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GAMEFLY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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As filed with the Securities and Exchange Commission on February 10, 2010

Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

GAMEFLY, INC.
(Exact name of Registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		7841 (Primary Standard Industrial Classification Code Number)		04-3700336 (I.R.S. Employer Identification No.)

GameFly, Inc.
5340 Alla Road, Suite 110
Los Angeles, CA 90066
(310) 664-6400
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)

David Hodess
President and Chief Executive Officer
GameFly, Inc.
5340 Alla Road, Suite 110
Los Angeles, CA 90066
(310) 664-6400
(Name, address, including zip code and telephone number, including
area code, of agent for service)


Copies to
Glen R. Van Ligten, Esq. Louis D. Soto, Esq. Orrick Herrington & Sutcliffe LLP 1000 Marsh Road Menlo Park, California 94025 Telephone: (650) 614-7400 Facsimile: (650) 614-7401		Mark Mihanovic, Esq. McDermott Will & Emery LLP 2049 Century Park East, 3800 Los Angeles, California 90067 Telephone: (310) 277-4110 Facsimile: (310) 277-4730

Approximate date of commencement of proposed sale to the public:
As soon as practicable following the effectiveness of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

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


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

CALCULATION OF REGISTRATION FEE

Title of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee




Common Stock, $0.0001 par value per share	$50,000,000	$3,565

(1): Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2): Includes shares which the underwriters have the option to purchase to cover overallotments, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion
Preliminary Prospectus dated February 10, 2010

PROSPECTUS

GameFly, Inc.

Common Stock

This is GameFly, Inc.'s initial public offering. We are selling shares of our common stock and the selling stockholders are selling shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.

We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After we determine the public offering price, we expect that the shares will trade on the NASDAQ Global Market under the symbol "GFLY."

Investing in the common stock involves risks that are described in the "Risk Factors" section beginning on page 10 of this prospectus.

	Per Share	Total

Public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to us	$	$
Proceeds, before expenses, to the selling stockholders	$	$

The underwriters may also purchase up to an additional shares from us, and up to an additional shares from the selling stockholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about , 2010.


BofA Merrill Lynch		Piper Jaffray


Cowen and Company		William Blair & Company

The date of this prospectus is , 2010.

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TABLE OF CONTENTS

		Page

PROSPECTUS SUMMARY		1
THE OFFERING		5
SUMMARY CONSOLIDATED FINANCIAL DATA		7
RISK FACTORS		10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		27
USE OF PROCEEDS		28
DIVIDEND POLICY		28
CAPITALIZATION		29
DILUTION		31
SELECTED CONSOLIDATED FINANCIAL DATA		33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		36
BUSINESS		63
MANAGEMENT		72
EXECUTIVE COMPENSATION		78
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		94
PRINCIPAL AND SELLING STOCKHOLDERS		96
DESCRIPTION OF CAPITAL STOCK		99
SHARES ELIGIBLE FOR FUTURE SALE		104
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK		106
UNDERWRITING		109
LEGAL MATTERS		115
EXPERTS		115
WHERE YOU CAN FIND ADDITIONAL INFORMATION		115
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1

You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. We and the selling stockholders are offering to sell, and seeking offers to buy, our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since such date.

No action has been or will be taken in any jurisdiction by us or any underwriter that would permit a public offering of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering and sale of our common stock and the distribution of this prospectus outside the United States. Unless otherwise expressly stated or the context otherwise requires, references in this prospectus to "dollars" and "$" are to U.S. dollars.

Market data used throughout this prospectus was obtained from internal surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Consultant surveys and industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness

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of such information is not guaranteed. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys and market research, which we believe to be reliable, based upon our management's knowledge of the industry, have not been independently verified.

"GameFly," "GameQ," "GameCenter," "Game Answers," "Cheat Freak," "Console Cheat Codes," "Ponged," "FileShack," "ShackNews," "CheatServer" and "GameStrata" and their respective logos are our trademarks. Solely for convenience, we refer to our trademarks in this prospectus without the ™ and ® symbols, but such references are not intended to indicate, in any way, that we will not assert to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Our Company

We are the largest online video game rental subscription service in the United States with more than 334,000 subscribers as of September 30, 2009. We provide our subscribers access to a comprehensive library of over 7,000 titles covering all major video game and handheld game consoles. There are over 100 million people that play console video games in the United States, according to the 2009 Gamer Segmentation Report published by The NPD Group, or NPD. We believe that online rental subscriptions will constitute a growing percentage of total video game-related expenditures and that our subscription service presents a compelling alternative for video game players who have historically either purchased video games or rented them from traditional retailers.

Our subscription service has grown rapidly since its launch in 2002. We believe our growth has been driven by the compelling value proposition of our subscription model, extensive selection of titles, high level of customer service and effective marketing programs, as well as the increase in the installed base of video game consoles. We purchase nearly every new title upon its initial release in the United States. In addition, we continue to carry in our inventory approximately 95% of all titles that have been released across multiple generations of the major video gaming platforms since the inception of our company. As evidence of the demand for games well after their initial release dates, more than 50% of the video games rented through our subscription service during the 12 months ended September 30, 2009 consisted of titles six months and older.

Our subscription service allows subscribers to have one or more video games out concurrently with no due dates, late fees or shipping charges for a fixed monthly fee. Subscribers select titles on our website, www.gamefly.com, receive video games via First-Class Mail and return them to us at their convenience using our prepaid mailers. Subscribers also have the option to purchase a video game they are currently renting through our "Keep" feature. Upon confirmation that a video game has been returned or that a subscriber has elected to "Keep" a video game, we mail the next available game in a subscriber's GameQ, a subscriber's personal wish list of titles. We believe a significant value we offer to our subscribers is the ability to rent video games before they buy them. According to our August 2009 survey of subscribers, "try before you buy" ranks as the most important feature of the GameFly service. In addition to selling video games through our "Keep" feature, we also sell new and used video games to our subscribers and others through www.gamefly.com.

To complement our subscription service and video game sales, we operate a network of advertising-supported websites that provide video game content and information. Our network of websites currently attracts approximately 4.4 million monthly unique visitors, most of whom are not subscribers. We focus on providing these visitors with video game-specific content to enhance their video game experience, which we believe increases our subscriber satisfaction and enables us to attract new subscribers. We have attracted premium advertisers who seek to reach the 18-34 year old male demographic.

Our revenues increased from $15.8 million in the fiscal year ended March 31, 2005 to $84.7 million in the fiscal year ended March 31, 2009, representing a compound annual growth rate of 52%. Our subscriber base increased from approximately 74,000 as of March 31, 2005 to more than 328,000 as of March 31, 2009, representing a 45% compound annual growth rate.

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Industry Overview

There are over 100 million people that play console video games in the United States, according to the 2009 Gamer Segmentation Report published by NPD. International Data Corporation, or IDC, estimates that there were approximately 200 million installed video game consoles (including handheld units) in North America at the end of 2009, a number that is estimated by IDC to increase to almost 260 million by the end of 2013. According to IDC, the installed base of the latest generation of game consoles, which includes the Sony PlayStation 3, Microsoft Xbox 360 and Nintendo Wii, is expected to grow from over 44 million consoles in 2008 to approximately 131 million consoles in 2013. According to a 2009 survey conducted by Frank N. Magid Associates, console gaming and Internet usage are the top two leisure activities for males in the United States between the ages of 18 and 34. North American video game hardware and software sales surpassed $29 billion in 2008 and are projected to grow at a rate of approximately 8% annually to $43 billion in 2013, according to IDC. Sales of video game software constituted approximately $20 billion, or 68%, of this market in 2008. For example, in November 2009, Activision announced that sales of its Call of Duty: Modern Warfare 2 video game title generated an estimated $550 million of revenue during the first five days following its launch to beat all previous five-day movie box office, book and video game sell-through records.

Subscriber Benefits

Our solution provides the following benefits to our subscribers:

•: Value. We offer our video game rental service on a subscription basis, significantly reducing the consumer's up-front cost associated with buying a new game. Through our subscription plans, subscribers can have one or more titles out concurrently with no due dates, late fees or shipping charges, for prices starting at $15.95 per month, which is significantly less than the suggested retail price of a newly released video game. Using our service, a subscriber can try a video game for as long as he or she desires and then choose to return or purchase it. Our average subscriber rents approximately 22 video games per year from us at a cost less than the purchase price of five new video games at an average price of $60.
•: Wide selection. We offer nearly all the latest video game titles available in the United States for Microsoft's Xbox 360 and Xbox, Sony's PlayStation 3, PlayStation 2 and PSP, and Nintendo's Wii, GameCube, DS and Game Boy Advanced consoles. Our library contains numerous copies of popular new releases, as well as many older "back-catalog" games that are generally less accessible in most video game rental and retail stores. We believe we are one of the few rental providers of console games that offers a broad selection of titles for previous generation platforms, giving us an advantage over traditional retailers and expanding our addressable market. Many of our subscribers play video games well after they have been released, leading us to believe that the availability of "back-catalog" games is an important differentiator of our service.
•: Convenience. Subscribers can easily select titles by building and modifying their GameQ, a personalized wish list or queue, of video game titles on our website. We create a unique experience for subscribers by personalizing our website to each subscriber's console type and selection history. Once selected, titles are sent to subscribers' homes through the U.S. Postal Service and returned to us in prepaid mailers. Subscribers also have the option to purchase a video game that they are currently renting through our "Keep" feature. Upon confirmation that a title has been returned or that a subscriber has elected to "Keep" a video game, we automatically mail the next available game in his or her GameQ.

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Strategy

Our objective is to extend our position as the leading online video game rental subscription service and to become a premier provider of video game content and information. In order to achieve our objective, we intend to:

•

Capitalize on a large and underpenetrated market. We believe there is a large and untapped customer base for our subscription service and that an increased investment in marketing will allow us to further penetrate this market. According to the 2009 Gamer Segmentation Report published by NPD, there are over 100 million people who play console video games in the United States. There are two distinct segments within this market that we intend to target to drive our business:

•: Core customers. According to our August 2009 survey of subscribers, approximately 64% of our subscribers fall into the 18-34 year old male demographic. According to NPD, there are more than 21 million console video game players in this segment. With our low 1% penetration rate, we believe that this segment continues to represent a large addressable market for our subscription service.
•: Families. A small portion of our subscribers are families. As a result of the introduction of new video games and video game consoles that appeal to families, such as the Nintendo Wii, we believe that this segment of the market is emerging as a potentially large subscriber base for us. To date, a relatively small portion of our marketing spending has been targeted toward families. We intend to increase our marketing expenditures targeted at this group.

•

Further improve the customer experience. We regularly add new features to make it easier for our subscribers to use our service. For example, we recently introduced our GameCenter iPhone application, which allows our subscribers to update their GameQ and access relevant video game-related content and information on their iPhones. We have also updated our e-commerce capability to enable visitors to purchase multiple new and used video games in a single transaction. To help ensure our customers receive video games quickly, we utilize proprietary technology to manage the process and distribution of more than 45,000 video games per day from our distribution centers. Our software automates the process of tracking and routing titles to and from each of our distribution centers and allocates order responsibilities among them. We regularly monitor, test and seek to improve the efficiency of our distribution, processing and inventory management systems. We intend to add additional distribution centers to enhance the efficiency of our distribution network and to decrease the delivery time of video games to our subscribers.

•

Build our community. In addition to serving more than 334,000 subscribers, our website www.gamefly.com attracts an average of 2.6 million monthly unique visitors. In order to build a community among these visitors, we have developed and continue to add features and content that enable us and our community to post reviews, ratings and other video game-related content. We believe this community enables us to engage with visitors, enhances loyalty and retention among our current subscribers and attracts new subscribers.

•

Expand GameFly Media. In addition to www.gamefly.com, we operate a network of additional video game-related websites including www.shacknews.com, www.fileshack.com, www.cheatfreak.com, www.consolecheatcodes.com, www.cheatserver.com, www.gameanswers.com and www.ponged.com. Our websites provide relevant content and information, such as industry-specific news, video game tips and cheat codes, screenshots and trailers of new titles, and game reviews and ratings to the video game community. Our websites are designed to enable our visitors to make informed decisions when purchasing or renting video games and

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enhance their overall video game experience. By developing or acquiring additional websites with video game-related content, we intend to grow our advertising revenue.

•: Expand distribution and delivery channels. In November 2009, we started selling new video games on our website and we intend to grow this service. We also intend to expand the channels through which we deliver video games to customers. For example, we are currently piloting a kiosk program with two national retailers that enables consumers to rent or buy video games from kiosks located in retail outlets. We also intend to increase the number of games consumers can play online and download from our network of websites, including www.ponged.com and www.fileshack.com.
•: Expand GameFly mobile presence. In September 2008, we enabled our subscribers to access www.gamefly.com from their mobile devices in order to search for video games and manage their GameQ. Since the launch of these mobile enhancements, monthly mobile visits to our website have grown at an average of 18% per month. In October 2009, we launched our GameCenter iPhone application, which allows our subscribers to manage their subscriptions and enables any visitor to easily access relevant video game-related content, news and information on their iPhones. We intend to continue the development of our GameCenter iPhone application and develop other mobile applications in order to grow our advertising revenue, increase our subscriber base and lower our churn rate.

Risk Factors

Our business is subject to numerous risks and uncertainties, as discussed more fully in the section entitled "Risk Factors" beginning on page 10 of this prospectus, which you should read in its entirety.

Corporate Information

We were incorporated in the state of Delaware on April 15, 2002 under the name GameFly, Inc.

Our principal executive offices are located at 5340 Alla Road, Suite 110, Los Angeles, CA 90066 and our telephone number is (310) 664-6400. Our website address is www.gamefly.com. The information contained on our website is not part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. Unless the context requires otherwise, in this prospectus the words "GameFly," "Company," "we," "our" and "us" refer to GameFly, Inc.

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THE OFFERING


Common stock offered:
	By GameFly, Inc.	shares
	By the selling stockholders	shares
	Total offering	shares
Common stock to be outstanding after this offering		shares
Overallotment option		The underwriters have an option to purchase a maximum of additional shares of common stock from us and the selling stockholders to cover overallotments. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.
Use of proceeds		We expect the net proceeds to us from this offering, after expenses, to be approximately $ million based on an assumed initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to acquire or invest in complementary technologies, solutions or businesses or to obtain rights to such complementary technologies, solutions or businesses. There are no agreements, understandings or commitments with respect to any such acquisition or investment at this time.
Dividend policy		We do not anticipate paying any dividends on our common stock in the foreseeable future. See "Dividend Policy."
Risk factors		Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 10 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
Proposed NASDAQ Global Market symbol		"GFLY"

The number of shares of our common stock outstanding after this offering is based on 15,268,620 shares outstanding as of September 30, 2009, and excludes:

•: 3,746,202 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2009 to purchase our common stock granted pursuant to the GameFly 2002 Stock Plan, as amended, or 2002 Stock Plan, at a weighted average exercise price of $1.11 per share;
•: 349,848 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2009 at a weighted average exercise price of $1.44 per share;

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•: an aggregate of 424,897 shares of common stock available for issuance as of September 30, 2009 under the 2002 Stock Plan; and
•: 1,500,000 shares of common stock, subject to increase on an annual basis, reserved for issuance under our 2010 Omnibus Equity Incentive Plan, or 2010 Plan, which we plan to adopt in connection with this offering.

Except as otherwise indicated, information in this prospectus reflects or assumes the following:

•: that our amended and restated certificate of incorporation and our amended and restated bylaws, which will be in effect at or prior to completion of this offering, are in effect;
•: the automatic conversion of all of our outstanding preferred stock into an aggregate of 9,900,801 shares of common stock upon completion of this offering;
•: no exercise of the underwriters' overallotment option to purchase up to additional shares of our common stock; and
•: an initial public offering price of $ per share, the mid-point of the range set forth on the cover of this prospectus.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize the consolidated financial data for our business. You should read this summary 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, all included elsewhere in this prospectus.

We derived the consolidated statements of operations data for the fiscal years ended March 31, 2007, 2008 and 2009 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated statements of operations data for the six months ended September 30, 2008 and 2009, and the unaudited consolidated balance sheet data as of September 30, 2009, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Results for the six months ended September 30, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2010. Our historical results are not necessarily indicative of the results to be expected in the future.

Pro forma basic net income (loss) per share has been calculated assuming the conversion of all outstanding shares of our preferred stock into 9,900,801 shares of common stock upon the completion of this offering. The balance sheet data as of September 30, 2009 is presented:

•: on an actual basis;
•: on a pro forma basis to reflect the automatic conversion of all outstanding shares of our preferred stock into 9,900,801 shares of common stock upon the completion of this offering; and
•: on a pro forma as adjusted basis to reflect the pro forma adjustments and the sale by us of shares of common stock offered by this prospectus at the initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus) after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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			Fiscal Year Ended March 31,									Six Months Ended September 30,

			2007			2008			2009			2008			2009
			(in thousands, except share and per share data)
Consolidated Statements of Operations:
Revenues:
	Base subscription		$	38,942		$	55,303		$	71,756		$	33,858		$	41,627
	Previously rented product			6,851			9,171			10,786			4,529			4,804

		Total rental revenues		45,793			64,474			82,542			38,387			46,431
	Advertising and other			220			1,672			2,128			1,030			1,250

		Total revenues		46,013			66,146			84,670			39,417			47,681

Cost of revenues:
	Rental(1)			27,384			36,658			45,140			19,714			21,952
	Advertising and other			—			238			202			105			368

		Total cost of revenues		27,384			36,896			45,342			19,819			22,320

Gross profit				18,629			29,250			39,328			19,598			25,361

Operating expenses:
	Fulfillment(2)			4,382			6,424			8,780			4,141			4,532
	Technology and development(2)			2,863			3,636			6,542			2,870			3,410
	Marketing(2)			9,274			13,526			17,521			8,065			8,303
	General and administrative(2)			2,179			3,065			3,592			1,635			2,438
	Depreciation and amortization			191			724			1,175			442			727
	Impairment of acquired website			—			—			668			—			—
	Impairment of goodwill			—			—			449			—			—

		Total operating expenses		18,889			27,375			38,727			17,153			19,410

Operating (loss) income				(260	)		1,875			601			2,445			5,951

Other income (expense):
	Interest income			250			199			68			41			5
	Interest expense			(353	)		(329	)		(225	)		(119	)		(148	)
	Change in fair value of warrants			—			—			—			—			(404	)
	Other—net			(30	)		(57	)		(164	)		(90	)		(23	)

		Total other income (expense)		(133	)		(187	)		(321	)		(168	)		(570	)

Income (loss) before income tax (provision) benefit				(393	)		1,688			280			2,277			5,381
Income tax (provision) benefit				(1	)		(60	)		3,780			3,111			(2,404	)

Net income (loss)			$	(394	)	$	1,628		$	4,060		$	5,388		$	2,977
Undistributed income attributable to preferred stockholders				—			(1,628	)		(3,276	)		(3,907	)		(2,245	)

Net income (loss) available to common stockholders			$	(394	)	$	—		$	784		$	1,481		$	732

Net income (loss) per share:
	Basic		$	(0.09	)	$	—		$	0.16		$	0.31		$	0.14

	Diluted		$	(0.09	)	$	—		$	0.10		$	0.19		$	0.09

Weighted average shares outstanding:
	Basic			4,192,622			4,551,307			4,893,713			4,765,129			5,196,328
	Diluted			4,192,622			4,551,307			7,824,282			7,612,750			8,173,469
Pro forma net income (loss) per share (unaudited):
	Basic								$	0.28					$	0.20

	Diluted								$	0.23					$	0.16

Pro forma weighted average shares outstanding used in calculating net income (loss) per share (unaudited):
	Basic									14,761,348						15,097,129
	Diluted									17,691,918						18,074,270

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(1): Amortization of video game library included in the above line item:

	Fiscal Year Ended March 31,						Six Months Ended September 30,

	2007		2008		2009		2008		2009
	(in thousands)
Amortization of video game library	$	9,206	$	11,637	$	13,455	$	6,105	$	5,872

(2): Stock-based compensation, including the impact of warrants and options, included in the above line items:

		Fiscal Year Ended March 31,						Six Months Ended September 30,

		2007		2008		2009		2008		2009
		(in thousands)
Fulfillment		$	43	$	69	$	88	$	50	$	39
Technology and development			30		109		478		145		152
Marketing			36		82		165		85		351
General and administrative			15		82		109		58		49

	Total stock-based compensation expense	$	124	$	342	$	840	$	338	$	591

	Fiscal Year Ended March 31,									Six Months Ended September 30,

	2007			2008			2009			2008			2009
Other Data:(1)
Total subscribers(2)		191,354			266,853			328,119			267,327			334,417
Monthly churn(3)		7.1	%		7.3	%		7.7	%		8.0	%		8.2	%
Average monthly revenue per subscriber	$	20.28		$	20.12		$	20.10		$	21.13		$	20.94
Subscriber acquisition cost	$	31.08		$	29.93		$	28.98		$	31.40		$	25.90

(1): The terms "total subscribers," "monthly churn," "subscriber acquisition cost" and "average monthly revenue per subscriber" are defined in the "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics" section.
(2): At end of period.
(3): Monthly churn is the average monthly churn for the quarters included in the periods shown.

	As of September 30, 2009

	Actual		Pro Forma		Pro Forma As Adjusted
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	11,014	$	11,014
Total assets		39,148		39,148
Long term debt (including current portion)		5,156		5,156
Convertible preferred stock		21,249		—
Total stockholders' equity		18,647		18,647

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information contained in this prospectus before deciding whether to purchase our stock. Our business, prospects, financial condition and operating results could be materially and adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in the prospectus, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock.

Risks Related to Our Business

If our efforts to attract and retain subscribers are not successful, our revenues will be adversely affected.

We generate substantially all of our revenue from subscriptions to our service and we must continue to attract subscribers to our service. Our ability to attract subscribers will depend primarily on our ability to consistently provide our subscribers with a valuable and quality experience for selecting, playing, receiving and returning video games, including providing content and features to enhance our subscribers' selection and play. For example, if consumers do not perceive our subscription service to be valuable relative to the services of our competitors, if we fail to deliver video games in a timely manner or deliver damaged video games, if we do not regularly introduce new content and features, or if we introduce new content and features that are not favorably received by the market, we may not be able to attract or retain subscribers. If we do not handle subscriber complaints effectively, our brand and reputation may suffer, we may lose our subscribers' confidence, and they may choose not to renew their subscriptions. In addition, many of our subscribers originate from word-of-mouth advertising and are directly referred to our service from existing subscribers. If our efforts to satisfy our existing subscribers are not successful, we may not be able to attract new subscribers and, as a result, our business, financial condition and results of operations will be adversely affected.

If we experience excessive rates of subscriber churn or our subscribers switch their subscriptions to lower cost plans, our revenues and business will be harmed.

We must minimize the rate of loss of existing subscribers and continually add new subscribers both to replace subscribers who choose not to renew their subscriptions and to grow our business beyond our current subscriber base. We describe the percentage of subscribers who elect not to renew their subscriptions as subscriber "churn." Subscribers choose not to renew their subscriptions for many reasons, including a desire to reduce discretionary spending or a perception that they do not use the service sufficiently, the service is a poor value, competitive services provide a better value or experience, or subscriber service issues are not satisfactorily resolved. Subscribers may choose not to renew their subscription at any time prior to the renewal date. If we are unable to attract new subscribers in numbers greater than our subscriber churn, our subscriber base will decrease and our business, financial condition and results of operations will be adversely affected. In addition, from time to time, we have experienced increases in the number of subscribers who switch their subscriptions to lower cost plans. Even if we are successful in minimizing churn, if significant numbers of our existing subscribers switch their subscriptions to lower cost plans, our business, financial condition and results of operations will be adversely affected.

If our subscriber churn increases, we may be required to increase the rate at which we add new subscribers in order to maintain and grow our revenues. If excessive numbers of subscribers cancel our service or switch their subscriptions to lower cost plans, we may be required to incur significantly higher marketing and advertising expenses than we currently anticipate in order to offset this loss of revenue. A significant increase in our subscriber churn or in the number of subscribers who switch their

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subscriptions to lower cost plans would have an adverse effect on our business, financial condition and results of operations.

If we are unable to compete effectively or withstand competitive pricing pressures, our business will be materially and adversely affected.

The market for in-home video game entertainment is intensely competitive and subject to rapid change. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. For example, we compete against large retailers, such as Amazon, eBay, Blockbuster, Best Buy, GameStop, Target and Walmart, and other competitors that offer video game sales or rentals through retail stores, online or both. Blockbuster recently began offering online rentals of new-release video games in Cleveland, Ohio and Seattle, Washington and Netflix, which currently offers only online subscription services for movies or other entertainment content, may in the future include video games in its service offering. In addition, alternative channels for online entertainment such as social networking sites, virtual worlds and massively multiplayer online games are growing in popularity and new technologies for delivery of in-home video game entertainment, such as Internet delivery of video game content, continue to receive considerable media and investor attention. There can be no assurance that we will be able to compete effectively against these competitors or against alternative channels of online entertainment delivery. To remain competitive, we must continue to provide relevant content and enhance and improve the functionality and features of our products and services. If competitors introduce new solutions that incorporate new technologies, our existing products and services may become obsolete. Our future success will depend on, among other things, our ability to:

•: anticipate demand for new products and services;
•: enhance our existing solutions;
•: respond to technological advances on a cost-effective and timely basis; and
•: decrease prices in response to pricing pressures from our competitors.

Demand for our service is also sensitive to price. Many external factors, including our marketing and technology costs and our competitors' pricing and marketing strategies, can significantly affect our pricing strategies. One of our competitors receives preferential rates and terms of service from the U.S. Postal Service, which may enable that firm to charge lower rates for its services. In addition, our competitors may adopt aggressive pricing policies and devote substantially more resources to marketing, website and systems development than we do. There can be no assurance that we will be able to compete effectively against current or new competitors at our existing pricing levels or at lower price levels in the future. Furthermore, we may need to increase the level of service provided to our subscribers and/or incur significantly higher marketing expenditures than we currently anticipate, which would further impact our ability to respond to pricing pressures.

If we are unable to successfully compete with the programs, technologies, or pricing strategies of our current or future competitors, we may not be able to increase or maintain market share, revenues or profitability, and our business, financial condition and results of operations will be materially and adversely affected.

If digital download or other technologies are more widely adopted and supported as a method of content delivery or other forms of online entertainment continue to grow in popularity, our business could be adversely affected.

Our rental subscription service currently depends on the distribution of physical video game media such as discs and cartridges. Existing and new technologies are continually being developed to enable consumers to download video game content from the Internet to a game console or a computer.

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Any of these technologies could become an alternative method of game content delivery that is widely supported by video game publishers and adopted by consumers. In addition, massively multiplayer online games, virtual worlds and other online games such as those offered by social networks are becoming increasingly popular. If these technologies are adopted more quickly than we anticipate or more quickly than Internet delivery offerings that we may provide in the future, other providers are better able to meet video game publisher and consumer needs and expectations, or these forms of online entertainment grow in popularity more quickly than we anticipate, our business, financial condition and results of operations could be adversely affected.

Our recent revenue growth rate may not be sustainable.

We may not be able to sustain our recent revenue growth rate in future periods and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. If our future growth fails to meet investor or analyst expectations, it could have a negative effect on our stock price. If our growth rate were to decline significantly or become negative, it would adversely affect our business, financial condition and results of operations.

If our marketing and advertising efforts fail to generate additional revenues on a cost-effective basis, or if we are unable to manage our marketing and advertising expenses, our business will suffer.

We utilize a broad mix of marketing programs to promote our service to potential new subscribers. Significant increases in the pricing of one or more of our marketing and advertising channels would increase our marketing and advertising expense or cause us to choose less expensive but less effective marketing and advertising channels. As we implement new marketing and advertising strategies and phase out older strategies, we may need to expand into marketing and advertising channels with significantly higher costs than our current channels, which could adversely affect our profitability. Further, we may over time become disproportionately reliant on one channel or partner, which would limit our marketing and advertising flexibility and could increase our operating expenses. We may also incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, and our marketing and advertising expenditures may not result in increased revenue or generate sufficient levels of brand awareness. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace existing marketing and advertising channels with similarly effective channels, our marketing and advertising expenses could increase substantially, our subscriber levels could be adversely affected, and our business, financial condition and results of operations will suffer.

If we are unable to improve market recognition of and loyalty to our brands, or if our reputation were to be harmed, our business may be adversely affected.

We must continue to build and maintain strong brand identity. To succeed, we must continue to attract and retain a large number of subscribers who may have previously relied on other rental sources and persuade them to subscribe to our service. In addition, we compete for subscribers against other in-home entertainment brands which are well-established and have greater recognition than ours. We believe that the importance of brand loyalty will only increase in light of increasing competition, both for online subscription services and other means of distributing video game titles, such as digital download. From time to time, our subscribers express dissatisfaction with our service, including among other things, our inventory availability and shipping times. To the extent dissatisfaction with our service is widespread or not adequately addressed, our brand may be adversely impacted. Many of our subscribers are passionate about video games, and many of these subscribers may participate in blogs on this topic. If actions we take or changes we make to our service upset these subscribers, their blogging could negatively affect our brand and reputation. If we are unable to maintain and develop

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our brand and reputation, our business, financial condition and results of operations may be adversely affected.

If we do not acquire sufficient video game titles or manage our inventory efficiently, our subscriber satisfaction and results of operations may be adversely affected.

If we do not acquire sufficient video game titles, we may not appropriately satisfy subscriber demand, and our subscriber satisfaction and results of operations may be adversely affected. Conversely, if we attempt to mitigate this risk and, as a result, acquire more titles than needed to satisfy our subscriber demand, our inventory utilization would become less effective and our profitability would be adversely affected. Similarly, if we are unable to sell used games in a timely manner, and at prices that are acceptable to us, as part of our inventory management efforts, our profitability would be adversely affected. Additionally, market factors such as exclusive distribution arrangements may impact our ability to acquire appropriate quantities of certain titles.

Our operating results may fluctuate from quarter to quarter, which could make them difficult to predict.

Our quarterly operating results are tied to certain financial and operational metrics that have fluctuated in the past and may fluctuate significantly in the future. As a result, you should not rely upon our past quarterly operating results as indicators of future performance. Our operating results depend on numerous factors, many of which are outside of our control. In addition to the other risks described in this "Risk Factors" section, the following risks could cause our operating results to fluctuate:

•: our ability to retain existing subscribers and attract new subscribers;
•: timing and amount of costs of new and existing marketing and advertising efforts;
•: seasonal fluctuations in the number of our subscribers;
•: timing and amount of inventory purchases in connection with the holiday season and the release of major video game titles;
•: timing and amount of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure;
•: the cost and timing of the development and introduction of new product and service offerings by our competitors or by us;
•: downward pressure on the pricing of our subscriptions; and
•: system failures, security breaches or Internet downtime.

For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance and our revenue and operating results in future quarters may differ materially from the expectations of management or investors.

Increases in the cost of delivering video games or other changes in U.S. Postal Service policies would adversely affect our profitability.

Increases in postal delivery rates or increases in the cost of fuel or other transportation costs related to the delivery of our video games would adversely affect our profitability if we elect not to raise our subscription fees to offset the increase. The U.S. Postal Service increased the rate for first class postage in May 2009 and is expected to raise rates again in subsequent years in accordance with the powers granted to it in connection with the 2007 postal reform legislation. In addition, the U.S. Postal Service continues to focus on plans to reduce its costs and make its service more efficient. If the U.S. Postal Service were to change any policies relative to the requirements of First-Class Mail,

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including changes in size, weight or machinability qualifications of our envelopes, such changes could result in increased shipping costs or higher breakage rates for our video games, and our gross margin could be adversely affected. Also, if the U.S. Postal Service reduces its available services, such as by closing facilities or discontinuing Saturday delivery service, our ability to timely deliver video games could be impacted, and our subscriber satisfaction could be adversely affected.

Increases in payment processing fees or changes to operating rules that increase our costs would increase our operating expenses and adversely affect our business and results of operations, and the termination of our relationship with any major credit card company would have a material impact on our business.

Our subscribers pay for our subscription services using credit cards or debit cards. Our acceptance of these payment methods requires that we pay certain processing fees for each credit card or debit card transaction. From time to time, these fees may increase, either as a result of rate changes by the payment processing companies or as a result of a change in our business practices which increases the fees on a cost-per-transaction basis. Such increases would adversely affect our business and results of operations.

We are subject to rules, regulations and practices governing our accepted payment methods, which are predominately credit cards and debit cards. These rules, regulations and practices could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines or higher transaction fees or lose our ability to accept these payment methods. In addition, our credit card fees may be increased by credit card companies if our chargeback rate, or the rate of payment refunds, exceeds certain minimum thresholds. If we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or for all credit card transactions, may be further increased, and, if the problem significantly worsens, credit card companies may terminate their relationship with us. Any increases in our credit card fees could adversely affect our results of operations, particularly if we elect not to raise our subscription rates to offset the increase. The termination of our ability to process payments on any major credit or debit card would have a material impact on our ability to operate our business.

If the sales prices of video games to retail customers decrease or the number of video game consoles purchased by retail consumers declines, our ability to attract new subscribers would be adversely affected.

We believe that video game publishers have significant flexibility in pricing video games for retail sale. If the retail price of video games were to become significantly lower, customers may choose to purchase video games rather than subscribe to our service, which would adversely affect our business. The maintenance and growth of our subscriber base is dependent upon consumers continuing to purchase video game consoles as such purchases significantly drive the purchase and rental of video games. If there is a decline in the number of video game consoles purchased by consumers, our business, financial condition and results of operations would be adversely affected.

Any significant disruption in service, on our websites or in our computer systems, which are currently hosted primarily by a single third party in a single location, could materially and adversely affect our business.

Substantially all of our communications, network and computer hardware used to operate our websites are co-located at the facilities of a third-party provider in a facility in Irvine, California. We do not control the operation of this facility. Hardware for our delivery systems is maintained in our shipping centers. Fires, floods, earthquakes, power losses, telecommunications failures, break-ins and similar events could damage these systems and hardware or cause them to fail completely. We do not have separately located backup systems for our operations. Our systems are not geographically redundant and our disaster recovery plan is not sufficient for all eventualities. A disrupting event at the

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Irvine facility could result in prolonged downtime of our operations and could materially and adversely affect our business, financial condition and results of operations.

Subscribers and potential subscribers access our service through our primary website, www.gamefly.com, where the title selection process is integrated with our delivery processing systems and software. Our reputation and ability to attract, retain and serve our subscribers is dependent upon the reliable performance of our websites, our network infrastructure and fulfillment processes. Interruptions in these systems, or with the Internet in general, could make our service unavailable and hinder our ability to receive and fulfill title requests. Much of our software is proprietary, and we rely on the expertise of our engineering and software development teams for the continued performance of our software and computer systems. Service interruptions or errors in our software, which result in the unavailability or impair usability of our website, could diminish the overall attractiveness of our subscription service to existing and potential subscribers. Additionally, problems faced by our third-party Web hosting provider, with the telecommunications network providers with which it contracts or with the systems by which it allocates capacity among its customers, including us, could adversely impact the experience of our subscribers.

Our servers are also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions and delays in our service and operations as well as loss, misuse or theft of data. Any attempts by hackers to disrupt our website service or our internal systems, if successful, could harm our business, be expensive to remedy and damage our reputation. Our insurance does not cover expenses related to direct attacks on our website or internal systems. Efforts to prevent hackers from entering our computer systems are expensive to implement and may limit the functionality of our services. Any significant disruption to our website or internal computer systems could result in a loss of subscribers and materially and adversely affect our business, financial condition and results of operations.

In the event of an earthquake, other natural or man-made disaster or loss of power, our operations could be adversely affected.

Our executive offices are located in Los Angeles, California, our network and computer hardware used to operate our websites are hosted at a single co-location facility in Irvine, California, and we have shipping centers located throughout the United States, including in earthquake and hurricane-sensitive areas. Our business and operations could be adversely affected in the event of these natural disasters as well as from electrical blackouts, fires, floods, power losses, telecommunications failures, break-ins or similar events. We may not be able to effectively shift our fulfillment and delivery operations to handle disruptions in service arising from these events. Because Irvine and Los Angeles, California, are located in an earthquake-sensitive area, we are particularly susceptible to the risk of damage to, or total destruction of, our executive offices and co-location facility. We are not insured against any losses or expenses that arise from a disruption to our business due to earthquakes and may not have adequate insurance to cover losses and expenses from other natural disasters.

We rely heavily on our technology to process deliveries and returns of our video games and to manage other aspects of our operations, and the failure of this technology to operate effectively could adversely affect our business.

We use complex proprietary and non-proprietary software technologies to process deliveries and returns of our video games and to manage other aspects of our operations. This technology is intended to allow our nationwide network of distribution centers to be operated on an integrated basis. We continually enhance or modify the technology used for our distribution operations. We cannot be sure that any enhancements or other modifications we make to our distribution operations will achieve the intended results or otherwise be of value to our subscribers. Future enhancements and modifications to our technology could consume considerable resources. If we are unable to maintain

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and enhance our technology to manage the processing of video games among our distribution centers in a timely and efficient manner, our ability to retain existing subscribers and to add new subscribers may be impaired.

If we experience delivery problems or if our subscribers or potential subscribers lose confidence in the U.S. Postal Service, we could lose subscribers, which would adversely affect our operating results.

We rely exclusively on the U.S. Postal Service to deliver video games from our shipping centers and to return them to us from our subscribers. We are subject to risks associated with using the public mail system to meet our shipping needs, including delays or disruptions caused by inclement weather, natural disasters, labor activism, health epidemics or bioterrorism. Our video games are also subject to risks of breakage and theft during our processing of shipments as well as during delivery and handling by the U.S. Postal Service. The risk of breakage is also impacted by the materials and methods used to manufacture video game discs and cartridges. If the companies manufacturing our video games use materials and methods more likely to break during delivery and handling or we fail to timely deliver video games to our subscribers, our subscribers could become dissatisfied and cancel our service, which would adversely affect our business, financial condition and results of operations. In addition, increased breakage and theft rates for our video games will decrease our profitability.

The loss of any of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel in the future, could harm our business.

We depend on the continued service and performance of our key personnel, including David Hodess, our President and Chief Executive Officer. We do not maintain key man insurance on any of our officers or key employees. We also do not have long-term employment agreements with any of our officers or key employees. In addition, much of our key technology and systems are custom-made for our business by our personnel. The loss of key personnel, including key members of our management team, as well as certain of our key marketing, sales, product development or technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business.

Stacey Peterson, our Chief Financial Officer, has only recently been employed by us, and we are still in the process of assimilating and integrating her into our operations. Our failure to successfully integrate this key employee into our business could adversely affect our business, financial condition and results of operations.

In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not be successful in attracting and retaining qualified personnel. We could also experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Accounting principles generally accepted in the United States relating to the expensing of stock options may discourage us from granting the size or type of stock option awards that job candidates may require to join our company. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

If we are not able to manage our growth, our business could be adversely affected.

We have expanded rapidly since we launched our subscription service in 2002. Many of our systems and operational practices were implemented when we were at a smaller scale of operations. Our growth in operations has placed a strain on our management, administrative, technological, operational and financial infrastructure. Anticipated future growth, including growth related to the

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broadening of our service offering and the addition of new distribution centers, will continue to place similar strains on our personnel, technology and infrastructure. A sudden increase in the number of our subscribers and in the number of visitors to our websites could strain our capacity and result in website performance issues. Our success will depend largely upon our management team's ability to manage the expected growth of our operations and improving our operational, financial, technological and management controls and our reporting systems and procedures. Additional capital investments will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, it could adversely affect our business, financial condition and results of operations.

If we acquire any businesses or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value or have an adverse effect on our results of operations.

As part of our business strategy, we may engage in acquisitions of businesses or technologies to augment our organic or internal growth. While we have engaged in some acquisitions in the past, we do not have extensive experience with integrating and managing acquired businesses or assets. Acquisitions involve challenges and risks in negotiation, execution, valuation and integration. Moreover, we may not be able to find suitable acquisition opportunities on terms that are acceptable to us. Even if successfully negotiated, closed and integrated, certain acquisitions may not advance our business strategy, may fall short of expected return-on-investment targets or may fail. For example, we recently wrote off the goodwill and certain other intangible assets associated with GameStrata, a company we acquired in October 2008. Any future acquisition could involve numerous risks including:

•: difficulty integrating the operations and products of the acquired business;
•: potential disruption of our ongoing business and distraction of management;
•: use of cash to fund the acquisition or for unanticipated expenses;
•: dilution to our current stockholders from the issuance of equity securities;
•: limited market experience in new businesses;
•: exposure to unknown liabilities, including litigation against the companies we may acquire;
•: potential loss of key employees or customers of the acquired company;
•: additional costs due to differences in culture, geographic locations and duplication of key talent; and
•: acquisition-related accounting charges affecting our balance sheet and operations.

In the event we enter into any acquisition agreements, closing of the transactions could be delayed or prevented by regulatory approval requirements, including antitrust review, or other conditions. We may not be successful in addressing these risks or any other problems encountered in connection with any attempted acquisitions, and we could assume the economic risks of such failed or unsuccessful acquisitions.

We are exposed to risks associated with credit card and payment fraud and with credit card processing, which could cause us to lose revenue.

Our subscribers use credit cards or debit cards to pay for our products and services. We have suffered losses, and may continue to suffer losses, as a result of fraudulent credit cards or other fraudulent payment data used on www.gamefly.com to obtain our subscription service and access to our video game inventory, as well as new and used video games. For example, under current credit card practices, we may be liable for fraudulent credit card transactions if we do not obtain a cardholder's signature, a frequent practice in Internet sales. Currently, we do not carry insurance against the risk of fraudulent credit card transactions. We employ technology solutions to help us detect fraudulent transactions. However, the failure to detect or control payment fraud could cause us to lose revenue.

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Our reputation and relationships with subscribers would be harmed if our subscriber data, particularly billing data, were to be accessed by unauthorized persons.

We maintain personal data regarding our subscribers, including names and mailing addresses. With respect to billing data, such as credit card numbers, we rely on licensed encryption and authentication technology to secure such information. If we, or our payment processing service, experience any unauthorized intrusion into our subscribers' data, current and potential subscribers may become unwilling to provide us with the information necessary for them to remain as or become subscribers, we could face legal claims, and our business could be adversely affected. Similarly, if a well-publicized breach of the consumer data security of any other major consumer website were to occur, there could be a general public loss of confidence in the use of the Internet for commerce transactions which could adversely affect our business, financial condition and results of operations.

We may seek additional capital and we cannot be certain that additional financing will be available.

From time to time, we may seek to obtain additional capital, either through equity, equity-linked or debt securities. The decision to obtain additional capital will depend on, among other things, our development efforts, business plans, operating performance and condition of the capital markets. If we are unable to obtain adequate financing on terms satisfactory to us when we require it, our ability to service our outstanding indebtedness, to continue to support our business growth and to respond to business challenges could be significantly limited.

Changes in the economy could impact our business.

We provide an entertainment service and the success of our business depends to a significant extent upon discretionary consumer spending, which is subject to a number of factors, including general economic conditions, consumer confidence, employment levels, business conditions, interest rates, availability of credit, inflation and taxation. The United States remains in an economic downturn. Continued weak economic conditions and further adverse trends in any of these economic indicators may cause consumer spending to decline further, which could impact our business as subscribers choose either to leave our service or reduce their service levels. Also, efforts to attract new subscribers may be adversely impacted. In addition, media prices may increase in a period of economic growth, which could significantly increase our marketing and advertising expenses. As a result, our business, financial condition and results of operations may be significantly affected by changes in the economy generally.

A material weakness in our internal controls over financial reporting has been identified, and if we fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial results.

Effective internal controls are necessary for us to provide reliable financial reports. In October 2009, in connection with our 2009 fiscal year audit, our independent registered accounting firm communicated to our board of directors a material weakness in our internal controls over financial reporting related to our lack of expertise and knowledge of U.S. Generally Accepted Accounting Principles, or GAAP, reporting requirements. A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. We have taken steps to address this material weakness, including hiring a Chief Financial Officer, that we believe have improved the financial close process. In addition we have contracted with additional accounting resources and intend to hire additional permanent accounting personnel. We believe that we have mitigated this issue, but if we are unable to conclude that we have effective internal controls over financial reporting, we receive further notification from our independent registered accounting firm regarding a material weakness in our internal controls over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report regarding the

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effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations. This could result in a decrease in the value of our common stock.

The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain qualified board members.

After the closing of this offering, we will be a public company and subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the NASDAQ Stock Market rules, including those promulgated in response to the Sarbanes-Oxley Act. We have never operated as a public company and the requirements of these rules and regulations will likely increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. For example, Section 404 of the Sarbanes-Oxley Act of 2002 requires that our management report on, and our independent auditors attest to, the effectiveness of our internal controls structure and procedures for financial reporting. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our chief executive officer, chief financial officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by the NASDAQ Stock Market, the Securities and Exchange Commission, or SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company, which will increase costs. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public company, which may divert attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. In addition, because our management team has limited experience managing a public company, we may not successfully or efficiently manage our transition into a public company.

The rules and regulations applicable to publicly traded companies could also make it more difficult for us to attract and retain qualified independent members of our board of directors. Additionally, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain coverage.

Our reported financial results may be adversely affected by changes in accounting principles applicable to us.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the

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announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.

We face the risk of future litigation that could cause us to incur unforeseen expenses and could occupy a significant amount of our management's time and attention.

From time to time, we may be engaged in legal proceedings or subject to litigation or claims that could negatively affect our business operations and financial position. Litigation disputes could cause us to incur unforeseen expenses, could occupy a significant amount of our management's time and attention and could negatively affect our business operations and financial position. For example, we are currently engaged in a legal proceeding with the U.S. Postal Service for which we are incurring significant legal expenses (see "Business—Legal Proceedings"). Any claims or litigation may be time-consuming and costly, divert management resources, require us to change our services, or have other adverse effects on our business. Any of the foregoing could have a material adverse effect on our results of operations and could require us to pay significant monetary damages.

Privacy concerns could limit our ability to utilize our subscriber data.

In the ordinary course of business, we collect and utilize data supplied by our subscribers. We currently face certain legal obligations regarding the manner in which we treat such information. Other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other information to data collected on the Internet regarding users' browsing and other habits. Increased regulation of data utilization practices, including self-regulation as well as increased enforcement of existing laws, could have an adverse effect on our business. In addition, if unauthorized access to our subscriber data were to occur or if we were to disclose data about our subscribers in a manner that was objectionable to them, our business reputation could be adversely affected and we could face potential legal claims that could impact our operating results.

We will also face additional privacy issues if privacy protections become more stringent in the United States. We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. Increased domestic or international regulation of data utilization and distribution practices, including self-regulation, could require us to modify our operations and incur significant expense, which could have an adverse effect on our business, financial condition and results of operations.

If government regulation of the Internet or other areas of our business changes or if consumer attitudes toward use of the Internet change, we may need to change the manner in which we conduct our business or incur greater operating expenses.

The adoption, modification or interpretation of laws or regulations relating to the Internet or other areas of our business could adversely affect the manner in which we conduct our business or the overall popularity or growth in use of the Internet. Such laws and regulations may cover automatic subscription renewal, credit card processing procedures, sales and other procedures, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts, consumer protection, broadband residential Internet access and the characteristics and quality of services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses, make it more difficult to retain existing subscribers and attract new subscribers or otherwise alter our business model. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.

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If we become subject to liability for content that we produce, publish or distribute through our service, our business could be adversely affected.

As a producer, publisher and distributor of video game-related content, we face potential liability for negligence, copyright, patent or trademark infringement or other claims based on the nature and content of materials that we produce, publish or distribute. We also may face liability for content uploaded from our users in connection with our community-related content or video game reviews. If we become liable, then our business, financial condition and results of operations could be adversely affected. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could harm our results of operations. We cannot assure that we are adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.

If U.S. Copyright law were altered to amend or eliminate the First Sale Doctrine or if publishers were to release or distribute titles in a manner that attempts to circumvent or limit the affects of the First Sale Doctrine, our business could be adversely affected.

Under U.S. Copyright Law, once a copyright owner sells a copy of a console video game, the copyright owner relinquishes all further rights to sell or otherwise dispose of that copy of the video game. While the owner of a U.S. copyright in a console video game retains the underlying copyright to the expression fixed in the work, the copyright owner gives up his ability to control the sale or disposition of a copy of the work once that copy has been sold. As such, once a copy of a console video game is sold into the U.S. market, those obtaining that copy of the video game are permitted to re-sell it, rent it or otherwise dispose of it. If Congress or the courts were to change or substantially limit this First Sale Doctrine, our ability to obtain video games and then rent them could be adversely affected. Likewise, if video game publishers agree to limit the sale or distribution of their content in ways that attempt to limit the effects of the First Sale Doctrine, our business could be adversely affected. If such agreements were to become commonplace or if additional impediments to obtaining video games were created (such as an exclusive rental window), our ability to obtain video games could be impacted and our business, financial condition and results of operations could be adversely affected.

Risks Related to Intellectual Property

If our intellectual property and technologies are not adequately protected to prevent use or appropriation by our competitors, the value of our brand and other intangible assets may be diminished, and our business may be materially and adversely affected.

Our future success and competitive position depends in part on our ability to protect our proprietary technologies and intellectual property. We rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, and trademark, copyright, patent and trade secret protection laws, to protect our proprietary technologies and intellectual property. GameFly is among our registered trademarks and we own the corresponding domain name www.gamefly.com. In addition, we have filed various trademark applications in the United States and abroad. However, we have also elected not to file applications with respect to certain of our trademarks.

There can be no assurance that the steps we have taken or will take will be adequate to protect our technologies and intellectual property, that our patent and trademark applications will lead to issued patents and registered trademarks, that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated or circumvented by others. Furthermore, the intellectual property laws of other countries at which our websites are or may in the future be directed may not protect our products and intellectual property rights to the same extent as the laws of the United States. The legal

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standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, both in the United States and in other countries. In addition, third parties may knowingly or unknowingly infringe our trademarks and other intellectual property rights, and litigation may be necessary to protect and enforce our intellectual property rights. Any such litigation could be very costly and could divert management attention and resources. If the protection of our technologies and intellectual property is inadequate to prevent use or appropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our products and methods of operation. Any of these events may have a material adverse effect on our business, financial condition and results of operations.

We also expect that the more successful we are, the more likely it will become that competitors will try to develop services that are similar to ours, which may infringe on our proprietary rights. It may also be more likely that competitors will claim that our products infringe on their proprietary rights. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be harmed.

If we are unable to protect our domain names, our reputation and brand could be adversely affected.

We currently own registrations for various domain names relating to our brand, including www.gamefly.com, www.shacknews.com and www.consolecheatcodes.com. Failure to protect our domain names could adversely affect our reputation and brand and make it more difficult for users to find our website and our service. Domain names similar to ours have been registered in the United States and elsewhere. The acquisition and maintenance of domain names generally are regulated by various agencies and their designees. However, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights varies from jurisdiction to jurisdiction and is unclear in some jurisdictions. The regulation of domain names in the United States and elsewhere may change in the near future. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names. Furthermore, the relationship between policies governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We may be unable, without significant cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

A substantial amount of our tools and technologies are protected by trade secret laws. In order to protect our proprietary technologies and processes, we rely in part on security measures, as well as confidentiality agreements with our employees, licensees, independent contractors and other advisors. These measures and agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. We could potentially lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of

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our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our business, revenue, reputation and competitive position.

Intellectual property claims against us could be costly and result in the loss of significant rights related to, among other things, our websites and marketing and advertising activities.

Trademark, patent, copyright and other intellectual property rights are important to us and other companies. Our intellectual property rights extend to our technologies, business processes and the content on our websites. We use intellectual property licensed from third parties in marketing and advertising our service. From time to time, third parties may allege that we have violated their intellectual property rights. If there is a claim against us for infringement, misappropriation, misuse or other violation of third-party intellectual property rights, and we are unable to obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely basis, our business and competitive position may be adversely affected. Other companies may be devoting significant resources to obtaining patents that could potentially affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business on the Internet. We have not searched patents relevant to our technologies and business. If we are forced to defend ourselves against intellectual property infringement claims, whether they are with or without merit or are determined in our favor, we may face costly litigation, diversion of technical and management personnel, limitations on our ability to use our websites or inability to market or provide our service. As a result of any such dispute, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease providing certain products or services, adjust our merchandizing or marketing and advertising activities or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. In addition, many of our co-branding, distribution and other partnering agreements require us to indemnify our partners for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling in such an action.

Risks Related to this Offering and our Common Stock

An active, liquid and orderly trading market for our common stock may not develop, our share price may be volatile and you may be unable to sell your shares at or above the offering price.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section and others beyond our control, including:

•: actual or anticipated fluctuations in our key operating metrics, financial condition and operating results;
•: a greater than expected loss of existing subscribers;
•: a negative change in one or more of our key metrics;
•: actual or anticipated changes in our growth rate;
•: issuance of new or updated research or reports by securities analysts;
•: our announcement of actual results for a fiscal period that are higher or lower than projected or expected results or our announcement of revenue or earnings guidance that is higher or lower than expected;
•: fluctuations in the valuation of companies perceived by investors to be comparable to us;

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•: share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
•: sales or expected sales of additional common stock;
•: announcements from, or operating results of, our competitors; or
•: general economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of shares of our common stock to decline. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business.

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

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have any and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these 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 stock price or trading volume to decline.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have shares of common stock outstanding. All shares sold in this offering, including any shares disposed of upon exercise of the underwriters' over-allotment option, will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 15,268,620 shares of common stock outstanding as of September 30, 2009 will be available for sale after this offering as follows:

Date of Availability for Sale		Number of Shares

180 days after the date of this prospectus (subject to extension upon the occurrence of specified events) due to the release of the lock-up agreement these stockholders have with GameFly or the underwriters
At some point after 180 days after the date of this prospectus, subject to vesting requirements and the requirements of Rule 144 (subject, in the case of affiliates, to volume limitations) or Rule 701

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In addition, the 4,171,099 shares underlying options that are either subject to the terms of our equity compensation plans or reserved for future issuance under our equity compensation plans as of September 30, 2009, as well as 1,500,000 additional shares of common stock reserved for issuance under the 2010 Plan, which we plan to adopt in connection with this offering, will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. At any time and without public notice, any or all of the shares subject to the lock-up may be released prior to expiration of the 180-day lock-up period at the discretion of Merrill Lynch, Pierce, Fenner & Smith Incorporated. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In addition, after this offering, the holders of 9,900,801 shares of common stock will be entitled to rights to cause us to register the sale of those shares under the Securities Act. All of these shares are subject to the 180-day lock-up period. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of such registration.

Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.

After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, approximately % of our outstanding common stock, assuming no exercise of the underwriters' option to purchase additional shares of our common stock in this offering and assuming the purchase of an aggregate of shares of common stock in this offering by members of our board of directors. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

•: delaying, deferring or preventing a change in corporate control;
•: impeding a merger, consolidation, takeover or other business combination involving us; or
•: discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

As a new investor, you will experience immediate and substantial dilution in tangible book value per share of common stock.

Purchasers in this offering will immediately experience substantial dilution in net tangible book value. Because our common stock has in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $ per share in net tangible book value, based on an assumed initial offering price of $ per share of common stock. The exercise of outstanding options, 2,917,810 of which are outstanding and exercisable as of September 30, 2009, may result in further dilution. See "Dilution."

We may seek additional capital that may result in stockholder dilution or that may have rights senior to those of our common stockholders.

From time to time, we may seek to obtain additional capital, either through equity, equity-linked or debt securities. The decision to obtain additional capital will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those

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securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution.

Management may apply our net proceeds from this offering to uses that do not increase our market value or improve our operating results.

We intend to use an as yet undetermined amount of the net proceeds from this offering for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to acquire or invest in complementary technologies, solutions or businesses or to obtain rights to such complementary technologies, solutions or businesses. Our management will have considerable discretion in applying our net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether we are using our net proceeds appropriately. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value. We may use our net proceeds for purposes that do not result in any increase in our results of operations, which could cause the price of our common stock to decline. We will not receive any of the proceeds from the sale of the shares of our common stock by the selling stockholders.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, the provisions of our credit facility prohibit us from paying cash dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

Delaware law and our corporate charter and bylaws will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws, that we intend to adopt before the completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. For example, our board of directors will have the authority to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the powers, preferences and rights of each series without stockholder approval. The ability to issue preferred stock could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of our company, or otherwise could adversely affect the market price of our common stock. Our amended and restated certificate of incorporation will require that any action to be taken by stockholders must be taken at a duly called meeting of stockholders, which may only be called by our board of directors, the chairperson of our board of directors or the chief executive officer with the concurrence of a majority of our board of directors, and may not be taken by written consent. Our amended and restated bylaws will require that any stockholder proposals or nominations for election to our board of directors must meet specific advance notice requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations. In addition, we will have a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change membership of a majority of our board of directors. For additional information, please see "Description of Capital Stock."

Furthermore, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," 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. We may, in some cases, use words such as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "potentially," "will" or "may," or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus include statements about:

•: our future financial performance, including our revenues, cost of revenues, operating expenses and ability to sustain profitability;
•: our ability to attract and retain subscribers;
•: our ability to compete effectively or withstand competitive pricing pressures;
•: our rate of revenue growth;
•: our ability to generate additional revenues on a cost-effective basis;
•: our plans regarding expansion of our marketing initiatives;
•: the success of our promotional programs and new products and services;
•: disruptions in our services;
•: our ability to retain and hire necessary employees;
•: success with respect to any future acquisitions;
•: our ability to adequately protect our intellectual property;
•: our liquidity and working capital requirements;
•: the cost associated with being a public company; and
•: the effect of laws applying to our business.

You should not place undue reliance on forward-looking statements in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, which statements apply only as of the date of this prospectus and involve risks and uncertainties. These important factors include, but are not limited to, those described under the caption "Risk Factors" and elsewhere. These factors should not be construed as exhaustive and you should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus contains various estimates related to the Internet, e-commerce and the video game industry. These estimates have been included in studies published or produced by market researchers and other firms, including The NPD Group, International Data Corporation and Frank N. Magid Associates. These estimates have been produced by industry analysts based on trends to date, their knowledge of technologies and markets, and customer research, but these are forecasts only and are subject to inherent uncertainty.

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of the shares of common stock that we are offering will be approximately $ million, after deducting underwriting discounts and commissions and estimated offering expenses and assuming an initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus). If the underwriters' overallotment option is exercised in full, we estimate that the net proceeds to us will be approximately $ million after deducting underwriting discounts and commissions and estimated offering expenses. We will not receive any of the proceeds from the sale of common stock by the selling stockholders.

We intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to acquire or invest in complementary technologies, solutions or businesses or to obtain rights to such complementary technologies, solutions or businesses. We have no present understandings, commitments or agreements to enter into any acquisitions of or investments in other businesses. Our management will have broad discretion over the uses of the net proceeds in this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government. We cannot predict whether the net proceeds invested will yield a favorable return.

The primary purposes of this offering are to raise capital, create a public market for our common stock, allow us easier and quicker access to public markets should we need more capital in the future, increase the profile and prestige of our company with existing and possible future subscribers, vendors and strategic partners, and make our stock more valuable and attractive to our employees and potential employees for compensation purposes.

DIVIDEND POLICY

We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. We do not anticipate paying cash dividends on our capital stock in the foreseeable future and intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, general business conditions, contractual restrictions, capital requirements, business prospects, restrictions on the payment of dividends under Delaware law and any other factors our board of directors may deem relevant.

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2009:

•: on an actual basis;
•: on a pro forma basis, giving effect to the automatic conversion upon the completion of this offering of all outstanding preferred stock into an aggregate of 9,900,801 shares of common stock as if such conversions upon the completion of this offering had occurred on September 30, 2009; and
•: on a pro forma as adjusted basis, giving effect to the sale by us of shares of common stock in this offering, at an initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with the sections titled "Use of Proceeds," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements and related notes included elsewhere.

		As of September 30, 2009

		Actual			Pro Forma			Pro Forma As Adjusted(1)
		(in thousands, except share data)
Cash and cash equivalents		$	11,014		$	11,014		$

Long-term liabilities (including current portion):
	Obligations under credit facility		2,500			2,500
	Other long-term liabilities		2,656			2,656

	Total long term liabilities (including current portion)		5,156			5,156

Stockholders' equity:
	Convertible preferred stock, $0.0001 par value; 10,048,494 shares authorized (actual); 9,900,801 issued and outstanding (actual); 5,000,000 shares authorized (pro forma and pro forma as adjusted); no shares issued and outstanding (pro forma and pro forma as adjusted)		21,249			—
	Common stock, $0.0001 par value; 20,000,000 shares authorized (actual); 5,367,819 shares issued and outstanding (actual); 100,000,000 shares authorized (pro forma and pro forma as adjusted); 15,268,620 shares issued and outstanding (pro forma) and shares issued and outstanding (pro forma as adjusted)		1			2
	Additional paid-in capital		3,589			24,837
	Accumulated deficit		(6,192	)		(6,192	)

	Total stockholders' equity		18,647			18,647

	Total capitalization	$	23,803		$	23,803		$

(1): A $1.00 increase (decrease) in the assumed initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase (decrease) the amount of additional paid-in capital, total stockholders' equity and total capitalization by approximately $ million, assuming the number of shares offered by us,

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as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The outstanding share information set forth above is as of September 30, 2009 and excludes:

•: 3,746,202 shares of common stock issuable upon the exercise of outstanding options as of September 30, 2009 to purchase our common stock granted pursuant to our 2002 Stock Plan at a weighted average exercise price of $1.11 per share;
•: 349,848 shares of common stock issuable upon the exercise of outstanding warrants as of September 30, 2009 at a weighted average exercise price of $1.44 per share;
•: an aggregate of 424,897 shares of common stock available for issuance as of September 30, 2009 under our 2002 Stock Plan; and
•: 1,500,000 shares of common stock, subject to increase on an annual basis, reserved for issuance under our 2010 Plan, which we plan to adopt in connection with this offering.

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DILUTION

If you invest in our common stock, you will experience immediate and substantial dilution to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after the offering.

The historical net tangible book value of our common stock as of September 30, 2009 was $14.7 million, or $2.74 per share. Historical net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding common stock. Dilution in net tangible book value per share represents the difference between the amount per share that you pay in this offering and the net tangible book value per share immediately after this offering. Dilution results from the fact that the initial public offering price is substantially in excess of the net tangible book value per share attributable to historical stockholders.

After giving effect to the (i) automatic conversion of our outstanding preferred stock into common stock in connection with this offering and (ii) receipt of the net proceeds from our sale of shares of common stock in this offering at the initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2009 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis:


Assumed initial public offering price per share				$
Net tangible book value per share as of September 30, 2009	$	2.74
Decrease in net tangible book value per share attributable to conversion of preferred stock	$	(1.78	)
Pro forma net tangible book value per share before this offering	$	0.96
Increase in pro forma net tangible book value per share attributable to this offering	$
Pro forma as adjusted net tangible book value per share				$

Dilution per share to new investors				$

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value as of September 30, 2009 by approximately $ million, the pro forma as adjusted net tangible book value after this offering by $ per share and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance for the underwriters and other estimated offering expenses payable by us.

The table below summarizes as of September 30, 2009, on a pro forma as adjusted basis described above, the number of shares of our common stock we issued and sold, the total consideration we received and the average price per share (i) paid to us by existing stockholders, (ii) to be paid by new investors purchasing our common stock in this offering at the initial public offering price of $ per share (the mid-point of the price range set forth on the cover page of this prospectus) before deducting estimated underwriting discounts and commissions payable by us of $ million and estimated offering expenses of approximately $ million, and (iii) the average price per share

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paid by existing stockholders and by new investors who purchase shares of common stock in this offering.

	Shares Purchased			Total Consideration

	Shares Purchased			Total Consideration			Average Price Per Share
	Number		Percent	Amount		Percent	Average Price Per Share
			(in thousands)
Existing stockholders		15,268,620		$	24,839		$	1.63
New investors
Total			100.0%	$		100.0%	$

The above discussion and tables are based on 15,268,620 shares of common stock issued and outstanding as of September 30, 2009 on a pro forma as adjusted basis and excludes:

•: 3,746,202 shares of common stock issuable upon the exercise of outstanding options as of September 30, 2009 to purchase our common stock granted pursuant to our 2002 Stock Plan at a weighted average exercise price of $1.11 per share;
•: 349,848 shares of common stock issuable upon the exercise of outstanding warrants as of September 30, 2009 at a weighted average exercise price of $1.44 per share;
•: an aggregate of 424,897 additional shares of common stock available for issuance as of September 30, 2009 under our 2002 Stock Plan; and
•: 1,500,000 shares of common stock, subject to increase on an annual basis, reserved for issuance under our 2010 Plan, which we plan to adopt in connection with this offering.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to shares or % of the total number of shares of our common stock outstanding after this offering. If the underwriters' overallotment option is exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to or % of the total number of shares of our common stock outstanding after this offering.

To the extent that any outstanding options or warrants are exercised, new investors will experience further dilution.

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected historical consolidated financial data below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section is not intended to replace the consolidated financial statements and is qualified in its entirety by the consolidated financial statements and related notes included in this prospectus.

The consolidated statements of operations data for the years ended March 31, 2007, 2008 and 2009 and the consolidated balance sheet data as of March 31, 2008 and 2009 are derived from our audited consolidated financial statements included in this prospectus. The consolidated statements of operations data for the years ended March 31, 2005 and 2006 and the consolidated balance sheet data as of March 31, 2005, 2006 and 2007 are derived from our audited consolidated financial statements not included in this prospectus. The unaudited consolidated statements of operations data for the six months ended September 30, 2008 and 2009, and the unaudited consolidated balance sheet data as of September 30, 2009, are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Results for the six months ended September 30, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending March 31, 2010. Historical results are not necessarily indicative of the results to be expected in the future.

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				Fiscal Year Ended March 31,															Six Months Ended September 30,

				2005			2006			2007			2008			2009			2008			2009
				(in thousands, except share and per share data)
Consolidated Statements of Operations:
Revenues:
	Base subscription			$	12,145		$	25,232		$	38,942		$	55,303		$	71,756		$	33,858		$	41,627
	Previously rented product				3,646			5,713			6,851			9,171			10,786			4,529			4,804

			Total rental revenues		15,791			30,945			45,793			64,474			82,542			38,387			46,431
	Advertising and other				—			—			220			1,672			2,128			1,030			1,250

			Total revenues		15,791			30,945			46,013			66,146			84,670			39,417			47,681

Cost of revenues:
	Rental(1)				11,025			21,019			27,384			36,658			45,140			19,714			21,952
	Advertising and other				—			—			—			238			202			105			368

			Total cost of revenues		11,025			21,019			27,384			36,896			45,342			19,819			22,320

Gross profit					4,766			9,926			18,629			29,250			39,328			19,598			25,361

Operating expenses:
	Fulfillment(2)				2,174			3,558			4,382			6,424			8,780			4,141			4,532
	Technology and development(2)				1,315			1,844			2,863			3,636			6,542			2,870			3,410
	Marketing(2)				5,106			8,182			9,274			13,526			17,521			8,065			8,303
	General and administrative(2)				1,149			1,371			2,179			3,065			3,592			1,635			2,438
	Depreciation and amortization				110			248			191			724			1,175			442			727
	Impairment of acquired website				—			—			—			—			668			—			—
	Impairment of goodwill				—			—			—			—			449			—			—

		Total operating expenses			9,854			15,203			18,889			27,375			38,727			17,153			19,410

Operating (loss) income					(5,088	)		(5,277	)		(260	)		1,875			601			2,445			5,951

Other income (expense):
	Interest income				—			65			250			199			68			41			5
	Interest expense				119			283			(353	)		(329	)		(225	)		(119	)		(148	)
	Change in fair value of warrants				—			—			—			—			—			—			(404	)
	Other—net				(142	)		(231	)		(30	)		(57	)		(164	)		(90	)		(23	)

		Total other income (expense)			(23	)		117			(133	)		(187	)		(321	)		(168	)		(570	)

Income (loss) before income tax (provision) benefit					(5,111	)		(5,160	)		(393	)		1,688			280			2,277			5,381
Income tax (provision) benefit					(1	)		(1	)		(1	)		(60	)		3,780			3,111			(2,404	)

Net income (loss)					(5,112	)		(5,161	)	$	(394	)	$	1,628		$	4,060		$	5,388		$	2,977
Undistributed income attributable to preferred stockholders					—			—			—			(1,628	)		(3,276	)		(3,907	)		(2,245	)

Net income available to common stockholders				$	(5,112	)	$	(5,161	)	$	(394	)		—		$	784		$	1,481		$	732

Net income (loss) per share:
	Basic			$	(1.22	)	$	(1.21	)	$	(0.09	)		—		$	0.16		$	0.31		$	0.14

	Diluted			$	(1.22	)	$	(1.21	)	$	(0.09	)		—		$	0.10		$	0.19		$	0.09

Weighted average shares outstanding:
	Basic				4,189,025			4,279,669			4,192,622			4,551,307			4,893,713			4,765,129			5,196,328
	Diluted				4,189,025			4,279,669			4,192,622			4,551,307			7,824,282			7,612,750			8,173,469



Pro forma net income (loss) per share (unaudited):
	Basic	$	0.28	$	0.20

	Diluted	$	0.23	$	0.16

Pro forma weighted average shares outstanding used in calculating net income (loss) per share (unaudited)
	Basic		14,761,348		15,097,129
	Diluted		17,691,918		18,074,270

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(1): Amortization of video game library included in the above line item:

	Fiscal Year Ended March 31,										Six Months Ended September 30,

	2005		2006		2007		2008		2009		2008		2009
	(in thousands)
Amortization of video game library	$	4,086	$	6,855	$	9,206	$	11,637	$	13,455	$	6,105	$	5,872

(2): Stock-based compensation, including the impact of warrants and options, included in the above line items:

	Fiscal Year Ended March 31,										Six Months Ended September 30,

	2005		2006		2007		2008		2009		2008		2009
	(in thousands)
Fulfillment	$	5	$	4	$	43	$	69	$	88	$	50	$	39
Technology and development		14		20		30		109		478		145		152
Marketing		4		20		36		82		165		85		351
General and administrative		21		30		15		82		109		58		49

Total stock-based compensation expense	$	44	$	74	$	124	$	342	$	840	$	338	$	591

		As of March 31,

		As of March 31,										As of September 30, 2009
		2005		2006		2007		2008		2009		As of September 30, 2009
		(in thousands)
Consolidated Balance Sheet Data:
	Cash and cash equivalents	$	10,377	$	6,518	$	2,974	$	3,700	$	6,114	$	11,014
	Total assets		17,125		16,947		16,901		22,077		34,601		39,148
	Long term liabilities (including current portion)		1,208		3,500		3,500		3,500		6,116		5,156
	Convertible preferred stock		21,520		21,520		21,520		21,520		21,594		21,249
	Total stockholders' equity		12,686		7,623		7,412		9,503		15,451		18,647

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under "Risk Factors" and elsewhere in this prospectus. See "Special Note Regarding Forward-Looking Statements."

Company Overview

Our subscription service has grown rapidly since its launch in 2002. We believe our growth has been driven by the compelling value proposition of our subscription model, extensive selection of titles, high level of customer service and effective marketing programs, as well as the increase in the installed base of video game consoles. Our subscription service allows subscribers to have one or more video games out concurrently with no due dates, late fees or shipping charges for a fixed monthly fee. Subscribers select titles on our website, www.gamefly.com, receive video games via First-Class Mail and return them to us at their convenience using our prepaid mailers.

We sell new and used games to our subscribers and others through our website. Our subscribers can also purchase used games through our "Keep" feature, which enables them to purchase a game they are renting. To complement our subscription service and video game sales, we operate a network of advertising-supported websites that provide video game content and information. Our network of websites currently attracts approximately 4.4 million monthly unique visitors, most of whom are not subscribers. We have attracted premium advertisers who seek to reach the 18-34 year-old male demographic.

Our revenues increased from $15.8 million in the fiscal year ended March 31, 2005 to $84.7 million in the fiscal year ended March 31, 2009, representing a compound annual growth rate of 52%. In the fiscal year ended March 31, 2009, approximately 85% of our revenues were generated from our subscription service. Our subscriber base increased from approximately 74,000 as of March 31, 2005 to more than 328,000 as of March 31, 2009, representing a 45% compound annual growth rate.

Business Trends

Our revenue, operating expenses and number of subscribers have generally increased on a sequential basis from quarter to quarter. However, we experience effects of seasonality due to increases in consumer spending during the holiday season, including the purchases of video games and video game consoles. Accordingly, our revenues and the number of our new subscribers generally increase at a higher rate during the fiscal quarters ending December 31 and March 31. In anticipation of an increase in new subscribers, we increase our inventory of video games at a higher rate during these quarters, which results in relatively greater amortization expense in these quarters and, to a lesser degree, in subsequent quarters. We also increase our sales and marketing expenses during these quarters in order to attract more subscribers.

Our business may also be impacted by the initial release of major video game titles, which occur throughout the year, and we often experience an increase in subscribers in anticipation of popular title releases. We may purchase a larger number of these newly released major video game titles in order to accommodate an anticipated demand increase which results in relatively greater amortization expense during the period of these purchases and, to a lesser degree, subsequent periods.

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We may also increase our sales and marketing expenditures to correspond with the release of these titles.

Key Business Metrics

Our management regularly reviews a number of financial and operating metrics, including the following key figures, to evaluate our business, allocate resources, make decisions regarding corporate strategies and evaluate forward-looking projections.

•: Total subscribers. A subscriber is an individual who pays for monthly access to our online video game rental subscription service. Total subscribers is defined as the number of subscribers at the end of the relevant period.
•: Monthly churn. Monthly churn is a measure representing the number of subscribers that cancel in the quarter divided by the sum of beginning subscribers and gross subscriber additions during the quarter, divided by three. Management uses this measure to determine the level of satisfaction of our subscriber base.
•: Average monthly revenue per subscriber. Average monthly revenue per subscriber is measured as total subscription revenues earned in the period from our online video game rental subscription service divided by the average number of subscribers in the period, divided by the number of months in the period. The average number of subscribers for the period is calculated by taking the average of the beginning and ending number of subscribers for the period.
•: Subscriber acquisition cost. Subscriber acquisition cost is defined as external marketing and advertising expense, divided by total subscriber additions in the period. Management uses this metric to determine the efficiency of our marketing and advertising programs in acquiring new subscribers.

The following represents our performance highlights for the periods presented:

	Fiscal Year Ended March 31,									Six Months Ended September 30,

	2007			2008			2009			2008			2009
Total subscribers(1)		191,354			266,853			328,119			267,327			334,417
Monthly churn(2)		7.1	%		7.3	%		7.7	%		8.0	%		8.2	%
Average monthly revenue per subscriber		$20.28			$20.12			$20.10			$21.13			$20.94
Subscriber acquisition cost		$31.08			$29.93			$28.98			$31.40			$25.90

(1): At period end.
(2): Monthly churn is the average monthly churn for the quarters included in the periods shown.

Components of Consolidated Statements of Operations

Revenues

Base subscription. We generate base subscription ("subscription") revenues by charging our subscribers a monthly subscription fee to access our full video game library. We charge each subscriber's credit card for the full monthly price of their subscription at the commencement of their subscription period and at each renewal date unless they cancel before the renewal date. We recognize subscription revenues ratably over each subscriber's monthly subscription period. Refunds to customers are recorded as reductions of revenues. When users sign up for trial subscriptions, we automatically

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charge their credit cards for a subscription at the end of the trial period unless they cancel before the end of the trial period. No revenue is recognized or allocated to the free trial period. We generate all of our subscription revenues in the United States.

Previously rented product. Previously rented product ("PRP") revenues reflected in historical periods consist of sales of used video games. Revenues from sales of video games are recognized upon shipment of the video game or, in the case of rented video games purchased through our "Keep" feature, upon shipment of the game case and manual. Revenues from product sales are subject to variability due to the fact that from time to time we change the prices of used video games in our library, or conduct bulk sales of such video games at or below carrying value, as a way to manage inventory.

Advertising and other. Advertising and other revenues primarily consist of advertising revenue that is recognized upon the delivery of advertising impressions on our network of websites and our mailers.

Cost of Revenues

Rental. Cost of rental revenues primarily consists of the amortization of our video game library, postage and packaging expenses related to shipping video games to and from subscribers, carrying value of previously rented video games that have been sold and, to a lesser extent, write-offs associated with items included in our video game library that are lost or damaged during the rental or sales process.

Advertising and other. Cost of advertising and other revenues consists primarily of expenses paid to firms that help us manage the placement of third-party advertisements on our network of websites and our mailers.

Operating Expenses

Fulfillment. Fulfillment expenses represent costs incurred in operating and staffing our distribution and customer service centers, including costs attributable to receiving, inspecting and warehousing our video game library. Fulfillment expenses also include credit card transaction fees.

Technology and development. Technology and development expenses consist of payroll and related costs incurred in testing, maintaining and modifying our network of websites, telecommunications systems, infrastructure, and other internal use software systems.

Marketing. Marketing expenses consist of payroll and related costs, advertising, public relations, and other costs related to promotional activities. We expense these costs as incurred.

General and administrative. General and administrative expenses consist principally of personnel-related expenses for our executive, finance, legal, human resources and other administrative personnel, as well as accounting and legal professional fees and other general corporate expenses, including settlement of legal claims.

Depreciation and amortization. Depreciation and amortization includes depreciation of property and equipment as well as amortization of intangible assets.

Impairment of acquired website. Impairment of acquired website is the difference between the carrying value and the fair value of the acquired website. We review acquired websites for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

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Impairment of goodwill. We classify the difference between the purchase price and the fair value of net assets acquired in a business combination as goodwill. Impairment of goodwill represents the amount by which the carrying value of a reporting unit's goodwill exceeds its implied fair value.

Other Income (Expense)

Interest income. Interest income includes interest earned on cash and cash equivalents.

Interest expense. Interest expense includes the interest expense associated with our revolving line of credit and any other debt instruments we may have outstanding.

Change in fair value of warrants. Change in fair value of warrants represents the change in the fair value of our warrant liability from period to period.

Other—net. Other—net includes the amortization of debt issuance costs associated with our revolving line of credit and any other debt instruments we may have outstanding.

Income Tax Provision

Income tax expense consists of federal and state income taxes in the United States.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances at the time made, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

We consider the assumptions and estimates associated with revenue recognition, the period of amortization and estimated salvage value of our video game library, recoverability of intangible assets, stock-based compensation and income taxes to be our critical accounting policies and estimates. For further information on our significant accounting policies, see Note 2 of the accompanying notes to our consolidated financial statements.

Revenue Recognition

Our revenues include monthly subscription fees, revenues from sales of video games and revenues from advertising. We recognize subscription revenues ratably during each subscriber's monthly subscription period. In accordance with GAAP, we recognize revenue when the following criteria have been met: persuasive evidence of an arrangement exists, no significant company obligations remain, collection of the related receivable is reasonably assured and the fees are fixed or determinable. Refunds to customers are recorded as a reduction of revenues.

Revenue from sales of video games are recognized upon shipment of the video game or, in the case of rented video games purchased through our "Keep" feature, upon shipment of the game case and manual. Advertising and other revenue is primarily comprised of advertising revenue that is recognized upon the delivery of advertising impressions on our network of websites and our mailers.

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Amortization of Video Game Library

Our video game library is carried at the lower of cost or market using the specific identification method. We amortize our video game library, less an estimated salvage value of the cost of the video game, using an accelerated sum-of-the-months digits method. We believe the use of an accelerated method is appropriate because we normally experience heavy initial demand for a title, which subsides once initial demand has been satisfied. In establishing the estimated salvage values and useful lives for our video game library, we consider historical sales prices and the periods over which titles historically have been rented. We periodically evaluate the estimates surrounding the useful lives and salvage values used in amortizing our video game library. Changes to these estimates resulting from changes in consumer demand, changes in our product offering or the price or availability of retail video games may materially impact the carrying value of our video game library and our gross margins.

Recoverability of Intangible Assets, Including Goodwill

We review our indefinite-lived intangible assets for impairment at least annually or as indicators of impairment exist based on comparing the fair value of the asset to the carrying value of the asset. Intangible assets not subject to amortization are comprised of goodwill and certain Internet domain names. As of September 30, 2009, intangible assets not subject to amortization are comprised of $2.2 million related to goodwill and $0.5 million related to certain Internet domain names. We perform our annual impairment test as of January 1. Our goodwill impairment test requires the use of fair-value techniques, which are inherently subjective.

We intend to estimate the fair value of the goodwill as of January 1, 2010 using a combination of the income and market value approaches for the reporting unit in which the goodwill resides.

Under the income approach, we will calculate the fair value of the reporting unit based on the present value of estimated future cash flows. Under the market approach, we intend to estimate the fair value based on market multiples of revenue and earnings for comparable publicly-traded companies or comparable sales transactions of similar companies. The estimates and assumptions to be used in our calculations included revenue growth rates, expense growth rates, expected capital expenditures to determine projected cash flows, expected tax rates, and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity, and our weighted average cost of capital based on returns on interest-bearing debt and common stock.

We intend to estimate the fair value of our Internet domain names as of January 1, 2010 based on comparable market transactions.

For the evaluation of intangible assets not subject to amortization, if events or changes in circumstances indicate the carrying value may not be recoverable, we compare the fair value of these intangible assets to their carrying value. We recognize impairment, if any, in the period of identification to the extent the carrying value of an asset exceeds the fair value of such asset.

Stock-Based Compensation

Prior to April 1, 2006, we elected to account for stock-based compensation related to employee stock option grants using the minimum value method for recognition purposes. Under this method, stock option awards issued to employees are accounted for using the Black-Scholes option-pricing method with a 0% volatility assumption. The expense associated with stock-based compensation was amortized over the periods the employee performs the related services, generally the vesting period. Effective April 1, 2006, we adopted new principles for share-based payment transactions, which requires the measurement and recognition of compensation expense for all stock-based awards issued to employees and directors based on estimated fair values.

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We adopted the new share-based payment principles using the prospective method, which requires the application of the accounting standard as of April 1, 2006, the first day of our fiscal year. In addition, we continue to amortize the compensation expense recorded under the minimum value method as those awards continue to vest. Effective April 1, 2006, stock-based compensation expense includes both the compensation expense for stock-based compensation awards based on the grant-date minimum value estimations as those awards continue to vest and the compensation expense for all stock-based compensation awards granted after April 1, 2006 will be based on the grant-date fair value estimations.

Under both the current and prior methods for share-based payment transactions, we selected the Black-Scholes option-pricing model to determine the estimated fair value and minimum value, respectively, at the date of grant for stock options. For awards granted prior to our adoption of the new method, the expense associated with stock-based compensation is amortized on an accelerated basis over the periods the employee performs the related services, generally the vesting period, consistent with the multiple option method. For awards granted after April 1, 2006, we made a one-time election to amortize compensation expense using the straight-line attribution method, under which stock-based compensation expense is recognized on a straight-line basis over the period the employee performs the related services, generally the vesting period of four years, net of estimated forfeitures. We have estimated forfeitures based on historical experience and will update the rates, as necessary, in subsequent periods if actual forfeitures differ from initial estimates.

The Black-Scholes option-pricing model requires management assumptions regarding various factors that require extensive use of accounting judgment and financial estimates. The fair value of the common stock underlying stock option grants is a significant input into the Black-Scholes option-pricing model. In the absence of a public trading market for our common stock, the exercise price per share for our stock option grants equal the estimated fair market value of our common stock on the grant date as determined by our board of directors in good faith using factors it considered appropriate, including the price at which shares of our common stock and preferred stock had previously been issued, the rights associated with our preferred stock and our business prospects, and which beginning in September 2007 included written reports periodically prepared by an independent valuation firm retained by our board of directors. In determining the fair value of our common stock, we estimate the aggregate fair value of the entire company (referred to as Business Enterprise Value or BEV) using a combination of the income approach and the market approach at each valuation date: September 30, 2008, December 31, 2008, March 31, 2009, and June 30, 2009. The income approach is an estimate of the present value of the future monetary benefits expected to flow to the owners of a business. It requires a projection of the cash flows that the business is expected to generate over a forecast period and an estimate of the present value of cash flows beyond that period, which is referred to as the terminal value. These cash flows are converted to present value by means of discounting, using a rate of return that accounts for the time value of money and the appropriate degree of risks inherent in the business. The market approach considers multiples of financial metrics based on both acquisitions and trading multiples of a group of guideline public companies. These multiples are then applied to our financial metrics to derive an indication of value.

Our indicated BEV at each valuation date was then allocated to the then outstanding shares of convertible preferred stock, warrants and options to purchase shares of convertible preferred stock and common stock, and common stock, using a probability-weighted expected return methodology ("PWERM"). The PWERM treats the various components of our capital structure as a series of call options on the proceeds expected from the sale of the company or the liquidation of our assets at some future date. These call options are then valued using the Black-Scholes option pricing model. This model defines the securities' fair values as functions of the current fair value of the company and assumptions based on the securities' rights and preferences. As a result, the option-pricing method requires assumptions regarding the anticipated timing of a potential liquidity event, such as an initial public offering, and the estimated volatility of our equity securities. The anticipated timing of a liquidity

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event utilized in these valuations was based on then current plans and estimates of our board of directors and management. Estimates of the volatility of our stock used in the PWERM were based on available information on the volatility of capital stock of comparable publicly traded companies.

We granted stock options with the following exercise prices during the twelve months ended September 30, 2009:

Option Grant Dates		Exercise Price Per Share

October 23, 2008	470,000	$	3.40
November 10, 2008	9,900	$	3.40
February 18, 2009	47,000	$	3.13
April 29, 2009	105,000	$	2.94
August 20, 2009	55,000	$	3.61

In determining the fair value of our BEV and common stock, we conducted current valuations using the approaches mentioned above. These estimates of the fair value of our common stock were made on information from the following valuation dates:

Valuation Date	Fair Value Per Share

September 30, 2008	$	3.40
December 31, 2008	$	3.13
March 31, 2009	$	2.94
June 30, 2009	$	3.61

Following this offering, we expect the exercise price of our options to be based on the closing price of our common stock on the date of grant or the date immediately prior to the date of grant.

Other significant inputs used by us in the Black-Scholes option-pricing model are as follows:

•: Volatility. We computed the expected volatility using multiple guideline public companies for a period approximating the expected term.
•: Expected term. We estimate the expected term for options granted after April 1, 2006, using the simplified method, which utilizes the weighted average expected life of each tranche of the stock option, determined based on the sum of each tranche's vesting period plus one-half of the period from the vesting date of each tranche to the stock option's expiration.
•: Risk free rate. The risk free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
•: Dividend yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

We also account for stock-based instruments and awards issued to nonemployees and warrants to purchase convertible preferred stock at fair value using the Black-Scholes option-pricing model. Management believes that the fair value of the stock-based awards is more reliably measured than the fair value of the services received. The fair value of each nonemployee award is remeasured each period until a commitment date is reached, which is generally the vesting date. Effective April 1, 2009, we adopted authoritative guidance issued by the FASB on contracts in an entity's own equity that requires the convertible preferred stock warrants to be classified as liabilities at their estimated fair value with changes in fair value at each reporting date recognized in the statement of operations

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regardless of whether the convertible preferred stock purchase warrants are vested. The FASB guidance requires this treatment since the warrants are exercisable into preferred stock with provisions that protect holders from a decline in the stock price.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. In evaluating our ability to recover our deferred tax assets, in full or in part, we consider available positive and negative evidence, including our history of achieving operating objectives; the achievement of cumulative pre-tax income on a trailing twelve quarter basis; our established subscriber base; future projections of pre-tax income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.

We operate within the tax jurisdictions of the U.S. federal government and various states and are subject to audit by the corresponding tax authorities. We provide for tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, relative tax law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

On April 1, 2007, we adopted authoritative guidance issued by the FASB on accounting for uncertainty in income taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. This guidance requires that the tax effects of a position be recognized only if it is "more-likely-than-not" to be sustained based solely on its technical merits as of the reporting date. We consider many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

With the adoption of this guidance, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle as of the date of adoption. This guidance prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. We did not have any unrecognized tax benefits as of the date of adoption. Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. See Note 12 of "Notes to Consolidated Financial Statements" for additional information, including the effects of adoption on our consolidated financial position, results of operations, and cash flows.

As of March 31, 2009, we have net deferred tax assets of $3.9 million. Should we determine that we will not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the net deferred tax assets would reduce income in the period such determination was made. Our effective tax rates have differed from the U.S. federal statutory tax rate primarily due to changes in our deferred income tax valuation allowance, state taxes, impairment of goodwill, and certain benefits realized related to stock option activity. Effective April 1, 2009, we adopted authoritative guidance issued by the FASB on contracts in an entity's own equity that requires our convertible preferred stock warrants outstanding on April 1, 2009 and each reporting date thereafter to be classified as liabilities at their estimated fair value with changes in fair value at each reporting date recognized in the statement of operations. The portion of any change in fair value of the warrant liability classified as "change in

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fair value of warrants" in the consolidated statement of operations will not be deductible for tax purposes and will therefore impact our effective tax rate. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

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Results of Operations

The following table sets forth, for the periods presented, our consolidated statements of operations. In the table below and throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" consolidated statements of operations data for the fiscal years ended March 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements; the consolidated statements of operations data for the six-month periods ended September 30, 2008 and 2009 have been derived from our unaudited interim consolidated financial statements. The information contained in the table below should be read in conjunction with our consolidated financial statements and the related notes beginning on page F-1 of this prospectus.

			Fiscal Year Ended March 31,									Six Months Ended September 30,

			2007			2008			2009			2008			2009
			(in thousands, except share and per share data)
Consolidated Statements of Operations:
Revenues:
	Base subscription		$	38,942		$	55,303		$	71,756		$	33,858		$	41,627
	Previously rented product			6,851			9,171			10,786			4,529			4,804

		Total rental revenues		45,793			64,474			82,542			38,387			46,431
	Advertising and other			220			1,672			2,128			1,030			1,250

		Total revenues		46,013			66,146			84,670			39,417			47,681
Cost of revenues:
	Rental(1)			27,384			36,658			45,140			19,714			21,952
	Advertising and other			—			238			202			105			368

		Total cost of revenues		27,384			36,896			45,342			19,819			22,320

Gross profit				18,629			29,250			39,328			19,598			25,361

Operating expenses:
	Fulfillment(2)			4,382			6,424			8,780			4,141			4,532
	Technology and development(2)			2,863			3,636			6,542			2,870			3,410
	Marketing(2)			9,274			13,526			17,521			8,065			8,303
	General and administrative(2)			2,179			3,065			3,592			1,635			2,438
	Depreciation and amortization			191			725			1,175			442			727
	Impairment of acquired website			—			—			668			—			—
	Impairment of goodwill			—			—			449			—			—

		Total operating expenses		18,889			27,375			38,727			17,153			19,410

Operating (loss) income				(260	)		1,875			601			2,445			5,951

Other income (expense):
	Interest income			250			199			68			41			5
	Interest expense			(353	)		(329	)		(225	)		(119	)		(148	)
	Change in fair value of warrants(3)			—			—			—			—			(404	)
	Other—net			(30	)		(57	)		(164	)		(90	)		(23	)

		Total other income (expense)		(133	)		(187	)		(321	)		(168	)		(570	)

Income (loss) before income tax (provision) benefit				(393	)		1,688			280			2,277			5,381
Income tax (provision) benefit(4)				(1	)		(60	)		3,780			3,111			(2,404	)

Net income (loss)			$	(394	)	$	1,628		$	4,060		$	5,388		$	2,977
Undistributed income attributable to preferred stockholders				—			(1,628	)		(3,276	)		(3,907	)		(2,245	)

Net income (loss) available to common stockholders			$	(394	)		—		$	784		$	1,481		$	732

Net income (loss) per share:
	Basic		$	(0.09	)		—		$	0.16		$	0.31		$	0.14

	Diluted		$	(0.09	)		—		$	0.10		$	0.19		$	0.09

Weighted average shares outstanding:
	Basic			4,192,622			4,551,307			4,893,713			4,765,129			5,196,328
	Diluted			4,192,622			4,551,307			7,824,282			7,612,750			8,173,469



Pro forma net income (loss) per share (unaudited):
	Basic	$	0.28	$	0.20

	Diluted	$	0.23	$	0.16

Pro forma weighted average shares outstanding used in calculating net income (loss) per share (unaudited)
	Basic		14,761,348		15,097,129
	Diluted		17,691,918		18,074,270

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(1): Amortization of video game library included in the above line item:

	Fiscal Year Ended March 31,						Six Months Ended September 30,

	2007		2008		2009		2008		2009
	(in thousands)
Amortization of video game library	$	9,206	$	11,637	$	13,455	$	6,105	$	5,872

(2): Stock-based compensation, including the impact of warrants and options, included in the above line items:

		Fiscal Year Ended March 31,						Six Months Ended September 30,

		2007		2008		2009		2008		2009
		(in thousands)
Fulfillment		$	43	$	69	$	88	$	50	$	39
Technology and development			30		109		478		145		152
Marketing			36		82		165		85		351
General and administrative			15		82		109		58		49

	Total stock-based compensation expense	$	124	$	342	$	840	$	338	$	591

(3): Effective April 1, 2009, we adopted authoritative guidance issued by the FASB that requires our convertible preferred stock warrants to be classified as liabilities at their estimated fair value, with changes in fair value at each reporting date recognized in the consolidated statement of operations. For the six months ended September 30, 2009, we recorded an expense for the change in the fair value of our warrant liability.
(4): The income tax benefit recognized in the six months ended September 30, 2008 and the fiscal year ended March 31, 2009 is primarily the result of us releasing all of the previously established valuation allowance.

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The following table sets forth, for the periods presented, our consolidated statements of operations as a percentage of total revenues. The information contained in the table below should be read in conjunction with the consolidated financial statements and the related notes beginning on page F-1 of this prospectus.

			Fiscal Year Ended March 31,									Six Months Ended September 30,

			2007			2008			2009			2008			2009
Consolidated Statements of Operations:
Revenues:
	Base subscription			84.6	%		83.6	%		84.8	%		85.9	%		87.3	%
	Previously rented product			14.9			13.9			12.7			11.5			10.1

		Total rental revenues		99.5			97.5			97.5			97.4			97.4
	Advertising and other			0.5			2.5			2.5			2.6			2.6

		Total revenues		100.0			100.0			100.0			100.0			100.0

Cost of revenues:
	Rental			59.5			55.4			53.3			50.0			46.0
	Advertising and other			0.0			0.4			0.2			0.3			0.8

		Total cost of revenues		59.5			55.8			53.5			50.3			46.8

Gross profit				40.5			44.2			46.5			49.7			53.2

Operating expenses:
	Fulfillment			9.5			9.7			10.4			10.5			9.5
	Technology and development			6.2			5.5			7.7			7.3			7.2
	Marketing			20.2			20.4			20.7			20.5			17.4
	General and administrative			4.7			4.6			4.2			4.1			5.1
	Depreciation and amortization			0.4			1.1			1.4			1.1			1.5
	Impairment of acquired websites			0.0			0.0			0.8			0.0			0.0
	Impairment of goodwill			0.0			0.0			0.5			0.0			0.0

		Total operating expenses		41.0			41.3			45.7			43.5			40.7

Operating (loss) income				(0.5	)		2.9			0.8			6.2			12.5

Other income (expense):
	Interest income			0.5			0.3			0.1			0.1			0.0
	Interest expense			(0.8	)		(0.5	)		(0.3	)		(0.3	)		(0.3	)
	Change in fair value of warrants			0.0			0.0			0.0			0.0			(0.8	)
	Other—net			(0.1	)		(0.1	)		(0.2	)		(0.2	)		(0.0	)

		Total other income (expense)		(0.4	)		(0.3	)		(0.4	)		(0.4	)		(1.1	)

Income (loss) before income tax (provision) benefit				(0.9	)		2.6			0.4			5.8			11.4
Income tax (provision) benefit				(0.0	)		(0.1	)		4.5			7.9			(5.0	)

Net income (loss)				(0.9	)		2.5			4.9			13.7			6.4
Undistributed income attributable to preferred stockholders				0.0			(2.5	)		(3.9	)		(9.9	)		(4.7	)

Net income (loss) available to common stockholders				(0.9	)		0.0			1.0			3.8			1.7

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Six Months Ended September 30, 2008 and 2009

Revenues

		Six Months Ended September 30,

		2008		2009		% Change
		(in thousands)
Base subscription		$	33,858	$	41,627		22.9	%
Previously rented product			4,529		4,804		6.1	%

	Total rental revenues		38,387		46,431		21.0	%
Advertising and other			1,030		1,250		21.4	%

	Total revenues	$	39,417	$	47,681		21.0	%

Base subscription. Our subscription revenues increased $7.8 million, or 22.9%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily the result of an increase in the number of total subscribers from 267,327 to 334,417 at the end of the respective periods. We believe the increase in our subscriber base is a result of our increased marketing efforts and brand awareness.

Previously rented product. Our PRP revenues increased $0.3 million, or 6.1%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily due to an increase in the number of used games sold.

Advertising and other. Our advertising and other revenues increased $0.2 million, or 21.4%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily due to an increase in visitor traffic and resulting impressions delivered as well as the addition of more advertising-focused websites, including ShackNews.

Cost of Revenues

		Six Months Ended September 30,

		2008		2009		% Change
		(in thousands)
Rental		$	19,714	$	21,952		11.4	%
Advertising and other			105		368		250.5	%

	Total cost of revenues	$	19,819	$	22,320		12.6	%

Cost of rental. Our cost of rental revenues increased $2.2 million, or 11.4%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily due to an increase in postage and packaging costs as a result of serving a larger subscriber base and, to a lesser extent, an increase in postage rates. An increase in the cost of the used games sold, resulting from an increase in rental and sales volume, also contributed to the overall increase during the period.

Cost of advertising and other. Our cost of advertising and other revenues increased by $0.3 million, or 250.5%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily due to costs associated with the introduction of video game rental kiosks and the acquisition of ShackNews.

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Operating Expenses

		Six Months Ended September 30,

		2008		2009		% Change
		(in thousands)
Fulfillment		$	4,141	$	4,532		9.4	%
Technology and development			2,870		3,410		18.8	%
Marketing			8,065		8,303		3.0	%
General and administrative			1,635		2,438		49.1	%
Depreciation and amortization			442		727		64.5	%

	Total operating expenses	$	17,153	$	19,410		13.2	%

Fulfillment. Our fulfillment expenses increased $0.4 million, or 9.4%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. The increase was primarily the result of an increase in credit card transaction costs due to a greater number of transactions and, to a lesser extent, an increase in personnel and lease costs associated with our distribution centers.

Technology and development. Our technology and development expenses increased $0.5 million, or 18.8%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This was primarily the result of an increase in the number of technology and development personnel.

Marketing. Our marketing expenses increased $0.2 million, or 3.0%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. Our increase in marketing expenses was primarily attributable to an increase in personnel-related expenses, offset by a decline in market research spending. We believe the decrease of our marketing expenses as a percentage of revenue from 20.5% to 17.4% from the six months ended September 30, 2008 to the six months ended September 30, 2009 was due to a more efficient and effective marketing channel mix.

General and administrative. Our general and administrative expenses increased $0.8 million, or 49.1%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily the result of increased professional fees, including legal fees related to the U.S. Postal Service dispute. Other factors that contributed to the increase included higher occupancy costs and facility expenses due to a move to a larger corporate office. We expect our general and administrative expenses to increase when we become a public company, as a result of increasing accounting, legal, personnel and other costs. This will result from instituting and monitoring a more comprehensive compliance and board governance function, maintaining and reviewing internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and preparing and distributing periodic reports.

Depreciation and amortization. Our depreciation and amortization expenses increased $0.3 million, or 64.5%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily the result of increased depreciable equipment and intangible assets.

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Other Income (Expense)

		Six Months Ended September 30,

		2008			2009			% Change
		(in thousands)
Interest income		$	41		$	5			(87.8	)%
Interest expense			(119	)		(148	)		24.4	%
Change in fair value of warrants			—			(404	)		NA
Other—net			(90	)		(23	)		(74.4	)%

	Total other income (expense)	$	(168	)	$	(570	)		239.3	%

Interest income. Our interest income decreased by less than $0.1 million, or 87.8%, from the six months ended September 30, 2008 to the six months ended September 30, 2009 due to a decrease in our effective interest rate despite our higher cash balance.

Interest expense. Our interest expense increased by less than $0.1 million, or 24.4%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. Despite a decrease in our effective interest rate from 6.8% to 5.2% for the six months ended September 30, 2008 to the six months ended September 30, 2009, we paid higher unused facility fees during the six months ended September 30, 2009.

Change in fair value of warrants. We recorded $0.4 million for the change in fair value of our warrant liability in the six months ended September 30, 2009 due to an increase in the estimated fair value of our capital stock into which the warrants may be exercised.

Other—net. Net other expenses decreased by less than $0.1 million, or 74.4%, from the six months ended September 30, 2008 to the six months ended September 30, 2009 primarily due to the increase of other income.

Income Tax (Provision) Benefit

	Six Months Ended September 30,

	2008		2009			% Change
	(in thousands)
Income tax (provision) benefit	$	3,111	$	(2,404	)		(177.3	)%

Our income tax expenses increased by $5.5 million, or 177.3%, from the six months ended September 30, 2008 to the six months ended September 30, 2009. Due to uncertainties related to the realization of deferred income tax assets, prior to the six months ended September 30, 2008 we had established a valuation allowance against all of our gross deferred income tax assets. During the six months ended September 30, 2008, we determined that it was more likely than not that we would realize our deferred income tax assets. The income tax benefit recognized in the six months ended September 30, 2008 is primarily the result of us releasing all of the previously established valuation allowance. Our effective income tax rate for the six months ended September 30, 2009 was 45%. Our effective income tax rate differs from the federal statutory rate of 35% primarily due to state taxes and expenses that are not deductible for income tax purposes such as stock-based compensation related to stock options designated as incentive stock options under the Internal Revenue Service tax code and changes in the fair value of our warrant liability that are recorded in our consolidated statements of operations.

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Fiscal Years Ended March 31, 2007, 2008 and 2009

Revenues

		Fiscal Year Ended March 31,

		Fiscal Year Ended March 31,						2007 to 2008 % Change			2008 to 2009 % Change
		2007		2008		2009		2007 to 2008 % Change			2008 to 2009 % Change
		(in thousands)
Base subscription		$	38,942	$	55,303	$	71,756		42.0	%		29.8	%
Previously rented product			6,851		9,171		10,786		33.9	%		17.6	%

	Total rental revenues		45,793		64,474		82,542		40.8	%		28.0	%
Advertising and other			220		1,672		2,128		660.0	%		27.3	%

	Total revenues	$	46,013	$	66,146	$	84,670		43.8	%		28.0	%

Base subscription

Fiscal 2008 compared to Fiscal 2009. Our subscription revenues increased $16.5 million, or 29.8%, from fiscal year 2008 to fiscal year 2009. This increase was primarily the result of an increase in the number of total subscribers from 266,853 to 328,119 at the end of the respective periods. We believe the increase in our subscriber base is a result of increased brand awareness and marketing efforts.

Fiscal 2007 compared to Fiscal 2008. Our subscription revenues increased $16.4 million, or 42.0%, from fiscal year 2007 to fiscal year 2008. This increase was primarily the result of an increase in the number of total subscribers from 191,354 to 266,853 at the end of the respective periods. In addition, there was a $1 monthly subscription fee increase for all new subscribers beginning in October 2007, which also contributed to the increase of subscription revenues.

Previously rented product

Fiscal 2008 compared to Fiscal 2009. Our PRP revenues increased $1.6 million, or 17.6%, from fiscal year 2008 to fiscal year 2009. This increase was primarily due to an increase in the number of used video games sold.

Fiscal 2007 compared to Fiscal 2008. Our PRP revenues increased $2.3 million, or 33.9%, from fiscal year 2007 to fiscal year 2008. This increase was primarily due to an increase in the average selling price and number of used video games sold.

Advertising and other

Fiscal 2008 compared to Fiscal 2009. Our advertising and other revenues increased $0.5 million, or 27.3%, from fiscal year 2008 to fiscal year 2009. This increase was primarily due to an increase in visitor traffic to our websites as well as the addition of more advertising-focused websites.

Fiscal 2007 compared to Fiscal 2008. Our advertising and other revenues increased $1.5 million, or 660.0%, from fiscal year 2007 to fiscal year 2008. This increase reflects the ramp-up of our advertising business which was initiated in October 2006.

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Cost of Revenues

		Fiscal Year Ended March 31,

		Fiscal Year Ended March 31,						2007 to 2008 % Change			2008 to 2009 % Change
		2007		2008		2009		2007 to 2008 % Change			2008 to 2009 % Change
		(in thousands)
Rental		$	27,384	$	36,658	$	45,140		33.9	%		23.1	%
Advertising and other			—		238		202		NA			(15.1	)%

	Total cost of revenues	$	27,384	$	36,896	$	45,342		34.7	%		22.9	%

Cost of rental

Fiscal 2008 compared to Fiscal 2009. Our cost of subscription revenues increased $8.5 million, or 23.1%, from fiscal year 2008 to fiscal year 2009. This increase was primarily due to an increase in postage and packaging costs as a result of serving a larger subscriber base and, to a lesser extent, an increase in postage rates. An increase in the cost of the used games sold due to an increase in rental and sales volume also contributed to the overall increase during the period.

Fiscal 2007 compared to Fiscal 2008. Our cost of subscription revenues increased $9.3 million, or 33.9%, from fiscal year 2007 to fiscal year 2008. This increase was primarily due to the increase in postage and packaging costs, amortization of our video game library and the cost of used games sold.

Cost of advertising and other

Fiscal 2008 compared to Fiscal 2009. Our cost of advertising and other revenues decreased by less than $0.1 million, or 15.1%, from fiscal year 2008 to fiscal year 2009. This decrease was primarily due to lower expenses paid to firms that help us manage the placement of third-party advertisements on our network of websites.

Fiscal 2007 compared to Fiscal 2008. Our cost of advertising and other revenues increased by $0.2 million from fiscal year 2007 to fiscal year 2008. This increase reflects the ramp-up of our advertising business which was initiated in October 2006.

Operating Expenses

		Fiscal Year Ended March 31,

		Fiscal Year Ended March 31,						2007 to 2008 % Change			2008 to 2009 % Change
		2007		2008		2009		2007 to 2008 % Change			2008 to 2009 % Change
		(in thousands)
Fulfillment		$	4,382	$	6,424	$	8,780		46.6	%		36.7	%
Technology and development			2,863		3,636		6,542		27.0	%		79.9	%
Marketing			9,274		13,526		17,521		45.8	%		29.5	%
General and administrative			2,179		3,065		3,592		40.7	%		17.2	%
Depreciation and amortization			191		724		1,175		279.1	%		62.3	%
Impairment of acquired website			—		—		668		NA			NA
Impairment of goodwill			—		—		449		NA			NA

	Total operating expenses	$	18,889	$	27,375	$	38,727		44.9	%		41.5	%

Fulfillment

Fiscal 2008 compared to Fiscal 2009. Our fulfillment expenses increased $2.4 million, or 36.7%, from fiscal year 2008 to fiscal year 2009. This increase was primarily due to an increase in personnel-related expenses resulting from an increase in the number of fulfillment employees and, to a lesser extent, increased credit card transaction costs due to greater transaction volume.

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Fiscal 2007 compared to Fiscal 2008. Our fulfillment expenses increased $2.0 million, or 46.6%, from fiscal year 2007 to fiscal year 2008. This increase was primarily due to an increase in personnel-related expenses resulting from an increase in the number of fulfillment employees and, to a lesser extent, increased credit card transaction costs due to greater transaction volume.

Technology and development

Fiscal 2008 compared to Fiscal 2009. Our technology and development expenses increased $2.9 million, or 79.9%, from fiscal year 2008 to fiscal year 2009. This increase was primarily due to higher personnel-related expenses resulting from additions in technology and development personnel, including the addition of GameStrata personnel.

Fiscal 2007 compared to Fiscal 2008. Our technology and development expenses increased $0.8 million, or 27.0%, from fiscal year 2007 to fiscal year 2008. This increase was primarily due to higher personnel-related expenses resulting from additions in technology and development personnel.

Marketing

Fiscal 2008 compared to Fiscal 2009. Our marketing expenses increased $4.0 million, or 29.5%, from fiscal year 2008 to fiscal year 2009. This increase was primarily due to an increase in marketing program expenses in order to attract prospective subscribers to our website.

Fiscal 2007 compared to Fiscal 2008. Our marketing expenses increased $4.3 million, or 45.8%, from fiscal year 2007 to fiscal year 2008. This increase was primarily due to an increase in marketing program expenses and personnel in order to attract prospective subscribers to our website.

General and administrative

Fiscal 2008 compared to Fiscal 2009. Our general and administrative expenses increased $0.5 million, or 17.2%, from fiscal year 2008 to fiscal year 2009. This increase was primarily due to higher professional fees and occupancy costs.

Fiscal 2007 compared to Fiscal 2008. Our general and administrative expenses increased $0.9 million, or 40.7%, from fiscal year 2007 to fiscal year 2008. This increase was primarily due to increased personnel costs, recruiting fees and other administrative expenses.

Depreciation and amortization

Fiscal 2008 compared to Fiscal 2009. Our depreciation and amortization expenses increased $0.5 million, or 62.3%, from fiscal year 2008 to fiscal year 2009 due to increases in property and equipment.

Fiscal 2007 compared to Fiscal 2008. Our depreciation and amortization expenses increased $0.5 million, or 279.1%, from fiscal year 2007 to fiscal year 2008 due to increases in property and equipment.

Impairment of acquired website

Fiscal 2008 compared to Fiscal 2009. In fiscal year 2009, we incurred a $0.7 million charge for the impairment of the acquired GameStrata website. We did not have any impairment expense for acquired website during fiscal year 2008.

Fiscal 2007 compared to Fiscal 2008. We did not have any impairment expense for acquired website during these periods.

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Impairment of goodwill

Fiscal 2008 compared to Fiscal 2009. We incurred a loss on a goodwill impairment of $0.4 million during fiscal year 2009, due to the impairment of the goodwill recorded in connection with the acquisition of GameStrata. We did not have any impairment of goodwill during fiscal year 2008.

Fiscal 2007 compared to Fiscal 2008. We did not have any impairment of goodwill during these periods.

Other Income (Expense)

		Fiscal Year Ended March 31,

		Fiscal Year Ended March 31,									2007 to 2008 % Change			2008 to 2009 % Change
		2007			2008			2009			2007 to 2008 % Change			2008 to 2009 % Change
		(in thousands)
Interest income		$	250		$	199		$	68			(20.4	)%		(65.8	)%
Interest expense			(353	)		(329	)		(225	)		(6.8	)%		(31.6	)%
Other—net			(30	)		(57	)		(164	)		90.0	%		187.7	%

	Total other income (expense)	$	(133	)	$	(187	)	$	(321	)		40.6	%		71.7	%

Interest income

Fiscal 2008 compared to Fiscal 2009. Our interest income decreased by $0.1 million, or 65.8%, from fiscal year 2008 to fiscal year 2009 due to a decrease in our effective interest rate.

Fiscal 2007 compared to Fiscal 2008. Our interest income decreased by less than $0.1 million, or 20.4%, from fiscal year 2007 to fiscal year 2008 due to a decrease in our effective interest rate.

Interest expense

Fiscal 2008 compared to Fiscal 2009. Our interest expense decreased by $0.1 million, or 31.6%, from fiscal year 2008 to fiscal year 2009. This was due to a decrease in our effective interest rate from 9.4% for fiscal year 2008 compared to 6.1% for fiscal year 2009.

Fiscal 2007 compared to Fiscal 2008. Our interest expense decreased by less than $0.1 million, or 6.8%, from fiscal year 2007 to fiscal year 2008. This was due to a decrease in our effective interest rate from 10.1% for fiscal year 2007 compared to 9.4% for fiscal year 2008.

Other—net

Fiscal 2008 compared to Fiscal 2009. Net other expenses increased by $0.1 million, or 187.7%, from fiscal year 2008 to fiscal year 2009 primarily due to our share of losses incurred by GameStrata.

Fiscal 2007 compared to Fiscal 2008. Net other expenses increased by less than $0.1 million, or 90.0%, from fiscal year 2007 to fiscal year 2008 primarily due to an increase in amortization of debt issuance costs.

Income Tax (Provision) Benefit

	Fiscal Year Ended March 31,

	Fiscal Year Ended March 31,								2007 to 2008 % Change			2008 to 2009 % Change
	2007			2008			2009		2007 to 2008 % Change			2008 to 2009 % Change
	(in thousands)
Income tax (provision) benefits		(1	)		(60	)		3,780		5,900.0	%		NA

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Fiscal 2008 compared to Fiscal 2009. Due to uncertainties related to the realization of deferred income tax assets, prior to the six months ended September 30, 2008, we had established a valuation allowance against all of our gross deferred income tax assets. During the fiscal year ended March 31, 2009, we determined that it was more likely than not that we would realize our deferred income tax assets. The income tax benefit recognized in the fiscal year ended March 31, 2009 is primarily the result of us releasing all of the previously established valuation allowance.

Fiscal 2007 compared to Fiscal 2008. Our provision for income taxes increased by less than $0.1 million from fiscal year 2007 to fiscal year 2008 due to the payment of state income taxes.

Unaudited Quarterly Results of Operations

The following table presents our unaudited quarterly consolidated results of operations for the six quarters ended September 30, 2009. This unaudited quarterly consolidated information has been prepared on the same basis as our audited consolidated financial statements, and, in the opinion of management, the statement of operations data includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. You should read this table in conjunction with our financial statements and the related notes located elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results of operations for any future periods.

			Three Months Ended

			June 30, 2008			September 30, 2008			December 31, 2008			March 31, 2009			June 30, 2009			September 30, 2009
			(in thousands)
Revenues:
	Base subscription		$	16,859		$	16,999		$	17,849		$	20,049		$	20,723		$	20,904
	Previously rented product			2,465			2,064			3,630			2,627			2,452			2,352

		Total rental revenues		19,324			19,063			21,479			22,676			23,175			23,256
	Advertising and other			521			509			557			541			575			675

		Total revenues		19,845			19,572			22,036			23,217			23,750			23,931

Cost of revenues:
	Rental(1)			9,871			9,843			13,493			11,933			11,121			10,831
	Advertising and other			36			69			38			59			144			224

		Total cost of revenues		9,907			9,912			13,531			11,992			11,265			11,055

Gross profit				9,938			9,660			8,505			11,225			12,485			12,876

Operating expenses:
	Fulfillment(2)			2,032			2,109			2,297			2,342			2,209			2,323
	Technology and development(2)			1,442			1,428			1,919			1,753			1,823			1,587
	Marketing(2)			3,999			4,066			4,657			4,799			4,157			4,146
	General and administrative(2)			818			817			961			996			1,051			1,387
	Depreciation and amortization			209			233			349			384			372			355
	Impairment of acquired website			—			—			—			668			—			—
	Impairment of goodwill			—			—			—			449			—			—

		Total operating expenses		8,500			8,653			10,183			11,391			9,612			9,798

Operating (loss) income				1,438			1,007			(1,678	)		(166	)		2,873			3,078

Other income (expense):
	Interest Income			22			19			20			7			3			2
	Interest Expense			(61	)		(58	)		(53	)		(53	)		(74	)		(74	)
	Change in fair value of warrants(3)			—			—			—			—			(121	)		(283	)
	Other—net			(44	)		(46	)		(64	)		(10	)		(4	)		(19	)

		Total other income (expense)		(83	)		(85	)		(97	)		(56	)		(196	)		(374	)

Income (loss) before income tax (provision) benefit				1,355			922			(1,775	)		(222	)		2,677			2,704
Income tax (provision) benefit(4)				(41	)		3,152			719			(50	)		(1,166	)		(1,238	)

Net income (loss)			$	1,314		$	4,074		$	(1,056	)	$	(272	)	$	1,511		$	1,466

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(1): Amortization of video game library included in the above line item:

	Three Months Ended

	June 30, 2008		September 30, 2008		December 31, 2008		March 31, 2009		June 30, 2009		September 30, 2009
	(in thousands)
Amortization of video game library	$	3,186	$	2,919	$	3,873	$	3,477	$	3,178	$	2,694

(2): Stock-based compensation, including the impact of warrants and options, included in the above line items:

	Three Months Ended

	June 30, 2008		September 30, 2008		December 31, 2008		March 31, 2009		June 30, 2009		September 30, 2009
	(in thousands)
Fulfillment	$	33	$	17	$	22	$	16	$	16	$	23
Technology and development		107		38		248		86		93		59
Marketing		53		32		12		68		156		195
General and administrative		35		23		20		30		24		25

Total	$	228	$	110	$	302	$	200	$	289	$	302

The following table presents certain unaudited other data and other financial data for the six quarters ended September 30, 2009.

		Three Months Ended

		June 30, 2008			September 30, 2008			December 31, 2008			March 31, 2009			June 30, 2009			September 30, 2009
Other data:
	Total subscribers(1)		264,471			267,327			308,846			328,119			336,206			334,417
	Monthly churn(2)		8.1	%		8.0	%		6.8	%		8.0	%		8.2	%		8.3	%
	Average monthly revenue per subscriber	$	21.15		$	21.31		$	20.65		$	20.98		$	20.80		$	20.78
	Subscriber acquisition cost	$	32.06		$	31.51		$	28.41		$	26.64		$	26.16		$	27.97

(1): At end of period.
(2): Monthly churn is the average monthly churn for the quarters included in the periods shown.
(3): Effective April 1, 2009, we adopted authoritative guidance issued by the FASB that requires our convertible preferred stock warrants to be classified as liabilities at their estimated fair value, with changes in fair value at each reporting date recognized in the consolidated statement of operations. For the three months ended June 30, 2009 and September 30, 2009, we recorded charges for the changes in the fair value of our warrant liability.
(4): The income tax benefit recognized in the three months ended September 30, 2008 is primarily the result of us releasing all of the previously established valuation allowance.

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The following table presents our unaudited quarterly consolidated results of operations for the six quarters ended September 30, 2009 as a percentage of revenues. You should read this table in conjunction with our consolidated financial statements and the related notes located elsewhere in this prospectus.

			Three Months Ended

			June 30, 2008			September 30, 2008			December 31, 2008			March 31, 2009			June 30, 2009			September 30, 2009
Revenues:
	Base subscription			85.0	%		86.9	%		81.0	%		86.4	%		87.3	%		87.4	%
	Previously rented product			12.4			10.5			16.5			11.3			10.3			9.8

		Total rental revenues		97.4			97.4			97.5			97.7			97.6			97.2
	Advertising and other			2.6			2.6			2.5			2.3			2.4			2.8

		Total revenues		100.0			100.0			100.0			100.0			100.0			100.0

Cost of revenues:
	Rental			49.7			50.3			61.2			51.4			46.8			45.3
	Advertising and other			0.2			0.4			0.2			0.3			0.6			0.9

		Total cost of revenues		49.9			50.7			61.4			51.7			47.4			46.2

Gross profit				50.1			49.3			38.6			48.3			52.6			53.8

Operating expenses:
	Fulfillment			10.2			10.8			10.4			10.1			9.3			9.7
	Technology and development			7.3			7.3			8.7			7.6			7.7			6.6
	Marketing			20.2			20.8			21.1			20.7			17.5			17.3
	General and administrative			4.1			4.2			4.4			4.3			4.4			5.8
	Depreciation and amortization			1.1			1.2			1.6			1.7			1.6			1.5
	Impairment of acquired website			0.0			0.0			0.0			2.9			0.0			0.0
	Impairment of goodwill			0.0			0.0			0.0			1.9			0.0			0.0

		Total operating expenses		42.9			44.3			46.2			49.2			40.5			40.9

Operating (loss) income				7.2			5.0			(7.6	)		(0.9	)		12.1			12.9

Other income (expense):
	Interest income			0.1			0.1			0.1			0.0			0.0			0.0
	Interest expense			(0.3	)		(0.3	)		(0.2	)		(0.2	)		(0.3	)		(0.3	)
	Change in fair value of warrants			0.0			0.0			0.0			0.0			(0.5	)		(1.2	)
	Other—net			(0.2	)		(0.2	)		(0.3	)		(0.0	)		(0.0	)		(0.1	)

		Total other income (expense)		(0.4	)		(0.4	)		(0.4	)		(0.2	)		(0.8	)		(1.6	)
Income (loss) before income tax (provision) benefit				6.8			4.6			(8.0	)		(1.1	)		11.3			11.3
Income tax (provision) benefit				(0.2	)		16.1			3.3			(0.2	)		(4.9	)		(5.2	)

Net income (loss)				6.6			20.7			(4.7	)		(1.3	)		6.4			6.1

Liquidity and Capital Resources

We have funded our operations during the last five years primarily from cash flows from operations and, to a lesser extent, our credit facility. Our primary uses of cash consist of expenses related to the following operating activities:

•: purchasing video games;
•: marketing and advertising activities;
•: shipping, handling and packaging video games;
•: fulfillment operations, including operating our distribution and customer service centers; and
•: general and administrative activities consisting of primarily personnel-related expenses.

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As of September 30, 2009, we had $13.5 million of total liquidity, comprised of $11.0 million in cash and cash equivalents and $2.5 million in availability under our line of credit. Our cash and cash equivalents increased $2.4 million from March 31, 2008 to March 31, 2009. As of September 30, 2009, our borrowings under our line of credit totaled $2.5 million.

Our future capital requirements may vary materially from those now planned and will depend on many factors, including:

•: the levels of advertising and promotion required to retain and acquire subscribers;
•: the price of acquiring new video games;
•: our shipping, handling and distribution costs;
•: the launch of additional services and products;
•: our competitive position in the marketplace;
•: the expansion of our distribution centers and our sales and marketing organization; and
•: continued market acceptance and growth of our subscription service.

We have experienced increases in our expenditures in connection with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase in the future. We expect cash on hand, internally generated cash flow, and available credit from our credit facility to provide adequate funds for operating and recurring cash needs, such as working capital, capital expenditures and debt repayments, for at least the next 12 months.

Cash Flow Analysis

Summary cash flow information for the fiscal years ended March 31, 2007, 2008 and 2009 and for the six month periods ended September 30, 2008 and 2009 is set forth below.

		Fiscal Year Ended March 31,									Six Months Ended September 30,

		2007			2008			2009			2008			2009
		(in thousands)
Net cash provided by (used for):
	Operating activities	$	(2,474	)	$	1,715		$	4,662		$	4,674		$	5,641
	Investing Activities		(1,076	)		(1,110	)		(2,537	)		(566	)		(269	)
	Financing Activities		6			121			289			60			(472	)

Increase (decrease) in cash and cash equivalents		$	(3,544	)	$	726		$	2,414		$	4,168		$	4,900

Cash and cash equivalents were $6.1 million at March 31, 2009, compared to $3.7 million at March 31, 2008 and $3.0 million at March 31, 2007. Cash and cash equivalents increased by $4.9 million to $11.0 million in the six months ended September 30, 2009, compared to an increase of $4.2 million to $7.9 million in the six months ended September 30, 2008. Cash and cash equivalents increased $2.4 million in the fiscal year ended March 31, 2009; increased $0.7 million in the fiscal year ended March 31, 2008; and decreased $3.5 million in the fiscal year ended March 31, 2007.

Net cash provided by operating activities

During the six months ended September 30, 2009, our operating cash flow consisted primarily of net income of $3.0 million and non-cash expenses of $16.0 million, which were offset by purchases of video games of $13.8 million and an increase in working capital of $0.4 million. The majority of the non-cash adjustments resulted from amortization of our video game library, expensing the carrying

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value of used product from our video game library upon sale, depreciation and amortization, the change in fair value of our warrant liability and stock-based compensation. The increase in working capital was mainly driven by an increase in accounts receivable offset by a net decrease in accounts payable and accrued liabilities. Cash provided by operating activities increased by approximately $1.0 million from the six months ended September 30, 2008 to the six months ended September 30, 2009. This increase was primarily due to higher non-cash items of $4.9 million offset by a decrease in net income of $2.4 million, a decrease in change in working capital of $1.3 million and an increase in purchases to build our video game library of $0.3 million.

During the fiscal year ended March 31, 2009, our operating cash flow consisted primarily of net income of $4.1 million, non-cash expenses of $30.1 million and an increase in working capital of $3.3 million, which were offset by purchases of video games of $32.9 million. The majority of the non-cash adjustments resulted from amortization of our video game library, expensing the carrying value of used product from our video game library upon sale, depreciation and amortization, the change in fair value of our warrant liability and stock-based compensation, which were offset by deferred taxes associated with the reversal of valuation allowance on our deferred income tax assets and the impairment of goodwill and certain other intangible assets associated with the GameStrata acquisition. The increase in working capital was mainly driven by an increase in accounts payable, accrued liabilities and unearned revenue, which were partially offset by a decrease in other assets. Cash provided by operating activities increased by $2.9 million from the fiscal year ended March 31, 2008 to the fiscal year ended March 31, 2009. This increase was primarily due to higher net income of $2.4 million, an increase in non-cash items of $1.6 million and an increase in changes in working capital of $1.1 million, which were offset by higher purchases of video games of $2.3 million.

During the fiscal year ended March 31, 2008, our operating cash flows consisted primarily of net income of $1.7 million, non-cash expenses of $28.5 million and an increase in working capital of $2.2 million, which were offset by purchases of video games of $30.6 million. The majority of the non-cash adjustments resulted from amortization of our video game library, expensing the carrying value of used product from our video game library upon sale, depreciation and amortization and stock-based compensation. The increase in working capital was mainly driven by an increase in accounts payable, accrued liabilities and unearned revenue, which were partially offset by a decrease in accounts receivable and other assets. Cash provided by operating activities increased by approximately $4.2 million from the fiscal year ended March 31, 2007 to the fiscal year ended March 31, 2008. This increase was primarily due to higher net income of $2.0 million, non-cash items of $6.3 million and an increase in change in working capital of $2.6 million, which were offset by higher purchases of video games of $6.8 million.

Net cash provided by investing activities

For the six months ended September 30, 2009, our investing activities consisted primarily of purchases of property, equipment and intangible assets. Cash used in investing activities decreased $0.3 million from the six months ended September 30, 2008 to the six months ended September 30, 2009. This decrease was driven by a reduction in equipment purchases of $0.4 million, which was offset by a release of restricted cash of $0.2 million.

During the fiscal year ended March 31, 2009, our investing activities consisted primarily of purchases of property, equipment and intangible assets, and our acquisition of ShackNews. Cash used in investing activities increased $1.4 million from the fiscal year ended March 31, 2008 to the fiscal year ended March 31, 2009 due primarily to an increase in property and equipment purchases of $1.4 million and the cash payment in connection with our acquisition of ShackNews of $0.6 million, which were partially offset by the release of restricted cash of $0.2 million and a decrease in the purchase of investments of $0.3 million associated with our investment in GameStrata in the prior fiscal year.

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During the fiscal year ended March 31, 2008, our investing activities consisted primarily of purchases of property, equipment and intangible assets, and the cash payment in connection with an investment in GameStrata. Cash used in investing activities remained approximately constant from the fiscal year ended March 31, 2007 to the fiscal year ended March 31, 2008. The decrease in purchases of property, equipment and intangibles of approximately $0.3 million was offset by the increase in cash used for our investment in GameStrata of $0.3 million.

Net cash provided by financing activities

During the six months ended September 30, 2009, our financing activities consisted primarily of proceeds from stock option exercises offset by repayment of our credit facility. Cash used by financing activities increased approximately $0.5 million from the six months ended September 30, 2008 to the six months ended September 30, 2008 primarily due to the repayment of our credit facility of $1.0 million, which was partially offset by an increase in the proceeds from the exercise of stock options of $0.5 million.

Cash provided by financing activities increased approximately $0.2 million from the fiscal year ended March 31, 2008 to the fiscal year ended March 31, 2009 due mostly to higher proceeds from the exercise of preferred stock warrants of $0.1 million and an excess tax benefit of $0.1 million.

Cash provided by financing activities increased approximately $0.1 million from the fiscal year ended March 31, 2007 to the fiscal year ended March 31, 2008 primarily due to higher proceeds from the exercise of stock options of $0.1 million.

Contractual obligations

We lease our facilities under noncancelable operating leases with expiration dates in fiscal years 2011, 2012 and 2013. As of September 30, 2009, we have $2.5 million in debt obligations under our line of credit for working capital, which expires in August 2010. We were in compliance with all debt covenants related to the credit facility as of September 30, 2009. We have no material long-term purchase obligations outstanding with any vendors or third parties. We believe current cash balances and cash generated by future operating activities will be sufficient to meet our contractual cash obligations and other operating cash requirements for the next 12 months.

The following table summarizes our principal contractual obligations as of March 31, 2009:

				Fiscal Year Ending March 31,

		Total		2010		2011		2012		2013		2014		2015
		(in thousands)
Obligations under credit facility		$	2,500		—	$	2,500		—		—		—		—
Credit facility interest(1)			260		130		130		—		—		—		—
Payment obligations under note payable(2)			2,000		500		500		500		500		—		—
Operating leases			3,146		883		905		865		493		—		—
Acquisition related minimum payment(3)			1,000		—		62		94		125		163		556

	Total contractual obligations		8,906		1,513		4,097		1,459		1,118		163		556

(1): Debt interest represents estimated interest payments assuming that the credit facility is outstanding until its due date. As our credit facility has variable interest rates (1.125% above prime rate), actual payments may vary due to changes in prime rate.
(2): Annual payments related to the note payable in conjunction with the ShackNews acquisition. Payment obligations do not include the total $1.0 million minimum revenue share payment related to the ShackNews acquisition due in October 2014.

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(3): Represents estimated minimum future revenue share payments aggregating $1.0 million to be paid to the former stockholders of ShackNews, an entity acquired by us in fiscal year 2009.

Off-balance sheet arrangements

We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, as part of our ongoing business. Accordingly, our operating results, financial condition and cash flows are not subject to off-balance sheet risks.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate fluctuations and inflation.

Interest rate fluctuation risk

We have market risk related to changing interest rates. As of September 30, 2009, we had $2.5 million in borrowings outstanding under our credit facility with a variable interest rate tied to the prime rate. A hypothetical interest rate change of 1% on our credit facility would have an immaterial impact on interest incurred for the fiscal year ended March 31, 2009 and the six months ended September 30, 2009.

Inflation risk

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

Recent Accounting Pronouncements

In September 2006, FASB issued authoritative guidance on fair value measurements, which creates a common definition of fair value, establishes a fair value hierarchy and requires expanded disclosures about fair value measurements. This guidance is effective for fiscal years beginning after November 15, 2007. However, in December 2007, FASB set the effective date of this guidance, which delayed the effective date for applying these new rules for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This guidance partially defers the effective date to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Effective for the fiscal year ending March 31, 2009, we adopted these rules, except as it applies to those nonfinancial assets and nonfinancial liabilities. The adoption of this guidance had no effect on our financial statements.

In December 2007, the FASB issued revised guidance for business combinations. The revised guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. Also, the revised guidance establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The requirements apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is the fiscal year ending March 31, 2010 for us. Certain acquired net operating losses, if realized, could result in a decrease in income tax expense.

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In April 2008, the FASB issued authoritative guidance on the determination of the useful life of intangible assets. This guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for goodwill and other intangible asset entity specific factors. Effective for the fiscal year ending March 31, 2010, we adopted the provisions of this accounting guidance, which is to be applied prospectively to intangible assets acquired after April 1, 2009, which had no effect on our financial statements.

In June 2009, the FASB issued authoritative guidance to amend prior rules on the consolidation of variable interest entities, which is effective for us beginning April 1, 2010. This amendment requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We do not believe the adoption of this guidance will have a material impact on its financial statements.

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BUSINESS

Overview

We are the largest online video game rental subscription service in the United States with more than 334,000 subscribers as of September 30, 2009. We provide our subscribers access to a comprehensive library of over 7,000 titles covering all major video game and handheld game consoles. There are over 100 million people that play console video games in the United States, according to the 2009 Gamer Segmentation Report published by NPD. We believe that online rental subscriptions will constitute a growing percentage of total video game-related expenditures and that our subscription service presents a compelling alternative for video game players who have historically either purchased video games or rented them from traditional retailers.

Industry Overview

There are over 100 million people that play console video games in the United States, according to the 2009 Gamer Segmentation Report published by NPD. IDC estimates that there were approximately 200 million installed video game consoles (including handheld units) in North America at the end of 2009, a number that is estimated by IDC to increase to almost 260 million by the end of

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2013. According to IDC, the installed base of the latest generation of game consoles, which includes the Sony PlayStation 3, Microsoft Xbox 360 and Nintendo Wii, is expected to grow from over 44 million consoles in 2008 to approximately 131 million consoles in 2013. According to a 2009 survey conducted by Frank N. Magid Associates, console gaming and Internet usage are the top two leisure activities for males in the United States between the ages of 18 and 34. North American video game hardware and software sales surpassed $29 billion in 2008 and are projected to grow at a rate of approximately 8% annually to $43 billion in 2013, according to IDC. Sales of video game software constituted approximately $20 billion, or 68%, of this market in 2008. For example, in November 2009, Activision announced that sales of its Call of Duty: Modern Warfare 2 video game title generated an estimated $550 million of revenue during the first five days following its launch to beat all previous five-day movie box office, book and video game sell-through records.

Console video game consumers face the following challenges:

•: High purchase cost. New console video games typically cost approximately $60 per title. Because a significant number of new titles are released each year and video games typically cannot be returned for a full refund once opened, we believe many consumers choose not to buy all of their desired games at these prices without knowing whether a particular game will meet their expectations.
•: Limited title availability. Traditional video game rental and retail stores have limited shelf space in their physical stores. We believe these stores typically carry mostly recent releases and devote limited shelf space to older video games for current and previous generation consoles due to these physical limitations. Because of the frequent release of new video games and franchise updates, older games become increasingly difficult for consumers to find at these traditional stores.
•: Inconvenience. In order to obtain video game rentals, consumers historically have been required to visit physical stores. This is often inconvenient, time-consuming and frustrating for the consumer if their desired game is not available at the time of visit.

Our Solution

Our solution provides the following benefits to our subscribers:

•: Value. We offer our video game rental service on a subscription basis, significantly reducing the consumer's up-front cost associated with buying a new game. Through our subscription plans, subscribers can have one or more titles out concurrently with no due dates, late fees or shipping charges, for prices starting at $15.95 per month, which is significantly less than the suggested retail price of a newly released video game. Using our service, a subscriber can try a video game for as long as he or she desires and then choose to return or purchase it. Our average subscriber rents approximately 22 video games per year from us at a cost less than the purchase price of five new video games at an average price of $60.
•: Wide selection. We offer nearly all the latest video game titles available in the United States for Microsoft's Xbox 360 and Xbox, Sony's PlayStation 3, PlayStation 2 and PSP, and Nintendo's Wii, GameCube, DS and Game Boy Advanced consoles. Our library contains numerous copies of popular new releases, as well as many older "back-catalog" games that are generally less accessible in most video game rental and retail stores. We believe we are one of the few rental providers of console games that offers a broad selection of titles for previous generation platforms, giving us an advantage over traditional retailers and expanding our addressable market. Many of our subscribers play video games well after they have been released, leading us to believe that the availability of "back-catalog" games is an important differentiator of our service.

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•: Convenience. Subscribers can easily select titles by building and modifying their GameQ, a personalized wish list or queue, of video game titles on our website. We create a unique experience for subscribers by personalizing our website to each subscriber's console type and selection history. Once selected, titles are sent to subscribers' homes through the U.S. Postal Service and returned to us in prepaid mailers. Subscribers also have the option to purchase a video game that they are currently renting through our "Keep" feature. Upon confirmation that a title has been returned or that a subscriber has elected to "Keep" a video game, we automatically mail the next available game in his or her GameQ.

Competitive Strengths

We believe that our revenue and subscriber growth are a result of the following competitive strengths:

•: Large subscriber base and established gaming community. As of September 30, 2009, we had more than 334,000 paying subscribers and generated over 4.4 million monthly unique visitors to our network of websites. We believe our subscriber base represents a significant portion of video game players who rent online. Our subscriber base has increased from approximately 74,000 as of March 31, 2005 to more than 328,000 as of March 31, 2009, representing a 45% compound annual growth rate, while our subscriber acquisition cost has generally decreased on an annual basis over the same period. We believe our brand, established subscriber base and large user community drive awareness of our subscription service.
•: High degree of recurring revenue. Unlike traditional rental and retail stores, our subscription service enables us to retain a majority of our customers from month to month. This business model provides us with recurring revenue and greater financial and operational predictability.
•: Video games for multiple platforms. Since we carry video games for multiple generations of all the major consoles and handhelds, our business is not dependent on the success or failure of any individual hardware product. Due to the highly predictive nature of our GameQ data, we are able to react quickly to changes in demand for individual titles for any specific platform while still managing our inventory in a capital efficient manner.
•: Inventory management and software development expertise. With over seven years of experience and the visibility afforded through GameQ, we believe we have a unique advantage in anticipating and planning for consumer demand for new releases, maintaining appropriate levels of "back-catalog" video games, and deciding when and at what price to sell used video games. We currently operate four distribution centers in the United States, which operate as a single centralized network, increasing our ability to deliver the most desired games to our customers on a timely basis. Most of the critical elements of our inventory management software have been custom developed by our engineering team and all have operated successfully in high load environments.
•: Multi-channel marketing capabilities. We have tested and refined our media buying strategies and marketing messages continuously over the past seven years. As a result, our subscriber acquisition cost has generally improved over time. By splitting our advertising expenses across online and offline media and benefiting from effective word-of-mouth advertising, we are able to improve the effectiveness of our marketing expenditures without relying on a single channel or media partner.
•: Scalable business model. We believe our scalable business model gives us a substantial advantage over our competitors that either do not have an established distribution network or require considerable investment and customization for their distribution facilities to become fully functional. Our web-based infrastructure enables us to service a large number

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of customers without retail outlets and through a limited number of low-cost, regional distribution centers. Because our distribution centers act as hubs in a centralized inventory management system, opening additional distribution centers does not require significant investment in new inventory.

Strategy

•

•: Core customers. According to our August 2009 survey of subscribers, approximately 64% of our subscribers fall into the 18-34 year old male demographic. According to NPD, there are more than 21 million console video game players in this segment. With our low 1% penetration rate, we believe that this segment continues to represent a large addressable market for our subscription service.
•: Families. A small portion of our subscribers are families. As a result of the introduction of new video games and video game consoles that appeal to families, such as the Nintendo Wii, we believe that this segment of the market is emerging as a potentially large subscriber base for us. To date, a relatively small portion of our marketing spending has been targeted toward families. We intend to increase our marketing expenditures targeted at this group.

•

Expand GameFly Media. In addition to www.gamefly.com, we operate a network of additional video game-related websites including www.shacknews.com, www.fileshack.com,

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www.cheatfreak.com, www.consolecheatcodes.com, www.cheatserver.com, www.gameanswers.com and www.ponged.com. Our websites provide relevant content and information, such as industry-specific news, video game tips and cheat codes, screenshots and trailers of new titles, and game reviews and ratings to the video game community. Our websites are designed to enable our visitors to make informed decisions when purchasing or renting video games and enhance their overall video game experience. By developing or acquiring additional websites with video game-related content, we intend to grow our advertising revenue.

•: Expand distribution and delivery channels. In November 2009, we started selling new video games on our website and we intend to grow this service. We also intend to expand the channels through which we deliver video games to customers. For example, we are currently piloting a kiosk program with two national retailers that enables consumers to rent or buy video games from kiosks located in retail outlets. We also intend to increase the number of games consumers can play online and download from our network of websites, including www.ponged.com and www.fileshack.com.
•: Expand GameFly mobile presence. In September 2008, we enabled our subscribers to access www.gamefly.com from their mobile devices in order to search for video games and manage their GameQ. Since the launch of these mobile enhancements, monthly mobile visits to our website have grown at an average of 18% per month. In October 2009, we launched our GameCenter iPhone application, which allows our subscribers to manage their subscriptions and enables any visitor to easily access relevant video game-related content, news and information on their iPhones. We intend to continue the development of our GameCenter iPhone application and develop other mobile applications in order to grow our advertising revenue, increase our subscriber base and lower our churn rate.

Our Websites

Our websites are focused on serving our subscribers and providing content and information to the video game community. GameFly.com is our primary website where we serve more than 334,000 subscribers. We also operate a network of websites referred to as GameFly Media, which, when combined with www.gamefly.com, currently generates an average of 33 million monthly page views and an average of 4.4 million monthly unique visitors. In addition to providing our subscription service, we also sell advertising on all of our websites. We believe these websites are attractive to advertisers who seek to target the video game community.

GameFly.com

Our flagship website, www.gamefly.com, enables subscribers to conveniently and quickly search for, select and rent video games. We categorize our titles by video game console and sub-categorize them in easy-to-find lists, including by genre and popularity. Our GameQ feature enables subscribers to select current titles, reserve upcoming releases and build a personalized wish list for future rentals on our website. We also tailor our website content around a subscriber's selection history and preferred video game consoles in order to create a customized user experience. Through our "Keep" feature, we also give subscribers the option to purchase a video game they have already rented. In addition, our shopping cart enables users to select and hold video games they are interested in purchasing, saves buyer information and reduces the amount of time needed to complete a transaction.

We offer a variety of different subscription service plans to accommodate a range of subscriber preferences. For our subscription plans, which range in price from $15.95 to $36.95 per month, subscribers can have one to four video games out at one time and can keep the games for as long as they want without due dates or late fees. At any time during their subscription, customers can easily change their membership level. Under our most popular plan, subscribers can rent two video games

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concurrently for $22.95 per month. Our subscribers prepay for our plans through monthly credit card payments and all subscriptions are renewed monthly unless users cancel their service.

Our account signup and management tools are delivered through an interface that is easy for customers to use. We have extensive measurement and testing capabilities which allow us to frequently adjust our website to meet our subscribers' preferences.

GameFly Media

Our GameFly Media portfolio of websites provides news, reviews and ratings, tips and cheat codes, screenshots and trailers of new video game titles. Our GameFly Media portfolio of websites includes:

ShackNews and FileShack. ShackNews provides industry-specific news, while FileShack allows users to download and store video game patches, previews, demos and other video game-related files. These websites help us connect with our video game community by encouraging users to post comments and content which are moderated by a group of volunteers.

CheatServer, Console Cheat Codes and Cheat Freak. We also own a number of websites that primarily provide video game tips and cheat codes to our users. In addition to cheat codes, these sites also offer game commentary, news and other video game-related content.

Game Answers. Game Answers is a free service that enables users to ask and answer questions related to video game topics and share their thoughts with the video game community. To facilitate participation, members receive points for activity, including answering other members' questions.

Ponged. Ponged provides our video game community free access to popular flash-based online casual games, including in the action, adventure, strategy and sports genres.

Marketing and Advertising

Our sales and marketing efforts are designed to attract visitors to our website and convert and retain them as paying subscribers in a cost effective manner. We employ a multi-channel customer acquisition strategy and market and advertise to potential subscribers through a combination of paid and unpaid sources. We believe that our paid marketing efforts are significantly enhanced by the benefits of word-of-mouth advertising and referrals by existing subscribers. We also believe there is a significant opportunity to attract more visitors to www.gamefly.com by employing additional sales and marketing initiatives. We regularly monitor the effectiveness of our marketing efforts primarily by conducting surveys during our registration process. We use the survey results to actively manage our online and offline media and channel mix in order to improve the efficiency of our marketing expenditures.

We are currently pursuing the following customer acquisition activities:

Online advertising. We advertise online through search engines, advertising networks and partner websites. We use a pay-per-click spending model on search engines and pay-per-conversion model on our various online advertising, affiliate and partner networks, in order to match our costs with new subscriber additions. In most cases we are able to determine which customers are generated through these advertising efforts because they click through on our advertisements to a landing page in our website, which we monitor.

Offline advertising. We advertise in print publications and on network and cable television channels which focus on our core customer base. Our print advertising is placed in video game and media publications, such as GamePro, Wired, Sports Illustrated and Marvel Comics. We advertise on

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television channels such as Comedy Central, Cartoon Network, Spike, G4 and ESPN. We also partner with various consumer product companies which include our promotional offers in their product packaging.

Word-of-mouth referrals. We believe that we have developed a loyal subscriber base, and new customers frequently indicate they have heard about us from current subscribers. We offer current subscribers a monetary referral incentive in exchange for referrals.

Reactivations. We also focus our marketing efforts on reactivating former subscribers who had cancelled their subscriptions. We track the reasons why subscribers cancel their accounts with us by obtaining a survey from them at the time of cancellation, which we use to tailor our marketing efforts to reactivate such subscribers. We provide our former subscribers with notice of upcoming major title releases, upgrades and improvements to our service offerings and other significant company news or events we believe may cause them to reactivate their subscription.

Operations

We currently stock more than 7,000 titles and utilize proprietary technology to manage the fulfillment and distribution of over 45,000 video games daily from our distribution centers. Our proprietary software automates the process of tracking and routing titles to and from each of our distribution centers and allocates order responsibilities among them. Our proprietary technology also helps us manage the integration of our website with our distribution centers, transaction processing systems and inventory levels.

We currently ship video games to subscribers from our four regional distribution centers located in Lakewood, California; Emsworth, Pennsylvania; Tampa, Florida; and Austin, Texas, which provide us with an aggregate of approximately 50,000 square-feet of facilities. Our distribution centers are operated solely by us. We opened our first distribution center outside of California in March 2007 and plan to open additional regional distribution centers as our business grows. By opening regional centers, we continue to improve our delivery times. Hardware for our delivery systems is maintained in our distribution centers. We deliver our video games to our subscribers through the U.S. Postal Service via First-Class Mail and our subscribers return them to us using prepaid mailers that we include with our delivery. Based on performance standards established by the U.S. Postal Service for its postal zones, we believe we are currently able to provide one- or two-day delivery service to over 90% of the U.S. population.

Substantially all of our network, communication and computer hardware used to operate our websites are co-located at a single facility in Irvine, California that offers network connections, power, air conditioning and other essential infrastructure. We do not control the operation of this facility. Although we do not currently have separately located backup systems for our operations, we plan to establish a redundant system to be located at a geographically separate third party facility within the next 12 months. Our websites are monitored 24 hours a day, seven days a week. We utilize a variety of proprietary software systems and commercially purchased systems, integrated and designed to rapidly and precisely diagnose and recover from failures. We conduct upgrades and installations of software in a manner designed to minimize disruptions to our subscribers.

We acquire video game rental inventory through direct purchases from video game publishers, wholesalers and distributors. We purchase our video game inventory from approximately 40 vendors. Our goal is to design purchasing strategies with each video game publisher, wholesaler and distributor that will provide us with the most appropriate number of video games per title at the best available price in order to satisfy our subscribers' demands. Most often, we purchase inventory on a title-by-title basis. We have no purchase contracts with trade vendors and generally conduct business on an order-by-order basis, a practice that is typical throughout the industry.

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Customer Service

We focus on retention of our current subscribers and believe our ability to establish and maintain long-term relationships with subscribers depends, in part, on the strength of our customer support and service operations. We utilize frequent communication and feedback from our subscribers to continually improve our website and our service. Our customer service center is open seven days a week. Our subscribers can communicate with our customer service representatives by email or telephone. We also feature a customer service chat function that enables customers to receive individual attention. We focus on eliminating the causes of customer support calls by automating certain self-service features on our website, such as the ability to report and correct most shipping problems. Our customer service operations are housed in our Los Angeles, California and Austin, Texas facilities.

Competition

We face competition from a variety of online and traditional companies. We generally compete with these companies on the basis of title selection, convenience, efficiency, value, website content and ease of use. We believe we compete favorably with respect to these factors. The market for video game rentals and sales is competitive and we believe it will continue to remain competitive as the video game market grows. The main categories of companies with which we compete are:

•: Online rental companies. We compete against online video game rental services, such as Gamerang, RentZero, GameMine and Gottaplay. Additionally, Blockbuster began its "Games by Mail" pilot program in 2009 to expand its movie rental service to include video games for customers in Cleveland, Ohio and Seattle, Washington. Netflix, which currently offers only online subscription services for movies or other entertainment content, may in the future include video games in its service offering. We believe we are able to provide greater subscriber satisfaction than our competition due to our broader and deeper selection of titles, efficient fulfillment and a broader video game community to which we provide additional video game content, such as cheat codes and reviews. In addition, we believe we enjoy the highest brand recognition in this category and that our extensive community has created a network effect on which we have been able to capitalize to acquire new subscribers.
•: Online retail companies. Our subscription service also competes with a large number of online retail companies which sell, rather than rent, video games, such as Amazon.com and eBay. Traditional retailers such as BestBuy, GameStop, Target and Walmart also sell online. However, these companies do not currently offer online video game rental services to consumers. In addition, our network of websites provides an extra level of content and information that may not be provided by many of these companies.
•: Traditional rental and retail stores. In addition to online vendors, we also compete with traditional rental and retail stores such as Blockbuster and Hollywood Video for video game rentals and sales, and GameStop, BestBuy, Target and Walmart for retail sales. If a consumer wants to subscribe to an online video game rental service, these traditional retail companies do not currently offer this service with the exception of Blockbuster, which began piloting its "Games by Mail" service for customers in Cleveland, Ohio and Seattle, Washington in 2009. We believe we offer a broader selection of video games for online rental than is typically carried in any individual store and benefit from an efficiency advantage compared to traditional rental and retail stores because of the centralization and flexibility of our inventory management. In contrast, traditional retailers generally spread inventory over hundreds or thousands of locations in order to serve a geographically dispersed user base.

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Intellectual Property

We use a combination of trademark, patent, copyright and trade secret laws and confidentiality agreements to protect our proprietary intellectual property. We believe that our registered trademark "GameFly" and the brand name recognition that we have developed are of significant value. We have filed applications for several additional trademarks and patents. Our pending trademark and patent applications may not be allowed. Even if these applications are allowed, they may not provide us a competitive advantage. To date, we have relied primarily on proprietary processes and know-how to protect our intellectual property related to our website and fulfillment processes. Competitors may challenge the validity and scope of our trademarks, patents and copyrights.

From time to time, we may encounter disputes over rights and obligations concerning intellectual property. We believe that our services do not infringe the intellectual property rights of any third party. However, we cannot assure that no infringement claim will be asserted against us or that we will prevail in any intellectual property dispute.

Employees

As of September 30, 2009, we had 186 full-time employees. Of these full-time employees, 92 were in distribution, 43 were in product development, 29 were in customer service, 13 were in sales and marketing, and nine were general or administrative employees. We utilize part-time and temporary employees to respond to fluctuating seasonal demand for video game shipments. Our employees are not covered by a collective bargaining agreement, and we consider our relations with our employees to be good.

Facilities

Our executive offices are located in Los Angeles, California, where we lease approximately 16,000 square feet under a lease that expires in November 2013. In addition, we operate four regional distribution centers located in Lakewood, California; Emsworth, Pennsylvania; Tampa, Florida; and Austin, Texas, which provide us with an aggregate of approximately 50,000 square feet of distribution center facilities. We anticipate that we will open additional distribution centers in the future as we continue to grow our subscriber base.

Legal Proceedings

On April 23, 2009, we filed a complaint with the Postal Regulatory Commission in Washington, D.C. asserting that the U.S. Postal Service is in violation of 39 U.S.C. §§101(d), 403(c), 404(b) and 3622(6)(8). Since November 2002, we have shipped our mailers with cardboard protectors to reduce the breakage of video games in transit. These protectors increase the size and weight of the mail pieces enough to require their mailing as two-ounce flats. In our complaint filed with the Postal Regulatory Commission, we assert that we are being unlawfully discriminated against as a customer which uses First-Class Mail to send and receive video games. We seek to receive from the Commission a prescription for reasonable and nondiscriminatory rates and terms of service. The relief we seek, among other matters, is to have the U.S. Postal Service offer GameFly the same low rate and favorable terms of service currently offered to certain other online movie and video game subscription services.

In addition to our claim against the Postal Regulatory Commission, from time to time we may become involved in other legal proceedings arising in the ordinary course of our business. We are not presently involved in any other legal proceeding in which the outcome, if determined adversely to us, would be expected to have a material adverse effect on our business, operating results or financial condition.

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MANAGEMENT

The following table sets forth information about our executive officers and members of our board of directors as of February 8, 2010.

Name		Position(s)

David Hodess	47	Chairman of the Board, President, Chief Executive Officer and Director
Stacey Peterson	46	Senior Vice President and Chief Financial Officer
Sean Spector	42	Senior Vice President of Business Development and Content, Director
Nilesh Seth	38	Senior Vice President of Product Development and Technology
Michael Gimlett	42	Senior Vice President of Merchandising and Logistics
Terri Luke	43	Senior Vice President of Operations
Rachel Silverstein	39	Vice President of Marketing
Michael Moritz(2)(3)	55	Director
Tom Banahan(1)(2)(3)	51	Director
Edward "Toby" Lenk(1)(3)	48	Director
Alison Davis(1)(2)	48	Director

(1): Member of the audit committee.
(2): Member of the compensation committee.
(3): Member of the nominating and corporate governance committee.

Executive Officers

David Hodess has served as our Chairman of the Board since January 2010 and as our President and Chief Executive Officer and as a member of our Board of Directors since April 2003. Prior to joining GameFly, Mr. Hodess was Founder, Chief Executive Officer and Chief Financial Officer of Cooking.com, Inc. From 1988 until 1998, Mr. Hodess worked for The Walt Disney Company where he held several business development positions, including Director of Corporate Strategic Planning and Director of Business Development for The Disney Store. Mr. Hodess holds a Master of Business Administration degree from the Harvard Business School and a Bachelor of Arts degree in Government from Dartmouth College.

Stacey Peterson has served as our Senior Vice President and Chief Financial Officer since January 2010. Prior to joining GameFly, Ms. Peterson served as Chief Financial Officer of Oversee.net, Inc. from June 2007 to April 2009. From August 2005 to November 2006, Ms. Peterson served as Chief Financial Officer of Internet Brands. From January 2000 to August 2005, Ms. Peterson served as Chief Financial Officer of TTM Technologies, Inc., a technology manufacturing company. Ms. Peterson began her career at Atlantic Richfield Company, where she served in various capacities from 1991 until 2000. Ms. Peterson holds a Master of Business Administration degree from the Wharton School of the University of Pennsylvania and a Bachelor of Science Degree in Applied Economics and Business Management from Cornell University.

Sean Spector has served as our Senior Vice President of Business Development and Content since December 2005, and as a member of our Board of Directors since April 2002. From April 2002 to December 2005, Mr. Spector served as our Vice President of Marketing and Business Development. Mr. Spector was a founder of GameFly. Mr. Spector was previously a Producer at Disney Online, a division of The Walt Disney Company, and an Agent in the New Media Group at Creative Artists Agency. Mr. Spector holds a Bachelor of Arts degree in Film from San Francisco State University.

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Nilesh Seth has served as our Senior Vice President of Product Development and Technology since April 2008 and served as our Vice President of Product Management from September 2003 until April 2008. Prior to joining GameFly, Mr. Seth served as Vice President, Applied Technology at eStyle, Inc. from September 1999 to September 2003. Mr. Seth began his career at Andersen Consulting (now Accenture) where he worked from 1993 to 1999. Mr. Seth holds a Bachelor of Science degree in Mathematics/Applied Science (Economics) from the University of California, Los Angeles.

Michael Gimlett serves as our Senior Vice President of Merchandising and Logistics and previously served as our Vice President of Merchandising from January 2006 to December 2009 and as our General Merchandise Manager from 2002 to December 2005. Prior to joining GameFly, Mr. Gimlett served as a Merchandise Manager for PlayStation.com from 2000 to 2002. Mr. Gimlett attended the University of California, San Diego.

Terri Luke serves as our Senior Vice President of Operations and previously served as our Vice President of Technical Operations and Customer Service from 2005 to December 2009. Prior to joining GameFly, Ms. Luke held several positions at consulting firms including Zamba Solutions where she was a Client Partner and Vice President of Delivery Services from February 1997 thru December 2004. Ms. Luke began her career at Anderson Consulting (now Accenture) from 1990 to 1997. Ms. Luke holds a Bachelor of Science degree in Industrial Engineering from the University of Wisconsin-Madison.

Rachel Silverstein has served as Vice President of Marketing since January 2006. Prior to joining GameFly, Ms. Silverstein served as Director of Global Brand Management (Kids Division) at Activision from October 2002 to November 2005 and Global Brand Manager (Action Sports and Racing Division) from November 2000 to October 2002. From June 1998 to November 2000, Ms. Silverstein was a Brand Manager at THQ. Ms. Silverstein holds a Bachelor of Arts degree in Sociology from the University of California, Los Angeles.

Directors

Michael Moritz has served as a member of our Board of Directors since July 2002. Mr. Moritz has served as a General Partner at Sequoia Capital, a venture capital firm, since 1986 and serves as a director of several private companies. Mr. Moritz holds a Master of Arts degree in History from Christ Church, Oxford, University of Oxford.

Tom Banahan has served as a member of our Board of Directors since November 2004. Mr. Banahan has served as a Managing Director at Tenaya Capital, a venture capital firm, since February 2009. From October 1999 to February 2009, Mr. Banahan served as Global Head of Venture Capital at Lehman Brothers. Mr. Banahan also currently serves as a director of several private companies. Mr. Banahan holds a Bachelor of Arts degree in Business Economics from the University of California, Santa Barbara.

Edward "Toby" Lenk has served as a member of our Board of Directors since our formation in 2002. Mr. Lenk has served as the President of Gap, Inc. Direct since April 2003. Mr. Lenk was a founder of GameFly and served as our founding Chief Executive Officer from our formation in 2002 to April 2003. Mr. Lenk holds a Master of Business Administration degree from the Harvard Business School and a Bachelor of Arts degree in Economics and Government from Bowdoin College.

Alison Davis has served as a member of our Board of Directors since February 2010. Ms. Davis is currently a Managing Director of Belvedere Capital Partners II LLC, a position she has held since April 2004. Previously, Ms. Davis served as Chief Financial Officer at Barclays Global Investors from April 2002 to March 2003. Prior to that, Ms. Davis served as senior partner and Practice Leader with A.T. Kearney from August 1993 to April 2000. Ms. Davis began her career in 1984, working until 1993, at McKinsey and Company, where she focused on the banking and financial services sectors. Ms. Davis

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is currently a director of LECG and Presidio Bank. Ms. Davis holds a Bachelor of Arts with honors and Master degrees in Economics from Cambridge University in England and a Master of Business Administration degree from the Stanford Graduate School of Business.

Our Board of Directors

Our board of directors consists of six members, four of whom qualify as "independent" according to the rules and regulations of The NASDAQ Stock Market.

Upon the closing of our initial public offering, all of our preferred stock will be automatically converted into our common stock and all of the contractual rights to appoint directors will be automatically terminated. In accordance with the amended and restated certificate of incorporation and the amended and restated bylaws that will become effective upon the consummation of the offering, our board of directors will be divided into three classes with staggered three-year terms as follows:

•: Class 1 directors will consist of Sean Spector and Tom Banahan, whose terms will expire at our annual stockholders meeting to be held in 2011;
•: Class 2 directors will consist of Toby Lenk and Alison Davis, whose terms will expire at our annual stockholders meeting to be held in 2012; and
•: Class 3 directors will consist of David Hodess and Michael Moritz, whose terms will expire at our annual stockholders meeting to be held in 2013.

At each annual general meeting of the stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the total number of directors. The authorized number of directors may be changed by resolution of the board of directors. Vacancies on the board of directors can be filled by the board of directors.

The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change of control.

Committees of the Board of Directors

Our board of directors has the authority to appoint committees to determine certain management and administrative functions. Prior or upon consummation of this offering, our board of directors will have three committees: an audit committee, a compensation committee and a nominating and corporate governance committee. Members serve on these committees until their resignation or until otherwise determined by our board of directors. We believe that the composition of these committees will meet the criteria for independence under, and the functioning of these committees comply with the requirements of, the Sarbanes-Oxley Act of 2002, the rules of The NASDAQ Stock Market and SEC rules and regulations that will become applicable to us upon consummation of the offering. We intend to comply with the requirements of The NASDAQ Stock Market with respect to committee composition of the independent directors as they become applicable to us. Each committee has the composition and responsibilities described below.

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Audit Committee

Our audit committee consists of Tom Banahan, Toby Lenk and Alison Davis, with Alison Davis serving as chair. Our audit committee oversees our corporate accounting and financial reporting process and internal controls over financial reporting. Our audit committee:

•: appoints and determines the compensation of a registered public accounting firm to serve as our independent auditor;
•: oversees the work of the independent auditor;
•: evaluates the independence and performance of the independent auditor;
•: reviews the plan for and the scope of the audit and related services and approves all professional services to be provided to us by our independent auditor;
•: discusses with the independent auditor its audit of the financial statements, any significant changes required in the independent auditor's audit plan, any serious difficulties or disputes with management encountered during the course of the audit and other matters related to the conduct of the audit which are to be communicated under generally accepted auditing standards;
•: reviews with management any significant changes to generally accepted auditing standards and other accounting policies or standards that will impact or could impact the financial reports under review;
•: reviews significant changes to our accounting principles and practices proposed by the independent auditor, the internal auditor, if any, or management;
•: meets with management and the independent auditor to discuss the annual and quarterly financial statements;
•: reviews and discusses with management and the independent auditor management's report on internal control over financial reporting and the independent auditor's audit of the effectiveness of our internal control over financial reporting and its attestation report, if required, prior to the filing of our annual report;
•: makes recommendations on the inclusion of annual and quarterly financial statements in our annual and quarterly reports, respectively;
•: reviews the scope and results of internal audits, if any;
•: establishes a procedure for receipt, retention and treatment of any complaints received by us about our accounting, internal accounting controls or auditing matters and for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters;
•: discusses with the independent auditor and management our risk assessment and risk management guidelines, policies and processes; and
•: on behalf of the board of directors, oversees the principal risk exposures facing us and our mitigation efforts in respect of such risks, including, but not limited to financial reporting risks and credit and liquidity risks.

Our board of directors has determined that each of our audit committee members meets the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and The NASDAQ Stock Market. Our board of directors has determined that Alison Davis is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication under the applicable rules and regulations of The NASDAQ Stock Market. The

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audit committee will operate under a written charter that will satisfy the applicable rules of the SEC and The NASDAQ Stock Market.

Compensation Committee

Our compensation committee consists of Michael Moritz, Tom Banahan and Alison Davis, with Michael Moritz serving as chair. Our compensation committee:

•: reviews and recommends policy relating to compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to compensation of the Chief Executive Officer and other senior officers, and
•: evaluates the performance of these officers in light of those goals and objectives and setting compensation of these officers based on such evaluations.

The compensation committee has authority to select, engage, compensate and terminate compensation consultants, legal counsel and such other advisors as it deems necessary and advisable to assist the compensation committee in carrying out its responsibilities and functions and the authority for approving the material terms of all arrangements between us and compensation consultants that have been engaged by the compensation committee with respect to non-executive compensation consulting services.

The compensation committee also administers the issuance of stock options and other awards under our stock plans, periodically reviews and makes recommendations to our board of directors as to compensation for non-employee directors.

The compensation committee also reviews and discusses with management our proposed disclosures under the "Compensation Discussion and Analysis" required by Regulation S-K under the Securities Exchange Act and recommends to our board of directors whether such Compensation Discussion and Analysis should be included in our proxy statement and Annual Report on Form 10-K. Our board of directors has determined that each member of our compensation committee meets the requirements for independence under the applicable rules and regulations of the SEC, The NASDAQ Stock Market and the Internal Revenue Code.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee consists of Michael Moritz, Tom Banahan and Toby Lenk, with Tom Banahan serving as chair. Our nominating and corporate governance committee:

•: makes recommendations regarding candidates for directorships and the size and composition of our board;
•: reviews with the board of directors on an annual basis the independence, skills and characteristics of our directors, and the skills and characteristics of the board of directors as a whole, in determining whether to recommend for re-election incumbent directors in the class subject to election;
•: assesses the effectiveness of any diversity policy the board of directors may determine to implement;
•: establishes a procedure for the consideration of candidates for directorship recommended by stockholders;
•: identifies, evaluates and annually recommends to the board of directors the chairmanship and membership of each committee of the board of directors;

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•: develops and recommends to the board of directors the adoption of corporate governance guidelines, and from time to time reviews and assesses the guidelines and recommends changes for approval by the board of directors;
•: develops and recommends to the board of directors the adoption of a code of ethics, and from time to time reviews and assesses the code of ethics, and recommends changes for approval by the board of directors; and
•: develops and recommends to the board of directors the adoption of procedures designed to identify "related party" transactions that are material to our consolidated financial statements or otherwise require disclosure under applicable laws or rules promulgated by the SEC, and approves, in accordance with such procedures, any such "related party" transactions.

Our board of directors has determined that each member of our nominating and corporate governance committee meets the requirements for independence under the applicable rules and regulations of The NASDAQ Stock Market.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers currently serves or in the past year has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board or compensation committee.

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. These standards are designed to deter wrongdoing and to promote honest and ethical conduct. The code of business conduct and ethics will be available on our website www.gamefly.com. Any amendments to the code, or any waivers of its requirements, will be disclosed on the website. The information that appears on our website is not part of, and is not incorporated into, this prospectus.

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EXECUTIVE COMPENSATION

This executive compensation section provides information about the material elements of the compensation awarded during fiscal year 2009 to or earned by our "named executive officers," who consist of our chief executive officer, and our three most highly compensated executive officers. The named executive officers were:

•: David Hodess, our President, Chief Executive Officer who also served as our Chief Financial Officer;
•: Sean Spector, our Co-Founder and Senior Vice President of Business Development and Content;
•: Michael Gimlett, our Senior Vice President of Merchandising and Logistics; and
•: Nilesh Seth, our Senior Vice President of Technology.

This executive compensation discussion addresses and explains the compensation practices that were followed in fiscal year 2009 and the numerical and related information in the summary compensation and other tables presented below.

Compensation Discussion and Analysis

Compensation Philosophy and Objectives

We design our overall compensation program to attract and retain executive officers with the skills, experience and commitment to help us achieve our business objectives. The compensation program is designed to reward the achievement of our financial and business goals.

Prior to this offering, we were a privately-held company with a limited number of equity holders. As such, we have not been subject to stock exchange listing requirements or SEC rules requiring a majority of our board of directors to be independent or relating to the formation and functioning of our board committees, including a compensation committee. Our chief executive officer, in consultation with our board of directors, made the final decisions regarding the compensation of our executive officers, other than for himself, and our board of directors determined the compensation of our chief executive officer.

Following the offering, our compensation committee will have the responsibility for establishing, implementing and monitoring adherence to our compensation program. None of our executive officers will be a member of our compensation committee. Our compensation committee will have the authority under its charter to engage the services of outside counsel, consultants, accountants and other advisors to assist it in discharging its responsibilities relating to our executive compensation policies. In determining base salary and target annual performance-based cash compensation, we strive to reward our executive officers with compensation that is within our budget and is sufficient to retain such officers while concurrently aligning their interests with the achievement of our annual financial and business goals as well as the goals of our stockholders. For fiscal year 2009, we approved small increases in the base salary of some of our executive officers for excellent performance or alignment with the compensation of other executives. We do not use rigid guidelines or formulas to determine the amount and mix of compensation elements for each executive officer. We have not adopted any formal or informal policies or guidelines for allocating compensation between cash and non-cash compensation or among different forms of non-cash compensation. Instead, we rely on the judgment and experience of our chief executive officer and board members.

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Roles of Executives and Compensation Consultant

Historically, our chief executive officer has determined the cash compensation of our other executive officers, based on his assessment of an officer's performance and our financial situation, and notified and obtained informal approval from our board of directors of his decisions. In connection with this offering, our board of directors has hired Towers Watson (previously known as Towers Perrin) as our compensation consultant to help evaluate both the cash and equity components of the compensation for our executive officers, and to recommend any changes to our cash and equity compensation in order to conform the compensation of our executive officers more closely to current competitive market rates.

Principal Elements of Executive Compensation

The total compensation of our executive officers consists of the following elements:

•: base salary;
•: discretionary annual cash and equity bonus dependent on our financial performance and for Mr. Gimlett, an additional cash bonus may be earned upon the improvement of our gross margin; and
•: long-term incentive compensation, consisting of equity awards.

Some of our executive officers are also entitled to potential payments upon specified termination events and vesting acceleration upon a termination prior to or after a change in control, as discussed below. Additionally, our executive officers receive other benefits that are generally available to our employees.

Base Salaries

The base salary for each of our named executives was initially determined in a negotiation between us and each officer when such officer started employment. Each year, our chief executive officer had the discretion to determine whether to increase the base salary of our named executive officers (except his own) and would approve such increases, based on such factors as an officer's performance, alignment of an officer's compensation with our other officers and high-level employees or retention purposes. Our board of directors has annually considered whether to increase the base salary of our chief executive officer, based on our revenues and other financial results and his overall performance. The salary we paid in fiscal year 2009 to each named executive officer is reflected in the Summary Compensation Table below. In fiscal year 2009, Mr. Hodess increased the base salary of each of Messrs. Spector and Seth. Mr. Spector's base salary was increased from $190,000 to $195,000 to be comparable with the base salary of Mr. Gimlett. Mr. Seth's base salary was increased from $162,000 to $175,000 based on his strong performance. In fiscal year 2008, the base salary of each of Messrs. Hodess and Gimlett had been increased. The base salary of Mr. Hodess was increased from $300,000 to $330,000 at our board's discretion, based on his leadership of our company and our financial results. Mr. Gimlett's base salary was increased by Mr. Hodess from $143,000 to $200,000 to retain him by matching another competitive employment offer.

Annual Incentive Compensation

We do not have a formal bonus plan or program for any of our employees, except for an incentive plan for Mr. Gimlett, as described below. Instead, we have a discretionary bonus program pursuant to which our chief executive officer and our directors determine whether to pay annual bonuses to our employees, including our named executive officers, after reviewing our gross revenues, earnings before income and taxes (excluding bonus and non-cash compensation expense), our cash flow needs and our financial condition and outlook as a whole. For fiscal year 2009, our board of directors

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decided to pay most of our employees, including our named executive officers, cash bonuses equal, on average, to approximately 4% of our employees' aggregate base salary for their dedication and hard work.

Mr. Gimlett was also eligible for a bonus under the Gimlett Merchandising Incentive Plan FYE 3-09 prepared by our chief executive officer, under which he could earn a bonus based on the improvement of our gross margin rate above a base line gross margin rate. For this purpose, our revenues were based on our subscription fees plus our product sales of used games. Our cost included our cost of subscription revenues plus our cost of product sales. Our gross profit was determined by subtracting our costs from our revenues, and our gross margin was determined by dividing our gross profit by our revenues. Specifically, the Gimlett Merchandising Incentive Plan FYE 3-09 made the following assumptions about our revenues and costs for fiscal 2009:


Subscription Fees plus		$	71,900,000
Product Sales of Used Games		$	12,700,000

	Revenues	$	84,600,000
Cost of Subscription Revenues plus		$	34,800,000
Cost of Product Sales		$	13,700,000

	Cost of Goods and Sales	$	48,500,000
	Gross Profit (Revenues—Cost of Goods and Sales)	$	36,100,000
	Gross Margin (Gross Profit/Revenues)		42.6	%

To the extent that our gross margin was higher than the baseline gross margin of 42.6%, Mr. Gimlett would earn a cash bonus according to the following formula:

Improvement in Gross Margin	Cash Bonus

Equal to or greater than 0.50% but less than 1.00%	$	10,000
Equal to or greater than 1.00% but less than 1.50%	$	20,000
Equal to or greater than 1.50% but less than 2.00%	$	30,000
Equal to or greater than 2.00%	$	40,000

Our gross margin was 45.3% for fiscal year 2009, which was more than 2.0% above our baseline gross margin rate of 42.6%, and Mr. Gimlett received a bonus of $40,000.

Long-Term Incentive Compensation

Background. We established our equity incentive plans to align the interests of our employees, including our executive officers, with the interests of our stockholders and to provide them an incentive to support our long-term success and growth. We award our equity incentive compensation in the form of options to acquire shares of our common stock, because we believe that stock options incentivize our executive officers and are directly tied to any increase in the value of our business. Historically, our board of directors had the authority to make equity grants to executive officers. Following this offering, our compensation committee will make all equity grants to our executive officers.

Timing and Size of Grants. We typically grant a stock option of significant size in the year that an executive officer commences employment. Generally, the initial hire grant vests according to a four-year schedule in which 25% of the option vests after twelve months of continuous service and 1/48th of the option vests upon the completion of each of the next 36 months of continuous service. Thereafter, we may make option grants at varying times and in varying amounts at the discretion of our compensation committee or our board of directors. We do not have any program or obligation that requires us to grant equity compensation to any executive officer on specified dates. The size of each

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grant is generally set at a level that our board of directors or compensation committee deems appropriate to create a meaningful opportunity for stock ownership while reflecting the individual's position and longevity with us, the individual's existing equity holdings, an officer's total equity holdings relative to other executive officers and the individual's potential for future responsibility.

In fiscal year 2009, among the executives and officers we only granted options to Messrs. Gimlett and Seth. Mr. Gimlett was granted a fully vested option to purchase 5,415 shares of our common stock and Mr. Seth was granted a fully vested option to purchase 4,386 shares of our common stock as a portion of their bonus earned for fiscal year 2008. In addition, Mr. Gimlett received an option to purchase 10,000 shares of our common stock and Mr. Seth received an option to purchase 20,000 shares of our common stock in each case for a promotion. The number of these option shares was determined by our board of directors based on the total number of options already granted to each executive officer and the length of vesting remaining in such options.

Stock Valuation. In the absence of a public trading market for our common stock, our board of directors determined the fair market value of our common stock in good faith using factors it considered appropriate, including the price at which shares of our common stock and preferred stock had previously been issued, the rights associated with our preferred stock and our business prospects, and which beginning in September 2007 included written reports periodically prepared by an independent valuation firm retained by our board of directors. All fiscal year 2009 equity awards to our employees, including named executive officers, had an exercise price equal to the fair market value of our common stock on the grant date, as defined under Internal Revenue Service regulations and determined by our board of directors based on an appraisal prepared by an independent valuation firm. Following this offering, we expect the exercise price of our options to be based on the closing price of our common stock on the date of the grant or the date immediately prior to the date of grant.

Restricted Shares, Stock Appreciation Rights and Stock Units. We generally have not granted restricted stock awards, stock appreciation rights or stock units because we believe that options offer a more powerful incentive. However, in the future our compensation committee may consider the grant of restricted shares of our common stock, stock appreciation rights or stock units in appropriate circumstances.

Stock Ownership Guidelines

We currently do not require our directors or executive officers to own a specified amount of our common stock. Our compensation committee believes that the stock and option holdings of our directors and executive officers are sufficient at this time to provide them incentive to perform for us and to align this group's interests with those of our stockholders.

Perquisites

Our executive officers participate in our group insurance and employee benefit plans on the same terms as our other salaried employees, including a 401(k) plan with a discretionary matching contribution, medical, dental and vision benefits, an employee assistance program, a short-term disability and long-term disability program, a flexible spending account plan and life and accidental death and dismemberment insurance. At this time, we do not provide special benefits or other perquisites to our named executive officers.

Severance and Change of Control Benefits

Mr. Hodess' offer letter, dated as of 2003, as amended, provides that if he experiences an involuntary termination, he will receive continued payment of his base salary at the rate then in effect and we will reimburse him for his COBRA premiums for a period of four (4) months. This severance amount was initially negotiated with Mr. Hodess when he accepted employment as our chief executive

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officer. In addition, Mr. Hodess was granted an option to purchase 181,000 shares of our common stock that was granted on May 10, 2007, which provides for the following vesting acceleration: if Mr. Hodess is involuntarily terminated without cause or voluntarily terminates his own employment for good reason (a) prior to a change of control, then 25% of the total number of option shares (45,250 option shares) will immediately vest and become exercisable; or (b) in connection with or following a change of control, then 50% of the total number of option shares will immediately vest and become exercisable (70,389 shares because he is already vested in the remaining shares as of March 31, 2009). Mr. Hodess negotiated these vesting acceleration terms with our board of directors in connection with this option grant.

Mr. Spector's offer letter, dated as of 2002, as amended, provides that if he experiences an involuntary termination, he will receive continued payment of his base salary at the rate then in effect and we will reimburse him for his COBRA premiums for a period of six (6) months. This severance benefit was negotiated by Mr. Spector and our board of directors, based on the market compensation conditions then in existence.

For additional information, please see "Executive Compensation—Potential Payments Upon Termination or Change in Control" and "Executive Compensation—Employment Agreements" below for more details.

Financial Restatement Adjustment

Our compensation committee has not adopted a policy on whether we will make retroactive adjustments to any cash or equity-based incentive compensation paid to executive officers or other employees where the payment was predicated upon the achievement of financial results that were subsequently the subject of a restatement. Our compensation committee believes that this issue is best addressed when the need actually arises, when all of the facts regarding the restatement are known.

Tax and Accounting Treatment of Compensation

Section 162(m) of the Internal Revenue Code places a limit of $1.0 million per person on the amount of compensation that we may deduct in any one year with respect to each of our named executive officers other than the chief financial officer. There is an exemption from the $1.0 million limitation for performance-based compensation that meets certain requirements. All grants of options or stock appreciation rights under our new Equity Incentive Plan, which we intend to adopt before this offering, are intended to qualify for the exemption. Please see "Executive Compensation—Equity Incentive Plan" for more details. Grants of restricted shares or stock units under our Equity Incentive Plan may qualify for the exemption if vesting is contingent on the attainment of objectives based on the performance criteria set forth in the plan and if certain other requirements are satisfied. Grants of restricted shares or stock units that vest solely on the basis of service cannot qualify for the exemption. To maintain flexibility in compensating officers in a manner designed to promote varying corporate goals, our compensation committee has not adopted a policy requiring all compensation to be deductible and to date, the compensation to our named executive officers has not exceeded the $1.0 million limitation. Our compensation committee may approve compensation or changes to plans, programs or awards that may cause the compensation or awards to exceed the limitation under section 162(m) if it determines that such action is appropriate and in our best interests.

We account for equity compensation paid to our employees under the rules of FASB Accounting Standards Codification ("ASC") Topic 718, "Stock Compensation" (formerly FASB Statement No. 123(R)) ("ASC 718"), which requires us to estimate and record an expense for each award of equity compensation over the service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is accrued. We have not tailored our executive compensation program to achieve particular accounting results.

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Summary Compensation Table

The following table sets forth all of the compensation awarded to, earned by, or paid to our named executive officers for the fiscal year ended March 31, 2009.

Name and Principal Position			Salary		Bonus		Option Awards(2)		Non-Equity Incentive Plan Compensation(3)		Total

David Hodess,		2009	$	330,000	$	13,200	$	47,711		—	$	390,911
	Chief Executive Officer and President(1)
Sean Spector,		2009	$	195,000	$	7,800		—		—	$	202,800
	Co-Founder and SVP of Business Development and Content
Michael Gimlett,		2009	$	200,000	$	8,000	$	15,632	$	40,000	$	263,632
	VP of Merchandising and Distribution
Nilesh Seth,		2009	$	175,000	$	7,000	$	12,034		—	$	194,034
	SVP of Product Development and Technology

(1): Our Chief Executive Officer and President served as our Principal Executive Officer and our Principal Financial Officer.
(2): The amounts in this column represent the dollar amount recognized for financial statement reporting purposes with respect to fiscal year 2009 in accordance with ASC 718. See Notes 2 and 10 of the notes to our consolidated financial statements included elsewhere in the prospectus for a discussion of all assumptions made by us in determining the ASC 718 values of its equity awards.
(3): The amounts in this column reflect the cash bonus awards actually paid to Mr. Gimlett under the Gimlett Merchandising Incentive Plan FYE 3-09.

Salary, Bonus and Non-Equity Incentive Plan Compensation in Proportion to Total Compensation

The amount of salary, bonus and non-equity incentive plan compensation earned in fiscal year 2009 in proportion to the total compensation reported for each of the named executive officers was:


Mr. Hodess:	88	%
Mr. Spector:	100	%
Mr. Gimlett:	94	%
Mr. Seth:	94	%

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Grants of Plan-Based Awards

The following table sets forth each non-equity incentive plan award and equity award granted to our named executive officers during the fiscal year ended March 31, 2009.



			Estimated Future Payouts Under Non-Equity Incentive Plan Awards											Exercise or Base Price Per Option Share of Option Awards
																Grant Date Fair Value of Stock and Option Awards
	Grant Date
Name	Grant Date		Threshold			Target			Maximum
David Hodess				—			—			—		—			—		—
Sean Spector				—			—			—		—			—		—
Michael Gimlett		4/15/08	$	10,000	(1)	$	20,000	(1)	$	40,000	(1)	10,000	(2)	$	2.77	$	3,186
		5/21/08										5,415	(3)	$	2.77	$	6,853
Nilesh Seth		4/15/08		—			—			—

GameFly Inc. S-1