Form 10-Q

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

For the Quarterly Period Ended March 31, 2011


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

For the Transition Period from to

Commission File 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.)

45 Fremont Street, Suite 2800
San Francisco, California 94105
(Address of Principal Executive Offices, including Zip Code)

(415) 800-6100
(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 May 3, 2011: 53,870,646

PART I. FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

GLU MOBILE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share data)


	March 31,			December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	24,388		$	12,863
Accounts receivable, net		11,968			10,660
Prepaid royalties		1,083			2,468
Prepaid expenses and other		1,687			2,557

Total current assets		39,126			28,548
Property and equipment, net		2,645			2,134
Other long-term assets		634			574
Intangible assets, net		8,006			8,794
Goodwill		4,796			4,766

Total assets	$	55,207		$	44,816


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,370		$	5,666
Accrued liabilities		923			939
Accrued compensation		3,219			4,414
Accrued royalties		6,015			7,234
Accrued restructuring		1,384			1,689
Deferred revenues		1,577			842
Current portion of long-term debt		—			2,288

Total current liabilities		19,488			23,072
Other long-term liabilities		7,847			7,859

Total liabilities		27,335			30,931


Commitments and contingencies (Note 5)

Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000 shares authorized at March 31, 2011 and December 31, 2010; no shares issued and outstanding at March 31, 2011 and December 31, 2010		—			—
Common stock, $0.0001 par value: 250,000 shares authorized at March 31, 2011 and December 31, 2010; 53,817 and 44,585 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		5			4
Additional paid-in capital		220,643			203,464
Accumulated other comprehensive income		1,138			1,159
Accumulated deficit		(193,914	)		(190,742	)

Total stockholders’ equity		27,872			13,885

Total liabilities and stockholders’ equity	$	55,207		$	44,816

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,
	2011			2010
Revenues	$	16,426		$	17,289
Cost of revenues:
Royalties and impairment of prepaid royalties and guarantees		3,840			4,691
Amortization of intangible assets		817			1,228

Total cost of revenues		4,657			5,919

Gross profit		11,769			11,370

Operating expenses:
Research and development		7,166			6,661
Sales and marketing		3,757			2,971
General and administrative		2,934			3,813
Amortization of intangible assets		—			55
Restructuring charge		490			594

Total operating expenses		14,347			14,094

Loss from operations		(2,578	)		(2,724	)
Interest and other income/(expense), net:
Interest income		22			7
Interest expense		(40	)		(304	)
Other income/(expense), net		198			(334	)

Interest and other income/(expense), net		180			(631	)

Loss before income taxes		(2,398	)		(3,355	)
Income tax provision		(774	)		(301	)

Net loss	$	(3,172	)	$	(3,656	)


Net loss per common share — basic and diluted:	$	(0.06	)	$	(0.12	)

Weighted average common shares outstanding — basic and diluted		52,048			30,458

Stock-based compensation expense included in:
Research and development	$	100		$	164
Sales and marketing		66			73
General and administrative		231			287

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,
	2011			2010
Cash flows from operating activities:
Net loss	$	(3,172	)	$	(3,656	)
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:
Depreciation and accretion		427			563
Amortization of intangible assets		817			1,283
Stock-based compensation		397			524
Interest expense on debt		2			265
Amortization of loan agreement costs		38			39
Non-cash foreign currency remeasurement loss/(gain)		(198	)		332
Impairment of prepaid royalties and guarantees		371			—
Changes in allowance for doubtful accounts		101			212
Changes in operating assets and liabilities:
Accounts receivable		(1,324	)		2,286
Prepaid royalties		928			1,409
Prepaid expenses and other assets		886			265
Accounts payable		243			(370	)
Other accrued liabilities		(15	)		72
Accrued compensation		(493	)		708
Accrued royalties		(1,308	)		(2,364	)
Deferred revenues		735			258
Accrued restructuring charge		(500	)		(582	)
Other long-term liabilities		(56	)		326

Net cash (used in)/provided by operating activities		(2,121	)		1,570


Cash flows from investing activities:
Purchase of property and equipment		(478	)		(108	)

Net cash used in investing activities		(478	)		(108	)


Cash flows from financing activities:
Proceeds from line of credit		—			11,797
Payments on line of credit		(2,288	)		(13,341	)
Net proceeds from Public Offering		15,872			—
MIG loan payments		(698	)		—
Proceeds from exercise of warrants		750			—
Proceeds from exercise of stock options and ESPP		306			156

Net cash provided by/(used in) in financing activities		13,942			(1,388	)


Effect of exchange rate changes on cash		182			(110	)

Net increase/(decrease) in cash and cash equivalents		11,525			(36	)
Cash and cash equivalents at beginning of period		12,863			10,510

Cash and cash equivalents at end of period	$	24,388		$	10,474

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.

The Company has incurred recurring losses from operations since inception and had an accumulated deficit of $193,914 as of March 31, 2011. For the three months ended March 31, 2011, the Company incurred a net loss from operations of $3,172. The Company may incur additional operating losses and negative cash flows in the future. Failure to generate sufficient revenues, reduce spending or raise additional capital could adversely affect the Company’s ability to achieve its intended business objectives.

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, 2010 filed with the SEC on March 21, 2011. 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, 2011 and its results of operations for the three ended March 31, 2011 and 2010, 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, 2010 has been derived from the audited consolidated financial statements as of that date, and the consolidated balance sheet presented as of March 31, 2011 has been derived from the unaudited condensed consolidated financial statements as of that date.

Basis of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents 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,
	2011			2010
Verizon Wireless		*	%		18.0	%
Apple		15.7			*


*		Revenues from the customer were less than 10% during the period.

At March 31, 2011, Verizon Wireless accounted for 13.1%, Apple accounted for 10.7% and Telecomunicaciones Movilnet accounted for 10.0% of total accounts receivable. At December 31, 2010, Verizon Wireless accounted for 18.3% and Telecomunicaciones Movilnet accounted for 14.8% of total accounts receivable.

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.


	Three Months Ended
	March 31,
	2011			2010
Net loss	$	(3,172	)	$	(3,656	)

Basic and diluted shares:
Weighted average common shares outstanding		52,048			30,459
Weighted average unvested common shares subject to repurchase		—			(1	)

Weighted average shares used to compute basic and diluted net loss per share		52,048			30,458

Net loss per share — basic and diluted	$	(0.06	)	$	(0.12	)

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,
	2011		2010
Warrants to purchase common stock		6,693		106
Unvested common shares subject to repurchase		—		1
Options to purchase common stock		6,996		5,734

		13,689		5,841

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASC ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350) — Intangibles — Goodwill and Other (“ASU 2010-28”). ASU 2010-28 which amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The amendments to this update are effective for us in the first quarter of 2011. Any impairment to be recorded upon adoption will be recognized as an adjustment to our beginning retained earnings. We do not expect the adoption of ASU 2010-28 to have a material impact on our condensed consolidated financial statements.

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, 2011, the Company had $24,388 in cash and cash equivalents.

Note 3 — Balance Sheet Components

Accounts Receivable


	March 31,			December 31,
	2011			2010
Accounts receivable	$	12,573		$	11,164
Less: Allowance for doubtful accounts		(605	)		(504	)

	$	11,968		$	10,660

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, 2011 and 2010.

Property and Equipment


	March 31,			December 31,
	2011			2010
Computer equipment	$	5,282		$	4,974
Furniture and fixtures		501			487
Software		3,498			2,919
Leasehold improvements		2,489			2,392

		11,770			10,772
Less: Accumulated depreciation and amortization		(9,125	)		(8,638	)

	$	2,645		$	2,134

Depreciation expense for the three months ended March 31, 2011 and March 31, 2010 was $427 and $563, respectively.

Other Long-Term Liabilities


	March 31,		December 31,
	2011		2010
Uncertain tax position obligations		5,028		4,991
Deferred income tax liability		1,178		1,170
Restructuring		578		773
Other		1,063		925

	$	7,847		7,859

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, 2011 and December 31, 2010 were as follows:


		March 31, 2011							December 31, 2010
				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	$	13,638	$	(13,638	)	$	—	$	13,545	$	(13,545	)	$	—
Catalogs	1 yr		1,247		(1,247	)		—		1,203		(1,203	)		—
ProvisionX Technology	6 yrs		205		(205	)		—		198		(198	)		—
Carrier contract and related relationships	5 yrs		18,940		(11,218	)		7,722		18,832		(10,352	)		8,480
Licensed content	5 yrs		2,851		(2,851	)		—		2,829		(2,810	)		19
Service provider license	9 yrs		449		(165	)		284		446		(151	)		295
Trademarks	3 yrs		549		(549	)		—		547		(547	)		—

			37,879		(29,873	)		8,006		37,600		(28,806	)		8,794

Other intangible assets amortized to operating expenses:
Emux Technology	6 yrs		1,330		(1,330	)		—		1,283		(1,283	)		—
Noncompete agreement	2 yrs		582		(582	)		—		562		(562	)		—

			1,912		(1,912	)		—		1,845		(1,845	)		—

Total intangibles assets		$	39,791	$	(31,785	)	$	8,006	$	39,445	$	(30,651	)	$	8,794

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, 2011 and 2010, the Company recorded amortization expense in the amounts of $817 and $1,228 respectively, in cost of revenues. During the three months ended March 31, 2011 and 2010, the Company recorded amortization expense in the amounts of zero and $55, respectively, in operating expenses.

As of March 31, 2011, the total expected future amortization related to intangible assets was as follows:


	Amortization
	Included in
	Cost of
Year Ending December 31,	Revenues
2011 (remaining nine months)	$	2,102
2012		2,802
2013		2,732
2014		272
2015 and thereafter		98

	$	8,006

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, 2011												December 31, 2010
	Americas			EMEA			APAC			Total			Americas			EMEA			APAC			Total
Balance as of January 1
Goodwill	$	24,871		$	25,354		$	24,039		$	74,264		$	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	)

		—			—			4,766			4,766			—			—			4,608			4,608
Goodwill Acquired during the year		—			—			—			—			—			—			—			—
Effects of Foreign Currency Exchange		—			—			30			30			—			—			158			158

Balance as of period ended:		—			—			4,796			4,796			—			—			4,766			4,766
Goodwill		24,871			25,354			24,069			74,294			24,871			25,354			24,039			74,264
Accumulated Impairment Losses		(24,871	)		(25,354	)		(19,273	)		(69,498	)		(24,871	)		(25,354	)		(19,273	)		(69,498	)

	$	—		$	—		$	4,796		$	4,796		$	—		$	—		$	4,766		$	4,766

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 or more frequently if triggering events occur.

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 is 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) EMEA and 3) APAC regions. As of March 31, 2011, the Company had goodwill attributable to the APAC reporting unit. The Company performed an annual impairment review as of September 30, 2010 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 method 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 November 2013. Rent expense for the three months ended March 31, 2011 and 2010 was $562 and $665, 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 $353 and $379 at March 31, 2011 and December 31, 2010, respectively, and was included within other long-term liabilities

At March 31, 2011, 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
2011 (remaining nine months)	$	2,850	$	554	$	2,296
2012		2,725		391		2,334
2013		1,052		—		1,052

	$	6,627	$	945	$	5,682

Minimum Guaranteed Royalties and Developer Commitments

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. The Company also has contracts with various external software developers (“third-party developers”) to design and develop games as part of its “Glu Partners” initiative. The Company advances funds to these third-party developers, in installments, payable upon the completion of specified development milestones. Contractually, these payments are generally considered advances against subsequent royalties on the sales of the products. Future minimum royalty payments and developer commitments for those agreements as of March 31, 2011 were as follows:


	Minimum
	Guaranteed		Developer
Year Ending December 31,	Royalties		Commitments		Total
2011 (remaining nine months)	$	159	$	1,646	$	1,805
2012 and thereafter		361		—		361

	$	520	$	1,646	$	2,166

These minimum guaranteed royalty payments and developer commitments are included in both current and long-term prepaid and accrued royalties.

Income Taxes

As of March 31, 2011, 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, 2011, 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, 2011 or December 31, 2010.

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, 2011 or December 31, 2010.

Contingencies

From time to time, the Company is subject to various claims, complaints and legal actions in the normal course of business. 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 2007, the Company acquired MIG to accelerate its presence in China. 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. The Earnout Notes required that the Company pay off the remaining principal and interest in installments. 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. In January 2011, the Company paid $698 of taxes that had been withheld on the December 31, 2010 Special Bonus Notes payment made to the former MIG shareholders in China. As of March 31, 2011, the Company had fully repaid both the Earnout Notes and Special Bonus Notes.

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 that the Company had previously entered into with the lender in February 2007, as amended. On August 24, 2009 and February 10, 2010, the Company and the lender entered into amendments to the Credit Facility, which reduced certain of the minimum targets specified in the EBITDA-related covenant contained in the Credit Facility. 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 and the lender 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%. On February 2, 2011, the Company and the lender entered into a fourth amendment which waived the Company’s default in maintaining minimum levels of EBITDA specified in the Credit Facility for the period beginning October 1, 2010 and ending December 31, 2010. Prior to this date, the Company was in compliance with all covenants under the Credit Facility. This amendment also removed the EBITDA financial covenant from the Credit Facility in its entirety and replaced this covenant with a net cash covenant, which requires the Company to maintain at least $10,000 in unrestricted cash at the lender or an affiliate of the lender, net of any indebtedness that is owed to the lender under the Credit Facility.

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 $2,195 as of March 31, 2011. 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.

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.

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.

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, 2011, the Company was in compliance with all covenants of the Credit Facility, and had no borrowings outstanding under the Credit Facility.

Note 7 — Stockholders’ Equity

Public Offering

In January 2011, the Company sold in an underwritten public offering an aggregate of 8,415 shares of its common stock at a public offering price of $2.05 per share for net cash proceeds of approximately $15,872 after underwriting discounts and commissions and offering expenses. The underwriters of this offering were Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Merriman Capital, Inc. and Northland Capital Markets.

Shelf Registration Statement

In December 2010, the Securities and Exchange Commission declared effective the Company’s shelf registration statement which allows the Company to issue various types of debt and equity instruments, including common stock, preferred stock and warrants. Issuances under the shelf registration will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The ability to issue debt and equity is subject to market conditions and other factors impacting the Company’s borrowing capacity. The Company has a $30,000 limit on the amount securities that can be issued under this shelf registration statement and has utilized $17,250 of this amount as of March 31, 2011 pursuant to the public offering in January 2011 described above.

Private Placement

On August 2010, the Company completed a private placement of its common stock (the “2010 Private Placement”) in which it issued to the Investors (i) an aggregate of 13,495 shares of the Company’s common stock at $1.00 per share and (ii) warrants initially exercisable to purchase up to 6,748 shares of the Company’s common stock at $1.50 per share (the “Warrants”), for initial proceeds of approximately $13,218 net of issuance costs (excluding any proceeds the Company may receive upon exercise of the Warrants). Of this amount, $2,198 was allocated to the value of the Warrants and $11,020 was allocated to the common stock. All amounts are recorded within stockholders’ equity. In March 2011, one of the Investors fully exercised its warrant to purchase 500 shares of the Company’s common stock, and the Company received gross proceeds of $750 in connection with such exercise.

Warrants to Purchase Common Stock

The Warrants issued in connection with the 2010 Private Placement have an initial exercise price of $1.50 per share of common stock, can be exercised immediately, have a five-year term and provide for weighted-average anti-dilution protection in addition to customary adjustment for dividends, reorganization and other common stock events.

Warrants outstanding as of March 31, 2011 were as follows:

Number

Exercise

of Shares

Price

Outstanding

Term

per

Under

Issue Date

(Years)

Share

Warrant

May 2006

9.03

106

August 2010

1.50

6,248

6,354

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. Other comprehensive loss for the three months ended March 31, 2011 and 2010 was $3,193 and $3,498, respectively.

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. On June 3, 2010, at the Company’s 2010 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment to the 2007 Plan to increase the aggregate number of shares of common stock authorized for issuance under the 2007 Plan by 3,000 shares. Furthermore, the number of shares available for grant and issuance under the 2007 Plan were increased automatically on January 1 of each of 2008 through 2011 by an amount equal to 3% of the Company’s shares outstanding on the immediately preceding December 31.

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, 2011, 5,254 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, 2011, 693 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 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, 2011, 49 shares were reserved for future grants under the Inducement Plan.

Stock Option Activity

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2011:


				Options Outstanding
							Weighted		Weighted
				Number			Average		Average		Aggregate
	Shares			of			Exercise		Contractual		Intrinsic
	Available			Shares			Price		Term (Years)		Value
Balances at December 31, 2010		4,148			6,928		$	2.02
Increase in authorized shares		1,338
Options granted		(464	)		464			2.47
Options canceled		281			(281	)		1.57
Options exercised		—			(149	)		0.94

Balances at March 31, 2011		5,303			6,962		$	2.10		4.68	$	17,645


Options vested and expected to vest at March 31, 2011					5,646		$	2.24		4.56	$	13,887
Options exercisable at March 31, 2011					2,155		$	3.54		3.70	$	3,795

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 $4.32 per share as of March 31, 2011. Consolidated net cash proceeds from option exercises were $140 and $9 for the three months ended March 31, 2011 and 2010, respectively. The Company realized no significant income tax benefit from stock option exercises during the three months ended March 31, 2011 or 2010. 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,
	2011			2010
Dividend yield		—	%		—	%
Risk-free interest rate		1.62	%		1.35	%
Expected volatility		63.5	%		75.7	%
Expected term (years)		4.00			3.22

The Company based its expected volatility on its own historic volatility and the historical volatility 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, 2011 and 2010 was $1.21 and $0.62, respectively.

The Company calculated employee stock-based compensation expense recognized in the three months ended March 31, 2011 and 2010 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,
	2011		2010
Research and development	$	100	$	164
Sales and marketing		66		73
General and administrative		231		287

Total stock-based compensation expense	$	397	$	524

As of March 31, 2011, the Company had $2,543 of total unrecognized compensation expense under ASC 718, net of estimated forfeitures, which will be recognized over a weighted average period of 3.05 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 $774 and $301 for the three months ended March 31, 2011 and 2010, 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 estimates its annual effective tax rate at the end of each quarterly period, and records the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized and jurisdictions where a reliable estimate of ordinary income cannot be made are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections. The Company’s ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382.

The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes (“ASC 740”). As of March 31, 2011 and December 31, 2010, the total amount of unrecognized tax benefits was $3,280 and $3,326, respectively. As of March 31, 2011 and December 31, 2010, approximately $19 and $73, 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 $60 and $57 of interest on uncertain tax positions during the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010, the Company had a liability of $3,713 and $3,630, respectively, related to interest and penalties for uncertain tax positions.

One of the Company’s subsidiaries in China has received the High & New Technology Enterprise qualification from the Ministry of Science and Technology, and also the Software Enterprise Qualification from the Ministry of Industry and Information Technology. During the third quarter of 2010, the State Administration of Taxation approved the Company’s application to apply the favorable tax benefits to operations beginning January 1, 2009. The Company has revalued certain deferred tax assets and liabilities during the quarter, and certain taxes that were expensed in 2009 were refunded in 2010, and the tax benefit was recognized. These qualifications are reviewed annually, and in the event that circumstances change and the Company no longer meets the requirements of the original qualification, the Company would need to revalue certain deferred tax assets and liabilities.

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 2008 filed tax return in the United Kingdom will begin to expire (close) in 2011. The Company’s China income tax returns are open by statute for tax years 2005 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 are included within 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.

A breakdown of the Company’s total sales to customers in the feature phone and smartphone markets is shown below:


	Three Months Ended
	March 31,
	2011		2010
	(in thousands)
Feature phone	$	10,478	$	15,106
Smartphone		5,948		2,183

Revenues	$	16,426	$	17,289

The Company generates its revenues in the following geographic regions:


	Three Months Ended
	March 31,
	2011		2010
United States of America	$	7,275	$	8,249
China		1,427		1,600
Americas, excluding the USA		1,916		2,176
EMEA		5,071		4,662
Other		737		602

	$	16,426	$	17,289

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,
	2011		2010
Americas	$	1,624	$	1,013
EMEA		592		714
Other		429		407

	$	2,645	$	2,134

Note 11 — Restructuring

Restructuring information as of March 31, 2011 was as follows:


	Restructuring
	2011						2010						2009
				Facilities						Facilities						Facilities			Superscape
	Workforce			Related			Workforce			Related			Workforce			Related			Plan			Total
Balance as of January 1, 2010	$	—		$	—		$	—		$	—		$	629		$	737		$	40		$	1,406
Charges to operations		—			—			1,540			1,854			—			235			—			3,629
Non Cash Adjustments		—			—			—			(269	)		—			—			(3	)		(272	)
Charges settled in cash		—			—			(1,244	)		—			(629	)		(414	)		(14	)		(2,301	)

Balance as of December 31, 2010		—			—			296			1,585			—			558			23			2,462
Charges to operations		369			93			28			—			—			—			—			490
Non Cash Adjustments		—			(86	)		—			—			—			—			4			(82	)
Charges settled in cash		(318	)		(7	)		(175	)		(313	)		—			(95	)		—			(908	)

Balance as of March 31, 2011	$	51		$	—		$	149		$	1,272		$	—		$	463		$	27		$	1,962

During 2009, 2010 and the first quarter of 2011, 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 first quarter of 2011 restructuring plan included $369 of restructuring charges relating to employee termination costs in the Company’s APAC, Latin America, Russia and United Kingdom offices. The remaining restructuring charge of $93 related primarily to facility related charges resulting from vacating a portion of the Company’s Moscow offices, which includes an $86 non-cash adjustment relating to a write off of leasehold improvements. Since the inception of the 2010 restructuring plan through March 31, 2011, the Company incurred $1,568 of restructuring charges relating to employee termination costs in the Company’s United States, APAC, Latin America and United Kingdom offices. The remaining restructuring charge of $1,854 related primarily to facility related charges resulting from the relocation of the Company’s corporate headquarters to San Francisco, which includes a $269 non-cash adjustment, primarily relating to a write off in fixed assets. Since the inception of the 2009 restructuring plan through March 31, 2011, the Company incurred $2,111 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 $1,102 of facility related charges, comprised of $944 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. The Company does not expect to incur any additional charges under the 2009 restructuring plan.

As of March 31, 2011, the Company’s remaining restructuring liability of $1,962 was comprised of $200 of severance and benefits payments due to former executives and former employees in its Latin America offices, which are due to be paid during 2011, and $1,762 of facility related costs that are expected to be paid over the remainder of the lease terms of one to two years. As of March 31, 2011, approximately $578 of facility costs included in the above table were classified as other long-term liabilities. As of December 31, 2010, the Company’s remaining restructuring liability of $2,462 was comprised of $296 of severance and benefits payments due to former executives, of which $175 were paid in the first quarter of 2011, and $2,166 of facility related costs, which included $773 of facility costs that were classified as other long-term liabilities. The Company paid $408 of these facility costs during the first quarter of 2011.

Note 12 — Subsequent Events

On April 4, 2011, Ellen F. Siminoff, a member of the Board of Directors of the Company, informed the Company that she did not intend to stand for re-election at the Company’s 2011 Annual Meeting of Stockholders (the “Annual Meeting”), which is currently scheduled to be held on June 2, 2011. Ms. Siminoff will serve the remainder of her term that expires at the Annual Meeting. This decision was not related to any disagreement with the Company relating to its operations, policies or practices.

On April 20, 2011, the Company’s Board of Directors approved an amendment to the 2007 Plan to increase the number of shares that the Company may grant to an eligible participant under the 2007 Plan during any calendar year. The current limits are 333 shares for current employees and other participants and 667 shares for new employees and participants; the Company’s Board of Directors approved increasing these limits to 750 shares and 1,500 shares, respectively. The Company will be submitting this amendment to the 2007 Plan to its stockholders for approval at the Annual Meeting.

On April 29, 2011, the Company entered into a Development and Distribution Agreement with Full Fathom Five, LLC. Under this agreement, the Company and Full Fathom Five, LLC will collaborate on the development of four original concepts during the two-year term of the agreement. These concepts will serve as the basis of games to be created by the Company and books to be developed by Full Fathom Five, LLC, with the potential of also bringing these concepts to additional media such as television and film. The parties will share in the revenues generated from their respective commercial exploitation of the jointly developed concepts. In addition, the Company issued Full Fathom Five, LLC 51 shares of its unregistered and restricted common stock, representing $200 of common stock based on the $3.92 closing price for the Company’s common stock on The NASDAQ Global Market on April 28, 2011, as a minimum guarantee against future revenue sharing payments. The shares issued to Full Fathom Five, LLC are subject to vesting restrictions that lapse over two years. Matthew A. Drapkin, a member of the Company’s Board of Directors, owns 10% of the membership interests of Full Fathom Five, LLC. Glu’s Nominating and Governance Committee and its full Board of Directors (other than Mr. Drapkin) approved this transaction with Full Fathom Five, LLC in accordance with the requirements of the Company’s Related Party Transaction Policy.

On May 1, 2011, the Company entered into a Development, Distribution and Investment Agreement with Blammo Games, Inc. Under this agreement, Blammo Games, Inc. will develop two games over the next 12 months that the Company will publish, and the parties will share in the revenues generated from such games after the Company has recouped the advance payments it will make to Blammo Games, Inc. In addition, the Company received an option to purchase up to a 25% ownership interest in Blammo Games, Inc., which option expires on May 1, 2016.


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;

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

• our expectations regarding the development of future products, including those for smartphones and tablets;

• our expectation that we will release 15 to 20 additional social, freemium games during 2011, of which approximately one-third will be developed by third parties pursuant to our Glu Partners program;

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

• our expectation that the substantial majority of the social, freemium games that we are developing for smartphones will be based on our own intellectual property, which we believe will significantly enhance our margins and long-term value;

• our expectations regarding our revenues, including the expected decline in revenues from games we develop for feature phones in our traditional carrier-based business and our expectation that our smartphone revenues will surpass our feature phone revenues on a monthly run rate basis by the end of 2011 and that this transition will position us to return to overall revenue growth in the longer term;

• our expectations regarding our operating expenses, including anticipated increased spending on sales and marketing and research and development initiatives during 2011 compared to 2010;

• our intention to utilize a significant portion of the net proceeds from our underwritten public offering that we completed in January 2011 to further the development of our global social gaming community, including with respect to our Glu Games Network and Glu Partners initiatives;

• 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; and

• our belief that our cash and cash equivalents, borrowings under our revolving credit facility and cash flows from operations, if any, will be sufficient to meet our cash needs for at least the next 12 months.

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 unaudited 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 2011, 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, 2011 were $16.4 million, a 5% decrease compared to the three months ended March 31, 2010, in which we reported revenues of $17.3 million. This decrease in revenues was primarily due to the continued migration of users from feature phones to smartphones, such as Apple’s iPhone and mobile phones utilizing Google’s Android operating system, which offer enhanced functionality and our shift in our product development focus towards developing new titles for smartphone devices. We believe that the transition from feature phone to smartphone devices will continue to accelerate for the remainder of 2011 and for the foreseeable future as consumers increasingly upgrade their phones. In addition, we intend to release fewer games for feature phones in future periods, which will further reduce our revenues that we derive from feature phones. Because we still expect feature phone revenues to likely comprise the majority of our revenues for 2011, we expect that our revenues for 2011 will likely decline compared with 2010.

For us to succeed in 2011 and beyond, we believe that we must increasingly publish mobile games that are widely accepted and commercially successful on the smartphone and tablet digital storefronts, which include Apple’s App Store, Google’s Android Market, Microsoft’s Windows Marketplace for Mobile and Palm’s App Catalog. Although we have experienced certain successes on these digital storefronts, particularly with respect to the Apple App Store, our smartphone revenue only accounted for approximately 36% and 13% of our revenues for the three months ended March 31, 2011 and March 31, 2010, respectively. Our strategy for increasing our revenues from smartphones and tablets involves becoming the leading publisher of social, mobile “freemium” games — games that are downloadable without an initial charge, but which enable a variety of additional features to be accessed for a fee or otherwise monetized through various advertising and offer techniques. Our social, freemium games are generally designed to be persistent through regular content updates. We believe this approach will enable us to build and grow a longer lasting and more direct relationship with our customers, which will assist us in our future sales and marketing efforts. We intend to have the substantial majority of our social, freemium games be based upon our own intellectual property, which we believe will significantly enhance our margins and long-term value.

Although we expect our revenues from smartphones and tablets to increase in 2011 as compared to 2010, we do not expect this increase to fully offset the anticipated decline in revenues from games we develop for feature phones, and therefore in 2011 we expect that our total revenues will likely decline from our 2010 revenues. However, we believe that our smartphone revenues will surpass our feature phone revenues on a monthly run rate basis by the end of 2011 and that this transition will position us to return to overall revenue growth in the longer term. Significantly growing our revenues from smartphones and tablets may be challenging for us for several reasons, including: (1) the current uncertainty regarding whether we can include certain types of offers in our games sold on the Apple App Store, which offers currently account for a significant portion of our smartphone revenues; (2) the open nature of many of the smartphone and tablet storefronts substantially increases the number of our competitors and competitive products; (3) we have only recently concentrated our efforts on developing and marketing social, freemium games; (4) our relatively limited experience with respect to creating games that include micro-transaction capabilities, advertizing and offers may cause us to have difficulty optimizing the monetization of our freemium games; (5) we historically have had limited success in generating significant revenues from games based on our own intellectual property rather than licensed brands; (6) our social, freemium games may not be widely downloaded by consumers for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts or a failure to achieve prominent storefront featuring for such games; and (7) 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 digital storefront owners and our licensors. The loss of any key relationships with our digital storefront owners, carriers, other distributors or licensors could impact our revenues in the future.

Our net loss in the three months ended March 31, 2011 was $3.2 million versus a net loss of $3.7 million in the three months ended March 31, 2010. This decrease was driven primarily by a decrease in costs of revenues of $1.3 million due to a decrease in royalty-burdened revenues and impairments of advanced royalties, a decrease in other income and expenses of $811,000 related primarily to lower interest charges as the MIG promissory notes were fully repaid and favorable foreign exchange revaluations in the first quarter of 2011 compared to same period in the prior year. These decreases were partially offset by an $863,000 reduction in revenues, a $473,000 increase in the tax provision and a $253,000 increase in operating expenses. The increase in our operating expenses for the three months ended March 31, 2011 compared with the three months ended March 31, 2010 was in part due to increased research and development and sales and marketing expense associated with the launch of our freemium titles. 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 these currencies fluctuated significantly in 2010 and the first three months of 2011.

We significantly increased our spending on sales and marketing initiatives in the first quarter of 2011 in connection with the launch and promotion of our initial social, freemium titles, and we expect our sales and marketing expenditures to remain at this increased level during the remainder 2011. We also 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, including through external development relationships. As a result of this increased spending on sales and marketing and research and development initiatives, we expect to use a significant amount of cash in operations as we seek to grow our business. 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 the restructuring measures we implemented during 2010 and first quarter of 2011, which primarily consisted of headcount reductions, will have a beneficial effect on our overall operating expenses, but will not fully offset the expected increases in our sales and marketing and research and development expenses in connection with our new social, freemium games, as discussed above. 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 mobile phones and tablets, we generally experience seasonal sales increases based on the holiday selling period. However, due to the time between mobile phone and tablet purchases and game purchases, some of this holiday impact occurs for us in our first calendar quarter. 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, 2011 totaled $24.4 million, an increase of $11.5 million from the balance at December 31, 2010. This increase was primarily due to $15.9 million of net proceeds we received from the underwritten public offering of common stock that we completed in January 2011 (the “2011 Public Offering”), and $1.1 million of proceeds received from warrant exercises, option exercises and purchases under our employee stock purchase program. These inflows were partially offset by $2.3 million paid under our credit facility, $2.1 million of cash used in operations, $698,000 of taxes that had been withheld on the December 31, 2010 Special Bonus Notes payment made to the former MIG shareholders and $478,000 of capital expenditures. We believe our cash and cash equivalents, together with cash flows from operations, if any, and borrowings under our credit facility, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Significant Transactions

In January 2011, we completed the 2011 Public Offering in which we sold an aggregate of 8,414,635 shares of our common stock at a price to the public of $2.05 per share for net proceeds of approximately $15.9 million after underwriting discounts and commissions and offering expenses. The underwriters of the 2011 Public Offering were Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Merriman Capital, Inc. and Northland Capital Markets. We intend to utilize a significant portion of the net proceeds from this offering to further the development of our global social gaming community, including with respect to our Glu Games Network and Glu Partners initiatives.

In August 2010, we completed a private placement of our common stock (the “2010 Private Placement”) in which we issued and sold to certain investors an aggregate of 13,495,000 shares of common stock at $1.00 per share and warrants exercisable to purchase up to 6,747,500 shares of common stock at $1.50 per share for initial gross proceeds of approximately $13.5 million (excluding any proceeds we may receive upon exercise of the warrants).

In December 2008, we renegotiated and extended our credit facility, and also amended the terms of the credit facility in August 2009, February 2010, March 2010 and February 2011. The credit facility, as amended, provides for borrowings of up to $8.0 million, subject to a borrowing base equal to 80% of our eligible accounts receivable. The most recent fourth amendment to the credit facility that we entered into in February 2011 waived our default in maintaining minimum levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”) specified in the credit facility for the period beginning October 1, 2010 and ending December 31, 2010. This fourth amendment also removed the EBITDA financial covenant from the credit facility in its entirety and replaced this covenant with a net cash covenant, which requires us to maintain at least $10.0 million in unrestricted cash at the lender or an affiliate of the lender, net of any indebtedness that we owe to the lender under the credit facility.

Critical Accounting Policies and Estimates

There were no significant changes in our Critical Accounting Policies and Estimates during the three months ended March 31, 2011 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, 2010.

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, 2011 and 2010

Revenues


	Three Months Ended
	March 31,
	2011		2010
	(in thousands)
Feature phone	$	10,478	$	15,106
Smartphone		5,948		2,183

Revenues	$	16,426	$	17,289

Our revenues decreased $863,000, or 5.0%, from $17.3 million for the three months ended March 31, 2010 to $16.4 million for the three months ended March 31, 2011. This decrease was due to a $4.6 million decline in feature phone revenue which was partially offset by a $3.8 million increase in smartphone revenue. The decrease in feature phone revenues was primarily due to the continued migration of users from feature phones to smartphones and our shift in our product development focus towards developing new titles for smartphone devices. The increase in smartphone revenues was due to increased sales growth on Apple’s iOS-based devices related primarily to micro-transactions, offers and advertisements revenues. International revenues (defined as revenues generated from carriers whose principal operations are located outside the United States) increased by $111,000, from $9.0 million in the three months ended March 31, 2010 to $9.2 million in the three months ended March 31, 2011. This was primarily related to a $409,000, or 8.8%, increase in our EMEA revenues. The increase in our EMEA revenues was primarily due to increased revenues from certain OEM relationships, partially offset by continued declines in our carrier-based business. The increase in our EMEA revenues was partially

offset by a $260,000 decrease in our Americas, excluding the United States, revenues primarily related to declining feature phone revenues. We expect our 2011 revenues to be likely lower than our 2010 revenues primarily as a result of the anticipated acceleration of the slowdown in the sale of our games on feature phones in our traditional carrier-based business as consumers increasingly migrate from traditional feature phones to more advanced platforms and smartphones. Although we expect our revenues from smartphones and tablets to increase in 2011 as compared to 2010, we do not expect this increase to fully offset the anticipated decline in revenues from games we develop for feature phones, and therefore we expect that our total revenues will likely decline in 2011 as compared with 2010. However, we believe that our smartphone revenues will surpass our feature phone revenues on a monthly run rate basis by the end of 2011 and that this transition will position us to return to overall revenue growth in the longer term.

Cost of Revenues


	Three Months Ended
	March 31,
	2011			2010
	(in thousands)
Cost of revenues:
Royalties and impairment of prepaid royalties and guarantees	$	3,840		$	4,691
Amortization of intangible assets		817			1,228

Total cost of revenues	$	4,657		$	5,919

Revenues	$	16,426		$	17,289

Gross margin		71.6	%		65.8	%

Our cost of revenues decreased $1.3 million, or 21.3%, from $5.9 million in the three months ended March 31, 2010 to $4.7 million in the three months ended March 31, 2011. This decrease was primarily due to a $851,000 decrease in royalties associated with a decline in royalty-burdened revenue and $860,000 of recoupments of previously impaired titles that were partially offset by an additional $371,000 of impairment charges during the first quarter of 2011. Our amortization of intangible assets decreased $411,000 due to certain intangible assets relating to MIG, Macrospace and Superscape being fully amortized during 2010. Revenues attributable to games based upon branded intellectual property decreased as a percentage of revenues from 79.8% in the three months ended March 31, 2010 to 67.1% in the three months ended March 31, 2011, primarily due to our focus on developing freemium games for smartphones that are based on our own intellectual property. Revenues attributable to games based upon original intellectual property were 32.9% of our total revenues for the three months ended March 31, 2011, primarily related to U.S. titles. The average royalty rate that we paid on games based on licensed intellectual property, excluding royalty impairments, decreased from 34.0% in the three months ended March 31, 2010 to 31.5% in the three months ended March 31, 2011 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 27.1% in the three months ended March 31, 2010 to 21.1% in the three months ended March 31, 2011.

Research and Development Expenses


	Three Months Ended
	March 31,
	2011			2010
	(in thousands)
Research and development expenses	$	7,166		$	6,661
Percentage of revenues		43.6	%		38.5	%

Our research and development expenses increased $505,000, or 7.6%, from $6.7 million in the three months ended March 31, 2010 to $7.2 million in the three months ended March 31, 2011. The increase in research and development costs was primarily due to an increase in outside service costs of $573,000 associated with the development of new freemium smartphone games by external developers as part of our Glu Partners program. Salaries and benefits decreased by $151,000, as we decreased our research and development staff from 365 employees at March 31, 2010 to 290 as of March 31, 2011, which was primarily a result of the restructuring of our studios in Brazil, China and Russia. These amounts were partially offset by a $298,000 increase in variable compensation paid to our employees under our bonus plans, and a $279,000 decrease in allocated facilities and overhead costs. As a percentage of revenues, research and development expenses increased from 38.5% for the three months ended March 31, 2010 compared to 43.6% for the three months ended March 31, 2011. Research and development expenses included $100,000 of stock-based compensation expense in the three months ended March 31, 2011 and $164,000 in the three months ended March 31, 2010. We anticipate that our research and development expenses will continue to increase during the remainder of 2011 due to our expected release of 15 to 20 new social, freemium titles during 2011, approximately one-third of which will be developed by external developers as part of our Glu Partners program and which will require significant upfront cash payment to such developers.

Sales and Marketing Expenses


	Three Months Ended
	March 31,
	2011			2010
	(in thousands)
Sales and marketing expenses	$	3,757		$	2,971
Percentage of revenues		22.9	%		17.2	%

Our sales and marketing expenses increased $786,000, or 26.5%, from $3.0 million in the three months ended March 31, 2010 to $3.8 million in the three months ended March 31, 2011. The increase was primarily due to a $986,000 increase in marketing promotions associated with the launch of our new social, freemium game titles during the first quarter of 2011 and a $216,000 increase in consulting fees associated with converting our Latin America sales and marketing to third-party distribution agents as discussed below. These amounts were partially offset by a $321,000 decrease in salaries, benefits, variable compensation and expatriate costs as we reduced our sales and marketing headcount from 54 at March 31, 2010 to 44 at March 31, 2011, which was partially the result of converting our Latin America sales and marketing team from our employees to employees of a third party distribution agent in the second quarter of 2010. As a percentage of revenues, sales and marketing expenses increased from 17.2% in the three months ended March 31, 2010 to 22.9% in the three months ended March 31, 2011. Sales and marketing expenses included $66,000 of stock-based compensation expense in the three months ended March 31, 2011 and $73,000 in the three months ended March 31, 2010. We significantly increased our spending on sales and marketing initiatives in the first quarter of 2011 in connection with the launch of our social, freemium titles, and we expect our sales and marketing expenditures to remain at this increased level during the remainder of 2011.

General and Administrative Expenses


	Three Months Ended
	March 31,
	2011			2010
	(in thousands)
General and administrative expenses	$	2,934		$	3,813
Percentage of revenues		17.9	%		22.1	%

Our general and administrative expenses decreased $879,000, or 23.1%, from $3.8 million in the three months ended March 31, 2010 to $2.9 million in the three months ended March 31, 2011. The decrease in general and administrative expenses was primarily due to a $443,000 decrease in professional and consulting fees associated with lower accounting, tax and legal and fees and a $138,000 decrease in allocated facility and overhead costs. Salaries and benefits decreased by $257,000, as we reduced headcount from 60 at March 31, 2010 to 50 at March 31, 2011. This amount was partially offset by a $100,000 increase in variable compensation under our bonus plan. As a percentage of revenues, general and administrative expenses decreased from 22.1% in the three months ended March 31, 2010 to 17.9% in the three months ended March 31, 2011. General and administrative expenses included $231,000 of stock-based compensation expense in the three months ended March 31, 2011 and $287,000 in the three months ended March 31, 2010.

Restructuring

Our restructuring charge decreased from $594,000 in the three months ended March 31, 2010 to $490,000 in the three months ended March 31, 2011. Our restructuring charges for the three months ended March 31, 2011 were comprised of $397,000 of restructuring charges relating to employee termination costs in our United States, China, Brazil and United Kingdom offices and $93,000 related primarily to facility related charges resulting from vacating a portion of our Moscow office.

Interest and Other Income/(Expense), Net

Interest and other income/(expense), net, decreased from a net expense of $631,000 during the three months ended March 31, 2010 to net income of $180,000 in the three months ended March 31, 2011. This change was primarily due to an increase in foreign currency gains of $530,000 related to the revaluation of certain assets and liabilities including accounts payable and accounts receivable and a $279,000 decrease in net interest expense related to the lower balances outstanding on the MIG notes and borrowings under our credit facility. We expect a decrease in net interest expense due to having fully repaid the MIG notes and due to having lower borrowings under our credit facility through 2011.

Income Tax Provision

Income tax provision increased from a tax provision of $301,000 in the three months ended March 31, 2010 to $774,000 in the three months ended March 31, 2011 primarily as a result of changes in the jurisdictions included in the anticipated effective tax rate computation and changes in pre-tax income in certain foreign entities year over year. We expect our effective tax rate in 2011 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,
	2011			2010
	(in thousands)
Consolidated Statement of Cash Flows Data:
Capital expenditures	$	478		$	108
Depreciation and amortization		1,244			1,846
Cash flows (used in)/provided by operating activities		(2,121	)		1,570
Cash flows used in investing activities		(478	)		(108	)
Cash flows provided by/(used in) in financing activities		13,942			(1,388	)

Since our inception, we have incurred recurring losses and negative annual cash flows from operating activities, and we had an accumulated deficit of $193.9 million as of March 31, 2011.

Operating Activities

For the three months ended March 31, 2011, net cash used in operating activities was $2.1 million, primarily due to a net loss of $3.2 million, an increase in accounts receivable of $1.3 million due to timing of cash collections, a decrease in accrued royalties of $1.3 million and a $500,000 decrease in accrued restructuring charges. These amounts were partially offset by a decrease in prepaid royalties of 928,000 and a decrease in prepaid expenses of 886,000. In addition, we had adjustments for non-cash items, including amortization expense of $817,000, depreciation expense of $427,000, stock-based compensation expense of $397,000 and impairment of prepaid royalties of $371.

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, 2011, we used $478,000 of cash for investing activities resulting primarily from purchases of computer, server and networking equipment to support our freemium games, purchases of software and the making of leasehold improvements.

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 the making of leasehold improvements.

Financing Activities

In the three months ended March 31, 2011, net cash provided by financing activities was $13.9 million due primarily to $15.9 million of net proceeds received from the 2011 Public Offering and $1.1 million of proceeds received from option exercises, warrant exercises and purchases under our employee stock purchase plan. These inflows were partially offset by $2.3 million that we repaid under our credit facility and a payment of $698,000 relating to taxes that had been withheld on the December 31, 2010 Special Bonus Notes payment made to the former MIG shareholders.

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.

Sufficiency of Current Cash and Cash Equivalents

Our cash and cash equivalents were $24.4 million as of March 31, 2011, which includes the $15.9 million in net proceeds that we received from the 2011 Public Offering. We expect to fund our operations and satisfy our contractual obligations for 2011 primarily through our cash and cash equivalents and borrowings under our revolving credit facility. However, as a result of our plans to increase our spending on sales and marketing and research and development initiatives in connection with our new social, freemium games that we will continue to release in 2011, we expect to use a significant amount of cash in our operations during 2011 as we seek to grow our business. We believe our cash and cash equivalents, together with borrowings under our credit facility and cash flows from operations, if any, 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, the impact of foreign currency rate changes, revenues that are lower than we currently anticipate, greater than expected operating expenses, particularly with respect to our research and development and sales and marketing initiatives, 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 or any investments or acquisitions that we may decide to pursue.

We currently have an $8.0 million credit facility, which expires on June 30, 2011. We do not intend to extend the maturity date of this credit facility, and may seek to enter into a new credit facility with the lender or a new lender. We cannot assure you that we will be able to enter into a new facility on terms favorable to us or at all. 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 and Net Cash. On August 24, 2009, we entered into an amendment to our credit facility, which reduced certain of the minimum targets contained in the credit facility’s EBITDA-related covenant. On February 10, 2010 we entered into a second amendment to the credit facility. 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 credit facility 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 periods a minimum amount of EBITDA. On February 2, 2011, we entered into a fourth amendment to our credit facility which waived our default in maintaining minimum levels of EBITDA specified in the credit facility for the period beginning October 1, 2010 and ending December 31, 2010. The fourth amendment also removed the EBITDA financial covenant from the credit facility in its entirety and replaced this covenant with a net cash covenant, which requires us to maintain at least $10.0 million in unrestricted cash at the lender or an affiliate of the lender, net of any indebtedness that we owe to the lender 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 our Credit Facility was limited to $2.2 million as of March 31, 2011. 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, 2011, we had no outstanding borrowings under our credit facility. Our failure to comply with the cash 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. 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 cash 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, 2011, we were in compliance with the covenants contained in the credit facility.

Of the $24.4 million of cash and cash equivalents that we held at March 31, 2011, approximately $789,000 was held in accounts in China. To fund our operations and repay our debt obligations, we repatriated $1.3 million of available funds from China to the United States in 2010. This amount was subject to withholding taxes of 5%. 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. 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.

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, potentially pursuant to our effective universal shelf registration statement, seeking to increase the amount available to us for borrowing under our credit facility, procuring a new debt facility and/or selling some of our assets. 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 as was the case with the 2010 Private Placement and the 2011 Public Offering. 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. If the amount of cash that we require is greater than we anticipate, 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, 2011:


	Payments Due by Period
	Total		1 Year*		1-3 Years		3-5 Years		Thereafter
	(in thousands)
Operating lease obligations, net of sublease income	$	5,682	$	2,296	$	3,386	$	—	$	—
Guaranteed royalties(1)		520		159		361		—		—
Developer commitments(2)		1,646		1,646		—		—		—
Uncertain tax position obligations, including interest and penalties(3)		5,028		—		—		—		5,028


*		Represents the remaining nine months of 2011

(1)		We have entered into license and development arrangements with various owners of brands and other intellectual property so that we can create and publish games for mobile handsets based on that intellectual property. A significant portion of these agreements require us to pay guaranteed royalties over the term of the contracts regardless of actual game sales.

(2)		We have contracts with various third-party developers to design and develop games as part of our “Glu Partners” initiative. These contracts require us to advance funds to these third-party developers, in installments, payable upon the completion of specified development milestones.

(3)		As of March 31, 2011, unrecognized tax benefits and potential interest and penalties were classified within “Other long-term liabilities” on our consolidated balance sheets. As of March 31, 2011, the settlement of our income tax liabilities cannot be determined; however, the liabilities are not expected to become due within the next 12 months.

Off-Balance Sheet Arrangements

At March 31, 2011, 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

The information in this section should be read in connection with the information on financial market risk related to changes in interest rates and non-U.S. currency exchange rates in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2010. Our market risk profile has not changed significantly during the first three months of 2011.

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, 2011, we had no balance outstanding under the credit facility and our effective interest rate at that time was approximately 5.75%. 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, 2011, we had no short-term investments and substantially all $24.4 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, 2011 and December 31, 2010, our cash and cash equivalents were maintained by financial institutions in the United States, the United Kingdom, Brazil, China, France, 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. At March 31, 2011, Verizon Wireless accounted for 13.1%, Apple accounted for 10.7% and Telecomunicaciones Movilnet accounted for 10.0% of total accounts receivable. At December 31, 2010, Verizon Wireless accounted for 18.3% and Telecomunicaciones Movilnet accounted for 14.8% of total accounts receivable. 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 2010 and in the first three months of 2011, 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 our 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 4. 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, 2011 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

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 $18.2 million in 2009, a net loss of $13.4 million in 2010 and a net loss of $3.2 million for the three months ended March 31, 2011. As of March 31, 2011, we had an accumulated deficit of $193.9 million. We expect to incur increased costs in order to implement additional initiatives designed to increase revenues, such as increased research and development and sales and marketing expenses related to our new games, particularly those designed for smartphones and tablets, such as Apple’s iPhone and iPad and devices based on Google’s Android operating system. 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 revenues declined in each of 2009 and 2010 from the preceding year, and we expect that our revenues will likely decline in 2011 from 2010 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 2009, we incurred aggregate charges of approximately $8.5 million for royalty impairments and restructuring activities, during 2010, we incurred aggregate charges of approximately $4.3 million for royalty impairments and restructuring activities and in the three months ended March 31, 2011, we incurred aggregate charges of approximately $861,000 for royalty impairments and restructuring activities. As of March 31, 2011, an additional $1.1 million of prepaid royalties remained on our balance sheet that are potentially subject to future impairment. 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 2011, as we implemented significant cost-reduction measures in 2009 and 2010 and the first quarter of 2011, making it more difficult for us to further reduce our operating expenses without a material adverse impact on our prospects in future periods. We intend to only selectively enter into new licensing arrangements in 2011, if any, which we expect will contribute to the anticipated reduction in our revenues from feature phones and which may adversely impact our revenues from smartphones and tablets to the extent that our games based on original intellectual property are not successful. With respect to our games based on licensed intellectual property, we may incur impairments of prepaid royalty guarantees if our forecasts for these games are lower than we anticipated at the time we entered into the agreements. For example, in 2009, 2010 and the first quarter of 2011 we impaired $6.6 million, $663,000 and 371,000, 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 2009, some of these currencies fluctuated by up to 40%, and we experienced continued significant fluctuations in 2010. 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;

•

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;

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

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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;

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the rate at which consumers continue to migrate from traditional feature phones to smartphones, as well as the rate of adoption of tablet devices;

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our success in developing and monetizing social, freemium games for smartphones and tablets;

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our ability to increase the daily and monthly active users of our social, freemium games that we develop for smartphones and tablets, as well as the number of minutes these users play such games;

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our ability to include certain types of offers in our games sold through the Apple App Store;

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changes in accounting rules, such as those governing recognition of revenue, including the period of time over which we recognize revenue for in-app purchases of virtual currency and goods within certain of our games;

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the expiration of existing content licenses for particular games;

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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, including to the extent that smartphone digital storefront owners impose a platform tax on our revenues derived from offers;

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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 smartphones;

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

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the timing of successful mobile handset launches;

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the timeliness and accuracy of reporting from carriers;

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the seasonality of our industry;

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strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

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the timing of compensation expense associated with equity compensation grants; and

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decisions by us to incur additional expenses, such as increases in marketing or research and development.

Our strategy to grow our business includes developing a significant number of new titles for smartphones and tablets rather than for feature phones, which currently comprises the substantial majority of our revenues. If we do not succeed in generating considerable revenues and gross margins from smartphones and tablets, our revenues, financial position and operating results may suffer.

As a result of the expected continued migration of users from traditional feature phones to smartphones, we expect our feature phone revenues, which represented a significant majority of our revenues in 2010, to continue to decrease in 2011. For us to succeed in 2011 and beyond, we believe that we must increasingly publish mobile games that are widely accepted and commercially successful on the smartphone and tablet digital storefronts (such as Apple’s App Store, Google’s Android Market Palm’s App Catalog and Microsoft’s Windows Marketplace for Mobile) as well as significantly increase our marketing-related expenditures in connection with the launch of our new games on these digital storefronts. Our efforts to significantly increase our revenues derived from games for smartphones and tablets may prove unsuccessful or, even if successful, it may take us longer to achieve significant revenue than anticipated because, among others reasons:

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it is uncertain whether Apple will continue to allow us to include certain types of offers in our games sold through the Apple App Store, and, if Apple were to prohibit such offers, we may be unable to replace the significant revenues that we currently derive from these offers;

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the open nature of many of these digital storefronts increases substantially the number of our competitors and competitive products and makes it more difficult for us to achieve prominent placement or featuring for our games;

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the billing and provisioning capabilities of some smartphones are currently not optimized to enable users to purchase games or make in-app purchases, which could make it difficult for users of these smartphones to purchase our games or make in-app purchases and could reduce our addressable market, at least in the short term;

•

competitors may have substantially greater resources available to invest in development and publishing of products for smartphones and tablets;

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these digital storefronts are relatively new markets, for which we are less able to forecast with accuracy revenue levels, required marketing and developments expenses, and net income or loss;

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we have less experience with open storefront distribution channels than with carrier-based distribution;

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the pricing and revenue models for titles on these digital storefronts are rapidly evolving (for example, the introduction of in-app purchasing capabilities and the potential introduction of usage-based pricing for games), and has resulted, and may continue to result, in significantly lower average selling prices for our premium games developed for smartphones as compared to games developed for feature phones, and a lower than expected return on investment for these games;

•

the competitive advantage of our porting capabilities may be reduced as smartphones become more widely adopted;

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many of our key licenses do not grant us the rights to develop games for the iPhone and certain other smartphones and tablets; and

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many OEMs and carriers are developing their own storefronts and it may be difficult for us to predict which ones will be successful, and we may expend time and resources developing games for storefronts that ultimately do not succeed.

If we do not succeed in generating considerable revenues and gross margins from smartphones and tablets, our revenues, financial position and operating results will suffer.

If we do not achieve a sufficient return on our investment with respect to our efforts to develop social, freemium games for smartphones and tablets, it could negatively affect our operating results.

We expect that a significant portion of our development activities for smartphones and tablets in 2011 and beyond will be focused on social, freemium games — games that are downloadable without an initial charge, but which enable a variety of additional features to be accessed for a fee or otherwise monetized through various advertising and offer techniques. Our efforts to develop social, freemium games for smartphones and tablets may prove unsuccessful or, even if successful, may take us longer to achieve significant revenue than anticipated because, among others reasons:

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we have limited experience in successfully developing and marketing social, freemium games;

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our relatively limited experience with respect to creating games that include micro-transaction capabilities, advertizing and offers may cause us to have difficulty optimizing the monetization of our freemium games;

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some of our competitors have released a significant number of social, freemium games on smartphones, and this competition will make it more difficult for us to differentiate our games and derive significant revenues from them;

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some of our competitors have substantially greater resources available to invest in the development and publishing of social, freemium games;

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we intend to have the significant majority of our social, freemium games be based upon our own intellectual property rather than well-known licensed brands, and, as a result, we may encounter difficulties in generating sufficient consumer interest in our games, particularly since we historically have had limited success in generating significant revenues from games based on our own intellectual property;

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social, freemium games currently represent a minority of the games available on smartphones and tablets and have a limited history, and it is unclear how popular this style of game will become or their revenue potential;

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our strategy with respect to developing social, freemium games for smartphones assumes that a large number of consumers will download our games because they are free and that we will subsequently be able to effectively monetize these games via in-app purchases. offers and advertisements; however, some smartphones charge users a fee for downloading content, and users of these smartphones may be reluctant to download our freemium games because of these fees, which would reduce the effectiveness of our product strategy;

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our social, freemium games may otherwise not be widely downloaded by consumers for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts or a failure to achieve prominent storefront featuring for such games;

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even if our social, freemium games are widely downloaded, we may fail to retain users of these games or optimize the monetization of these games for a variety of reasons, including poor game design or quality, gameplay issues such as game unavailability, long load times or an unexpected termination of the game due to data server or other technical issues or our failure to effectively respond and adapt to changing user preferences through updates to our games;

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we have encountered difficulties in keeping users engaged in our social, freemium games for a significant amount of time subsequent to their initial download of the games, in large part due to the limited social features currently contained in our games, and we may have difficulty increasing consumer retention in our games;

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we expect that approximately one-third of the social, freemium games that we intend to release during 2011 will be produced by third parties with which we have a strategic relationship, which will reduce our control over the development process and may result in product delays and games that do not meet our and consumer expectations regarding quality;

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the Federal Trade Commission has recently indicated that it intends to review issues related to in-app purchases, particularly with respect to games that are marketed primarily to minors (a recent class action lawsuit has been filed relating to this issue; Glu has not been named as a party to this lawsuit) and the Federal Trade Commission might issue rules significantly restricting or even prohibiting in-app purchases or we could potentially be named as a defendant in a future class action lawsuit; and

•

because these are effectively new products for us, we are less able to forecast with accuracy revenue levels, required marketing and development expenses, and net income or loss.

If we do not achieve a sufficient return on our investment with respect to developing and selling social, freemium games, it will negatively affect our operating results.

If sales of feature phones in our carrier-based business or the average selling prices of our games sold through wireless carriers decline more rapidly than we currently expect, it could have a material adverse impact on our revenues, financial position and results of operations.

We currently derive the majority of our revenues from sales of our games on feature phones through wireless carriers. Our revenues for each of 2009 and 2010 declined from the prior year due to a decrease in sales in our carrier-based business, resulting primarily from the continuing migration of consumers from feature phones to smartphones that enable the download of applications from sources other than a carrier’s branded e-commerce service, such as the Apple App Store and Google’s Android Market. We believe that the decline in the sales of feature phones and the transition of consumers to smartphones will continue to accelerate and will result in an overall decline in our revenues in 2011 compared with 2010. In addition, due to the accelerating decline in the sales of feature phones, we intend to release significantly fewer games for feature phones in future periods, which will further reduce our revenues that we derive from feature phones. The ability of smartphones and tablets to serve as a source of significant revenues is uncertain, and we will likely be unable to generate sufficient revenues from these platforms in 2011 to make up for the expected decline in sales of our games on feature phones. In addition, games sold on smartphones typically have lower average prices than our games sold on feature phones, and to the extent consumers continue to migrate to smartphones, it could result in lower average prices for our games sold on feature phones. Any unexpected acceleration in the slowdown in sales of feature phones, or any reduction in the average prices of our games sold through our wireless carriers, could have a material adverse impact on our revenues, financial position and results of operations.

The markets in which we operate are highly competitive, and many of our competitors have significantly greater resources than we do.

The development, distribution and sale of mobile games is a highly competitive business, characterized by frequent product introductions and rapidly emerging new platforms, technologies and storefronts. For end users, we compete primarily on the basis of game quality, brand, customer reviews and, with respect to our premium products, price. We compete for promotional and deck placement based on these factors, as well as the relationship with the digital storefront owner or wireless carrier, historical performance, perception of sales potential and relationships with licensors of brands and other intellectual property. For content and brand licensors, we compete based on royalty and other economic terms, perceptions of development quality, porting abilities, speed of execution, distribution breadth and relationships with carriers. We also compete for experienced and talented employees.

Our primary competitors have historically been Electronic Arts (EA Mobile) and Gameloft, with Electronic Arts having the largest market share of any company in the mobile games market. With respect to our social, freemium games that we publish for smartphones and tablets, we also compete with a number of other companies, including DeNA, which became a more formidable competitor through its acquisition of ngmoco, and Zynga, as well as other large publishers who create content for traditional gaming consoles and for online play. In addition, given the open nature of the development and distribution for smartphones and tablets, we also compete or will compete with a vast number of small companies and individuals who are able to create and launch games and other content for these mobile devices utilizing limited resources and with limited start-up time or expertise. Many of these smaller developers are able to offer their games at no cost or substantially reduce their prices to levels at which we may be unable to respond competitively and still achieve profitability given their low overhead. As an example of the competition that we face, it has been estimated that more than 50,000 active games were available on the Apple App Store as of April 30, 2011. The proliferation of titles in these open developer channels makes it difficult for us to differentiate ourselves from other developers and to compete for end users who purchase content for their smartphones without substantially increasing spending to market our products or increasing our development costs.

Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets, include the following:

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significantly greater revenues and financial resources;

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stronger brand and consumer recognition regionally or worldwide;

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the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products;

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larger installed customer bases from related platforms such as console gaming or social networking websites to which they can market and sell mobile games;

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more substantial intellectual property of their own from which they can develop games without having to pay royalties;

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lower labor and development costs and better overall economies of scale;

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greater resources to make acquisitions;

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greater platform specific focus, experience and expertise; and

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broader global distribution and presence.

If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales could decline, our margins could decline and we could lose market share, any of which would materially harm our business, operating results and financial condition.

End user tastes are continually changing and are often unpredictable; if we fail to develop and publish new mobile games that achieve market acceptance, our sales would suffer.

Our business depends on developing and publishing mobile games that digital storefront owners will prominently feature or wireless carriers will place on their decks and that end users will buy. We must continue to invest significant resources in research and development, analytics and marketing to enhance our offering of games and introduce new games, and we must make decisions about these matters well in advance of product release to timely implement them. Our success depends, in part, on unpredictable and volatile factors beyond our control, including end-user preferences, competing games, new mobile platforms and the availability of other entertainment activities. If our games and related applications do not respond to the requirements of digital storefront owners and carriers and the entertainment preferences of end users, or they are not brought to market in a timely and effective manner, our business, operating results and financial condition would be harmed. Even if our games are successfully introduced and initially adopted, a subsequent shift in the entertainment preferences of end users could cause a decline in our games’ popularity that could materially reduce our revenues and harm our business, operating results and financial condition.

If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our games or if we incur excessive expenses promoting and maintaining our brand or our games, our potential revenues could be limited, our costs could increase and our operating results and financial condition could be harmed.

We believe that establishing and maintaining our brand is critical to establishing a direct relationship with end users who purchase our products from direct-to-consumer channels, such as the Apple App Store and Google’s Android Market, and maintaining our existing relationships with wireless carriers and content licensors, as well as potentially developing new such relationships.

Increasing awareness of our brand and recognition of our games will be particularly important in connection with our new strategic focus of developing social, freemium games based on our own intellectual property. Our ability to promote the Glu brand depends on our success in providing high-quality mobile games. Similarly, recognition of our games by end users depends on our ability to develop engaging games of high quality with attractive titles. However, our success also depends, in part, on the services and efforts of third parties, over which we have little or no control. For instance, if digital storefront owners or wireless carriers fail to provide high levels of service, our end users’ ability to access our games may be interrupted, which may adversely affect our brand. If end users, digital storefront owners, branded content owners and wireless carriers do not perceive our existing games as high-quality or if we introduce new games that are not favorably received by our end users, digital storefront owners and wireless carriers, then we may not succeed in building brand recognition and brand loyalty in the marketplace. In addition, globalizing and extending our brand and recognition of our games will be costly and will involve extensive management time to execute successfully, particularly as we expand our efforts to increase awareness of our brand and games among international consumers. Moreover, if a game is introduced with defects, errors or failures or unauthorized objectionable content or if a game has playability issues such as game unavailability, long load times or a unexpected termination of the game due to data server or other technical issues, we could experience damage to our reputation and brand, and our attractiveness to digital storefront owners, wireless carriers, licensors, and end users might be reduced. In addition, although we have significantly increased our sales and marketing-related expenditures in connection with the launch of our new social, freemium games, these efforts may not succeed in increasing awareness of our brand and new games. If we fail to increase and maintain brand awareness and consumer recognition of our games, our potential revenues could be limited, our costs could increase and our business, operating results and financial condition could suffer.

Inferior storefront featuring or deck placement would likely adversely impact our revenues and thus our operating results and financial condition.

Wireless carriers provide a limited selection of games that are accessible to their subscribers through a deck on their mobile handsets. The inherent limitation on the number of games available on the deck is a function of the limited screen size of handsets and carriers’ perceptions of the depth of menus and numbers of choices end users will generally utilize. Carriers typically provide one or more top-level menus highlighting games that are recent top sellers, that the carrier believes will become top sellers or that the carrier otherwise chooses to feature, in addition to a link to a menu of additional games sorted by genre. We believe that deck placement on the top-level or featured menu or toward the top of genre-specific or other menus, rather than lower down or in sub-menus, is likely to result in higher game sales. If carriers choose to give our games less favorable deck placement, our games may be less successful than we anticipate, our revenues may decline and our business, operating results and financial condition may be materially harmed.

Conversely, the open nature of the digital storefronts, such as the Apple App Store and Google’s Android Market, allow for vast numbers of applications to be offered to consumers from a much wider array of competitors than in the wireless carrier channel. This may reduce the competitive advantage of our established network of relationships with wireless carriers. It may also require us to expend significantly increased amounts to generate substantial revenues on these platforms, reducing or eliminating the profitability of publishing games for them.

The open nature of many of the digital storefronts substantially increases the number of our competitors and competitive products, which makes it more difficult for us to achieve prominent placement or featuring for our games. Our failure to achieve prominent placement or featuring for our games on the smartphone storefronts could result in our games not generating significant sales. We believe that a number of factors may influence the featuring or placement of a game in these digital storefronts, including:

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the perceived attractiveness of the title or brand;

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the past critical or commercial success of the game or of other games previously introduced by a publisher;

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the publisher’s relationship with the applicable digital storefront owner and future pipeline of quality titles for it; and

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the current market share of the publisher.

If carriers choose to give our games less favorable deck placement or if our games do not receive prominent placement on the digital storefronts, our games may be less successful than we anticipate, our revenues may decline and our business, operating results and financial condition may be materially harmed.

Third parties will be developing some of our social, freemium games, and to the extent that they do not timely deliver high-quality games that meet our and consumer expectations, our business will suffer.

Recently, we initiated our Glu Partners program, which will provide for the external development of some of our games; we currently expect that approximately one-third of the social, freemium games that we intend to release during 2011 will be produced by third parties with which we have a strategic relationship. We have historically created and developed all of our games in our internal studios, and we do not have any experience in outsourcing and managing the production of our game concepts by external developers. Because we will have no direct supervision and reduced control of this external development process, it could result in development delays and games of lesser quality and that are more costly to develop than those produced by our internal studios. This may particularly be the case to the extent that we do not provide our external developers with sufficiently detailed game development documentation, which could result in us providing them with a number of change orders that would delay development and increase our production costs.

We have agreed to pay these external developers significant development fees and, in some cases, bonuses based on consumer reviews of the published games, and to the extent that these games are not commercially successful, we may not generate sufficient revenues to recoup our development costs or produce a sufficient return on investment, which would adversely affect our operating results. In addition, we may lose the services of one of our external developers for a number of reasons, including that a competitor acquires its business or signs the developer to an exclusive development arrangement. In addition, the developer might encounter financial or other difficulties that cause it to go out of business, potentially prior to completing production of our games, or otherwise render it unable to fulfill its obligations under the development agreement, and we may be unable to recoup our upfront payment to the developer under such circumstances. There is also significant demand for the services of external developers which may cause our developers to work for a competitor in the future or to renegotiate agreements with us on terms less favorable for us.

Changes in foreign exchange rates and limitations on the convertibility of foreign currencies could adversely affect our business and operating results.

Although we currently transact approximately one-half of our business in U.S. Dollars, we also transact approximately one-fourth of our business in pounds sterling and Euros and the remaining portion of our business in other currencies. Conducting business in currencies other than U.S. Dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our reported operating results. Fluctuations in the value of the U.S. Dollar relative to other currencies impact our revenues, cost of revenues and operating margins and result in foreign currency exchange gains and losses. To date, we have not engaged in exchange rate hedging activities, and we do not expect to do so in the foreseeable future. Even if we were to implement hedging strategies to mitigate this risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as cash expenditures, ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.

We face additional risk if a 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 our ability to react to rapid foreign currency devaluations and to repatriate funds to the United States should we require additional working capital.

We have depended on a small number of games for a significant portion of our revenues in recent fiscal periods. If these games do not continue to succeed or we do not release highly successful new games, our revenues would decline.

In our industry, new games are frequently introduced, but a relatively small number of games account for a significant portion of industry sales. Similarly, a significant portion of our revenues comes from a limited number of mobile games, although the games in that group have shifted over time. For example, in 2010 and 2009, we generated approximately 41.6% and 35.0% of our revenues, respectively, from our top ten games, but no individual game represented more than 10% of our revenues in any of those periods. If our new games are not successful, our revenues could be limited and our business and operating results would suffer in both the year of release and thereafter.

We might elect not to renew our existing brand and content licenses when they expire and might not choose to obtain additional licenses, which would negatively impact our feature phone revenues and might negatively impact our smartphone revenues to the extent that we do not create successful games based on our own intellectual property.

Revenues derived from mobile games and other applications based on or incorporating brands or other intellectual property licensed from third parties accounted for 78.1% and 77.5% of our revenues in 2010 and 2009, respectively. In 2010, revenues derived under various licenses from our five largest licensors, Activision, Atari, Freemantle Media, Harrah’s and 2waytraffic, together accounted for approximately 45.0% of our revenues. Creating games based on well-known, licensed brands has historically been critical to the success of our feature phone business, as this helped us achieve more prominent placement on our wireless carriers decks and contributed to greater commercial success with feature phone consumers. However, we have determined to shift our business strategy towards becoming the leading publisher of social, mobile freemium games, and we intend to have the substantial majority of these social, freemium games be based upon our own intellectual property. As a result, we will be allocating a significantly smaller amount of our operating budget to licensing deals and might elect not to renew our existing brand and content licenses when they expire. In addition, we intend to only selectively enter into new licensing arrangements, if any, in future periods. Our existing licenses expire at various times during the next several years, and our feature phone revenues will be negatively impacted to the extent that we lose the right to distribute games based on licensed content. This expected decline in our feature phone revenues could have an unexpectedly greater impact on our overall revenues and operating results to the extent that we are not successful in significantly increasing our revenues from games developed for smartphones and tablets based on our own intellectual property.

System or network failures could reduce our sales, increase costs or result in a loss of revenues or end users of our games.

We rely on digital storefronts’, wireless carriers’ and other third-party networks to deliver games to end users and on their or other third parties’ billing systems to track and account for the downloading of our games. We also rely on our own servers to operate our new social, freemium games that are delivered as a live service, to maintain our analytics data and to deliver games on demand to end users through our carriers’ networks. In addition, certain of our subscription-based games, require access over the mobile Internet to our servers to enable certain features. Any technical problem with storefronts’, carriers’, third parties’ or our billing, delivery or information systems, servers or communications networks could result in the inability of end users to download or play our games, prevent the completion of billing for a game or result in the loss of users’ virtual currency or other in-app purchases or our analytics data, or interfere with access to some aspects of our games. For example, in connection with the release of our Gun Bros game on the Apple App Store in the fourth quarter of 2010, we experienced issues with our data servers that resulted in gameplay issues and the loss of some users’ virtual assets they acquired through in-app purchases. In the event of a loss of virtual assets, we may be required to issue refunds, we may receive negative publicity and game ratings, and we may lose users of our games, any of which would negatively affect our business. In addition, during the fourth quarter of 2010 and first quarter of 2011, we lost some of our analytics data, including data with respect to our daily and monthly average users. Furthermore, from time to time, our carriers have experienced failures with their billing and delivery systems and communication networks, including gateway failures that reduced the provisioning capacity of their branded e-commerce system. Any such technical problems could cause us to lose end users or revenues or incur substantial repair costs and distract management from operating our business.

We currently rely primarily on wireless carriers to market and distribute our games for feature phones and thus to generate a significant portion of our revenues. The loss of or a change in any significant carrier relationship, including their credit worthiness, could materially reduce our revenues and adversely impact our cash position.

A significant portion of our revenues is derived from a limited number of carriers. In 2010, we derived approximately 44.1% of our revenues from relationships with five carriers, including Verizon Wireless, which accounted for 15.2% of our revenues. We expect that we will continue to generate a significant portion of our revenues through distribution relationships with fewer than 20 carriers in 2011. If any of our carriers decides not to market or distribute our games or decides to terminate, not renew or modify the terms of its agreement with us or if there is consolidation among carriers generally, we may be unable to replace the affected agreement with acceptable alternatives, causing us to lose access to that carrier’s subscribers and the revenues they afford us. In addition, having a significant portion of our revenues concentrated among a limited number of carriers also creates a credit concentration risk for us, and in the event that any significant carrier were unable to fulfill its payment obligations to us, our operating results and cash position would suffer. Finally, our credit facility’s borrowing base is tied to our accounts receivable. If any of our wireless carriers were delinquent in their payments to us, it would reduce our borrowing base and could require us to immediately repay any borrowings outstanding related to such carrier. If any of these eventualities come to pass, it could materially reduce our revenues and otherwise harm our business.

Changes made by wireless carriers and other distributors to their policies regarding pricing, revenue sharing, supplier status, billing and collections could adversely affect our business and operating results.

Wireless carriers generally control the price charged for our mobile games either by approving or establishing the price of the games charged to their subscribers. Some of our carrier agreements also restrict our ability to change prices. In cases where carrier approval is required, approvals may not be granted in a timely manner or at all. A failure or delay in obtaining these approvals, the prices established by the carriers for our games, or changes in these prices could adversely affect market acceptance of those games. Similarly, for some of our carriers, including Verizon Wireless, when we make changes to a pricing plan (the wholesale price and the corresponding suggested retail price based on our negotiated revenue-sharing arrangement), adjustments to the actual retail price charged to end users may not be made in a timely manner or at all (even though our wholesale price was reduced). A failure or delay by these carriers in adjusting the retail price for our games, could adversely affect sales volume and our revenues for those games.

In addition, wireless carriers have the ability to change their pricing policy with their customers for downloading content, such as our games. For example, Verizon Wireless began imposing a data surcharge to download content on those of its customers who had not otherwise subscribed to a data plan. Such charges have, and could in the future, deter end users from purchasing our content. In addition, wireless carriers could renegotiate the revenue sharing arrangement that we have in place with them to our detriment. For example in the first quarter of 2010, China Mobile, the largest carrier in China, reduced the revenue share that we receive from our games sold on the mBox platform in approximately 15 provinces in China, which has begun, and will likely continue, to negatively impact our revenues in China. Furthermore, a portion of our revenues is derived from subscriptions. Our wireless carriers have the ability to discontinue offering subscription pricing, without our approval.

In China, sales to wireless carriers such as China Mobile may only be made by service providers, which are companies who have been licensed by the government to operate and publish mobile games. China Mobile has designated four classes of licenses for service providers with respect to mobile gaming, with a Class A license being the highest designation. We had held, through our Chinese subsidiaries, one of the three Class A licenses that had been awarded by China Mobile; however, we lost this Class A license in the first quarter of 2011 and now hold a Class B license. We expect the loss of the Class A license to cause our revenues in China to decline in future periods unless we are able to regain our Class A license or replace this lost revenue with alternative revenue streams.

Carriers and other distributors also control billings and collections for our games, either directly or through third-party service providers. If our carriers or their third-party service providers cause material inaccuracies when providing billing and collection services to us, our revenues may be less than anticipated or may be subject to refund at the discretion of the carrier. Our market is experiencing a growth in adoption of smartphones, such as the Apple iPhone and devices based on Google’s Android operating system. For many of our wireless carriers, these smartphones are not yet directly integrated into the carrier’s provisioning infrastructure that would allow them to sell games directly to consumers, and games are instead sold through third parties, which is a more cumbersome process for consumers and results in a smaller revenue share for us. These factors could harm our business, operating results and financial condition.

A shift of technology platform by wireless carriers and mobile handset manufacturers could lengthen the development period for our games, increase our costs and cause our games to be of lower quality or to be published later than anticipated.

End users of games must have a mobile handset with multimedia capabilities enabled by technologies capable of running third-party games and related applications such as ours. Our development resources are concentrated in the Apple iPhone, Google Android, Blackberry, i-mode, Mophun, Palm, Symbian, Windows Mobile, BREW and Java platforms. It is likely that one or more of these technologies will fall out of favor with handset manufacturers and wireless carriers, as transitions to different technologies and technology platforms have happened in the past and will occur in the future. If there is a rapid shift to a different technology platform, such as Adobe Flash or Flash Lite, or a new technology where we do not have development experience or resources, the development period for our games may be lengthened, increasing our costs, and the resulting games may be of lower quality, and may be published later than anticipated. In such an event, our reputation, business, operating results and financial condition might suffer.

We face added business, political, regulatory, operational, financial and economic risks as a result of our international operations and distribution, any of which could increase our costs and adversely affect our operating results.

International sales represented approximately 55.1% and 52.2% of our revenues in 2010 and 2009, respectively. In addition, as part of our international efforts, we acquired U.K.-based Macrospace in December 2004, UK-based iFone in March 2006, China-based MIG in December 2007 and Superscape, which had a significant presence in Russia, in March 2008. We have international offices located in a number of foreign countries including Brazil, China, England and Russia. We expect to maintain our international presence, and we expect international sales to be an important component of our revenues. Risks affecting our international operations include:

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challenges caused by distance, language and cultural differences;

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multiple and conflicting laws and regulations, including complications due to unexpected changes in these laws and regulations;

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foreign currency exchange rate fluctuations;

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difficulties in staffing and managing international operations;

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potential violations of the Foreign Corrupt Practices Act, particularly in certain emerging countries in East Asia, Eastern Europe and Latin America;

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greater fluctuations in sales to end users and through carriers in developing countries, including longer payment cycles and greater difficulty collecting accounts receivable;

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protectionist laws and business practices that favor local businesses in some countries;

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regulations that could potentially affect the content of our products and their distribution, particularly in China;

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potential adverse foreign tax consequences;

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foreign exchange controls that might prevent us from repatriating income earned in countries outside the United States, particularly China;

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price controls;

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the servicing of regions by many different carriers;

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imposition of public sector controls;

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political, economic and social instability;

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restrictions on the export or import of technology;

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trade and tariff restrictions and variations in tariffs, quotas, taxes and other market barriers; and

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difficulties in enforcing intellectual property rights in certain countries.

In addition, developing user interfaces that are compatible with other languages or cultures can be expensive. As a result, our ongoing international operations may be more costly than we expect. As a result of our international operations in Asia, Europe and Latin America, we must pay income tax in numerous foreign jurisdictions with complex and evolving tax laws. If we become subject to increased taxes or new forms of taxation imposed by governmental authorities, our results of operations could be materially and adversely affected.

These risks could harm our international operations, which, in turn, could materially and adversely affect our business, operating results and financial condition.

If we fail to deliver our games at the same time as new mobile handset models and tablets are commercially introduced, our sales may suffer.

Our business depends, in part, on the commercial introduction of new handset models and tablets with enhanced features, including larger, higher resolution color screens, improved audio quality, and greater processing power, memory, battery life and storage. For example, some companies have launched new smartphones or tablets, including Apple’s iPhone and iPad and devices based on the Google’s Android operating system. In addition, consumers generally purchase the majority of content, such as our games, for a new handset or tablet within a few months of purchasing the handset or tablet. We do not control the timing of these handset and tablet launches. Some new handsets are sold by carriers with one or more games or other applications pre-loaded, and many end users who download our games do so after they purchase their new handsets to experience the new features of those handsets. Some handset and tablet manufacturers give us access to their handsets prior to commercial release. If one or more major handset or tablet manufacturers were to cease to provide us access to new handset models prior to commercial release, we might be unable to introduce compatible versions of our games for those handsets or tablets in coordination with their commercial release, and we might not be able to make compatible versions for a substantial period following their commercial release. If, because we do not adequately build into our title plan the demand for games for a particular handset or tablet or experience game launch delays, we miss the opportunity to sell games when new handsets or tablets are shipped or our end users upgrade to a new handset or tablet, our revenues would likely decline and our business, operating results and financial condition would likely suffer.

If a substantial number of the end users that purchase our games by subscription change mobile handsets or if wireless carriers switch to subscription plans that require active monthly renewal by subscribers or change or cease offering subscription plans, our sales could suffer.

Subscriptions represent a significant portion of our feature phone revenues. As handset development continues, over time an increasing percentage of end users who already own one or more of our subscription games will likely upgrade from their existing handsets. With some wireless carriers, end users are not able to transfer their existing subscriptions from one handset to another. In addition, carriers may switch to subscription billing systems that require end users to actively renew, or opt-in, each month from current systems that passively renew unless end users take some action to opt-out of their subscriptions, or change or cease offering subscription plans altogether. If our subscription revenues decrease significantly for these or other reasons, our sales would suffer and this could harm our business, operating results and financial condition.

If we fail to maintain and enhance our capabilities for porting games to a broad array of mobile handsets, our attractiveness to wireless carriers and branded content owners will be impaired, and our sales and financial results could suffer.

To reach large numbers of wireless subscribers, mobile entertainment publishers like us must support numerous mobile handsets and technologies. Once developed, a mobile game designed for feature phones may be required to be ported to, or converted into separate versions for, more than 1,000 different handset models, many with different technological requirements. These include handsets with various combinations of underlying technologies, user interfaces, keypad layouts, screen resolutions, sound capabilities and other carrier-specific customizations. If we fail to maintain or enhance our porting capabilities, our sales could suffer, branded content owners might choose not to grant us licenses and carriers might choose to give our games less desirable deck placement or not to give our games placement on their decks at all.

Changes to our game design and development processes to address new features or functions of handsets or networks might cause inefficiencies in our porting process or might result in more labor intensive porting processes. In addition, in the future we will be required to port existing and new games to a broader array of handsets and develop versions specific to new smartphones. If we utilize more labor-intensive porting processes, our margins could be significantly reduced and it may take us longer to port games to an equivalent number of handsets. For example, the time required to develop and port games to some of the new smartphones, including the iPhone and those based on the Android operating system, is longer and thus developing and porting for the advanced platforms is more costly than developing and porting for games for feature phones. Since the majority of our revenues are currently derived from the sale of games for feature phones in our carrier-based business, it is important that we maintain and enhance our porting capabilities. However, as additional smartphone digital storefronts are developed and gain market prominence, our porting capabilities represent less of a business advantage for us, yet we could be required to invest considerable resource in this area to support our existing business. These additional costs could harm our business, operating results and financial condition.

Our industry is subject to risks generally associated with the entertainment industry, any of which could significantly harm our operating results.

Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control. These risks could negatively impact our operating results and include: the popularity, price and timing of release of games and mobile handsets on which they are played; the commercial success of any movies upon which one of more of our games are based; economic conditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.

If one or more of our games were found to contain hidden, objectionable content, our reputation and operating results could suffer.

Historically, many video games have been designed to include hidden content and gameplay features that are accessible through the use of in-game cheat codes or other technological means that are intended to enhance the gameplay experience. For example, our Super K.O. Boxing game released for feature phones includes additional characters and game modes that are available with a code (usually provided to a player after accomplishing a certain level of achievement in the game). These features have been common in console and computer games. However, in several cases, hidden content or features have been included in other publishers’ products by an employee who was not authorized to do so or by an outside developer without the knowledge of the publisher. From time to time, some of this hidden content and these hidden features have contained profanity, graphic violence and sexually explicit or otherwise objectionable material. If a game we published were found to contain hidden, objectionable content, our wireless carriers and other distributors of our games could refuse to sell it, consumers could refuse to buy it or demand a refund of their money, and, if the game was based on licensed content, the licensor could demand that we incur significant expense to remove the objectionable content from the game and all ported versions of the game. This could have a materially negative impact on our business, operating results and financial condition.

Our business and growth may suffer if we are unable to hire and retain key personnel.

Our future success will depend, to a significant extent, on our ability to retain and motivate our key personnel, namely our management team and experienced sales and engineering personnel. In addition, in order to grow our business, succeed on our new business initiatives, such as developing social, freemium titles for smartphones and tablets, and replace departing employees, we must be able to identify and hire qualified personnel. Competition for qualified management, sales, engineering and other personnel can be intense, and we may not be successful in attracting and retaining such personnel. This may be particularly the case for us to the extent our stock price remains at a depressed level, as individuals may elect to seek employment with other companies that they believe have better long-term prospects. Competitors have in the past and may in the future attempt to recruit our employees, and our management and key employees are not bound by agreements that could prevent them from terminating their employment at any time. We may also experience difficulty assimilating our newly hired personnel and they may be less effective or productive than we anticipated, which may adversely affect our business. In addition, we do not maintain a key-person life insurance policy on any of our officers. Our business and growth may suffer if we are unable to hire and retain key personnel.

Acquisitions could result in operating difficulties, dilution and other harmful consequences.

We have acquired a number of businesses in the past, including, most recently, Superscape, which had a significant presence in Russia, in March 2008 and MIG, which is based in China, in December 2007. We expect to continue to evaluate and consider a wide array of potential strategic transactions, including business combinations and acquisitions of technologies, services, products and other assets. At any given time, we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. The process of integrating any acquired business may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:

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diversion of management time and a shift of focus from operating the businesses to issues related to integration and administration;

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declining employee morale and retention issues resulting from changes in compensation, management, reporting relationships, future prospects or the direction of the business;

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the need to integrate each acquired company’s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

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the need to implement controls, procedures and policies appropriate for a larger public company that the acquired companies lacked prior to acquisition;

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in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; and

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liability for activities of the acquired companies before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.

If the anticipated benefits of any future acquisitions do not materialize, we experience difficulties integrating businesses acquired in the future, or other unanticipated problems arise, our business, operating results and financial condition may be harmed.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our earnings based on this impairment assessment process, which could harm our operating results. For example, during 2008 we incurred an aggregate goodwill impairment charge related to write-downs in the third and fourth quarters of 2008 of $69.5 million as the fair values of our three reporting units were determined to be below their carrying values.

Moreover, the terms of acquisitions may require that we make future cash or stock payments to shareholders of the acquired company, which may strain our cash resources or cause substantial dilution to our existing stockholders at the time the payments are required to be made. For example, pursuant to our merger agreement with MIG, we were required to make $25.0 million in future cash and stock payments to the former MIG shareholders, which payments we renegotiated in December 2008. Had we paid the MIG earnout and bonus payments on their original terms, we could have experienced cash shortfall related to the cash payments and our stockholders could have experienced substantial dilution related to the stock payments.

We may need to raise additional capital or borrow funds to grow our business, and we may not be able to raise capital or borrow funds on terms acceptable to us or at all.

The operation of our business, and our efforts to grow our business, requires significant cash outlays and commitments. As of March 31, 2011, we had $24.4 million of cash and cash equivalents, $789,000 of which was held in our China subsidiaries. To the extent we require additional working capital in our U.S. or other non-Chinese operations, it could be very difficult to repatriate money held in our China subsidiaries due to our declining operating profits in China, and such repatriation would be subject to taxation, potentially at high rates.

As a result of our plans to increase our spending on sales and marketing and research and development initiatives in connection with our new social, freemium games that we will release in 2011, we expect to use a significant amount of cash in our operations in 2011 as we seek to grow our business. If our cash and cash equivalents, together with borrowings under our credit facility, are insufficient to meet our cash requirements, we will either need to seek additional capital, potentially through an additional debt or equity financing (potentially pursuant to our effective universal shelf registration statement), by increasing the amount available to us for borrowing under the credit facility, procuring a new debt facility or selling some of our assets. We may not be able to raise needed cash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to our stockholders, such was the case with respect to the 2010 Private Placement and the 2011 Public Offering, particularly given our current stock price. 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 our credit facility. Additionally, we may be unable to increase the size of the 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 also may not be able to access the full $8.0 million potentially available under of our credit facility, as the credit facility’s borrowing base is based upon our accounts receivable; as of March 31, 2011, the maximum amount available for borrowing under the credit facility was limited to $2.2 million. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our growth and operating plans to the extent of available funding, which would harm our ability to grow our business. Furthermore, if we are unable to remain in compliance with the financial or other covenants contained in the credit facility and do not obtain a waiver from the lender then, subject to applicable cure periods, any outstanding indebtedness under the credit facility could be declared immediately due and payable. This credit facility also is scheduled to expire on June 30, 2011. We do not intend to extend the maturity date of this credit facility, and may seek to enter into a new credit facility with the lender or a new lender; we cannot assure you that we would be able to enter into a new facility on terms favorable to us or at all.

Our business is subject to increasing regulation of content, consumer privacy, distribution and online hosting and delivery in the key territories in which we conduct business. If we do not successfully respond to these regulations, our business may suffer.

Legislation is continually being introduced that may affect both the content of our products and their distribution. For example, data and consumer protection laws in the United States and Europe impose various restrictions on our business, which will be increasingly important to our business as we continue to market our products directly to end users and to the extent we obtain personal information about our customers. We currently collect certain personally identifiable information regarding our customers, including the unique device identifiers (UDIDs) of our customers’ smartphones and tablets, and may in the future collect additional personally identifiable information regarding our customers. Any concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other privacy related matters, even if unfounded, could damage our reputation and operating results. The rules regarding data and consumer protection laws vary by territory although the Internet recognizes no geographical boundaries. In the United States, for example, numerous federal and state laws have been introduced which attempt to restrict the content or distribution of games. Legislation has been adopted in several states, and proposed at the federal level, that prohibits the sale of certain games to minors. If such legislation is adopted and enforced, it could harm our business by limiting the games we are able to offer to our customers or by limiting the size of the potential market for our games. We may also be required to modify certain games or alter our marketing strategies to comply with new and possibly inconsistent regulations, which could be costly or delay the release of our games. The Federal Trade Commission has also recently indicated that it intends to review issues related to in-app purchases, particularly with respect to games that are marketed primarily to minors. If the Federal Trade Commission issues rules significantly restricting or even prohibiting in-app purchases, it would significantly impact our business strategy. In addition, two self-regulatory bodies in the United States (the Entertainment Software Rating Board) and the European Union (Pan European Game Information) provide consumers with rating information on various products such as entertainment software similar to our products based on the content (for example, violence, sexually explicit content, language). Furthermore, the Chinese government has adopted measures designed to eliminate violent or obscene content in games. In response to these measures, some Chinese telecommunications operators have suspended billing their customers for certain mobile gaming platform services, including those services that do not contain offensive or unauthorized content, which could negatively impact our revenues in China. Any one or more of these factors could harm our business by limiting the products we are able to offer to our customers, by limiting the size of the potential market for our products, or by requiring costly additional differentiation between products for different territories to address varying regulations.

If we do not adequately protect our intellectual property rights, it may be possible for third parties to obtain and improperly use our intellectual property and our business and operating results may be harmed.

Our intellectual property is an essential element of our business. We rely on a combination of copyright, trademark, trade secret and other intellectual property laws and restrictions on disclosure to protect our intellectual property rights. To date, we have not sought patent protection. Consequently, we will not be able to protect our technologies from independent invention by third parties. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise to obtain and use our technology and games. Monitoring unauthorized use of our games is difficult and costly, and we cannot be certain that the steps we have taken will prevent piracy and other unauthorized distribution and use of our technology and games, particularly internationally where the laws may not protect our intellectual property rights as fully as in the United States. In the future, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and divert our management’s attention and our resources. In addition, some of our competitors have in the past released games that are nearly identical to successful games released by their competitors in an effort to confuse the market and divert users from the competitor’s game to the copycat game. To the extent that these tactics are employed with respect to any of our games, it could reduce our revenues that we generate from these games.

In addition, although we require our third-party developers to sign agreements not to disclose or improperly use our trade secrets and acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property and to assign to us any ownership they may have in those works, it may still be possible for third parties to obtain and improperly use our intellectual properties without our consent. This could harm our business, operating results and financial condition.

Third parties may sue us, including for intellectual property infringement, which, if successful, may disrupt our business and could require us to pay significant damage awards.

Third parties may sue us, including for intellectual property infringement, or initiate proceedings to invalidate our intellectual property, which, if successful, could disrupt the conduct of our business, cause us to pay significant damage awards or require us to pay licensing fees. For example, in a dispute that we settled in July 2010, Skinit, Inc. filed a complaint against us and other defendants in which it sought unspecified damages, plus attorney’s fees and costs. In the event of a future successful claim against us, we might be enjoined from using our or our licensed intellectual property, we might incur significant licensing fees and we might be forced to develop alternative technologies. Our failure or inability to develop non-infringing technology or games or to license the infringed or similar technology or games on a timely basis could force us to withdraw games from the market or prevent us from introducing new games. In addition, even if we are able to license the infringed or similar technology or games, license fees could be substantial and the terms of these licenses could be burdensome, which might adversely affect our operating results. We might also incur substantial expenses in defending against third-party disputes, litigation or infringement claims, regardless of their merit. Successful claims against us might result in substantial monetary liabilities, an injunction against us and might materially disrupt the conduct of our business and harm our financial results.

Our reported financial results could be adversely affected by changes in financial accounting standards or by the application of existing or future accounting standards to our business as it evolves.

Our reported financial results are impacted by the accounting policies promulgated by the SEC and national accounting standards bodies and the methods, estimates, and judgments that we use in applying our accounting policies. Due to recent economic events, the frequency of accounting policy changes may accelerate, including conversion to unified international accounting standards. Policies affecting software revenue recognition have and could further significantly affect the way we account for revenue related to our products and services. For example, we are developing and selling games for smartphones and tablets, including social, freemium games that we began to release in the fourth quarter of 2010, and the accounting for revenue derived from these platforms and games, particularly with regard to micro-transactions, is still evolving and, in some cases, uncertain. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenue, could have a significant adverse effect on our reported results although not necessarily on our cash flows.

If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negatively impact the price of our stock.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. We have incurred, and expect to continue to incur, substantial accounting and auditing expenses and expend significant management time in complying with the requirements of Section 404. Even if we conclude, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness or a significant deficiency in our internal control, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including ineligibility for short form resale registration, action by the SEC, the suspension or delisting of our common stock from the NASDAQ Global Market and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified members for our board of directors.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, and the rules and regulations of the NASDAQ Stock Market. The requirements of these rules and regulations has significantly increased our legal, accounting and financial compliance costs, makes some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. This can be difficult to do. For example, we depend on the reports of wireless carriers for information regarding the amount of sales of our games and related applications and to determine the amount of royalties we owe branded content licensors and the amount of our revenues. These reports may not be timely, and in the past they have contained, and in the future they may contain, errors.

To maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we expend significant resources and provide significant management oversight to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts also involve substantial accounting-related costs. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Market.

The Sarbanes-Oxley Act and the rules and regulations of the NASDAQ Stock Market make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be considered independent for purposes of the NASDAQ Stock Market rules, and officers will be significantly curtailed.

Changes in our tax rates or exposure to additional tax liabilities could adversely affect our earnings and financial condition.

We are subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, and, in the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain.

We are also required to estimate what our tax obligations will be in the future. Although we believe our tax estimates are reasonable, the estimation process and applicable laws are inherently uncertain, and our estimates are not binding on tax authorities. The tax laws’ treatment of software and internet-based transactions is particularly uncertain and in some cases currently applicable tax laws are ill-suited to address these kinds of transactions. Apart from an adverse resolution of these uncertainties, our effective tax rate also could be adversely affected by our profit level, by changes in our business or changes in our structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the elections we make, changes in applicable tax laws (in the United States or foreign jurisdictions), or changes in the valuation allowance for deferred tax assets, as well as other factors. Further, our tax determinations are subject to audit by tax authorities which could adversely affect our income tax provision. Should our ultimate tax liability exceed our estimates, our income tax provision and net income or loss could be materially affected.

We incur certain tax expenses that do not decline proportionately with declines in our consolidated pre-tax income or loss. As a result, in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.

We are also required to pay taxes other than income taxes, such as payroll, value-added, net worth, property and goods and services taxes, in both the United States and foreign jurisdictions. We are subject to examination by tax authorities with respect to these non-income taxes. There can be no assurance that the outcomes from examinations, changes in our business or changes in applicable tax rules will not have an adverse effect on our earnings and financial condition. In addition, we do not collect sales and use taxes since we do not make taxable sales in jurisdictions where we have employees and/or property or we do not have nexus in the state. If tax authorities assert that we have taxable nexus in the state, those authorities might seek to impose past as well as future liability for taxes and/or penalties. Such impositions could also impose significant administrative burdens and decrease our future sales. Moreover, state and federal legislatures have been considering various initiatives that could change our position regarding sales and use taxes.

Furthermore, as we change our international operations, adopt new products and new distribution models, implement changes to our operating structure or undertake intercompany transactions in light of changing tax laws, acquisitions and our current and anticipated business and operational requirements, our tax expense could increase.

Our stock price has fluctuated and declined significantly since our initial public offering in March 2007, and may continue to fluctuate, may not rise and may decline further.

The trading price of our common stock has fluctuated in the past and is expected to continue to fluctuate in the future, as a result of a number of factors, many of which are outside our control, such as:

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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole, such as the continuing unprecedented volatility in the financial markets;

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changes in the operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

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actual or anticipated fluctuations in our operating results;

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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

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failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our industry, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock;

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ratings or other changes by any securities analysts who follow our company or our industry;

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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, capital raising activities or capital commitments;

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the public’s response to our press releases or other public announcements, including our filings with the SEC;

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any significant sales of our stock by our directors, executive officers or large stockholders, including the investors in the 2010 Private Placement whose shares have been registered for resale under the Securities Act and may be freely sold at any time;

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lawsuits threatened or filed against us; and

•

market conditions or trends in our industry or the economy as a whole.

In addition, the stock markets, including the NASDAQ Global Market on which our common stock is listed, have recently and in the past, experienced extreme price and volume fluctuations that have affected the market prices of many companies, some of which appear to be unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Securities class action litigation against us could result in substantial costs and divert our management’s attention and resources.

Our principal stockholders, executive officers and directors have substantial control over our company, which may prevent you or other stockholders from influencing significant corporate decisions.

Matthew A. Drapkin and Hany M. Nada, each of whom is a member of our board of directors, are affiliated with entities that previously held substantial amounts of our common stock and purchased shares of our common stock and warrants to purchase shares of our common stock in the 2010 Private Placement. In addition, Mr. Drapkin and one of his partners also purchased shares and warrants in the 2010 Private Placement for their own account. These persons and entities, which we collectively refer to as the Affiliated Investors, beneficially owned approximately 16.1% of our common stock as of April 30, 2011. In addition, the Affiliated Investors, together with the other members of our board of directors, our executive officers and our other 5% or greater stockholders, beneficially owned 42.9% of our common stock as of April 30, 2011. As a result, these stockholders will, if they so choose, be able to control or substantially control all matters requiring stockholder approval. These matters include the election of directors and approval of significant corporate transactions, such as a merger, consolidation, takeover or other business combination involving us. These stockholders may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership could also adversely affect the market price of our common stock or reduce any premium over market price that an acquirer might otherwise pay.

Some provisions in our certificate of incorporation, bylaws and the terms of some of our licensing and distribution agreements and our credit facility may deter third parties from seeking to acquire us.

Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:

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our board of directors is classified into three classes of directors with staggered three-year terms;

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only our chairman of the board, our lead independent director, our chief executive officer, our president or a majority of our board of directors is authorized to call a special meeting of stockholders;

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our stockholders are able to take action only at a meeting of stockholders and not by written consent;

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only our board of directors and not our stockholders is able to fill vacancies on our board of directors;

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our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and

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advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before a meeting of stockholders.

In addition, the terms of a number of our agreements with branded content owners and wireless carriers effectively provide that, if we undergo a change of control, the applicable content owner or carrier will be entitled to terminate the relevant agreement. Also, our credit facility provides that a change in control of our company is an event of default, which accelerates all of our outstanding debt, thus effectively requiring that we or the acquirer be willing to repay the debt concurrently with the change of control or that we obtain the consent of the lender to proceed with the change of control transaction. Individually or collectively, these matters may deter third parties from seeking to acquire us.


ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.		RESERVED

None.


ITEM 5.		OTHER INFORMATION

None.


ITEM 6.		EXHIBITS

The exhibits listed on the Exhibit Index (following the Signatures section of this report) are incorporated by reference into this Item 6.


	Page

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010		3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010		4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010		5

Notes to Unaudited Condensed Consolidated Financial Statements		6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		30

ITEM 4. CONTROLS AND PROCEDURES		31

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		32

ITEM 1A. RISK FACTORS		32

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		50

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		50

ITEM 4. RESERVED		50

ITEM 5. OTHER INFORMATION		50

ITEM 6. EXHIBITS		50

SIGNATURES		51

Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02


	GLU MOBILE INC.
Date: May 5, 2011	By:	/s/ Niccolo M. de Masi
		Niccolo M. de Masi
		President and Chief Executive Officer (Principal Executive Officer)

Date: May 5, 2011	By:	/s/ Eric R. Ludwig
		Eric R. Ludwig
		Senior Vice President, Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer)


*		This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Glu Mobile Inc. specifically incorporates it by reference.