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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

or

For the transition period            to            

Commission file number 000-50928

JAMDAT MOBILE INC.
(Exact name of registrant as specified in its charter)

3415 South Sepulveda Boulevard, Suite 700
Los Angeles, California 90034
(Address of principal executive offices and zip code)

(310) 636-3100
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.0001 par value
(Title of class)

        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 ý    No o

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

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

        The registrant is unable to provide the aggregate market value of voting and non-voting common equity held by nonaffiliates on June 30, 2004 (the last business day of the registrant's most recently completed second fiscal quarter) as the registrant's common stock was not publicly traded on that date.

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive proxy statement relating to its 2005 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the registrant's last fiscal year, are incorporated by reference into Part III of this report.

Table of Contents

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Special Note Regarding Forward-Looking Statements

        This Annual Report on Form 10-K 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. In making such statements, we must rely on estimates and assumptions drawn in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. These estimates and assumptions are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond our control. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements made by us, or on our behalf.

        In particular, the words "expect," "anticipate," "estimate," "may," "will," "should," "intend," "believe" and similar expressions are intended to identify forward-looking statements. In light of the risks and uncertainties inherent in all forward-looking statements, you should not consider the inclusion of forward-looking statements in this report to be a representation by us or any other person that our objectives or plans will be achieved.

        Risks and uncertainties that could cause actual results to differ from our forward-looking statements include those discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results of Operations" and elsewhere in this report.

        We undertake no obligation to update our forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

        The "JAMDAT" family of related marks, images and symbols are our properties and trademarks. All other trademarks, trade names and service marks appearing in this report are the property of their respective holders. References to "JAMDAT," "we," "us," "our," or similar terms refer to JAMDAT Mobile Inc. together with its consolidated subsidiaries.

PART I

ITEM 1. Business

Overview

        We are a leading global publisher of wireless entertainment applications, including games, ring tones, images and other entertainment content.

        Our applications are designed to take advantage of multimedia enhancements in the latest generation of mobile phones, including high-resolution color displays, increased processing power and improved audio capabilities. We publish applications in multiple categories designed to appeal to a broad range of wireless subscribers. Our portfolio of more than 100 applications is based on intellectual properties that we create and own, and well-established brands that we license from third parties. Our original properties include, among others, JAMDAT Bowling, Lemonade Tycoon and Downtown Texas Hold'em. Our licensed brands include, among others, Bejeweled, The Lord of the Rings, Tony Hawk's Underground, Scrabble, Boggle and Yahtzee. We also publish many of our JAMDAT SPORTS titles under license agreements with the NFL, MLB, the NBA and the NHL.

        Our customers typically purchase and download our applications through a wireless carrier's branded e-commerce service accessed directly from their mobile phones, which must be enabled by technologies such as BREW and Java. These wireless carrier services include, among others, Verizon Wireless' Get It Now, Sprint PCS Vision, Cingular MEdia and Vodafone live!. Our customers are charged a one-time or monthly subscription fee for the application which appears on their mobile phone bills. The wireless carriers retain a percentage of the fee and remit the balance to us. The

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wireless distribution of our applications eliminates traditional publishing complexities, including physical production, packaging, shipping, inventory management and return processing.

        We have agreements to distribute our applications in over 40 countries through more than 80 wireless carriers. These wireless carriers include most of the regional and all of the national U.S. wireless carriers (such as Alltel, Cingular/AT&T Wireless, Nextel, Sprint PCS, T-Mobile and Verizon Wireless) as well as most of the major wireless carriers operating elsewhere around the world (including KDDI, O2, NTT DoCoMo, Orange, Rogers, Telefonica, Vivo and Vodafone). Subscribers of Verizon Wireless, Sprint PCS and Cingular/AT&T Wireless, our largest carrier relationships by revenue, accounted for approximately 50%, 18% and 3%, respectively, of our revenues for the year ended December 31, 2003, and approximately 38%, 15% and 13%, respectively, of our revenues for the year ended December 31, 2004.

The Wireless Entertainment Market

        The wireless entertainment market has emerged as a result of the rapid growth and significant technological advancement in the wireless communications industry. Wireless carriers are launching new data services, including downloadable games, ring tones and images, to drive revenues and take advantage of advanced wireless networks and next-generation mobile phones.

        We believe that growth in the wireless entertainment market has been positively influenced by a number of key factors and trends that we expect to continue in the near future, including:

        Growth in Wireless Subscribers.    According to the International Telecommunications Union, in 2004, the number of global wireless subscribers reached nearly 1.5 billion and subscriber growth is expected to continue as wireless communications increase in emerging markets around the world.

        Deployment of Advanced Wireless Networks.    Wireless carriers are deploying high-speed, next-generation digital networks which have enabled the over-the-air delivery and billing of data applications, including games, to mobile phones.

        Availability of Mobile Phones with Multimedia Capabilities.    In recent years, the mobile phone has evolved from a voice-only device to a personal data and voice communications device that enables access to wireless content and data services. Mobile phone manufacturers are competing for consumers by designing next-generation mobile phones with enhanced features, including built-in digital cameras, color screens, music, video and data connectivity. Manufacturers are also embedding application environments such as BREW and Java into mobile phones to enable multimedia applications, including gaming. We believe that the availability of these next-generation mobile phones is driving demand for wireless entertainment applications that take advantage of these advanced multimedia capabilities.

        Demand for Wireless Entertainment.    Wireless carriers are increasingly launching and promoting wireless entertainment applications to differentiate their services and drive revenues. The delivery of games, ring tones, images and other entertainment content to subscribers enables wireless carriers to leverage both the increasing installed base of next-generation mobile phones and their investment in high-bandwidth wireless networks. Consumers are downloading and paying for wireless gaming content offered by these wireless carriers.

Our Competitive Strengths and Challenges

        We believe that our competitive strengths include:

        Innovative, Award-Winning Applications.    We publish high-quality, innovative applications that build JAMDAT brand loyalty among our customers and appeal to wireless carriers and mobile phone manufacturers seeking to promote mobile phone features and services. Our applications have received high rankings from industry critics and have won several major industry awards.

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        Diverse Portfolio of Original and Licensed Properties.    We publish a diverse portfolio of wireless entertainment applications. During the years ended December 31, 2003 and 2004, we derived 57% and 46% of our revenues, respectively, from JAMDAT-branded applications, including JAMDAT Bowling and Lemonade Tycoon. The balance of our revenues are generated from applications based on intellectual properties licensed from third parties such as Activision, Atari, New Line Productions and PopCap Games, as well as all four major North American professional sports leagues—the NFL, MLB, the NBA and the NHL.

        Proven Revenue-Generating Catalog.    Many of our applications that we launched in prior years have lasting appeal and continue to generate revenue long after their initial release due to their high quality and broad availability.

        Multiple Carrier Relationships.    Our carrier relationships are a result of our early commitment to the wireless entertainment market and focus on carrier and customer service.

        Deployment Capacity.    Due to the ever-changing variety of mobile phones available to consumers, wireless entertainment publishers are required to adapt each of their applications to function on as many different handsets as possible. We have created proprietary technologies and internal systems and controls that enable us to develop and deploy our applications accordingly, and currently we deploy our applications to over 250 mobile phone models.

        Proprietary Technology and Commitment to Research and Development.    We have invested in and continue to explore new technologies that will enable us to publish the most innovative wireless entertainment applications possible. For example, we have invested in research and development of multi-player technologies and services, 3D graphics rendering engines and player community features.

        Experienced Management Team.    Our executive team has significant experience in the video game publishing, wireless communications and media industries, and most of them have been with us since at least 2001. We believe our management team's expertise and continuity is a significant competitive advantage in the increasingly complex wireless entertainment publishing market.

        Notwithstanding these strengths, we expect to face significant challenges in our business, including:

        Dependence on Wireless Carriers.    We are highly reliant on wireless carriers for the successful delivery of our applications and for billing and collecting the fees for such applications. Many factors outside our control could impair our ability to deliver our applications through wireless carriers, including the carriers' preference for our competitors' applications or the carriers' decision to discontinue altogether the sale of applications such as ours.

        Alternative Distribution Channels.    Increased use of distribution channels which enable consumers to download applications without having to access a wireless carrier's branded e-commerce service, such as Internet portals and premium-SMS, could reduce the market power of the wireless carriers' branded e-commerce services. Reduced sales through the wireless carriers' e-commerce channels could force us to rely on these alternative sales channels, which may prove more costly and less effective to us in selling our applications.

        Need to Create Compelling Content.    Our customers demand increasingly sophisticated and compelling applications, which requires us to invest significant resources in research and development to enhance our existing offering of wireless applications and introduce new applications.

        Rapidly Evolving Market.    The wireless entertainment market is evolving rapidly and publishers must have the management and technical expertise to respond adequately to the increasing technological sophistication and complexity of mobile phones and wireless networks.

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        Intense Competition.    The wireless entertainment market is intensely competitive. Some of our existing and potential competitors have greater resources, stronger brand names and a broader geographic presence than we do.

        Sales, Marketing and Support Requirements.    The size and complexity of the global wireless entertainment market requires publishers to have sophisticated sales, marketing and support organizations to meet the needs of both our customers and the wireless carriers that distribute our applications. We must also have effective quality assurance capabilities to deliver high quality products and sufficient resources to deploy our applications broadly.

Our Strategy

        Our goal is to be the leading global publisher of wireless games and other entertainment applications. To achieve this goal, we plan to:

        Publish High-Quality Entertainment Applications.    We believe that publishing a diversified portfolio of the highest quality, most innovative applications is critical to our business. We intend to:

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Develop Innovative Applications.    We will continue to devote significant resources to the development of high-quality, innovative applications and work with the best application developers. As the wireless landscape has rapidly and continuously evolved, we have designed games that have leveraged advancements in wireless network and mobile phone technology. For example, we launched our Gladiator multi-player game in 2000 using Wireless Application Protocol, or WAP. In 2002, we introduced JAMDAT Bowling to coincide with the introduction of mobile phones utilizing BREW and Java. According to Verizon Wireless, JAMDAT Bowling has become one of the most popular wireless games on its Get it Now service. In 2003 and 2004, we introduced multi-player applications, including Bejeweled Multiplayer, JAMDAT Bowling 2 and Scrabble, to leverage wireless carriers' deployment of advanced, high-speed networks. We are currently developing applications using 3D graphics rendering engines and player community features that take advantage of the growing processing capacity of the emerging next generation of mobile phones.



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Emphasize JAMDAT-Branded Applications.    We plan to emphasize the creation of JAMDAT-branded applications that typically generate higher margins for us. We intend to develop sequels to our more successful JAMDAT applications, as we have done with JAMDAT Bowling in launching JAMDAT Bowling 2 and JAMDAT Bowling 3D, and with Lemonade Tycoon in launching Lemonade Tycoon 2. These applications differentiate us from our competitors, particularly those acting as aggregators or distributors, who generally do not own or control intellectual properties. We may also expand our catalog of JAMDAT brands through the acquisition of intellectual properties, as we recently did with our purchase of Downtown Texas Hold'em.



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License World-Class Brands.    We will continue to license well-known, third-party brands and collaborate with major media companies, professional sports leagues and other brand holders to publish third-party branded applications. We believe that familiar titles facilitate the adoption of our applications by wireless subscribers and wireless carriers, and create strong marketing opportunities.

        Enhance Our Distribution Channels.    Strengthening and expanding our distribution channels is critical to our business. We will continue to:

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Increase Our Deployment Capability.    We customize our applications for use on numerous mobile phone models and carrier networks. Deploying wireless applications is a complex process that is resource intensive, requires skilled personnel and uses advanced technologies. We believe that

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the time and difficulty involved in building and organizing our deployment capabilities represents a significant barrier to entry to our potential competitors. To strengthen our competitive advantages in deployment, we intend to increase the number of managerial and technical employees working in deployment and make further investments in our proprietary technologies to increase the scope and efficiency of our deployment capability.

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Strengthen Our Wireless Carrier Relationships.    We plan to strengthen our existing relationships with wireless carriers by continuing to support their strategic needs and by launching new, high-quality, innovative applications. We also intend to build relationships with additional wireless carriers to reach a larger subscriber base. We plan to build our presence in international markets where we are already generating revenues. We also plan to establish carrier relationships in certain emerging markets as wireless infrastructure improves and the availability of next-generation mobile phones increases. Where appropriate, we intend to enter new markets to leverage our expertise, brands, application portfolio and technologies.



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Expand Use of Alternative Sales and Marketing Channels.    We intend to expand our use of alternative channels to market and sell our applications. For example, we have partnered with Yahoo! in the United States and Jamba! in certain European markets to distribute our applications through their online sites. Our own Internet site also enables us to market and sell our applications directly to wireless subscribers. Additionally, we have recently partnered with Radio Shack to make our applications available at Radio Shack's retail and online locations using our proprietary distribution system, JAMDAT Games-to-Go™. We will also continue to work with mobile phone manufacturers to embed our applications directly into mobile phones prior to sale. When using these alternative channels for our wireless applications, the wireless carrier generally provides the billing and collection service and continues to retain a percentage of the purchase price. In addition, the third-party provider, such as a retailer or Internet portal, also generally retains a percentage of the purchase price of sales taking place through these alternative sales and marketing channels.

        Build the JAMDAT Brand.    We intend to build JAMDAT into one of the most widely recognized brands in the wireless entertainment market. We believe that the decisions of wireless carriers and our customers are influenced by brand recognition. We intend to continue building our brand identity through application quality, customer and carrier support, advertising campaigns, industry trade shows, public relations and other marketing efforts.

        Expand Our Global Presence.    We will continue to expand organically as well as pursue attractive acquisition opportunities, including other wireless entertainment publishers, developers or related companies, both in the United States and abroad, to access compelling applications, brands, technology and talent. For example, in January 2005, we acquired Downtown Wireless, a developer and distributor of wireless entertainment applications located in Los Angeles.

Our Applications

        We design our applications to be fun and innovative. We believe application quality and diversity, customer and carrier support, and brand recognition are the key components of a publisher's success and not the number of applications offered. We focus on selectively increasing our application portfolio with high-quality, innovative applications. Our application portfolio includes single- and multi-player games, ring tones, images and other entertainment content.

        Sales of our applications are tied, in part, to the commercial introduction of new mobile phone models. Many new mobile phone models are released in the fourth quarter to coincide with the holiday shopping season. Since some customers download our applications soon after they purchase new mobile phones, we may experience some seasonal fluctuations based on this key holiday selling period.

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        The fees for our wireless games generally range from $3.99 to $7.49 for a one time purchase and from $1.49 to $2.99 for a monthly subscription. The fees for our ring tones generally range from $0.99 for a single ring tone to $11.99 for a collection of ring tones.

        We earned 46% of our revenues for the year ended December 31, 2004 from JAMDAT-branded applications, with the balance coming from applications based on license agreements with, among others, Activision, Atari, New Line Productions and PopCap Games, as well as the NFL, MLB, the NBA and the NHL.

        Some of our leading titles include the following:

        JAMDAT SPORTS.    Utilizing our licenses with the NFL, MLB, the NBA and the NHL, we have released a series of JAMDAT SPORTS-branded titles, including our most recent additions, MLB 2005, NBA 2005, NBA Three-Point Shootout, NHL Hockey 2005 and NFL 2005. We have released other JAMDAT SPORTS titles, including JAMDAT SPORTS' Golf 2004, which was rated 8.6 out of 10 on Wireless Gaming Review. Currently, we have new versions of each of our JAMDAT SPORTS-branded titles in various stages of development, and intend to release those applications to correspond to the start of each new league season.

        JAMDAT Bowling.    JAMDAT Bowling is one of our original titles and is a classic bowling game utilizing realistic pin physics. Based on the popularity of JAMDAT Bowling, we created JAMDAT Bowling 2 with real-time, multi-player capabilities, improved sound and graphics and personalization features. JAMDAT Bowling 2 was rated 8.9 out of 10 on Wireless Gaming Review. In 2005, we released a new three-dimensional graphics version of this popular title for high-end mobile phones with JAMDAT Bowling 3D. In fiscal 2002, 2003 and 2004, we generated approximately 14%, 25% and 21% of our revenue, respectively, from our JAMDAT Bowling applications.

        Downtown Texas Hold'em.    We recently acquired Downtown Wireless, LLC, or Downtown Wireless, the developer and distributor of Downtown Texas Hold'em. Downtown Texas Hold'em is based on the popular casino poker game and was, according to Verizon Wireless, its second most popular game as of January 2005.

        The Lord of the Rings.    We offer a suite of applications, including games, ring tones and images, based on The Lord of the Rings motion picture trilogy. We timed the release of many of these applications to coincide with The Lord of the Rings motion picture releases in 2002 and 2003. The Lord of the Rings: The Two Towers and The Lord of the Rings: The Return of the King are strategy and action games, and were rated 8.0 out of 10 and 9.0 out of 10, respectively, by Wireless Gaming Review. We also released The Lord of the Rings Trivia, The Lord of the Rings Pinball and an application based on The Lord of the Rings motion picture trilogy, as well as ring tones and images based on music and characters from the motion pictures.

        Bejeweled. Bejeweled is a fast-paced puzzle game and Bejeweled Multiplayer is a real-time, multiplayer version of the original game. Bejeweled Multiplayer is the only game ever to be rated 10 out of 10 on Wireless Gaming Review. In fiscal 2004, we generated approximately 14% of our revenue from our Bejeweled family of applications.

        Tony Hawk's Underground (THUG).    Inspired by Activision's series of the same name, THUG and our recently released THUG 2 are skateboarding games that allow players to horizontally scroll through skateboarding courses and cityscapes. THUG and THUG 2 were rated 9.0 and 8.2, respectively, out of 10, by Wireless Gaming Review.

        We also develop and distribute a limited number of games for PC's and PDA's that are distributed primarily through online sites, including Yahoo! and MSN Zone, and certain retail locations.

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Distribution Channels

        We currently distribute our entertainment applications primarily through wireless carriers to their subscribers. In addition to our carrier distribution channel, we also distribute our applications through Internet portals, including our own website, by embedding them directly into mobile phones and through retail locations.

        Wireless Carrier Channel.    We have agreements to distribute our applications through more than 80 carriers in over 40 countries. Our customers download our applications to their mobile phones and their wireless carrier bills them a one-time fee or monthly subscription fee. Our carrier distribution agreements establish the fees to be retained by the carrier for distributing our applications. Our carrier agreements are not exclusive and generally have a limited term of one or two years, with evergreen, or automatic renewal, provisions upon expiration of the initial term. The agreements generally do not obligate the carriers to market or distribute any of our applications. In addition, the carriers can often terminate these agreements early and, in some instances, without cause.

        For the year ended December 31, 2004, we received approximately 38% of our revenues from subscribers of Verizon Wireless and 15% of our revenues from subscribers of Sprint PCS. In 2003, we received approximately 50% of our revenues from subscribers of Verizon Wireless and 18% of our revenues from subscribers of Sprint PCS. In October 2004, the merger of Cingular Wireless and AT&T Wireless, or Cingular/AT&T Wireless, was approved by the Federal Communications Commission, or FCC. If the merger had been completed prior to 2004, revenue from the combined company would have represented 13% of our revenues for the year ended December 31, 2004.

        Other Sales and Marketing Channels.    Although we intend to continue distributing our applications primarily through wireless carriers, we are also developing alternative means of marketing and selling our applications directly to wireless subscribers, including marketing our applications through Internet portal sites, including the Yahoo! and Jamba! sites, and our own website, through mobile phone manufacturers and retail stores. For instance, we recently partnered with Radio Shack to make our applications available to Radio Shack customers who subscribe to wireless carrier services using our proprietary JAMDAT Games-to-Go distribution system. When using these alternative channels to distribute our wireless applications, the wireless carrier generally provides the billing and collection service and continues to retain a percentage of the purchase price for those services. In addition, the third-party provider, such as a retailer or Internet portal, also generally retains a percentage of the purchase price of sales taking place through these alternative sales and marketing channels. As a result, we typically earn less from sales through these third-party providers than we do from sales directly through wireless carriers.

JAMDAT Studios

        Development.    Our studios are responsible for developing our applications. Our studios employ software engineers, artists and designers to create our applications, and producers who coordinate production and oversee the budgeting and scheduling for each application. In addition, we contract with third-party developers to create some of our applications and we assign producers from our studios to coordinate production based on specifications we provide. In either case, we own the copyright to the applications we publish. We believe that we can control costs, diversify risk and maintain access to talent by using both internal and third-party development resources.

        Our studios also manage our research and development activities. We continuously develop and evaluate new technologies that enable us to create even more compelling applications for our customers. For example, we have invested in research and development of multi-player technologies and services, 3D graphics rendering engines and player community features. We also create tools and technologies to help customize our applications for new mobile phone models. Our research and

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development expenses for the years ended December 31, 2002, 2003 and 2004 were approximately $4.0 million, $7.3 million and $12.6 million, respectively.

        We believe that developing high-quality, innovative and marketable applications is critical to our success. Our applications undergo a rigorous "greenlight" process. Executives from our sales, marketing, studio, deployment and finance departments all participate in this process. As part of this process, we evaluate every application in development at major milestones from concept to application release. We believe that our greenlight process contributes to the quality of our applications by allowing us to address consumer, carrier and other market needs during product development.

        Deployment.    Our studios typically develop a new application using one application platform and one or more mobile phone models. Once the application is completed, our deployment group deploys the application as broadly as we determine is commercially viable based on our internal analysis of an application's marketability and technical feasibility. Specifically, our deployment group customizes and localizes the application for each mobile phone model on which a particular carrier intends to distribute the application to its subscribers. In this process, we seek to customize the application for the screen size, processing power, sound capabilities, memory footprint, local execution environment, operating system and other characteristics of a particular mobile phone model. As a result of the diverse markets served by our carriers, we have developed a global, decentralized deployment capability that can customize applications based on local languages, wireless and mobile phone technologies, application platforms, including BREW or Java, and customer preferences. As part of the deployment process, we also subject our applications to a formal quality assurance process to ensure that the application meets our quality standards for each mobile phone model for each carrier on which we distribute, as well as meeting the certification requirements of the respective carrier.

Sales and Marketing

        Our sales and marketing organization works closely with wireless carriers around the world to create merchandising and marketing opportunities for our applications. Through ongoing communications with carrier sales and marketing organizations, we match our application portfolio with the strategic needs of the carrier and the preferences of their subscribers. Our sales and marketing organization, working closely with our studios, also identifies and evaluates wireless distribution opportunities for applications owned by third parties, including developers and other publishers. We provide these distribution services to third parties based upon our evaluation of the marketability of their applications. In 2004, these third party distribution services accounted for less than 1% of our revenues.

        Our sales and marketing organization is also responsible for managing our own marketing efforts. We market our applications using advertising, industry trade shows and other events, sponsorships, public relations and our website. We intend to continue to build our direct marketing capabilities and further develop our sales and marketing organization by hiring additional sales and marketing personnel and increasing our marketing expenditures.

Technology

        We have created proprietary technologies that we believe allow us to develop and distribute innovative applications, improve the efficiency of our business and reduce our dependence on third-party technology platforms. These technologies include the following:

        Application Development Tools.    We use many of our proprietary technologies to ensure that our applications are innovative and of high quality. For example, we have developed our own software development kit, MEDiK®. Our third-party developers use MEDiK to develop applications that meet our rigorous, quality standards as well as the certification requirements of each carrier. We continue to update MEDiK periodically to take advantage of the latest advances in mobile phone technologies.

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        Multi-player Platforms.    We believe that the mobile phone's inherent connectivity and communications features make it an ideal entertainment device. To capitalize on that connectivity, we have invested in the development of multi-player services. We have developed a suite of integrated client-server technologies that enable real-time play, turn-based play and short message service, or SMS, play. We have also developed multi-player community technologies that facilitate, among other things, player matching, high-score rankings and tournaments.

        Distribution Tools.    We have developed software tools, including our application manager and mobile phone profiling tools, which enable us to efficiently deploy our applications on many different mobile phones. We have also developed hosting and provisioning technologies that enable us to deliver applications directly to our customers' mobile phones, bundle applications for value-added sales and provide our customers with a virtual "locker" where they can store and manage their applications on their wireless carrier's network after purchase.

        Billing and Data Mining Tools.    We have developed billing platform technologies that enable our carriers to provide alternate billing methods to their subscribers, including direct carrier billing integration and premium SMS. Our billing platform technologies also support different subscriber payment options, including one-time fee or subscription billing. We also utilize an internal data mining system that enables us to collect and analyze real time data related to customer purchases and application usage. We use this data to better understand our customers' purchase and usage patterns so that we may continually provide them with better applications and improved services through our carriers.

        JAMDAT Games-to-Go™ Distribution System.    We have recently developed our JAMDAT Games-to-Go proprietary retail distribution system which powers our direct-to-consumer sales initiatives in cooperation with our wireless carrier partners for billing processing purposes. We can also incorporate this platform into the retail sales efforts of others, as we did recently with Radio Shack, enabling them to market and sell our applications directly to their consumers.

Competition

        The wireless entertainment applications market is highly competitive and characterized by frequent product introductions, evolving wireless platforms and new technologies. As demand for applications continues to increase, we expect new competitors to enter the market and existing competitors to allocate more resources to develop and market applications. As a result, we expect competition in the wireless entertainment market to intensify.

        The current and potential competition in the wireless entertainment applications market includes major media companies, traditional video game publishing companies, wireless carriers, wireless software providers and other pure-play wireless entertainment companies. Larger, more established companies are increasingly focused on developing and distributing wireless applications that directly compete with us.

        We also compete with wireless content aggregators, who pool applications from multiple developers (and sometimes publishers) and offer them to carriers or through other sales channels. We generally differentiate ourselves from aggregators in several key respects. Unlike us, aggregators do not typically fund development, provide design input or provide quality assurance for their applications. Also, since aggregators usually do not own an application's copyright, they often retain less than a majority of the revenues generated from application sales.

        Currently, we consider our primary competitors in the global publishing market to be Disney, Electronic Arts, Gameloft, Infospace, Mforma, Namco, Sony Pictures, Sorrent, THQ Wireless, VeriSign and Yahoo!. We also consider Blue Lava to be a competitor in the U.S. market.

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        We believe we compete favorably in the principal competitive factors in our market, which consist of the following:

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a broad and deep distribution channel with strong carrier relationships;



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a diverse portfolio of high-quality applications; and



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technical capability and management experience and expertise.

Intellectual Property

        Our intellectual property is an essential element of our business. We use a combination of trademark, patent, copyright, trade secret and other intellectual property laws, confidentiality agreements and license agreements to protect our intellectual property. Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own or license. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.

        We are the registered owner of 38 software copyrights in the United States and have seven applications for software copyrights pending in the United States for various wireless games.

        We are the owner of eight trademarks registered with the U.S. Patent and Trademark Office, including the names "JAMDAT," "JAMDAT Mobile" and our logo, and have ten trademark applications pending with the U.S. Patent and Trademark Office. We also own 15 registered trademarks in Brazil, Canada, the European Community, Japan, Korea, Mexico and Switzerland, including the names "JAMDAT," "JAMDAT Mobile" and our logo, and have 34 trademark applications pending in a number of other jurisdictions for the same trademarks, including Australia, Canada, Mexico, Malaysia, New Zealand, Singapore, China, the European Community, India and Japan. Registrations of both U.S. and foreign trademarks are renewable every ten years.

        We have two patent applications pending with the U.S. Patent and Trademark Office, one of which is also pending in Canada, Japan, India and Europe, but we cannot be certain that the prosecution of these applications will result in any issued patents.

        In addition, many of our applications are based on or incorporate intellectual properties that we license from third parties. We have both exclusive and non-exclusive licenses to use these properties for terms that range from one to five years. Our licensed brands include, among others, Bejeweled, The Lord of the Rings, Tony Hawk's Underground, Scrabble, Boggle and Yahtzee. Our licensors include a number of well-established video game publishers and major media companies, including Activision, Atari, GameHouse, Microsoft, New Line Productions, Nickelodeon and PopCap Games. Additionally, we currently hold licenses from all four major North American professional sports leagues—the NFL, MLB, the NBA and the NHL. In fiscal 2004, revenues derived from our applications branded with the intellectual properties of our three largest licensors, PopCap Games, Activision and New Line Productions, ranged from 9% to 14% of our revenues.

        From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot be certain that we will prevail in any intellectual property dispute. If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of our applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.

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Employees

        As of December 31, 2004, we had 206 employees in the United States, Canada, Europe, Japan and India, including 154 in research and product development. We have never had a work stoppage and none of our employees is represented by a labor organization or under any collective bargaining arrangements. We consider our employee relations to be good.

Financial Information about Segments and Geographic Areas

        We operate in a single business segment for financial reporting purposes.

        The following table shows our domestic and international revenues and our long-lived assets, based on location.

Corporate Information

        We were incorporated in Delaware in March 2000 by eCompanies Wireless, LLC, an incubator of wireless technology companies, which was a joint venture between eCompanies LLC and Sprint Spectrum, L.P. In July 2003, we acquired substantially all of the assets of Jeux Hexacto, Inc., or Hexacto, a Canadian developer of wireless entertainment applications. We became a public company on September 28, 2004 and our stock is currently traded on the NASDAQ National Market. In January 2005, we acquired all of the membership interests of Downtown Wireless, a developer and distributor of wireless entertainment applications.

Seasonality

        Many new mobile phone models are released in the fourth quarter to coincide with the holiday shopping season. Because some customers download our applications soon after they purchase new mobile phones, we may experience seasonal fluctuations based on this key holiday selling period.

Additional Information

        We make available free of charge through our website, www.jamdat.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as

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soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission, or SEC.

        The public may read any of the items we file with the SEC at the SEC's Commission's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC at http://www.sec.gov.

ITEM 2. Properties

        Our corporate headquarters is located in Los Angeles, California, where we lease approximately 23,000 square feet under a lease that expires in January 2009. We also lease approximately 15,000 square feet in Montreal, Canada, under a lease that expires in September 2006, and we lease other office facilities in Guildford, England, Tokyo, Japan and Hyderabad, India. The Montreal, Guildford, Tokyo and Hyderabad offices are all used for sales and marketing, product development and support. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our business and operations.

ITEM 3. Legal Proceedings

        On December 4, 2003, JAMDAT Canada brought an action in the Court of Quebec, Civil Division, against Nova Media Verlag GmbH and New Media Agency GmbH, two European distributors of certain of JAMDAT Canada's retail products, for unpaid royalties in the amount of 40,425 Euros, and for confirmation of termination of all license agreements entered into with them. On May 6, 2004, JAMDAT Canada filed an amended complaint to increase its claim for unpaid royalties to 192,265 Euros. The defendants contested this action and filed a counterclaim; the counterclaim was dismissed in our favor on December 20, 2004.

        On February 22, 2005, JAMDAT Mobile Inc. was named as a co-defendant, along with Atari, Atari Interactive, Hasbro and AT&T Wireless, in a federal action brought by Games, Inc. in the Southern District of New York, which action is related to an underlying suit filed by Atari, Atari Interactive and Hasbro against Games, Inc. Games, Inc. has alleged that, among other things, Atari, Atari Interactive and Hasbro previously licensed to Games, Inc. the right to distribute Scrabble and other Atari and Hasbro branded games via the Internet, and that our wireless distribution of those games is a violation of their contractual rights. Summary judgment was granted to Atari, Atari Interactive and Hasbro in the related underlying action on February 22, 2005, which we believe forecloses the pendant action involving us.

        In addition to the foregoing, from time to time we may be involved in other litigation relating to claims of alleged infringement, misuse or misappropriation of intellectual property rights of third parties. We may also be subject to claims arising out of our operations in the normal course of business. As of the date of this Form 10-K, we are not a party to any such other litigation that would have a material adverse effect on us or our business.

ITEM 4. Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the quarter ended December 31, 2004.

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PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

        Our Common Stock is quoted on the National Association of Securities Dealers Automatic Quotation System National Market under the symbol "JMDT." The following table sets forth the reported high and low bid prices of the Common Stock as reported by NASDAQ for the calendar periods indicated:

        Prior to September 28, 2004, there was no established public trading market for our Common Stock.

Holders

        As of March 18, 2005, there were approximately 68 record holders of our Common Stock.

Dividends

        We have never declared or paid cash dividends on our capital stock. We currently anticipate that we will retain future earnings, if any, to finance the growth and development of our business. Accordingly, we do not expect to declare or pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors, which will depend on our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.

Recent Sales of Unregistered Securities

        On January 5, 2005, we entered into a Purchase Agreement with Downtown Wireless, John Cibulski, James Coriston, Jr. and Ruben Sandoval to purchase 100% of the limited liability company membership interests in Downtown Wireless. As partial consideration for the purchase of the membership interests, we issued 34,635 shares of Common Stock, of which 11,545 shares were issued to each of Messrs. Cibulski, Coriston and Sandoval, respectively. We issued these securities in a transaction exempt from registration under Section 4(2) of the Securities Act.

Use of Proceeds

        We completed our initial public offering on October 4, 2004, pursuant to a Registration Statement on Form S-1 initially filed on July 2, 2004, as subsequently amended (File No. 333-117127), and as supplemented by the Registration Statement on Form S-1 filed on September 28, 2004 (File No. 333-119354). The effective date of the Registration Statement is September 28, 2004. The managing underwriters of the public offering were Lehman Brothers and Merrill Lynch & Co. In the offering, we sold an aggregate of 4,390,781 shares of our common stock, including shares subject to the over-allotment option, at a price to the public of $16.00 per share. In our initial public offering, our stockholders also sold 1,991,719 shares for their own accounts, including shares subject to the over-allotment option, also at a price to the public of $16.00 per share; we received none of the proceeds of those sales.

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        The aggregate offering price was $102.1 million, of which the aggregate gross proceeds to us were approximately $70.3 million. We paid expenses of approximately $7.2 million, of which approximately $4.9 million represented underwriting discounts and commissions and approximately $2.3 million represented expenses related to the offering. Net proceeds from the offering to us were approximately $63.1 million.

        None of the net proceeds received by us from the initial public offering were paid directly or indirectly to any director, officer, general partner of JAMDAT or their associates, to any person owning 10% or more of any class of equity securities of JAMDAT, or to any of our affiliates. To date, $5.6 million of our net proceeds were used to finance the Downtown Wireless acquisition and additional amounts were used to extend certain license agreements. The remaining proceeds are, as of March 18, 2005, invested in cash and short term investments. We expect that our use of the remaining proceeds from the offering will conform to the intended use of the proceeds described in our final initial public offering prospectus dated September 28, 2004.

ITEM 6. Selected Financial Data

        You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this Form 10-K. The consolidated statements of operations data for the period beginning March 13, 2000, our inception, through December 31, 2000, and for the year ended December 31, 2001, and the consolidated balance sheet data as of December 31, 2000, 2001 and 2002 are derived from our audited consolidated financial statements for those periods, which are not included in this Form 10-K. The consolidated statements of operations data for the years ended December 31, 2002, 2003 and 2004 and the consolidated balance sheet data as of December 31, 2003 and 2004 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. This section presents our historical consolidated financial data and does not purport to project our results of operations or financial position for any future period or date.

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(1)

Includes revenues from a related party, Sprint PCS amounting to zero, $33,000, $410,000, $2,462,000 and $5,530,000 for the years ended December 31, 2000, 2001, 2002, 2003 and 2004, respectively. See Note 19 to our consolidated financial statements for further detail.

(2)

Stock-based compensation charges are excluded from the following operating expense categories (in thousands):

(3)

See Notes 2 and 14 to our consolidated financial statements for the determination of shares used in computing basic and diluted net income (loss) per share.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        We are a leading global publisher of wireless entertainment applications, including games, ring tones, images and other entertainment content. We develop our applications both internally and through third-party developers. We have agreements to distribute our applications through more than 80 wireless carriers. Our customers typically purchase our applications through a wireless carrier's branded e-commerce service accessed directly from their mobile phones. These carrier services include, among others, Verizon Wireless' Get It Now, Sprint PCS Vision, Cingular MEdia and Vodafone live!. Our customers download our applications to their mobile phones and they are charged a one-time or monthly subscription fee for the application which appears on their mobile phone bill. The wireless carrier collects the fee, retains a percentage and remits the balance to us. Subscribers must have a mobile phone with multimedia capabilities to download and use our applications. We also distribute our applications through Internet portal sites, retail stores and mobile phone manufacturers that embed our games directly in mobile phones. In addition, we offer a limited number of personal computer, or PC, and personal digital assistant, or PDA, products that may be purchased through Internet portal sites and at retail locations.

        Our games and other entertainment applications are based on intellectual properties that we create and own, and well-established brands that we license from third parties. Our original properties include, among others, JAMDAT Bowling, Lemonade Tycoon and Downtown Texas Hold'em. Our licensed brands include, among others, Bejeweled, The Lord of the Rings, Tony Hawk's Underground, Scrabble, Boggle and Yahtzee. We also currently have license agreements with the NFL, MLB, the NBA and the NHL.

        In 2000 and 2001, we were primarily engaged in developing applications for existing and emerging technologies in the wireless entertainment market and building wireless carrier relationships in the United States. We generated minimal revenues during this period. In 2002, Verizon Wireless launched Get It Now and we began selling our applications to Verizon Wireless subscribers with BREW-enabled mobile phones. Get It Now provides a billing mechanism through which Verizon Wireless bills its subscribers on behalf of application providers like us. During the second half of 2002, we began selling our applications through other U.S. carriers, including Sprint PCS and AT&T Wireless, when they launched similar e-commerce application download services.

        Although we began operations in the United States, we have expanded internationally. In early 2002, we entered the Korean and Japanese markets through agreements with local distribution partners. In the second quarter of 2003, we opened an office in the United Kingdom to target the European market. In the third quarter of 2003, we entered the Chinese market through agreements with local distribution partners. Additionally, in the third quarter of 2003, we entered the Canadian market through our acquisition on July 3, 2003 of all the assets of Hexacto. The acquisition was accounted for as a purchase and Hexacto's operating results are included in our operating results for periods subsequent to the acquisition date. In early 2004, we opened a Tokyo office to establish distribution relationships directly with wireless carriers in Japan. In August 2004, we opened an office in Hyderabad, India to provide software development services and establish distribution relationships directly with wireless carriers in India. In December 2004, we completed an investment in a Chinese wireless entertainment distributor to further enable the distribution of our applications through Chinese wireless carriers.

        In managing and evaluating our business, we consider, among other factors, the following:

•

Penetration of next-generation mobile phones.    The primary growth drivers of our business are the number of mobile phones in the market capable of downloading our applications and our ability to deploy our applications to those mobile phones—primarily through our carrier relationships.

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We believe that our revenue growth to date has tracked growth in the number of available next-generation mobile phones, although there is no reliable industry data on the penetration of mobile phones with multimedia capabilities. We believe that, over time, the majority of all mobile phones worldwide will be capable of downloading data applications through application environments like BREW and Java.

•

Complexity of mobile phone features and technologies.    We support numerous mobile phone models and technologies in an effort to reach the maximum number of wireless subscribers. We have developed processes and proprietary technologies that have enabled us to deploy our applications efficiently to over 250 mobile phone models. However, keeping pace with the rapid innovation of mobile phone technologies together with the continuous introduction of new mobile phone models by wireless carriers, requires investment in deployment capabilities, including personnel, technologies and equipment. To date, we have broadly supported mobile phones utilizing BREW and Java as the primary application environment.



•

Composition of our application portfolio.    Our strategy is to publish a diversified and balanced portfolio of high-quality applications based on both JAMDAT brands and brands that we license from third parties. For the years ended December 31, 2003 and 2004, we derived 57% and 46%, respectively, of our revenues from JAMDAT-branded applications. Our license agreements for third-party brands typically require that we pay an advance or guaranteed royalty payment. We generally recoup all of the advances we have paid from royalties earned from sales of the application before the licensor receives any further royalty payments from us. We also distribute applications for other publishers, developers and licensors. When we distribute applications, we generally do not assume the cost or responsibility associated with application development, which ultimately results in a higher royalty payment to the third party, and therefore, a lower gross margin for us on distributed products. For the years ended December 31, 2003 and 2004, these third party distribution services accounted for less than 2% and 1% of our revenues, respectively.



•

Pricing of our applications.    Our prices and purchasing methods vary by application, mobile phone model and wireless carrier. We offer some of our applications only on a monthly subscription basis and others only through a one-time purchase option. We also bundle multiple applications for a monthly subscription fee. Subscriptions to our applications generally renew automatically on a month-to-month basis and are terminable by our customers at any time. Although we have the ability to propose prices to our carriers, in general, the final price for our applications is set by the carrier. The carriers typically charge $1.49 to $2.99 for a monthly subscription and $3.99 to $7.49 for a one-time purchase of our applications. For the years ended December 31, 2003 and 2004, we derived approximately 32% and 30% of our revenues, respectively, from subscriptions.



•

Revenues by carrier.    We distribute our applications primarily through wireless carriers. We generally seek to create direct contractual relationships with these carriers when they launch their "bill on behalf" of services. Our ability to generate revenues and the terms under which we deliver our applications depend on a number of factors, including our ability to maintain strong relationships with the carriers and to differentiate our applications from those of our competitors. Subscribers of Verizon Wireless and Sprint PCS, our largest and second largest carrier relationships by revenue, accounted for approximately 50% and 18%, respectively, of our revenues during the year ended December 31, 2003, and approximately 38% and 15%, respectively, of our revenues during the year ended December 31, 2004. In October 2004, the FCC approved the Cingular/AT&T Wireless merger. If the merger had been completed prior to 2004, revenue from the combined company would have represented 13% of our revenues for the year ended December 31, 2004.

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•

Revenues by geography.    While we have initially focused on building our presence in the United States, we believe that the wireless entertainment market is expanding globally and we intend to pursue revenue opportunities outside of the United States. Our Montreal, Canada office distributes our applications to wireless carriers in Canada and, starting in late 2003, our Guildford, England office began distributing our applications throughout Europe. In April 2004, we opened an office in Tokyo, Japan to distribute our applications in the Japanese market. We distribute our applications in China and Korea through local distribution partners, and in December 2004, we invested in a Chinese wireless entertainment distributor to further enable the distribution of our applications in China. In August 2004, we opened an office in Hyderabad, India to distribute our applications in India and provide offshore software development services. All of our other international distribution efforts are currently managed directly from the United States. During the years ended December 31, 2003 and 2004, we derived approximately 22% and 20% of our revenues, respectively, from international markets.

Application of Critical Accounting Policies and Estimates

        We have identified the policies below as critical to our business operations and understanding of our financial results. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

        We recognize revenues in accordance with the guidelines of SEC Staff Accounting Bulletin, or SAB, No. 104 "Revenue Recognition." We generally recognize revenues from the sale or subscription of our applications to wireless subscribers under distribution agreements with wireless carriers and other distributors in the period in which the applications are purchased or over the period in which the applications are subscribed, assuming that: fees are fixed and determinable; we have no significant obligations remaining; and collection of the related receivable is reasonably assured. In accordance with our distribution agreements, the wireless carriers and other distributors are responsible for billing, collecting and remitting to us our percentage of the fees. The wireless carriers and other distributors generally report the final sales data to us within 10 to 45 days following the end of each month. In situations where wireless carriers are not contractually obligated to report sales data prior to our external reporting deadlines, we estimate our revenues based on preliminary sales data derived from our servers or directly from the carrier, an analysis of carrier-specific historical sales trends and the expected impact of all newly launched applications during the period. To date, instances requiring estimates have not been significant. Our policy is to record differences between estimated revenues and actual revenues in the next reporting period once the actual amounts are determined.

        In accordance with Emerging Issues Task Force, or EITF, No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent," we recognize as revenues the net amount the wireless carrier or distributor pays to us upon the sale of our applications, net of any service or other fees earned and deducted by the wireless carrier or distributor. We have evaluated our wireless carrier and distributor agreements and have determined that we are not the principal when selling our applications through wireless carriers. Key indicators that we evaluated to reach this determination include:

•

wireless subscribers directly contract with wireless carriers who have most of the customer service interaction and are generally viewed as the primary obligor by the wireless subscribers;



•

wireless carriers generally have significant control over the types of applications and content that are offered to their wireless subscribers;

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•

wireless carriers are directly responsible for billing and collecting fees from wireless subscribers, including the resolution of billing disputes;



•

wireless carriers generally pay us a fixed percentage of revenues collected;



•

wireless carriers generally must approve the price of our applications in advance of their sale to wireless subscribers, and our more significant carrier customers have the ability to set the ultimate price charged to the wireless subscriber; and



•

we have limited risks, including no inventory risk and limited credit risk, because wireless carriers generally bear the risk of collecting from their subscribers.

        Based on our evaluation of these factors, we believe that recognizing revenues on a net basis is appropriate where the above indicators are present.

        We also derive revenues from license agreements with mobile phone manufacturers that allow them to embed our applications directly into their mobile phones. Generally, these manufacturers pay a per unit license fee for each mobile phone manufactured with an embedded application. Manufacturers generally report manufacturing data within 45 days after the end of the month or quarter in which such activity takes place. In situations where handset manufacturers are not contractually obligated to report sales data prior to our external reporting deadlines, we estimate our revenues based on preliminary sales data obtained from the handset manufacturers, an analysis of historical sales trends and the expected impact of any newly released handsets which feature embedded versions of our products. Our procedures for estimating revenues under these license agreements include:

•

Evaluation of monthly manufacturing data received to evaluate trends of manufacturing activity based on our knowledge of the mobile phones being produced that embed our applications; and



•

Communication with the appropriate personnel at the manufacturer to obtain preliminary manufacturing information prior to receipt of the formal royalty report or payment for the month.

To date, instances requiring estimates have not been significant and our policy is to record differences between estimated revenues and actual revenues in the next reporting period once the actual amounts are determined. Historically, differences between our estimates and actual revenues have not been materially different and, when we were a private company, we had adequate time to adjust our estimated revenues to actual results once we receive final sales data. We recognize revenues from these arrangements in the month or quarter that this manufacturing activity takes place assuming: fees are fixed and determinable; we have no significant obligations remaining; and collection of the related receivable is reasonably assured.

        As of December 31, 2002, 2003 and 2004, revenue which is based on our estimation process amounted to 4.3%, 1.3% and 0%, respectively. As discussed above, distribution agreements requiring revenue estimates are generally related to smaller foreign wireless carriers, distributors and mobile phone manufacturers, who generally take longer to report their actual results to us. Revenues requiring estimates decreased to 0% of revenues for the year ended December 31, 2004 as a result of our efforts to shorten the reporting lag of smaller European carriers. We will continue to encourage smaller wireless carriers, distributors and mobile phone manufacturers to provide us with timely sales reports, to avoid situations that would require us to estimate portions of our revenues in the future.

        In addition, we have generated limited revenues from providing consulting services and contractual development work for carriers. In the event that we receive upfront payments for these activities, revenues are generally recognized upon delivery or over the contractual term depending on the underlying contractual obligations. Revenues under these types of arrangements are not anticipated to be significant in the future.

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        Deferred revenues generally consist of up-front payments from wireless carriers or other distribution partners for development or other services that we are not recognizing until we fulfill our underlying contractual obligations and the related revenues are earned.

        Although the majority of our revenue is denominated in the functional currency of the entity responsible for the sale, we do have certain contracts where revenue is denominated in currency other than the functional currency. In these instances, revenue is converted at a quoted average exchange rate for the period over which the revenue was earned.

Impairment of Goodwill and Long-Lived Assets

        We periodically assess potential impairments of our goodwill in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets." We assess impairment of our other long-lived assets in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered by us include significant underperformances relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. In addition, we assess goodwill at least annually in accordance with SFAS No. 142. SFAS No. 142 requires a two-step process for evaluating whether goodwill has been impaired. The first step of the goodwill impairment test compares the fair value of the company with its carrying value, including goodwill. If the fair value exceeds its carrying amount, goodwill is not impaired. If the carrying value exceeds its fair value, we compare the fair value of goodwill with the carrying value of that goodwill. If the carrying value of goodwill exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. When we determine that the carrying value of a long-lived asset, other than goodwill, may not be recoverable based upon the existence of one or more of the above indicators of impairment, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, we recognize an impairment loss. We report an impairment loss in the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair market value if available, or discounted cash flows if not. To date, we have not had an impairment of goodwill or other long-lived assets.

Income Taxes

        We periodically review the likelihood that we will realize the value of our deferred tax assets and liabilities to determine if a valuation allowance is necessary. We have recorded a full valuation allowance against our net deferred tax assets. We have maintained a full valuation allowance because we concluded that it was not likely we would realize the value of our deferred tax assets, in light of our history of net operating losses and limited operating history, potential limitations on the utilization of net operating loss carryovers, future taxable income and feasibility of tax planning initiatives. If we determine in the future that it is more likely than not that we will realize any future deferred tax assets for which we previously provided a valuation allowance, we would reduce the existing valuation allowance and recognize income in the amount of the reduction. Conversely, if we determine that we would not be able to realize any future recorded net deferred tax asset, we would increase the valuation allowance and recognize the increase as a charge to our results of operations in the period we reached the conclusion.

        In addition, we operate within multiple domestic and foreign taxing jurisdictions and are subject to audit in those jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that our financial statements reflect a reasonable

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assessment of our foreign tax liability, it is possible that the ultimate resolution of these issues could significantly differ from our original estimates.

Accounting for Stock-Based Compensation

        We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, and comply with the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No. 25, compensation cost, if any, is recognized over the respective vesting period based on the difference between the deemed fair value of our common stock and the exercise price on the date of grant. We account for non-employee stock-based awards, in which goods or services are the consideration received for the equity instruments issued, in accordance with the provisions of SFAS No. 123 and related interpretations. We have recorded compensation charges for issuances of stock awards where the exercise price was less than the deemed fair value of the underlying stock for financial accounting purposes. See "—Results of Operations—Stock-Based Compensation."

Software Development Costs

        We expense research and development costs, which consist primarily of software development costs, as they are incurred. We account for software development costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." We expense software development costs that we incur in the research and development of software products and enhancements to existing software products until the time when we establish technological feasibility, and we capitalize costs from that time until the product is available for general release to customers. Under our current practice of developing new applications, the technological feasibility of the underlying software is not established until substantially all product development is complete, which generally includes the development of a working model. As a result, to date, we have not capitalized any costs relating to our application development because the costs incurred after the establishment of technological feasibility of our applications have not been significant. In addition, in the future, we will consider the following factors in determining whether costs can be capitalized: the emerging nature of the wireless entertainment market; the rapid evolution of the platforms and mobile phones on which we develop; the lack of pre-orders or sales history for our applications; the uncertainty regarding an application's revenue-generating potential; our lack of control over the sales channel resulting in uncertainty as to when an application will be available for sale, if at all; and our historical practice of canceling applications throughout each stage of the development process.

Advance or Guaranteed Licensor Royalty Payments

        Advance or guaranteed licensor royalty payments are fees that we pay to third-party brand holders for use of their intellectual property, including trademarks or copyrights, in the development of our applications. We capitalize advance or guaranteed royalty payments to licensors and amortize these amounts to cost of revenues over the period in which revenues for the license will be generated, which is typically over the term of the license agreement, based on either the agreement execution date or application launch date, depending on the terms of the license agreement.

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Results of Operations

        The following table sets forth the items in our historical consolidated statements of operations for the periods indicated and as a percentage of revenues (dollars in thousands):

Sources of Revenues

        We principally derive revenues from the licensing of our applications to wireless subscribers for a one-time purchase fee or a monthly subscription fee. Substantially all of these fees appear on our customers' monthly mobile phone bill. In accordance with our carrier agreements, the carriers perform billing and collection functions and remit a percentage of the fees to us. We recognize the net amount of revenues due to us from the wireless carrier. We generate the vast majority of our revenues through our carrier distribution channel when wireless subscribers download our applications to their mobile phones, typically through a carrier's branded e-commerce service. Our customers may also initiate the purchase of our applications from various Internet portal sites or through other delivery mechanisms

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with carriers continuing to be responsible for billing, collecting and remitting to us a percentage of those fees. We also generate limited revenues from mobile phone manufacturers when they embed one of our applications directly into a mobile phone. We generally receive payment from the manufacturer on a per mobile phone basis. Revenues from embed sales represented 6% and 3% of our revenues for the years ended December 31, 2003 and 2004, respectively. Finally, we generate limited revenues from the sale of some of our applications, including PC and PDA products, through Internet portal sites and retail stores. Revenues from these sales represented 9% and 3% of our revenues for the years ended December 31, 2003 and 2004, respectively. We currently anticipate that revenues from PC and PDA products, which are a result of the Hexacto acquisition, will continue to decline as a percentage of total revenues. We expect this decline because we do not currently anticipate significant future investment in these types of revenue opportunities.

Cost of Revenues

        Our cost of revenues includes amortization of advance or guaranteed royalties to licensors, royalty payments to licensors, royalty payments to developers in excess of development costs, amortization of acquired software and other costs. Our gross profit is determined largely by the mix of our JAMDAT-branded and licensed applications sold during a particular period under varying royalty obligations associated with each application. There are multiple internal and external factors that affect the mix between sales of JAMDAT-branded and licensed applications including the overall ratio of JAMDAT-branded applications to licensed applications available for sale during a particular period. The success of any individual application during a particular period is affected by internal and external factors such as marketing and media exposure, product quality, competitive products and consumer acceptance. If our mix of sales shifts substantially to licensed applications or applications with higher overall royalty rates, our gross margin would decline.

        We capitalize advance or guaranteed royalty payments to licensors and amortize these amounts to cost of revenues over the period in which revenues for the license will be generated, which is typically over the term of the license agreement. If our licensors earn royalties in excess of advances or guaranteed payments, we categorize the excess royalties as cost of revenues in the period they are earned by the licensor. If our external developers earn royalties in excess of our previously expensed application development costs, we similarly categorize the excess royalties as cost of revenues in the period the developer actually earns the royalties. Most of our licensors and developers have the right to audit our calculation of their royalties. If an audit by a licensor or developer caused a disagreement which ultimately resulted in an additional royalty obligation, we would categorize the amount as a cost of revenues in the period in which the additional obligation was realized. Costs incurred for the development of our applications prior to technological feasibility are expensed as incurred throughout the development process, and are included in research and development expenses.

        Acquired software consists of completed software acquired in the acquisition of Hexacto. We amortize acquired software over the estimated useful life of two years.

        Other costs of revenues consist primarily of bandwidth, co-location space and other fees associated with maintaining our carrier-grade hosting environment used for developing and operating our application provisioning and multi-player gaming services.

Operating Expenses

        Our operating expenses primarily include research and development, selling and marketing, general and administrative and stock-based compensation.

        Research and Development.    Our research and development expenses relate primarily to compensation and associated costs for the internal and external development and deployment of our entertainment applications, quality assurance testing, compensation and associated costs of technology

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employees working on platform technologies, mobile phone and wireless service costs associated with application development and deployment, and certification testing required by carriers.

        We devote substantial resources to the development and deployment of our applications and expect this to continue in the future. We attempt to balance the mix of internal and external application development. We believe that developing applications internally through our own employee developers allows us to increase margins, leverage the technology we have developed and better control application delivery. The use of external development allows us to significantly increase the number and diversity of our applications while controlling fixed costs. We also believe external developers provide dynamism and creativity and we will continue to work closely with the best-available application developers. Our external application development costs are typically structured as non-refundable advance payments against future royalties earned, if any. The advance amounts generally range between $60,000 and $200,000 per application. Our applications generally require from six months to one year to produce, based on the complexity and feature set of the application developed, the number of platforms and handsets covered and the experience of the developer. We expect the payments to developers and the production time to increase as the complexity and feature sets of the applications they develop increase. We expect our research and development expenses will increase in absolute terms as we continue to create new applications and technologies as our company grows.

        Selling and Marketing.    Our selling and marketing expenses relate primarily to the compensation and associated costs for marketing and sales personnel, marketing and advertising, trade shows, public relations and other promotional activities, and general business development activities. We expect selling and marketing expenses to increase in absolute terms with the growth of our business and as we further promote the JAMDAT brand and our applications in the future.

        General and Administrative.    Our general and administrative expenses relate primarily to the compensation and associated costs for general and administrative personnel, professional fees, facility costs, information technologies and service costs. In addition to our headquarters, located in Los Angeles, California, we maintain offices in Tokyo, Japan, Montreal, Canada, Guildford, England and Hyderabad, India. We expect that general and administrative expenses will increase in absolute terms as we hire additional personnel and incur costs related to the anticipated growth of our business and our operation as a public company.

        Stock-Based Compensation.    In connection with the grant of common stock awards, we have recorded deferred stock-based compensation for the difference between the exercise price and the deemed fair value for financial accounting purposes of the underlying shares of stock and option awards to employees on the date of the grant. In addition, for restricted stock awards that were exercised with notes receivable from stockholders that did not have fixed accounting, we recognized deferred stock-based compensation for increases in the deemed fair value at the end of each reporting period until a fixed and final measurement occurred in April 2003 which resulted in recognition of cumulative deferred stock-based compensation of approximately $3.9 million through April 2003.

        Prior to our initial public offering, during the nine months ended September 30, 2004, we granted stock awards and options with exercise prices ranging from $0.48 per share to $16.00 per share and deemed fair values for accounting purposes for the same period ranging from $5.43 per share to $16.00 per share, resulting in deferred stock-based compensation of $4.8 million for the period. All stock options that we have granted to our employees and directors under our equity plans were intended to be exercisable at a price per share not less than the fair value of the shares of our common stock underlying those options or stock awards on their respective dates of grant. Because there was not a public market for our shares prior to our initial public offering, our board of directors determined these exercise prices in good faith, based on the best information available to the board and our management at the time of grant. All stock awards and options granted subsequent to our initial public

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offering have been and will continue to be issued with exercise prices equal to the market value of our stock at the close of business on the date of grant.

        For grants made prior to our initial public offering, we did not obtain contemporaneous valuations by an unrelated valuation specialist at the times we issued stock options or awards because our board of directors believed the best indicator of the fair value of our common stock was a market approach based on the preferred stock prices paid by outside investors after making adjustments for preferred stock preferences. In addition, our board of directors believed that, because of the early stage of our business, traditional valuation approaches used by independent valuation firms, such as an income approach, would not be relevant and would not be worth the cost. Subsequently, in anticipation of our initial public offering, we reassessed the valuations of our common stock using a retrospective valuation performed by management, which required us to make complex and subjective judgments. The deemed fair value of our common stock was determined using a combination of a market approach at several key dates and straight-line interpolation of the deemed fair value at those dates to the contemplated initial public offering price. Management's valuation took into consideration the following factors:

•

key company milestones;



•

third party preferred stock investments and related common stock implied values based on preferred stock preferences;



•

comparable company analysis;



•

key industry and market factors; and



•

contemplated initial public offering price per share.

        The deemed fair values for financial accounting purposes subsequent to October 4, 2004, the date we closed our initial public offering of common stock, were determined based on quoted market prices on the date of the respective grant.

        The differences between the range of deemed fair values of $5.43 to $16.00 per share for stock awards granted during the year ended December 31, 2004 and the initial public offering price of $16.00 per share were a result of the following factors:

•

During the fourth quarter of 2003, we issued $11 million of Series D preferred stock at a price of $1.46 per share, which converted into common stock upon the completion of our initial public offering at a conversion price of $4.38 per share after giving effect to our 1-for-3 reverse stock split, to a venture capital firm that had not previously been an investor. We also increased the number and deployment of our applications and our revenues grew sequentially by 28% over our revenues for the third quarter of 2003. In spite of these events, we continued to believe the likelihood of an initial public offering was remote because we had not achieved the necessary revenue scale or profitability. In determining the value of our common stock, we considered the revised liquidation preferences after our Series D financing and the achievement of the above-noted milestones. Accordingly, by the end of 2003, we determined that the deemed fair value for our common stock was higher than the Series D preferred stock price.



•

During the quarter ended March 31, 2004, we continued to increase the number of our applications available for sale and our revenues grew sequentially by 35% over our revenues for the fourth quarter of 2003. In addition, we achieved our first profitable quarter in the first quarter of 2004.



•

During the quarter ended June 30, 2004, we continued to increase the number of our applications available for sale and our revenues grew sequentially by 20% over our revenues for the first quarter of 2004 and we maintained our profitability. In mid-April and early May 2004, we received our first potential valuations from certain major investment banks. Based on these

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valuations, we retained investment bankers in mid-May 2004 to advise us on a potential initial public offering.

•

During the quarter ended September 30, 2004, we filed our initial registration statement on July 2, 2004. The preliminary estimates of our common stock price were based on projected 2005 revenues and earnings, which assumed significant continued growth in revenues and profits. In addition, this value was also based on favorable capital market conditions. On October 4, 2004, we completed our initial public offering at a price of $16.00 per share of common stock.

        Although immediately prior to the initial public offering it was reasonable to expect that the completion of the offering would add value to our common shares because they would have increased liquidity and marketability, the amount of additional value could not have been measured with either precision or certainty.

        We recognize compensation expense as we amortize the deferred stock-based compensation amounts on an accelerated basis over the related graded vesting periods, generally over four years.

        During the years ended December 31, 2001, 2002, 2003 and 2004, we recorded deferred stock-based compensation to stockholders equity of $0.3 million, $29,000, $4.8 million and $4.8 million, respectively, related to the final remeasurement of restricted shares underlying the notes to stockholders and the grant of new restricted common stock and option awards. Future annual amortization of deferred stock-based compensation for restricted common stock and options as of December 31, 2004 is as follows (in thousands):

Income Taxes

        We are subject to tax in the United States on our U.S. sourced income and our foreign subsidiaries are subject to tax in the jurisdictions in which they operate. Due to prior year operating losses, we have not paid income taxes since inception and have generated significant net operating losses which can be applied against future taxable income. In addition, we have paid foreign withholding taxes on revenue generated in certain foreign countries which are available as foreign tax credits against future taxable income. Due to our history of operating losses and the related uncertainty about our ability to generate sufficient taxable income during the carryforward period, we have recorded a valuation allowance against the entire amount of these otherwise recognizable deferred tax assets as of December 31, 2003 and 2004. During the year ended December 31, 2004, we generated operating income for the first time since our inception and have utilized a portion of our net operating loss carryforward to offset our estimated taxable income. The tax provision associated with our operating income was offset by reversal of the associated valuation allowance. Accordingly, as a result of our prior year losses and the current year partial reversal of our valuation allowance, we have not recorded a tax provision for any of the years ended December 31, 2002, 2003 or 2004. During 2005, we anticipate continuing to generate taxable income which should allow us to alleviate any uncertainty about our ability to recognize our deferred tax assets and reverse the remaining valuation allowance. Upon reversal of the remaining valuation allowance, which will be recorded as a one-time tax benefit, we will immediately begin to show a tax provision as operating income is earned.

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Comparison of the years ended December 31, 2003 and 2004

        Revenues.    Our revenues increased 171% from $13.5 million for the year ended December 31, 2003 to $36.6 million for the year ended December 31, 2004. The increase primarily resulted from increased sales volume of our new and existing applications due to an increase of addressable next-generation handsets, as a result of sales of new handsets by our carriers and the addition of new carriers offering download services. We increased the number of applications generating revenue to 107 during the year ended December 31, 2004 from 63 during the year ended December 31, 2003. Our Canadian revenues decreased as a percentage of revenues from 10% for the year ended December 31, 2003 to 4% for the year ended December 31, 2004. The decrease resulted from a realignment of resources in our Canadian studio away from PC and PDA game development and towards wireless development. Our non-Canadian international revenues increased from 11% of our revenues for the year ended December 31, 2003 to 15% of our revenues for the year ended December 31, 2004. The impact of exchange rate changes on revenue denominated in currencies other than U.S. dollars amounted to a net increase in revenue of approximately $0.7 million for the year ended December 31, 2004.

        Cost of Revenues.    Cost of revenues increased 248% from $2.0 million for the year ended December 31, 2003 to $7.0 million for the year ended December 31, 2004. The increase primarily resulted from increased royalty payments to developers and licensors resulting from our increased revenues and an increase in licensors and developers that are receiving royalties in excess of advance payments. In addition, we experienced an increase in license amortization from $1.0 million during 2003 to $1.4 million during 2004 due to the acquisition of additional licenses and an increase in amortization of intangibles resulting from the mid-year timing of the Hexacto acquisition in 2003.

        Gross Profit.    Our gross profit increased 158% from $11.5 million for the year ended December 31, 2003 to $29.6 million for the year ended December 31, 2004. The increase primarily resulted from an increase in our revenues. Our gross profit decreased as a percentage of revenues from 85% for the year ended December 31, 2003 to 81% for the year ended December 31, 2004. This decrease is a result of increased royalty payments associated with the increased sale of licensed properties as a percentage of revenue from 43% of sales for the year ended December 31, 2003 to 54% of sales for the year ended December 31, 2004. In addition, royalty payments to developers and licensors for products that have earned royalties in excess of advance payments have increased over the prior year period as a result of our increased revenues for certain products.

        Research and Development.    Research and development expenses increased 72% from $7.3 million for the year ended December 31, 2003 to $12.6 million for the year ended December 31, 2004. The increase primarily resulted from an increase in the number of applications being developed and deployed from the prior year, increasing full-time headcount in the United States, the opening and operation of offices in Japan and India, and increased spending on platform technologies, mobile phones and wireless service plans to support our development and deployment efforts. External development expenses represented 19% of total research and development expenses for the year ended December 31, 2004 compared to 35% for the year ended December 31, 2003. The decrease in external development expenses as a percentage of total research and development expenses is primarily due to utilization of JAMDAT Canada's internal studio during the full twelve months of 2004 compared to only six months for the year ended December 31, 2003, following our acquisition of Hexacto in July 2003. As a percentage of revenues, research and development expenses declined from 54% for the year ended December 31, 2003 to 34% for the year ended December 31, 2004 due to the overall growth of our revenues, which resulted in economies of scale in our research and development expenses.

        Selling and Marketing.    Selling and marketing expenses increased 70% from $3.2 million for the year ended December 31, 2003 to $5.5 million for the year ended December 31, 2004. The increase

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primarily resulted from higher spending on targeted online advertising, increased expense in the United Kingdom and the opening and operation of our office in Japan. Factors contributing to higher operating costs in the United Kingdom include increases in travel and entertainment, marketing and headcount associated with being in operation only eight months in 2003 versus twelve months in 2004. As a percentage of revenues, selling and marketing expenses declined from 24% for the year ended December 31, 2003 to 15% for the year ended December 31, 2004 due to the overall growth of our revenues, which resulted in economies of scale in our selling and marketing expenses.

        General and Administrative.    General and administrative expenses increased 84% from $3.9 million for the year ended December 31, 2003 to $7.2 million for the year ended December 31, 2004. The increase in general and administrative expenses was due primarily to increases in facilities and personnel costs, the opening and operation of offices in the UK, Japan and India and increased professional fees resulting from our operations as a publicly traded company. As a percentage of revenues, general and administrative expenses declined from 29% for the year ended December 31, 2003 to 20% for the year ended December 31, 2004 due to the overall growth of our revenues, which resulted in economies of scale in our general and administrative expenses, offset by the additional costs of operating as a publicly traded company.

        Stock-based Compensation.    Stock-based compensation for the year ended December 31, 2003 was $4.0 million compared to $3.0 million for the year ended December 31, 2004. The decrease was primarily a result of reduced stock-based compensation for the year ended December 31, 2004 compared to the year ended December 31, 2003 as the prior period stock-based compensation was primarily a result of the re-measurement of the fair value of previously issued restricted stock awards exercised with notes receivable from stockholders that did not have fixed accounting until the final measurement in April 2003 partially offset by 2004 grants below deemed fair value.

        Acquired In-Process Research and Development or IPRD.    IPRD represents the write-off of acquired in-process research and development related to the July 3, 2003 acquisition of Hexacto.

        Interest and Other Income, Net.    Interest and other income, net for the year ended December 31, 2003 amounted to income of $0.1 million compared to income of $0.4 million for the year ended December 31, 2004. The change was primarily a result of interest income generated from the proceeds of our initial public offering.

Comparison of years ended December 31, 2002 and 2003

        Revenues.    Our revenues increased 746% from $1.6 million in the year ended December 31, 2002 to $13.5 million in the year ended December 31, 2003. The increase primarily resulted from increased sales volume of new and existing applications due to an increase of addressable next generation handsets, as a result of sales of new handsets by our carriers. We increased the number of applications available for sale to 63 during the year ended December 31, 2003 from 21 during the prior year. We also established an office in the United Kingdom and completed the acquisition of Hexacto during the period. We had $0.2 million international revenues in 2002 compared to $2.9 million of international revenues in 2003.

        Cost of Revenues.    Cost of revenues increased 82% from $1.1 million in the year ended December 31, 2002 to $2.0 million in the year ended December 31, 2003. The increase primarily resulted from an increase in license amortization due to the acquisition of additional licenses and an increase in excess royalty payments to certain developers and licensors resulting from increased revenues. In addition, we incurred software amortization expense in 2003 as a result of the acquisition of Hexacto. Cost of revenues, as a percentage of revenues, decreased from 69% in 2002 to 15% in 2003 due to the overall growth of our revenue, which resulted in amortization of prepaid licenses being less significant as a percentage of revenue in 2003.

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        Gross Profit.    Our gross profit increased 2,218% from $0.5 million in the year ended December 31, 2002 to $11.5 million in the year ended December 31, 2003. Our gross profit as a percentage of revenues increased from 31% for the year ended December 31, 2002 to 85% for the year ended December 31, 2003. The increase in our gross profit (and in our gross profit as a percentage of revenues) resulted from the substantial increase in our revenues over the prior period. Amortization costs relating to existing prepaid licenses represented a significant percentage of revenues in the prior period because such amortization was based on contractual terms and was prior to significant revenues being generated.

        Research and Development.    Research and development expenses increased 84% from $4.0 million in the year ended December 31, 2002 to $7.3 million in the year ended December 31, 2003. The increase primarily resulted from an increase in the number of applications being developed and deployed from the prior year, a significant increase in personnel both in the United States and abroad, including 38 personnel associated with the acquisition of Hexacto and increased spending on platform technologies, mobile phones and wireless service plans to support application development and deployment. External development represented 35% of total research and development expenses during 2003 as compared to 34% in 2002.

        Selling and Marketing.    Selling and marketing expenses increased 217% from $1.0 million for the year ended December 31, 2002 to $3.2 million for the year ended December 31, 2003. The increase primarily resulted from our effort to market directly to consumers through different media, including in theater and print advertising, costs associated with marketing efforts in the European markets and increased personnel and marketing costs resulting from the acquisition of Hexacto as well as costs associated with increased marketing at major trade events such as the Electronic Entertainment Expo, or E3. As a percentage of revenues, selling and marketing expenses declined from 64% in 2002 to 24% in 2003 due to the overall growth of our revenues, which resulted in economies of scale in our selling and marketing expenses.

        General and Administrative.    General and administrative expenses increased 107% from $1.9 million in the year ended December 31, 2002 to $3.9 million in the year ended December 31, 2003. The increase was due primarily to increases in facilities and personnel costs, including an increase in personnel and facilities costs as a result of the acquisition of Hexacto and the operations of JAMDAT Mobile (UK), and increased professional fees. As a percentage of revenues, general and administrative expenses declined from 118% in 2002 to 29% in 2003 due to the overall growth of our revenues which resulted in economies of scale in our general and administrative expenses.

        Stock-based Compensation.    Stock-based compensation for the year ended December 31, 2003 was $4.0 million compared to $90,000 for the year ended December 31, 2002. The increase in 2003 was primarily a result of the impact of the re-measurement of the fair value of previously issued restricted stock awards purchased in part with notes receivable from stockholders that did not have fixed accounting until the final measurement in April 2003. In addition, a smaller portion of the stock-based compensation was related to the amortization of deferred stock-based compensation for new stock grants made in 2003 at exercise prices below the deemed fair value for financial accounting purposes.

        Acquired In-Process Research and Development (IPRD).    IPRD represents the write-off of acquired in-process research and development related to the acquisition of Hexacto.

        Interest and Other Income, Net.    Interest and other income, net for the year ended December 31, 2002 amounted to $52,000 compared to $77,000 for the year ended December 31, 2003. The increase was primarily a result of the increase in interest income earned on the cash and cash equivalent balances in 2003, partially offset by increased interest expense from our notes payable obligations.

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Liquidity and Capital Resources

        Prior to 2004, we had incurred recurring losses and negative annual cash flows from operations and we have an accumulated deficit of $18.4 million as of December 31, 2004. Our primary sources of liquidity have been private placements of preferred shares to investors, credit facilities and the proceeds from our initial public offering. In the future, we anticipate that our primary sources of liquidity will come from cash generated from operating activities. Our cash, cash equivalents and short-term investments were $11.1 million as of December 31, 2003 and $64.9 million as of December 31, 2004.

        Our net cash used in operating activities for the years ended December 31, 2002, 2003 and 2004 was $6.6 million, $3.7 million and $6.4 million, respectively. Net cash used in operating activities for the years ended December 31, 2002 and 2003 was primarily the result of our net losses of $6.4 million and $7.1 million, respectively, offset by non-cash items such as depreciation and amortization, stock-based compensation and changes in accounts receivable, accounts payable, acquisition of brand licenses and other operating assets and liabilities. Net cash used in operating activities for the years ended December 31, 2004 was primarily the result of significant increases in accounts receivable and other assets, offset by our net income of $1.8 million and non-cash items such as depreciation and amortization and stock-based compensation. Accounts receivable from carriers has increased with our revenue growth. Our days sales in outstanding receivables increased from 83 days at December 31, 2003 to 103 days at December 31, 2004 due primarily to a combination of the impact of receivables from our European operations which generally require longer payment terms and a scheduled December payment from a major U.S. carrier that was not received until January 2005. Our accounts receivable balance increased by $3.3 million to $4.7 million for the year ended December 31, 2003 and $8.0 million to $12.9 million for the year ended December 31, 2004. The growth in receivables is anticipated to continue if our revenues continue to increase and this will continue to have a significant impact on our cash flows from operations. For the years ended December 31, 2003 and 2004, we spent $1.0 million and $4.6 million, respectively, on the acquisition of third party licenses, which is included in prepaid royalties in cash flows from operations. In the future, we may be required to spend increasing amounts of money to acquire desirable third party licenses depending on the rights that we acquire and the value that the license holders place on those rights. If we acquire new third party licenses, we will likely spend significant amounts to develop and market products for the acquired licenses.

        Our net cash provided by investing activities was $0.5 million for the year ended December 31, 2002, and net cash used in investing activities was $3.8 million and $35.0 million for the years ended December 31, 2003 and 2004, respectively. Net cash used in investing activities for the year ended December 31, 2004 was comprised of $1.8 million in acquisitions of fixed assets and net investment of $33.5 million of initial public offering proceeds used to purchase short term investments, and a $0.5 million equity investment in a Chinese wireless entertainment distributor, offset by a release of restricted cash in the amount of $0.8 million. Net cash used in investing activities for the year ended December 31, 2003 was comprised of a $2.6 million business acquisition, $0.5 million in acquisitions of fixed assets and the restriction of $0.8 million in cash. Our acquisitions of fixed assets were primarily purchases of personal computers, servers, software and fixtures. We expect to continue to invest in our facilities and technology to support our operations and remain competitive. Also, in January 2005, we acquired all of the limited liability company membership interests in Downtown Wireless for $5.6 million in cash and 34,635 shares of our common stock, which is equal to approximately $0.7 million based on the closing price of our common stock on the Nasdaq National Market for the three trading days prior to the closing of the acquisition. It is likely that we will continue to use cash to fund our current operations, including or international operations, or possibly make additional acquisitions or investments.

        Our net cash provided by financing activities was $7.9 million, $10.6 million and $61.7 million, for the years ended December 31, 2002, 2003, and 2004, respectively. Net cash provided by financing

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activities for the year ended December 31, 2004 was comprised of net payments of bank facilities and notes payable of $2.4 million, offset by proceeds from the issuance of common stock of $64.1 million, including $63.1 million of net proceeds from our initial public offering. Net cash provided by financing activities for the year ended December 31, 2003 consisted of net payments of bank facilities of $0.4 million, offset by proceeds from the issuance of convertible preferred stock of $11.0 million.

        We believe that our current cash and cash equivalents, and cash flow from operations, will be sufficient to meet our current anticipated cash needs, including for working capital purposes, capital expenditures and various contractual obligations, for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or to obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in incurring debt service obligations and could result in operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although there are no present understandings, commitments or agreements with respect to the acquisition of any other businesses, applications or technologies, we may, from time to time, evaluate acquisitions of other businesses, applications or technologies.

Indebtedness

        As of December 31, 2004, we had $66,000 of indebtedness, and we did not have any material outstanding debt securities, material contingent liabilities or material mortgages or liens.

        We are party to a financing arrangement with Silicon Valley Bank that provides for a $400,000 term loan for the acquisition of property and equipment. On August 10, 2001, we borrowed $400,000, requiring 36 equal principal and interest payments, which commenced on September 1, 2001. Borrowings are collateralized by the Company's assets and bear interest at the greater of the bank's prime rate plus 1%, or 8%, per annum. In August 2004, we paid all principal, interest, and other associated fees and have no further financial or non-financial obligations under the loan.

        As of December 31, 2004, JAMDAT Canada had an operating line of credit with the Bank of Montreal bearing interest at the bank's prime lending rate plus 1.75%. Maximum borrowing in 2003 of $500,000 Canadian Dollars, or CAD, was reduced to $200,000 CAD in 2004, and is based on receivable levels of JAMDAT Canada and is collateralized by all the present and future accounts receivable, work in progress and inventory of JAMDAT Canada, as well as certain other assets of JAMDAT Canada. At December 31, 2003 and 2004, JAMDAT Canada had available borrowings of up to $59,000 ($77,000 CAD) and $166,000 ($200,000 CAD), respectively, and $326,000 ($423,000 CAD) and $0 outstanding, respectively, under this credit facility. The credit facility requires JAMDAT Canada to maintain certain financial and non-financial covenants, the most restrictive of which is maintaining minimum working capital and debt to net tangible asset ratios. JAMDAT Canada was in compliance with these covenants at December 31, 2003 and 2004. JAMDAT Mobile Inc. guarantees JAMDAT Canada's obligations to the Bank of Montreal.

        JAMDAT Canada has a fixed asset loan with the Bank of Montreal bearing interest at the bank's prime lending rate plus 3%. The loan is collateralized by certain assets of JAMDAT Canada and is payable through February 2006. JAMDAT Mobile Inc. guarantees JAMDAT Canada's obligations to the Bank of Montreal under the loan. The loan agreement requires JAMDAT Canada to maintain certain financial and non-financial covenants, the most restrictive of which is maintaining minimum working capital and debt to net tangible asset ratios. JAMDAT Canada is in compliance with these covenants at December 31, 2003 and 2004. As of December 31, 2003 and 2004, the outstanding principal balance of the loan was approximately $28,000 and $16,000, respectively.

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        We entered into a promissory note payable agreement as purchase consideration related to the acquisition of Hexacto. The non-interest bearing principal balance on the note was $819,000, and it had a discounted carrying value of $793,000 at December 31, 2003. In addition to this amount, the note also includes up to $1,000,000 of contingent consideration related to the acquisition based on the achievement of certain revenue milestones in 2003 for Hexacto as set forth in the purchase agreement. In June 2004, we paid the entire balance of the notes payable including accrued interest amounting to $1,837,000 to the selling shareholders of Hexacto.

        In connection with the acquisition of Hexacto, we also assumed a note payable which was originally an obligation of the seller. The uncollateralized obligation is repayable in monthly principal payments of $6,588 through August 2005. As of December 31, 2003 and December 31, 2004, the outstanding principal balance of the note was approximately $83,000 and $50,000, respectively.

        As of December 31, 2004, the remaining principal payments related to our notes payable obligations are as follows (in thousands):

Proceeds of Initial Public Offering

        We completed our initial public offering on October 4, 2004. In the offering, we sold an aggregate of 4,390,781 shares of our common stock, including shares subject to the over-allotment option, at a price to the public of $16.00 per share. The aggregate gross proceeds to us from the public offering were approximately $70.3 million. We incurred expenses of approximately $7.2 million, of which approximately $4.9 million represented underwriting discounts and commissions and approximately $2.3 million represented expenses related to the offering. Net proceeds to us from the offering were $63.1 million. We received the net proceeds on October 4, 2004, $5.6 million of which was used to finance the Downtown Wireless acquisition and additional amounts of which were used to extend certain license agreements. The remaining proceeds are, as of March 18, 2005, invested in cash and short term investments.

        We intend to use the net proceeds from our initial public offering primarily for working capital and general corporate purposes. The amounts that we actually expend for working capital and other general corporate purposes will vary significantly depending on a number of factors, including future revenue growth, if any, and the amount of cash that we generate from operations. As a result, we will retain broad discretion over the allocation of the net proceeds of our initial public offering. We also may use the net proceeds for the acquisition of businesses, applications and technologies. Other than as disclosed in this report, we have no current agreements or commitments for the acquisition of any businesses, products or technologies. Pending these uses, we will invest the remaining net proceeds of our initial public offering in short-term, interest bearing, investment grade securities.

Contractual Obligations

        Our major outstanding contractual obligations relate to our non-cancelable operating leases, notes payable and guaranteed royalties. We have no long-term obligations of more than five years. We have

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summarized in the table below our fixed contractual cash obligations as of December 31, 2004 (in thousands).

Off-Balance Sheet Arrangements

        We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts, or any other off-balance sheet arrangements.

Recent Accounting Pronouncements

        In June 2004, the Financial Accounting Standards Board, or the FASB, issued Emerging Issues Task Force Issue No. 02-14, "Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock." EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004. We adopted EITF 02-14 during the fourth quarter of 2004. Adoption of EITF 02-14 did not have a material impact on our consolidated financial position, results of operations or cash flows.

        In March 2004, the EITF reached consensus on EITF Issue No. 03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" which provides guidance on determining when an investment is considered impaired, whether that investment is other than temporary and the measurement of an impairment loss. EITF 03-1 is applicable to marketable debt and equity securities within the scope of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method of accounting. In September 2004, the FASB delayed the effective date for the measurement and recognition criteria contained in EITF 03-1. The delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The adoption of EITF 03-1 is not expected to have a material impact on our results of operations and financial position.

        In December 2004, the FASB revised SFAS No. 123 (SFAS 123R), "Share-Based Payment," that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statement of income. The statement requires companies to assess the most appropriate model to calculate the value of the options. We currently use the Black-Scholes option pricing model to

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value options and are currently assessing which model we may use in the future under the statement and may deem an alternative model to be the most appropriate. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option pricing model. In addition, there are a number of other requirements under the new standard that will result in differing accounting treatment than currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options. In addition to the appropriate fair value model to be used for valuing share-based payments, we will also be required to determine the transition method to be used at date of adoption. The allowed transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The effective date of the new standard for our consolidated financial statements is our third fiscal quarter in 2005.

        Upon its adoption, SFAS 123R will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants rather than disclose the impact on our consolidated net income within our footnotes as is our current practice. The amounts disclosed within our footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of SFAS 123R. Compensation expense calculated under SFAS 123R may differ from amounts currently disclosed within our footnotes based on changes in the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits and changes in interest rates or other factors. In addition, upon adoption of SFAS 123R, we may choose to use a different valuation model to value the compensation expense associated with employee stock options.

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Factors That May Affect Future Results of Operations

        You should consider carefully the following risks described below, together with the other information contained in this report and in our other public filings in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline.

Risks Related to Our Business

We have a history of losses, have only recently become profitable and may not sustain or increase profitability in the future.

        For the year ended December 31, 2003, we had a net loss of approximately $7.1 million and an accumulated deficit of approximately $20.1 million. In 2004, we attained profitability but continue to carry an accumulated deficit of $18.4 million. We cannot be certain that our recent profitability will be sustainable, and if we fail to sustain our profitability, the market price of our common stock will likely decline.

We have a limited operating history, which may make it difficult for you to evaluate our business.

        We were incorporated in March 2000 and began offering entertainment applications through wireless carriers to their subscribers in October 2000. Accordingly, we have a limited history of generating revenues, and the future revenues and income potential of our business is uncertain. As a result of our short operating history, we have limited financial data that you can use to evaluate our business. Any evaluation of our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties often encountered by companies in our stage of development. Some of these risks and uncertainties relate to our ability to do the following:

•

maintain our current, and develop new, wireless carrier relationships upon which our business currently depends;



•

respond effectively to competition; and



•

attract and retain qualified management and employees.

        If we are unable to address these risks, our operating results may not meet the expectations of investors, which would likely cause the price of our common stock to decline.

We currently rely on wireless carriers, in particular, Verizon Wireless, Sprint PCS and Cingular/AT&T Wireless, to generate our revenues. The loss of any of these relationships, or a material change in any of them, could materially harm our business.

        For the year ended December 31, 2004, we received approximately 38% of our revenues from subscribers of Verizon Wireless and 15% of our revenues from subscribers of Sprint PCS with average outstanding accounts receivable balances of $3.7 million and $0.4 million, respectively. For the year ended December 31, 2003, we received approximately 50% of our revenues from subscribers of Verizon Wireless and approximately 18% of our revenues from subscribers of Sprint PCS with average outstanding accounts receivable balances of $1.6 million and $0.2 million, respectively. In October 2004, the FCC approved the Cingular/AT&T Wireless merger. If the merger had been completed prior to 2004, revenue from the combined company would have represented 13% of our revenues for the year ended December 31, 2004. We expect that we will continue to generate a significant portion of our revenues through a limited number of carriers for the foreseeable future, although these carriers may vary from period to period. A significant portion of our outstanding accounts receivable are with Verizon Wireless, Sprint PCS and Cingular/AT&T Wireless, which results in a concentration of our credit risk. If any of Verizon Wireless, Sprint PCS or Cingular/AT&T Wireless is unable to fulfill its

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payment obligations to us under our carrier agreements with them, our revenues could decline significantly.

        Our carrier agreements are not exclusive and generally have a limited term of one or two years with evergreen, or automatic renewal, provisions upon expiration of the initial term. These agreements set out the terms of our distribution relationships with the carriers but generally do not obligate the carriers to market or distribute any of our applications. In addition, the carriers can often terminate these agreements early, and in some instances, at any time, without cause.

        Many other factors outside our control could impair our ability to generate revenue through our wireless carriers generally, including the following:

•

a carrier's preference for the applications of our competitors over our applications;



•

a carrier's decision to offer its own competing entertainment applications;



•

a carrier's decision to discontinue the sale of our applications, or altogether discontinue sales of applications such as ours;



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a carrier's decision to offer entertainment applications to its subscribers for free;



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a carrier's network encountering technical problems that disrupt the delivery of or billing for our applications;



•

a carrier's decision to restrict or alter subscription or other terms for purchasing our applications;



•

a carrier's decision to increase the fees it charges to market and distribute our applications, thereby increasing its own revenues and decreasing our share of revenues; or



•

consolidation among wireless carriers.

        If any of our wireless carriers decides not to market or distribute our applications or decides to terminate or not renew its agreement with us or if there is consolidation among carriers generally, we may be unable to replace the affected agreements with acceptable alternatives, causing us to lose access to subscribers, which could materially harm our business, operating results and financial condition.

        Wireless carriers generally control the price charged for our applications either by approving the price of our applications or by establishing the price charged to their wireless subscribers. Some of our carrier agreements may 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, or the price established by the carriers for our applications, could adversely affect market acceptance of our applications.

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

        The development, distribution and sale of wireless entertainment applications is a highly competitive business. We compete primarily on the basis of quality of applications, brand, carrier and customer service and distribution breadth. We also compete for experienced and talented employees.

        Currently, we consider our primary global competitors to be Disney, Electronic Arts, Gameloft, Infospace, Mforma, Namco, Sony Pictures, Sorrent, THQ Wireless, VeriSign and Yahoo!. We also consider Blue Lava to be a competitor in the U.S. market. In the future, likely competitors may include other major media companies, traditional video game publishers, content aggregators, wireless software providers and other pure-play wireless entertainment publishers. Wireless carriers may also decide to develop and distribute their own wireless entertainment applications. If carriers enter the wireless entertainment applications market, they might refuse to distribute some or all of our applications or may deny us access to all or part of their networks.

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        Some of our competitors' advantages over us include the following:

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substantially greater revenues and financial resources;



•

stronger brand names and consumer recognition;



•

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



•

pre-existing relationships with brand holders;



•

more resources to make acquisitions;



•

lower labor and development costs; and



•

broader geographic presence.

        We face different market dynamics and competition outside the United States. In some international markets, our competitors have greater brand recognition and broader distribution than we have. We may not be as successful as our competitors in generating revenues in international markets due to our inability to provide applications that are attractive to the local market, the lack of recognition of our brand or other factors. Developing user interfaces that are compatible with other languages or cultures could be expensive. As a result, our international expansion efforts may be more costly and less profitable than we expect.

        If we are not as successful as our competitors in our target markets, our sales could decline, our margins could be negatively impacted and we could lose market share, any of which could materially harm our business.

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

        We depend on the continued contributions of our senior management and other key personnel and, in particular, Mitch Lasky, our chief executive officer. The loss of the services of any of our executive officers or other key employees could harm our business. All of our U.S. executive officers and key employees are at-will employees. However, some of our key employees in our international offices have employment agreements for a term. None of our U.S. employees is bound by a contractual non-competition agreement, which could make us vulnerable to recruitment efforts by our competitors. Internationally, we may experience difficulty in enforcing our agreements with our employees and contractors generally. We only maintain a key person life insurance policy on Mr. Lasky. Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance, marketing and creative personnel. Qualified individuals are in high demand, and we may incur significant costs to attract them. If we are unable to attract or retain the personnel we need to succeed, our business may suffer.

        Competition for senior management personnel in our industry both in the United States and abroad is intense and we may not be able to retain our senior management personnel or attract and retain new personnel in the future. In addition, volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management personnel and other key employees have become, or will soon become, substantially vested in their initial restricted stock, or stock option, grants. Employees may be more likely to leave us if their owned shares or the shares underlying their options have significantly appreciated in value relative to the original purchase price of the shares or the option exercise price.

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If we fail to develop and introduce new applications that achieve market acceptance, our sales could suffer.

        Our business depends on providing applications that wireless subscribers want to buy. We must continue to invest significant resources in research and development to enhance our offering of wireless applications and introduce new applications. Our operating results would suffer if our applications are not responsive to the preferences of our customers or are not effectively brought to market.

        The planned timing or introduction of new applications is subject to risks and uncertainties. Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new applications, which could result in a loss of, or delay in, revenues or damage to our reputation and brand. If any of our applications is introduced with defects, errors or failures, we could experience decreased sales, loss of customers and damage to our reputation and brand. In addition, new applications may not achieve sufficient market acceptance to offset the costs of development. Our success depends, in part, on unpredictable and volatile factors beyond our control, including customer preferences, competing applications and the availability of other entertainment activities. A shift in mobile phone usage or the entertainment preferences of our customers could cause a decline in our applications' popularity that could materially reduce our revenues and harm our business.

        We continuously develop and introduce new applications for use on next-generation mobile phones. We must make product development decisions and commit significant resources well in advance of the anticipated introduction of a new mobile phone model. New mobile phone models for which we are developing applications may be delayed, may not be commercially successful, may have a shorter life cycle than anticipated or may not be adequately promoted by wireless carriers or the mobile phone manufacturer. If the mobile phone models for which we are developing applications are not released when expected or do not achieve broad market penetration, our potential revenues will be limited and our business will suffer.

If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our applications, or if we incur excessive expenses promoting and maintaining our brand, our business could be harmed.

        We believe that establishing and maintaining our brand is critical to retaining and expanding our customer base. Promotion of our brand will depend on our success in providing high-quality wireless entertainment applications. However, such success will depend, in part, on the services and efforts of third parties, over which we have little or no control. For instance, if our wireless carriers fail to provide quality service, our customers' ability to access our applications may be interrupted, which may adversely affect our brand. If our customers and carriers do not perceive our existing products and services as high quality, or if we introduce new applications that are not favorably received by our customers and carriers, then we may be unsuccessful in building brand recognition and brand loyalty in the marketplace. In addition, globalizing and extending our brand may be costly. It will also involve extensive management time to execute successfully. Further, the markets in which we operate are highly competitive and many of our competitors, such as Disney, Electronic Arts and Sony Pictures, already have substantially more brand recognition than we do. If we fail to successfully increase brand awareness and consumer recognition of our applications, our potential revenues could be limited, our costs could increase and our business could suffer.

We depend on our JAMDAT Bowling applications for a significant portion of our revenues.

        In each of the years ended December 31, 2003 and 2004, we generated approximately 25% and 21%, respectively, of our revenues from our JAMDAT Bowling applications. We expect to continue to derive a substantial portion of our revenues from our JAMDAT Bowling applications. If our JAMDAT

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Bowling applications are not successful in the future or we are unable to develop new applications that are as successful, our future revenues could be limited and our business may suffer.

Failure to renew our existing licenses or to obtain additional licenses could harm our business.

        Many of our applications are based on or incorporate intellectual properties that we license from third parties. We have both exclusive and non-exclusive licenses to use these properties for terms that range from one to five years. We may be unable to renew these licenses on terms favorable to us, or at all, and we may be unable to secure alternatives in a timely manner. We expect that licenses we obtain in the future will impose development, distribution and marketing obligations on us. If we breach our obligations, our licensors may have the right to terminate the license or change an exclusive license to a non-exclusive license.

        Our licenses with the major North American professional sports leagues are non-exclusive. We face significant competition from third parties that may develop applications based on these professional sports leagues which compete with our applications.

        Competition for licenses may also increase the advances, guarantees and royalties that we must pay to our licensors, which could significantly increase our costs. Failure to maintain our existing licenses or obtain additional licenses with significant commercial value could impair our ability to introduce new applications or continue our current applications, which could materially harm our business. In the year ended December 31, 2004, our revenues derived from applications branded with the intellectual properties of our three largest licensors, PopCap Games, Activision and New Line Productions, together accounted for approximately 34% of our revenues.

If our independent, third party developers cease development of new applications for us and we are unable to find comparable replacements, our competitive position may be adversely impacted.

        We rely on independent third party developers to develop many of our entertainment applications, which subjects us to the following risks:

•

key developers who worked for us in the past may choose to work for or be acquired by our competitors;



•

developers currently under contract may try to renegotiate our agreements with them on terms less favorable to us; and



•

our developers may be unable or unwilling to allocate sufficient resources to complete our applications on a timely or satisfactory basis or at all.

        If our developers terminate their relationships with us or negotiate agreements with terms less favorable to us, we would have to increase our internal development staff, which would be a time-consuming and potentially costly process. If we are unable to increase our internal development staff in a cost-effective manner or if our current internal development staff fails to create successful applications, our earnings could be materially diminished.

        In addition, although we require our third-party developers to sign agreements acknowledging that all inventions, trade secrets, works of authorship, development and other processes generated by them 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 use our intellectual properties without our consent.

If we fail to deliver our applications to correspond with the commercial introduction of new mobile phone models, our sales may suffer.

        Our business is tied, in part, to the commercial introduction of new mobile phone models with enhanced features, including color screens and greater processing power. Many new mobile phone models are released in the final quarter of the year to coincide with the holiday shopping season. We

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cannot control the timing of these mobile phone launches. Some of our customers download our applications soon after they purchase their new mobile phones in order to experience the new features of those phones. If we miss the opportunity to sell applications when our customers upgrade to a new mobile phone due to application launch delays, our sales may suffer. In addition, if we miss the key holiday selling period, either because the introduction of a new mobile phone model is delayed or we do not successfully deploy our applications in time for the holiday selling season, our sales may suffer.

System or network failures could reduce our sales, increase costs or result in a loss of customers.

        We rely on our carriers' networks to deliver our applications to our customers and on their billing systems to track and account for the downloading of our applications. In certain circumstances, we also rely on our servers to deliver applications on demand to our customers through their wireless carriers' networks. Any failure of, or technical problem with, the carriers' or our billing and delivery systems, information systems or communications networks could result in the inability of our customers to download our applications or prevent the completion of billing for an application. If any of these systems fails, there is an interruption in the supply of power, an earthquake, fire, flood or other natural disaster, or an act of war or terrorism, our customers may be unable to access our applications. Any failure of, or technical problem with, the carriers' or our systems could cause us to lose customers or revenues or incur substantial repair costs and distract management from operating our business. From time to time, we have experienced limited failures with our carriers' billing and delivery systems and communication networks. If these billing and delivery failures or technical problems were to continue for a prolonged period of time, they could reduce our sales, increase costs or result in a loss of customers.

Growth may place significant demands on our management and our infrastructure.

        We have experienced, and may continue to experience, growth in our business through acquisitions and internal growth. This growth has placed, and may continue to place, significant demands on our management and our operational and financial infrastructure. In particular, continued growth could strain our ability to:

•

recruit, train and retain highly skilled personnel;



•

maintain our quality standards;



•

develop and improve our operational, financial and management controls;



•

enhance our reporting systems and procedures; and



•

maintain customer satisfaction.

        The improvements required to manage our growth will require significant expenditures and allocation of valuable management resources. If we fail to maintain the efficiency of our organization as it grows, our profit margins will decline and our earnings could be materially diminished.

The acquisition of other companies, businesses or technologies could result in operating difficulties, dilution and other harmful consequences.

        We may selectively pursue strategic acquisitions, any of which could be material to our business, operating results and financial condition. Future acquisitions could divert management's time and focus from operating our business. In addition, integrating an acquired company, business or technology is risky and may result in unforeseen operating difficulties and expenditures associated with integrating employees from the acquired company into our organization and integrating each company's accounting, management information, human resources and other administrative systems to permit effective management.

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        Some or all of these risks may be realized as a result of our acquisition of Downtown Wireless in January 2005. If the anticipated benefits of this acquisition do not materialize, we experience difficulties integrating Downtown Wireless or other unanticipated problems arise, our business may be harmed.

        Foreign acquisitions, such as our acquisition in July 2003 of Hexacto, involve risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. In addition, a significant portion of the purchase price of Hexacto was allocated to acquired goodwill, which must be assessed for impairment at least annually. In the future, if the Hexacto business does not yield expected revenues, we may be required to take charges to our earnings based on this impairment assessment process, which could harm our financial position.

        The anticipated benefits of our past and future acquisitions may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, including our common stock, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all.

Expansion into international markets is important to our long-term strategy, and as we expand internationally, we face added business, political, regulatory, operational, financial and economic risks, any of which could increase our costs and hinder our growth.

        An important element of our business strategy is the expansion of our international sales by targeting markets, such as Europe and Asia, where we believe acceptance of our applications is likely. We expect international sales to be an important component of our revenues. International sales represented approximately 20% of our revenues for the year ended December 31, 2004 and approximately 22% of our revenues for the year ended December 31, 2003, of which sales in Canada represented approximately 4% of our revenues for the year ended December 31, 2004 and approximately 10% of our revenues for the year ended December 31, 2003. Risks affecting our international operations include:

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challenges caused by distance, language and cultural differences;



•

multiple, conflicting and changing laws and regulations, including complications due to unexpected changes in regulatory requirements, foreign laws, tax schemes, international import and export legislation, trading and investment policies, foreign currency fluctuations, exchange controls and tariff and other trade barriers;



•

difficulties in enforcing intellectual property rights in countries other than the United States;



•

the burdens of complying with a wide variety of foreign laws and regulations;



•

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



•

foreign tax consequences;



•

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



•

price controls;



•

imposition of public sector controls;



•

political, economic and social instability;



•

higher costs associated with doing business internationally;



•

restrictions on the export or import of technology;



•

difficulties in staffing and managing international operations;

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•

trade and tariff restrictions;



•

variations in tariffs, quotas, taxes and other market barriers; and



•

greater fluctuations in sales to customers in developing countries, including longer payment cycles and greater difficulty collecting accounts receivable.

        Since the second quarter of 2003, we have opened offices in Canada, England, Japan and India, and may, in the future, open other international offices. In addition, expansion into India and similar developing countries subjects us to the effects of regional instability, civil unrest and hostilities, and could adversely affect us by disrupting communications and making travel more difficult.

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

If we do not adequately protect our intellectual property rights, our competitive position may be adversely affected.

        We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology and applications. Monitoring unauthorized use of our applications 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 applications, particularly in foreign countries, where the laws may not protect our intellectual property rights as fully as in the United States. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our management and resources.

        In addition, we have two patent applications pending in the United States, one of which is also pending in Canada, Japan, India and Europe, but we cannot be certain that the prosecution of these applications will result in any issued patents.

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

        Third parties may sue us for intellectual property infringement or initiate proceedings to invalidate our intellectual property, either of which, if successful, could disrupt the conduct of our business, cause us to pay significant damage awards or require us to pay licensing fees. In the event of a successful claim against us, we may be enjoined from using our intellectual property, we may incur significant licensing fees and we may be forced to develop alternative technologies. Our failure or inability to develop non-infringing technology or applications or to license the infringed or similar technology or applications on a timely basis could force us to withdraw products from the market or prevent us from introducing new products. In addition, even if we are able to license the infringed or similar technology or applications, license fees could be substantial and the terms of such licenses could be burdensome, which may adversely affect our operating results. We may also incur substantial expenses in defending against third-party infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities and may materially disrupt the conduct of our business.

We face risks associated with currency exchange rate fluctuations.

        Although we currently transact business primarily in U.S. dollars, a larger portion of our revenues may be denominated in foreign currencies as we expand our international operations. 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

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result in foreign currency translation gains and losses. Historically, we have not engaged in exchange rate hedging activities. Although we may implement hedging strategies to mitigate this risk, these strategies may not eliminate our exposure to foreign exchange rate fluctuations and involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategy and potential accounting implications.

Changes to financial accounting standards and new exchange rules could make it more expensive to issue stock options to employees, which would increase compensation costs and may cause us to change our business practices.

        We prepare our financial statements to conform with generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the Public Company Accounting Oversight Board, the SEC and various other bodies. A change in those policies could have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced.

        For example, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with our company. Several regulatory agencies and entities are considering regulatory changes that could make it more difficult or expensive for us to grant stock options to employees. For example, the Financial Accounting Standards Board has recently released FAS 123R that will require us to record a charge to earnings for employee stock option grants. In addition, regulations implemented by the Nasdaq National Market generally require stockholder approval for all stock option plans, which could make it more difficult or expensive for us to grant stock options to employees. We may, as a result of these changes, incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business, operating results and financial condition.

Risks Relating to Our Industry

Wireless communications technology is changing rapidly, and we may not be successful in working with these new technologies.

        Wireless network and mobile phone technologies are undergoing rapid innovation. New mobile phones with more advanced processors and supporting advanced programming languages continue to be introduced in the market. We have no control over the demand for, or success of, these products. However, if we fail to anticipate and adapt to these and other technological changes, our market share and our operating results may suffer. Our future success will depend on our ability to adapt to rapidly changing technologies, develop applications to accommodate evolving industry standards and improve the performance and reliability of our applications. In addition, the widespread adoption of networking or telecommunications technologies or other technological changes could require substantial expenditures to modify or adapt our entertainment applications.

        The markets for our applications are also characterized by frequent new mobile phone model introductions and shortening mobile phone model life cycles. The development of new, technologically advanced applications to match the advancements in mobile phone technology is a complex process requiring significant research and development expense, as well as the accurate anticipation of technological and market trends. As the life cycle of mobile phone models and other wireless devices shortens, we will be required to develop and adapt our existing applications and create new applications more quickly. These efforts may not be successful. Any failure or delay in anticipating technological advances or developing and marketing new applications that respond to any significant change in

43

technology or customer demand could limit the available channels for our applications and limit or reduce our sales.

If wireless subscribers do not continue to use their mobile phones to access entertainment applications, our business may be adversely affected.

        We operate in a developing industry. Our success depends on growth in the number of wireless subscribers who use their mobile phones to access data services and, in particular, entertainment applications. If this market does not continue to grow or we are unable to acquire new customers, our business growth and future revenues could be limited.

The popularity of wireless applications is dependent on the availability and market penetration of mobile handsets enabled with advanced technologies such as BREW and Java, the availability and adoption of which is beyond our control.

        Our customers must have a mobile phone with multimedia capabilities enabled by technologies such as BREW and Java to download and use our applications. Although there is no publicly available, reliable industry information regarding the number of mobile phones with these multimedia technologies, we believe that, currently, only a limited number of wireless subscribers have these mobile phones. Handsets enabled with advanced technologies, such as BREW and Java, may be significantly more expensive than handsets without such technologies. As such, we cannot be certain whether existing wireless subscribers will be willing to purchase mobile phones with these technologies. If one or more of these technologies, such as BREW or Java, falls out of favor with mobile phone manufacturers and wireless carriers or fails to gain widespread market acceptance among wireless subscribers, the sales of our applications could suffer.

Our business depends on the growth and maintenance of wireless communications infrastructure.

        Our success will depend on the continued growth and maintenance of wireless communications infrastructure in the United States and around the world. This includes deployment and maintenance of reliable next-generation digital networks with the necessary speed, data capacity and security for providing reliable wireless communications services. Wireless communications infrastructure may be unable to support the demands placed on it if the number of customers continues to increase, or if existing or future customers increase their bandwidth requirements. In addition, viruses, worms and similar break-ins and disruptions from illicit code or unauthorized tampering may harm the performance of wireless communications. If a well-publicized breach of security were to occur, general mobile phone usage could decline, which could reduce the demand for and use of our applications. Wireless communications experience a variety of outages and other delays as a result of infrastructure and equipment failures, and could face outages and delays in the future. These outages and delays could reduce the level of wireless communications usage as well as our ability to distribute our applications successfully.

The complexity and incompatibilities among next-generation mobile phones and wireless technologies may require us to use additional resources for the development of our applications.

        To reach large numbers of wireless subscribers, wireless entertainment publishers like us must support numerous mobile phone models and technologies. However, keeping pace with the rapid innovation of mobile phone technologies together with the continuous introduction of new, and often incompatible, mobile phone models by wireless carriers requires us to make significant investments in research and development, including personnel, technologies and equipment. In the future, we may be required to make substantial, additional investments in our development if the number of different types of mobile phone models continues to proliferate.

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Next-generation mobile phones may significantly reduce or eliminate the wireless carriers' control over delivery of our applications, and force us to further rely on alternative sales channels which, if not successful, could require us to significantly increase our sales and marketing expenses.

        A significant portion of our applications are currently sold through the branded e-commerce services of wireless carriers. We have invested significant resources developing this sales channel. However, a small number of mobile phone models currently available include operating systems that allow consumers to browse the Internet and, in some cases, download applications from sources other than a carrier's branded e-commerce service. These so-called "open operating systems" include Microsoft Smartphone, Symbian, Palm OS and Linux. In addition, the development of other application delivery mechanisms such as premium-SMS will enable consumers to download applications without having to access the carrier's branded e-commerce service. Increased use by consumers of open operating system handsets or premium-SMS delivery systems will enable them to bypass wireless carriers' branded e-commerce services and could reduce the market power of wireless carriers. This could force us to further rely on alternative sales channels where we may not be as successful selling our applications, and could require us to significantly increase our sales and marketing expenses.

Actual or perceived security vulnerabilities in mobile phones could adversely affect our revenues.

        Maintaining the security of mobile phones and wireless networks is critical for our business. There are individuals and groups who develop and deploy viruses, worms and other malicious software programs that may attack wireless networks and mobile phones. Security experts have identified a computer "worm" program, entitled "Cabir," that targets mobile phones running on the Symbian operating system. In March 2005, another worm that uses a combination of Bluetooth and MMS technologies to target mobile phones running on the Symbian operating system, identified as "Commwarrior.A," was discovered by security experts. While neither of these worms has been widely released or presents an immediate risk to our business, we believe future threats could lead some customers to seek to return our applications, reduce or delay future purchases or reduce or delay the use of their mobile phones. Wireless carriers and mobile phone manufacturers may also increase their expenditures on protecting their wireless networks and mobile phone products from attack, which could delay adoption of new mobile phone models. Any of these activities could adversely affect our revenues.

Changes in government regulation of the media and wireless communications industries may adversely affect our business.

        It is possible that a number of laws and regulations may be adopted in the United States and elsewhere which could restrict the media and wireless communications industries, including customer privacy, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through wireless carriers. We anticipate that regulation of our industry will increase and we will be required to devote legal and other resources to addressing such regulation. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the media and wireless communications industries may lessen the growth of wireless communications services and may materially reduce our ability to increase or maintain sales of our applications.

A decline in, or limitation on, the use of mobile phones would negatively impact our business.

        A number of public and private entities have begun to restrict the use of mobile phones on their premises. For example, many places of worship, restaurants, hospitals, medical offices, libraries, museums, concert halls and other private and public businesses restrict the use of mobile phones due to

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privacy concerns, the inconvenience caused by mobile phone users to other patrons and the disruption mobile phones may cause to other electronic equipment at these locations.

        Legislation has also been proposed in the U.S. Congress and by many states and municipalities to restrict or prohibit the use of mobile phones while driving motor vehicles. Some states and municipalities in the United States have already passed laws restricting the use of mobile phones while driving, and similar laws have been enacted in other countries. These laws and other potential laws prohibiting or restricting the use of mobile phones could reduce demand for mobile phones generally and, accordingly, the demand for our applications, which could reduce our ability to increase or maintain sales of our applications.

        A number of studies have examined the health effects of mobile phone use and the results of some of the studies have been interpreted as evidence that mobile phone use causes adverse health effects. The establishment of a link between the use of mobile phone services and health problems, and any media reports suggesting such a link, could reduce demand for mobile phones and, accordingly, the demand for our applications.

Risks Related to Ownership of Our Common Stock

Sales of a substantial number of shares of common stock in the public market may adversely affect the market price for our common stock.

        Immediately following the consummation of our initial public offering on October 4, 2004, we had 19,749,942 shares of common stock outstanding, of which 6,382,500 shares were sold in the offering and are freely tradable without restriction or further registration under the Securities Act, unless purchased by our "affiliates," as such term is defined under the Securities Act, in which case such shares will be subject to the resale limitations but not the holding period requirements of Rule 144 under the Securities Act. In connection with our public offering, we and our executive officers and directors, the selling stockholders and substantially all of our other stockholders, option holders and warrant holders, entered into 180-day lock-up agreements with the underwriters, which expired on March 27, 2005. Holders of 5,592 shares, in the aggregate, and a holder of warrants to purchase 4,000 shares were not subject to a lock-up agreement. The lock-up agreements prohibited each of us from selling or otherwise disposing of our shares of common stock except in limited circumstances. Now that the lock-up agreements have expired, these shares of our common stock will be available for sale into the public market, subject to applicable securities laws, which could reduce the market price for shares of our common stock.

        Under our Second Amended and Restated Investors' Rights Agreement, some of our stockholders have customary demand and piggyback registration rights. In addition, we intend to file a registration statement under the Securities Act to register an aggregate of up to 4,166,666 shares of our common stock reserved for issuance under our 2004 Equity Incentive Plan, or 2004 Stock Plan, which will, when issued in accordance with such plans, be eligible for immediate sale in the public market. The 3,804,837 shares reserved for issuance under our Amended and Restated 2000 Stock Incentive Plan became available for sale under Rule 144 within 90 days of the date of our offering. We recently issued 34,635 shares of our restricted common stock in connection with our acquisition of Downtown Wireless, and may issue our common stock in connection with other acquisitions or investments in the future. The perception of investors that a large number of shares may enter the market when prices rise could depress the market price for our common stock.

Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid or at all.

        Our common stock has only been traded publicly for a short period of time. We cannot predict the extent to which a trading market will develop in the future or how liquid that market might become.

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The trading price of our common stock could be subject to wide fluctuations due to the factors discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results of Operations" section and elsewhere in this report. In addition, the stock market in general, and the Nasdaq National Market and technology companies in particular, have experienced extreme price and volume fluctuations. Current trading prices and valuations may not be sustainable. Investor sentiment towards the market and our industry may adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a company's securities, securities class action litigation has often been instituted against such companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.

If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, our stock price and trading volume could decline.

        The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our common stock, our common stock price would likely decline. If analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.

We do not intend to pay any cash dividends in the foreseeable future.

        We have never declared or paid any cash dividend on our capital stock, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. We intend to reinvest any earnings in the growth of our business. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs and plans for expansion.

We have and will continue to incur increased costs as a public company.

        As a public company, we have incurred increased costs and will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the Nasdaq National Market, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of being a public company, we are required to maintain additional board committees and adopt policies regarding internal controls and disclosure controls and procedures. In addition, we have and will continue to incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, but we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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Concentration of ownership among our existing executive officers, directors and related principal stockholders may prevent new investors from influencing significant corporate decisions and may result in a lower trading price for our common stock than if ownership of our common stock was less concentrated.

        As of March 18, 2005, our executive officers, directors and related principal stockholders beneficially owned, in the aggregate, approximately 52% of our outstanding common stock. As a result, these stockholders, acting together, could have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of control could be disadvantageous to other stockholders with interests different from those of our executive officers, directors and related principal stockholders. For example, our executive officers, directors and related principal stockholders could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders. In addition, this significant concentration of common stock ownership may adversely affect the market price for our common stock because investors often perceive disadvantages in owning stock in companies with a concentration of ownership in a few stockholders.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

        Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

•

Vacancies created by the expansion of the board of directors, or the resignation, death or removal of a director may be filled only by a majority of the remaining directors, even though less than a quorum, or by a sole remaining director, and not by the stockholders.



•

Our stockholders may not act by written consent. As a result, a holder or holders controlling a majority of our capital stock will not be able to take certain actions without holding a stockholders' meeting.



•

Our certificate of incorporation does not provide for cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates. Members of the board of directors may only be removed for cause and upon the affirmative vote of the holders of a majority of our capital stock entitled to vote.



•

Our certificate of incorporation provides for the board of directors to be divided into three classes, each with staggered three-year terms. As a result, only one class of directors will be elected at each annual meeting of stockholders, and each of the two other classes of directors will continue to serve for the remainder of their respective three-year term, limiting the ability of stockholders to reconstitute the board of directors.



•

Our bylaws provide that the holders of a majority of our capital stock entitled to vote constitute a quorum for the conduct of business at a meeting of stockholders. However, the holders of at least two-thirds of our outstanding voting stock must approve any amendments to the protective provisions of our certificate of incorporation and bylaws, which include the requirements that actions by stockholders be taken at duly called meetings and not by written consent, and that our board of directors be divided into three classes with staggered terms.



•

Our bylaws provide that special meetings of the stockholders can be called only by the board of directors, the chairman of the board or the president, and not by any stockholders. Our bylaws also prohibit the conduct of any business other than as specified in the notice of special meeting or as otherwise brought before the meeting by the board of directors. These provisions may

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discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to obtain control of our company.

•

Our board of directors may issue, without stockholder approval, shares of preferred stock with rights, preferences and privileges determined by the board of directors. The ability to authorize and issue preferred stock with voting or other rights or preferences makes it possible for our board of directors to issue preferred stock with super voting, special approval, dividend or other rights or preferences that could impede the success of any attempt to acquire us.



•

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction in which such person became such an interested stockholder. Our board of directors could rely on Delaware law to prevent or delay an acquisition of our company.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

        At December 31, 2003 and 2004, we had $2.4 million and $0.1 million, respectively, of fixed rate debt that was subject to risks related to adverse changes in market rates. We do not believe that a change of one percent in interest rates would have a material impact on our results of operations or financial condition. Our other exposure to risk for changes in interest rates relates primarily to our investments in short-term financial instruments. Investments in both fixed rate and floating rate interest earning instruments carry some interest rate risk. The fair value of fixed rate securities may fall due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. Based on our current cash and cash equivalent balances and short-term investments, a 10% decrease in interest rates would result in more than $100,000 in decreased interest income over the course of a year.

Foreign Currency Risk

        Our international activities are primarily conducted through subsidiaries of our U.S. parent company. We are exposed to foreign currency transaction gains and losses because a significant amount of the net receivables of the U.S. parent due from its subsidiaries and international customers are denominated in currencies other than the U.S. dollar, primarily the British Pound, the Euro, the Canadian dollar and the Japanese Yen. We use the Bank of Canada published exchange rates to determine all of our foreign currency rates. Our foreign subsidiaries conduct their businesses in local currency. We have experienced immaterial foreign exchange gains or losses to date and we do not engage in any hedging activities. For the year ended December 31, 2004, approximately $7.2 million, or 20% of our total revenues, were denominated in foreign currencies, primarily the Canadian dollar and Euro. The exchange rate for the Canadian dollar to the U.S. dollar has ranged from .72 to .85 Canadian dollars per U.S. dollar for the year ended December 31, 2004 and the Euro has ranged from 1.18 to 1.36 Euro per U.S. dollar. The impact of exchange rate changes on revenue denominated in foreign currencies amounted to a net increase in revenue of approximately $0.7 million for the year ended December 31, 2004. Our net assets in our foreign operations amounted to $9.4 million as of December 31, 2004, which included $2.9 million in accounts receivable denominated in foreign currencies, and a 10% change in the foreign exchange rates would result in a $0.9 million change in our net foreign assets. However, as our foreign operations expand, we may become more vulnerable to fluctuations in foreign currency exchange rates.

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ITEM 8. Financial Statements and Supplementary Data

        Financial Statements and the Report of Independent Registered Public Accounting Firm are filed with this Annual Report on Form 10-K in a separate section following Part IV, as shown on the index under Item 15(a) of this Annual Report.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

        Not applicable.

Item 9A. Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications

        Our Chief Executive Officer, Mitch Lasky, and Chief Financial Officer, Michael Marchetti, with the participation of our management, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective in timely making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.

        We have attached as exhibits to this report the certifications of the Chief Executive Officer and the Chief Financial Officer that are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This "Controls and Procedures" section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Definition of Disclosure Controls and Procedures

        Disclosure controls and procedures are methods designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Disclosure Controls and Procedures.

        Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving a company's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

Changes in Internal Control over Financial Reporting

        There was no change in the Company's internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, which occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART III

Item 10. Directors and Executive Officers of the Registrant

        The information in Item 10 is incorporated herein by reference to portions of the proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended December 31, 2004.

Item 11. Executive Compensation

        The information in Item 11 is incorporated herein by reference to portions of the proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended December 31, 2004.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information in Item 12 is incorporated herein by reference to portions of the proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended December 31, 2004.

Item 13. Certain Relationships and Related Transactions

        The information in Item 13 is incorporated herein by reference to portions of the proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended December 31, 2004.

Item 14. Principal Accountant Fees and Services

        The information in Item 14 is incorporated herein by reference to portions of the proxy statement for the annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended December 31, 2004.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

        Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements and the notes thereto.

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53

**

Filed herewith.

*

Confidential treatment requested as to certain portions of this Exhibit.

†

Management contract or compensatory plan or arrangement.

(1)

Incorporated by reference from the Company's Registration Statement on Form S-1, File No. 333-117127, as filed on July 2, 2004.

(2)

Incorporated by reference from Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 333-117127, as filed on August 19, 2004.

(3)

Incorporated by reference from Amendment No. 2 to the Company's Registration Statement on Form S-1, File No. 333-117127, as filed on September 7, 2004.

(4)

Incorporated by reference from Amendment No. 4 to the Company's Registration Statement on Form S-1, File No. 333-117127, as filed on September 24, 2004.

(5)

Incorporated by reference from the Company's Current Report on Form 8-K/A, as filed on March 21, 2005.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

        Date: March 30, 2005

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

        Each person whose signature appears below hereby authorizes Mitch Lasky and Michael Marchetti, or either of them, as attorneys-in-fact to sign on his behalf, individually, and in the capacity stated below, and to file all amendments and/or supplements to this Annual Report on Form 10-K.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of JAMDAT Mobile Inc.

        In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of JAMDAT Mobile Inc. and its subsidiaries (the "Company") at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed on the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/  PRICEWATERHOUSECOOPERS LLP      

Los Angeles, California
February 24, 2005

F-2

JAMDAT Mobile Inc.

Consolidated Balance Sheets

(Dollars in thousands, except share and per share data)

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

F-3

JAMDAT Mobile Inc.

Consolidated Statements of Operations

(Dollars in thousands, except share and per share data)