidiaries’ operations is diminished. There can be no assurance that IESA will complete sufficient actions to assure its future financial stability.

     If IESA is unable to complete its action plan and address its liquidity problems and fund its working capital needs, IESA would likely be unable to fund its and its subsidiaries’ video game development operations, including that of Atari Interactive. 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. Such a reduction of our revenues, among other things, could result in a breach of one or more of the covenants contained in our revolving credit facility with HSBC. If the above contingencies occurred, we probably would be forced to take actions that could include, but would not necessarily be limited to, a significant reduction in our expenditures for internal and external new product development and the implementation of a comprehensive cost reduction program to reduce our overhead expenses. These actions, should they become necessary, 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. At present, there can be no assurance regarding any of the foregoing contingencies and management will continue to monitor these developments closely.

     IESA distributes our products in Europe, Asia, and certain other regions, and pays us royalties in this respect. IESA (through its subsidiaries) also develops 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. Atari Interactive is the source of approximately 38% of our net revenue and we generate approximately 5% of our net revenue from royalties on IESA’s distribution of our products in Europe, Asia, and certain other regions.

     Additionally, though 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 stock, potential

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investors and current and potential business/trade partners may view IESA’s financial situation as relevant to an assessment of Atari. Therefore, if IESA is unable to address its financial issues, 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 52% 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 assets that might be desirable to our other stockholders. Additionally, despite efforts to implement all necessary corporate governance safeguards, for example, review by an independent special committee of the Board, IESA may unilaterally approve certain transactions as a result of their majority position. IESA also has sufficient voting power to elect a majority of our Board of Directors; four of the nine members of our Board of Directors are directors, employees or former employees (within three years) of IESA or its affiliates. Two of the remaining five directors are currently affiliated with us (or were affiliated with us within the past three years). Therefore, only three of the total nine directors are considered independent. This concentration of control could be disadvantageous to other stockholders whose interests differ from those of IESA. By October 2005, we must appoint/elect a new independent director to serve on our Audit Committee in order to remain compliant with the NASDAQ corporate governance requirements.

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. In connection with a 2003 recapitalization, Atari Interactive extended the term of the license under which we use the Atari name to ten years expiring December 31, 2013, for which we issued 2,000,000 shares of our common stock to Atari Interactive. In addition, we will pay a royalty equal to 1% of our net revenues during years six through ten of the extended license. 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, Atari Interactive’s use of the Atari mark (either through itself, its affiliates or third parties) to exploit products could affect the reputation or value associated with the Atari mark, and therefore materially affect our business. Therefore, we are dependent upon the cooperation and business actions of IESA and its affiliates with regard to the Atari trademark.

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, relocation expenses, 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 recoup our investment, which may negatively impact our results of operations.

Our revolving credit facility could be terminated.

     As of May 13, 2005, we utilize the proceeds of our revolving credit facility with HSBC to fund our working capital needs, including the manufacturing and development of products. The credit documents which we entered into with HSBC to obtain this revolving credit facility contain numerous covenants and conditions which may cause a default upon breach thereof by us. Although we are currently in full compliance under the credit documents and no event of default has occurred, there can be no assurance that we will continue to remain in compliance. If an event of default occurs under any credit document and HSBC opts not to waive such default, the revolving credit facility may be terminated and all debt outstanding accelerated, in which case we will need to raise additional capital or seek other alternatives, many of which may adversely affect our stock price.

RISKS RELATED TO OUR COMMON STOCK

Our stock price is highly volatile.

     The trading price of our common stock has been and could continue to be subject to wide fluctuations in response to certain factors, including, but not limited to, the following:

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     Additionally, the public stock markets experience price and trading volume volatility, particularly in high technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons often unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. As of March 31, 2005, of the 121,296,092 million shares of our outstanding common stock, only 57.9 million shares (approximately 47.7%) were not held by our affiliates. This stock ownership structure and general lack of liquidity may also be a cause of volatility in the market price of our stock.

The large number of shares eligible for public sale could cause our stock price to decline.

     IESA holds a substantial number of shares of our common stock that it is able to sell in the public market. We generally cannot control the timing of any sale made by IESA. During fiscal 2005, IESA sold approximately 18.5 million shares of our stock. Large sales by IESA could significantly reduce the market price of our common stock. These potential sales also could impede our ability to raise future capital.

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 450 Fifth Street, N.W., 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.

corporate apartments in New York City for use by our executive officers, directors, consultants and relocating executives. Those leases expire in August 2005, December 2005, and July 2006, respectively.

      California . We have a lease for approximately 17,400 square feet of office space in Santa Monica, California, which expires in May 2006. We have announced that we are ceasing operations at this location and we are looking to sublease this space. We also lease approximately 16,460 square feet of office space in Newport Beach, California for long-term use by Shiny, an internal development studio. This lease expires in August 2007. We have a lease for approximately 15,000 square feet of office space in Sunnyvale, California, which expires in December 2006.

      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 is occupied by our Humongous studio. Under this lease, Humongous subleases parking lot space and an approximate total of 16,600 square feet of office space under four subleases, one of which expires in April 2008 and three of which expire in May 2008.

      Minnesota . We lease 14,291 square feet of office space in Plymouth, Minnesota, under a lease which expires in March 2006. This office space was occupied by the Minneapolis studio which ceased operations in fiscal 2004. Our intention is to sublet the space.

      Massachusetts . In Beverly, Massachusetts, we occupy a portion of the 53,184 square feet of the office space leased by Atari Interactive. Our lease expires in June 2007. We have announced that we are ceasing operations at this location and we are looking to sublease this space.

      Other States in the U.S . In Scottsdale, Arizona, we lease 25,000 square feet of office space under a lease which expires in March 2006. We have subleased these premises for the remainder of the lease term.

      Europe . For our internal Reflections studio, we maintain a lease for approximately 23,285 square feet of office space in Newcastle upon Tyne, United Kingdom. This lease expires in August 2011. Reflections also maintained a lease for office space in Gateshead Tyne and Wear, which we had sublet until September 2004. Reflections exercised its right to terminate the lease early so that Reflection’s lease expired in September 2004, the same time as the sublease for this space.

Interplay filed a cross-complaint against us, Atari Interactive, Infogrames Korea and Roes 101 through 200. We and Atari Interactive, filed an Answer on December 3, 2003. On March 25, 2004 KBK filed a Second Amended Complaint for Damages adding new causes of action for fraud against Gamesonline and Interplay; seeking rescission of the Electronic Distribution Agreement between KBK and Gamesonline; for “breach of third party beneficiary rights” against Atari Interactive; for unlawful restraint of trade against all defendants; for RICO Act violations against all defendants; and for civil conspiracy against all defendants; and adds allegations of alter ego status between Gamesonline and Interplay and as between us, Atari Interactive, and Atari Korea.

     On March 10, 2004 the Court entered a stipulation among the parties referring the matter to a private judge. The private judge, retired Superior Court Judge Harvey Schneider, will be presiding over all aspects of the case, including the non-jury trial.

     We and Atari Interactive prevailed on a Motion for Leave to File a Cross-Complaint against Interplay and Gamesonline. We and Atari Interactive, Inc. also prevailed on a Motion for Summary Adjudication on the RICO Act claim.

     On July 1, 2004, KBK filed a Third Amended Complaint whereby certain previous allegations were either omitted or clarified as a result of the Court’s rulings at the June 17, 2004 hearings.

     KBK has purported to serve in Korea an entity it called “Atari Korea” with a Summons and Complaint in this case. Atari Korea Ltd. filed a Motion to Quash Service based on failure to comply with the terms of the Hague Convention and/or lack of personal jurisdiction over that entity. This motion was granted.

     On or about October 1, 2004, KBK’s litigation counsel resigned. On October 8, 2004, we and Atari Interactive filed an ex parte application to strike KBK’s pleadings or, in the alternative, for an order shortening the time to hear such application as noticed motions. The ex parte application was heard and denied on October 11, 2004 but the Court did grant the application for a shortened period of time to hear such application as noticed motions. On October 19, 2004, the Court granted our Motion to Strike KBK’s pleadings due to the fact that KBK has no counsel to represent it in the litigation and did not file any opposition to the motion. The Court dismissed KBK’s complaint without prejudice. The cross-claims have not been dismissed by the other parties to the litigation. We and Atari Interactive are in discussions with the other parties with respect to same.

Atari, Inc., Atari Interactive, Inc., and Hasbro, Inc. v. Games, Inc., Roger W. Ach, II , and Chicago West Pullman LLC

     On May 17, 2004, we and Atari Interactive together with Hasbro, Inc., or Hasbro, filed a complaint against Games, Inc., its CEO, Roger W. Ach, II, or Ach, and Chicago West Pullman LLC in the United States District Court for the Southern District of New York and sought a temporary restraining order and preliminary injunction to stop Games, Inc.’s and Ach’s use of certain trademarks and copyrights owned by Atari Interactive and Hasbro. The plaintiffs allege that an interim license that we granted to Games, Inc. for the development and publication of certain games in a specified online format expired by its terms when Games, Inc. failed to pay us certain fees by April 30, 2004, pursuant to an Asset Purchase, License and Assignment Agreement between us and Games, Inc. dated December 31, 2003, as amended. The plaintiffs allege that Games, Inc.’s failure to pay voided an expected transfer of the “Games.com” domain name and certain web site assets from us to Games, Inc. and constituted a breach of contract and that Chicago West Pullman LLC’s failure to pay constituted a breach of guarantee. The plaintiffs further allege that upon the expiration of the interim license, all intellectual property rights granted under that license reverted back to us, but that Games, Inc. nevertheless continued to use plaintiffs’ intellectual property. On May 18, 2004, the Court granted a temporary restraining order against Games, Inc. and Ach and scheduled a preliminary injunction hearing for May 28, 2004, which was postponed until June 11, 2004. Prior to that hearing, Games, Inc. agreed to the preliminary injunction and the Court signed an order granting the preliminary injunction pending the outcome of the case.

     On June 16, 2004, Games, Inc. served its Answer and Counterclaim to the Complaint. In its counterclaim, Games, Inc. alleges that plaintiffs breached the Asst Purchase, License and Assignment Agreement and a Settlement Agreement dated March 31, 2004 by, inter alia , licensing other web sites to use on-line play of certain Atari and Hasbro games that Games , Inc. claimed were part of its exclusive license under the Agreement.

     On June 23, 2004, the Court ordered that the parties attend a case management conference scheduled for June 29, 2004. At the June 29, 2004, case management conference, Games, Inc.’s counsel raised issues relating to plaintiffs’ failure to respond to its discovery requests. The Court directed that plaintiffs submit a letter brief setting forth its generic objections to Games, Inc.’s discovery requests. The Court ordered that plaintiffs’ letter brief be submitted by July 6, 2004 and that Games, Inc. submit its reply by July 13, 2004. The Court also scheduled a teleconference for July 14, 2004. On July 6, 2004,

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plaintiffs submitted its letter brief to the Court and also served Games, Inc. with its Rule 26(a)(1) initial disclosures and Answer to the Counterclaim.

     Games, Inc.’s counsel failed to appear for the July 14, 2004, teleconference and it was adjourned to July 15, 2004. At that teleconference, the Court granted the majority of plaintiffs’ motion to quash Games, Inc.’s discovery requests.

     On July 16, 2004, it came to plaintiffs’ attention that, in violation of the preliminary injunction, Games, Inc. had issued a press release on July 13, 2004, that erroneously stated that Games, Inc. owned the “games.com” web site and that it had an exclusive license to certain Atari and Hasbro games. Plaintiffs immediately brought the erroneous press release to the attention of Games, Inc.’s counsel. On that same day, Games, Inc. replaced the erroneous press release with a corrected press release, but refused to issue a corrective press release explaining that it in fact did not own either the web site or have any license to Atari and Hasbro games. On July 19, 2004, plaintiffs brought this to the attention of the Court, who ordered that a corrective press release be issued, but approved language submitted by Games, Inc.’s counsel.

     On September 3, 2004, in a teleconference with the Court, Games, Inc. requested from the Court that plaintiffs be ordered to produce agreements with third parties from the first quarter of 2004 concerning online play of certain Atari and Hasbro games. During that same teleconference, plaintiffs sought permission to move to dismiss the counterclaims against Atari Interactive and Hasbro. On September 8, 2004, the Court broadened the scope of discovery to include documents regarding contracts and negotiations between Atari and Hasbro and third parties between January 1, 2004 and March 31, 2004 regarding online play of the original classic versions of the games. The Court also set a schedule for plaintiffs’ motion to dismiss the Counterclaims, which has been fully submitted and is under judicial deliberation.

     On October 4, 2004, it came to plaintiffs’ attention that Games, Inc. was in violation of the preliminary injunction because it represented in its Form 10-KSB filing dated October 1, 2004, that Games, Inc. owned the domain name “games.com” and that it had an exclusive license to certain Hasbro and Atari games. Plaintiffs immediately brought this to the attention of Games, Inc.’s counsel, who represented that certain, but not all, statements would be amended. But Games, Inc. did not amend its Form 10-KSB. Accordingly, plaintiffs sought permission to move for contempt for violation of the preliminary injunction.

     On October 14, 2004, in a teleconference with the Court, the Court granted plaintiffs’ request to move for contempt, and ordered that the parties brief that motion on the same schedule as the briefing schedule for motions for summary judgment. The Court also reset the schedule for this case. The Court ordered that all discovery be completed by November 12, 2004, that opening briefs on summary judgment be filed by November 29, 2004, that answering papers be filed on December 13, 2004, and that reply papers be filed by December 20, 2004. The parties completed discovery, and plaintiffs filed their motion for summary judgment, and motion for contempt sanctions, on November 29, 2004. The Court heard oral argument on these motions on January 12, 2005.

     On February 23, 2005, the Court issued an order granting plaintiffs’ motion to dismiss certain of Games, Inc.’s counterclaims, and on March 11, 2005, the court granted our motion for summary judgment on its breach of contract claim and dismissed Games, Inc.’s remaining counterclaims. The Court denied Games, Inc.’s motion for reconsideration on April 4, 2005. On May 4, 2005, the Court issued a memorandum order granting us and Atari Interactive damages in the following amount: (1) immediate payment of approximately $3.1 million, plus interest at an annual rate of nine percent from April 30, 2004; (2) immediate redemption of 10,250 shares of Games, Inc. stock for $1.025 million, plus interest at an annual rate of nine percent from April 30, 2004; (3) immediate redemption of 10,000 additional shares of Games, Inc. stock for $1 million; (4) redemption of the remaining 10,000 share at any time after December 29, 2005. The order provides that the “judgment runs directly against Games, Inc. but in the event Games fails to satisfy it, it runs secondarily against Chicago West Pullman LLC and Ach.” The Court’s order also lifts the preliminary injunction imposed at the outset of the case.

     Ach filed a motion for reconsideration concerning the Court’s ruling that the judgment would run directly against Ach, and we requested that the Court issue a permanent injunction and clarify certain aspects of the judgment. On May 27, 2005, the Court issued an order denying Ach’s motion for reconsideration and confirming its earlier ruling that the judgment would run against Ach personally. The Court also clarified that after December 29, 2005, we are entitled to an additional $1.0 million, representing the cash redemption of the last 10,000 shares of Games Inc.’s stock. The Court also issued a permanent injunction barring Games Inc. from “selling or distributing any product that contains the intellectual property” that is the subject of the asset purchase agreement. The remaining elements of the original judgment remain. As of March 31, 2005, we have not recorded any amounts related to this matter.

American Video Graphics, L.P., v. Electronic Arts, Inc. et. al.

     On August 23, 2004, American Video Graphics, L.P. filed a lawsuit against us, Electronic Arts, Inc., Take-Two Interactive Software, Inc., Ubi Soft, Activision Inc., THQ, Inc., Vivendi Universal Games, Inc., Sega of America, Inc., Square Enix, Inc., Tecmo, Inc., Lucasarts, a division of Lucas Films Entertainment Co., Ltd., and Namco Hometek, Inc. in

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the United States District Court for the Eastern District of Texas, Tyler Division (Case No. 6:04 CV-398-LED). We were served with the Summons and Complaint on September 7, 2004. The Complaint alleges infringement of US Patent No. 4,734,690 (method and apparatus for spherical panning) and seeks unspecified damages. We were served with a First Amended Complaint on or about October 7, 2004, which amended the original Complaint to properly name certain of the other defendants in the suit. We filed an Answer on November 8, 2004.

     On February 7, 2005, a Second Amended Complaint was filed against all of the above defendants, plus Sony Online Entertainment, Inc., Sony Computer Entertainment America, Inc., Microsoft Corp., and Nintendo of America, Inc. We answered the Second Amended Complaint on February 24, 2005. Discovery is ongoing.

iEntertainment Network, Inc. v. Epic Games, Inc., Atari, Inc. Valve Corporation, Sierra Entertainment, Inc., Sony Corporation of Japan, Sony Corporation of America, Sony Computer Entertainment America, Inc. and Sony Online Entertainment, Inc.

     On December 22, 2004, we were served with a Complaint by iEntertainment, Inc. The Complaint has been filed in the United States District Court of the Eastern District of North Carolina Western Division (5:04-CV-647-BD(1) and names the following defendants: us, Epic Games, Inc., Valve Corporation, Sierra Entertainment, Inc., Sony Corporation of Japan, Sony Corporation of America, Sony Computer Entertainment America, Inc. and Sony Online Entertainment, Inc. The Complaint alleges infringement of US Patent No. 6,042,477 (method of and system for minimizing the effects of time latency in multiplayer electronic games played on interconnected computers) and seeks unspecified damages. We answered the Complaint on or about March 28, 2005.

Codemasters, Inc. v. Atari, Inc.

     On January 13, 2005, we were served with a Complaint filed by Codemasters, Inc., or Codemasters, against us in New York Supreme Court, County of New York. The causes of action arise out of contractual disputes regarding payments owed by each party to the other. Codemasters’ causes of action include breach of contract, failure to respond to submitted statements of account and unjust enrichment. Codemasters is seeking relief in the amount of approximately $0.9 million and such other relief as may be just and proper, including interests, costs associated with the suit. In February 2005, we answered the Complaint and also served Counterclaims. The parties settled the matter on May 5, 2005. Pursuant to the settlement Agreement, we paid Codemasters approximately $0.3 million.

Mr. M.L. Edmondson v. Reflections Interactive Limited

     On March 4, 2005, Martin Lee Edmondson, the former Managing Director of Reflections Interactive Limited, our wholly-owned UK subsidiary, filed a Notice of Claim with the Newcastle upon Tyne Employment Tribunal claiming constructive unfair dismissal as a result of Reflections alleged repudiatory breach of a contract of employment that necessitated Mr. Edmondson’s resignation. Mr. Edmondson is seeking a declaration that he was unfairly dismissed and compensation in an unspecified amount for such dismissal. Compensation in the Employment Tribunal is limited to £55,000 in respect of the maximum compensatory award. Mr. Edmondson could be awarded for unfair dismissal, together with a maximum basic award of (depending on age and length of service) £1,350 to £2,025. On April 1, 2005, Reflections filed a Response denying that there was a fundamental breach of contract that entitled Mr. Edmondson to resign and claim constructive dismissal. A case management discussion was scheduled for April 29, 2005 but has been postponed pending the parties ongoing without prejudice discussions regarding settlement. The Employment Tribunal has granted a stay of the proceedings until July 8, 2005, by which date the parties must report to the Employment Tribunal on the progress of the without prejudice discussions.