UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number 001-33368

Glu Mobile Inc.

(Exact name of the Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		91-2143667 (I.R.S. Employer Identification No.)

2207 Bridgepointe Parkway, Suite 300
San Mateo, California 94404
(Address of Principal Executive Offices, including Zip Code)

(650) 532-2400
(Registrant’s Telephone number, including Area Code)

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Shares of Glu Mobile Inc. common stock, $0.0001 par value per share, outstanding as of April 30, 2010: 30,610,219 shares.

 

 

GLU MOBILE INC.

FORM 10-Q

Quarterly Period Ended March 31, 2010

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			31
ITEM 4T. CONTROLS AND PROCEDURES			33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			34
ITEM 1A. RISK FACTORS			34
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			52
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			52
ITEM 4. RESERVED			52
ITEM 5. OTHER INFORMATION			52
ITEM 6. EXHIBITS			52
SIGNATURES			53
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

GLU MOBILE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	10,474			$	10,510
Accounts receivable, net			13,344				16,030
Prepaid royalties			4,614				6,738
Prepaid expenses and other			2,185				2,520
Total current assets			30,617				35,798
Property and equipment, net			2,953				3,344
Prepaid royalties			809				96
Other long-term assets			802				833
Intangible assets, net			11,759				13,059
Goodwill			4,610				4,608
Total assets		$	51,550			$	57,738
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	4,154			$	4,480
Accrued liabilities			940				817
Accrued compensation			2,526				1,829
Accrued royalties			10,105				12,604
Accrued restructuring			824				1,406
Deferred revenues			1,169				914
Current portion of long-term debt			15,038				16,379
Total current liabilities			34,756				38,429
Other long-term liabilities			7,919				7,616
Total liabilities			42,675				46,045
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000 shares authorized at March 31, 2010 and December 31, 2009; no shares issued and outstanding at March 31, 2010 and December 31, 2009			—				—
Common stock, $0.0001 par value: 250,000 shares authorized at March 31, 2010 and December 31, 2009; 30,575 and 30,360 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively			3				3
Additional paid-in capital			188,758				188,078
Accumulated other comprehensive income			1,089				931
Accumulated deficit			(180,975	)			(177,319	)
Total stockholders’ equity			8,875				11,693
Total liabilities and stockholders’ equity		$	51,550			$	57,738

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

GLU MOBILE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(in thousands, except per share data)

		Three Months Ended
		March 31,
		2010				2009
Revenues		$	17,289			$	20,775
Cost of revenues:
Royalties			4,691				5,813
Amortization of intangible assets			1,228				2,848
Total cost of revenues			5,919				8,661
Gross profit			11,370				12,114
Operating expenses:
Research and development			6,661				6,397
Sales and marketing			2,971				4,112
General and administrative			3,813				4,485
Amortization of intangible assets			55				51
Restructuring charge			594				—
Total operating expenses			14,094				15,045
Loss from operations			(2,724	)			(2,931	)
Interest and other income/(expense), net:
Interest income			7				18
Interest expense			(304	)			(364	)
Other expense, net			(334	)			(461	)
Interest and other income/(expense), net			(631	)			(807	)
Loss before income taxes			(3,355	)			(3,738	)
Income tax provision			(301	)			(2,019	)
Net loss		$	(3,656	)		$	(5,757	)
Net loss per common share — basic and diluted:		$	(0.12	)		$	(0.19	)
Weighted average common shares outstanding — basic and diluted			30,458				29,595
Stock-based compensation expense included in:
Research and development		$	164			$	180
Sales and marketing			73				151
General and administrative			287				433

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

GLU MOBILE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(in thousands)

		Three Months Ended March 31,
		2010				2009
Cash flows from operating activities:
Net loss		$	(3,656	)		$	(5,757	)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
Depreciation and accretion			563				593
Amortization of intangible assets			1,283				2,899
Stock-based compensation			524				764
MIG earnout expense			—				656
Interest expense on debt			265				276
Amortization of loan agreement costs			39				38
Non-cash foreign currency remeasurement gain			332				442
Changes in allowance for doubtful accounts			212				20
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			2,286				(130	)
Prepaid royalties			1,409				(1,034	)
Prepaid expenses and other assets			265				678
Accounts payable			(370	)			(393	)
Other accrued liabilities			72				221
Accrued compensation			708				67
Accrued royalties			(2,364	)			(482	)
Deferred revenues			258				(8	)
Accrued restructuring charge			(582	)			(349	)
Other long-term liabilities			326				(1,045	)
Net cash provided by/(used in) operating activities			1,570				(2,544	)
Cash flows from investing activities:
Purchase of property and equipment			(108	)			(305	)
Net cash used in investing activities			(108	)			(305	)
Cash flows from financing activities:
Proceeds from line of credit			11,797				18,312
Payments on line of credit			(13,341	)			(13,851	)
MIG loan payments			—				(6,000	)
Proceeds from exercise of stock options and ESPP			156				11
Net cash used in financing activities			(1,388	)			(1,528	)
Effect of exchange rate changes on cash			(110	)			(115	)
Net decrease in cash and cash equivalents			(36	)			(4,492	)
Cash and cash equivalents at beginning of period			10,510				19,166
Cash and cash equivalents at end of period		$	10,474			$	14,674

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

GLU MOBILE INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

Note 1 — The Company, Basis of Presentation and Summary of Significant Accounting Policies

Glu Mobile Inc. (the “Company” or “Glu”) was incorporated in Nevada in May 2001 and reincorporated in the state of Delaware in March 2007. The Company creates mobile games and related applications based on third-party licensed brands and other intellectual property, as well as its own original intellectual property.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 31, 2010. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of March 31, 2010 and its results of operations for the three months ended March 31, 2010 and 2009, respectively. These unaudited condensed consolidated financial statements are not necessarily indicative of the results to be expected for the entire year. The unaudited consolidated balance sheet presented as of December 31, 2009 has been derived from the audited consolidated financial statements as of that date, and the consolidated balance sheet presented as of March 31, 2010 has been derived from the unaudited condensed consolidated financial statements as of that date.

The Company had $10,474 of cash and cash equivalents as of March 31, 2010. During the three months ended March 31, 2010, the Company generated $1,570 of cash from operating activities, which was offset by $108 of cash used in investing activities and $1,388 of cash used in financing activities. The Company expects to continue to fund its operations and satisfy its contractual obligations for 2010 primarily through its cash and cash equivalents, borrowings under the Company’s revolving credit facility and any cash generated by operations. However, there can be no assurances that the Company will be able to generate positive operating cash flow during 2010 or beyond. The Company believes its cash and cash equivalents, together with any cash flows from operations and borrowings under its credit facility will be sufficient to meet its anticipated cash needs through for at least the next 12 months. However, the Company’s cash requirements for the next 12 months may be greater than anticipated due to, among other reasons, lower than expected cash generated from operating activities including the impact of foreign currency rate changes, revenues that are lower than currently anticipated, greater than expected operating expenses, usage of cash to fund its foreign operations, unanticipated limitations or timing restrictions on its ability to access funds that are held in its non-U.S. subsidiaries, a deterioration of the quality of the Company’s accounts receivable, which could lower the borrowing base under its credit facility, and any failure on the Company’s part to remain in compliance with the covenants under the revolving credit facility. The Company currently expects that it will be able to comply with the EBITDA-related covenant contained in the credit facility. If revenues are lower than anticipated, the Company may be required to reduce its operating expenses to remain in compliance with this covenant. Reducing operating expenses could be very challenging for the Company, since it undertook operating expense reductions and restructuring activities in the third and fourth quarters of 2008, the third quarter of 2009 and the first quarter of 2010 that reduced operating expenses significantly. However, the Company expects to continue its efforts to reduce operating expenses during the first half of 2010. Reducing operating expenses further than the Company currently anticipates could have the effect of reducing revenues. On August 24, 2009, February 10, 2010 and March 18, 2010, the Company entered into amendments to its Loan and Security Agreement with the lender, which (1) reduced certain of the minimum targets contained in the EBITDA-related covenant, (2) changed the measurement period for the EBITDA covenant from a rolling six month calculation to a quarterly calculation, (3) extended the maturity date of the Loan and Security Agreement from December 22, 2010 until June 30, 2011 and (4) increased the interest rate for borrowings under the Loan and Security Agreement by 0.75% to the lender’s prime rate, plus 1.75%, but no less than 5.0% (see Note 6). As of March 31, 2010, the Company was in compliance with the modified covenants.

If the Company’s cash sources are insufficient to satisfy the Company’s cash requirements, the Company may seek to raise additional capital by selling convertible debt, preferred stock (convertible into common stock or unconvertible) or common stock, seeking to increase the amount available to the Company for borrowing under the Company’s credit facility, procuring a new debt facility, selling some of the Company’s assets, and/or seeking to restructure the MIG earnout and bonus payments. The Company may be unable to raise additional capital through the sale of securities, or to do so on terms that are favorable to it, particularly given current capital market and overall economic conditions. Any sale of convertible debt securities or additional equity securities could result in substantial dilution to the Company’s stockholders. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of the Company’s common stock, all of which is subject to the provisions of the credit facility. Additionally, the Company may be unable to increase the size of the Company’s credit facility or procure a new debt facility, or to do so on terms that are acceptable to it, particularly in light of the current credit market conditions. Similarly, the Company may be unable to restructure the MIG earnout and bonus payments to the extent it may need. If the amount of cash that the Company generates from operations is less than anticipated or if the Company uses cash in its operations, it could also be required to extend the term of its credit facility beyond its June 30, 2011 expiration date (or replace it with an alternate loan arrangement), and resulting debt payments thereunder could further inhibit the Company’s ability to achieve profitability in the future. The credit facility also contains other customary events of default, including a “material adverse change” clause (see Note 6).

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable.

The Company derives its accounts receivable from revenues earned from customers located in the United States and other locations outside of the United States. The Company performs ongoing credit evaluations of its customers’ financial condition and currently does not require any collateral from its customers. The Company bases its allowance for doubtful accounts on management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews past due balances over a specified amount individually for collectability on a monthly basis and all other balances quarterly. The Company writes off accounts receivable balances against the allowance when it determines that the amount will not be recovered.

The following table summarizes the revenues from customers that accounted for in excess of 10% of the Company’s revenues for the periods indicated:

		Three Months Ended
		March 31,
		2010				2009
Verizon Wireless			18.0	%			21.8	%
China Mobile			*				12.2

At March 31, 2010, Verizon Wireless accounted for 24.4% of total accounts receivable. At December 31, 2009, Verizon Wireless accounted for 24.1% of total accounts receivable. No other carrier represented more than 10% of the Company’s total accounts receivable as of these dates.

Net Loss Per Share

The Company computes basic net loss per share attributable to common stockholders by dividing its net loss for the period by the weighted average number of common shares outstanding during the period less the weighted average number of unvested common shares subject to repurchase by the Company.

		Three Months Ended
		March 31,
		2010				2009
Net loss		$	(3,656	)		$	(5,757	)
Basic and diluted shares:
Weighted average common shares outstanding			30,459				29,596
Weighted average unvested common shares subject to repurchase			(1	)			(1	)
Weighted average shares used to compute basic and diluted net loss per share			30,458				29,595
Net loss per share — basic and diluted		$	(0.12	)		$	(0.19	)

The following weighted average options to purchase common stock, warrants to purchase common stock and unvested shares of common stock subject to repurchase have been excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have had an anti-dilutive effect:

		Three Months Ended
		March 31,
		2010				2009
Warrants to purchase common stock			106				106
Unvested common shares subject to repurchase			1				1
Options to purchase common stock			5,734				5,010
			5,841				5,117

Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (“FASB”) issued Update No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). It updates the existing multiple-element revenue arrangements guidance currently included under Accounting Standards Codification (“ASC”) 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). The revised guidance primarily provides two significant changes: (1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and (2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.

In October 2009, the FASB issued Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”) which amended the accounting requirements under the Software Topic, ASC 985-605 Revenue Recognition. The objective of this update is to address the accounting for revenue arrangements that contain tangible products and software. Specifically, products that contain software that is “more than incidental” to the product as a whole will be removed from the scope of ASC subtopic 985-605 (previously AICPA Statement of Position 97-2). The amendments align the accounting for these revenue transaction types with the amendments under ASU 2009-13 mentioned above. The guidance provided within ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010 and allows for either prospective or retrospective application, with early adoption permitted. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.

In June 2009, the FASB issued Statement 167, which amended the consolidation guidance that applies to variable interest entities (“VIE”) under ASC 810, Consolidation (“ASC 810”). The new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The Company adopted this guidance on January 1, 2010. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted a new accounting standard update regarding business combinations, ASC 805, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. ASC 805 also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Although the Company did not enter into any business combinations during 2009 or the first quarter of 2010, the Company believes ASC 805 may have a material impact on the Company’s future consolidated financial statements if the Company were to enter into any future business combinations depending on the size and nature of any such future transactions.

Note 2 — Fair Value Measurements

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Effective January 1, 2010, the Company adopted ASU 2010-06, which amended ASC 820 to require new disclosures for transfers of financial assets and liabilities into and out of Levels 1 and 2 in the fair value hierarchy and for activity in Level 3 in the fair value hierarchy. The adoption of the amended disclosure requirements for fair value measurements did not affect the disclosures because the Company did not transfer financial assets or liabilities between levels in the fair value hierarchy. The Company’s cash and investment instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. As of March 31, 2010, the Company had $10,474 in cash and cash equivalents.

Note 3 — Balance Sheet Components

Accounts Receivable

		March 31,				December 31,
		2010				2009
Accounts receivable		$	14,102			$	16,576
Less: Allowance for doubtful accounts			(758	)			(546	)
		$	13,344			$	16,030

Accounts receivable includes amounts billed and unbilled as of the respective balance sheet dates. The Company had no significant write-offs or recoveries during the three months ended March 31, 2010 and 2009.

Property and Equipment

		March 31,				December 31,
		2010				2009
Computer equipment		$	5,207			$	5,167
Furniture and fixtures			471				455
Software			2,748				2,742
Leasehold improvements			3,319				3,360
			11,745				11,724
Less: Accumulated depreciation and amortization			(8,792	)			(8,380	)
		$	2,953			$	3,344

Depreciation expense for the three months ended March 31, 2010 and 2009 was $563 and $593, respectively.

Other Long-Term Liabilities

		March 31,				December 31,
		2010				2009
Accrued royalties		$	440			$	96
Uncertain tax position obligations			4,633				4,614
Deferred income tax liability			1,737				1,736
Other			1,109				1,170
		$	7,919				7,616

Note 4 — Goodwill and Intangible Assets

The Company’s intangible assets were acquired in connection with the acquisitions of Macrospace in 2004, iFone in 2006, MIG in 2007 and Superscape in 2008. The carrying amounts and accumulated amortization expense of the acquired intangible assets, including the impact of foreign currency exchange translation, at March 31, 2010 and December 31, 2009 were as follows:

						March 31, 2010												December 31, 2009
										Accumulated												Accumulated
										Amortization												Amortization
										Expense												Expense
										(Including												(Including
		Estimated				Gross				Impact of				Net				Gross				Impact of				Net
		Useful				Carrying				Foreign				Carrying				Carrying				Foreign				Carrying
		Life				Value				Exchange)				Value				Value				Exchange)				Value
Intangible assets amortized to cost of revenues:
Titles, content and technology		2.5 yrs				$	13,463			$	(13,463	)		$	—			$	13,599			$	(13,411	)		$	188
Catalogs		1 yr					1,172				(1,172	)			—				1,239				(1,239	)			—
ProvisionX Technology		6 yrs					193				(168	)			25				204				(168	)			36
Carrier contract and related relationships		5 yrs					18,488				(7,854	)			10,634				18,558				(7,149	)			11,409
Licensed content		5 yrs					2,744				(2,111	)			633				2,753				(1,902	)			851
Service provider license		9 yrs					431				(110	)			321				431				(98	)			333
Trademarks		3 yrs					542				(542	)			—				544				(512	)			32
							37,033				(25,420	)			11,613				37,328				(24,479	)			12,849
Other intangible assets amortized to operating expenses:
Emux Technology		6 yrs					1,250				(1,104	)			146				1,321				(1,111	)			210
Noncompete agreement		2 yrs					547				(547	)			—				578				(578	)			—
							1,797				(1,651	)			146				1,899				(1,689	)			210
Total intangibles assets						$	38,830			$	(27,071	)		$	11,759			$	39,227			$	(26,168	)		$	13,059

The Company has included amortization of acquired intangible assets directly attributable to revenue-generating activities in cost of revenues. The Company has included amortization of acquired intangible assets not directly attributable to revenue-generating activities in operating expenses. During the three months ended March 31, 2010 and 2009, the Company recorded amortization expense in the amounts of $1,228 and $2,848 respectively, in cost of revenues. During the three months ended March 31, 2010 and 2009, the Company recorded amortization expense in the amounts of $55 and $51, respectively, in operating expenses.

As of March 31, 2010, the total expected future amortization related to intangible assets was as follows:

		Amortization				Amortization
		Included in				Included in				Total
		Cost of				Operating				Amortization
Year Ending December 31,		Revenues				Expenses				Expense
2010 (remaining nine months)		$	2,983			$	146			$	3,129
2011			2,856				—				2,856
2012			2,739				—				2,739
2013			2,671				—				2,671
2014			270				—				270
2015 and thereafter			94				—				94
		$	11,613			$	146			$	11,759

Goodwill

The Company attributes all of the goodwill resulting from the Macrospace acquisition to its Europe, Middle East and Africa (“EMEA”) reporting unit. The goodwill resulting from the iFone acquisition is evenly attributed to the Americas and EMEA reporting units. The Company attributes all of the goodwill resulting from the MIG acquisition to its Asia and Pacific (“APAC”) reporting unit and all of the goodwill resulting from the Superscape acquisition to the Americas reporting unit. The goodwill allocated to the Americas reporting unit is denominated in U.S. Dollars (“USD”), the goodwill allocated to the EMEA reporting unit is denominated in Pounds Sterling (“GBP”) and the goodwill allocated to the APAC reporting unit is denominated in Chinese Renminbi (“RMB”). As a result, the goodwill attributed to the EMEA and APAC reporting units are subject to foreign currency fluctuations.

Goodwill by geographic region for the periods indicated was as follows:

		March 31, 2010																December 31, 2009
		Americas				EMEA				APAC				Total				Americas				EMEA				APAC				Total
Balance as of January 1
Goodwill		$	24,871			$	25,354			$	23,881			$	74,106			$	24,871			$	25,354			$	23,895			$	74,120
Accumulated Impairment Losses			(24,871	)			(25,354	)			(19,273	)			(69,498	)			(24,871	)			(25,354	)			(19,273	)			(69,498	)
			—				—				4,608				4,608				—				—				4,622				4,622
Goodwill Acquired during the year			—				—				—				—				—				—				—				—
Effects of Foreign Currency Exchange			—				—				2				2				—				—				(14	)			(14	)
Adjustments			—				—				—				—				—				—				—				—
Impairment Losses			—				—				—				—				—				—				—				—
Balance as of			—				—				4,610				4,610				—				—				4,608				4,608
Goodwill			24,871				25,354				23,883				74,108				24,871				25,354				23,881				74,106
Accumulated Impairment Losses			(24,871	)			(25,354	)			(19,273	)			(69,498	)			(24,871	)			(25,354	)			(19,273	)			(69,498	)
		$	—			$	—			$	4,610			$	4,610			$	—			$	—			$	4,608			$	4,608

In accordance with ASC 350, Intangibles — Goodwill and Other (“ASC 350”) the Company’s goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350, the Company performs the annual impairment review of its goodwill balance as of September 30.

ASC 350 requires a two-step approach to testing goodwill for impairment for each reporting unit annually, or whenever events or changes in circumstances indicate the fair value of a reporting unit is below its carrying amount. The first step measures for impairment by applying the fair value-based tests at the reporting unit level. The second step (if necessary) measures the amount of impairment by applying the fair value-based tests to individual assets and liabilities within each reporting units. The fair value of the reporting units are estimated using a combination of the market approach, which utilizes comparable companies’ data, and/or the income approach, which uses discounted cash flows.

The Company has three geographic segments comprised of the 1) Americas, 2) APAC and 3) EMEA regions. As of March 31, 2010, the Company had goodwill attributable to the APAC reporting unit. The Company performed an annual impairment review as of September 30, 2009 as prescribed in ASC 350 and concluded that it was not at risk of failing the first step, as the fair value of the APAC reporting unit exceeded its carrying value and thus no adjustment to the carrying value of goodwill was necessary. As a result, the Company was not required to perform the second step. In order to determine the fair value of the Company’s reporting units, the Company utilizes the discounted cash flow and market methods. The Company has consistently utilized both methods in its goodwill impairment tests and weights both results equally. The Company uses both methods in its goodwill impairment tests as it believes both, in conjunction with each other, provide a reasonable estimate of the determination of fair value of the reporting unit — the discounted cash flow method being specific to anticipated future results of the reporting unit and the market method, which is based on the Company’s market sector including its competitors. The assumptions supporting the discounted cash flow method, were determined using the Company’s best estimates as of the date of the impairment review.

Note 5 — Commitments and Contingencies

Leases

The Company leases office space under non-cancelable operating facility leases with various expiration dates through July 2013. Rent expense for the three months ended March 31, 2010 and 2009 was $665 and $666, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. The deferred rent balance was $338 and $440 at March 31, 2010 and December 31, 2009, respectively, and was included within other long-term liabilities.

At March 31, 2010, future minimum lease payments under non-cancelable operating leases were as follows:

		Minimum
		Operating								Net
		Lease				Sub-lease				Lease
Year Ending December 31,		Payments				Income				Payments
2010 (remaining nine months)		$	2,405			$	88			$	2,317
2011			3,016				78				2,938
2012			1,837				—				1,837
2013			194				—				194
		$	7,452			$	166			$	7,286

Minimum Guaranteed Royalties

The Company has entered into license and development agreements with various owners of brands and other intellectual property to develop and publish games for mobile handsets. Pursuant to some of these agreements, the Company is required to pay minimum royalties over the term of the agreements regardless of actual game sales. Future minimum royalty payments for those agreements as of March 31, 2010 were as follows:

		Minimum
		Guaranteed
Year Ending December 31,		Royalties
2010 (remaining nine months)		$	3,104
2011			348
2012			42
2013 and thereafter			50
		$	3,544

Commitments in the above table include $2,052 of guaranteed royalties to licensors that are included in the Company’s consolidated balance sheet as of March 31, 2010 because the licensors do not have any significant performance obligations. These commitments are included in both current and long-term prepaid and accrued royalties.

Income Taxes

As of March 31, 2010, unrecognized tax benefits and potential interest and penalties are classified within “Other long-term liabilities” on the Company’s condensed consolidated balance sheets. As of March 31, 2010, the settlement of the Company’s income tax liabilities could not be determined; however, the liabilities are not expected to become due within the next 12 months.

Indemnification Agreements

The Company has entered into agreements under which it indemnifies each of its officers and directors during his or her lifetime for certain events or occurrences while the officer or director is or was serving at the Company’s request in that capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had recorded no liabilities for these agreements as of March 31, 2010 or December 31, 2009.

In the ordinary course of its business, the Company includes standard indemnification provisions in most of its license agreements with carriers and other distributors. Pursuant to these provisions, the Company generally indemnifies these parties for losses suffered or incurred in connection with its games, including as a result of intellectual property infringement and viruses, worms and other malicious software. The term of these indemnity provisions is generally perpetual after execution of the corresponding license agreement, and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is generally unlimited. The Company has never incurred costs to defend lawsuits or settle indemnified claims of these types. As a result, the Company believes the estimated fair value of these indemnity provisions is minimal. Accordingly, the Company had recorded no liabilities for these provisions as of March 31, 2010 or December 31, 2009.

Contingencies

From time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. For example, the Company is engaged in a contractual dispute with a licensor, Skinit, Inc., related to, among other claims, alleged underpayment of royalties and failure to perform under a distribution agreement, pursuant to which Skinit previously claimed that it is owed approximately $600. On April 21, 2009, Skinit filed a complaint against the Company and other defendants, seeking unspecified damages plus attorney’s fees and costs. The complaint, filed in the Superior Court of California in Orange County (case number 30-2009), alleges breach of contract, interference with economic relations, conspiracy and misrepresentation of fact. On June 25, 2009, the Company filed a motion in the Superior Court in Orange County requesting an order compelling Skinit to arbitrate its claim against the Company and requesting that the court stay the action pending the determination of the motion and the subsequent arbitration. On July 30, 2009, the court granted the Company’s motion in its entirety and the dispute will now proceed to arbitration, which is currently scheduled to occur on August 9, 2010.

The Company does not believe it is party to any currently pending litigation, the outcome of which will have a material adverse effect on its operations, financial position or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors.

Note 6 — Debt

MIG Notes

In December 2008, the Company amended the MIG merger agreement to acknowledge the full achievement of the earnout milestones and at the same time entered into secured promissory notes in the aggregate principal amount of $20,000 payable to the former MIG shareholders (the “Earnout Notes”) as full satisfaction of the MIG earnout. In March 2010, the Company entered into an agreement with the holders of the Earnout Notes and the Special Bonus Notes to postpone the payments that would have been due on March 31, 2010 until at least May 1, 2010. The Earnout Notes require that the Company pay off the principal and interest in installments with aggregate remaining principal payments scheduled as follows:

May 1, 2010		$	1,500
June 30, 2010		$	1,500
September 30, 2010		$	1,500
December 31, 2010		$	1,500
			6,000

The Earnout Notes are secured by a lien on substantially all of the Company’s assets and are subordinated to the Company’s obligations to the lender under the Company’s Loan and Security Agreement, dated as of February 15, 2007, as amended (the “Credit Facility”), and any replacement credit facility that meets certain conditions. The Earnout Notes began accruing simple interest on April 1, 2009 at the rate of 7% compounded annually and may be prepaid without penalty. A change of control of the Company accelerates the payment of principal and interest under the Earnout Notes.

As of March 31, 2010, the Company had paid $14,000 of principal and $191 of interest to the MIG shareholders related to the Earnout Notes. On May 1, 2010, the Company paid an additional $1,500 of principal and $350 of interest to the MIG shareholders related to the Earnout Notes.

In December 2008, the Company also entered into secured promissory notes in the aggregate principal amount of $5,000 payable to two former shareholders of MIG (the “Special Bonus Notes”) as full satisfaction of the special bonus provisions of their employment agreements. The Company currently intends to pay the $5,000 of principal plus accrued interest from cash held in China. The Special Bonus Notes provide for cash payments as follows:

May 1, 2010		$	937
June 30, 2010		$	937
September 30, 2010		$	1,563
December 31, 2010		$	1,563
			5,000

The Special Bonus Notes are guaranteed by the Company and the Company’s obligations are secured by a lien on substantially all of the Company’s assets. The Special Bonus Notes are subordinated to the Credit Facility and any replacement credit facility that meets certain conditions. The Special Bonus Notes began accruing simple interest on April 1, 2009 at the rate of 7% compounded annually, and may be paid off in advance without penalty. A change of control of the Company accelerates the payment of principal and interest under the Earnout Notes. The Company has recorded the entire $5,000 of the Special Bonus Notes as of March 31, 2010 as the former MIG shareholders are fully vested in the special bonus.

As of March 31, 2010, the Company’s remaining debt related to the Earnout and Special Bonus Notes was all current and amounted to $11,924. On May 1, 2010, the Company paid the MIG shareholders $937 of principal and $379 of interest related to the Special Bonus Notes.

Based on the borrowing rates currently available to the Company with similar terms and maturities, the carrying value of the Earnout and Special Bonus Notes of $11,924 in principal and accrued interest approximates fair value.

Credit Facility

In December 2008, the Company entered into a revolving credit facility (the “Credit Facility”), which amended and superseded the Loan and Security Agreement entered into in February 2007, as amended. On August 24, 2009 and February 10, 2010, the Company entered into amendments to the Credit Facility, which reduced certain of the minimum targets contained in the EBITDA-related covenant discussed below. The February 10, 2010 amendment also changed the measurement period for the EBITDA covenant from a rolling six month calculation to a quarterly calculation. On March 18, 2010, the Company entered into a third amendment to the agreement which extended the maturity date of the Credit Facility from December 22, 2010 until June 30, 2011 and increased the interest rate for borrowings under the Credit Facility by 0.75% to the lender’s prime rate, plus 1.75%, but no less than 5.0%.The Credit Facility provides for borrowings of up to $8,000, subject to a borrowing base equal to 80% of the Company’s eligible accounts receivable. The maximum amount available for borrowing under the Credit Facility was limited to $3,871 as of March 31, 2010. The Company’s obligations under the Credit Facility are guaranteed by certain of the Company’s domestic and foreign subsidiaries and are secured by substantially all of the Company’s assets, including all of the capital stock of certain of the Company’s domestic subsidiaries and 65% of the capital stock of certain of its foreign subsidiaries.

The interest rate for the Credit Facility is the lender’s prime rate, plus 1.75%, but no less than 5.0%. Interest is due monthly, with all outstanding obligations due at maturity. The Company must also pay the lender a monthly unused revolving line facility fee of 0.35% on the unused portion of the $8,000 commitment. In addition, the Company paid the lender a non-refundable commitment fee of $55 in December 2008 and paid an additional fee of $55 during December 2009. The Credit Facility limits the Company and certain of its subsidiaries’ ability to, among other things, dispose of assets, make acquisitions, incur additional indebtedness, incur liens, pay dividends and make other distributions, and make investments. The Credit Facility requires the Company to establish a separate account at the lender for collection of its accounts receivables. All deposits into this account are automatically applied by the lender to the Company’s outstanding obligations under the Credit Facility.

In addition, under the Credit Facility, the Company must comply with the following financial covenants:

January 1, 2010 through March 31, 2010		$	(2,100	)
April 1, 2010 through June 30, 2010		$	(1,100	)
July 1, 2010 through September 30, 2010		$	(500	)
October 1, 2010 through December 31, 2010		$	1,750
January 1, 2011 through March 31, 2011		$	(300	)
April 1, 2011 through June 30, 2011		$	100

For purposes of the above covenant, EBITDA means (a) the Company’s consolidated net income, determined in accordance with U.S. GAAP, plus (b) interest expense, plus (c) to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) non-cash stock compensation expense, plus (f) non-cash goodwill and other intangible assets and royalty impairments, plus (g) non-cash foreign exchange translation charges, minus (h) all non-cash income of the Company and its subsidiaries for such period.

The Company’s failure to comply with the financial or operating covenants in the Credit Facility would not only prohibit the Company from borrowing under the facility, but would also constitute a default, permitting the lender to, among other things, declare any outstanding borrowings, including all accrued interest and unpaid fees, becoming immediately due and payable. A change in control of the Company (as defined in the Credit Facility) also constitutes an event of default, permitting the lender to accelerate the indebtedness and terminate the Credit Facility. To the extent an event of default occurs under the Credit Facility and the lender accelerates the indebtedness and terminates the Credit Facility, this would also trigger the cross-default provisions of the Earnout Notes and Special Bonus Notes.

The Credit Facility also includes a “material adverse change” clause. As a result, if a material adverse change occurs with respect to the Company’s business, operations or financial condition, then that change could constitute an event of default under the terms of the Credit Facility. When an event of default occurs, the lender can, among other things, declare all obligations immediately due and payable, could stop advancing money or extending credit under the Credit Facility and could terminate the Credit Facility. The Company’s believes that the risk of a material adverse change occurring with respect to its business, operations or financial condition and the lender requesting immediate repayment of amounts already borrowed, stopping advancing the remaining credit or terminating the Credit Facility is remote.

The Credit Facility matures on June 30, 2011, when all amounts outstanding will be due. If the Credit Facility is terminated prior to maturity by the Company or by the lender after the occurrence and continuance of an event of default, then the Company will owe a termination fee equal to $80, or 1.00% of the total commitment.

As of March 31, 2010, the Company was in compliance with all covenants of the Credit Facility and had outstanding obligations of $3,114. Based on the borrowing rates currently available to the Company with similar terms and maturities, the carrying value approximates fair value.

Note 7 — Stockholders’ Equity

Warrants to Purchase Common Stock

Warrants outstanding as of March 31, 2010 were as follows:

Number

Exercise

of Shares

Price

Outstanding

Term

per

Under

Issue Date

(Years)

Share

Warrant

May 2006

7

$

9.03

106

Comprehensive Loss

Comprehensive loss consists of two components, net loss and other comprehensive income/(loss). Other comprehensive income/(loss) refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. The Company’s other comprehensive income/(loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

Note 8 — Stock Option and Other Benefit Plans

2007 Equity Incentive Plan

In January 2007, the Company’s Board of Directors adopted, and in March 2007 the stockholders approved, the 2007 Equity Incentive Plan (the “2007 Plan”). At the time of adoption, there were 1,766 shares of common stock authorized for issuance under the 2007 Plan plus 195 shares of common stock from the Company’s 2001 Stock Option Plan (the “2001 Plan”) that were unissued. In addition, shares that were not issued or subject to outstanding grants under the 2001 Plan on the date of adoption of the 2007 Plan and any shares issued under the 2001 Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options that expire or become unexercisable for any reason without having been exercised in full, will be available for grant and issuance under the 2007 Plan.

The Company may grant options under the 2007 Plan at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by its Board of Directors, provided, however, that (i) the exercise price of an incentive stock option (“ISO”) or non-qualified stock options (“NSO”) may not be less than 100% or 85%, respectively, of the estimated fair value of the underlying shares of common stock on the grant date, and (ii) the exercise price of an ISO or NSO granted to a 10% stockholder may not be less than 110% of the estimated fair value of the shares on the grant date. Prior to the Company’s IPO, the Board determined the fair value of common stock in good faith based on the best information available to the Board and Company’s management at the time of the grant. Following the IPO, the fair value of the Company’s common stock is determined by the last sale price of such stock on the NASDAQ Global Market on the date of determination. The stock options granted to employees generally vest with respect to 25% of the underlying shares one year from the vesting commencement date and with respect to an additional 1/48 of the underlying shares per month thereafter. Stock options granted during 2007 prior to October 25, 2007 have a contractual term of ten years and stock options granted on or after October 25, 2007 have a contractual term of six years.

The 2007 Plan also provides the Board of Directors the ability to grant restricted stock awards, stock appreciation rights, restricted stock units, performance shares and stock bonuses.

As of March 31, 2010, 2,721 shares were available for future grants under the 2007 Plan.

2007 Employee Stock Purchase Plan

In January 2007, the Company’s Board of Directors adopted, and in March 2007 the Company’s stockholders approved, the 2007 Employee Stock Purchase Plan (the “2007 Purchase Plan”). The Company initially reserved 667 shares of its common stock for issuance under the 2007 Purchase Plan. On each January 1 for the first eight calendar years after the first offering date, the aggregate number of shares of the Company’s common stock reserved for issuance under the 2007 Purchase Plan will be increased automatically by the number of shares equal to 1% of the total number of outstanding shares of the Company’s common stock on the immediately preceding December 31, provided that the Board of Directors may reduce the amount of the increase in any particular year and provided further that the aggregate number of shares issued over the term of this plan may not exceed 5,333. The 2007 Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock at the beginning of an offering period or after a purchase period ends.

In January 2009, the 2007 Purchase Plan was amended to provide that the Compensation Committee of the Company’s Board of Directors may fix a maximum number of shares that may be purchased in the aggregate by all participants during any single offering period (the “Maximum Offering Period Share Amount”). The Committee may later raise or lower the Maximum Offering Period Share Amount. The Committee established the Maximum Offering Period Share Amount of 500 shares for the offering period that commenced on February 15, 2009 and ended on August 14, 2009, and a Maximum Offering Period Share Amount of 200 shares for each offering period thereafter.

As of March 31, 2010, 616 shares were available for issuance under the 2007 Purchase Plan.

2008 Equity Inducement Plan

In March 2008, the Company’s Board of Directors adopted the 2008 Equity Inducement Plan (the “Inducement Plan”) to augment the shares available under its existing 2007 Equity Incentive Plan. The Inducement Plan did not require the approval of the Company’s stockholders. The Company initially reserved 600 shares of its common stock for grant and issuance under the Inducement Plan. On December 28, 2009, the Company’s Board of Directors appointed Niccolo de Masi as the Company’s President and Chief Executive Officer and the Compensation Committee of the Company’s Board of Directors awarded him a non-qualified stock option to purchase 1,250 shares of the Company’s common stock, which was issued on January 4, 2010 under the Inducement Plan. Immediately prior to the grant of this award, the Compensation Committee amended the Inducement Plan to increase the number of shares available for grant under the plan by 819 shares to 1,250 shares. The Company may only grant NSOs under the Inducement Plan. Grants under the Inducement Plan may only be made to persons not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to such individual’s entering into employment with the Company and to provide incentives for such persons to exert maximum efforts for the Company’s success. The Company may grant NSOs under the Inducement Plan at prices less than 100% of the fair value of the shares on the date of grant, at the discretion of its Board of Directors. The fair value of the Company’s common stock is determined by the last sale price of such stock on the NASDAQ Global Market on the date of determination.

As of March 31, 2010, 18 shares were reserved for future grants under the Inducement Plan.

2009 Stock Option Exchange Program

On April 22, 2009, the Company launched a voluntary stock option exchange program (the “Exchange Program”) pursuant to which its eligible United States and United Kingdom employees (“Eligible Employees”) had the right to exchange all options to purchase shares of its common stock outstanding prior to the Exchange Program launch date having an exercise price equal to or greater than $1.25 per share (“Eligible Options”) granted under the 2007 Plan or the 2001 Plan for new nonqualified stock options to be granted under the 2007 Plan (“New Options”). Eligible Options that were tendered for New Options were cancelled and returned to the 2007 Plan for re-issuance thereunder. The Company’s executive officers and directors were not eligible to participate in the Exchange Program. The Exchange Program provided that Eligible Employees would receive a New Option for each tendered Eligible Option, depending on the exercise price of the Eligible Option tendered, in accordance with the exchange ratios set forth in the table below:

		Exchange Ratio
		(New Options-for-
Exercise Price		Eligible Options)
$1.25 – $1.99		1-for-1
2.00 – 3.99		1-for-2
4.00 – 5.94		1-for-3
5.95 or greater		1-for-4

The Company completed the Exchange Program in the second quarter of 2009. Eligible Employees tendered options to purchase 821 shares of common stock in exchange for replacement options to purchase 261 shares of common stock under the Company’s 2007 Plan. This resulted in $15 of incremental stock-based compensation to be amortized monthly over three years. The new options have a six-year term and vest over three years in 36 equal monthly installments. The exercise price of the New Options equals the closing sale price of the Company’s common stock of $0.78 per share as reported on The NASDAQ Global Market on May 22, 2009.

Stock Option Activity

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2010:

						Options Outstanding
										Weighted				Weighted
						Number				Average				Average				Aggregate
		Shares				of				Exercise				Contractual				Intrinsic
		Available				Shares				Price				Term (Years)				Value
Balances at December 31, 2009			2,654				4,841			$	3.49
Increase in authorized shares			911
Options granted			(1,372	)			1,372				1.20
Options canceled			547				(547	)			3.11
Options exercised			—				(15	)			0.61
Balances at March 31, 2010			2,740				5,651			$	2.98				4.66			$	250
Options vested and expected to vest at March 31, 2010							4,797			$	3.27				4.51			$	213
Options exercisable at March 31, 2010							2,329			$	5.02				3.65			$	69

The aggregate intrinsic value in the preceding table is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of the Company’s common stock of $0.98 per share as of March 31, 2010. Consolidated net cash proceeds from option exercises were $9 and $11 for the three months ended March 31, 2010 and 2009, respectively. The Company realized no significant income tax benefit from stock option exercises during the three months ended March 31, 2010 or 2009. As required, the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

The Company applies the fair value provisions of ASC 718, Compensation-Stock Compensation (“ASC 718”). Under ASC 718, the Company estimated the fair value of each option award on the grant date using the Black-Scholes option valuation model and the weighted average assumptions noted in the following table.

		Three Months Ended
		March 31,
		2010				2009
Dividend yield			—	%			—	%
Risk-free interest rate			1.35	%			1.52	%
Expected volatility			75.7	%			50.4	%
Expected term (years)			3.22				3.88

The Company based its expected volatility on the historical volatility of itself and of a peer group of publicly traded entities. The expected term of options gave consideration to early exercises, post-vesting cancellations and the options’ contractual term, which was extended for all options granted subsequent to September 12, 2005 but prior to October 25, 2007 from five to ten years. Stock options granted on or after October 25, 2007 have a contractual term of six years. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury Constant Maturity Rate as of the date of grant. The weighted-average fair value of stock options granted during the three months ended March 31, 2010 and 2009 was $0.62 and $0.25, respectively.

The Company calculated employee stock-based compensation expense recognized in the three months ended March 31, 2010 and 2009 based on awards ultimately expected to vest and reduced it for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The following table summarizes the consolidated stock-based compensation expense by line items in the consolidated statement of operations:

		Three Months Ended
		March 31,
		2010				2009
Research and development		$	164			$	180
Sales and marketing			73				151
General and administrative			287				433
Total stock-based compensation expense		$	524			$	764

As of March 31, 2010, the Company had $3,167 of total unrecognized compensation expense under ASC 718, net of estimated forfeitures, which will be recognized over a weighted average period of 3.09 years. As permitted by ASC 718, the Company has deferred the recognition of its excess tax benefit from non-qualified stock option exercises.

Note 9 — Income Taxes

The Company recorded an income tax provision of $301 and $2,019 for the three months ended March 31, 2010 and 2009, respectively, related to foreign withholding taxes and income taxes. The income tax rates vary from the Federal and State statutory rates due to the valuation allowances on the Company’s net operating losses, foreign tax rate differences, and withholding taxes.

The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes (“ASC 740”). As of March 31, 2010 and December 31, 2009, the total amount of unrecognized tax benefits was $2,860 and $2,899, respectively. As of March 31, 2010 and December 31, 2009, approximately $51 and $90, respectively, of unrecognized tax benefits, if recognized, would impact the Company’s effective tax rate. The remaining balance, if recognized, would adjust the Company’s goodwill from acquisitions or would adjust the Company’s deferred tax assets which are subject to a valuation allowance.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company recorded $57 and $57 of interest on uncertain tax positions during the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010 and December 31, 2009, the Company had a liability of $3,336 and $3,279, respectively, related to interest and penalties for uncertain tax positions.

One of the Company’s subsidiaries in China has received approval as a High & New Technology Enterprise qualification from the Ministry of Science and Technology, and also as the Software Enterprise Qualification from the Ministry of Industry and Information Technology. These qualifications provide preferential income tax treatment which will be effected upon the approval of the Company’s application with the State Administration of Taxation to apply the favorable tax benefits to operations beginning January 1, 2009. In the event that the State Administration for Taxation approves the Company’s application, certain taxes that were expensed in 2009 could be refunded and certain deferred tax assets and liabilities will be revalued.

The Company is subject to taxation in the United States and various foreign jurisdictions. The material jurisdictions subject to examination by tax authorities are primarily the State of California, United States, United Kingdom and China. The Company’s federal tax return is open by statute for tax years 2001 and forward and could be subject to examination by the tax authorities. The Company’s California income tax returns are open by statute for tax years 2001 and forward. The statute of limitations for the Company’s 2007 tax return in the United Kingdom will close in 2010. The Company’s China income tax returns are open by statute for tax years 2002 and forward. In practice, a tax audit, examination or tax assessment notice issued by the Chinese tax authorities does not represent finalization or closure of a tax year.

Note 10 — Segment Reporting

ASC 280, Segment Reporting (“ASC 280”), establishes standards for reporting information about operating segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information on a geographic basis, however these aggregate into one operating segment for purposes of allocating resources and evaluating financial performance.

Accordingly, the Company reports as a single operating segment — mobile games. It attributes revenues to geographic areas based on the country in which the carrier’s principal operations are located.

The Company generates its revenues in the following geographic regions:

		Three Months Ended
		March 31,
		2010				2009
United States of America		$	8,249			$	10,023
China			1,600				2,544
Americas, excluding the USA			2,176				2,154
EMEA			4,662				5,567
Other			602				487
		$	17,289			$	20,775

The Company attributes its long-lived assets, which primarily consist of property and equipment, to a country primarily based on the physical location of the assets. Property and equipment, net of accumulated depreciation and amortization, summarized by geographic location was as follows:

		March 31,				December 31,
		2010				2009
Americas		$	1,872			$	2,194
EMEA			774				700
Other			307				450
		$	2,953			$	3,344

Note 11 — Restructuring

Restructuring information as of March 31, 2010 was as follows:

		Restructuring
		2010				2009								2008
										Facilities								Facilities				Superscape
		Workforce				Workforce				Related				Workforce				Related				Plan				Total
Balance as of January 1, 2007		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Charges assumed as part of acquisition			—				—				—				—				—				3,768				3,768
Charges to operations			—				—				—				989				755				—				1,744
Charges settled in cash			—				—				—				(889	)			(312	)			(3,311	)			(4,512	)
Balance as of December 31, 2008			—				—				—				100				443				457				1,000
Charges to operations			—				1,009				867				—				—				—				1,876
Non Cash Adjustments			—				—				(62	)			—				—				(11	)			(73	)
Charges settled in cash			—				(380	)			(68	)			(100	)			(443	)			(406	)			(1,397	)
Balance as of December 31, 2009			—				629				737				—				—				40				1,406
Charges to operations			594				—				—				—				—				—				594
Non Cash Adjustments			—				—				—				—				—				(2	)			(2	)
Charges settled in cash			(435	)			(629	)			(110	)			—				—				—				(1,174	)
Balance as of March 31, 2010		$	159			$	—			$	627			$	—			$	—			$	38			$	824

During 2008, 2009 and the first quarter of 2010, the Company’s management approved restructuring plans to improve the effectiveness and efficiency of its operating model and reduce operating expenses around the world. The 2010 restructuring plan included $594 of restructuring charges relating to employee termination costs in the Company’s United States, APAC, Latin America and United Kingdom offices. Since the inception of the 2009 restructuring plan through March 31, 2010, the Company incurred $1,876 in restructuring charges. These charges included $1,009 of workforce related charges, comprised of severance and termination benefits of $657 associated with the departure of the Company’s former Chief Executive Officer, and $352 relating to employee termination costs in the Company’s United States and United Kingdom offices. The remaining restructuring charge included $867 of facility related charges, comprised of $709 of charges associated with changes in the sublease probability assumption for the vacated office space in the Company’s United States headquarters and an additional restructuring charge of $158 net of sublease income, resulting from vacating a portion of the Company’s EMEA headquarters based in the United Kingdom. These amounts were partially offset by a $73 non-cash adjustment, primarily relating to a write down in fixed assets associated with the restructuring of the Company’s EMEA headquarters. Since the inception of the 2008 restructuring plan through March 31, 2010, the Company incurred $1,744 in restructuring charges. These charges included $989 related to employee severance and benefit arrangements due to the termination of employees in France, Hong Kong, Sweden, the United Kingdom and the United States and $755 related to vacated office space at the Company’s headquarters. The Company does not expect to incur any additional charges under the 2009 and 2008 restructuring plans.

As of March 31, 2010, the Company’s remaining restructuring liability of $824 was comprised of $159 of severance and benefits payments due to the Company’s former General Manager of APAC, which are due to be paid in the second quarter of 2010, and $665 of facility related costs that are expected to be paid over the remainder of the lease terms of one to three years. However, any changes in the assumptions used in the Company’s vacated facility accrual could result in additional charges in the future. As of December 31, 2009, the Company’s remaining restructuring liability of $1,406 was comprised of $629 of severance and benefit payments due to the Company’s former Chief Executive Officer, which were paid in the first quarter of 2010, and $777 of facility related costs.

In the second quarter of 2010 and as part of the 2010 restructuring, the Company anticipates incurring approximately $350 of restructuring charges related to employee severance and benefit arrangements. A significant portion of these charges related to termination costs associated with fulfilling the terms of the separation agreement with the Company’s former Senior Vice President of Global Product Development and Chief Technology Officer, Alessandro Galvagni, announced on April 6, 2010.

Note 12 — Subsequent Events

On April 6, 2010, the Company announced that Alessandro Galvagni and Thomas M. Perrault, the Company’s former Vice President of Global Human Resources, would be leaving the Company, effective as of April 10 and April 15, 2010, respectively.

On May 6, 2010, the Company’s Board of Directors increased the size of the Board of Directors from eight directors to nine directors and elected Matthew A. Drapkin to the Board of Directors as a Class II director.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this discussion and elsewhere in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “may,” “will,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “could,” “estimate,” “continue” and similar expressions or variations are intended to identify forward-looking statements. In this report, forward-looking statements include, without limitation, the following:

• our expectations and beliefs regarding the future conduct and growth of our business, including our intention to significantly increase our studio capacity dedicated toward advanced platforms and smartphones;

• our expectations regarding competition and our ability to compete effectively;

• our expectations regarding the development of future products, including those for smartphones, as well as our intention to shift a larger portion of our research and development expenses towards these development efforts;

• our expectation that a larger portion of the games we develop for smartphones will be based on our own intellectual property;

• our intention to focus our development efforts on persistent-state, freemium games and increase our use of in-game advertising, micro-transactions and other monetization techniques with respect to the games we develop for smartphones;

• our expectations regarding our revenues and expenses, including the expected decline in revenues from games we develop for feature phones in our base carrier business;

• our assumptions regarding the impact of Recent Accounting Pronouncements applicable to us;

• our assessments and estimates that determine our effective tax rate and valuation allowance;

• our belief that our cash and cash equivalents, borrowings under our revolving credit facility and cash flows from operations will be sufficient to meet our working capital needs, contractual obligations, debt service obligations, capital expenditure requirements and similar commitments;

• our expectation regarding repatriating funds from China to the United States in the late second or early third quarter of 2010;

• our expectation regarding our ability to maintain compliance with or negotiate the financial and other covenants in our credit facility; and

• our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that we may incur as a result of those proceedings.

Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Risk Factors” elsewhere in this report. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements to reflect future events or circumstances.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes contained elsewhere in this report. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following sections:

•

An Overview that discusses at a high level our operating results and some of the trends that affect our business;

•

Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements;

•

Recent Accounting Pronouncements;

•

Results of Operations, including a more detailed discussion of our revenues and expenses; and

•

Liquidity and Capital Resources, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments.

Overview

This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understand our financial results for the first quarter of 2010, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, including our unaudited consolidated financial statements and accompanying notes.

Financial Results and Trends

Revenues for the three months ended March 31, 2010 were $17.3 million, a 17% decrease compared to the three months ended March 31, 2009, in which we reported revenues of $20.8 million. This decrease was primarily driven by a decline in feature phones sold in the channel relating to our traditional carrier business, which in turn led to a decrease in the number of games that we sold. The decrease was partially offset by the impact of foreign currency exchange rates, which had a greater positive impact on our revenues for the first three months of 2010 compared to the comparable period of 2009. The decline in our feature phone revenues was both a result of the global economic slowdown and the continued migration of users from traditional feature phones to more advanced platforms and smartphones, such as Apple’s iPhone, Google’s Android and Research In Motion’s BlackBerry, which offer enhanced functionality. We believe that this transition will continue to accelerate in 2010 as consumers increasingly upgrade their phones. As a result, we expect an overall decline in our revenues in 2010 from the sale of games that we develop for feature phones in our base carrier business, which we expect will still generate the substantial majority of our revenues in 2010.

As part of our strategy for growth in 2010 and beyond, we intend to significantly increase our studio capacity that is dedicated towards publishing mobile games that are widely accepted and commercially successful on the smartphone storefronts, which include Apple’s App Store, Google’s Android Market, Microsoft’s Windows Marketplace for Mobile, Palm’s App Catalog, Nokia’s Ovi Store and Research In Motion’s Blackberry App World. Although we experienced certain successes on these smartphone storefronts in 2009 and the first three months of 2010, particularly with respect to the Apple App Store, our smartphone revenues did not meet our expectations and represented less than 10% of our revenues for the three months ended March 31, 2010. We expect that a significant portion of our development activities for these smartphone storefronts will be focused on persistent-state, “freemium” games — games that are downloadable without an initial charge or for a small fee, but which enable a variety of additional features to be accessed for a fee or otherwise monetized through various advertising and offering techniques. We believe this approach will enable us to build and grow and more direct relationship with our customers. We intend to have the significant majority of these persistent-state, freemium games be based upon our own intellectual property, which we believe will significantly enhance our margins and long-term value. However, we do not expect to release any persistent-state, freemium titles prior to the fourth quarter of 2010, which we expect will negatively impact the revenues we generate from smartphones in the second and third quarters of 2010.

Although we expect our revenues from advanced platforms and smartphones to increase in 2010 as compared to 2009, we do not expect this increase to fully offset the anticipated decline in revenues from games we develop for feature phones in our traditional base carrier business. Significantly growing our revenues and further succeeding in this channel may be challenging for us for several reasons, including: (1) the open nature of many new smartphone storefronts increases substantially the number of our competitors and competitive products, which makes it more difficult for us to achieve prominent placement or featuring for our games, (2) the competitive advantage of our porting capabilities may be reduced as these advanced platforms and smartphones become more widely adopted; (3) many of our key licenses do not grant us the rights to develop games for the iPhone and other smartphones; (4) open storefront distribution is still relatively new for us, and we must develop a marketing strategy that allows us to generate sustainable and increasingly profitable revenues, without significantly increasing our marketing or development expenses; (5) the pricing and revenue models for titles on these smartphone storefronts are rapidly evolving, and has resulted, and may continue to result, in significantly lower average selling prices for our games developed for smartphones as compared to games we have developed for feature phones in our traditional carrier channels; and (6) we have a limited ability to invest heavily in this strategy.

In addition, our revenues will continue to depend significantly on growth in the mobile games market, our ability to continue to attract new end users in that market and the overall strength of the economy, particularly in the United States. Our revenues may also be adversely impacted by decisions by our carriers to alter their customer terms for downloading our games. For example, Verizon Wireless, our largest carrier, imposes a data surcharge to download content on those Verizon customers who have not otherwise subscribed to a data plan. Our revenues depend on a variety of other factors, including our relationships with the feature phone and smartphone storefronts and our licensors. Even if mobile games based on licensed content or brands remain popular with end users, any of our licensors could decide not to renew an existing license or not to license additional intellectual property to us and instead license to our competitors or develop and publish their own mobile games or other applications, competing with us in the marketplace. The loss of any key relationships with our carriers, other distributors or licensors could impact our revenues in the future. We expect our 2010 revenues to be lower than our 2009 revenues, and in future periods, our revenues could continue to decline.

Our net loss in three months ended March 31, 2010 was $3.7 million versus a net loss of $5.8 million in the three months ended March 31, 2009. This decrease was driven primarily by a decrease in cost of revenues of $2.7 million, a decrease in income tax provision of $1.7 million, a decrease in operating expenses of $951,000 and a decrease in interest and other expense of $176,000, which was partially offset by a $3.5 million reduction in revenues. The decrease in our operating expense for the three months ended March 31, 2010 compared with the three months ended March 31, 2009 was in part due to the headcount reductions and related measures that we took in connection with the restructurings that we implemented in both the third quarter of 2009 and the first quarter of 2010. Our operating results are also affected by fluctuations in foreign currency exchange rates of the currencies in which we incur meaningful operating expenses (principally the British Pound Sterling, Chinese Renminbi, Brazilian Real and Russian Ruble) and our customers’ reporting currencies, as we transact business in more than 70 countries in more than 20 different currencies, and in 2009 and the first three months of 2010, some of these currencies fluctuated by up to 40%.

We expect that our expenses to develop and port games for advanced platforms and smartphones will increase as we enhance our existing titles and develop new titles to take advantage of the additional functionality offered by these platforms. Our ability to attain profitability will be affected by our ability to grow our revenues and the extent to which we must incur additional expenses to expand our sales, marketing, development, and general and administrative capabilities to grow our business. The largest component of our recurring expenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation, for our employees. We expect that our cash expenses will decline in 2010 compared to 2009 in terms of absolute dollars as a result of the restructuring measures we implemented in the first quarter of 2010, which primarily consisted of headcount reductions. Our business has historically been impacted by seasonality, as many new mobile handset models are released in the fourth calendar quarter to coincide with the holiday shopping season. Because many end users download our games soon after they purchase new handsets, we generally experience seasonal sales increases based on the holiday selling period. However, due to the time between handset purchases and game purchases, most of this holiday impact occurs for us in our first calendar quarter. In addition, we release many of our products in conjunction with specific events, such as the release of a related movie. Further, for a variety of reasons, including roaming charges for data downloads that may make purchase of our games prohibitively expensive for many end users while they are traveling, we sometimes experience seasonal sales decreases during the summer, particularly in parts of Europe. We expect these seasonal trends to continue in the future.

Cash and cash equivalents at March 31, 2010 totaled $10.5 million, a decrease of $36,000 from the balance at December 31, 2009. This decrease was primarily due to $1.5 million that we paid under our credit facility and $108,000 for capital expenditures. These outflows were partially offset by $1.6 million of cash generated from operations. We believe our cash and cash equivalents, together with cash flows from operations and borrowings under our credit facility, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

We currently expect that we will be able to comply with the EBITDA-related covenant contained in our revolving credit facility. However, if our revenues are lower than we anticipate, we will be required to further reduce our operating expenses to remain in compliance with these covenants. Reducing our operating expenses could be very challenging for us, since we undertook operating expense reductions and restructuring activities in the third and fourth quarters of 2008, the third quarter of 2009 and the first quarter of 2010 that reduced our operating expenses significantly. However, we expect to continue our efforts to reduce operating expenses during the first half of 2010. Reducing operating expenses further than we currently anticipate could have the effect of negatively impacting our revenues. In August 2009, February 2010 and March 2010, we entered into amendments to our revolving credit facility with the lender, which (1) reduced certain of the minimum targets contained in the earnings before interest, depreciation and amortization (“EBITDA”) related covenant, (2) changed the measurement period for the EBITDA covenant from a rolling six-month calculation to a quarterly calculation, (3) extended the maturity date of the credit facility from December 22, 2010 to June 30, 2011 and (4) increased the interest rate for borrowings under the credit facility by 0.75% to the higher of the lender’s prime rate plus 1.75%, or 5% (see Liquidity and Capital Resources – Sufficiency of Current Cash and Cash Equivalents below). A failure on our part to remain in compliance with the covenants under the revolving credit facility could adversely impact our cash requirements for the next twelve months.

Significant Transaction

In December 2007, we acquired MIG to accelerate our presence in China, deepen our relationship with China Mobile, the largest wireless carrier in China, acquire access and rights to leading franchises for the Chinese market, and augment our internal production and publishing resources with a studio in China. We purchased all of MIG’s then outstanding shares for a total purchase price of $30.5 million, consisting of cash consideration to MIG shareholders of $14.7 million and transaction costs of $1.3 million. As a result of the attainment of the revenue and operating income milestones in 2008 by MIG, we were committed to pay the $20.0 million in additional consideration to the MIG shareholders and the $5.0 million of bonuses to two officers of MIG. In December 2008, we restructured the timing and nature of these payments and issued to former shareholders of MIG an aggregate of $25.0 million in promissory notes, which are due in 2009 and 2010. Due to decreases in our long-term forecasts and current market capitalization, a portion of the goodwill resulting from the MIG acquisition was impaired during the year ended December 31, 2008.

Critical Accounting Policies and Estimates

There were no significant changes in our Critical Accounting Policies and Estimates during the three months ended March 31, 2010 as compared to the Critical Accounting Policies and Estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

Information with respect to Recent Accounting Pronouncements may be found in Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements in this report, which information is incorporated herein by reference.

Results of Operations

Comparison of the Three Months Ended March 31, 2010 and 2009

Revenues

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Revenues		$	17,289			$	20,775

Our revenues decreased $3.5 million, or 16.8%, from $20.8 million for the three months ended March 31, 2009 to $17.3 million for the three months ended March 31, 2010. This decrease was primarily driven by a decline in feature phones sold in the channel relating to our traditional carrier business, which in turn led to a decrease in the number of games that we sold, and a migration of users from feature phones to smartphones where we were unable to capture the same market share as we have in our traditional carrier business. This was partially offset by foreign currency exchange rates which had a more favorable impact on our revenues for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. International revenues (defined as revenues generated from carriers whose principal operations are located outside the United States) decreased by $1.8 million, from $10.8 million in the three months ended March 31, 2009 to $9.0 million in the three months ended March 31, 2010. This was primarily related to a $800,000 decrease in our APAC revenues due to $700,000 of one time revenues recorded from an APAC customer in the first quarter of 2009 and a decrease in our revenue share arrangements with China Mobile, which accounts for approximately 90% of our revenues in China. In the first quarter of 2010, China Mobile reduced the revenue share for all publishers, including us, in 15 provinces for its mBox platform. We expect our 2010 revenues to be lower than our 2009 revenues primarily as a result of the anticipated acceleration of the slowdown in the sale of our games on feature phones in our base carrier business as consumers increasingly migrate from traditional feature phones to more advanced platforms and smartphones. Although we expect our revenues from games designed for smartphones to increase in 2010, we do not expect this increase to fully offset the anticipated decline in revenues from feature phones.

Cost of Revenues

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Cost of revenues:
Royalties		$	4,691			$	5,813
Amortization of intangible assets			1,228				2,848
Total cost of revenues		$	5,919			$	8,661
Revenues		$	17,289			$	20,775
Gross margin			65.8	%			58.3	%

Our cost of revenues decreased $2.7 million, or 31.7%, from $8.7 million in the three months ended March 31, 2009 to $5.9 million in the three months ended March 31, 2010. This decrease was primarily due to a $1.6 million reduction in amortization for titles and content associated with intangible assets acquired from Superscape in March 2008 that were fully amortized in the first quarter of 2009 and a decrease of $1.1 million in royalties associated with a decline in revenue. Revenues attributable to games based upon branded intellectual property increased as a percentage of revenues from 75.9% in the three months ended March 31, 2009 to 79.8% in the three months ended March 31, 2010, primarily due to a decrease in sales of games developed by MIG and Superscape based on their original intellectual property. Revenues attributable to games based upon original intellectual property were 20.2% of our total revenues for the three months ended March 31, 2010, of which nearly one-third related to MIG. The average royalty rate that we paid on games based on licensed intellectual property, excluding royalty impairments, decreased from 36.9% in the three months ended March 31, 2009 to 34.0% in the three months ended March 31, 2010 due to decreased sales of titles with higher royalty rates. Overall royalties, including impairment of prepaid royalties and guarantees, as a percentage of total revenues decreased from 28.0% in the three months ended March 31, 2009 to 27.1% in the three months ended March 31, 2010.

Research and Development Expenses

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Research and development expenses		$	6,661			$	6,397
Percentage of revenues			38.5	%			30.8	%

Our research and development expenses increased $264,000, or 4.1%, from $6.4 million in the three months ended March 31, 2009 to $6.7 million in the three months ended March 31, 2010. The increase in research and development costs was primarily due to increases in salaries and benefits of $203,000 associated with higher executive bonuses and an increase in allocated facilities and overhead costs of $344,000, which was partially offset by a $234,000 decrease in outside services costs due to a reduction in third-party costs for porting and external development. We decreased our research and development staff from 422 employees at March 31, 2009 to 365 as of March 31, 2010; however the majority of these staff reductions occurred during March 2010. As a percentage of revenues, research and development expenses increased from 30.8% for the three months ended March 31, 2009 compared to 38.5% for the three months ended March 31, 2010. Research and development expenses included $164,000 of stock-based compensation expense in the three months ended March 31, 2010 and $180,000 in the three months ended March 31, 2009.

Sales and Marketing Expenses

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Sales and marketing expenses		$	2,971			$	4,112
Percentage of revenues			17.2	%			19.8	%

Our sales and marketing expenses decreased $1.1 million, or 27.7%, from $4.1 million in the three months ended March 31, 2009 to $3.0 million in the three months ended March 31, 2010. The decrease was primarily due to a $656,000 decrease in the MIG earnout expense due to lower amortization of stock-based compensation associated with reaching the end of the vesting terms and conditions, a $342,000 decrease in salaries, benefits, variable compensation and expatriate costs as we reduced our sales and marketing headcount from 67 at March 31, 2009 to 54 at March 31, 2010, and a $78,000 decrease in stock-based compensation costs due to reduced headcount. As a percentage of revenues, sales and marketing expenses decreased from 19.8% in the three months ended March 31, 2009 to 17.2% in the three months ended March 31, 2010. Sales and marketing expenses included $73,000 of stock-based compensation expense in the three months ended March 31, 2010 and $151,000 in the three months ended March 31, 2009.

General and Administrative Expenses

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
General and administrative expenses		$	3,813			$	4,485
Percentage of revenues			22.1	%			21.6	%

Our general and administrative expenses decreased $672,000, or 15.0%, from $4.5 million in the three months ended March 31, 2009 to $3.8 million in the three months ended March 31, 2010. The decrease in general and administrative expenses was primarily due to a $393,000 decrease in facility and overhead costs, a $195,000 decrease in professional and consulting fees and a $146,000 decrease in stock-based compensation. We decreased our general and administrative headcount from 68 at March 31, 2009 to 60 at March 31, 2010. As a percentage of revenues, general and administrative expenses increased from 21.6% in the three months ended March 31, 2009 to 22.1% in the three months ended March 31, 2010. General and administrative expenses included $287,000 of stock-based compensation expense in the three months ended March 31, 2010 and $433,000 in the three months ended March 31, 2009.

Restructuring

Our restructuring charge was $594,000 during the three months ended March 31, 2010; there was no charge in the same period last year.

In the second quarter of 2010 and as part of the 2010 restructuring, we anticipate incurring approximately $350,000 of restructuring charges related to employee severance and benefit arrangements. A significant portion of these charges relate to termination costs associated with fulfilling the terms of the separation agreement with our former Senior Vice President of Global Product Development and Chief Technology Officer, Alessandro Galvagni, announced in April 2010.

Interest and other Income/(Expense), Net

Interest and other income/(expense), net, decreased from a net expense of $807,000 during the three months ended March 31, 2009 to a net expense of $631,000 in the three months ended March 31, 2010. This change was primarily due to a decrease in foreign currency loss of $127,000 related to the revaluation of certain assets and liabilities and a $60,000 decrease in interest expense related to the MIG notes and borrowings under our credit facility. We expect to generate minimal interest income during 2010 as a result of lower cash balances. We also expect to incur interest expense on the MIG notes and borrowings under our credit facility through 2010.

Income Tax Provision

Income tax provision decreased from $2.0 million in the three months ended March 31, 2009 to $301,000 in the three months ended March 31, 2010 primarily as a result of the interim period tax allocation and changes in income tax in certain foreign entities. We expect our effective tax rate in 2010 to fluctuate on a quarterly basis. The effective tax rate could be affected by changes in the valuation of our deferred tax assets, changes in actual results versus our estimates, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

Liquidity and Capital Resources

		Three Months Ended March 31,
		2010				2009
		(in thousands)
Consolidated Statement of Cash Flows Data:
Capital expenditures		$	108			$	305
Depreciation and amortization			1,846				3,492
Cash flows provided by/(used in) operating activities			1,570				(2,544	)
Cash flows used in investing activities			(108	)			(305	)
Cash flows used in financing activities			(1,388	)			(1,528	)

Since our inception, we have incurred recurring losses and negative annual cash flows from operating activities, and we had an accumulated deficit of $181.0 million as of March 31, 2010. Prior to our initial public offering, our primary sources of liquidity had been private placements of shares of our preferred stock and borrowings under our credit facilities.

Operating Activities

For the three months ended March 31, 2010, net cash provided by operating activities was $1.6 million, primarily due to a decrease in accounts receivable of $2.3 million due to declining sales in our carrier business and improved cash collections, a $1.4 million decrease in our prepaid royalties and a $708,000 increase in accrued compensation. In addition, we had adjustments for non-cash items, including amortization expense of $1.3 million, depreciation expense of $563,000, stock-based compensation expense of $524,000, non-cash foreign currency re-measurement loss of $332,000 and interest expense on debt of $265,000. These amounts were partially offset by a net loss of $3.7 million, a decrease in accrued royalties of $2.4 million and a decrease in accrued restructuring charges of $582,000 due to severance payments made to our former CEO.

We may decide to enter into new licensing arrangements for existing or new licensed intellectual properties that may require us to make royalty payments at the outset of the agreement. If we do sign these agreements, this could significantly increase our future use of cash in operating activities.

Investing Activities

In the three months ended March 31, 2010, we used $108,000 of cash for investing activities resulting primarily from purchases of computer and networking equipment, and leasehold improvements.

In the three months ended March 31, 2009, we used $305,000 of cash for investing activities resulting primarily from purchases of property and equipment, all of which related to additional network and server equipment.

Financing Activities

In the three months ended March 31, 2010, net cash used in financing activities was $1.4 million due to net payments of $1.5 million under our line of credit facility, which was partially offset by proceeds from option exercises and purchases under our employee stock purchase plan of $156,000.

In the three months ended March 31, 2009, net cash used in financing activities was $1.5 million due to the payment of $6.0 million related to the MIG notes but offset by the net proceeds from borrowings under our credit facility of $4.5 million.

Sufficiency of Current Cash and Cash Equivalents

Our cash and cash equivalents were $10.5 million as of March 31, 2010. During the three months ended March 31, 2010, we used $36,000 of cash. We expect to continue to fund our operations and satisfy our contractual obligations for 2010 primarily through our cash and cash equivalents, borrowings under our revolving credit facility and any cash generated by operations. However, there can be no assurances that we will be able to generate positive operating cash flow during 2010 or beyond. We believe our cash and cash equivalents, together with any cash flows from operations and borrowings under our credit facility, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our cash requirements for the next 12 months may be greater than we anticipate due to, among other reasons, lower than expected cash generated from operating activities including the impact of foreign currency rate changes, revenues that are lower than we currently anticipate, greater than expected operating expenses, usage of cash to fund our foreign operations, unanticipated limitations or timing restrictions on our ability to access funds that are held in our non-U.S. subsidiaries, a deterioration of the quality of our accounts receivable, which could lower the borrowing base under our credit facility, and any failure on our part to remain in compliance with the covenants under our revolving credit facility. Our expectations regarding cash sufficiency assume that our operating results will be sufficient to enable us to comply with our credit facility’s EBITDA-related covenant discussed below. If our revenues are lower than we anticipate, we might be required to reduce our operating expenses to remain in compliance with this financial covenant. Reducing our operating expenses could be very challenging for us, since we undertook operating expense reductions and restructuring activities in the third and fourth quarters of 2008, the third quarter of 2009 and the first quarter of 2010 that reduced our operating expenses significantly from second quarter of 2008 levels. However, we expect to continue our efforts to reduce operating expenses during the first half of 2010. Reducing operating expenses further than we currently expect could have the effect of reducing our revenues.

Our cash needs include our requirement to repay $6.0 million of principal under the MIG notes as of March 31, 2010, which is payable in 2010 from our domestic entities, as well as $5.0 million of principal under promissory notes issued to two former shareholders of MIG which is payable in 2010 from our Chinese entities. These amounts do not reflect the payment of $3.2 million on the MIG subordinated notes on May 1, 2010 (see Note 6 of Notes to Unaudited Consolidated Financial Statements included in Item I of this report for more information regarding our debt). Our anticipated cash requirements during 2010 also include payments for prepaid royalties and guarantees, of which a portion is related to anticipated new license agreements (for which there are no existing contractual commitments), which amount we may elect to reduce if we require more working capital than we currently anticipate. (See Note 5 of Notes to Unaudited Consolidated Financial Statements included in Item I of this report for more information regarding our contractual commitments.) However, this reduced spending on new licenses and any additional reduction in spending may adversely impact our title plan for 2010 and beyond, and accordingly our ability to generate revenues in future periods. Conversely, if cash available to us is greater than we currently anticipate, we may elect to increase prepaid royalties above currently anticipated levels if we believe it will contribute to enhanced revenue growth and profitability.

We currently have an $8.0 million credit facility, which expires in June 30, 2011. Our credit facility contains financial covenants and restrictions that limit our ability to draw down the entire $8.0 million. These covenants are as follows:

•

EBITDA. On August 24, 2009, we entered into an amendment to our credit facility, which reduced certain of the minimum targets contained in the EBITDA-related covenant. On February 10, 2010 we entered into a second amendment to the agreement. The second amendment changed the measurement period for the EBITDA covenant from a rolling six month calculation to a quarterly calculation. On March 18, 2010, we entered into a third amendment to the agreement which (1) extended the maturity date of the credit facility from December 22, 2010 until June 30, 2011, (2) increased the interest rate for borrowings under the credit facility by 0.75% to the lender’s prime rate, plus 1.75%, but no less than 5.0%, and (3) requires us to maintain, measured on a consolidated basis at the end of each of the following periods, EBITDA of at least the following:

January 1, 2010 through March 31, 2010		$	(2,100,000	)
April 1, 2010 through June 30, 2010		$	(1,100,000	)
July 1, 2010 through September 30, 2010		$	(500,000	)
October 1, 2010 through December 31, 2010		$	1,750,000
January 1, 2011 through March 31, 2011		$	(300,000	)
April 1, 2011 through June 30, 2011		$	100,000

We currently believe that we will be able to comply with the minimum EBITDA targets set forth above. For purposes of the above covenant, EBITDA means (a) our consolidated net income, determined in accordance with U.S. GAAP, plus (b) interest expense, plus (c) to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) non-cash stock compensation expense, plus (f) non-cash goodwill and other intangible assets and royalty impairments, plus (g) non-cash foreign exchange translation charges, minus (h) all of our non-cash income and the non-cash income of our subsidiaries for such period.

•

Minimum Domestic Liquidity:  We must maintain at the lender an amount of cash, cash equivalents and short-term investments of not less than the greater of: (a) 20% of our total consolidated unrestricted cash, cash equivalents and short-term investments, or (b) 15% of outstanding obligations under the credit facility.

The credit facility also includes a “material adverse change” clause. As a result, if a material adverse change occurs with respect to our business, operations or financial condition, then that change could constitute an event of default under the terms of our credit facility. When an event of default occurs, the lender can, among other things, declare all obligations immediately due and payable, could stop advancing money or extending credit under the credit facility and could terminate the credit facility. We believe that the risk of a material adverse change occurring with respect to our business, operations or financial condition and the lender requesting immediate repayment of amounts already borrowed, stopping advancing the remaining credit or terminating the credit facility is remote.

Our credit facility is collateralized by eligible customer accounts receivable balances, as defined by the lender. There can be no assurances that our eligible accounts receivable balances will be adequate to allow us to draw down on the entire $8.0 million credit facility particularly if any of our larger customers’ creditworthiness deteriorates. At our current revenue levels, we are not able to access the full $8.0 million of the credit facility. The maximum amount available for borrowing under the credit facility was limited to $3.9 million as of March 31, 2010. In addition, among other things, the credit facility limits our ability to dispose of certain assets, make acquisitions, incur additional indebtedness, incur liens, pay dividends and make other distributions, and make investments. Further, the credit facility requires us to maintain a separate account with the lender for collection of our accounts receivables. All deposits into this account will be automatically applied by the lender to our outstanding obligations under the credit facility.

As of March 31, 2010, we had outstanding borrowings of $3.1 million under our credit facility, which is classified as a current liability on the March 31, 2010 balance sheet. In March 2010, the maturity date of the credit facility was extended to June 30, 2011. Our failure to comply with the financial or operating covenants in the credit facility would not only prohibit us from borrowing under the facility, but would also constitute a default, permitting the lender to, among other things, declare any outstanding borrowings, including all accrued interest and unpaid fees, immediately due and payable. A change in control of Glu also constitutes an event of default, permitting the lender to accelerate the indebtedness and terminate the credit facility. The credit facility also contains other customary events of default. To the extent an event of default occurred under the credit facility and the lender accelerated the indebtedness and terminated the credit facility, this would also trigger the cross-default provisions of the MIG notes. Utilizing our credit facility results in debt payments that bear interest at the lender’s prime rate plus 1.75%, but no less than 5.0%, which adversely impacts our cash position and result in operating and financial covenants that restrict our operations. (See Note 6 of Notes to Unaudited Consolidated Financial Statements included in Item I of this report for more information regarding our debt.)

The credit facility matures on June 30, 2011, when all amounts outstanding will be due. If the credit facility is terminated prior to maturity by us or by the lender after the occurrence and continuance of an event of default, then we will owe a termination fee equal to $80,000, or 1.00% of the total commitment. As of March 31, 2010, we were in compliance with all covenants.

Of the $10.5 million of cash and cash equivalents that we held at March 31, 2010, approximately $5.4 million were held in accounts in China. To fund our operations and repay our debt obligations, we repatriated approximately $4.0 million of available funds from China to the United States during 2009, which was subject to withholding taxes of 5%, and we intend to repatriate an additional $1.4 million of funds available from China to the United States in the late second or early third quarter of 2010. Subsequent to such anticipated repatriation, we do not anticipate repatriating any additional funds from China for the foreseeable future, as changes in our revenue share arrangement with China Mobile has significantly impacted our ability to generate meaningful cash from our China operations. We paid $937,000 of principal under promissory notes due to the former MIG shareholders on May 1, 2010 and intend to pay the remaining $4.1 million of principal in 2010 from our Chinese entities. In addition, given the current global economic environment and other potential developments outside of our control, we may be unable to utilize the funds that we hold in all of our non-U.S. accounts, which funds include cash and marketable securities, since the funds may be frozen by additional international regulatory actions, the accounts may become illiquid for an indeterminate period of time or there may be other such circumstances that we are unable to predict.

In addition, we may require additional cash resources due to changes in business conditions or other future developments, including any investments or acquisitions we may decide to pursue, and to defend against, settle or pay damages related to a litigation dispute to which we are currently a party. We also intend to enter into new licensing arrangements for existing or new licensed intellectual properties, which may require us to make royalty payments at the outset of the agreements well before we are able to collect cash payments and/or recognize revenues associated with the licensed intellectual properties.

If our cash sources are insufficient to satisfy our cash requirements, we may seek to raise additional capital by selling convertible debt, preferred stock (convertible into common stock or unconvertible) or common stock, seeking to increase the amount available to us for borrowing under our credit facility, procuring a new debt facility, selling some of our assets, and/or seeking to restructure our obligations under the MIG notes. We may be unable to raise additional capital through the sale of securities, or to do so on terms that are favorable to us, particularly given current capital market and overall economic conditions. Any sale of convertible debt securities or additional equity securities could result in substantial dilution to our stockholders. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock, all of which is subject to the provisions of the credit facility. Additionally, we may be unable to increase the size of our credit facility or procure a new debt facility, or to do so on terms that are acceptable to us, particularly in light of the current credit market conditions. We may also be unable to restructure our obligations under the MIG notes to the extent we may need. If the amount of cash that we generate from operations is less than anticipated, or if we use cash in our operations, we could also be required to extend the term of our credit facility beyond its June 30, 2011 expiration date (or replace it with an alternate loan arrangement), and resulting debt payments thereunder could further inhibit our ability to achieve profitability in the future.

Contractual Obligations

The following table is a summary of our contractual obligations as of March 31, 2010:

		Payments Due by Period
		Total				1 Year*				1-3 Years				3-5 Years				Thereafter
		(in thousands)
Operating lease obligations, net of sublease income		$	7,286			$	2,317			$	4,969			$	—			$	—
Guaranteed royalties(1)			3,544				3,104				390				50				—
MIG earnout and bonus notes(2)			11,924				11,924				—				—				—
Uncertain tax position obligations, including interest and penalties(3)			4,633				—				—				—				4,633
Line of credit			3,114				3,114				—				—				—

Off-Balance Sheet Arrangements

At March 31, 2010, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate and Credit Risk

Our exposure to interest rate risk relates primarily to (1) our interest payable under our $8.0 million credit facility and potential increases in our interest payments arising from increases in interest rates and (2) our investment portfolio and the potential losses arising from changes in interest rates.

We are exposed to the impact of changes in interest rates as they affect interest payments under our $8.0 million credit facility. Advances under the credit facility accrue interest at rates that are equal to our credit facility lender’s prime rate, plus 1.75%, but no less than 5.0%. Consequently, our interest expense will fluctuate with changes in the general level of interest rates. At March 31, 2010, we had $3.1 million outstanding under the credit facility and our effective interest rate at that time was approximately 5.0%. We believe that a 10% change in the lender’s prime rate would have a significant impact on our interest expense, results of operations and liquidity.

We are also potentially exposed to the impact of changes in interest rates as they affect interest earned on our investment portfolio. As of March 31, 2010, we had no short-term investments and substantially all $10.5 million of our cash and cash equivalents was held in operating bank accounts earning nominal interest. Accordingly, we do not believe that a 10% change in interest rates would have a significant impact on our interest income, operating results or liquidity related to these amounts.

The primary objectives of our investment activities are, in order of importance, to preserve principal, provide liquidity and maximize income without significantly increasing risk. We do not currently use or plan to use derivative financial instruments in our investment portfolio.

As of March 31, 2010 and December 31, 2009, our cash and cash equivalents were maintained by financial institutions in the United States, the United Kingdom, Australia, Brazil, Chile, China, Columbia, France, Germany, Hong Kong, Italy, Russia and Spain, and our current deposits are likely in excess of insured limits.

Our accounts receivable primarily relate to revenues earned from domestic and international wireless carriers. We perform ongoing credit evaluations of our carriers’ financial condition but generally require no collateral from them. As of March 31, 2010 and December 31, 2009, Verizon Wireless accounted for 24.4% and 24.1% of our total accounts receivable, respectively, and no other carrier represented more than 10% of our total accounts receivable as of these dates.

Foreign Currency Exchange Risk

We transact business in more than 70 countries in more than 20 different currencies, and in 2009 and 2010, some of these currencies fluctuated by up to 40%. Our revenues are usually denominated in the functional currency of the carrier while the operating expenses of our operations outside of the United States are maintained in their local currency, with the significant operating currencies consisting of British Pound Sterling (“GBP”), Chinese Renminbi, Brazilian Real and Russian Ruble. Although recording operating expenses in the local currency of our foreign operations mitigates some of the exposure of foreign currency fluctuations, variances among the currencies of our customers and our foreign operations relative to the United States Dollar (“USD”) could have and have had a material impact on our results of operations.

Our foreign currency exchange gains and losses have been generated primarily from fluctuations in GBP versus the USD and in the Euro versus GBP. At month-end, foreign currency-denominated accounts receivable and intercompany balances are marked to market and unrealized gains and losses are included in other income (expense), net. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in stockholders’ equity. We have in the past experienced, and in the future may experience, foreign currency exchange gains and losses on our accounts receivable and intercompany receivables and payables. Foreign currency exchange gains and losses could have a material adverse effect on our business, operating results and financial condition.

There is also additional risk if the currency is not freely or actively traded. Some currencies, such as the Chinese Renminbi, in which our Chinese operations principally transact business, are subject to limitations on conversion into other currencies, which can limit out ability to react to foreign currency devaluations.

To date, we have not engaged in exchange rate hedging activities and we do not expect to do so in the foreseeable future.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.

ITEM 4T.		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e) and 15d-15(e), were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.		LEGAL PROCEEDINGS

From time to time, we are subject to various claims, complaints and legal actions in the normal course of business. For example, we are engaged in a contractual dispute with a licensor, Skinit, Inc., related to, among other claims, alleged underpayment of royalties and failure to perform under a distribution agreement, pursuant to which Skinit previously claimed that it is owed approximately $600,000. On April 21, 2009, Skinit filed a complaint against us and other defendants, seeking unspecified damages plus attorney’s fees and costs. The complaint, filed in the Superior Court of California in Orange County (case number 30-2009), alleges breach of contract, interference with economic relations, conspiracy and misrepresentation of fact. On June 25, 2009, we filed a motion in the Superior Court in Orange County requesting an order compelling Skinit to arbitrate its claim against us and requesting that the court stay the action pending the determination of the motion and the subsequent arbitration.  On July 30, 2009, the court granted our motion in its entirety and the dispute will now proceed to arbitration, which is currently scheduled to occur on August 9, 2010. 

We do not believe we are party to any currently pending litigation, the outcome of which will have a material adverse effect on our operations, financial position or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on us because of defense costs, potential negative publicity, diversion of management resources and other factors.

ITEM 1A.		RISK FACTORS

Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations and the market value of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial performance. Because of the risks and uncertainties discussed below, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods.

We have a history of net losses, may incur substantial net losses in the future and may not achieve profitability.

We have incurred significant losses since inception, including a net loss of $3.3 million in 2007, a net loss of $106.7 million in 2008, a net loss of $18.2 million in 2009 and a net loss of $3.7 million for the three months ended March 31, 2010. As of March 31, 2010, we had an accumulated deficit of $181.0 million. We may be required to incur increased costs in order to implement additional initiatives designed to increase revenues, such as increased marketing for our new games, particularly those designed for advanced platforms and smartphones, such as the Apple iPhone, Google Android and Research In Motion’s BlackBerry. If our revenues do not increase to offset these additional expenses, if we experience unexpected increases in operating expenses or if we are required to take additional charges related to impairments or restructurings, we will continue to incur significant losses and will not become profitable. In addition, our 2009 revenues were lower than our 2008 revenues, and we expect that our revenues will likely decline in 2010 from 2009 levels. If we are not able to significantly increase our revenues, we will likely not be able to achieve profitability in the future. Furthermore, during 2008, we incurred aggregate charges of approximately $77.6 million for goodwill, royalty impairments and restructuring activities, and during 2009, we incurred aggregate charges of approximately $8.5 million for royalty impairments and restructuring activities. If we continue to incur these charges, it will continue to negatively affect our operating results and our ability to achieve profitability.

Our financial results could vary significantly from quarter to quarter and are difficult to predict, particularly in light of the current economic environment, which in turn could cause volatility in our stock price.

Our revenues and operating results could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition, we may not be able to predict our future revenues or results of operations. We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs are to a large extent fixed. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for that quarter. This will be particularly true for 2010, as we implemented significant cost-reduction measures in 2008 and 2009, as well as in the first quarter of 2010, making it more difficult for us to further reduce our operating expenses without a material adverse impact on our prospects in future periods. Individual games and carrier relationships represent meaningful portions of our revenues and net income or loss in any quarter. We may incur significant or unanticipated expenses when licenses are added or renewed, we may experience a significant reduction in revenue if licenses are not renewed or we may incur impairments of prepaid royalty guarantees if our forecast for games based on licensed intellectual property is lower than we anticipated at the time we entered into the agreement. For example, in 2008 and 2009, we impaired $6.3 million and $6.6 million, respectively, of certain prepaid royalties and royalty guarantees primarily due to several distribution arrangements in our Europe, Middle East and Africa region and other global development and distribution arrangements that we entered into in 2007 and 2008. In addition, some payments from carriers that we recognize as revenue on a cash basis may be delayed unpredictably.

We are also subject to macroeconomic fluctuations in the United States and global economies, including those that impact discretionary consumer spending, which have deteriorated significantly in many countries and regions, including the United States, and may remain depressed for the foreseeable future. Some of the factors that could influence the level of consumer spending include continuing conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending. These issues can also cause foreign currency rates to fluctuate, which can have an adverse impact on our business since we transact business in more than 70 countries in more than 20 different currencies. In 2008, some of these currencies fluctuated by up to 40%, and we experienced continued significant fluctuations in 2009. These issues may continue to negatively impact the economy and our growth. If these issues persist, or if the economy enters a prolonged period of decelerating growth or recession, our results of operations may be harmed. As a result of these and other factors, our operating results may not meet the expectations of investors or public market analysts who choose to follow our company. Our failure to meet market expectations would likely result in a decline in the trading price of our common stock.

In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly results include:

•

the number of new games released by us and our competitors, including those for smartphones and advanced platforms;

•

the timing of release of new games by us and our competitors, particularly those that may represent a significant portion of revenues in a period;

•

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

•

changes in the prominence of deck placement or storefront featuring for our leading games and those of our competitors;

•

fluctuations in the size and rate of growth of overall consumer demand for mobile handsets, games and related content;

•

the rate at which consumers continue to migrate from traditional feature phones to more advanced platforms and smartphones;

•

our success in developing and monetizing persistent-state, freemium games for smartphones;

•

the strength or weakness in consumer demand for new mobile devices;

•

the expiration of existing content licenses for particular games;

•

the timing of charges related to impairments of goodwill, intangible assets, prepaid royalties and guarantees;

•

changes in pricing policies by us, our competitors or our carriers and other distributors;

•

changes in pricing policies by our carriers related to downloading content, such as our games, which pricing policies could be influenced by the lower average prices for content on advanced platforms and smartphones;

•

changes in the mix of original and licensed games, which have varying gross margins;

•

carrier policies around off portal marketing and monetization;