ACCLAIM ENTERTAINMENT INC - 10-K Annual Report

Back to GetFilings.com

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

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 1996

OR

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

For the transition period from to
----- -----

Commission file number 0-16986

ACCLAIM ENTERTAINMENT, INC.
(Exact name of the registrant as specified in its charter)

Delaware 38-2698904

(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) identification No.)

One Acclaim Plaza, Glen Cove, New York 11542
(Address of principal executive offices)

(516) 656-5000
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $0.02 par value

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

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

As at December 12, 1996, approximately 49,693,000 shares of Common Stock of the
Registrant were issued and outstanding and the aggregate market value of voting
common stock held by non-affiliates was approximately $232,900,000.

ACCLAIM ENTERTAINMENT, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED AUGUST 31, 1996

ITEMS IN FORM 10-K

Facing Page Page

PART I

.............................................................................................. 1
Item 1. BUSINESS.................................................................... 1
Item 2. PROPERTIES.................................................................. 26
Item 3. LEGAL PROCEEDINGS........................................................... 27
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS..................................................................... 31

PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................................. 32
Item 6. SELECTED FINANCIAL DATA..................................................... 33
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 34
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 47
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 76
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 79
Item 11. EXECUTIVE COMPENSATION...................................................... 83
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT....................................................... 90
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 92

PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................................................. 93

Signatures............................................................................................. 96

PART I

THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 ("BUSINESS") AND
ITEM 7 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS"), CONTAINS CERTAIN FORWARD-
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS "BELIEVE,"
"ANTICIPATE," "THINK," "INTEND," "PLAN," "WILL BE" AND SIMILAR
EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS REGARDING FUTURE EVENTS AND/OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "RISK FACTORS" BELOW
AT PAGES 19 TO 25, WHICH COULD CAUSE ACTUAL EVENTS OR THE ACTUAL
FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT. IN LIGHT OF THE SIGNIFICANT RISKS AND
UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE REGARDED AS
A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE
OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED.

Item 1. BUSINESS

Introduction

Acclaim Entertainment, Inc. ("Acclaim"), together with its
subsidiaries (Acclaim and its subsidiaries are collectively
referred to as the "Company"), is a mass market entertainment
company whose principal business to date has been as a publisher
of interactive entertainment software ("Software") for use with
dedicated interactive entertainment hardware platforms
("Entertainment Platforms"). The Company also engages in (i) the
development and publication of comic books, which commenced in
July 1994 through the acquisition of Acclaim Comics, Inc.,
formerly Voyager Communications, Inc. ("Acclaim Comics"); (ii) the
distribution of Software titles developed by other software
publishers ("Affiliated Labels"), which commenced in the first
quarter of fiscal 1995; (iii) the marketing of its motion capture
technology and studio services, which commenced in the first
quarter of fiscal 1995; (iv) the distribution of coin-operated,
location-based ticket redemption games, which commenced in August
1995 through the acquisition of Acclaim Redemption Games, Inc.,
formerly Lazer-Tron Corporation ("Lazer-Tron"); and (v) the
distribution of coin-operated video arcade games, which commenced
in May 1996.

Since inception, the Company has developed products for ten
different Entertainment Platforms, including the following: the
8-bit Nintendo Entertainment System (the "NES"), the portable
Nintendo GameBoy, the 16-bit Sega Genesis system (the "Genesis"),
the 16-bit Super Nintendo Entertainment System (the "SNES"), the

portable Sega GameGear, the 32-bit Sony PlayStation

("PlayStation") and the 32-bit Sega Saturn ("Saturn").
Substantially all of the Company's Software sold during the fiscal
year ended August 31, 1996 was developed for 16-bit and 32-bit
platforms. However, in April 1996, the Company decided to exit
the 16-bit and portable cartridge business due to the introduction
of 32- and 64-bit platforms and the related maturation and
deterioration of the North American 16-bit and portable cartridge
markets. Since such time, the Company has released, and may
continue to release, 16-bit or portable Software selectively. See
" -- Interactive Entertainment Software," " -- Products" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."

A Delaware corporation, Acclaim was founded in 1987 and has
overseas operations in Japan, Canada, France, Germany, Spain and
the United Kingdom.

Substantially all of the Company's revenues are derived from
one industry segment: the publication of Software. For
information about the Company's foreign and domestic operations
and export sales, see Note 21 of Notes to Consolidated Financial
Statements.

Business Strategy

The principal aspects of the Company's business strategy,
which are subject to various risks and uncertainties beyond the
Company's control (see " -- Risk Factors"), are as follows:

Software Development

The Company's Software development strategy is driven by the
hardware platforms that are marketed and/or are anticipated to be
marketed from time to time, the time and cost of Software
development for each platform, the cost of manufacturing Software
for a particular platform and the attendant retail price points
for Software. Historically, the development time for 8-bit and
portable cartridge Software was between six and twelve months and,
for 16-bit cartridge Software, between ten and fourteen months.
The development time for Software for 32-bit compact-disk read-
only memory ("CD-ROM") platforms and for the Nintendo N64
cartridge platform is currently between fourteen and twenty
months. The cost of manufacturing cartridge Software is
significantly higher than CD-ROM Software. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." Currently, the Company's Software development
efforts are focused on the Sony PlayStation, the Sega Saturn, the
Nintendo N64 and various personal computer compact disk systems
("PC CD Systems").

2

Once the Company has decided which Entertainment Platforms it
intends to support, the Company then focuses on the types of
Software to be developed for each platform (see " -- Products").
The Company's product development methods and organization are
modeled on those used in the Software entertainment industry.
"Producers" employed by the Company oversee and are responsible
for development of the Company's Software. The producers direct
teams comprised of either the Company's own Software studios or
independent Software studios and, among other things, manage and
monitor the delivery schedule and budget for each title, ensure
that the title follows the approved treatment and story boards,
act as facilitators with licensors whose trademarks or brands may
be incorporated in the title, if necessary, and coordinate testing
and final approval of the title.

The Company has invested in the creation of programming tools
and engines that are used in the design and development of its
Software. These tools and engines allow for more cost-effective
product development. The Company has also invested in a motion
capture studio for the application of its animation technology
and, in fiscal 1995, the Company completed the construction of its
ultimatte or "blue screen" studio.

In calendar 1995, the Company acquired three Software
studios: Iguana Entertainment, Inc. ("Iguana") in January 1995,
and Sculptured Software, Inc. ("Sculptured") and Probe
Entertainment Limited ("Probe") in October 1995. Prior thereto,
the Company relied exclusively on independent Software studios and
paid them advances and, after recoupment of such advances,
royalties based on sales. The Company anticipates that a majority
of its Software released in fiscal 1997 will be developed
internally. The Company believes that internal development allows
it to control better the product quality of its Software and
allows the Company to take advantage of its proprietary tools and
engines. From time to time, the Company may use independent
Software studios selectively to develop Software titles based on
the expertise of the independent Software studios in respect of
the particular type of Software title to be programmed and/or when
the Company does not have the capacity to develop all Software to
be released in any particular time period.

From time to time, the Company also enters into selected
licensing agreements with independent publishers to market and
distribute in selected markets Software titles developed by them.
The Company pays the publisher a royalty based on sales and
retains the inventory and marketing risk of such Software.

Products

The Company plans to produce high quality titles and address
a wide range of interactive entertainment categories and
audiences, such as puzzle, sports, arcade conversions,

3

action/adventure and fantasy. Software is generally tailored for
the hardware system for which it is being developed, based on the
capability of the hardware platform and the consumer demographics
for such platform. With respect to Entertainment Platforms, the
Company's strategy is to emphasize sports simulation and arcade
style titles and, with respect to PC CD Systems, the Company
intends to emphasize fantasy/role-playing, adventure and sports
simulation titles.

Marketing

The Company's marketing strategy is based on Software
featuring (i) original properties, (ii) brands, personalities
and/or icons and (iii) successful arcade properties. Original
properties are generally titles created by the Company's Software
studios and are based upon an original story or concept developed
by the Company. The Company creates Software based on or
featuring well-known or identifiable "brands" (such as NFL
Quarterback Club, NBA Jam and World Wrestling Federation) and
personalities or icons (such as Frank Thomas, Spiderman, Turok and
X-O Manowar) licensed or created by the Company. Arcade
properties are coin-operated games based upon which the Company
creates Software.

The Company's plan is to develop one key brand each year
based on its original properties, which brand may then be featured
on an annual basis in successive titles across multiple
Entertainment Platforms. By creating key brands, the Company is
able to take advantage of cross-merchandising opportunities, to
benefit from economies of scale and to capitalize on the name
recognition of the key brands in each subsequent year in which
they are used.

The Company markets its Software through, among other things,
television, radio, print and on-line advertisements, promotions
and public relations and enters into co-operative advertising
arrangements with certain of its customers. For its significant
releases, the Company creates marketing events through pre-release
promotions and point-of-sale materials.

Distribution and Sales

The Company believes that the most efficient way to
distribute its Software is by tailoring the distribution method to
each geographic market and, where appropriate, the Company
distributes directly through a subsidiary in an effort to maximize
revenues and profits.

In the United States, independent sales representatives are
used to reach over 18,000 store locations. These independent
representatives are supervised by regional sales managers employed
by the Company.

4

The Company sells and distributes Software directly in Japan,
Canada, France, Spain, Germany and the United Kingdom. For sales
in other markets, the Company appoints distributors. The
Company's Software is available in over 50 countries.

Interactive Entertainment Software

Industry Overview

The interactive entertainment industry is characterized by
rapid technological change, resulting in hardware platform and
related Software product cycles. No single Entertainment Platform
or system has achieved long-term dominance. Accordingly, the
Company focuses its efforts on the development of Software for the
Entertainment Platforms that dominate the interactive
entertainment market at a given time or that the Company perceives
as having the potential to achieve mass market acceptance at such
time as the Company's Software for such platform is to be
released. See " -- Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a
discussion of the difficulties in assessing hardware platform
dominance and the resulting impact upon the Company. No assurance
can be given that the Company will correctly identify the
Entertainment Platforms with mass market potential or be
successful in publishing Software for such platforms or cease
developing Software for a declining Entertainment Platform on a
timely basis.

The home interactive entertainment industry started a new
period of growth beginning in 1985, when Nintendo Co., Ltd.
(Japan) (Nintendo Co., Ltd. and its subsidiary, Nintendo of
America, Inc., are collectively herein referred to as "Nintendo")
commenced marketing the 8-bit NES cartridge platform in the United
States. The NES was the consumer's hardware platform of choice
for most of the late '80s.

In 1989, Nintendo introduced its portable Game Boy system and
in 1991 Sega Enterprises Ltd. ("Sega") introduced its portable
Game Gear system. Although other manufacturers introduced
portable systems, the Game Boy and Game Gear systems dominated the
portable market.

In 1990, Sega introduced the 16-bit Genesis and, in 1991,
Nintendo introduced the 16-bit SNES. The 16-bit systems were more
sophisticated than the 8-bit systems, producing faster and more
complex images with more life-like animation and better sound
effects. The industry experienced rapid rates of growth
commencing in 1992, fueled by sales of the 16-bit cartridge
Entertainment Platforms manufactured by Nintendo and Sega. By
1992, the 16-bit platforms had replaced the 8-bit platforms as the
consumer's hardware platform of choice, and sales of new 16-bit
hardware systems peaked in calendar 1993.

5

In 1993, Sega introduced the Sega CD, a compact disk ("CD")
player consisting of an attachment for its 16-bit Genesis
cartridge system. Additional CD platforms, including personal
computer systems for which Software products are published, are
currently marketed by Philips, Commodore, Apple, IBM, IBM-
compatible manufacturers and The 3DO Company ("3DO"). Atari
launched Jaguar, its 64-bit cartridge-based system, in November
1993 and Sega launched 32X, its 32-bit cartridge-based attachment
for its 16-bit Genesis system, in November 1994.

Sega and Sony Corporation (Sony Corporation and its
subsidiary, Sony Computer Entertainment of America, are
collectively herein referred to as "Sony") launched 32-bit CD-
based systems in Japan in November 1994. Sega shipped its Saturn
system in the United States commencing in May 1995 and Sony
released its PlayStation system in the United States in September
1995. Nintendo released N64, its new 64-bit read-only memory
("ROM") cartridge-based system, in Japan in June 1996 and in North
America in September 1996. Matsushita has announced plans to
release M2, its 64-bit CD-based hardware system, in Japan in 1997.
There can be no assurance that any of these systems or any of the
other newly introduced or announced systems will achieve commercial
success or market penetration similar to that of the SNES or
Genesis systems. See " -- Risk Factors."

The following table sets forth the Company's estimates, based
on information received from hardware manufacturers, leading
retailers and industry analysts, in respect of the number of units
of the Entertainment Platforms listed below sold in North America
in the calendar years indicated:

1991 1992 1993 1994 1995 1996+
(in millions)

Nintendo SNES 1.7 5.6 4.5 3.1 2.4 1.4

Sega Genesis 1.5 4.6 5.5 3.7 2.2 1.0

Nintendo GameBoy 3.7 3.5 3.7 2.5 2.4 1.6

Sega CD N/A 0.2 0.5 0.4 0.1 --

Sega Saturn N/A N/A N/A N/A 0.3 0.7

Sony PlayStation N/A N/A N/A N/A 0.7 2.5

Nintendo N64 N/A N/A N/A N/A N/A 1.2

________________________
+ estimate

The Company's revenues have traditionally been derived from
sales of Software for the then dominant Entertainment Platforms.
Accordingly, the Company's revenues are subject to fluctuation
and have been, as in fiscal 1996 (see "Management's Discussion

6

and Analysis of Financial Condition and Results of Operations"),
and in the future could be, materially adversely affected during
transition periods when new hardware platforms have been
introduced but none has achieved a significant installed base.

From inception through fiscal 1991, substantially all of the
Company's revenues were derived from sales of Software for the
NES. Although the Company commenced the publication of Software
for Game Boy in fiscal 1990, for the SNES in fiscal 1991 and for
the Genesis and Game Gear systems in fiscal 1992, the Company did
not derive significant revenues from the sale of portable or 16-
bit Software until fiscal 1992. The Company commenced the
development and sale of Software for Sega CD in fiscal 1994 and
for the Sega 32X and Sega Saturn and for the Sony PlayStation in
fiscal 1995. Most of the Company's revenues in fiscal 1994 and
the majority of the Company's revenues in fiscal 1995 were
derived from sales of Software for the 16-bit SNES and Genesis

systems. The Company believes that full-priced ("front line")
16-bit Software sales peaked in calendar 1994 and have decreased
substantially since that time.

Due to the relatively longer time necessary to develop and
manufacture 16- and 32-bit Software, the Company's strategic
decisions in respect of the hardware systems it intended to
support were required to be made in 1994, approximately 12 to 18
months prior to the shipment of Software for those platforms. In
deciding which hardware systems to support in calendar 1995 and
1996 and which titles to develop for shipment in those years, the
Company had to project, as early as 1994, anticipated sales
levels of 16- and 32-bit Software in 1995 and 1996.

Based on information available in 1994 and based on its
historical experience with respect to the transition from 8-bit
to 16-bit platforms, the Company believed that Software sales for
16-bit platforms would, although continuing to decrease overall,
still dominate the interactive entertainment market in 1995 and
that such sales would remain substantial through the 1996 holiday
season. Accordingly, the Company's strategy for Christmas 1995
was to develop Software for multiple hardware platforms -- 16-
bit, 32-bit and PC CD Systems -- and the Company anticipated that
substantially all of its revenues in fiscal 1995 would be derived
from its 16-bit Software sales. The Company anticipated that its
sales of 32-bit and PC CD Software in fiscal 1996 would grow as
compared to fiscal 1995 but that the majority of its revenues in
fiscal 1996 would still be derived from 16-bit Software sales.
However, the 16-bit Software market matured much more rapidly
than anticipated by the Company, the Company's Christmas 1995 16-
bit Software sales were substantially lower than anticipated and,
by April 1996, the Company derived minimal profits from such
Software sales and made the decision to exit the 16-bit and
portable cartridge markets. The Company's 32-bit and PC CD
Software sales in fiscal 1996 were materially insufficient to

7

offset the decline in sales of 16-bit Software. The acquisitions
of the Software studios materially increased the Company's fixed
product development and general and administrative expenses in
fiscal 1996. The decline in the 16-bit market, the relatively
slow growth of the 32-bit market and increased fixed operating
costs materially adversely affected the Company's results of
operations and liquidity in fiscal 1996. See " -- Risk Factors"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

License Agreements

In December 1994, the Company entered into an agreement (the
"Sony Agreement") with Sony, pursuant to which the Company
received, among other things, a non-exclusive license to develop
and distribute Software for the Sony PlayStation platform in the
United States and Canada. The Sony Agreement expires in December
1998. The Company has also entered into a five-year agreement
with an affiliate of Sony pursuant to which it received a non-
exclusive license to develop and distribute Software for the Sony
PlayStation platform in Japan.

In April 1992, the Company entered into an agreement with
Sega (the "Sega Agreement") and has certain other arrangements,
pursuant to which the Company received the non-exclusive right to
utilize the "Sega" name and its proprietary information and
technology in order to develop and distribute Software titles for
use with various Sega platforms. The Sega Agreement, as amended,
expired in December 1995. The Company and Sega are continuing to
operate in the ordinary course under the terms of the expired
Sega Agreement and such arrangements with respect to older
platforms and, with respect to the Saturn platform, under an oral
agreement and other arrangements. No assurance can be given that
the Company will be successful in negotiating a new agreement.
The Company believes that the terms of any new agreement with
Sega, if one is entered into, will not impose materially greater
obligations on the Company than the Sega Agreement, although
there can be no assurance of that result.

The Company has various license agreements with Nintendo
(collectively, the "Nintendo License Agreements") pursuant to
which it has the nonexclusive right to utilize the "Nintendo"
name and its proprietary information and technology in order to
develop and market Software titles for various 8-bit, 16-bit and
portable Nintendo platforms in various territories throughout the
world. The Nintendo License Agreements for the different
platforms expire at various times between 1996 and the end of
1997. The Company also has an agreement with Nintendo for the
development and marketing of one Software title for Nintendo's
N64 system in North America. The Company currently anticipates
shipping the N64 title (Turok) in the spring of 1997. The
Company has been advised by Nintendo of the basic terms of the

8

N64 license and anticipates that it will receive a draft license
shortly; however, no assurance can be given that the Company will
receive such license.

Sony, Nintendo and Sega charge their licensees a fixed
amount per unit based, in part, on memory capacity, chip
configuration and/or the market price for compact disk

manufacture. With respect to Software for Nintendo platforms,
this charge covers manufacturing, printing and packaging of the
unit, as well as a royalty for use of their respective names,
proprietary information and technology. With respect to Software
for Sony's PlayStation, the Company is required to make a
separate royalty payment to Sony for each Software unit
manufactured by Sony for the Company; this payment is made upon
manufacture of the units. The charges are subject to adjustment
by Sony, Nintendo and Sega at their discretion. The Company
manufactures (through subcontractors) substantially all of its
Sega Software titles for worldwide distribution and pays Sega a
royalty for each Software unit so manufactured and sold; this
payment is made upon sale of the units by the Company. See " --
Production, Sales and Distribution." However, the Company does
not have the right to manufacture any Software for the Sony
PlayStation or Nintendo N64 platforms. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."

Sony, Nintendo and Sega have the right to review and
evaluate, under standards established by them, the game program
for each title and the right to inspect and evaluate all art
work, packaging and promotional materials used by the Company in
connection with the Software. The Company is responsible for
resolving at its own expense any warranty or repair claims
brought with respect to the Software. To date, the Company has
not experienced any material warranty claims.

Under each of these license agreements, the Company bears
the risk that the information and technology licensed from Sony,
Nintendo or Sega and incorporated in the Software may infringe
the rights of third parties and must indemnify Sony, Nintendo or
Sega with respect to, among other things, any claims for
copyright or trademark infringement brought against Sony,
Nintendo or Sega and arising from the development and
distribution of the game programs incorporated in the Software by
the Company. To date, the Company has not received any material
claims of infringement; no assurance can be given that the
Company will not receive such claims in the future. See " --
Trademark, Copyright and Patent Protection."

The Company has a license agreement with 3DO for the
development of Software for its 32-bit system and has been
provided with product specifications for M2, although the Company

9

has not yet announced that it will market Software for either of
these platforms.

Although the Company has historically been able to renew
and/or negotiate extensions of its Software license agreements
with hardware developers, there can be no assurance that, at the
end of their current terms, the Company will continue to be able
to do so or that the Company will be successful in negotiating
definitive license agreements with developers of new hardware
systems. The inability to negotiate agreements with developers
of new hardware systems or the termination of all of the
Company's license agreements will, and the termination of any one
of the Company's license agreements could, have a material
adverse effect on the Company's financial position and results of
operations.

Development Of Software

The Company's product development methods and organization
are modeled on those used in the Software entertainment industry.
"Producers" employed by the Company oversee and are responsible
for development of the Company's Software. The producers direct
teams comprised of either the Company's own Software studios or
independent Software studios and, among other things, manage and
monitor the delivery schedule and budget for each title, ensure
that the title follows the approved treatment and story boards,
act as facilitators with licensors whose brands may be
incorporated in the title, if necessary, and coordinate testing
and final approval of the title.

In 1995, the Company expanded its ability to develop
Software internally through its acquisition of three Software
studios: Iguana in January 1995 and Sculptured and Probe in
October 1995. The Company now has approximately 530 employees in
its product development and research and development departments.
The Company's human resources dedicated to product development
have significantly expanded through these acquisitions and the
Company anticipates that a majority of its Software released in
fiscal 1997 will be developed internally. From time to time, the
Company may use independent Software studios selectively to
develop Software titles based on the expertise of the independent
Software studios in respect of the particular type of Software
title to be programmed and/or when the Company does not have the
capacity to develop all Software to be released in any particular
time period.

The Company constantly seeks new sources of brands from
which to develop Software and has historically obtained such
rights from a variety of sources in the film (e.g., Terminator
II), comic book publishing (e.g., Spiderman and Turok), sports
(e.g., NFL Quarterback Club and World Wrestling Federation),
arcade (e.g. NBA Jam Extreme) and other entertainment industries.

10

The contractual agreements granting the Company rights to use
such brands are varied -- some agreements are restricted to
individual properties and some agreements cover a series of
properties or grant rights to create Software based on or
featuring particular personalities or icons over a period of
time. Sales of Software incorporating certain brands have
accounted for significant portions of the Company's revenues from
time to time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition to
creating original properties, the Company intends to continue to
seek brands from various sources. See " -- Risk Factors."

The Company checks Software developed by its internal and
independent Software studios prior to manufacture for defects
("bugs"). There can be no assurance that these checks will
necessarily discover or resolve all possible bugs in the software
code and, if it were to distribute a title with serious bugs, the
Company might be required to recall those titles. The Software
developed for the various Nintendo, Sega and Sony formats are
also tested by those manufacturers for bugs. The Company's
Software for PC CD Systems is tested for bugs both internally and
by independent testing organizations. To date, the Company has
not had to recall any Software titles due to bugs.

Products

Since inception, the Company has developed and sold Software
for a variety of dedicated hardware systems. Although older Software
titles may continue to be available for sale, the Company
generally actively markets only its ten to fifteen most recently
released titles.

The life cycle of a Software title generally ranges from less
than three months to upwards of twelve months. The life cycle of a
particular title is dependent on its initial success. Although actual
results vary greatly from title to title, the retail sell-through of a
title is highest during the three months immediately after its introduction.

The Company plans to produce high quality titles and address
a wide range of interactive entertainment categories and audiences, such
as puzzle, sports, arcade conversions, action/adventure and fantasy.
Software is generally tailored for the hardware system for which it is
being developed, based on the capability of the hardware platform and
the consumer demographics for such platform. With respect to Entertainment
Platforms, the Company's strategy is to emphasize sports simulation and
arcade style titles and, with respect to PC CD Systems, the Company
intends to emphasize fantasy/role-playing, adventure and sports
simulation titles.

11

The Company's future success will be dependent in large part
on its ability to develop and market "hit" titles for hardware
platforms with significant installed bases. If the Company were
unable, for any reason, to develop and market such "hit" titles,
the Company's financial position and results of operations would
be materially adversely affected, as they were in fiscal 1996.
See "-- Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

In fiscal 1996, the Company released 39 32-bit titles, 22
16-bit titles and 9 portable titles. The Company made the
decision to exit the 16-bit and portable Software markets in
April 1996. Since such time, the Company completed the
development of Software in progress and has released two 16-bit
titles (Ultimate Mortal Kombat on SNES and Genesis) and 3 portable
titles and is currently selling its remaining inventory of 16-bit
and portable Software. The Company may, from time to time, (a)
release 16-bit and/or portable titles selectively to support its
key brands and (b) if requested by a retailer, produce additional
units of particular title(s) on a special order basis.

The Company currently plans to release between 18 and 20
titles in calendar 1997 for the 32-bit PlayStation and Saturn
platforms. As the market penetration of these platforms increases,
it is the Company's intention to reduce the number of titles
released by it. The Company plans to release between 15 and 20
PC CD Software titles in fiscal 1997, of which 5 to 6 titles will
be released only for PC CD Systems. With respect to the Nintendo
N64 platform, the Company intends to release between four
and six Software titles in calendar 1997, assuming the Company is
granted a license to develop N64 Software, one of which will be
released in the spring of 1997 under the Company's current N64
agreement with Nintendo. See " -- License Agreements."

Production, Sales And Distribution

The lead time for the manufacture of cartridge Software is
longer than for CD Software.

Pursuant to the terms of its license with Sony, the Company
is required to purchase PlayStation Software from Sony. Sony
generally manufactures and delivers Software to the Company
within four weeks after the placement by the Company of a
purchase order. Reorders are generally delivered within two
weeks by Sony.

The Company manufactures (through subcontractors) all of its
Software for PC CD Systems and substantially all of its Sega
Software. The cost of Sega Software when manufactured by the
Company, together with the royalties payable to Sega for such

manufacturing, is slightly lower than the cost of the Company's
Software when manufactured by Sega. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

12

Orders for CD Software manufactured by the Company (through sub-
contractors) are generally filled within 20-30 days of the
placement of the order. Re-orders for such Software are
generally filled within 10 days.

Historically, with respect to Nintendo Software, the Company
placed a purchase order and opened a letter of credit with
respect to a particular title and Nintendo manufactured and
delivered such Software to the Company within 60 to 90 days
thereafter. Nintendo has informed the Company that it will be
required to purchase its N64 Software from Nintendo on a similar
basis and the Company anticipates that the lead times for
production of such Software will be comparable to its historical
experience.

The Company's Software is sold in the United States using
regional sales representative organizations which receive
commissions based on the net sales of each product sold. The
Company maintains an in-house sales management team to supervise
the sales representatives. The sales representatives also act as
sales representatives for certain of the Company's competitors.
Two of the sales representative organizations marketing the
Software are owned in whole or in part by James Scoroposki, an
officer, director and principal stockholder of the Company. See
"Certain Relationships and Related Transactions."

The Company sells its Software primarily to mass
merchandisers, large retail toy store chains, department stores
and specialty stores. The Software is also sold, to a lesser
extent, to wholesale distributors. The Company does not have
written agreements with its customers. Sales to Toys "R" Us,
Inc. accounted for approximately 12% and 11% of the Company's net
revenues for each of the fiscal years ended August 31, 1994 and
1995, respectively. No single customer or distributor accounted
for more than 10% of the Company's net revenues for the year
ended August 31, 1996. Other important North American customers
include Wal-Mart, Target, Best Buy, Sears, KayBee, Blockbuster
Entertainment and Electronics Boutique. The loss of any
important customer could have a material adverse effect on the
Company.

The Company distributes its Software directly in the United
States. The Company sells and distributes Software directly in
Japan, Canada, France, Spain, Germany and the United Kingdom. The

sales and distribution activities of Acclaim's European
subsidiaries are administered through a central management
division, Acclaim Europe, based in London. For sales in other
markets, the Company appoints regional distributors.

The Company's Software is currently available to customers
in more than 50,000 stores in over 50 countries.

13

Marketing And Advertising

The Company's marketing strategy is based on Software
featuring (i) original properties, (ii) brands, personalities
and/or icons and (iii) successful arcade properties. Original
properties are generally titles created by the Company's Software
studios and are based upon an original story or concept developed
by the Company. The Company creates Software based on or featuring
well-known or identifiable brands (such as NFL Quarterback Club,
NBA Jam and World Wrestling Federation) and personalities or icons
(such as Frank Thomas, Spiderman, Turok and X-O Manowar) licensed
or created by the Company. Arcade properties are coin-operated
games based upon which the Company creates Software.

The target consumer for the Company's Software for
Entertainment Platforms are primarily males aged 11 to 21 and,
for PC CD Systems, are primarily males aged 15 to 25. In
developing a strategy for the marketing of a Software title, the
Company seeks story concepts and brands, personalities or icons
that it believes will appeal to the imagination of its target
consumer. The Company creates marketing campaigns consistent
with the target consumer for each title. The Company markets its
Software with, among other things, television, radio, print and
on-line advertisements; consumer contests and promotions;
publicity activities; and trade shows. In addition, the Company
enters into cooperative advertising arrangements with certain of
its customers, pursuant to which the Company's products are
featured in the retail customer's own advertisements to its
customers. Dealer displays and in-store merchandising are also
used to increase consumer awareness of the Company's products.

The Company's ability to promote and market its products is
important to its success. The Company's plan is to develop one
key brand each year based on its original properties, which brand
may then be featured on an annual basis in successive titles
across multiple Entertainment Platforms. For example, the
Company's WWF titles have been published on 11 platforms over 8
years. By creating key brands, the Company is able to take
advantage of cross-merchandising opportunities, to benefit from

economies of scale and to capitalize on the name recognition of
the brands in each subsequent year in which they are used.

The Company's ability to maintain favorable relations with
retailers and to receive the maximum advantage from its
advertising expenditures is dependent in part on its ability to
provide retailers with a timely and continuous flow of product.
See " -- Development of Software" and "-- Risk Factors."

The Company from time to time releases its significant
titles simultaneously across a series of platforms. However, due

14

to the significant development time required for Software for
each Entertainment Platform, the Company may choose, in the
future, not to release Software simultaneously across multiple
platforms.

The Company is generally not contractually obligated to
accept returns, except for defective product. However, in order
to maintain retail relationships, the Company may permit its
customers to return or exchange Software titles and may provide
price protection for titles unsold by a customer. The Company
establishes reserves for such concessions; however, concessions
materially exceeded reserves therefor in fiscal 1996 and no
assurance can be given that such concessions will not exceed the
reserves established therefor in the future period. See "
- -- Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

The Company's warranty policy is to provide the original
purchaser with replacement or repair of defective Software for a
period of 90 days after sale. To date, the Company has not
experienced significant warranty claims.

Trademark, Copyright And Patent Protection

Each of Sony, Nintendo and Sega incorporate a security
device in the Software and their respective hardware units in
order to prevent unlicensed software publishers from infringing
Sony's, Nintendo's or Sega's proprietary rights, as the case may
be, by manufacturing games compatible with their hardware. Under
its various license agreements with Sony, Nintendo and Sega, the
Company is obligated to obtain or license any available
trademark, copyright and patent protection for the original work
developed by the Company and embodied in or used with the
Software and to display the proper notice thereof, as well as
notice of the licensor's intellectual property rights, on all its
Software.

Each Software title may embody a number of separately
protected intellectual properties: (i) the trademark for the
brand featured in the Software (for example, Spiderman); (ii) the
software copyright; (iii) the name and label trademarks, such as
"LJN" and "Acclaim"; and (iv) the copyright for Sony's,
Nintendo's or Sega's proprietary technical information.

The Company has registered the logo "Acclaim" in the United
States and in certain foreign territories and owns the copyrights
for many of its game programs. "Nintendo," "Nintendo
Entertainment System," "Game Boy", "Super NES" and "N64" are
trademarks of Nintendo of America, Inc.; "Sega," "Sega Genesis,"
"Master System," "Sega MegaDrive," "Game Gear" and "Saturn" are
trademarks of Sega and "Sony", "Sony Computer Entertainment" and
"PlayStation" are trademarks of Sony. The Company does not own

15

the trademarks, copyrights or patents covering the proprietary
information and technology utilized in the NES, SNES, Game Boy,
N64, Genesis, Master System, MegaDrive, Game Gear, Saturn or
PlayStation or, to the extent licensed from third parties, the
brands, concepts and game programs featured in and comprising the
Software. Accordingly, the Company must rely on the trademarks,
copyrights and patents of such licensors for protection of such
intellectual property from infringement. Under the Company's
license agreements with certain of the independent Software
developers, the Company may bear the risk of claims of
infringement brought by third parties and arising from the sale
of Software and each of the Company and such developers has
agreed to indemnify the other for costs and damages incurred
arising from such claims and attributable to infringing
proprietary information, if any, embodied in the Software and
provided by the indemnitor.

There can be no assurance that the information and
technology licensed or developed by the Company will not be
independently developed or misappropriated by third parties.

Competition

Competition to develop and market Software is intense. The
Company competes with Nintendo, Sega, Sony and publishers
licensed by Nintendo, Sega and/or Sony to develop Software for
use with their respective hardware systems. Nintendo, Sega and
Sony, as well as certain other publishers, have greater financial
and other resources than the Company.

The Company believes that it is one of the largest

independent publishers of Software for dedicated platforms in the
United States. The market for Software for PC CD Systems is
fragmented and the Company believes that it has a small share of
that market.

Competitive factors include marketing and sales abilities,
capital resources, proprietary technology and product development
capability, product quality, depth of worldwide retail
distribution channels and management experience. No assurance
can be given that the Company will compete successfully on any of
these factors. See " -- Risk Factors."

Comic book publishing

Through the acquisition of Acclaim Comics in July 1994, the
Company commenced its development and publication of comic books.
To date, substantially all of Acclaim Comics' revenues have been
derived from sales of comic books on a nonreturnable basis
through unaffiliated distributors to the comic book direct
market, which consists of comic book specialty stores and mail
order comic book dealers. The Company has not derived

16

significant revenues from the sale of comic books by Acclaim
Comics in fiscal 1995 or fiscal 1996.

Acclaim Comics has created a superhero comic book series
featuring characters created or licensed by it, which are
published under its "VALIANT" imprint. In 1995, Acclaim Comics
entered into an agreement with Diamond Comic Distributors, Inc.
for exclusive distribution of these books. In fiscal 1997, Acclaim
Comics plans to continue to publish comic books under its VALIANT
imprint and to launch publications under its Acclaim Books
imprint, which will be distributed primarily by Penguin Books. At
present, Acclaim Comics plans to publish under the Acclaim Books
imprint (a) Acclaim Young Reader books, featuring characters
licensed from Walt Disney, the Fox Children's Television Network
and Saban Entertainment, which are scheduled for release in the
spring of 1997, and (b) Classics Illustrated titles in a study
guide format, as well as collector's editions and in CD-ROM
format. The Classics Illustrated titles, which are licensed from
First Classics Inc., are scheduled for release in January 1997.

The Company has released and intends to continue to release
Software products based on characters licensed or created by
Acclaim Comics for a variety of platforms, such as X-O Manowar
and Turok (scheduled for release in the spring of 1997).

Acclaim Comics' future revenues growth, if any, will depend

on the licensing and merchandising of its characters in
interactive entertainment and other media such as motion picture
or television, the use of its characters in the Company's
Software and coin-operated games, increased sales of comic books,
the introduction of new comic titles, and Acclaim Comics' entry
into the mass market for distribution and sales of its comic
books outside the United States.

Distribution of Affiliated Labels

The Company, through ADI, commenced the marketing and
distribution of Affiliated Labels in October 1994. The Company
currently distributes products for, among others, Interplay,
Ocean and Take 2. The Company receives a distribution fee from
such publishers. To date, the Company has not derived
significant revenues from the Affiliated Labels program. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Motion Capture Services

The technology embodied in the Company's motion capture
services were developed in part by its Advanced Technologies
Group ("ATG"). ATG was initially established in January 1991 to
develop tools that would enable the Company's independent
Software developers more efficiently and cost-effectively to

17

create and animate characters for Software and enhance game play
and product quality.

With the advancement of CD-ROM technology, ATG's activities
expanded to include motion capture (a three-dimensional animation
creation process) and the design of tools for use in programming
Software for CD-ROM platforms or cartridge-based platforms
utilizing 32-bit or 64-bit processors. The Company has
constructed a motion capture studio and a blue screen studio
utilizing advanced ultimatte software and proprietary video
processing tools for compositing and layering characters in a
variety of entertainment media. The Company has utilized its
motion capture technology in titles such as NBA Jam Extreme and
NFL Quarterback Club.

The Company believes that its motion capture technology may
have applications in other entertainment media and has marketed
its technology and studio services. Warner Bros. used the
Company's motion capture technology and studio services to create
certain of the special effects for Batman Forever, which was
released in the summer of 1995 and is using such technology and

services to create certain of the special effects for Batman and
Robin (which is scheduled for release in the summer of 1997).
New Line Cinema utilized the Company's motion capture technology
to create certain home video animation special effects for Mortal
Kombat and Twentieth Century Fox utilized the Company's motion
capture technology to create certain special effects for the 1995
motion picture, Power Rangers.

To date, the Company's revenues from the licensing of its
motion capture technology and studio services have not been
material. No assurance can be given that the Company will be
successful in marketing its technology and selling its studio
services and, even if it were successful, that revenues generated
therefrom will be material.

Coin-operated arcade games

In July 1994, the Company established Acclaim Coin-Operated
Entertainment, Inc. ("Acclaim Coin-Op"), a wholly-owned
subsidiary, for the creation and distribution of stand-alone
coin-operated games. Acclaim Coin-Op shipped two video games in
fiscal 1996. The Company currently plans to release
approximately two coin-operated games per year.

In August 1995, the Company acquired Lazer-Tron, which
creates and markets coin-operated ticket redemption games for use
in family entertainment centers and other entertainment venues.
Redemption games award tickets to players based on their skill
level in playing the games and these tickets may be redeemed for
prizes or merchandise. As designer, developer, manufacturer and
marketer, Lazer-Tron has created such games as Spin-To-Win(Trademark),

18

Ribbit Racin(Trademark), Aftershock(Trademark) and Pogger(Trademark),
the first arcade game featuring popular POG(Trademark) games pieces.
See Note 5 of Notes to Consolidated Financial Statements.

To date, the Company has not derived significant revenues
from the sale of coin-operated video games distributed by Acclaim
Coin-Op and/or Lazer-Tron. The successful creation and marketing
of such games will be dependent, in large part, on the Company's
ability to hire and retain developers for the creation of, and to
create or license properties for use in, coin-operated games
which achieve wide-spread market acceptance. There can be no
assurance that the Company will be successful in creating and
marketing coin-operated games or that any revenues derived by the
Company from the sale of such games will be material.

The Company licensed certain hardware technology from SCE

and Sega for the development of its first two coin-operated
games. The Company is developing its own proprietary hardware
technology for future applications, although there can be no
assurance that the Company will be successful in creating such
technology. In addition, the Company has developed new data
compression audio technology with high fidelity, motion picture
sound quality, which has applications in the coin-operated arcade
game platform, as well as other high-end game platforms.

Employees

The Company currently employs approximately 930 persons
world-wide on a full-time basis, approximately 690 of whom are
employed in the United States. The Company believes that its
relationship with its employees is good.

RISK FACTORS

Future operating results of the Company depend upon many
factors and are subject to various risks and uncertainties. Some
of the risks and uncertainties which may cause the Company's
operating results to vary from anticipated results or which may
materially and adversely affect its operating results are as
follows:

Recent Operating Results

The Company's net revenues declined from $566.7 million in
fiscal 1995 to $161.9 million in fiscal 1996. The Company had
net earnings of $44.7 million in fiscal 1995 and a net loss of
$(221.4) million in fiscal 1996. The loss for fiscal 1996
includes, among other things, the second and fourth quarter
special cartridge video charges taken by the Company aggregating
approximately $114 million. The Company believes that sales of
its 32- and 64-bit and PC CD Software will fall materially short

19

of levels necessary to offset the continuing decline in 16-bit
Software sales and that its revenues and operating profits from
the sale of Software for the new Entertainment Platforms and PC
CD Systems in fiscal 1997 will be materially less than its
revenues and operating profits in fiscal 1994 and 1995. The
Company may not be able to offset the decline in 16-bit Software
sales with increased sales of Software for the new Entertainment
Platforms and PC CD Systems in future periods. In such event,
the Company's results of operations and profitability will
continue to be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of

Operations -- Results of Operations."

Liquidity and Bank Relationships

The Company's net cash used in operations increased from
approximately $7.3 million in fiscal 1995 to approximately $38.3
million in fiscal 1996. The Company has experienced a decrease
in net cash from operations in recent periods primarily due to
the industry transition from 16-bit to 32- and 64-bit hardware
and Software. The Company anticipates that its cash flows from
operations will not be sufficient to cover its operating expenses
in fiscal 1997. There can be no assurance that the Company's
operating expenses will not materially exceed cash flows
available from the Company's operations in future periods. To
enhance its long-term liquidity, the Company has significantly
reduced the number of its employees and is evaluating various
alternatives, including the raising of additional capital, the
sale of certain assets and the renegotiation of debt covenants and
repayment terms related to its long-term debts. There can be no
assurance that such capital infusion will be available or that any
such capital infusion, sale or renegotiation could be effected on
satisfactory terms. In addition, the Company's future long-term
liquidity will be materially dependent on its ability to develop
and market "hit" Software for the hardware platforms that dominate
the interactive entertainment market. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."

As a result of its financial performance in fiscal 1996,
as at August 31, 1996, the Company was, and at the date hereof is,
in default of various financial covenants under loan agreements
with certain of its institutional lenders and accordingly of
applicable cross default provisions of such loan agreements other
than under its revolving credit agreement with BNY Financial
Corporation ("BNY") which defaults have been waived. At December 1,
1996, the Company's indebtedness aggregated $40 million. The
inclusion of the "going concern" explanatory paragraph in the audit
report on the Company's 1996 financial statements also constitutes
an event of default under the Company's agreement with BNY and its
term loan facility with Midland. Although the Company is current in
its payments under all its existing facilities, the lenders have

20

reserved their rights and remedies in respect of the unwaived events of
default, including the right to accelerate the loans and demand immediate
payment plus interest, and foreclose on the collateral securing the loans
if payment is not made. The Company is in discussions with its lenders
to obtain waivers of these remaining defaults and to restructure the
facilities, including negotiating more restrictive covenants, a paydown

of a significant portion of the outstanding loans and acceleration of
the payment terms. Although the Company believes it will be able to
remain in compliance with the new covenants negotiated with BNY and being
discussed with the other lenders, and will generate adequate cash flow
to service its obligations under these facilities, there can be no
assurance that additional covenant defaults, or a payment default, will
not occur in the future. The Company's ability to meet these covenants
and meet such obligations can be affected by factors beyond its control.
There can be no assurance that the Company will be able to obtain waivers
of the existing, or any future, default or that the lenders will not
exercise their remedies. In such event, the Company's operations would
be materially adversely affected.

Going Concern Considerations

The report of KPMG Peat Marwick LLP, independent auditors for the
Company, includes an explanatory paragraph relating to substantial doubt as
to the ability of the Company to continue as a going concern. The Company
incurred significant losses from operations in fiscal 1996 and anticipates
incurring material losses for the first and second quarters of fiscal 1997
and is in default of various covenants under the agreements with certain of
its lenders, which defaults permit the lenders to accelerate the loans
and seek immediate repayment, foreclose on collateral securing the loans
if payment is not made, and seek other relief. In addition, the Company
has experienced, and expects to continue to experience during fiscal 1997,
negative cash flow from operations, and is a party to significant litigation,
including various class action lawsuits. A "going concern" explanatory
paragraph is expected to have a material adverse affect on the terms of
any bank financing or capital the Company may seek. See Note 2 of Notes to
Consolidated Financial Statements.

Industry Trends; Platform Transition; Technological Change

The interactive entertainment industry is characterized by
rapid technological change, resulting in limited hardware
platform and Software life cycles. No single hardware platform
or system has achieved long-term dominance. The Company has
historically derived substantially all of its revenues from the
publication and distribution of Software for then dominant
hardware platforms. The Company's revenues are subject to
fluctuation during transition periods when new hardware platforms
have been introduced but none has achieved mass market
penetration.

21

The interactive entertainment industry is currently
undergoing, and the Company anticipates that in both the short-
and long-term future it will continue to undergo, significant
changes due in large part to (i) the introduction of
Entertainment Platforms incorporating more advanced processors

and operating systems, (ii) the impact of technological changes
embodied in PC CD Systems and software therefor, (iii) the
development of electronic and wireless delivery systems and (iv)
the entry and participation of new companies in the industry.

The Company's results of operations and profitability have
been materially adversely affected during the fiscal year ended
August 31, 1996 largely by the material decline in sales of the
Company's 16-bit Software and the transition to the new platforms
described herein. There can be no assurance that any of the new
platforms will achieve market penetration similar to that
achieved by the SNES and Genesis systems.

Substantially all of the Company's revenues in fiscal 1997
are anticipated to be derived from the sale of titles designed to
be played on the PlayStation, Sega Saturn, N64 and various PC CD
Systems. At any given time, the Company has expended significant
development and marketing resources on product development for
platforms (such as SNES and Genesis) that have had shorter life
cycles than the Company expected, as in fiscal 1996, or on
products designed for new platforms (such as the N64) that have
not yet achieved large installed bases. The success of the
Company's titles is significantly affected by market acceptance
and penetration of new Entertainment Platforms and the life cycle
of older Entertainment Platforms and the Company must predict
accurately the market acceptance, installed base and life cycle
of each platform. If the Company chooses not to develop Software
titles for a platform that achieves a significant installed base,
discontinues development for a platform that has a longer than
expected life cycle, develops for a platform that does not
achieve a significant installed base or continues development for
a platform that has a shorter than expected life cycle, the
Company's results of operations and liquidity could be materially
adversely affected.

Inventory Management; Risk of Returns

The Company is generally not contractually obligated to
accept returns, except for defective product. However, the Company
permits its customers to return or exchange Software titles and
may provide price protection on titles unsold by a customer. Management
must make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Among the more significant estimates are estimated allowances for
returns and discounts. In fiscal 1996, price protection, returns and exchanges

22

were materially higher than the Company's reserves therefor, as a
result of which the Company's results of operations and liquidity
in fiscal 1996 were materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1M and Note 22 of Notes to Consolidated
Financial Statements. The Company believes that after giving effect to
the fourth quarter adjustments, it has established adequate reserves
for future price protection returns, exchanges and other similar concessions.
No assurance can be given that future price protection, returns, exchanges
and other similar concessions will not exceed the Company's reserves
therefor and, if so exceeded, the Company's financial condition and
results of operations will be materially adversely affected.

In addition, the Company has offered and anticipates that it
will continue to offer stock-balancing programs for its PC CD
Software. The Company has established reserves for such
programs, which have not been material to date. No assurance can
be given that future stock-balancing programs will not become
material and/or will not exceed the Company's reserves for such
programs and, if so exceeded, the Company's results of operations
and financial condition could be materially adversely affected.

Products

A significant portion of the Company's revenues in any quarter
are generally derived from sales of Software in that quarter or in the
immediately preceding quarter. The life cycle of a Software title generally
ranges from less than three months to upwards of twelve months. Accordingly,
the Company is constantly required to develop, introduce and sell new
Software in order to generate revenues. The Company may not be able to
develop, introduce and sell new competitive titles on a timely basis, in
which event its results of operations and profitability would be materially
adversely affected.

Increased Product Development Costs

In order to manage its Software development process and to
ensure access to a pool of Software developers and maintain
confidentiality about its Software titles, development tools and
engines in an increasingly competitive market, the Company
acquired three Software studios in 1995. The result of such
acquisitions was that the Company's fixed Software development
and overhead costs were significantly higher in fiscal 1996 as
compared to its historical rate. Accordingly, the Company's
results of operations and profitability were materially adversely
affected in fiscal 1996. No assurance can be given that such
costs will not continue to have a material adverse effect on the
Company's operations in future periods.

Product Development Schedules; Earnings Fluctuations

The timing of the release of Software titles can cause
material quarterly revenue and earnings fluctuations.

23

Product development schedules are difficult to predict
due, in large part, to the difficulty of scheduling accurately
the creative process and, with respect to Software for the new
hardware platforms, the use of new development tools and the
learning process associated with development for new
technologies. As the industry trend toward more sophisticated
Entertainment Platforms and PC CD Systems continues, the related
Software titles frequently include more original, creative
content and are more complex to develop and, accordingly, cause
additional development and scheduling risk. See "Business --
Production, Sales and Distribution." As a result, the Company's
quarterly results of operations are difficult to predict and the
failure to meet product development schedules or even minor
delays in product deliveries could cause a shortfall in shipments
in any given quarter which in the past have caused, and in the
future could cause, the results of operations and net income for
such quarter to fall materially below anticipated levels.

In addition, the market for interactive entertainment
Software is "hits" driven. The release of "hit" titles for
hardware platforms with significant installed bases can
significantly affect revenues. Historically, such "hit" titles
have accounted for significant portions of the Company's revenues.
There can be no assurance that the Company will be able to
publish "hit" titles for hardware platforms with significant
installed bases.

Competition

The Software market is intensely competitive and is
characterized by constant introductions of new Software and
advancing technologies.

The Company competes with a variety of companies who offer
products that compete directly with one or more of the Company's
products. Typically, the Company's chief competitor on a
dedicated platform is the hardware manufacturer of the platform,
to whom the Company pays royalties and, in some cases,
manufacturing charges. Accordingly, the hardware manufacturers
have a price, marketing and distribution advantage with respect
to Software marketed by them and such advantage is particularly
important in a mature or declining market which supports fewer
full-priced titles and customers make purchasing decisions on
non-"hit" products based in part on price (as compared to
developing markets with limited Software titles, when price has
been comparatively a less important factor in Software sales).

The Company's competitors also include a number of
independent Software publishers licensed by the hardware
manufacturers. These competitors vary in size from very small
companies to companies with financial, managerial and technical

24

resources comparable to or greater than those of the Company.
See "Business -- Competition."

No assurance can be given that the Company will be able to
compete successfully.

New Business Ventures

During the last two years, the Company has completed
acquisitions, or has commenced operations, of various new
businesses including (i) the publication of comic books, (ii) the
distribution of Software for affiliated labels, (iii) the
marketing of its motion capture technology and studio services,
(iv) the distribution of coin-operated, location-based ticket
redemption games and (v) the distribution of coin-operated video
games. The Company also acquired three Software studios in
calendar 1995. The Company has made significant investments and
has incurred significant expenses in connection with the
acquisition/establishment of such businesses in fiscal 1995 and
1996, and anticipates that it will continue to incur significant
expenses in connection with certain of the operations thereof.
To date, none of such new businesses has generated material
revenues and there can be no assurance that such businesses will
generate material revenues or the timing thereof. To the extent
the Company continues to incur material expenses in connection
with such ventures during periods when they do not generate
significant revenues, the Company's results of operations and
profitability will be materially adversely affected.

Employees

The interactive entertainment industry is characterized by a
high level of employee mobility and aggressive recruiting of
skilled personnel among competitors. The ability to identify,
hire and retain such personnel is essential to the Company's
success. No assurance can be given that the Company will be able
to attract and retain such personnel.

Because of the foregoing factors, as well as other factors
affecting the Company's operating results and financial
condition, past financial performance should not be considered a
reliable indicator of future performance, and investors should
not use historical trends to anticipate results or trends in

future periods.

25

Item 2. PROPERTIES.

The Company's corporate headquarters are located in a 70,000
square foot office building, which was purchased by the Company
in fiscal 1994. The Company also leases approximately 10,000
square feet of office space in Glen Cove, New York and owns a
10,000 square foot office building in Oyster Bay, New York, which
has been leased to a third party tenant. The Company's motion
capture studio, located in Glen Cove, was completed in September
1994 and, in November 1995, the Company completed the purchase of
the Glen Cove building containing its ultimatte studio.

In addition, the Company's United States subsidiaries lease
and occupy approximately 15,000 square feet of office space in New York,
and approximately 88,000 square feet of office space in California,
Texas and Utah.

The Company's foreign subsidiaries lease office space in
Canada, Japan, France, Germany and the United Kingdom.

26

Item 3. LEGAL PROCEEDINGS.

The Company and certain of its directors and/or executive
officers were sued in various complaints filed in December 1995,
which were consolidated into an action entitled In re: Acclaim
Ent. Shareholder Litigation, 95 Civ. 4979 (E.D.N.Y.) (TCP) in the
United States District Court in the Eastern District of New York.
The plaintiffs, on behalf of a class of the Company's
stockholders, claim unspecified damages arising from the
Company's December 4, 1995 announcement that it was revising
results for the fiscal year ended August 31, 1995 to reflect a
decision to defer $18 million of revenues and $10.5 million of
net income previously reported on October 17, 1995 for the fiscal
year ended August 31, 1995. The consolidated complaint was
served on the defendants on or about June 14, 1996, and a
corrected consolidated complaint was served on or about July 10,
1996. Defendants have answered the complaint and have produced
documents. No depositions have taken place to date in this
action. The Company intends to defend this action vigorously.

By summons and complaint dated December 11, 1995, certain
of the Company's directors and/or executive officers were named as
defendants, and the Company was named as a nominal defendant, in a
shareholder derivative action entitled Eugene Block v. Gregory E.
Fischbach, James Scoroposki, Robert Holmes, Bernard J. Fischbach,
Michael Tannen, Robert H. Groman and James Scibelli, defendants, and
Acclaim Entertainment, Inc., Nominal Defendant, (CV 95-036316) (Supreme
Court of the State of New York, County of Nassau) (the "Derivative Action").
The Derivative Action was brought on behalf of the Company (as nominal
defendant), alleging that the individual defendants violated their
fiduciary duties to the Company in connection with the Company's revision
of its revenues for the fiscal year ended August 31, 1995. Plaintiff
alleges that the individual defendants (1) breached their duty of candor,
(2) caused the Company to waste corporate assets, and (3) mismanaged the
Company, and, accordingly, seeks unspecified damages. Plaintiffs withdrew
their complaint and filed an amended complaint. The parties have briefed
defendants' motion to dismiss based on plaintiffs' failure to make a
proper demand. The Company intends to defend this action vigorously.

The Securities and Exchange Commission (the "Commission")
has issued orders directing a private investigation relating to,
among other things, the Company's earnings estimate for fiscal
1995 and its decision in the second quarter of fiscal 1996 to
exit the 16-bit portable and cartridge markets. The Company has
provided documents to the Commission, and the Commission has
taken testimony from Company representatives. The Company
intends fully to cooperate with the Commission in its
investigation. No assurance can be given as to whether there
will be any litigation or, if so, as to the outcome of this
matter.

27

The Company's subsidiary, Lazer-Tron, was sued in an action
entitled Eric Goldstein, on behalf of himself and all others
similarly situated, v. Lazer-Tron Corporation, Norman B.
Petermeier, Matthew F. Kelly, Bryan M. Kelly, Morton Grosser,
Bob K. Pryt and Roger V. Smith (V-009846-7) in the Superior Court
of the State of California, County of Alameda, Eastern Division.
The plaintiffs allege, among other things, breach of fiduciary
duty, abuse of control and negligence. In addition, certain directors
and officers of Lazer-Tron have been named as defendants in an action
entitled Adrienne Campbell, individually and on behalf of all others
similarly situated, v. Norman B. Petermeier, Matthew F. Kelly, Bryan
M. Kelly, Morton Grosser, Bob K. Pryt, Roger V. Smith and Does 1
through 50, inclusive, Civil No. 760717-4, in the Superior Court of
the State of California, County of Alameda. The plaintiffs, on behalf
of a class of Lazer-Tron's shareholders, claim damages based on
allegations that, as a result of lack of due diligence by the named
defendants in fully investigating the proposed acquisition by the
Company of Lazer-Tron, the defendants breached their fiduciary duties
to Lazer-Tron's shareholders. These two actions have been
consolidated. On November 13, 1996, the Court certified a class in
the consolidated action and designated the named plaintiffs as class
representatives. The individual defendants and Lazer-Tron have
tendered a claim to CIGNA Insurance Company and have requested
settlement authority from the carrier to resolve the consolidated
action.

The Company and certain of its directors and/or executive
officers were sued in various complaints filed in April 1994,
which were consolidated into an action entitled In re Acclaim
Entertainment, Inc. Securities Litigation (CV 94 1501) (the "WMS
Action"). The plaintiffs, on behalf of a class of the Company's
stockholders, claim damages arising from the Company's alleged failure
to comply with the disclosure requirements of the securities laws in
respect of the Company's relationship with WMS Industries Inc. ("WMS")
and the status of negotiations on renewal of a license agreement with
WMS, pursuant to which WMS granted the Company a right of first
refusal to create software for "computer games", "home video games"
and "handheld game machines" based on arcade games released by WMS
through March 21, 1995. The plaintiffs allege that, by no later than
January 12, 1994, the Company knew or should have known that (i) it
was likely that the license agreement with WMS would not be renewed,
(ii) the nonrenewal of the license agreement would have a material
adverse impact on the Company, (iii) any joint venture or other
agreement between WMS and the Company that might be entered into in
the future, however unlikely that may be, would be on terms
substantially less advantageous to the Company than the license
agreement and (iv) statements by the Company's

28

representative that rumors relating to the nonrenewal of the
license agreement were "unsubstantiated" and that talks between
the Company and WMS were continuing, were materially false and
misleading. Accordingly, the plaintiffs claim that the
defendants should have disclosed the likely nonrenewal of the
license agreement. Discovery is almost complete, and the parties have
moved for summary judgment. In addition, plaintiffs have moved to
expand the Class Period from the current period (January 13, 1994 to
March 30, 1994) to encompass a class consisting of all those who have
purchased Acclaim stock for the period January 4, 1994 to March 30,
1994. Defendants have opposed plaintiffs' motion to expand the class
and have cross-moved to shorten the class to the period February 4,
1994 or March 16, 1994 to March 29, 1994. The summary judgment and
class motions were argued before the Court on November 22, 1996 and
subsequently the Court ordered plaintiffs to move for leave to amend
their complaint to set forth the allegations on which their claim that
the defendants misrepresented the status of the WMS negotiations
between January 4 and January 13 are based. On December 16, 1996,
the Court granted plaintiffs' motion for leave to serve an amended
complaint and issued a report and recommendation recommending that the
plaintiffs' motion to extend the class period be granted. No opinion
has been issued on the parties' summary judgment motion. The Company
believes the lawsuit is without merit and lacks any basis in fact,
and intends to defend the WMS Action vigorously.

The Company has also asserted a third-party action against
its insurance company, Mt. Hawley Insurance Company ("Mt. Hawley")
based on Mt. Hawley's disclaimer of coverage for liability which
may result from the WMS Action and for fees and expenses up to the
amount of the policy incurred in connection with the defense of the
WMS Action, and has moved for a separate trial of this action and
for an immediate trial of a coverage issue. This motion was also
argued on November 22, 1996, and the Court has not yet issued a
decision on this motion.

The Company and certain of its directors and/or executive
officers also are defendants in an action entitled Adrienne Campbell
and Donna Sizemore, individually and on behalf of all others similarly
situated, v. Acclaim Entertainment, Inc., Anthony R. Williams, James
Scoroposki, and Robert Holmes, C-95-04395 (EFL), which was commenced
in the United States District Court for the Northern District of
California. In that action, plaintiffs, two former shareholders of
Lazer-Tron, filed a class action complaint on December 8, 1995 on
behalf of all former Lazer-Tron shareholders who exchanged their
Lazer-Tron stock for Common Stock pursuant to the August 31, 1995
merger transaction. Plaintiffs allege violations of Sections 10(b),
14(a) and 14(e) of the Securities Exchange Act of 1934, Sections 11
and 12(2) of the Securities Act of 1933, and fraud and deceit,
constructive fraud, negligent misrepresentation and breach of
fiduciary duty. On October 8, 1996, the Judicial Panel on
Multidistrict Litigation ordered the transfer of the action from the
Northern

29

District of California to the United States District Court for
the Southern District of New York for coordinated or consolidated
pretrial proceedings with the action entitled In re Acclaim
Ent. Shareholder Litigation discussed above. The Company has
moved to dismiss this action.

The New York State Department of Taxation and Finance (the
"Department"), following a field audit of the Company with
respect to franchise tax liability for its fiscal years ended
August 31, 1989, August 31, 1990 and August 31, 1991, has
notified the Company that a stock license fee (plus interest and
penalties) of approximately $1,933,000, relating to the Company's
outstanding capital stock as of 1989, is due to the State. The
Company is contesting the fee and a petition denying liability
has been filed. No assurance can be given as to the outcome of
this matter.

The Company is also party to various litigations arising in
the course of its business, the resolution of none of which, the
Company believes, will have a material adverse effect on the
Company's liquidity or results of operations.

30

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On August 7, 1996, at the Annual Meeting of Stockholders of
the Company, the stockholders (i) elected the following
directors: Gregory E. Fischbach (by a vote of 29,654,484 shares
for and 1,766,630 shares withheld); James Scoroposki (by a vote
of 29,651,210 shares for and 1,769,904 shares withheld); Robert
Holmes (by a vote of 29,651,264 shares for and 1,769,850 shares
withheld); Bernard J. Fischbach (by a vote of 29,650,204 shares
for and 1,770,910 shares withheld); Michael Tannen (by a vote of
29,645,583 shares for and 1,775,531 shares withheld); Robert
Groman (by a vote of 29,660,044 shares for and 1,761,070 shares
withheld); James Scibelli (by a vote of 29,644,664 shares for and
1,776,450 shares withheld); and Bruce W. Ravenel (by a vote of
29,656,418 shares for and 1,764,696 shares withheld); and (ii)
approved, by a vote of 26,437,806 shares for, 4,809,778 shares
against and abstentions or broker non-votes with respect to
173,530 shares, certain changes to the Company's 1988 Stock
Option Plan.

31

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.

The common stock, par value $0.02 per share (the "Common Stock"),
of the Company is traded on The NASDAQ Stock Market National Market
System. On December 12, 1996, the closing sale price of the Common Stock
was $5.75 per share. As of such date, there were approximately 1,270
holders of record of the Common Stock.

The following table sets forth the range of high and low
sales prices for the Common Stock for each of the periods
indicated:

Price
Period High Low

Fiscal Year 1995
First Quarter ................ $20.63 $15.63
Second Quarter ............... 15.63 13.44
Third Quarter ................ 17.50 13.69
Fourth Quarter ............... 27.50 16.25

Fiscal Year 1996
First Quarter ................ $28.19 $19.56
Second Quarter ............... 20.00 10.00
Third Quarter ................ 13.63 7.63
Fourth Quarter ............... 11.88 7.31

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on
the Common Stock and has no present intention to declare or pay
cash dividends on the Common Stock in the foreseeable future.
The guaranty of Acclaim Comics' obligations to Midland Bank plc
executed by the Company in July 1994 contains restrictions on the
payment of dividends by the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 13 of the Notes to Consolidated Financial
Statements. The Company intends to retain any earnings which it
may realize in the foreseeable future to finance its operations.

32

Item 6. SELECTED FINANCIAL DATA.

The following tables should be read in conjunction with the
consolidated financial statements of the Company and the notes
thereto and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section appearing
elsewhere in this Form 10-K.

Fiscal Year Ended August 31,

(in 000s, except per
share information) 1996(4) 1995(3) 1994(2) 1993 1992(1)

Statement of Operations Data:
Net revenues $ 161,945 $ 566,723 $ 480,756 $ 327,091 $ 214,628
Cost of revenues 180,072 268,501 220,744 170,748 114,114
Gross (loss) profit (18,127) 298,222 260,012 156,343 100,514
Selling, advertising, general and
administrative expenses 200,440 203,930 172,099 101,950 66,493
Product development 34,582 10,126 4,626 3,036 2,149
Operating interest 6,417 3,957 1,979 1,183 1,583
Depreciation and amortization 14,910 9,543 3,838 3,227 3,197
(Loss) earnings from operations (274,476) 70,666 77,470 46,947 27,092
Other income (expense), net 5,609 5,608 (475) 1,138 (3,255)
(Loss) earnings before income taxes (268,867) 76,274 76,995 48,085 23,837
Net (loss) earnings (221,368) 44,770 45,055 28,185 13,846
Net (loss) earnings per common and
common equivalent share $ (4.47) $ 0.86 $ 1.00 $ 0.63 $ 0.37
Weighted average number of common
and common equivalent shares
outstanding 49,515 52,300 45,150 44,875 37,815

All common share information has been restated to reflect the three-for-two
stock split in the form of a 50% stock dividend distributed on August 23, 1993.

(1) Includes results of operations of Arena from January 4, 1992
(2) Includes results of operations of Acclaim Comics from July 29, 1994
(3) Includes results of operations of Iguana from January 4, 1995 and of
Lazer-Tron for the entire year
(4) Includes results of operations of Sculptured and Probe for the entire year

August 31,
1996 1995 1994 1993 1992

Balance Sheet Data:
Working capital (deficiency) $ (10,039) $ 200,455 $ 131,820 $ 80,564 $ 51,402
Total assets 239,651 442,827 335,878 206,771 129,179
Current portion of long-term debt 25,527 25,196 1,538 87 87
Long-term liabilities 4,032 461 41,754 2,538 3,380
Stockholders' equity 93,589 314,707 175,243 96,867 64,706

33

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Overview

Acclaim Entertainment, Inc. ("Acclaim"), together with its
subsidiaries (Acclaim and its subsidiaries are collectively
hereinafter referred to as the "Company"), is a mass market
entertainment company whose principal business to date has been as
a leading publisher of interactive entertainment software
("Software") for use with interactive entertainment hardware
platforms ("Entertainment Platforms"). The Company also engages
in (i) the development and publication of comic books, which
commenced in July 1994 through the acquisition of Acclaim Comics,
Inc., formerly Voyager Communications, Inc. ("Acclaim Comics");
(ii) the distribution of Software titles developed by other
Software publishers ("Affiliated Labels"), which commenced in the
first quarter of fiscal 1995; (iii) the marketing of its motion
capture technology and studio services, which commenced in the
first quarter of fiscal 1995; (iv) the distribution of coin-
operated, location-based ticket redemption games, which commenced
in August 1995 through the acquisition of Acclaim Redemption
Games, Inc., formerly Lazer-Tron Corporation ("Lazer-Tron"); and
(v) the distribution of coin-operated video arcade games, which
commenced in May 1996.

The interactive entertainment industry is characterized by
rapid technological change, resulting in hardware platform and
related Software product cycles. No single Entertainment Platform
or system has achieved long-term dominance. The Company's
strategy is to develop Software for the hardware platforms that
currently dominate the market and to develop Software for the
hardware platforms that the Company perceives as having the
potential to achieve mass market acceptance at such time as the
Company's Software for such platform is to be released. This
generally requires the Company to estimate the probable success
of future hardware systems as much as 12 to 24 months prior to
their introduction in order to allow sufficient lead time to
develop Software that will be available for such new systems at
or near the time of their release. If the Company does not
accurately predict the success of existing or future hardware
systems due to, among other things, the long Software development
lead times involved, it could be in the position, as it was in
fiscal 1996, of marketing Software (i) for new hardware systems
that have not achieved significant market penetration and/or (ii)
for hardware systems that have become or are becoming obsolete
due to the introduction or success of new hardware systems. See
"Business -- Risk Factors" and " -- Results of Operations." No
assurance can be given that the Company will, in the future,
correctly identify the systems with mass market potential or be
successful in publishing Software for the platforms that achieve
significant installed bases.

34

The interactive entertainment industry is currently
undergoing, and management anticipates that in both the short- and
long-term future it will continue to undergo, significant changes
due, in large part, to (i) the introduction of Entertainment
Platforms incorporating more advanced processors and operating
systems, (ii) the impact of technological changes embodied in
personal computer/compact disk/multimedia systems ("PC CD
Systems") and software therefor, (iii) the development of
electronic and wireless delivery systems and (iv) the entry and
participation of new companies in the industry. There can be no
assurance that any of the newly introduced or announced platforms
will achieve market penetration similar to that achieved by the
SNES or Genesis 16-bit platforms.

The Company's revenues have traditionally been derived from
sales of Software for the then dominant platforms. Accordingly,
the Company's revenues are subject to fluctuation and have been
and, in the future, could be materially adversely affected during
transition periods when new hardware platforms have been
introduced but none has achieved a significant installed base.

Most of the Company's revenues in fiscal 1994 and the
majority of the Company's revenues in fiscal 1995 were derived
from sales of Software for 16-bit Entertainment Platforms. The
Company believes that full-priced ("front line") 16-bit Software
sales peaked in calendar 1994 and have decreased substantially
since that time.

Due to the relatively longer time necessary to develop
and manufacture 16- and 32-bit Software, the Company's strategic
decisions in respect of the hardware systems it intended to support
were required to be made in 1994, approximately 12 to 18 months prior
to the shipment of Software for those platforms. In deciding which
hardware systems to support in calendar 1995 and 1996 and which titles
to develop for shipment in those years, the Company had to project, as
early as 1994, anticipated sales levels of 16- and 32-bit Software
in 1995 and 1996.

Based on information available in 1994 and based on its
historical experience with respect to the transition from 8-bit to
16-bit platforms, the Company believed that Software sales for 16-
bit platforms would, although continuing to decrease overall,
still dominate the interactive entertainment market in 1995 and
that such sales would remain substantial through the 1996 holiday
season. Accordingly, the Company's strategy for Christmas 1995
was to develop Software for multiple hardware platforms -- 16-bit,

32-bit and PC CD Systems -- and the Company anticipated that
substantially all of its revenues in fiscal 1995 would be derived
from its 16-bit Software sales. The Company anticipated that its
sales of 32-bit and PC CD Software in fiscal 1996 would grow as
compared to fiscal 1995 but that the majority of its revenues in
fiscal 1996 would still be derived from 16-bit Software sales.
However, the 16-bit Software market matured much more rapidly than
anticipated by the Company, the Company's Christmas 1995 16-bit

35

Software sales were substantially lower than anticipated and, by
April 1996, the Company derived minimal profits from such Software
sales and made the decision to exit the 16-bit and portable
cartridge markets.

In connection with the Company's decision to exit the 16-bit
and portable Software markets in April 1996, the Company recorded
a special cartridge video charge of approximately $48.9 million in
the second quarter of fiscal 1996, consisting of provisions of
approximately $28.8 million and approximately $20.1 million,
respectively, to adjust accounts receivable and inventories at
February 29, 1996 to their estimated net realizable values in
conjunction with management's decision to exit the portable and
16-bit cartridge market.

Retail sales of the Company's cartridge Software during the
second fiscal quarter generally fell short of the Company's
expectations. Such sales were adversely impacted by the
continuing decline of the market for 16-bit Software and the
related transition to 32- and 64-bit Entertainment Platforms. As
the 16-bit Software market continued to mature and shrink, the
number of available titles continued to increase and, management
believes, consumers became increasingly more discriminating about
full-price Software purchases and the rates of sales of such
Software declined. Accordingly, as inventory levels of the
Company's Software grew at retail, the Company offered
concessions in the form of discounts, returns and allowances to
its retailers at higher than anticipated levels in order to manage
inventory sell-through. However, the Company did not generate
profits from sales of its Software when discounted to the mid priced
and budget priced levels necessary to achieve retail sell through.
As a result of the foregoing, the Company's revenues for the
quarter ended February 29, 1996 were materially adversely
affected and the Company incurred a net loss from operations (including
the special cartridge video charge) of $87.9 million and a net loss
(on an after-tax basis) of $55.8 million for the quarter ended February
29, 1996. See "Business -- Risk Factors" and Note 3 of Notes to
Consolidated Financial Statements.

Management believes that the previously discussed industry
trends and factors which contributed to its decision in the second
quarter of fiscal 1996 to exit the 16-bit cartridge and portable
market generally continued and accelerated in the second half of
fiscal 1996. Retail inventories were higher in this period than
had been anticipated by management in April 1996 and sell-through
of the Company's 16-bit as well as other Software was at lower
than anticipated rates. The Company's 32-bit and PC CD Software
sales in fiscal 1996 were materially insufficient to offset the
decline in sales of 16-bit Software. The acquisitions of the
Software studios materially increased the Company's fixed
development and general and administrative expenses in fiscal
1996. The decline in the 16-bit market, the relatively slow
growth of the 32-bit market and increased fixed operating costs

36

materially adversely affected the Company's results of operations
and liquidity in fiscal 1996.

The Company recorded a loss from operations of $274.5
million for fiscal 1996, which includes an additional charge related
to 16-bit and portable Software of $65.0 million, in the fourth
quarter ended August 31, 1996 and a net loss (on an after tax basis)
of $221.4 million for fiscal 1996. The loss for the fourth quarter
of fiscal 1996 of $162.2 million reflects additional write-offs of
receivables, the establishment of additional receivables reserves,
severance charges incurred in the fourth quarter in connection with
the downsizing of the Company and the reduction of certain deferred
costs, as well as an operating loss for the period resulting primarily
from price protection and similar concessions granted to retailers at
greater than anticipated levels in connection with the Company's
16-bit Software. See "Business -- Risk Factors" and Note 22 of Notes
to Consolidated Financial Statements.

The Company is continuing to sell its existing 16-bit and
portable cartridge Software inventory and has released, and may
continue to release, 16-bit and/or portable Software selectively
to support its key brands and, if requested by a retailer, may
produce additional units of particular title(s) on a special order
basis.

The Company is currently developing Software for the Sony
PlayStation, the Sega Saturn, the Nintendo N64 and various PC CD
Systems. The 32- and 64-bit platforms have not achieved market
penetration similar to that of the SNES or Genesis; accordingly,
the number of units of each Software title sold for those systems
is significantly less than the number of units of a title
generally sold during 1993, 1994 and 1995 for the 16-bit systems
because of the smaller installed base of the 32- and 64-bit
systems. The Company plans currently to release between 18 and 20

titles for the 32-bit PlayStation and Saturn platforms in calendar 1997.
As the market penetration of these platforms increases, it is the
Company's intention to reduce the number of titles released by it.
The Company plans to release between 15 and 20 PC CD Software
titles in fiscal 1997, of which 5 to 6 titles will be released
only for PC CD Systems. With respect to the Nintendo N64
platform, the Company intends to release between four and six
Software titles in calendar 1997, one of which will be released in
the spring of 1997 under the Company's current N64 agreement with
Nintendo. Management anticipates that sales of the Company's 32-
and 64-bit and PC CD Software will fall materially short of levels
necessary to offset the continuing decline in 16-bit Software sales
and that the Company's revenues and operating profits from the sale
of 32- and 64- bit and PC CD Software in fiscal 1997 will be materially
less than the Company's revenues and operating profits in fiscal 1994
and 1995. Accordingly, management anticipates incurring material losses
for the first and second quarters of fiscal 1997. See "Business -- Risk
Factors." No assurance can be given of the Company's results of operations
and profitability in future periods. See "Business -- Risk Factors."

37

As a result of the Company's acquisitions of Iguana,
Sculptured and Probe in 1995 (two of which were completed in
fiscal 1996), the Company's fixed costs relating to the
development of Software and its general and administrative
expenses were substantially higher in fiscal 1996 as compared to
prior periods. See "Business -- Risk Factors" and "-- Operating
Expenses." Such expenses in the aggregate had a material adverse
impact on the Company's profitability in fiscal 1996. Management
plans to maintain or reduce the dollar level of research and
development expenses in fiscal 1997 which expenses management
anticipates will be offset, in part, by revenues derived from
sales of Software developed by the studios.

In August 1996, the Company down-sized and reorganized some
of its operations. Severance charges and other costs related to
the down-sizing of approximately $5 million were incurred in the
fourth quarter of fiscal 1996. Management anticipates that the
Company will realize operating expense reductions resulting
therefrom commencing in fiscal 1997.

The release of "hit" titles for hardware platforms with
significant installed bases can significantly affect revenues.
Historically, such "hit" titles (such as the WWF titles) have
accounted for significant portions of the Company's revenues
during particular periods. In fiscal 1995, the NBA Jam Tournament
Edition titles accounted for a significant portion of revenues;
and in fiscal 1994, the Mortal Kombat II and NBA Jam titles each

accounted for a significant portion of gross revenues. See "Legal
Proceedings." No single title accounted for a significant portion
of the Company's revenues in fiscal 1996. The lack of a "hit"
title for a hardware platform with a significant installed base in
fiscal 1996 contributed to the Company's loss for the year. See
"Business -- Risk Factors."

The timing of the release of Software can cause material
quarterly revenue and earnings fluctuations. A significant portion
of the Company's revenues in any quarter are generally derived from
Software first shipped in that quarter. Product development
schedules are difficult to predict due, in large part, to the
difficulty of scheduling accurately the creative process and, with
respect to Software for new hardware platforms, the use of new
development tools and the learning process associated with
development for new technologies. Software for the new
Entertainment Platforms requires more development time and,
accordingly, causes additional development and scheduling risk.
As a result, the Company's quarterly results of operations are
difficult to predict and the failure to meet product development
schedules or even minor delays in product deliveries could cause a
shortfall in shipments in any given quarter which in the past have
caused, and in the future could cause, the Company's results of
operations and net income for such quarter to fall significantly
below anticipated levels. See "Business -- Risk Factors."

The Company's ability to generate sales growth and
profitability will be materially dependent on (i) the growth of
the Software market for 32- and 64-bit Entertainment Platforms and

38

PC CD Systems, (ii) the Company's ability to identify, develop and
publish "hit" Software for hardware platforms with significant
installed bases and (iii) the development of, and the generation
of revenues from, its other entertainment operations.

Results of Operations

The following table sets forth certain statements of
consolidated operations data as a percentage of net revenues for
the periods indicated:

Fiscal Year Ended August 31,
1996 1995 1994
---- ---- ----

Domestic revenues 58.7% 74.8% 76.4%
Foreign revenues 41.3 25.2 23.6
---- ---- ----
Net revenues 100.0 100.0 100.0
Cost of revenues 111.2 47.4 45.9
---- ---- ----
Gross (loss) profit (11.2) 52.6 54.1

Selling, advertising, general
and administrative expenses 123.8 36.0 35.8
Product development 21.4 1.8 1.0
Operating interest 4.0 0.7 0.4
Depreciation and amortization 9.2 1.7 0.8
---- ---- ----
Total operating expenses 158.3 40.2 38.0
(Loss) earnings from operations (169.5) 12.4 16.1
Other income (expense), net 3.5 1.0 (0.1)
(Loss) earnings before income (166.0) 13.5 16.0
taxes
Net (loss) earnings (136.7) 7.9 9.4

Net Revenues

The Company's gross revenues were derived from the following
product categories:

1996+ 1995+ 1994+
---- ---- ----
Portable Software 8.0% 10.0% 13.0%
16-Bit Software 44.0% 74.0% 83.0%
32-bit Software 32.0% 5.0% --

PC CD Software 12.0% 4.0% 2.0%
Other 4.0% 7.0% 2.0%

+The numbers in this chart do not give effect to sales credits and
allowances granted by the Company in the periods covered since the
Company does not track such credits and allowances by product
category. Such credits and allowances were material to the
Company's results of operations in fiscal 1996. Accordingly, the
numbers presented may vary materially from those that would be
disclosed if the Company were able to present such information as
a percentage of net revenues.

39

The decrease in the Company's net revenues from $566.7
million for the year ended August 31, 1995 to $161.9 million
for the year ended August 31, 1996 was predominantly due to
reduced unit sales of 16-bit Software, increased returns and
allowances relating primarily to 16-bit Software and a reduction
in average unit selling prices for 16-bit Software. See
" -- Overview." Management anticipates that sales of the
Company's 32-bit, 64-bit and PC CD Software in fiscal 1997 will
offset the reduction in revenues from sales of 16-bit Software and
no assurance can be given with respect to the Company's revenues
in future periods. In addition, to date, the Company has not
generated material revenues from any of its operations other than
Software publishing and no assurance can be given that the Company
will be able to generate such revenues in the future. See
"Business" and " -- Overview."

The increase in the Company's net revenues from $480.8
million for the year ended August 31, 1994 to $566.7 million for
the year ended August 31, 1995 was predominantly due to increased
sales of 32-bit and PC CD Software and increased foreign sales
and, to a lesser extent, revenues of Lazer-Tron (which are
included in the Company's results of operations for the year) and
Acclaim Comics.

The Company is substantially dependent on Sony, Sega and
Nintendo as the sole manufacturers of the hardware platforms
marketed by them and as the sole licensors of the proprietary
information and technology needed to develop Software for those
platforms. In fiscal years 1994, 1995 and 1996, the Company
derived 45%, 47% and 29% of its gross revenues, respectively, from
sales of Nintendo-compatible Software and in fiscal years 1994,
1995 and 1996, the Company derived 55%, 46% and 36% of its gross
revenues, respectively, from sales of Sega-compatible Software.
In addition, in fiscal 1996, the Company derived 19% of its gross
revenues from sales of Software for the Sony PlayStation.

Gross Profit

Excluding the impact of the special cartridge video charge,
gross profit fluctuates as a result of six factors: (i) the level
of returns and allowances; (ii) the number of "hit" products and
average unit selling prices; (iii) the percentage of sales of CD
Software; (iv) the level of manufacture by the Company of its
Software; (v) the percentage of foreign sales; and (vi) the
percentage of foreign sales to third party distributors.

The Company's gross profit is adversely impacted by increases
in the level of returns and allowances to retailers, which reduces
the average unit price obtained for its Software sales.

Similarly, lack of "hit" titles or a low number of "hit" titles,
resulting in lower average unit sales prices, adversely impacts
the Company's gross profits.

40

The Company's margins on sales of CD Software are higher than
those on cartridge Software as a result of significantly lower
product costs.

The Company arranges for the manufacture by subcontractors of
its Sega Software under its agreement with Sega. See "Business --
License Agreements." The cost of Software manufactured by the
Company, together with the royalties payable to Sega for such
manufacturing, is lower than the cost of the Company's Software
products when manufactured by Sega. The royalty payable to Sega
for Software manufactured by the Company is included as an
operating expense, rather than as part of cost of revenues and
increased levels of manufacturing by the Company result in higher
gross profit as a percentage of net revenues. Software for the
Sony and Nintendo platforms is manufactured by Sony and Nintendo,
respectively. Royalties are payable to Sony and Nintendo as part
of the product cost at the time of manufacture and such costs are
included in the Company's cost of revenues sold which results in
lower gross profit as a percentage of net revenues when compared
to gross profit on sales of Sega Software.

The Company's margins on foreign cartridge Software sales are
typically lower than those on domestic sales due to higher prices
charged by hardware licensors for Software distributed by the
Company outside North America. The Company's margins on foreign
cartridge Software sales to third party distributors are
approximately one-third lower than those on sales that the Company
makes directly to foreign retailers.

Gross profit decreased from $298.2 million (53% of net
revenues) for the year ended August 31, 1995 to a gross loss of
$(18.1) million ((11.2)% of net revenues) for the year ended August
31, 1996 predominantly due to increased returns and allowances
relating to 16-bit Software.

Gross profit increased from $260.0 million (54% of net
revenues) for the year ended August 31, 1994 to $298.2 million
(53% of net revenues) for the year ended August 31, 1995. The
dollar increase is predominantly attributable to increased sales
volume. The reduction in gross profit as a percentage of net
revenues is primarily attributable to the lower percentage of

sales of Sega Software (all of which was manufactured by the
Company) during fiscal 1995, which was offset by increased sales
of higher margin CD Software in that year.

Management anticipates that the Company's future gross profit
will be affected by (i) the percentage of returns, price
protection and other similar concessions in respect of the
Company's Software sales and (ii) the Company's product mix (i.e.,
the percentage of CD Software and sales related to the Company's
new businesses). Although gross margins on sales of CD Software
are, and are anticipated to continue to be, higher than those on

41

sales of cartridge Software, management believes that
stock-balancing programs for its PC CD Software products will
result in higher rates of returns of such product as compared to
the historical rate of return of Cartridge Software. As the
percentage of sales of PC CD Software products increases,
management anticipates that its reserves for such returns will
increase, thereby offsetting a portion of the higher gross margins
generated from CD Software sales.

The Company purchases substantially all of its products at
prices payable in United States dollars. Appreciation of the yen
could result in increased prices charged by Sony, Sega or Nintendo
to the Company (although, to date, none of them has effected such
a price increase), which the Company may not be able to pass on to
its customers and which could adversely affect its results of
operations.

Operating Expenses

Selling, advertising, general and administrative expenses
decreased from $203.9 million (36% of net revenues) for fiscal
1995 to $200.4 million (124% of net revenues) for fiscal 1996. The
dollar decrease is primarily attributable to the decreased sales
volume discussed above offset, in part, by increased overhead
expenses relating to the operations of the studios in fiscal 1996.
The percentage increase is attributable to reduced sales volume.

Selling, advertising, general and administrative expenses
increased from $172.1 million (36% of net revenues) for fiscal
1994 to $203.9 million (36% of net revenues) for fiscal 1995. The
dollar increase is attributable to increased sales volume.

Product development expenses increased from $4.6 million (1%
of net revenues) in fiscal 1994 to 10.1 million (2% of net
revenues) in fiscal 1995 to $34.6 million (21% of net revenues in
fiscal 1996 due to the increase in Software development resulting

from the acquisition of the three Software studios in calendar
1995. A substantial portion of such expenses were previously
included as royalties paid to independent Software studios.

Operating interest expense was $2.0 million (0.4% of net
revenues) for fiscal 1994, $4.0 million (0.7% of net revenues) for
fiscal 1995 and $6.4 million (4% of net revenues) for fiscal
1996. The increase was primarily attributable, in fiscal 1995, to
increased sales volume and, in fiscal 1996, to higher outstanding
balances under the Company's principal credit facility.

Depreciation and amortization increased from $3.8 million (1%
of net revenue) for fiscal 1994 to $9.5 million (2% of net
revenues) for fiscal 1995 to $14.9 million (9% of net revenues)
for fiscal 1996. The increase in fiscal 1995 is primarily
attributable to increased amortization of the excess of costs over
net assets acquired arising from the acquisition of Acclaim Comics
and Iguana and depreciation relating to the acquisition of the

42

Company's corporate headquarters. The increase in fiscal 1996 is
primarily attributable to depreciation relating to the Company's
corporate headquarters and of fixed assets held by the studios.

During the fourth quarter of fiscal 1996, based on current
conditions in the comic book industry, the Company reduced the
estimated remaining life of goodwill relating to Acclaim Comics
from forty years to twenty years, which increased the related
amortization expense by approximately $300,000 in the fourth
quarter.

Seasonality

The Company's business is seasonal, with higher revenues and
operating income typically occurring during its first, second and
fourth fiscal quarters (which correspond to the Christmas and
post-Christmas selling season). The timing of the delivery of
Software titles and the releases of new products cause materially
fluctuations in the Company's quarterly revenues and earnings.

Liquidity and Capital Resources

The Company used net cash from operating activities of
approximately $38.3 million and $7.3 million in fiscal 1996 and
1995, respectively, and derived approximately $29.1 million of net
cash from operating activities in fiscal 1994.

The decrease in net cash from operations in fiscal 1996 as
compared to fiscal 1995 was primarily attributable to a decrease
in cash received from customers. The decrease in cash received from

customers is primarily attributable to lower sales resulting from
the maturation of the 16-bit market and the related transition to
32-bit and 64-bit platforms. See " -- Overview."

The decrease in net cash from operations in fiscal 1995 as
compared to fiscal 1994 was primarily attributable to relatively
lower proceeds received from the Company's customers and, to a
lesser extent, higher payments of interest to the Company's
commercial lenders in connection with higher outstanding balances
on the Company's working capital loans and acquisition financing.
See Notes 2, 3 and 13 of Notes to Consolidated Financial
Statements.

The Company derived net cash from investing activities of
approximately $7.4 million and $26.4 million in fiscal 1996 and
1995, respectively, and used net cash in financing activities of
approximately $63.0 million in fiscal 1994.

The decrease in net cash from investing activities in fiscal
1996 as compared to fiscal 1995 is primarily attributable to lower

43

proceeds (approximately $14.6 million and $57.2 million in fiscal
1996 and 1995, respectively) derived from the sale of TCI capital
stock (due to sales of a lower number of shares of such stock),
offset by (i) higher cash associated with the acquisition of
certain subsidiaries (approximately $7.9 million from Sculptured
and Probe in fiscal 1996 as compared to $1.7 million from Lazer-
Tron and Iguana in fiscal 1995), which reflects cash held by
subsidiaries at the respective dates of acquisition, and (ii)
lower cash expended on the acquisition of fixed assets in fiscal
1996 as compared to fiscal 1995. See Notes 5, 6, and 9 of Notes
to Consolidated Financial Statements.

The increase in net cash provided by investing activities in
fiscal 1995 as compared to fiscal 1994 is primarily attributable
to (i) the sale of TCI capital stock in fiscal 1995, (ii) the $40
million loan from Midland Bank plc in connection with the
acquisition of Acclaim Comics in fiscal 1994 and (iii) higher cash
expended on the acquisition of fixed assets in fiscal 1995 as
compared to fiscal 1994. See Notes 6 and 9 of Notes to
Consolidated Financial Statements.

The Company derived net cash from financing activities of
approximately $5.0 million in fiscal 1996, used net cash from
financing activities of approximately $9.6 million in fiscal 1995
and derived net cash from financing activities of approximately
$41.2 million in fiscal 1994.

The increase in net cash provided by financing activities in
fiscal 1996 as compared to fiscal 1995 is primarily attributable
to (i) proceeds from mortgage financing of the Company's
headquarters in Glen Cove, (ii) the restructuring of the Midland
Bank plc financing in fiscal 1995, which required pre-payment of a
portion of such debt and (iii) an increase in proceeds from
short-term bank loans in fiscal 1996. See Notes 11 and 13 of
Notes to Consolidated Financial Statements.

The decrease from approximately $41.2 million of net cash
provided by financing activities in fiscal 1994 as compared to
approximately $9.6 million of net cash used in financing
activities in fiscal 1995 is primarily attributable to the $40
million loan from Midland Bank plc in fiscal 1994 in connection
with the acquisition of Acclaim Comics.

The Company generally purchases its inventory of Nintendo and
Sega (to the extent not manufactured by the Company) Software by
opening letters of credit when placing the purchase order. At
August 31, 1994, 1995 and 1996, amounts outstanding under letters
of credit were approximately $48.6 million, $24.1 million and $3.1
million, respectively. Other than such letters of credit, the
Company does not currently have any material capital expenditure
commitments.

The Company has a revolving credit and security agreement
with its principal domestic bank in the amount of $70 million,

44

which agreement expires on January 31, 1999. The credit agreement
will be automatically renewed for another year by its terms,
unless terminated upon 90 days' prior notice by either party. The
Company draws down working capital advances and opens letters of
credit against the facility in amounts determined on a formula
based on factored receivables and inventory, which advances are
secured by the Company's assets. This bank also acts as the
Company's factor for the majority of its North American
receivables, which are assigned on a pre-approved basis. At
August 31, 1996, the factoring charge was 0.25% of the receivables
assigned and the interest on advances was at the bank's prime rate
minus one-half of one percent. Effective November 8, 1996,
interest is charged at the bank's prime rate plus one percent.
The Company was at August 31, 1996 in default of its financial
covenants under this agreement, which default has been waived,
but remains in default of the prohibition on having a "going
concern" paragraph in the audit report on its financial
statements. The Company is current in its payment obligations.
In connection with obtaining such waiver, the interest rate on
advances was increased as described above, the advance formula was

significantly modified to restrict and reduce the eligible
receivables and inventory against which advances would be made,
the financial covenants were made more restrictive on the Company
and otherwise restructured to more accurately address the decrease
in sales, profitability and cash flow of the Company and
anticipated operations in future periods, and certain additional
events of default were added. See "Risk Factors".

In connection with its acquisition by the Company, Acclaim
Comics entered into a credit agreement with Midland Bank plc
("Midland") for a loan (the "Loan") of $40 million. In connection
with the establishment of its joint venture with Tele-Communications,
Inc. ("TCI") and the related stock swap with TCI, the Company reached
an agreement with Midland pursuant to which it repaid $15 million of
the Loan and the remaining $25 million principal amount of the Loan
is being amortized over a four and one-half year period terminating
in July 1999. See Note 13 of Notes to Consolidated Financial Statements.
The Loan, which is a direct obligation of Acclaim Comics, bears
interest, at the borrower's option, at either (i) the higher of
the federal funds rate plus one-half of one percent and the
lender's prime rate, in each case, plus 125 basis points or (ii)
the London interbank offered rate plus 250 basis points, and is
secured by a first priority lien on substantially all of the
assets of Acclaim Comics. The Loan is also guaranteed by Acclaim
and certain of its subsidiaries and is secured by a first priority
lien on all of the issued and outstanding shares of Acclaim Comics
and by a third priority lien on substantially all of the assets of
the Company. The credit agreement and related documents
establishing and securing the Loan, as well as the guarantees
delivered by Acclaim and its subsidiaries, contain customary
financial, affirmative and negative covenants, including mandatory
prepayments from excess cash flow of Acclaim Comics and from the
proceeds of asset sales or sales of equity by the Company and
restrictions on the declaration or payment of dividends by Acclaim
Comics and the Company. The Company is in default of its

45

financial covenants, and the cross default provisions and certain other
terms of the Loan, but is in compliance with its payment obligations.
The Company is in discussion with the lender for a waiver of the default
and a restructuring of the Loan, including implementing more restrictive
covenants, the Company immediately paying down a significant portion of
the Loan and agreeing to accelerated payment terms for the balance. See
"Business -- Risk Factors".

The Company completed the purchase of a 70,000 square foot
building and an adjoining parcel of land in April 1994. The
purchase price for such property (where the Company's headquarters
are located), and capital expenditures of approximately $23.1

million for improvements to the property through August 31, 1996,
were financed with cash flows from operations. The Company is in
default of its financial covenants and of the cross default
provisions of the financing arrangements for this facility, which
financing is secured by a mortgage on the building. The Company
is in compliance with its payment obligations. The Company is
discussing waiver of the default with the lender, including the
Company agreeing to pay down immediately a portion of the loan
and agreeing to accelerated payment terms for the balance. See
"Business -- Risk Factors".

In November 1996, the Company received an income tax refund
of approximately $54 million related to the carryback of its loss for
fiscal 1996. As a result, management believes that the Company has
sufficient cash for its short-term liquidity needs. To enhance its
long-term liquidity, the Company has significantly reduced the number
of its employees and is evaluating various alternatives, including
raising additional capital, the sale of certain assets and renegotiation
of debt covenants and repayment terms related to its long-term debts.
There can be no assurances that such capital infusion will be
available or that any such capital infusion, advances, sale or
renegotiation could be effected on satisfactory terms. In addition,
the Company's future long-term liquidity will be materially dependent
on its ability to develop and market Software that achieves
widespread market acceptance for use with the Entertainment Platforms
that dominate the market.

The Company is party to various litigations arising in the
course of its business, the resolution of none of which, the
Company believes, will have a material adverse effect on the
Company's liquidity or financial condition. The Company is also
party to certain class action litigations. See "Legal
Proceedings" and Note 20 of Notes to Consolidated Financial
Statements.

46

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Independent Auditors' Report

The Board of Directors and Stockholders
Acclaim Entertainment, Inc.:

We have audited the accompanying consolidated balance sheet of Acclaim
Entertainment, Inc. and Subsidiaries as of August 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedule for the year
ended August 31, 1996. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Acclaim
Entertainment, Inc. and subsidiaries as of August 31, 1996, and the results of
their operations and their cash flows for the year ended August 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's significant loss from
operations in fiscal 1996, the Company's violation of certain loan covenants and
various uncertainties including the resolution of litigation raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

The selected quarterly financial data in note 22 contain information that
we did not audit, and, accordingly, we do not express an opinion on that data.
We attempted but were unable to review the quarterly data in accordance with
standards established by the American Institute of Certified Public Accountants
because we believe that the Company's internal control structure policies and
procedures for the preparation of interim financial information did not provide
an adequate basis to enable us to complete such a review.

KPMG PEAT MARWICK LLP
New York, New York
December 16, 1996

47

Report of Independent Certified Public Accountants

Board of Directors and Stockholders,
Acclaim Entertainment, Inc.

We have audited the accompanying consolidated balance sheet of Acclaim
Entertainment, Inc. and Subsidiaries as of August 31, 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended August 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Acclaim
Entertainment, Inc. and Subsidiaries as of August 31, 1995 and the results of
their operations and their cash flows for each of the years in the two-year
period ended August 31, 1995 in conformity with generally accepted accounting
principles.

We have also audited financial statement schedule II of Acclaim
Entertainment, Inc. and Subsidiaries for each of the years in the two-year
period ended August 31, 1995. In our opinion, the financial statement schedule
for such periods presents fairly, in all material respects, the information
required to be set forth therein.

As described in Note 20, the Company and certain officers have been named
as defendants in various class action claims, the outcome of which cannot
presently be determined. Accordingly, no provision for any liability that might
result upon the resolution of these matters has been made in the fiscal 1995
consolidated financial statements.

GRANT THORNTON LLP
New York, New York
December 8, 1995

48

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000s, except per share data)

August 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,814 $ 44,749
Marketable equity securities 11,278 26,503
Accounts receivable - net 20,478 179,311
Inventories 8,052 16,015
Prepaid expenses 18,513 41,083
Income taxes receivable 54,334 14,171
Other current assets -- 4,654
--------- ---------
TOTAL CURRENT ASSETS 131,469 326,486
--------- ---------
OTHER ASSETS
Fixed assets - net 42,779 33,970
Excess of cost over net assets acquired - net of
accumulated amortization of $13,052 and $9,091,
respectively 54,939 59,837
Other assets 10,464 22,534
--------- ---------
TOTAL ASSETS $ 239,651 $ 442,827
--------- ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 29,749 $ 49,072
Short-term borrowings 5,321 4,233
Accrued expenses 78,506 47,017
Income taxes payable 724 180
Current portion of long-term debt 25,527 25,196
Obligation under capital leases - current 1,681 333
--------- ---------
TOTAL CURRENT LIABILITIES 141,508 126,031
--------- ---------

LONG-TERM LIABILITIES
Obligation under capital leases - noncurrent 3,685 408
Other long-term liabilities 347 53
--------- ---------
TOTAL LIABILITIES 145,540 126,492
--------- ---------
MINORITY INTEREST 522 1,628

STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 1,000 shares

authorized; None issued -- --
Common stock, $0.02 par value; 100,000 shares authorized;
50,041 and 46,281 shares issued, respectively 1,001 926
Additional paid in capital 165,782 158,133
(Accumulated deficit), retained earnings (70,642) 153,141
Treasury stock, 348 and 273 shares, respectively (1,813) (807)
Foreign currency translation adjustment (754) 811
Unrealized gain on marketable equity securities 15 2,503
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 93,589 314,707
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 239,651 $ 442,827
--------- ---------

See notes to consolidated financial statements.

49

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in 000s, except per share data)

Fiscal Year Ended August 31,
1996 1995 1994
---- ---- ----

GROSS REVENUES $ 376,024 $ 591,804 $ 520,771
SALES CREDITS AND ALLOWANCES 214,079 25,081 40,015
--------- --------- ---------
NET REVENUES 161,945 566,723 480,756
COST OF REVENUES 180,072 268,501 220,744
--------- --------- ---------
GROSS (LOSS) PROFIT (18,127) 298,222 260,012
--------- --------- ---------
OPERATING EXPENSES
Selling, advertising, general and
administrative expenses 200,440 203,930 172,099
Product development 34,582 10,126 4,626
Operating interest 6,417 3,957 1,979
Depreciation and amortization 14,910 9,543 3,838
--------- --------- ---------
TOTAL OPERATING EXPENSES 256,349 227,556 182,542
--------- --------- ---------
(LOSS) EARNINGS FROM OPERATIONS (274,476) 70,666 77,470
--------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 3,845 2,131 1,338
Other income (expense) 4,103 6,859 (1,143)
Interest expense (2,339) (3,382) (670)
--------- --------- ---------
(LOSS) EARNINGS BEFORE INCOME TAXES (268,867) 76,274 76,995
--------- --------- ---------
(BENEFIT FROM) PROVISION FOR INCOME TAXES (46,393) 31,625 31,940
--------- --------- ---------
(LOSS) EARNINGS BEFORE MINORITY INTEREST (222,474) 44,649 45,055
--------- --------- ---------
MINORITY INTEREST 1,106 (121) --
--------- --------- ---------
NET (LOSS) EARNINGS $(221,368) $ 44,770 $ 45,055
--------- --------- ---------
NET (LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ (4.47) $ 0.86 $ 1.00
--------- --------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 49,515 52,300 45,150
--------- --------- ---------

See notes to consolidated financial statements.

50

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(in 000s, except per share data)

Preferred Stock(1) Common Stock
-------------------- ------------------ (Accumulated
Issued Issued Additional Deficit)
------ ------ Paid-In Deferred Retained Treasury
Shares Amount Shares Amount Capital Compensation Earnings Stock
------ ------ ------ ------ ------- ------------ -------- -----

Balance August 31, 1993 -- -- 37,259 $ 745 $ 38,377 -- $ 61,516 $ (807)
-------- -------- ------ --------- --------- --------- --------- ---------

Net Earnings -- -- -- -- -- -- 45,055 --
Issuances -- -- 971 19 14,981 -- -- --
Exercise of Stock Options -- -- 1,118 23 7,435 -- -- --
Tax Benefit from Exercise of
Stock Options -- -- -- -- 8,453 -- -- --
Foreign Currency Translation Gain -- -- -- -- -- -- -- --
-------- -------- ------ --------- --------- --------- --------- ---------
Balance August 31, 1994 -- -- 39,348 787 69,246 -- 106,571 (807)
-------- -------- ------ --------- --------- --------- --------- ---------
Net Earnings -- -- -- -- -- -- 44,770 --
Issuances -- -- 5,182 104 83,659 $ (12,292) -- --
Deferred compensation expense -- -- -- -- -- 1,640 -- --
Exercise of Stock Options -- -- 628 13 4,170 -- -- --
Pooling of Interests with Lazer-Tron -- -- 1,123 22 10,609 -- 1,800 --
Tax Benefit from Exercise of
Stock Options -- -- -- -- 1,101 -- -- --
Foreign Currency Translation Gain -- -- -- -- -- -- -- --
Unrealized Gain on
Marketable Equity Securities -- -- -- -- -- -- -- --
-------- -------- ------ --------- --------- --------- --------- ---------
Balance August 31, 1995 -- -- 46,281 926 168,785 (10,652) 153,141 (807)
-------- -------- ------ --------- --------- --------- --------- ---------
Net Loss -- -- -- -- -- (221,368) --
Issuances of Common Stock
and Options -- -- 463 9 7,756 (7,765) -- --
Deferred compensation expense -- -- -- -- -- 3,304 -- --
Exercise of Stock Options
and Warrants -- -- 552 11 3,711 -- -- --
Pooling of Interests with Sculptured
and Probe -- -- 2,745 55 (55) -- (2,415) --
Tax Benefit from Exercise of
Stock Options -- -- -- -- 698 -- -- --
Purchase of Treasury Stock -- -- -- -- -- -- (1,006)
Foreign Currency Translation Loss -- -- -- -- -- -- -- --

Unrealized Loss on
Marketable Equity Securities -- -- -- -- -- -- -- --
-------- -------- ------ --------- --------- --------- --------- ---------
Balance August 31, 1996 -- -- 50,041 $ 1,001 $ 180,895 $ (15,113) $ (70,642) $ (1,813)
-------- -------- ------ --------- --------- --------- --------- ---------

Unrealized
Foreign Gain On
Currency Marketable
Translation Equity
Adjustment Securities Total
---------- ---------- -----

Balance August 31, 1993 $ (2,964) -- $ 96,867
--------- --------- ---------

Net Earnings -- -- 45,055
Issuances -- -- 15,000
Exercise of Stock Options -- -- 7,458
Tax Benefit from Exercise of
Stock Options -- -- 8,453
Foreign Currency Translation Gain 2,410 -- 2,410
--------- --------- ---------
Balance August 31, 1994 (554) -- 175,243
--------- --------- ---------
Net Earnings -- -- 44,770
Issuances -- -- 71,471
Deferred compensation expense -- -- 1,640
Exercise of Stock Options -- -- 4,183
Pooling of Interests with Lazer-Tron -- -- 12,431
Tax Benefit from Exercise of
Stock Options -- -- 1,101
Foreign Currency Translation Gain 1,365 -- 1,365
Unrealized Gain on
Marketable Equity Securities -- $ 2,503 2,503
--------- --------- ---------
Balance August 31, 1995 811 2,503 314,707
--------- --------- ---------
Net Loss -- -- (221,368)
Issuances of Common Stock
and Options -- -- --
Deferred compensation expense -- -- 3,304
Exercise of Stock Options
and Warrants -- -- 3,722
Pooling of Interests with Sculptured
and Probe -- -- (2,415)
Tax Benefit from Exercise of
Stock Options -- -- 698
Purchase of Treasury Stock -- -- (1,006)
Foreign Currency Translation Loss (1,565) -- (1,565)
Unrealized Loss on
Marketable Equity Securities -- (2,488) (2,488)
--------- --------- ---------

Balance August 31, 1996 $ (754) $ 15 $ 93,589
--------- --------- ---------

(1) The Company is authorized to issue 1,000 shares of preferred stock at a par
value of $0.01 per share, none of which shares is presently issued and
outstanding.

See notes to consolidated financial statements

51

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in 000s, except per share data)

Fiscal Year Ended August 31,
1996 1995 1994
---- ---- ----
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES
Cash received from customers $ 331,101 $ 614,526 $ 499,663
Cash paid to suppliers and employees (383,209) (594,457) (439,034)
Interest received 3,845 2,131 1,338
Interest paid (8,756) (7,339) (2,649)
Income taxes received (paid) 18,719 (22,127) (30,236)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (38,300) (7,266) 29,082
--------- --------- ---------

CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Acquisition of subsidiaries, net 7,912 1,743 (47,805)
Investment in marketable securities -- -- (10,375)
Sales of marketable securities 14,599 57,160 8,314
Acquisition of fixed assets, excluding
capital leases (13,488) (29,862) (10,195)
Disposal of fixed assets 133 284 15
Acquisition of other assets (1,731) (2,919) (2,954)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 7,425 26,406 (63,000)
--------- --------- ---------

CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Proceeds from term loan -- -- 40,000
Proceeds from mortgage 6,676 -- --
Payment of mortgage (223) (1,342) (87)
Proceeds from short-term bank loans 15,873 11,304 14,278
Payment of short-term bank loans (14,337) (8,769) (20,313)
Exercise of stock options 3,722 4,183 7,458
Payment of obligation under capital leases (496) (292) (156)
Issuance of common stock 4 1,398 --
Payment of long-term debt (6,196) (16,046) --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 5,023 (9,564) 41,180
--------- --------- ---------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (83) 497 1,669
--------- --------- ---------

NET (DECREASE) INCREASE IN CASH (25,935) 10,073 8,931

CASH AT BEGINNING OF YEAR 44,749 34,676 25,745
--------- --------- ---------
CASH AT END OF YEAR $ 18,814 $ 44,749 $ 34,676
--------- --------- ---------

52

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)

Fiscal Year Ended August 31,
1996 1995 1994
---- ---- ----

RECONCILIATION OF NET (LOSS) EARNINGS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Net (Loss) Earnings $(221,368) $ 44,770 $ 45,055
--------- --------- ---------
Adjustments to reconcile net (loss) earnings
to net cash
(used in) provided by operating activities:
Depreciation and amortization 14,910 9,543 3,838
(Gain) loss on sale of marketable securities (3,690) (5,968) 135
Increase (Decrease) in allowance for returns
and discounts 214,079 25,081 40,015
Deferred taxes 4,264 8,610 (3,571)
Minority interest in net earnings of consolidated
subsidiary (1,106) (121) --
Deferred compensation expense 3,304 1,640 --
Non-cash inventory charges 25,753 -- --
Non-cash royalty charges 30,432 -- --
Other non-cash charges 1,577 1,751 32
Change in assets and liabilities, net of effects
of acquisitions:
(Increase) in accounts receivable (28,123) (35,754) (99,249)
(Increase) Decrease in inventories (17,842) 1,298 8,643
Decrease (Increase) in prepaid expenses 6,759 (17,345) (954)
(Increase) Decrease in other current assets (19) (8,813) 2,111
(Decrease) Increase in trade accounts payable (21,046) (23,031) 10,940
(Decrease) Increase in accrued expenses (14,612) 580 13,147
(Decrease) Increase in income taxes payable (31,572) (9,507) 8,940
--------- --------- ---------
Total adjustments 183,068 (52,036) (15,973)
--------- --------- ---------

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (38,300) $ (7,266) $ 29,082
--------- --------- ---------

Supplemental schedule of noncash investing and
financing activities:
1996 1995 1994
---- ---- ----
Acquisition of equipment under capital leases $ 4,631 $ 91 $ 377

In fiscal 1995, the Company purchased all of the capital stock of Iguana
Entertainment, Inc. for $5,513, net of cash received. In connection with the
acquisition, liabilities assumed were as follows:

Fair value of assets acquired $ 9,179
Cash paid for the capital stock (5,513)
-------
Liabilities assumed $ 3,666
-------

In fiscal 1995, the Company issued 4,349 shares of its common stock, valued at
$71,472 in exchange for 3,403 Class A common shares of Telecommunications, Inc.

53

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Continued)
(in 000s, except per share data)

In fiscal 1994, the Company purchased all of the capital stock of Acclaim Comics
for $62,805, net of cash received. In connection with the acquisition,
liabilities assumed were as follows:

Fair value of assets acquired $67,478
Cash paid for the capital stock (50,588)
Fair market value of common stock issued (15,000)
-------
Liabilities assumed $ 1,890
-------

See notes to consolidated financial statements.

54

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

A. Business

Acclaim Entertainment, Inc. and its subsidiaries ("Acclaim" or the
"Company") is a mass market entertainment company whose principal business
to date has been publishing and distributing interactive entertainment
software. The Company also develops and publishes comic books, markets its
motion capture technology and studio services and distributes
coin-operated, location-based ticket redemption games and coin-operated
video arcade games.

B. Principles of Consolidation

The consolidated financial statements include the accounts of Acclaim and
its majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated.

C. Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

D. Marketable Equity Securities

The Company determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Securities are classified as held-to-maturity when
the Company has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at cost and investment income is
included in earnings. The Company classifies certain highly liquid
securities as trading securities. Trading securities are stated at fair
value and unrealized holding gains and losses are included in income.
Securities that are not classified as held-to-maturity or trading are
classified as available-for-sale. Available-for-sale securities are carried
at fair value, with the unrealized holding gains and losses, net of tax,
reported as a separate component of stockholders' equity. The cost of
securities sold is based on the specific identification method.

E. Inventories

Inventories are stated at the lower of FIFO cost (first-in, first-out) or
market and consist principally of finished goods.

F. Prepaid Royalties

Royalty advances represent advance payments made to independent software
developers and licensors of intellectual properties. All such payments are
recoupable against future royalties in excess of minimum nonrefundable
advances made in respect of software licensed under the terms of the
agreements. Prepaid royalties are expensed as selling expenses at
contractual royalty rates based on actual net product sales. That portion
of prepaid royalties deemed unlikely to be recovered through product sales
is charged to selling expenses. Royalty advances are classified as current
and noncurrent assets based on estimated net product sales within the next
year.

55

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

G. Fixed Assets

Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, or,
where applicable, the terms of the respective leases, whichever is shorter.
The asset values of capitalized leases are included in fixed assets and the
associated liabilities are reflected as obligations under capital leases.

H. Excess of Cost Over Net Assets Acquired

Excess of cost over net assets acquired is being amortized on the
straight-line basis over periods ranging from five to twenty years (See
note 5). It is the Company's policy to evaluate and recognize an impairment
of goodwill if it is probable that the recorded amounts are in excess of
anticipated undiscounted future cash flows.

I. Net Revenues

Revenues are recorded when products are shipped to customers. The Company
is generally not contractually obligated to accept returns, except for
defective product. However, the Company permits its customers to return
or exchange product and may provide price protection on products unsold
by a customer. Revenue is recorded net of an allowance for estimated
returns, price concessions and other discounts. Such allowance is reflected
as a reduction to accounts receivable when the Company expects to grant
credits for such items; otherwise, it is reflected as a liability. The
Company also recognizes revenue from sub-licensing of its intellectual
properties. Such revenues are recognized under royalty agreements when
the Company fulfills all of its obligations in accordance with such
agreements.

J. Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.

K. Foreign Currency Translations

Assets and liabilities of foreign operations are translated at rates of
exchange at the end of the period, while results of operations are
translated at average exchange rates in effect for the period. Unrealized
gains and losses from the translation of foreign assets and liabilities are
classified as a separate component of stockholders' equity. Included in
other income (expense) are realized gains and (losses) from foreign
currency transactions of $2,917, ($2,832), $5,092, ($4,576) and $2,610
($3,336) in fiscal 1996, 1995, and 1994, respectively. The Company does not
enter into material foreign currency hedging transactions.

56

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

L. Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure of the fair value of
certain financial instruments. As of August 31, 1996 and 1995, the fair
value of financial instruments (cash and equivalents, receivables, trade
accounts payable, short-term borrowings and certain other liabilities)
approximates book value due to the short maturity of these instruments. The
Company is unable to determine the fair value of its term loan and
mortgage note since they are in default.

M. Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the more significant estimates included

in these financial statements are the estimated allowances for returns and
discounts, the estimated valuation of inventory and the recoverability of
advance royalty payments and goodwill. Actual results could differ from
those estimates.

N. Reclassifications

Certain reclassifications were made to prior period amounts to conform to
the current period presentation format.

2. LIQUIDITY

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company's
significant loss from operations in fiscal 1996, the uncertainty whether the
Company's products in development will be "hits", the Company's default of
certain loan financial covenants related to its bank financings and uncertainty
regarding the resolution of litigation, including various class action lawsuits,
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might arise from the outcome of this uncertainty.

The Company believed that the majority of its software revenues in fiscal
1996 would be derived from 16-bit software sales. However, the 16-bit software
market matured much more rapidly than anticipated by the Company (See note 3)
and the Company's 32-bit and PC CD software sales in fiscal 1996 were materially
insufficient to offset the decline in sales of 16-bit software. Due to these
factors and the increased fixed operating costs primarily attributable to the
acquisition of software studios, the Company's results of operations and
liquidity in fiscal 1996 were materially adversely affected. Short-term
liquidity concerns were alleviated in November 1996 when the Company received an
income tax refund of approximately $54,000 related to the carryback of its loss
for fiscal 1996. The Company, to enhance its long-term liquidity, has
significantly reduced the number of its personnel and is also evaluating various
alternatives, including a capital infusion, the sale of certain assets and
renegotiating debt convenants and repayment terms related to its long-term debt.
However, the Company's future long-term liquidity will be materially dependent
on its ability to develop and market new software products that achieve
widespread market acceptance for use with the hardware platforms that dominate
the market.

57

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

3. SPECIAL CARTRIDGE VIDEO CHARGE (unaudited)

In fiscal 1996 the Company's revenues were adversely affected due to
new hardware platform introductions and the resulting shift from demand for
16-bit software to 32- and 64-bit software and PC CD software compatible
with the new hardware systems. Due to the relatively longer development period

relating to 16-bit and 32-bit software products, the Company's strategic
decisions to support certain 16-bit and portable hardware systems and develop
certain software products were made well in advance of the time it became
apparent that the transition period commenced.

In addition, in fiscal 1996, the Company did not release "hits" for
hardware platforms with significant installed bases, as it had in prior years
and offered concessions (such as returns and discounts) to its customers at
higher than anticipated levels in order to manage 16-bit software inventory
levels. Finally, the Company exited the 16-bit and portable software markets in
April 1996.

As a result, the Company recorded a special cartridge video charge in the
second quarter of fiscal 1996 of $48,947 to adjust accounts receivable and
inventories to their estimated net realizable values. Due to the continued and
accelerated deterioration of the 16-bit and portable cartridge business
throughout 1996, the Company revised its estimates in the fourth quarter of
fiscal 1996 and recorded an additional charge of $65,031, primarily to adjust
accounts receivable and inventory to their revised estimated net realizable
values. The total charge of $113,978 for the year ended August 31, 1996 consists
of provisions of approximately $90,524 and $23,455, respectively, to adjust
accounts receivable and inventories related to 16-bit and portable Software to
their estimated net realizable values subsequent to the Company's decision to
exit such software market and is reflected as sales returns and allowances and
in cost of sales, respectively, in the statement of consolidated operations.

The following presents the effect of the special cartridge video charge upon net
revenues and cost of revenues:

1996

Gross Revenues $376,024
Sales credits and allowances 123,555
--------
252,469

Special Cartridge Video Charge 90,524
--------
Net revenues $161,945
--------

Cost of revenues $156,617
Special Cartridge Video Charge 23,455
--------
$180,072
--------
Gross (Loss) Earnings $(18,127)
--------

4. LICENSE AGREEMENTS

The Company has various license agreements with Nintendo Co., Ltd. (Japan)
(Nintendo Co., Ltd. and its subsidiary, Nintendo of America, Inc., are

collectively herein referred to as "Nintendo") pursuant to which it has the
nonexclusive right to utilize the "Nintendo" name and its proprietary
information and technology in order to develop and market interactive
entertainment software ("Software") for use with various 8-bit, 16-bit and
portable Nintendo platforms in various territories throughout the world. The
Company also has an agreement with Nintendo to develop and market one N64
Software title in North America. The license agreements with Nintendo for the
different platforms expire at various times.

58

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

4. LICENSE AGREEMENTS (continued)

In April 1992, the Company entered into an agreement with Sega Enterprises
Ltd. ("Sega"), pursuant to which the Company received the nonexclusive right to
utilize the "Sega" name and its proprietary information and technology in order
to develop and distribute software titles for use with various Sega platforms.
The Company exercised its option to extend the Sega Agreement, which agreement,
as amended, expired in December 1995. The Company is currently negotiating a new
agreement with Sega. In the interim, the Company and Sega are continuing to
operate under the terms of the expired Sega Agreement, and with respect to the
Sega Saturn hardware platform are operating under an oral agreement. The Company
believes that the impact, if any, of a new agreement with Sega will not have a
material adverse effect on its financial condition or results of operations.

In December 1994, the Company entered into an agreement with Sony Computer
Entertainment of America ("SCE") pursuant to which the Company received the
nonexclusive right to utilize its proprietary information and technology in
order to develop and distribute Software titles for use with the Sony
PlayStation(TM) for a four year period expiring in December 1998.

5. ACQUISITIONS

SCULPTURED SOFTWARE, INC.

On October 10, 1995, the Company acquired all the issued and outstanding
stock of Sculptured Software Inc., a software developer pursuant to an Agreement
and Plan of Merger dated October 9, 1995 for 1,013 shares of the Company's
common stock.

The acquisition was accounted for as a pooling of interests and
accordingly, the Company's financial statements for the year ended August 31,
1996 include the results of Sculptured. Prior period financial statements were
not restated as the acquisition had an immaterial effect upon previously
reported revenue and net income of the consolidated entities.

PROBE ENTERTAINMENT LTD.

On October 16, 1995, the Company acquired all the issued and outstanding
stock of Probe Entertainment Ltd., a software developer pursuant to an Agreement
and Plan of Merger dated October 10, 1995 for 1,732 shares of the Company's
common stock.

The acquisition was accounted for as a pooling of interests and,
accordingly, the Company's financial statements for the year ended August 31,
1996 include the results of Probe. Prior period financial statements were not
restated as the acquisition had an immaterial effect upon previously reported
revenue and net income of the consolidated entities.

IGUANA ENTERTAINMENT, INC.

On January 4, 1995, the Company acquired all the issued and outstanding
common stock of Iguana Entertainment, Inc., developers of interactive video
games, pursuant to the terms of an Agreement and Plan of Merger dated December
20, 1994. The acquisition was accounted for as a purchase. Accordingly, the
operating results of Iguana are included in the Statements of Consolidated
Operations from the acquisition date. The acquired assets and liabilities have
been recorded at their estimated fair values at the date of acquisition.

59

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

5. ACQUISITIONS (Continued)

In consideration for the Iguana stock, the Company paid $5,000 in cash. The
total cost of the acquisition was $7,342, (which includes direct acquisition
costs) of which $2,357 was allocated to identifiable net tangible assets. The
remaining balance of $4,985 represents the excess of the purchase price over the
fair value of the net assets acquired, which is being amortized on a
straight-line basis over five years.

Proforma results of operations, assuming the acquisition had been made at
the beginning of each year presented, would not be materially different from the
consolidated results reported.

LAZER-TRON CORPORATION

On August 31, 1995, the Company acquired all the issued and outstanding
common stock of Lazer-Tron Corporation, a developer and manufacturer of
coin-operated redemption games pursuant to an Agreement and Plan of Merger dated
March 22, 1995. Under the terms of the agreement, Lazer-Tron shareholders
received .314 of a share of the Company's common stock for each Lazer-Tron
share. Accordingly, the Company issued 1,123 shares of its common stock for all
the outstanding shares of Lazer-Tron common stock. Additionally, outstanding

options and warrants to acquire Lazer-Tron were converted to options and
warrants to acquire 318 shares of the Company's common stock.

The acquisition was accounted for as a pooling of interests and,
accordingly, the Company's financial statements for the year ended August 31,
1995 have been restated to include the results of Lazer-Tron. Prior period
financial statements were not restated as the acquisition had an immaterial
effect upon previously reported revenue and net income of the consolidated
entities.

ACCLAIM COMICS, INC.

On July 29, 1994, the Company acquired all the issued and outstanding
common stock of Acclaim Comics, Inc. (formerly Voyager Communications Inc.),
publisher of Valiant Comics, pursuant to the terms of an Agreement and Plan of
Merger dated April 30, 1994. The acquisition was accounted for as a purchase.
Accordingly, the operating results of Acclaim Comics are included in the
Statements of Consolidated Operations from the acquisition date. The acquired
assets and liabilities have been recorded at their estimated fair values at the
date of acquisition.

In consideration for the Acclaim Comics' stock, the Company paid $65,000
comprised of (i) $50,000 in cash and (ii) 971 shares of the common stock of the
Company. The total cost of the acquisition was $65,588 (which includes direct
acquisition costs) of which $9,505 was allocated to identifiable net tangible
assets. The remaining balance of $56,083 represents the excess of the purchase
price over the fair value of the net assets acquired, which was being amortized
on a straight-line basis over forty years. During the fourth quarter of fiscal
1996, based on current conditions in the comic book industry, the Company
reduced the estimated remaining life of the goodwill related to Acclaim Comics
to twenty years, which increased the related amortization expense by
approximately $300. In connection with the acquisition, Acclaim Comics obtained
a $40,000 term loan. (See note 13.)

60

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

5. ACQUISITIONS (Continued)

The following unaudited combined pro forma information shows the results of
operations for the year ended August 31, 1994 as though the purchase of Acclaim
Comics had been made at the beginning of that fiscal year.

Net sales $504,436
Net earnings 47,695
Net earnings per share 1.04

The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been made
at the beginning of the period, or of results which may occur in the future.

6. MARKETABLE EQUITY SECURITIES

Marketable equity securities at August 31, 1996 and 1995 consisted
primarily of Class A Common Shares of Tele-Communications, Inc. Such shares have
been classified as "available for sale " securities and accordingly are stated
at fair market value. Unrealized holding gains of $15 and $2,503 (net of income
taxes of $1,784 at August 31, 1995) at August 31, 1996 and 1995, respectively,
are classified as a separate component of stockholders' equity. In fiscal 1996
and 1995, other income includes realized gains from the sale of marketable
equity securities of $3,689 and $5,968 respectively.

On October 19, 1994, Acclaim Cable Holdings, Inc. a wholly-owned subsidiary
of the Company, entered into a Partnership Agreement (the "Partnership
Agreement") with TCI GameCo Ventures, Inc., an indirect wholly-owned subsidiary
of Tele-Communications, Inc. ("TCI"), for the creation of a Delaware limited
partnership (the "Joint Venture"), the interests in which are indirectly held
65% by the Company and 35% by TCI. The Company and TCI are currently
reconsidering the viability of the Joint Venture.

In connection with the execution of the Partnership Agreement, the Company
entered into an Exchange Agreement (the "Exchange Agreement") with TCI and TCI
GameCo Holdings, Inc. ("TCI Sub"), pursuant to which the Company issued and sold
to TCI Sub 4,349 shares of the Company's common stock in exchange for 3,403
shares of Class A Common Stock of TCI.

7. ACCOUNTS RECEIVABLE

Accounts receivable are comprised of the following:

August 31,
1996 1995
---- ----
Receivables assigned to factor $55,099 $155,782
Less advances from factor 23,487 37,082
------- --------
Due from factor 31,612 118,700
Unfactored accounts receivable 12,031 33,093
Accounts receivable - Foreign 20,229 41,743
Other receivables 5,472 5,410
Allowances for returns and discounts (48,866) (19,635)
------- --------
$20,478 $179,311
------- --------

Pursuant to a factoring agreement, the Company's principal bank acts as its
factor for the majority of its North American receivables, which are assigned on
a pre-approved basis. At August 31, 1996, the factoring charge amounted to 0.25%
of the receivables assigned. The Company's obligations to the bank are
collateralized by all of the Company's and its North American subsidiaries'
accounts receivable, inventories and equipment. The advances for factored
receivables are pursuant to a revolving credit and security agreement, which
expires on January 31, 1999, in the maximum amount of $70 million. Pursuant to
the terms of the agreement, which can be cancelled by either party upon 90 days
written

61

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

7. ACCOUNTS RECEIVABLE (Continued)

notice prior to the end of the term, the Company is required to maintain
specified levels of working capital and tangible net worth, among other
financial covenants.

The Company draws down working capital advances and opens letters of credit
(up to an aggregate maximum of $20 million) against the facility in amounts
determined on a formula based on factored receivables, inventory and cost of
imported goods under outstanding letters of credit. Interest was charged at the
bank's prime lending rate (8.25% at August 31, 1996) per annum on such advances.
Effective November 8, 1996, interest is charged at the bank's prime lending rate
plus one percent per annum on such advances. As of August 31, 1996, the Company
was in default of certain financial covenants under its revolving credit
facility, which defaults have been waived by the lender. The Company

is also in default of the prohibitions on having a "going concern" paragraph
in the audit report on its financial statements under the revolving credit
facility and the term loan.

Pursuant to the terms of certain distribution, warehouse and credit and
collection agreements, certain of the Company's foreign accounts receivable are
due from certain distributors. These receivables are not collateralized and as a
result management periodically monitors the financial condition of these
distributors. No additional credit risk beyond amounts provided for collection
losses is believed inherent in the Company's accounts receivable. At August 31,
1996 and 1995, the balance due from a distributor was approximately 19% and 19%
of accounts receivable foreign, respectively.

8. PREPAID EXPENSES

Prepaid expenses are comprised of the following:

August 31,
1996 1995
---- ----
Royalty advances $6,783 $25,640
Prepaid advertising costs 2,868 6,292
Other prepaid expenses 8,862 9,151
------- -------
$18,513 $41,083
------- -------

Prepaid advertising costs consist principally of advance payments in
respect of television and other media advertising. Advertising expenses are
charged to income as incurred.

9. FIXED ASSETS

The major classes of fixed assets are as follows:

August 31,
1996 1995
---- ----
Buildings and improvements $24,724 $21,351
Furniture, fixtures and equipment 34,490 19,608
Automotive equipment 1,680 1,368
------- -------
60,894 42,327
Less: accumulated depreciation (18,115) (8,357)
------- -------
$42,779 $33,970
------- -------

62

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

9. FIXED ASSETS (Continued)

The estimated useful lives of these assets are:

Buildings and improvements 1 to 20 years
Furniture, fixtures and equipment 1 to 7 years
Automotive equipment 3 to 5 years

10. OTHER ASSETS

Other assets are comprised of the following:

August 31,
1996 1995
---- ----
Royalty advances 5,255 5,000
Investments 1,000 4,000
Other assets 4,209 13,534
------- -------
$10,464 $22,534
------- -------

11. SHORT-TERM BORROWINGS

Short-term borrowings at August 31, 1996 and 1995 consisted of notes
payable to banks in Japan of $3,671 and $4,233, respectively, and $1,650
outstanding under lines of credit with two domestic banks at August 31, 1996.

The notes payable to banks in Japan are short-term, maturing within 90 days
and are collateralized by inward letters of credit from distributors. The
average annual interest rate applicable to the bank loans for the year ended
August 31, 1996 was approximately 2%. Such agreement also provides that the bank
has the right to offset cash of the Company collected under the inward letters
of credit and deposited with it against the associated short-term notes.

The credit agreement with one domestic bank provides for borrowings of up
to $2,000 for general working capital purposes and is due on demand. Borrowings
under the agreement bear interest at the bank's prime rate plus one percent
(9.25% at August 31, 1996) and are based upon a percentage of eligible accounts
receivable. The balance at August 31, 1996 was $1,300 which was repaid in
December, 1996.

A revolving line of credit agreement with the other domestic bank provides
for borrowings of up to $500 and is renewable yearly with interest charged at
one and one-half percent above the bank's prime rate (9.75% at August 31, 1996).
The balance at August 31, 1996 was $350.

63

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

12. ACCRUED EXPENSES

Accrued expenses are comprised of the following:

August 31,
1996 1995
---- ----
Accrued royalties payable $28,090 $18,712
Accrued selling expenses and sales allowances 30,804 8,957
Accrued payroll and payroll taxes 2,229 5,750
Other accrued taxes 4,290 3,606
Other accrued expenses 13,093 9,992
------- -------
$78,506 $47,017
------- -------

13. LONG-TERM DEBT

Long-term debt consists of the following:

August 31,
1996 1995
---- ----
(A) Term loan $19,000 $25,000
(B) Mortgage note 6,527 --
Other -- 196
------- -------
25,527 25,196
Less: current portion 25,527 25,196
------- -------
$ -- $ --
------- -------

(A) In conjunction with the acquisition of Acclaim Comics, Inc., Acclaim
Comics entered into a term loan guaranteed by the Company and collateralized by
all the assets of Acclaim Comics, which bears interest based on LIBOR plus 2.5%
(5.5625% at August 31, 1996) and was due and payable on January 29, 1996. On
April 14, 1995, Acclaim Comics repaid $15,000 and exercised its option to extend
the loan for an additional four and one-half year period, payable in quarterly
installments of $1,500 through July 1998 and $1,750 through July 1999, at an
interest rate of LIBOR plus 3.5%. The loan contains covenants which require the
maintenance of certain financial ratios, restrict encumbrance of assets and
limit the payment of dividends by the Company and Acclaim Comics.

(B) The mortgage note bears interest at the bank's prime lending rate

(8.25% at August 1996) and is payable in quarterly installments that commenced
March 1, 1996. The principal amount is payable in quarterly installments that
commenced on May 1, 1996. On March 27, 2003, the unpaid principal sum of
$3,559, together with all accrued and unpaid interest, will be due and payable.
The mortgage note is collateralized by a building (Corporate Headquarters) with
a carrying value of approximately $17,425.

As of August 31, 1996, the Company has been advised by the lenders
of the aforementioned long term debt that events of default have occurred and
are continuing under clauses of the respective lending agreements regarding
certain financial ratio requirements and prohibitions on cross defaults with
other facilities. Although interest and principal payments continue to be made
on a timely basis, the lenders have advised that they reserve the right to take
any and all actions including the option of accelerating and/or demanding
immediate

64

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

13. LONG-TERM DEBT (Continued)

repayment of the obligations. Accordingly, the debt has been classified as
current. As of August 31, 1995, the term loan was also classified as a current
liability due to a covenant, with which the Company was not in compliance, that
was revised but not yet effective. The Company is currently discussing
additional modifications with all of its lenders. The Company expects that the
modifications to its term loan and mortgage will include an immediate paydown of
a portion of the loan and accelerated payment terms for the balance.

14. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES

The Company is committed under various capital leases for automotive and
computer equipment expiring at various dates through 2006. Future minimum
payments required under such leases are as follows:

Years ending August 31,
1997 $2,108
1998 2,116
1999 1,248
2000 348
2001 264
Thereafter 400
------
Total minimum lease payments 6,484
Less: amount representing interest 1,118
------
Present value of net minimum
lease payments $5,366

------

The present value of net minimum lease payments is reflected in the
balance sheet as current and noncurrent obligations under capital leases of
$1,681 and $3,685, respectively.

The Company has operating leases for rental space and equipment which
expire on various dates through 2006. The leases provide for contingent
rentals based upon escalation clauses. Future minimum rental payments
required under such leases are as follows:

Years ending August 31,
1997 3,836
1998 3,375
1999 2,965
2000 2,580
2001 2,246
Thereafter 4,698
-------
Total minimum operating lease payments $19,700
-------

15. (BENEFIT FROM) PROVISION FOR INCOME TAXES

During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The cumulative effect of the
accounting change was not material.

65

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

15. (BENEFIT FROM) PROVISION FOR INCOME TAXES (Continued)

The (recovery of) provision for income taxes consists of the following:

1996 1995 1994
---- ---- ----
Current:
Federal $(52,808) $ 20,131 $ 21,382
Foreign 1,453 (457) 991
State -- 2,240 4,685
-------- -------- --------
(51,355) 21,914 27,058
-------- -------- --------
Deferred:
Federal 4,264 8,880 (3,551)
Foreign -- (270) (20)
-------- -------- --------
4,264 8,610 (3,571)
-------- -------- --------
Charge in lieu of income taxes 698 1,101 8,453
-------- -------- --------
Total income tax provision (benefit) $(46,393) $ 31,625 $ 31,940
-------- -------- --------

A reconciliation of the federal statutory income tax rate with the
effective income tax rate follows:

1996 1995 1994
---- ---- ----
Statutory tax rate (35.0)% 35.0% 35.0%

State income taxes, net of
federal income tax benefit -- 2.2 3.6
Increase in valuation allowance 12.2 -- --
Net operating loss carryback benefit
at less than statutory rate 4.2 -- --
Nondeductible expenses 0.9 2.1 1.0
Foreign tax rate differential, net of
foreign tax credits 0.1 0.2 1.3
Other 0.3 2.0 0.6
----- ---- ----
Effective income tax rate (17.3)% 41.5% 41.5%
----- ---- ----

The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities recorded on the consolidated balance sheets
as of August 31, 1996 and 1995 are as follows:

1996 1995
---- ----
Deferred Deferred Tax Deferred Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
---------- ----------- ---------- -----------

Reserves and allowances $13,711 -- $ 1,662 --
Investment in subsidiary 2,879 -- 3,664 --
Accrued expenses 1,750 -- -- --
Federal net operating loss
carryforwards 8,750 -- -- --
Unrealized gains on marketable
securities -- -- -- $ 1,784
Foreign net operating loss
carryforwards 5,644 -- 1,059 --
Other 806 $ 75 692 43
------- ------- ------- -------
33,540 75 7,077 1,827
Valuation allowance 33,465 -- 548 --
------- ------- ------- -------
$ 75 $ 75 $ 6,529 $ 1,827
------- ------- ------- -------

66

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

15. (BENEFIT FROM) PROVISION FOR INCOME TAXES (Continued)

As of August 31, 1996, the Company has a U.S. tax net operating loss
carryforward of approximately $25,000 expiring in fiscal 2011. At August 31,
1996 the Company has provided a valuation allowance of $33,465 against its net
deferred tax assets due to the Company's recent pre-tax losses and lack of
significant offsetting objective evidence.

At August 31, 1995, one of the Company's foreign subsidiaries had unused
tax benefits of $548 related to foreign net operating loss carryforwards. A
valuation allowance of $548 has been recognized to offset the related deferred
tax asset due to the uncertainty of realizing the benefit of the loss
carryforwards.

Deferred tax assets of $2,259 are classified as other current assets at
August 31, 1995. During fiscal 1995, additional tax benefits at $1,187
attributable to Acclaim Comics were recorded as a reduction of the excess cost

over the net assets acquired.

A provision for additional taxes on income which would become payable upon
the repatriation of the earnings from its foreign subsidiaries has not been
provided since, upon repatriation, the tax consequences of such distributions
would be substantially offset by available foreign tax credits.

16. (LOSS) EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS

(Loss) earnings per common share and common share equivalents are computed
by dividing net earnings by the weighted average number of common shares and
dilutive common share equivalents (stock options and warrants) outstanding. The
weighted average number of common shares and common share equivalents used in
computing net (loss)earnings per common share for the years ended August 31,
1996, 1995 and 1994 were 49,515, 52,300 and 45,150, respectively.

17. STOCK OPTION PLAN

The Company has a stock option plan which, as amended, provides for the
grant of up to 15,000 shares of its common stock to employees, directors and
consultants. The exercise price per share of all incentive stock options
heretofore granted has been the market price, or 110% thereof for certain
employees, or, for non-incentive options, not less than 85% of market price, of
the Company's common stock on the date of grant. Generally, outstanding options
become exercisable evenly over a three year period from the date of grant
(although this may be accelerated due to retirement or death). Outstanding
options must generally be exercised within ten years from the date of grant or,
with respect to incentive options, within five years from the date of grant for
certain employees. The 1988 Stock Option Plan terminates in May 1998. At August
31, 1996, options to purchase approximately 5,980 shares were exercisable and
options to purchase 128 shares were available for future grant under the 1988
stock option plan.

67

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

17. STOCK OPTION PLAN (Continued)

Transactions are summarized as follows:

Shares Under Option
-------------------
Incentive Non-Incentive Exercise Price
--------- ------------- --------------
Outstanding, August 31, 1993 3,595 5,062 $0.89-21.33
----- ------ ------------
Granted 864 2,303 $13.25-25.25
Exercised (451) (635) $1.95-11.17
Cancelled (450) (1,726) $1.95-25.25
----- ------ ------------
Outstanding, August 31, 1994 3,558 5,004 $0.89-21.75
----- ------ ------------
Conversion of Lazer-Tron Options 108 27 $5.41-40.61
Granted 1,596 2,861 $13.75-24.00
Exercised (464) (43) $1.95-17.92
Cancelled (427) (2,022) $3.92-20.63
----- ------ ------------
Outstanding, August 31, 1995 4,371 5,827 $0.89-40.61
----- ------ ------------
Granted 1,239 2,799 $6.38-24.75
Exercised (384) (95) $0.89-17.92
Cancelled (241) (1,234) $1.95-26.88
----- ------ ------------
Outstanding, August 31, 1996 4,985 7,297 $1.95-37.42
----- ------ ------------

In addition, options to purchase 37 shares of common stock at $4.17 per
share, 37 shares of common stock at $5.67 per share, 37 shares of common stock
at $4.58 per share, 56 shares of common stock at $2.08 per share, 150 shares of
common stock at $2.04 per share, 11 shares of common stock at $3.92 per share,
19 shares of common stock at $13.25 per share, 56 shares of common stock at $16
per share and 250 shares of common stock at $13.25 per share were granted
outside the 1988 Stock Option Plan and remain outstanding at August 31, 1996.

In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation," which must be adopted by the Company in fiscal 1997. The Company
has elected not to implement the fair value based accounting method for employee
stock options, but has elected to disclose, commencing in fiscal 1997, the pro
forma net income and earnings per share as if such method had been used to
account for stock-based compensation cost as described in the Statement.

18. EQUITY

At August 31, 1996 and 1995, 2,625 stock warrants were outstanding and
exercisable. The stock warrants entitle the holders thereof to purchase 1,500
shares of common stock at $2.42 per share and 1,125 shares of common stock at
$3.00 per share. The stock warrants expire in 2001.

In addition, outstanding stock warrants to purchase shares of Lazer-Tron
Corporation (See note 5) were converted into warrants entitling the holders
thereof to purchase 17 shares of common stock at $30.57 per share at August 31,
1996 and 1995, 40 shares of common stock at $9.55 per share at August 31, 1996
and 1995 and 105 shares of common stock at $15.92 per share at August 31, 1995.
In

68

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

18. EQUITY (Continued)

addition, certain of such warrants entitle the holders thereof to receive
warrants to purchase 20 shares of common stock at $15.92 per share at August 31,
1996 and 1995. These warrants expire at various times through 1998.

Deferred compensation at August 31, 1996 and 1995 was $8,194 and $10,652,
respectively, which represents escrowed common stock on behalf of certain
executives pursuant to employment agreements. The common stock is ratably
released from escrow and the fair value of the common stock is recorded as
expense when earned over the five-year term of the agreements, and are
recoverable by the Company if the executive's employment with the Company is
terminated upon the occurrence of certain events specified in the respective
employment agreements.

In fiscal 1996 the Company issued 463 shares of restricted common stock to
employees. The fair value of the common stock issued of $4,990 is being expensed
when earned over the five-year period that the restrictions lapse. If employment
with the Company is terminated by the employee, any remaining restricted shares
will be returned to the Company. Deferred compensation includes $4,576 at August
31, 1996 related to such restricted stock awards.

Also included in deferred compensation at August 31, 1996 is $2,343 related
to grants of stock options with exercise prices less than the fair value of the
Company's common stock on the date of grant. Total deferred compensation was
$2,775, which will be expensed at varying amounts through 1999.

19. MAJOR SUPPLIERS AND CUSTOMERS AND RELATED PARTY TRANSACTIONS

A. Major Suppliers and Customers

The Company is substantially dependent on Nintendo as the sole manufacturer
of N64, SNES and Game Boy hardware and a significant portion of the Software for
those platforms and as the sole licensor of the proprietary information and the
technology needed to develop the Software for those platforms; on Sega as the
sole manufacturer of Saturn, Genesis, Master System, Game Gear and Sega CD
hardware and a portion of Software for those platforms and as the sole licensor
of the proprietary information and the technology needed to develop Software for
those platforms; and on Sony as the sole manufacturer of PlayStation hardware
and all of the Software for that platform. In fiscal years 1996, 1995 and 1994,
the Company derived 29%, 47% and 45% of its gross revenues, respectively, from
sales of Nintendo-compatible products, in fiscal years 1996, 1995 and 1994, the
Company derived 36%, 46%, and 55% of its gross revenues, respectively, from
sales of Sega-compatible products and in fiscal year 1996 the Company derived
19% of its gross revenues, from sales of Sony-compatible products.

The Company markets its products primarily to mass merchandise companies,
large retail toy store chains, department stores and specialty stores. No one
customer accounted for more than 10% of revenues for the year ended August 31,
1996. Sales to one customer represented 11% and 12% of revenues for the years
ended August 31, 1995 and 1994, respectively.

69

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

19. MAJOR SUPPLIERS AND CUSTOMERS AND RELATED PARTY TRANSACTIONS (Continued)

B. Related Party Transactions

Sales commissions are payable to two companies owned or controlled by one
of the Company's principal stockholders for sales obtained by these companies.
These commissions amounted to approximately $515, $2,249 and $3,657 for the
years ended August 31, 1996, 1995 and 1994, respectively, of which $1 and $458
are included in accrued expenses at August 31, 1996 and 1995, respectively.

20. COMMITMENTS AND CONTINGENCIES

(a) In December 1995, actions were filed against the Company and several
of its directors and/or executive officers. The plaintiffs, on behalf of a class
of the Company's stockholders, claim unspecified damages arising from the
Company's December 4, 1995 announcement that it revised results for the fiscal
year ended August 31, 1995 to reflect a decision to defer $18 million of
revenues and $10.5 million of net income previously reported on October 17, 1995
for the fiscal year ended August 31, 1995. The actions were consolidated
into a class action entitled In re: Acclaim Ent. Shareholder Litigation, 95 Civ.
4979 (E.D.N.Y.) (TCP). The consolidated complaint was served on defendants on
or about June 14, 1996, and a corrected consolidated complaint was served on or
about July 10, 1996. Defendants' have answered the complaint and have produced

documents. No depositions have taken place to date in this action. The Company
has Directors' and Officers' liability insurance which may cover some portion of
the liability, if any, resulting from these actions. The ultimate outcome of the
litigation cannot presently be determined. Accordingly, no provision for any
liability that may result upon adjudication has been recognized in the
accompanying consolidated financial statements.

(b) The Company and certain of its directors and/or executive officers were also
sued in an action (the "Campbell Action") filed in December 1995 in the United
States District Court in the Northern District of California. The plaintiffs in
the Campbell Action, on behalf of former Lazer-Tron stockholders, claim
unspecified damages arising from alleged violations of the anti-fraud provisions
of the federal securities laws relating to, among other things, (i) the
Company's October 17, 1995 announcement of its results of operations for the
fiscal year ended August 31, 1995, which was subsequently revised by the
Company's December 4, 1995 announcement reflecting a decision to defer $18
million of revenues and $10.5 million of net income previously reported for the
fiscal year ended August 31, 1995 and (ii) the alleged misleading nature of
prior public disclosures and announcements made by the Company. In addition, in
the Campbell Action, the plaintiffs also allege certain common law causes of
action. The Campbell Action has been transferred to the United States District
Court for the Southern District of New York for consolidation with the action
described in note 20(a). Additionally, actions may be brought against the
Company and its officers and directors arising from the matters described above.
The Company has Directors' and Officers' liability insurance which may cover a
portion of the liability, if any, resulting from the Campbell Action. The
ultimate outcome of the litigation cannot presently be determined. Accordingly,
no provision for any liability that may result upon adjudication has been
recognized in the accompanying financial statements.

(c) By summons and complaint dated December 11, 1995, certain of the Company's
directors and/or executive officers were named as defendants, and the Company
was named as a nominal defendant, in a shareholder derivative action in the
Supreme Court of the State of New York, County of Nassau (the

70

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

20. COMMITMENTS AND CONTINGENCIES (continued)

"Derivative Action"). The Derivative Action was brought on behalf of
the Company (as nominal defendant), alleging that the individual defendants
violated their fiduciary duties to the Company in connection with the Company's
revision of its revenues for the fiscal year ended August 31, 1995 (as
described in detail in note 20 (a)). Plaintiff alleges that the individual
defendants (1) breached their duty of candor, (2) caused the Company to waste
corporate assets, and (3) mismanaged the Company, and, accordingly, seeks
unspecified damages. Plaintiffs withdrew their complaint and filed an amended
complaint. The parties have briefed defendants' motion to dismiss based on

plaintiffs' failure to make a proper demand. The Company has Directors' and
Officers' liability insurance which may cover some portion of the liability, if
any, resulting from the Derivative Action. The ultimate outcome of the
litigation cannot presently be determined. Accordingly, no provision for any
liability that may result upon adjudication has been recognized in the
accompanying financial statements.

(d) The Securities and Exchange Commission has issued orders directing a private
investigation relating to, among other things, the Company's earnings estimate
for fiscal 1995 and its decision in the second quarter of fiscal 1996 to exit
the 16-bit portable and cartridge market. The Company has been and intends to
continue to fully cooperate with the Commission in its investigation.

(e) The New York State Department of Taxation and Finance (the "Department") has
been conducting a field audit of the Company with respect to franchise tax
liability for its fiscal years ended August 31, 1989, 1990 and 1991. The Company
has recently been informed that the Department has made preliminary findings
that a stock license fee (plus interest and penalties) of approximately $1,933,
relating to the Company's outstanding capital stock as of 1989, is due to the
State. The Company is contesting the fee and a petition denying liability has
been filed. The Company believes that it has defenses and based on advice from
legal counsel, the ultimate outcome of this audit will not have a material
adverse effect on the Company.

(f) The Company's subsidiary, Lazer-Tron, was sued in an action in the Superior
Court of the State of California, County of Alameda, Eastern Division. In
addition, certain directors and officers of Lazer-Tron have been named as
defendants in an action pending in the Superior Court of the State of
California, County of Alameda. In addition, certain directors and/or executive
officers of Lazer-Tron have been named as defendants in another action in the
Superior Court of the State of California, County of Alameda. The plaintiffs, on
behalf of a class of Lazer-Tron's stockholders, claim damages based on
allegations that, as a result of lack of due diligence by the named defendants
in fully investigating the proposed acquisition by the Company of Lazer-Tron,
the defendants breached their fiduciary duties to Lazer-Tron's shareholders.
These two actions have been consolidated. The court certified a class in the
consolidated action. Lazer-Tron and the Company intend to defend this actions
vigorously. Management believes, based on the allegations stated in the
complaints, discovery proceedings to date, preliminary settlement discussions
and advice from its legal counsel, that the ultimate outcome of these actions
will not have a material adverse effect on the Company.

71

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

20. COMMITMENTS AND CONTINGENCIES (continued)

(g) In April, 1994, the Company and its executive officers were sued in four
actions regarding its agreement with WMS Industries Inc. ("WMS"). The WMS
actions were consolidated and on July 21, 1994, the plaintiffs served a second
consolidated amended class action complaint entitled In re Acclaim
Entertainment, Inc., Securities Litigation (CV 94 1501). The plaintiffs, on
behalf of a class of the Company's stockholders, claim damages arising from the
Company's alleged failure to comply with the disclosure requirements of the
securities laws in respect of the Company's relationship with WMS and the status
of negotiations on the renewal of a license agreement with WMS, pursuant to
which WMS granted the Company a right of first refusal to create software for
"computer games", "home video games" and "handheld game machines" based on
arcade games released by WMS through March 21, 1995. The plaintiffs allege that,
by no later than January 12, 1994, the Company knew or should have known that
(i) it was likely that the license agreement with WMS would not be renewed, (ii)
the nonrenewal of the license agreement would have a material adverse impact on
the Company, (iii) any joint venture or other agreement between WMS and the
Company that might be entered into in the future, however unlikely that may be,
would be on terms substantially less advantageous to the Company than the
license agreement and (iv) statements by the Company's representative that
rumors relating to the nonrenewal of the license agreement were
"unsubstantiated" and that talks between the Company and WMS were continuing,
were materially false and misleading. Accordingly, the plaintiffs claim that the
defendants should have disclosed the likely nonrenewal of the license agreement.
Discovery in the WMS Actions is almost complete, and the parties have moved for
summary judgment. In addition, plaintiffs have moved to expand the class period.
Defendants have opposed the motion. The Company believes the lawsuit is without
merit and lacks any basis in fact, intends to defend the WMS Actions vigorously,
and has asked for permission to move for summary judgment in its favor. The
Company has also asserted a third-party action against its insurance company,
Mt. Hawley Insurance Company ("Mt. Hawley") based on Mt. Hawley's disclaimer of
coverage for liability which may result from the WMS Actions and for fees and
expenses incurred in connection with the defense of the WMS Actions. The
ultimate outcome of the litigation cannot presently be determined. Accordingly,
no provision for any liability that may result upon adjudication has been
recognized in the accompanying consolidated financial statements.

(h) The Company is also party to various other litigations arising in the course
of its business, the resolution of none of which, the Company believes, will
have a material adverse effect on the Company's liquidity or Results of
Operations.

(i) At August 31, 1996, the Company and its subsidiaries had outstanding letters
of credit aggregating approximately $3,100 for the purchase of merchandise. The
Company's subsidiaries had independent facilities totalling approximately
$45,000 with various banks at August 31, 1996.

(j) Trade accounts payable include $3,100 and $22,000 at August 31, 1996 and
1995, respectively, which were collateralized under outstanding letters of
credit.

72

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

20. COMMITMENTS AND CONTINGENCIES (continued)

(k) The Company has established an Employee Savings Plan (the "Plan") effective
January 1, 1995, which qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. The Plan is available to all U.S. employees
who meet the eligibility requirements. Under the Plan, participating employees
may elect to defer a portion of their pretax earnings, up to the maximum allowed
by the Internal Revenue Service (up to the lessor of 15% of compensation or
$9,240 for calendar year 1996). All amounts vest immediately. Generally, the
Plan assets in a participant's account will be distributed to a participant or
his or her beneficiaries upon termination of employment, retirement, disability
or death. All Plan administrative fees are paid by the Company.

The Company does not provide its employees any other post retirement or
post employment benefits, except discretionary severance payments upon
termination of employment.

At August 31, 1996, the Company recorded severance costs of $5,000,
included in other accrued expenses.

(l) The Company has entered into employment agreements with certain of its
directors and officers which provide for annual bonus payments based on
consolidated income before income taxes, in addition to their base compensation.

21. OPERATIONS IN GEOGRAPHIC AREAS

The Company is primarily engaged in one industry segment, the development,
marketing and distribution of Software products. The following information sets
forth geographic information on the Company's net revenues, (loss) earnings from
operations and identifiable assets.

United States Europe Japan Other Eliminations Consolidated
------------- ------ ----- ----- ------------ ------------

Year ended August 31, 1996:
Sales to unaffiliated customers $ 57,742 $ 86,043 $ 14,945 $ 3,215 -- $ 161,945
Transfers between geographic areas 6,368 -- -- 91 (6,459) --
--------- --------- --------- --------- --------- ---------
Total net revenues $ 64,110 $ 86,043 $ 14,945 $ 3,306 $ (6,459) $ 161,945
--------- --------- --------- --------- --------- ---------
(Loss) earnings from operations $(281,159) $ 6,041 $ 1,369 $ (727) $ -- $(274,476)
--------- --------- --------- --------- --------- ---------
Identifiable Assets at August 31, 1996 $ 204,749 $ 23,415 $ 9,442 $ 2,045 $ -- $ 239,651
--------- --------- --------- --------- --------- ---------
Year ended August 31, 1995:
Sales to unaffiliated customers $ 428,868 $ 95,556 $ 27,274 $ 15,025 $ -- $ 566,723
Transfers between geographic areas 11,388 102 -- -- (11,490) --
--------- --------- --------- --------- --------- ---------
Total net revenues $ 440,256 $ 95,658 $ 27,274 $ 15,025 $ (11,490) $ 566,723
--------- --------- --------- --------- --------- ---------
Earnings from operations $ 45,457 $ 17,732 $ 1,872 $ 5,605 $ -- $ 70,666
--------- --------- --------- --------- --------- ---------
Identifiable Assets at August 31, 1995 $ 410,873 $ 19,259 $ 10,462 $ 2,233 $ -- $ 442,827
--------- --------- --------- --------- --------- ---------
Year ended August 31, 1994:
Sales to unaffiliated customers $ 367,271 $ 78,878 $ 17,338 $ 17,269 $ -- $ 480,756
Transfers between geographic areas 11,057 333 11,728 -- (23,118) --
--------- --------- --------- --------- --------- ---------
Total net revenues $ 378,328 $ 79,211 $ 29,066 $ 17,269 $ (23,118) $ 480,756
--------- --------- --------- --------- --------- ---------
Earnings from operations $ 56,295 $ 9,438 $ 4,425 $ 7,312 $ -- $ 77,470
--------- --------- --------- --------- --------- ---------
Identifiable Assets at August 31, 1994 $ 295,649 $ 32,982 $ 5,292 $ 1,955 $ -- $ 335,878
--------- --------- --------- --------- --------- ---------

73

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FISCAL YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
(in 000s, except per share data)

21. OPERATIONS IN GEOGRAPHIC AREAS (Continued)

Export sales from the U. S. have been insignificant during each of the years in
the three year period ended August 31, 1996.

22. QUARTERLY FINANCIAL DATA (UNAUDITED)

During the second half of fiscal 1996, the deterioration of the 16-bit
cartridge and portable software market accelerated. Retail inventories were
higher than anticipated and the Company's sales of its 16-bit products, as well
as its other software products, continued to require more retail incentives,
including price concessions. As a result, the Company's financial statements in
the fourth quarter include several adjustments to accrue additional sales
credits and allowances, reduce inventory to its net realizable value and write
off prepaid royalties. The Company also accrued the costs associated with a
reduction in its work force and to increase goodwill amortization. On a pre-tax
basis, these fourth quarter adjustments are as follows:

Adjustments to estimated net realizable value
of 16-bit cartridge and portable software accounts
receivable and inventory $ 65,000
Adjustments to estimated net realizable value of
other accounts receivable and inventory 29,000
Write-offs of prepaid royalties 31,000
Write-off of capitalized software costs 8,000
Provision for severance costs 5,000
Accelerated amortization of goodwill 300
--------
$138,300
--------

A portion of these adjustments relate to prior quarters. However, the
Company was unable to determine a reasonable method to allocate the adjustments
since a combination of customer retail sales practices, sales concessions
originating outside the Company's financial reporting process and changing
16-bit and portable software market conditions make more accurate estimates of
the period in which these charges belong impractical to determine.

The following table sets forth certain quarterly financial information for
fiscal 1996:

Quarter Ended
-------------
November 30, February 29, May 31, August 31,
1995 1996 1996 1996 Total
---- ---- ---- ---- -----

Gross Revenues $ 154,162 $ 104,377 $ 66,310 $ 51,175 $ 376,024
Sales credits and allowances 19,715 *86,451 3,671 *104,242 214,079
--------- --------- --------- --------- ---------
Net revenues 134,447 17,926 62,639 (53,067) 161,945
Cost of revenues 75,863 *54,553 24,456 *25,200 180,072
Net (loss) earnings 595 (55,771) (3,968) (162,224) (221,368)
Net (loss) earnings per share $ 0.01 $ (1.12) $ (0.08) $ (3.28) $ (4.47)

* Includes amounts relating to the special cartridge video charge as follows:

Quarter Ended (in millions) Total
--------------------------- -----
February 29, 1996 August 31, 1996

Sales credits
and allowances $28.8 $61.7 $90.5

Cost of revenues 20.1 3.3 23.4
------ ------ ------
$48.9 $65.0 $113.9

Quarter Ended
-------------
November 30, February 29, May 31, August 31,
1994 1995 1995 1995 Total
---- ---- ---- ---- -----

Net revenues $ 164,304 $ 161,273 $ 107,654 $ 133,492 $ 566,723
Cost of revenues 77,665 73,456 53,792 63,588 268,501
Net earnings 15,958 13,856 8,855 6,101 44,770
Net earnings per share $ 0.34 $ 0.28 $ 0.17 $ 0.11 $ 0.86

The sum of the quarterly net earnings per share amounts do not equal the
annual amount reported, as per share amounts are computed independently for each
quarter and for the twelve months based on the weighted average common and
common equivalent shares outstanding in each such period.

75

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

On July 24, 1996, at the recommendation of its Audit
Committee (the "Audit Committee"), the Board of Directors of
Acclaim adopted a resolution (i) not to retain Grant Thornton LLP
("GT") as the Company's independent auditors for the fiscal year
ending August 31, 1996 and (ii) to engage KPMG Peat Marwick LLP
("KPMG") as the Company's independent auditors for the fiscal year
ending August 31, 1996. GT was so advised on July 25, 1996.

The reports of GT on the Company's consolidated financial
statements as of and for the two years ended August 31, 1995 and
1994 did not contain an adverse opinion or a disclaimer of opinion
nor were they qualified or modified as to uncertainty, audit scope
or accounting principles, except that the report of GT on the
Company's financial statements for the fiscal year ended August
31, 1995 contains a modification as to uncertainty relating to the
eventual outcome of certain class action lawsuits in which Acclaim
and certain of its officers and directors have been named as
defendants. See Note 20 of Notes to Consolidated Financial
Statements.

During the Company's two most recent fiscal years ended
August 31, 1995 and in the interim period from September 1, 1995
through July 24, 1996 there were no disagreements with GT on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of GT, would have caused them
to make reference thereto in their report(s) on the Company's
financial statements for such fiscal year(s) or for such interim
period, except:

(a) A matter, which was resolved to GT's satisfaction, in
respect of the timing of the recognition of certain revenues from
nonrefundable, recoupable exclusivity fees, which had been
included in revenues for the fourth quarter of fiscal 1995 in the
October 1995 announcement by the Company of its financial results
for fiscal 1995. The Audit Committee and/or senior management of
the Company, on the one hand, and GT, on the other hand, had
several discussions in respect of such matter. The matter was
resolved by the Company revising such announced financial results
to exclude such revenues from its financial results for fiscal
1995.

(b) A matter, which was resolved to GT's satisfaction, in
respect of the balance sheet presentation of a $19 million loan
from Midland Bank plc. As of August 31, 1995, the Company did not
meet a financial ratio covenant in the loan agreement relating to
such loan. The Company's senior management and GT discussed this

matter, which was resolved by the Company reclassifying the $19
million loan from long term debt to current liabilities.

76

In addition, GT proposed several audit adjustments that were
not recorded by the Company because they were considered by the
Company and GT to be immaterial to the Company's consolidated
financial statements for fiscal 1995 taken as a whole.

During the Company's two most recent fiscal years ended
August 31, 1995 and the interim period from September 1, 1995
through July 24, 1996, there were no "reportable events" as
defined in Item 304(a)(1)(v) of Regulation S-K ("Regulation S-K")
promulgated under the Securities Exchange Act of 1934, except as
follows:

By letter dated April 15, 1996, GT advised the Company
that they had noted certain internal control structure matters
that related to significant deficiencies in the design or
operation of the Company's internal control structure, relating to
the quality and depth of financial management, analysis of
significant estimates, lack of internal audit function and
accounting for capitalized software costs, that, in their
judgment, could adversely affect the Company's ability to record,
process, summarize and report financial data consistent with the
assertions of management in the Company's financial statements.

In May 1996, KPMG was retained to conduct a review of certain
internal controls to identify and assist the Company to implement
any additional necessary steps to strengthen its internal
controls.

A member of the Audit Committee and/or senior management has
discussed the subject matter of each item described above with GT,
and the Company has authorized GT to respond fully to all
inquiries of KPMG concerning the subject matter thereof.

In response to the Company's draft Form 8-K filing presented to GT, the
Company received the following letter dated July 31, 1996 from GT which was
filed as an Exhibit to the Company's Form 8-K filed with the Securities and
Exchange Commission.:

Securities and Exchange Commission
Washington, D.C. 20549

Re: Acclaim Entertainment, Inc.
File No. 0-16986

Dear Sir or Madam:

We have read Item 4 of the Form 8-K of Acclaim Entertaiment, Inc. We
believe it should be supplemented and, in part, amended to reflect the

following:

With regard to the interim period from September 1, 1995 through July
24, 1996, we were not engaged to perform timely reviews of the fiscal
1996 quarterly consolidated financial statements of the Registrant. On
July 17, 1996, however, we were engaged to perform a review of the
quarterly consolidated financial statements of the Registrant for each
of the first three quarters of the fiscal year ending August 31, 1996
in respect of the Registrant's filing on Form S-3 on behalf of certain
selling shareholders. On July 25, 1996, the Registrant orally advised
us of our termination as their independent accountants. In connection
with such review, certain matters, which were still pending at the time
of our termination, may have resulted in additional disagreements
and/or reportable events had we completed our procedures. These matters
included the following:

o the recognition and/or disclosure of a settlement offer pertaining
to the Lazer-Tron class action litigations.

o the recoverability asessment pertaining to excess of costs over
net assets acquired attributable to Acclaim Comics, Inc.

o the findings of the "internal controls audit" being conducted by
KPMG Peat Marwick.

With regard to reportable events, we had issued our Internal Control
Structure/Reportable Conditions letter dated April 15, 1996 (an initial
draft of which was provided to the Registrant on January 25, 1996)
summarizing reportable conditions and recommendations which
specifically addressed the Registrant's quality and depth of financial
management, analysis of significant estimates, lack of internal audit
function and accounting for capitalized software costs. Further, the
reportable conditions discussed therein are those that we had noted as
of December 8, 1995 in conjunction with our audit of the Registrant's
consolidated financial statements as of and for the year ended August
31, 1995; we have not updated our procedures regarding such matters
since that date. We have not discussed with the Audit Committee the
subject matter of our Internal Control Structure/Reportable
Conditions letter, despite our requests to the Registrant to meet with
the Audit Committee for that purpose.

With regard to the subject matter of the disagreements set forth in
Item 4 which are contained in more detail in our Report to the Audit
Committee dated April 15, 1996 (an initial draft of which was provided
to the Registrant on January 18, 1996), please be advised that we had a
telephonic discussion on December 4, 1995 with the Audit Committee
addressing only disagreements that had occurred through that date.

In connection with the Registrant's filing on Form S-3 referred to
above, we requested the Proxy Statement for the upcoming Annual
Shareholders' meeting which would be incorporated by reference in the
Form S-3, thereby forming a part of the registration statement.
Professional standards require that we read such information. We were
informed by the Registrant as recently as July 23, 1996 that the Proxy
Statement was not available for our review. On July 24, 1996, through
EDGAR, we independently obtained a copy of such requested Proxy
Statement and learned that the Registrant had filed such Proxy
Statement with the Securities and Exchange Commission on July 18, 1996.
We viewed this as a restriction placed by the Registrant on information
requested by us during the conduct of our procedures.

With regard to the Registrant's retention of KPMG Peat Marwick to
conduct an "internal controls audit," we did not discuss this matter
with the Registrant's Audit Committee and/or senior management.
However, as described in our Report to the Audit Committee dated April
15, 1996 (an initial draft of which was provided to the Registrant on
January 18, 1996), we were informed by management that the Registrant's
legal counsel retained KPMG Peat Marwick to assist in responding to the
Securities and Exchange Commission's Division of Enforcement. Further,
we have no knowledge as to the specific matters on which KPMG Peat
Marwick was consulted.

* * * * *

With regard to the following statements made by the Registrant in Item
4 of Form 8-K dated July 24, 1996, we have no basis for agreeing or
disagreeing with:

o the first sentence of Item 4 with respect to the July 24, 1996
Board of Directors resolution.

o the last sentence to the first paragraph of Item 4 with respect to
the Registrant's press release and any information contained
therein.

o the last sentence to the second subparagraph (b) of the third
paragraph of Item 4 with respect to the matter referred to in such
paragraph being resolved with the bank.

o the sixth paragraph of Item 4 with respect to the May 1996
retention of KPMG to conduct an "internal controls audit."

Very truly yours,

GRANT THORNTON LLP

In response to GT's letter of July 31, 1996, the Company
notes the following:

(a) Notwithstanding the fact that GT was not retained to
perform formal reviews of the Company's financial statements for
the first, second and third quarters of fiscal 1996, GT provided
the Company with extensive advice and consultation regarding the
appropriate presentation of such quarterly financial statements
and also advised on the accounting theories and methodologies
applied; and

(b) In connection with GT's review of the Company's
quarterly financial statements for each of the first three

77

quarters of fiscal 1996 in respect of the Company's Registration
Statement on Form S-3, GT advised the Company on Tuesday, July 23,
1996, that it had completed its review procedures, that there were
no outstanding issues for further discussion and that GT would
release its consent in connection with the Form S-3. In addition,
on Tuesday, July 23, 1996, the Company delivered to GT its
management representation letter, which generally signifies the
completion of the review procedure. The Company delivered to GT a
copy of the Proxy Statement relating to its annual meeting of
stockholders to be held on August 7, 1996. On July 24, 1996, the
Company was advised by GT that, upon review of the Proxy
Statement, GT noted that auditors had not yet been retained for
fiscal 1996 and accordingly, GT would not release its consent
unless they were appointed as the Company's auditors for fiscal

1996. GT subsequently raised the matters discussed in GT's
letter, which are disputed by the Company as indicated above.

78

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information concerning each
of the directors and executive officers of the Company:

Principal
Name Occupation Age
---- ---------- ---

Gregory E. Fischbach Co-Chairman of the Board; 54
President and Chief
Executive Officer of the
Company

James Scoroposki Co-Chairman of the Board, 48
Senior Executive Vice
President, Secretary and
Treasurer of the Company

Robert Holmes Consultant 43

Bernard J. Fischbach Attorney 51

Michael Tannen Chief Executive Officer 56
and President of Tannen
Media Ventures

Robert H. Groman Attorney 54

James Scibelli President of Roberts & 46
Green, Inc.

Bruce W. Ravenel President and Chief 46
Executive Officer of TCI
Internet Services, Inc.

J. Mark Hattendorf Executive Vice President 46
and Chief Financial and
Accounting Officer

Anthony R. Williams Executive Vice President 38

Gregory E. Fischbach, a founder of the Company, has been
Chief Executive Officer of the Company since its formation and
Co-Chairman of the Board since March 1989. Mr. Fischbach was
also President of the Company from its formation to January 1990
and has been President of the Company since October 1996. From

June 1986 until January 1987, he was President of RCA/Ariola
International, responsible for the management of its record

79

operations outside the U.S. and in charge of its seventeen
operating subsidiaries.

James Scoroposki, a founder of the Company, has been Senior
Executive Vice President since December 1993, Co-Chairman of the
Board since March 1989 and Secretary and Treasurer of the Company
since its formation. Mr. Scoroposki was also Chief Financial
Officer of the Company from April 1988 to May 1990 and Executive
Vice President of the Company from formation to November 1993.
Since December 1979, he has also been the President and sole
shareholder of Jaymar Marketing Inc. ("Jaymar"), a sales
representation organization. See "Certain Relationships and
Related Transactions."

Robert Holmes held a variety of positions including, most
recently, President of the Company, from April 1987 to October
1996. Mr. Holmes is currently employed by the Company, pursuant
to his existing agreement in principle with the Company, as a
special advisor to the Board reporting to Mr. Gregory Fischbach.
From 1983 to 1987, he served in a variety of positions at
Activision, Inc., an international home computer and video game
software company.

Bernard J. Fischbach has been engaged in the private
practice of law in Los Angeles, California since 1976 with
Fischbach, Perlstein, Lieberman & Yanny and its predecessor
firms. See "Certain Relationships and Related Transactions."

Michael Tannen has, since 1988, been the President and Chief
Executive Officer of InterVision, Inc., a subsidiary of Millicom
Incorporated, a company involved in publishing, television
production and home video distribution and sales, and Chief
Executive Officer of Kinnevik Media Ventures, Ltd., a media
service subsidiary of A.B. Kinnevik, a Swedish conglomerate
engaged, among other things, in international satellite
television broadcasting, cable television networks and cellular
mobile telephone and paging operations. In 1992, Mr. Tannen also
became Chief Executive Officer of Television Holdings
International, S.A., a wholly owned subsidiary of A.B. Kinnevik.

Robert H. Groman has, for more than the preceding five
years, been a partner in the general practice law firm of Groman,
Ross & Tisman, P.C. (and its predecessor firms) located in Long
Island, New York. See "Certain Relationships and Related
Transactions."

James Scibelli has, since March 1986, served as president of
Roberts & Green, Inc., a New York financial consulting firm

offering a variety of financial and investment consulting
services. Mr. Scibelli is also a director of Boardwalk Casino,
Inc., which owns and operates a hotel and casino, and of B.U.M.
International, Inc., a factory outlet based retailer of

80

contemporary men's, women's and children's casual apparel and
accessories.

Bruce W. Ravenel has, since January 1996, served as
President and Chief Executive Officer of TCI Internet Services,
Inc. and Senior Vice President for Internet Services of TCI
Communications, Inc., both wholly-owned subsidiaries of Tele-
Communications, Inc. ("TCI"), in which capacity he has been
responsible for all Internet-related business activities of TCI.
From 1994 to 1996, Mr. Ravenel was Senior Vice President and
Chief Operating Officer of TCI Technology Ventures, Inc. ("TCI
Technology"), a division of TCI, and from 1991 to 1994 he served
as Senior Vice President of TCI Technology.

J. Mark Hattendorf has been the Executive Vice President and
Chief Financial Officer of the Company since July 1996. From
October 1995 to June 1996, Mr. Hattendorf served as Senior Vice
President and Chief Financial Officer of Prodigy Services
Company, an online consumer services company. From September
1993 to October 1995, Mr. Hattendorf served as Senior Vice
President and Chief Financial Officer of Herbalife International
Inc., a nutritional direct selling organization. From 1991 to
1993, Mr. Hattendorf served as a full time financial consultant
to Canal+, a French entertainment company engaged, among other
things, in international satellite television broadcasting.

Anthony Williams is Executive Vice President of the Company.
Prior to such time and for more than the preceding five years,
Mr. Williams held a variety of positions with the Company.

Since November 1996, the Board of Directors has an Executive
Committee (the "Executive Committee"), the members of which are
Messrs. Tannen, Groman, Scibelli, B. Fischbach and Scoroposki.
The Executive Committee has such powers as may be assigned to it
by the Board of Directors from time to time. It is charged with
meeting with the management of the Company on a regular basis
regarding the Company's plans for fiscal 1997 and monitoring
management's efforts in this regard.

The Board of Directors has an Audit Committee (the "Audit
Committee"), the members of which are Messrs. Tannen, Groman and
Scoroposki. The Audit Committee has such powers as may be
assigned to it by the Board of Directors from time to time. It
is charged with recommending to the Board of Directors the
engagement or discharge of independent public accountants,
reviewing the plan and results of the auditing engagement with

the officers of the Company, and reviewing with the officers of
the Company the scope and nature of the Company's internal
accounting controls.

The Board of Directors also has a Compensation and Stock
Option Committee (the "Compensation Committee"), the members of

81

which are Messrs. Tannen and Scibelli. The Compensation
Committee has such powers as may be assigned to it by the Board
of Directors from time to time. It is charged with determining
compensation packages for the Chief Executive Officer and the
Senior Executive Vice President of the Company, establishing
salaries, bonuses and other compensation for the Company's
executive officers and with administering the Company's 1988
Stock Option Plan (the "Plan") and the Company's 1995 Restricted
Stock Plan, and recommending to the Board of Directors changes to
the Plan.

Messrs. Gregory E. and Bernard J. Fischbach are brothers.
There is no family relationship among any other directors or
executive officers of the Company.

Mr. Ravenel was elected as a director of the Company in
February 1995 in connection with the sale by the Company of
4,348,795 shares of its common stock to TCI GameCo Holdings, Inc.
("TCI Sub"), an indirect wholly-owned subsidiary of TCI, in
February 1995. In addition, in February 1995, Messrs. Gregory
Fischbach and Scoroposki entered into a voting agreement with TCI
Sub pursuant to which each party agreed to vote all shares
beneficially owned by it in favor of those individuals nominated
by the Board of Directors of the Company for election to the
Board of Directors at any annual or special meeting of the
stockholders of the Company at which directors are to be elected
provided that, subject to certain exceptions, such nominees
include Messrs. Gregory Fischbach and Scoroposki (or their
designees or successors) and one individual proposed by TCI Sub.

The Company has agreed with each of Messrs. G. Fiscbach and
Scoroposki, pursuant to the terms of their respective employment
agreements, to use its best efforts to cause him to be elected as a
director.

There is no other arrangement or understanding pursuant to
which any person has been elected as a director or executive
officer of the Company.

82

Item 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes all plan and non-plan
compensation awarded to, earned by or paid to the Company's Chief
Executive Officer and its four other executive officers
(together, the "Named Executive Officers") who were serving as
executive officers during and at the end of the last completed
fiscal year ended August 31, 1996 for services rendered in all
capacities to the Company and its subsidiaries for each of the
Company's last three fiscal years:

Annual All Other
Compensation Long Term Compensation Compensation*
-------------------------------- ---------------------- ------------
Awards
----------
Securities
Name and Underlying
Principal Salary Bonus Options
Position Year $ $ # $
- --------- ---- -------- ---------- ------- -------

Gregory E. Fischbach 1996 $775,000 $ -0- 150,000 $19,200
Co-Chairman and 1995 775,000 2,775,000 150,000 17,000
Chief Executive Officer 1994 775,000 2,685,000 300,000 14,500

James Scoroposki 1996 500,000 -0- 150,000 5,100
Co-Chairman, Senior 1995 500,000 2,350,000 150,000 4,600
Executive Vice President, 1994 483,000 2,685,000 300,000 4,300
Treasurer and Secretary

Robert Holmes 1996 605,000 -0- -0- 6,000
President and Chief 1995 550,000 2,350,000 325,000 6,000
Operating Officer 1994 500,000 1,467,000 450,000 5,400

J. Mark Hattendorf 1996 250,000 -0- 165,000 -0-
Executive Vice President
and Chief Financial
and Accounting Officer

Anthony Williams 1996 225,000 -0- -0- 2,100
Executive Vice 1995 225,000 45,000 140,000 2,000
President 1994 200,000 100,000 200,000 1,800

________________________________________________
* Represents dollar value of insurance premiums paid by the Company
during the fiscal year with respect to term life insurance for
the benefit of the Named Executive Officers.

No restricted stock awards, stock appreciation rights or long-term
incentive plan awards (all as defined in the proxy regulations promulgated by
the Securities and Exchange Commission) were awarded to, earned by, or paid to
the Named Executive Officers during any of the Company's last three fiscal
years.

83

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information with respect to
grants of stock options to purchase the Company's common stock,
par value $0.02 per share (the "Common Stock"), pursuant to the
Company's 1988 Stock Option Plan (the "Plan") granted to the
Named Executive Officers during the fiscal year ended August 31,
1996.

Individual Grants Potential
---------------------------------------------------- Realizable Value
Number Percent of at Assumed Annual
of Total Rates of Stock
Securities Options Price Appreciation
Underlying Granted to For Option Term
Options Employees Exercise Expira- -----------------------------
Granted in Fiscal Price tion 5% 10%
Name (#) Year ($/sh) Date ($) ($)
- ---- --------- --------- ------- --------- ------------ ------------

Gregory E. Fischbach 150,000 3.7% $ 7.50 7/23/2006 $ 707,506 $ 707,506

James Scoroposki 150,000 3.7% 7.50 7/23/2006 707,506 707,506

Robert Holmes -0- NA NA NA NA NA

J. Mark Hattendorf 39,999 1.0% 7.50 7/23/2006 188,664 478,111
125,001 3.1% 6.38 7/23/2006 1,299,054 2,068,526

Anthony Williams -0- NA NA NA NA NA

All Stockholders (1) -- -- -- -- 255,697,943 647,988,790

______________________

1 These figures were calculated assuming that the price of the 49,693,000
shares of Common Stock issued and outstanding on August 31, 1996
increased from $8.125 per share at compound rates of 5% and 10% per
year for ten years. The purpose of including this information is to
indicate the potential realizable value at the assumed annual rates of
stock price appreciation for the ten-year option term for all of the
Company's stockholders.

84

AGGREGATE OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information with respect to
each exercise of stock options during the fiscal year ended
August 31, 1996 by the Named Executive Officers and the value at
August 31, 1996 of unexercised stock options held by the Named
Executive Officers.

Number of
Securities
Underlying Value of
Unexercised Unexercised
Options In-the-Money
at Fiscal Options at
Year-End Fiscal Year-End
Shares Acquired Value (#) ($)
Name on Exercise Realized(1) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- (#) ($)
---------------- ------------ ------------------------- -------------------------

Gregory Fischbach 0 $ 0 1,365,000/300,000 $5,807,814/93,750

James Scoroposki 0 0 1,365,000/300,000 5,807,814/93,750

Robert Holmes 0 0 1,342,085/316,667 4,505,771/0

J. Mark Hattendorf 0 0 0/165,000 0/243,751

Anthony Williams 0 0 377,166/165,334 1,034,375/0

- ---------------
1 Fair market value of securities underlying the options at fiscal year
end minus the exercise price of the options.

Directors' Compensation

Directors who are not also employees of the Company receive
a $10,000 annual fee, reimbursement of expenses for attending
meetings of the Board and generally receive an annual grant of
options to purchase 18,750 shares under the Plan. See "Certain
Relationships and Related Transactions." In addition, options
may be granted under the Plan to non-employee directors who
render services to the Company and who are not also members of
the Compensation Committee.

85

Employment Contracts, Termination of Employment and
Change-in-Control Arrangements

The Company has employment agreements with each of Gregory
Fischbach and James Scoroposki, providing for Mr. Gregory
Fischbach's employment as Chief Executive Officer and for Mr.
Scoroposki's employment as Senior Executive Vice President,
Secretary and Treasurer, for terms expiring in August 2000.

The agreements with Messrs. Gregory Fischbach and Scoroposki
provide for annual base salaries of $775,000 and $500,000,
respectively, for the term of the agreements. In addition, each
of the agreements provides for annual bonus payments to
Mr. Fischbach in an amount equal to 3.25% of the Company's net
pre-tax profits for each fiscal year and to Mr. Scoroposki in an
amount equal to 2.75% of the Company's net pre-tax profits for
each fiscal year. The agreement with Mr. Scoroposki specifically
allows him to devote that amount of his business time to the
business of certain sales representative organizations controlled
by him as does not interfere with the services to be rendered by
him to the Company. The sales representative organizations under
his control have officers and employees who oversee the
operations of such organizations. Mr. Scoroposki attends board
meetings of such companies but has no active involvement in their
day to day operations. Under the agreements, the Company
provides each of Messrs. Gregory Fischbach and Scoroposki with $2
million term life insurance and disability insurance.

If the employment agreement of either of Messrs. Gregory
Fischbach or Scoroposki is terminated within one year after
occurrence of a change in control of the Company (other than a
termination for cause) or if either of Messrs. Gregory Fischbach
or Scoroposki terminates his employment agreement upon the
occurrence of both a change in control of the Company and a
change in the circumstances of his employment, he would be
entitled to receive severance benefits in an amount equal to the
total of (i) three years' base salary and (ii) three times the
largest bonus paid to him for the three fiscal years immediately
preceding any such termination of his employment.

The Company has an agreement in principle with Mr. Holmes
for his employment as President and Chief Operating Officer,
which provides for a current annual base salary of $605,000. In
October 1996, Mr. Holmes relinquished his roles as President and
Chief Operating Officer, but remains an employee of the Company
under the existing agreement in principle as a special advisor to
the Board reporting to Mr. Gregory Fischbach. The term of the
agreement expires on August 31, 1999. The agreement guarantees
Mr. Holmes a 10% annual increase in his base salary for the term
of the agreement. In addition, the agreement provides for annual
bonus payments equal to 2.75% of the Company's net pre-tax
profits for each fiscal year. The Company provides Mr. Holmes

86

with a $2 million term life insurance policy and disability
insurance.

Under the agreement with Mr. Holmes, if his employment is
terminated within one year after the occurrence of a change in
control of the Company (other than a termination for cause) or if
he terminates his agreement upon the occurrence of both a change
in control of the Company and a change in the circumstances of
his employment, he would be entitled to receive severance
benefits in an amount equal to the total of (i) three years' base
salary and (ii) three times the largest bonus paid to him for the
three fiscal years immediately preceding any such termination of
his employment.

The Company also has an agreement in principle with Mr.
Williams for his employment as Executive Vice President and Chief
Financial and Accounting Officer, which provides for a current
annual base salary of $225,000. In July 1996, Mr. Williams
relinquished his roles as Chief Financial and Accounting Officer,
but retains his role as Executive Vice President under the terms
of the existing agreement in principle. The agreement expires in
August 1999. Mr. Williams is also entitled to a bonus in an
amount to be determined at the discretion of the Board of
Directors if the Company achieves certain financial performance
objectives. The Company provides Mr. Williams with a $1 million
term life insurance policy and disability insurance. If Mr.
Williams' employment in terminated within one year after the
occurrence of a change in control of the Company (other than a
termination for cause) or if he terminates his agreement upon the
occurrence of both a change in control of the Company and a
change in the circumstances of his employment, he would be
entitled to receive severance benefits in an amount equal to the
total of (i) one year's base salary and (ii) two times the bonus
paid to him for the fiscal year immediately preceding any
termination of his employment.

Each of the agreements with Messrs. Gregory Fischbach,
Scoroposki, Holmes and Williams provides that, in the event of a
change in control of the Company, all options theretofore granted
to each of them shall vest and become immediately exercisable and
the Company has agreed to indemnify each of them against any
excise taxes imposed on such executive by section 4999(a) of the
Internal Revenue Code of 1986, as amended (including all
applicable taxes on such indemnification payment).

Each of the agreements with Messrs. Gregory Fischbach,
Scoroposki, Holmes and Williams prohibits disclosure of
proprietary and confidential information regarding the Company
and its business to anyone outside the Company both during and
subsequent to employment. In addition, the employees agree, for
the duration of their employment with the Company and for one

year thereafter, not to engage in any competitive business

87

activity, nor to persuade or attempt to persuade any customer,
software developer, licensor, employee or other party with whom
the Company has a business relationship to sever its ties with
the Company or reduce the extent of its relationship with the
Company.

In addition, at the end of their respective terms, if the
agreements with each of Messrs. Gregory Fischbach, Scoroposki,
Holmes and Williams are not renewed on substantially similar
terms, the employee would be entitled to receive severance
benefits in an amount equal to the total cash compensation paid
to him during the 12-month period immediately preceding such
termination of his employment.

Benefit Plans

The Company does not have a pension plan. For information
with respect to options granted to executive officers of the
Company under the Company's 1988 Stock Option Plan, see page 84.

Compliance with reporting requirements

The Company believes that, during the fiscal year ended
August 31, 1996, all filing requirements under Section 16(a) of
the Securities Exchange Act of 1934 (the "Exchange Act")
applicable to its officers, directors and greater than ten
percent beneficial owners were complied with on a timely basis.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are Michael Tannen
and James Scibelli, who are intended to be "disinterested
persons" within the meaning of Rule 16b-3(c)(2)(i) promulgated
under the Exchange Act and "outside directors" within the
contemplation of section 162(m)(4)(C)(i) of the Internal Revenue
Code of 1986, as amended.

88

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth certain information as of
December 12, 1996 (except as otherwise indicated) with respect to
the number of shares of Common Stock beneficially owned by each
person who is known to the Company to beneficially own more than
5% of the Common Stock, the number of shares of Common Stock
beneficially owned by each director of the Company and each
executive officer of the Company, and the number of shares of
Common Stock beneficially owned by all executive officers and
directors of the Company as a group. Except as otherwise
indicated, each such stockholder has sole voting and investment
power with respect to the shares beneficially owned by such
stockholder.

Percent of
Amount and Nature of Common Stock
Name and Address Beneficial Ownership (1) Outstanding
- ---------------- ------------------------ ------------

Gregory E. Fischbach (2)(3) 7,498,151 14.3%
One Acclaim Plaza
Glen Cove, New York 11542

James Scoroposki (3)(4) 6,877,451 13.1
One Acclaim Plaza
Glen Cove, NY 11542

TCI GameCo Holdings, Inc. (3) 4,348,795 8.8
Terrace Tower II
5619 DTC Parkway
Englewood, CO 80111

Merrill Lynch & Co., Inc. (5) 6,711,177 13.4
World Financial Center
North Tower
250 Vesey Street
New York, NY 10281

The Capital Group Companies,
Inc. (6) 2,865,800 5.8
333 South Hope Street
Los Angeles, CA 90071

Robert Holmes (7) 1,684,210 3.3
One Acclaim Plaza
Glen Cove, NY 11542

Bernard J. Fischbach (8) 287,526 *
1925 Century Park East
Suite 1260
Los Angeles, CA 90067

Robert H. Groman (9) 81,250 *
196 Peachtree Lane
Roslyn Heights, NY 11577

89

Michael Tannen (9) 76,125 *
90 Riverside Drive, #5B
New York, NY 10024

James Scibelli (10) 25,750 *
2936 Bay Drive
Merrick, NY 11566

Bruce W. Ravenel (11) 10,250 *
5750 DTC Parkway, 2nd Floor
Englewood, CO 80111

J. Mark Hattendorf -0- -0-
One Acclaim Plaza
Glen Cove, NY 11542

Anthony R. Williams (12) 397,166 *
One Acclaim Plaza
Glen Cove, NY 11542

All executive officers and
directors as a group
(10 persons) (11) (13) 16,589,051 29.1%

___________________
* Less than 1% of class.

(1) Includes shares issuable upon exercise of warrants and
options which are exercisable within the next 60 days.

(2) Includes 2,677,500 shares issuable upon exercise of warrants
and options, 36,276 shares held as co-trustee of trusts for
the benefit of Mr. Scoroposki's children and 156,276 shares
settled by Mr. Gregory Fischbach in trust for the benefit of
his children. Each of Mr. Gregory Fischbach and Mr.

Scoroposki has agreed to vote, or cause to be voted, all
shares of Common Stock beneficially owned by him in the
manner in which all shares of Common Stock beneficially
owned by the other are voted on all matters presented to a
vote of stockholders at any annual or special meeting of the
Company's stockholders.

(3) Messrs. Gregory Fischbach and Scoroposki and TCI GameCo
Holdings, Inc. ("TCI Sub"), an indirect wholly owned
subsidiary of Tele-Communications, Inc. ("TCI"), have
entered into a voting agreement pursuant to which they have
agreed to vote all shares beneficially owned by each of them
in favor of those individuals nominated by the Board of
Directors of the Company for election to the Board of
Directors at any annual or special meeting of the
stockholders of the Company at which directors are being
elected provided that, subject to certain exceptions, such
nominees include Messrs. Gregory Fischbach and Scoroposki
(or their designees or successors) and one individual
proposed by TCI Sub.

90

(4) Includes 2,677,500 shares issuable upon exercise of warrants
and options, 156,276 shares held as co-trustee of trusts for
the benefit of Mr. Gregory Fischbach's children and 36,276
shares settled by Mr. Scoroposki in trust for agreed to
vote, or cause to be voted, all shares of Common Stock
beneficially owned by him in the manner in which all shares
of Common Stock beneficially owned by the other are voted on
all matters presented to a vote of stockholders at any
annual or special meeting of the Company's stockholders.

(5) Information in respect of the beneficial owner of Merrill
Lynch & Co., Inc. ("ML&Co.") has been derived from Amendment
No. 2 to its Schedule 13-G, dated February 13, 1996, filed
on its behalf and on behalf of Merrill Lynch Group, Inc.
("ML Group"), Princeton Services, Inc, ("PSI"), Merrill
Lynch Asset Management, L.P. d/b/a Merrill Lynch Asset
Management ("MLAM") and Merrill Lynch Technology Fund, Inc.
("MLTF") with the Securities and Exchange Commission (the
"Commission"). Based solely on such Amendment No. 2 to
Schedule 13-G, ML&Co., ML Group and PSI are parent holding
companies, MLAM is a registered investment adviser and MLTF
is a registered investment company (for which MLAM acts as
investment adviser), which has an interest that relates to
greater than 5% of the Common Stock.

(6) Information in respect of the beneficial ownership of The
Capital Group Companies, Inc. has been derived from its
Schedule 13-G, dated February 6 1995, filed on its behalf
and on behalf of Capital Research and Management Company
("CRMC") with the Commission. The Company has been advised

that (a) CRMC is a registered investment adviser and an
operating subsidiary of The Capital Group Companies, Inc.,
(b) at December 31, 1994, CRMC exercised investment
discretion with respect to 2,830,000 shares of Common Stock,
which were owned by various institutional investors and (c)
CRMC has no power to direct the vote of such shares.

(7) Includes 1,342,085 shares issuable upon exercise of options.

(8) Represents 131,250 shares issuable upon exercise of options
and 156,276 shares held as co-trustee of trusts for the
benefit of Mr. Gregory Fischbach's children.

(9) Represents shares issuable upon exercise of options.

(10) Includes 18,750 shares issuable upon exercise of options.

(11) Does not include 4,348,795 shares held by TCI Sub. Mr.
Ravenel is an executive officer of TCI Internet Services,
Inc., a subsidiary of TCI and an affiliate of TCI Sub.
Includes (i) 6,250 shares issuable on exercise of options

91

and (ii) 2,000 shares held by Mr. Ravenel's wife, as to
which shares Mr. Ravenel disclaims beneficial ownership.

(12) Includes 377,166 shares issuable on exercise of options.

(13) Includes 7,387,876 shares issuable upon exercise of warrants
and options.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. James Scoroposki, an officer, director and principal
stockholder of the Company, is the sole stockholder, a director
and president of a sales representative organization selling
interactive entertainment software and a 50% stockholder, a
director and executive vice president of another sales
representative organization selling interactive entertainment
software. Such sales representative organizations act as sales
representatives for the Company, receive commissions from the
Company with respect to interactive entertainment software sold
by them and will continue to do so during the fiscal year ending
August 31, 1997. For the fiscal year ended August 31, 1996, the
commissions paid by the Company to these sales representative
organizations amounted to approximately $515,000. The agreements
between the Company and these sales representatives are on terms
that are at least as favorable to the Company as could have been
obtained from unaffiliated third parties. In addition to
representing the Company's products, these companies also
represent competitors of the Company who distribute interactive
entertainment software, and derive most of their revenue from

representing companies other than the Company.

Mr. Scoroposki is also the sole shareholder of The Crescent
Club, which provides restaurant services and related
entertainment and meeting facilities to the Company and will
continue to do so for the fiscal year ending August 31, 1997.
For the fiscal year ended August 31, 1996, payments made by the
Company to The Crescent Club amounted to approximately $83,000.

The firm of Fischbach, Perlstein, Liebermann & Yanny, of
which Bernard J. Fischbach is a partner, performs legal services
for the Company and will continue to do so for the fiscal year
ending August 31, 1997. Payments made by the Company for said
services amounted to approximately $858,000 for the fiscal year
ended August 31, 1996.

The firm of Groman, Ross & Tisman, P.C. of which Robert H.
Groman is a partner, also performs legal services for the Company
and will continue to do so for the fiscal year ending August 31,
1997. Payments made by the Company for said services amounted to
approximately $43,000 for the fiscal year ended August 31, 1996.

92

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.

(a) and (d) 1. Financial Statements:

The following Financial Statements of the Company are
included in Part II: Item 8

Reports of Independent Auditors.
Consolidated Balance Sheets ---
August 31, 1996 and 1995.
Statements of Consolidated Operations ---
Years Ended August 31, 1996, 1995 and 1994.
Statements of Consolidated Stockholders' Equity ---
Years Ended August 31, 1996, 1995 and 1994.
Statements of Consolidated Cash Flows ---
Years Ended August 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.

(a) and (d) 2. Financial Statement Schedules:

Schedule II Allowance for Returns and Discounts

All other schedules have been omitted because they are not
applicable, or not required, or because the required information
is included in the Consolidated Financial Statements or notes
thereto.

(b) Current Reports on Form 8-K:

Current Report on Form 8-K, filed August 1, 1996

(c) Exhibits:

Exhibit No. Description

3.1 Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1,
filed on April 21, 1989, as amended (Registration
Number 33-28274) (the "1989 S-1"))

3.2 Amendment to the Certificate of Incorporation of
the Company (incorporated by reference to Exhibit
3.2 to the 1989 S-1)

3.3 Amendment to the Certificate of Incorporation of
the Company (incorporated by reference to Exhibit
4(d) to the Company's Registration Statement on

93

Form S-8, filed on May 19, 1995 (Registration
Number 33-59483) (the "1995 S-8")

3.4 Amended and Restated By-Laws of the Company
(incorporated by reference to Exhibit 4(e) to the
1995 S-8)

4 Specimen form of the Company's Common Stock
certificate (incorporated by reference to Exhibit
4 to the Company's Annual Report on Form 10-K for
the year ended August 31, 1989, as amended (File
No. 0-16986) (the "1989 10-K"))

10.1(Diamond) Employment Agreement dated as of September 1, 1994
between the Company and Gregory Fischbach; Amendment
No. 1, dated as of December 8, 1996, between the
Company and Gregory Fischbach

10.2(Diamond) Employment Agreement dated as of September 1, 1994
between the Company and J. Scoroposki; Amendment
No. 1, dated as of December 8, 1996, between the
Company and James Scoroposki

10.3(Diamond) 1988 Stock Option Plan (incorporated by reference
to Exhibit 4(a) to the Company's 1995 S-8)

10.4 Revolving Credit and Security Agreement, dated as
of January 1, 1993, between the Company, Acclaim
Distribution Inc., LJN Toys, Ltd., Acclaim
Entertainment Canada, Ltd. and Arena Entertainment
Inc., as borrowers, and BNY Financial Corporation,
as lender, as amended and restated on February 28,
1995 (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for
the quarter ended February 28, 1995 (File No. 0-
16986) (the "1995 10-Q"))

10.5 Restated and Amended Factoring Agreement, dated as
of February 28, 1995, between the Company and BNY
Financial Corporation (incorporated by reference
to Exhibit 10.2 to the 1995 10-Q)

10.6* License Agreement, dated as of December 14, 1994,
by and between Sony Computer Entertainment of
America and the Company

21 Subsidiaries of Registrant

94

___________________

* Confidential treatment has been granted with respect to certain
information contained in this exhibit.

(Diamond) Management contract or compensatory plan or arrangement
required to be identified pursuant to Item 14(a)3 of this
report.

95

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

ACCLAIM ENTERTAINMENT, INC.

December 13, 1996 By Gregory Fischbach
----------------------------
Gregory Fischbach
Co-Chairman of the Board and
Chief Executive Officer

December 13, 1996 By J. Mark Hattendorf
----------------------------
J. Mark Hattendorf
Executive Vice President and
Chief Financial and Accounting
Officer

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

Gregory Fischbach Co-Chairman of the December 13, 1996
- ----------------------------- Board; Chief Executive
Gregory Fischbach Officer; President; Director

James Scoroposki Co-Chairman of the Board December 13, 1996
- ----------------------------- Executive Vice President;
James Scoroposki Treasurer; Secretary;
Director

- ----------------------------- Director December __, 1996
Robert Holmes

Bernard J. Fischbach Director December 13, 1996
- -----------------------------
Bernard J. Fischbach

Michael Tannen Director December 13, 1996
- -----------------------------
Michael Tannen

Robert Groman Director December 13, 1996
- -----------------------------
Robert Groman

James Scibelli Director December 13, 1996
- -----------------------------
James Scibelli

Bruce Ravenel Director December 13, 1996
- -----------------------------
Bruce Ravenel

96

Schedule II

ACCLAIM ENTERTAINMENT, INC.
AND SUBSIDIARIES
ALLOWANCE FOR RETURNS AND DISCOUNTS
(in 000s, except per share data)

BALANCE AT PROVISIONS FOR BALANCE AT
BEGINNING OF RETURNS AND RETURNS AND END OF
PERIOD PERIOD DISCOUNTS DISCOUNTS PERIOD
------ ------ --------- --------- ------

Year ended
August 31, 1994 $24,108 $40,015 $28,796 $35,327

Year ended
August 31, 1995 $35,327 $25,081 $40,773 $19,635

Year ended
August 31, 1996 $19,635 $214,079 $184,848 $48,866