• our beliefs regarding trends for our businesses;

• the assumptions underlying our Critical Accounting Policies and Estimates, including stock volatility and other assumptions used to estimate the fair value of share-based compensation;

• our expectations regarding the costs and other effects of our acquisitions;

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

• our expected cash, cash equivalents and short-term investments balance at December 31, 2008;

• our belief that the international financial institutions that hold our investments are financially sound; and

• our belief that our cash, cash equivalents and investments, including cash flows from operations, will be sufficient to meet our working capital needs, capital expenditure requirements and similar commitments for at least the next 12 months.

Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors", set forth in Part II, Item 1A of this Form 10-Q. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report or to conform these forward-looking statements to actual results.
Our MD&A includes the following sections:
• overview that discusses at a high level our operating results and some of the trends that affect our business;

• significant changes since our most recent Annual Report on Form 10-K in the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements;

• the Recent Accounting Pronouncements that apply to us;

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

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

Overview
About Glu Mobile
Glu Mobile is a leading global publisher of mobile games. We have developed and published a portfolio of casual and traditional games to appeal to a broad cross section of the subscribers served by our wireless carriers and other distributors. We create games and related applications based on third-party licensed brands and other intellectual property, as well as on our own original brands and intellectual property. Our games based on licensed intellectual property include Call of Duty 4, Deer Hunter 2, Diner Dash 2, Sonic the Hedgehog, Transformers, World Series of Poker and Zuma. Our games based on our own intellectual property include Brain Genius, Space Monkey, Stranded and Super K.O. Boxing.
In March 2008, we acquired Superscape, a global publisher of mobile games, to deepen and broaden our game library, gain access to 3-D game development resources and to augment our internal production and publishing resources with a studio in Moscow, Russia. We paid 10 pence (pound sterling) in cash for each issued share of Superscape for a total purchase price of $38.9 million, consisting of cash consideration of $36.8 million and transaction costs of $2.1 million.
In December 2007, we acquired MIG to accelerate our presence in China, to deepen our relationship with China Mobile, the largest wireless carrier in China, to acquire access and rights to leading franchises for the Chinese market, and to augment our internal production and publishing resources with a studio in China. We purchased all of MIG's then outstanding shares for a total purchase price of $15.2 million, consisting of cash consideration to MIG shareholders of $14.7 million and transaction costs of $573,000. In addition, subject to MIG's achieving revenue and operating income milestones for fiscal 2008, we agreed to pay up to $20.0 million in additional consideration to MIG shareholders, payable up to 30% in Glu stock and 70% in cash, and up to $5.0 million of bonuses, payable entirely in stock, to two officers of MIG. Given MIG's performance during the first nine months of fiscal 2008, we expect that we will be required to make these "earnout" payments.
In March 2007, we completed our initial public offering, or IPO, of common stock in which we sold and issued 7.3 million shares of common stock at a price of $11.50 per share to the public. We raised a total of $84.0 million in gross proceeds from the IPO, or approximately $74.8 million in net proceeds after deducting underwriting discounts and commissions of $5.9 million and other offering costs of $3.3 million. Upon the closing of the IPO, all shares of redeemable convertible preferred stock outstanding automatically converted into 15.7 million shares of common stock.
Financial Results and Trends
Revenues for the three months ended September 30, 2008 were $23.9 million, a 43.5% increase from $16.7 million in the three months ended September 30, 2007. Revenues for the nine months ended September 30, 2008 were $68.2 million, a 39.9% increase from $48.7 million in the nine months ended September 30, 2007. The revenue growth in both periods was due primarily to revenues from MIG and Superscape in the 2008 periods, for which we recorded no revenues in the comparable 2007 periods. The revenue growth not attributable to the MIG and Superscape acquisitions was primarily attributable to the increase in the numbers of units of games sold. Although our revenues increased in the September 30, 2008 period compared to the September 30, 2007 period, our growth was slower than we anticipated in part as a result of the current economic conditions. We expect that consumer spending will continue to decline in the foreseeable future due to, among other factors, the fact that handset unit sales were down slightly from the quarter ended June 30, 2008 to the quarter ended September 30, 2008, and we expect a further decline in new handset units in 2009. In addition, the introduction of the next-generation and higher-end devices such as the iPhone, Android, and N-Gage devices has had the initial effect of drawing some of our best downloading customers away from the carrier-based business, which represents the substantial majority of our customer base. Accordingly, we have been increasing our investment in these next-generation handsets and have shifted approximately 30% of our development resources for 2009 products currently in development to higher-end devices.
In the three months ended September 30, 2008, one carrier represented 10% or more of revenues, Verizon Wireless (21.0%), and in the three months ended September 30, 2007 one carrier represented 10% or more of revenues, Verizon Wireless (23.6%). In the nine months ended September 30, 2008, one carrier represented 10% or more of revenues, Verizon Wireless (21.1%), and in the nine months ended September 30, 2007, one carrier represented 10% or more of revenues, Verizon Wireless (23.3%). In the nine months ended September 30, 2008, no title represented 10% or more of revenues, compared to the nine months ended September 30, 2007, in which one title, Monopoly Here & Now, which we no longer distribute, represented 10% or more of revenues. No title represented 10% or more of revenues during the three months ended September 30, 2008 and 2007. During the quarter ended September 30, 2008, we recorded an impairment on prepaid and guaranteed royalty agreements totaling $1.9 million, primarily due to reduced revenue forecasts for two of our distribution arrangements. In addition, during the quarter ended September 30, 2008, we recorded a $1.3 million foreign currency loss related to the revaluation of intercompany balance sheet accounts, primarily driven by the change in the value of the British pound sterling relative to the U.S. Dollar. If the value of the U.S. dollar relative to the British pound sterling continues to decline, we expect that we will record additional foreign currency exchange losses.

Our revenue growth rate will continue to depend significantly on continued growth in the mobile game market and our ability to continue to attract new end users in that market, purchases of new mobile handsets, unanticipated governmental activities in certain international markets and the overall strength of the economy, particularly in the U.S. In addition, our revenue growth rate may be adversely impacted by decisions by our carriers to alter their customer terms for downloading our games. For example, Verizon Wireless, our largest carrier, recently began imposing a data surcharge to download content on those Verizon customers who have not otherwise subscribed to a data plan. Our revenues depend on a variety of factors, including our relationships with our carriers and licensors. Even if mobile games based on licensed content or brands remain popular, any of our licensors could decide not to renew our existing license or not to license additional intellectual property to us and instead license to our competitors or develop and publish their own mobile games or other applications, competing with us in the marketplace. The loss of any key relationships with our carriers or licensors could impact our revenues in the future.
Our total operating expenses for the three months ended September 30, 2008 were $67.1 million, a 400.7% increase over $13.4 million in the three months ended September 30, 2007. Our total operating expenses for the nine months ended September 30, 2008 were $107.2 million, a 187.7% increase over $37.3 million in the nine months ended September 30, 2007. The increase in both periods was due primarily to our impairment of goodwill of $46.6 million, expenses associated with MIG and Superscape (including charges associated with the acquisitions) in the 2008 periods, for which we recorded no expenses in the comparable 2007 periods, and additionally due to increased headcount and related expenses as we added personnel to support our growth. As of September 30, 2008, we had approximately 600 employees compared to 320 as of September 30, 2007. In addition, we expect that our expenses to develop and port games for new mobile platforms will increase as we enhance our existing titles and develop new titles to take advantage of the additional functionality offered by these platforms.
Our ability to attain profitability will be affected by our ability to grow our revenues and the extent to which we must incur additional expenses to expand our sales, marketing, development, and general and administrative capabilities to grow our business. The largest component of our recurring expenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation, for our employees.
Cash, cash equivalents and short-term investments at September 30, 2008 totaled $20.7 million, a decrease of $39.1 million from December 31, 2007, primarily due to cash paid in March 2008 for the Superscape acquisition. Included in our $20.7 million of cash, cash equivalents and short-term investments is $842,000 of auction-rate securities whose auctions continue to fail and deteriorate in fair value. We expect that our cash, cash equivalents and short-term investments balance at December 31, 2008 will be approximately $17.0 million.
Critical Accounting Policies and Estimates There have been no significant changes in our Critical Accounting Policies and Estimates during the nine months ended September 30, 2008 as compared to the Critical Accounting Policies and Estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Recent Accounting Pronouncements
Information with respect to Recent Accounting Pronouncements may be found in Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements in this quarterly report, which information is incorporated herein by reference.

Results of Operations
Comparison of the Three Months Ended September 30, 2008 and 2007 Revenues

Three Months Ended September 30, 2008 2007

Our revenues increased $7.2 million, or 43.5%, from $16.7 million for the three months ended September 30, 2007 to $23.9 million for the three months ended September 30, 2008, due primarily to revenues from MIG and Superscape, our growing catalog of titles and broader distribution reach in our international markets, particularly in China, Latin America and parts of Europe. No revenues from MIG or Superscape titles were recorded during the three months ended September 30, 2007 compared to a total of $5.6 million in revenues recorded during the three months ended September 30, 2008. International revenues (defined as revenues generated from carriers whose principal operations are located outside the United States) increased by $5.3 million, from $7.5 million in the three months ended September 30, 2007 to $12.8 million in the three months ended September 30, 2008. The increase in international revenues was primarily a result of increased sales in China and other developing markets, including Latin America. Additionally, revenues from carriers located in the United States increased $1.9 million from $9.2 million in the three months ended September 30, 2007 to $11.1 million in the three months ended September 30, 2008 primarily as a result of sales from Superscape titles. The year over year increases in revenues were negatively impacted by a decrease in sales of $2.6 million related to Hasbro titles that we no longer have the rights to distribute.

   Cost of Revenues

                                                          Three Months Ended
                                                             September 30,
                                                           2008          2007
                                                            (In thousands)
       Cost of revenues:                                         -
       Royalties                                        $    5,753     $  4,587
       Impairment of prepaid royalties and guarantees        1,921            -
       Amortization of intangible assets                     3,247          483

       Total cost of revenues                           $   10,921     $  5,070

       Revenues                                         $   23,894     $ 16,651

       Gross margin                                           54.3 %       69.6 %

Our cost of revenues increased $5.9 million, or 115.4%, from $5.1 million in the three months ended September 30, 2007 to $10.9 million in the three months ended September 30, 2008. The increase resulted from an impairment of some prepaid royalties and guarantees of $1.9 million, an increase in royalties of $1.2 million due to the absolute dollar increase in revenues with associated royalties and an increase in amortization of acquired intangible assets of $2.8 million due primarily to the amortization of intangible assets acquired in December 2007 from MIG and March 2008 from Superscape. Revenues attributable to games based upon branded intellectual property decreased as a percentage of revenues from 88.6% in the three months ended September 30, 2007 to 72.4% in the three months ended September 30, 2008, primarily due to sales of games developed by MIG and Superscape based on their respective original intellectual property. The average royalty rate that we paid on games based on licensed intellectual property increased from 31.1% in the three months ended September 30, 2007 to 33.3% in the three months ended September 30, 2008 due to increased sales of titles with higher royalty rates. Overall royalties, including impairment of prepaid royalties and guarantees, as a percentage of total revenues increased from 27.5% to 32.1% due to the impairment of some prepaid royalties and guarantees but offset by an increase in revenue from games based on our intellectual property, especially sales of MIG and Superscape titles.
Gross Margin
Our gross margin decreased from 69.6% in the three months ended September 30, 2007 to 54.3% in the three months ended September 30, 2008 primarily because of the $2.8 million increase in the amortization of intangible assets resulting from the Superscape and MIG acquisitions and a $1.9 million impairment of some prepaid royalties and guarantees.

   Research and Development Expenses

                                                     Three Months Ended
                                                       September 30,
                                                      2008         2007
                                                       (In thousands)
              Research and development expenses    $  9,223      $ 5,863
              Percentage of revenues                   38.6 %       35.2 %

Our research and development expenses increased $3.4 million, or 57.3%, from $5.9 million in the three months ended September 30, 2007 to $9.2 million in the three months ended September 30, 2008. The increase in research and development costs was primarily due to increases in salaries and benefits of $1.8 million, facility and overhead costs to support our increased headcount of $753,000, outside services costs for porting and external development of $583,000, and travel and entertainment costs to manage our international studios of $145,000.
Research and development staff increased by 242 employees to a total of 454 as of September 30, 2008 as compared to the same period in 2007, and salaries and benefits increased as a result. This growth in headcount was due primarily to the opening of our development studio in Beijing, China during 2007, the addition of a studio in Hefei, China as result of the MIG acquisition and the addition of the development studio in Moscow, Russia as a result of the Superscape acquisition. Research and development expenses included $310,000 of stock-based compensation expense in the three months ended September 30, 2007 and $261,000 in the three months ended September 30, 2008. As a percentage of revenues, research and development expenses increased from 35.2% in the three months ended September 30, 2007 to 38.6% in the three months ended September 30, 2008 due to the increase in headcount resulting from the addition of the China and Russia studios.

   Sales and Marketing Expenses

                                                  Three Months Ended
                                                    September 30,
                                                   2008         2007
                                                    (In thousands)
                Sales and marketing expenses    $  6,004      $ 3,326
                Percentage of revenues              25.1 %       20.0 %

Our sales and marketing expenses increased $2.7 million, or 80.5%, from $3.3 million in the three months ended September 30, 2007 to $6.0 million in the three months ended September 30, 2008. The increase was primarily due to an increase in salaries and benefits of $428,000, as we grew our sales and marketing headcount from 51 at September 30, 2007 to 73 at September 30, 2008, a $1.1 million increase in stock-based compensation due primarily to the quarterly accrual related to the MIG stock-based compensation earnout, a $622,000 increase due to the quarterly cash-based component of the MIG earnout, a $320,000 increase in marketing promotions and a $198,000 increase in allocated facility costs to support our increased headcount. We recorded the stock and cash-based compensation related to the MIG earnout, as we believe the financial metrics stipulated in the purchase agreement will be attained given the current quarter's performance. We increased staffing and marketing program spending to expand our marketing efforts for our games and the Glu brand, to increase sales efforts to our new and existing wireless carriers and to expand our sales and marketing operations into the Asia-Pacific and Latin America regions. As a percentage of revenues, sales and marketing expenses increased from 20.0% in the three months ended September 30, 2007 to 25.1% in the three months ended September 30, 2008 primarily due to the accrual of the MIG cash and stock-based earnout. Sales and marketing expenses included $224,000 of stock-based compensation expense in the three months ended September 30, 2007 and $1.3 million in the three months ended September 30, 2008.

   General and Administrative Expenses

                                                      Three Months Ended
                                                        September 30,
                                                       2008         2007
                                                        (In thousands)
             General and administrative expenses    $  5,085      $ 4,149
             Percentage of revenues                     21.3 %       24.9 %

Our general and administrative expenses increased $936,000, or 22.6%, from $4.1 million in the three months ended September 30, 2007 to $5.1 million in the three months ended September 30, 2008. The increase in general and administrative expenses was primarily the result of a $412,000 increase in professional fees for our implementation of Section 404 under Sarbanes-Oxley and for various recruiting services, a $200,000 increase in salaries and benefits, a $187,000 increase in business and franchise taxes related to our expanded operations in Brazil and China and an increase in facility and overhead costs of $163,000 to support our increased headcount. We increased our general and administrative headcount from 57 at September 30, 2007 to 72 at September 30, 2008. As a percentage of revenues, general and administrative expenses decreased slightly from 24.9% in the three months ended September 30, 2007 to 21.3% in the three months ended September 30, 2008 as a result of increased revenues. General and administrative expenses included $626,000 of stock-based compensation expense in the three months ended September 30, 2007 and $569,000 in the three months ended September 30, 2008.

Other Operating Expenses
Our amortization of intangible assets, such as non-competition agreements, acquired from Macrospace and iFone was $67,000 in the three months ended September 30, 2007 and $67,000 in the three months ended September 30, 2008.
Our impairment of goodwill increased from zero in the three months ended September 30, 2007 to $46.6 million in the three months ended September 30, 2008. Based primarily upon our estimate of forecasted discounted cash flows and our market capitalization, we determined that the carrying amount of the goodwill at each of our Americas and EMEA reporting units was in excess of its respective fair value. The analysis of our goodwill balance caused us to conclude that all $25.3 million of the goodwill attributed to the EMEA reporting unit was impaired, as was $21.2 million of the $24.1 million of goodwill attributed to the Americas reporting unit. As a result, we recorded a non-cash goodwill impairment charge to operations totaling $46.6 million during the third quarter of 2008. No goodwill impairment charge was recorded related to the goodwill attributed to our APAC reporting unit as the fair value of the reporting unit exceeded the carrying value of its goodwill.
Our restructuring charge increased from zero during the three months ended September 30, 2007 to $126,000 during the three months ended September 30, 2008 as we undertook activities to terminate a small number of employees in our USA, UK and Hong Kong offices. The resulting restructuring charges principally consisted of costs associated with employee termination benefits that were paid in full during the third quarter of 2008.
Other Expenses
Interest and other income/(expense), net, decreased from a net income of $1.3 million during the three months ended September 30, 2007 to a net expense of $1.9 million in the three months ended September 30, 2008. This change was primarily due to an increase in foreign currency losses of $1.7 million, a decrease in interest income of $830,000 resulting from lower cash balances as a result of the MIG and Superscape acquisitions and a write-down of our two remaining failed auction-rate securities of $682,000. We expect interest income to decrease in 2008 as a result of lower cash balances due to our use of cash for our acquisitions of MIG and Superscape and the lower interest rates we expect on our investments.
Income Tax Provision
Income tax provision increased from $228,000 in the three months ended September 30, 2007 to $822,000 in the three months ended September 30, 2008 primarily as a result of increased foreign withholding taxes resulting from increased sales in countries with withholding tax requirements and taxes on income in some foreign entities.
Comparison of the Nine Months Ended September 30, 2008 and 2007 Revenues

Nine Months Ended September 30, 2008 2007

Our revenues increased $19.5 million, or 39.9%, from $48.7 million for the nine months ended September 30, 2007 to $68.2 million for the nine months ended September 30, 2008, due primarily to revenues from MIG and Superscape, our growing catalog of titles, broader international distribution reach and increased unit sales of our games. No revenues from MIG or Superscape titles were recorded during the nine months ended September 30, 2007 compared to $14.9 million recorded during the nine months ended September 30, 2008. International revenues increased $14.0 million from $22.4 million in the nine months ended September 30, 2007 to $36.4 million in the nine months ended September 30, 2008, primarily as a result of increased sales in APAC and other developing markets, including Latin America.