UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended March 31, 2004

OR

ATARI, INC.

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

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

Securities registered pursuant to Section 12(b) of the Act: none

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [   ]

     The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based on the $4.04 closing sale price of the common stock on September 30, 2003 as reported on the NASDAQ National Market, was approximately $142,874,669. As of June 9, 2004, there were 121,275,614 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference

     Portions of Registrant’s definitive proxy statement for its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

ATARI, INC. AND SUBSIDIARIES
MARCH 31, 2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

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This Annual Report contains statements that may constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution readers regarding certain forward-looking statements in this Report, press releases, securities filings, and all other documents and communications. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Annual Report on Form 10-K are forward looking. The words “believe”, “expect”, “anticipate”, “intend” and similar expressions generally identify forward-looking statements. While we believe in the veracity of all statements made herein, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic and competitive uncertainties and contingencies and known and unknown risks. As a result of such risks, our actual results could differ materially from those expressed in any forward-looking statements made by, or on behalf of, us. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Some of the factors that could cause actual results or future events to differ materially or otherwise, include the following: the loss of key customers; delays in product development and related product release schedules; maintaining relationships with leading independent video game software developers; adapting to the rapidly changing industry technology; maintaining or acquiring licenses to intellectual property; the termination or modification of our agreements with hardware manufacturers; an inability to maintain or find debt financing on terms commercially reasonable to us; and pricing of and demand for distributed products. For specific information concerning these and other such factors please see the section entitled “Risk Factors” on pages 13 to 20.

Nintendo®, Game Boy®, Game Boy® Advance, Nintendo GameCube®, and Game Boy® Color are trademarks and/or registered trademarks of Nintendo of America, Inc. Sony’s PlayStation® and PlayStation® 2 are trademarks and/or registered trademarks of Sony Computer Entertainment, Inc. Microsoft Xbox^™ is a registered trademark of Microsoft Corporation. Asteroids®, Backyard Basketball®, Backyard Sports^™, Centipede®, Civilization®, Civilization® III: Conquests^™, Deer Hunter®, DRIV3R^™, Driver^™, Freddi Fish^™, Kya®, Missile Command®, Shadow Ops^™: Red Mercury, Sid Meier’s Civilization®, Stuntman®, Test Drive®, and V-Rally® are trademarks and/or registered trademarks of Atari Inc., its subsidiaries, and its affiliated entities. All other trademarks are property of their respective owners.

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PART I

ITEM 1. BUSINESS

OVERVIEW

          We are a leading global publisher and developer of video game software for both gaming enthusiasts and the mass-market audience, as well as a leading distributor of video game software in North America. We publish and distribute games for all platforms, including Sony PlayStation and PlayStation2; Nintendo Game Boy, Game Boy Advance and GameCube; Microsoft Xbox; and personal computers, referred to as PCs. We also publish and sub-license games for the wireless, internet, and other evolving platforms. Our diverse portfolio of products extends across every major video game genre, including: action, adventure, strategy, children, family, driving and sports games.

          Our products are based on intellectual properties that we have either created and own internally or which have been licensed from third parties, including leading entertainment companies. We continually seek the best available talent to join our internal development team, which we believe is one of the most creative in the industry.

          Our internally developed franchises range across all genres and platforms, and feature some of our most successful properties to date, including:

•		Driver (more than 6.0 million units sold in the U.S., including all installments);
•		Test Drive (more than 5.8 million units sold in the U.S., including all installments);
•		Backyard Sports (more than 6.5 million units sold in the U.S., including all sports and all installments);
•		Freddi Fish (more than 2.6 million units sold in the U.S., including all installments); and
•		Putt Putt (more than 2.4 million units sold in the U.S., including all installments).

          Our extensive library of licensed properties, which constitutes an important component of our product strategy, includes some of the most recognizable names in popular entertainment, which we believe reduces product risk. A significant number of our licensed properties have come from the television, motion picture and sports industries, including the following:

•		Warner Bros. Entertainment (The Matrix);
•		Viacom / Nickelodeon (Mission: Impossible 2, Survivor, Blue’s Clues and Dora the Explorer);
•		Sony Pictures (Godzilla);
•		C2 Pictures (Terminator 3);
•		Canal + (Terminator and Terminator 2);
•		Dreamworks (Sinbad);
•		FUNimation (Dragon Ball Z);
•		National Football League;
•		National Hockey League;
•		National Basketball Association; and
•		Major League Baseball.

          In addition to our publishing and development activities, we also distribute video game software in the United States and Canada, handling both our own products as well as those titles developed by certain third-party distributors with whom we have contracts. As a leading distributor of video game software throughout the U.S., we maintain what we believe to be state-of-the-art distribution operations and systems, reaching well in excess of 30,000 retail outlets nationwide. Additionally, through our relationship with our majority stockholder, Infogrames Entertainment S.A., or IESA, a French corporation, listed on Euronext, our products are distributed exclusively by IESA throughout Europe, Asia and other regions. See our risk factor regarding our dependence upon IESA. Similarly, we exclusively distribute IESA’s products in the United States and Canada.

          Through our distribution agreement with IESA, we have the rights to publish and sub-license certain intellectual properties either owned or licensed by IESA or Atari Interactive, Inc. Those properties include key franchises such as Roller Coaster Tycoon and Sid Meier’s Civilization, Atari classics such as Asteroids, Missile Command and Centipede and Hasbro properties such as TRANSFORMERS and Dungeons & Dragons.

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          For the year ended March 31, 2004, we reported net revenues of $468.9 million and net income of $0.7 million. During this twelve month period, on the strength of several of our key releases, particularly Enter the Matrix and several Dragon Ball Z titles, we ranked third among PC game publishers and fifth 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.) was organized 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”. Effective March 28, 2003, we changed our fiscal year-end from June 30 to March 31. 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 should not be deemed part of this Annual Report.

INDUSTRY OVERVIEW

          The video game software industry primarily comprises software for dedicated game consoles or platforms (such as GameCube, PlayStation2 and Xbox), handhelds (such as Game Boy Advance) 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 worldwide video game software market is expected to be $21.3 billion in 2004.

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.

          The current generation of video game console hardware leverages CD-ROM and DVD-ROM technology. Handheld platforms, however, still rely on cartridge technology. Use of disc-based technology in consoles has been an important advancement in the industry as it provides greater memory capacity, shorter manufacturing lead times and decreased manufacturing costs. Another important technological advancement has been the introduction of “backward compatibility”, or the ability of current generation consoles to operate software from the previous generation of consoles. This provides additional market longevity to both prior generation hardware and software. 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 30.1 million households in 2004, compared to 10.6 million and 12.3 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.

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Personal computers

          Advances in personal computer technology take place at a more rapid pace than 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 fact that this market has typically not been subject to video game industry cycles and that publishers are not required to pay hardware royalties and high manufacturing costs makes this an attractive market for video game publishers.

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. Given these facts, we expect consolidation within the video game software industry to continue.

RECAPITALIZATION AND SECONDARY OFFERING

          During the second quarter of fiscal 2004, we completed a recapitalization through the issuance of new shares pursuant to (i) an agreement with our majority stockholder (through direct and indirect stock holdings), IESA and (ii) a public offering. Per the agreement with IESA, on September 18, 2003, we issued an aggregate of 39,029,877 shares of our common stock, valued at $4.25 per share, to IESA and its wholly-owned subsidiary California U.S. Holdings, Inc., or CUSH, in satisfaction of approximately $165.9 million of our net indebtedness to IESA. The converted debt consisted of the following outstanding amounts at September 18, 2003: $48.3 million of a medium-term loan, $44.8 million of a revolving credit agreement with IESA, $46.3 million of non-interest bearing subordinated convertible notes and $73.1 million of 5% subordinated convertible notes. The 5% subordinated convertible notes were converted into shares of our common stock at a more favorable rate than was available under the original terms of such notes. The incremental value of the additional stock issued was treated as a non-cash dividend to IESA. The recapitalization agreement provided for an offset of previously provided advances to Atari Interactive and Atari Australia Pty Ltd. of $44.7 million and $1.9 million, respectively. Accordingly, upon completion of the recapitalization, no debt was owed to IESA or its subsidiaries pursuant to the above financing arrangements.

          On September 24, 2003, IESA sold 17,179,412 of the shares issued as part of the recapitalization at $4.25 per share in a public offering. We also sold 9,820,588 new shares of our common stock in the public offering at $4.25 per share, generating net proceeds to us of approximately $34.9 million. After these transactions and the exercise of the underwriter’s over-allotment option on October 21, 2003, IESA owns approximately 67% of our common stock directly and through its subsidiaries CUSH and Atari Interactive.

          In connection with the recapitalization, Atari Interactive extended the term of the license under which we use the Atari name to ten years expiring on December 31, 2013. We issued 2,000,000 shares of our common stock to Atari Interactive for the extended license and will pay a royalty equal to 1% of our net revenues during years six through ten of the extended license. There shall be no royalty payments due in years one through five.

RELATIONSHIP WITH IESA

          IESA renders management services to us and we render management services to Atari Interactive, which is based in Beverly, Massachusetts. Atari Interactive develops videogames, and owns the name “Atari” and the Atari logo, which we use under our license. As discussed further in the “Distribution” section of this Report, IESA is also the distributor of our products in Europe, Asia and certain other regions and we are the distributor of IESA’s and its affiliates’ products in the United States and Canada.

          IESA has incurred significant losses from operations and is highly leveraged. Should IESA experience liquidity issues, among other things, this may result in its inability to fund the development efforts of Atari Interactive, and our results of operations may suffer because, as the North American distributor of the games developed by Atari Interactive, our revenue could significantly decrease. Such a reduction of our revenue, among other things, could result in a breach of one or more of the covenants contained in our GECC senior credit facility. In the event any of the above contingencies occur, management is prepared to take various actions which may include, but not be limited to, a reduction in our expenditures for internal and external new product development and a reduction in overhead expenses. These actions, should they become necessary, may result in a significant reduction in the size of our operations.

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PRODUCTS

          Our core strength has typically been in titles for the action, adventure, strategy, children, family, racing and sports genres. We have built a leading children’s entertainment portfolio and have successfully transitioned a number of proven television and movie franchises to successful video game franchises. We continually seek to expand our product portfolio with proven intellectual properties and through the creation of sequels and expansion of successful titles.

          The following table lists our 25 top selling titles (based on dollar sales) during the year ended March 31, 2004.

          For fiscal 2004, we had one title, Enter the Matrix, published on four different platforms, which represented approximately 20% of our consolidated revenues.

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PUBLISHING

          Our publishing activities include the management of development, marketing, packaging and sales of video game software for all platforms, including PlayStation, PlayStation2, Game Boy, Game Boy Advance, GameCube, Xbox, and PC. During the year ended March 31, 2004, on the strength of several of our key releases, particularly Enter the Matrix and several Dragon Ball Z titles, we ranked third among PC game publishers and fifth 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, 2004, our publishing operations were organized as follows:

•

Santa Monica Studio—Santa Monica, California—With an emphasis on action, adventure, driving and sports games, our Santa Monica studio publishes titles that are developed both internally and externally. With proximity to the Hollywood community, the Santa Monica Studio is strategically positioned to acquire and manage key titles licensed from the motion picture and television studios. Key titles released by the Santa Monica studio during fiscal 2004 included: Enter the Matrix, Unreal Tournament 2004, Terminator 3: Rise of the Machines, Mission Impossible: Operation Surma, Magic the Gathering: Battle Ground, Unreal II: The Awakening, Temple of Elemental Evil: A Greyhawk Adventure, Neverwinter Nights: The Hordes of the Underdark, Neverwinter Nights: The Shadows of Undrentide, and Godzilla: Destroy all Monsters, among others. The Santa Monica Studio published 15 new titles in fiscal 2004, generating approximately 39% of our publishing revenue for the year.

•

Beverly Studio—Beverly, Massachusetts—The Beverly studio focuses 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 includes those titles previously published under the Hasbro Interactive label, which was acquired by IESA in 2001 and is now named Atari Interactive. Pursuant to our management agreement with IESA, we manage this facility and are responsible for publishing the games for which development is managed by Atari Interactive in the United States and Canada. Key titles published by the Beverly Studio in fiscal 2004 included: all titles within the Dragon Ball Z and Backyard Sports franchises, Civilization III: Conquests, Roller Coaster Tycoon II, Dungeons & Dragons: Heroes, Kya, and Yu Yu Hakusho: Spirit Detective, among others. The Beverly Studio published 38 titles in fiscal 2004 and generated approximately 33% of our publishing revenue for the year.

          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 the two publishing studios 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:

•

Humongous Entertainment—Seattle, Washington—The Humongous Studio focuses solely on the development of children’s titles, and the Studio has developed some of the most successful children’s interactive franchises in the industry. Among its critically and commercially successful character series of games, its Freddi Fish and Putt Putt franchises have to date sold in excess of 2.6 million units and 2.4 million units, respectively, in the United States, and its Backyard Sports franchise, the leading interactive sports series for children, has sold more than 6.5 million units in the United States to date.

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•		Reflections—Newcastle, England—Reflections is responsible for the creation and development of our hit Driver franchise, which has sold more than 12 million units worldwide to date, as well as Stuntman, which was released in June 2002. Reflections is currently working on DRIV3R, which is scheduled to be released in June 2004.
•		Shiny Entertainment, Inc.—Newport Beach, California—We acquired Shiny in April 2002, along with the rights to develop console and PC games based on The Matrix film trilogy. Shiny developed Enter the Matrix, which was released simultaneously with The Matrix Reloaded, the second film in The Matrix trilogy, in May 2003 and has sold in excess of 5 million units worldwide to date.
•		Minneapolis Studio—Minneapolis, Minnesota—Prior to being closed in March 2004, the Minneapolis studio developed games focusing primarily on action and adventure genres for the casual gamer. Given the nature of these products and their broad audience appeal, a large percentage of the Minneapolis studio’s lineup was published for the PC. Franchises and licenses previously developed in Minneapolis are now being overseen by the Beverly Studio, which had handled all marketing and support services for Minneapolis, prior to the Studio’s closing in March 2004.
•		Legend Entertainment—Chantilly, Virginia – Legend, which was closed in January 2004, focused primarily on certain games developed under the Unreal license. Upon completion of Unreal II: The Awakening for the holiday 2003 season, which was its only remaining project, the Studio was closed.

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

•		Paradigm Entertainment, Inc.—Dallas, Texas—Paradigm is the studio behind the successful Pilot Wings game. Paradigm developed several of our recently released titles, including Mission Impossible: Operation Surma and the upcoming Terminator 3: The Redemption.
•		Atari Interactive—Beverly, Massachusetts—Atari Interactive’s studio is responsible for managing franchises such as Roller Coaster Tycoon, Civilization and Monopoly Tycoon, as well as TRANSFORMERS, which was released in May 2004.
•		Eden Studios SAS—Lyon, France—Eden Studios developed the successful V-Rally series, which, to date, has sold more than 3.8 million units worldwide. Most recently, Eden developed Kya, which was released for the holiday 2003 season.
•		Atari Melbourne House Pty Ltd—Melbourne, Australia—Atari Melbourne House is the studio behind our recently released TRANSFORMERS game (May 2004). Previously, the Studio had developed Grand Prix Challenge.
•		Hunt Valley—Hunt Valley, Maryland—The Hunt Valley Studio, which was closed in November 2003, developed several games, including Dungeons & Dragons: Heroes, which was released for the holiday 2003 season and was the final title developed by the Studio.

External development

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

•

BioWare Corp. (Neverwinter Nights);

•

Chris Sawyer (Roller Coaster Tycoon series);

•

Deep Red (Monopoly Tycoon);

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Digital Extremes (Unreal Championship);

•

Digital Fiction (Yu Yu Hakusho);

•

Epic Games (Unreal Tournament 2004 and Unreal Tournament 2003);

•

Firaxis Entertainment (Civilization and Pirates!);

•

Monster Games (Test Drive: Eve of Destruction);

•

Stormfront Studios (Forgotten Realms: Demon Stone);

•

Webfoot Technologies (Dragon Ball Z: The Legacy of Goku); and

•

Zombie Studios (Shadow Ops: Red Mercury).

          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 products. The producer also helps ensure that development milestones are met in a timely manner. We generally have the right to suspend or terminate making payments to an external developer if the developer fails to meet its development milestones in a timely fashion. Also, we generally have the option to terminate these agreements at relatively low costs.

SALES AND MARKETING

          Our sales and marketing programs emphasize four areas:

•

launching new products;

•		raising the public’s awareness of new brands and franchises;
•		extending the life of existing products and properties to the greatest degree possible; and

•

exploiting the marketability of our intellectual property and products through licensing arrangements that expand application into other consumer product categories.

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

•		on-line marketing on the Internet and direct mailings;
•		advertising in video gaming, computer, and general consumer publications;

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in-store promotions utilizing display towers and endcaps;

•

advertising on television and radio;

•

“guerilla” or “underground” marketing techniques, in which marketing materials are placed in locations which are frequented by the targeted groups of consumers;

•

“viral” marketing techniques in which consumers “pass along” our messages to other targeted groups of consumers; and

•

promotional partnerships with other consumer product companies and third-parties.

          We believe the Internet is integral to 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.

          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.

          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.

          In order to improve efficiency, our sales efforts are handled internally by a single sales organization. We currently have three sales regions, each managed by a vice president of sales. Two of these regions focus on selling our products to retailer and reseller accounts. The third region deals with sales derived from the licensing of our intellectual property and products. Within each region, we have five sales 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, Canal +, Dreamworks, Major League Baseball, National Hockey League, National Basketball Association and the National Football League.

          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.

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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:

*        IESA, our parent entity 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.

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DISTRIBUTION

United States and Canada

          Throughout the United States and Canada, we distribute our own products, as well as the products of other publishers, utilizing our distribution operations and systems. We are the exclusive distributors for IESA in the United States and Canada. 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, i.e., manufacturing, EDI/order processing, inventory management, purchasing, and tracking of shipments. We believe these systems help us:

•

increase the efficiency, accuracy and integrity of order processing and payments;

•

shorten order turnaround time; and

•

ensure prompt delivery of desired titles.

          Our strength in distribution in the United States and Canada ensures access to favorable shelf space for our products. We believe that we are one of the largest distributors of video game software to mass merchants in the United States. We distribute our products to a variety of outlets, including mass-merchant retailers such as Wal-Mart and Target; major retailers, such as Best Buy, 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. Additionally, our games are made available through various on-line retail and “e-tail” companies (i.e. Amazon.com).

          Based on the strength of our distribution operations, we have successfully attracted other publishers to utilize our mass merchant distribution capabilities for their products. Other publishers’ products are generally acquired by us and distributed under the name of the publisher of such products, who is, in turn, responsible for the publishing, packaging, marketing and customer support 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. Our sales and distribution programs for other publishers’ products are an integral part of our overall approach to the United States and Canadian 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

          Because of IESA’s strong presence in Europe, Asia and certain other regions worldwide, 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 and Canada. 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 profit of the products distributed by IESA, or 130.0% of the royalty rate due to the developer, 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.

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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 and 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 2-3 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 2004, we have 486 employees domestically, with 223 in product development, 96 in administration (i.e., senior management, human resources, legal, IT and facilities), 55 in finance, 48 in sales and 64 in marketing. During the fiscal year, we had operations in New York, New York; Beverly, Massachusetts; Minneapolis, Minnesota (Studio closed in March 2004); Seattle, Washington; Sunnyvale, California; Santa Monica, California; Chantilly, Virginia (Studio closed in January 2004); and Newport Beach, California. We also have operations internationally at our Reflections Studio located in Newcastle, England, which has 109 employees.

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 SEGA, among others. In addition, we compete with first-party publishers such as Sony, Nintendo, and Microsoft, who in some instances publish their own products in competition with third-party publisher licenses.

          Atari Interactive has granted us a license to use the name “Atari”. We believe that the Atari brand, which is largely credited with launching the video game industry, continues to carry a level of recognition that can be used as a competitive advantage. 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 and Canada and, through IESA, in Europe, Asia and other regions. We believe that popular franchises such as Driver, Test Drive, Civilization, the Backyard Sports series, Deer Hunter and Roller Coaster Tycoon, and attractive licenses such as The Matrix, Terminator, Unreal, Dragon Ball Z, Blue’s Clues, Major League Baseball and the National Football League, provide us with a competitive angle to market 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 19 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 of this Report.

          Please see Note 19 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.

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RISK FACTORS

RISKS RELATED TO OUR BUSINESS

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

          Our sales to Wal-Mart, Best Buy, Target and GameStop accounted for approximately 24.6%, 11.2%, 9.9% and 8.4%, respectively, of net revenues for the year ended March 31, 2004. Our gross accounts receivable from these retailers were approximately $9.6 million, $8.2 million, $6.1 million and $4.8 million, respectively, as of March 31, 2004. Our business, results of operations and financial condition would be adversely affected if:

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we lost any of these retailers as a customer;

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any of these retailers purchased significantly fewer products supplied by us;

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

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

          We do not have any written agreements or understandings with Wal-Mart, Best Buy, Target or GameStop. Consequently, our relationship with Wal-Mart, Best Buy, Target or GameStop could end or change at any time. We cannot assure you that Wal-Mart, Best Buy, Target and GameStop will continue to use us as a major supplier of video game software, or at all.

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:

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the timing of our release of new titles;

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the popularity of new titles and titles released in prior periods;

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changes in the mix of titles with varying profit margins;

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the timing of customer orders; and

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fluctuations in the size and rate of growth of consumer demand for titles for different platforms.

          In other particular fiscal quarters, our net revenues may be lower and 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 the expectations of market analysts or investors, the price of our common stock will likely decrease.

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. 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.

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

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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.

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 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.

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, several of our titles such as Enter the Matrix, Mission Impossible: Operation Surma, and Terminator 3: Rise of the Machines, 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. We are currently in the process of negotiating renewals for several third party 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.

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 and PlayStation 2, 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 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:

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

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. Generally we do not enter into any employment contracts with members of senior management. 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.

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 Brothers, are increasing their focus on the video game software market and may become significant 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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respond more quickly to new or emerging technologies or changes in customer preferences;

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carry larger inventories;

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undertake more extensive marketing campaigns;

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adopt more aggressive pricing policies; and

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make higher offers or guarantees to software developers and licensors than us.

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 successfully compete 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

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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. 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, 2003 and March 31, 2004, net revenues from our distribution business were approximately 18.0% and 13.4%, respectively, of our total net revenues. This decrease as a percentage of net revenues is primarily a result of our decision to reduce our lower margin third-party distribution arrangements. 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.

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 and Canada and IESA distributes products on our behalf in Europe, Asia and certain other regions throughout the world. If these agreements are terminated or amended in a manner adverse to us, we may: