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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

or

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

For the transition period from __________ to __________

Commission File Number 0-24363

INTERPLAY ENTERTAINMENT CORP.
(Exact name of the registrant as specified in its charter)

DELAWARE 33-0102707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

16815 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92606
(Address of principal executive offices)

(949) 553-6655
(Registrant's telephone number, including area code)

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

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

COMMON STOCK, $0.001 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 [X] No [_]

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. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]

As of June 30, 2003, the aggregate market value of voting common stock held by
non-affiliates was approximately $3,499,417 based upon the closing price of the
common stock on that date.

As of April 1, 2004, 93,855,634 shares of common stock of the Registrant were
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the issuer's 2004 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Report. Our
Form 8-K filed on February 25, 2003, and amendment to such Form 8-K filed on
February 27, 2003, are incorporated by reference into Part II, Item 9 of this
Report.





INTERPLAY ENTERTAINMENT CORP.

INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003


PAGE
----
PART I

Item 1. Business 4

Item 2. Properties 11

Item 3. Legal Proceedings 11

Item 4. Submission of Matters to a Vote of Security Holders 13

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13

Item 6. Selected Financial Data 15

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16

Item 7A. Quantitative and Qualitative Disclosure about
Market Risk 46

Item 8. Consolidated Financial Statements and Supplementary
Data 46

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 47

Item 9A Controls and Procedures 47

PART III

Item 10. Directors and Executive Officers of the Registrant 47

Item 11. Executive Compensation 47

Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 48

Item 13. Certain Relationships and Related Transactions 48

Item 14. Principal Accountant Fees and Services 48

PART IV

Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 48

Signatures 49

Exhibit Index 51


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THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
AND EXCHANGE ACT OF 1934 AND SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO THE
SAFE HARBORS CREATED THEREBY. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS
REPORT EXCEPT FOR HISTORICAL INFORMATION MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, OUR USE OF WORDS
SUCH AS "PLAN," "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND,"
"COULD," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO HELP IDENTIFY FORWARD-LOOKING STATEMENTS.
IN ADDITION, ANY STATEMENTS THAT REFER TO EXPECTATIONS, PROJECTIONS OR OTHER
CHARACTERIZATIONS OF FUTURE EVENTS OR CIRCUMSTANCES ARE FORWARD-LOOKING
STATEMENTS.

THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON CURRENT
EXPECTATIONS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AS WELL AS
CERTAIN ASSUMPTIONS. FOR EXAMPLE, ANY STATEMENTS REGARDING FUTURE CASH FLOW,
REVENUE PROJECTIONS, INCLUDING THOSE FORWARD-LOOKING STATEMENTS LOCATED IN "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", FINANCING ACTIVITIES, COST REDUCTION MEASURES, REPLACEMENT OF OUR
TERMINATED LINE OF CREDIT AND MERGERS, SALES OR ACQUISITIONS ARE FORWARD-LOOKING
STATEMENTS AND THERE CAN BE NO ASSURANCE THAT WE WILL AFFECT ANY OR ALL OF THESE
OBJECTIVES IN THE FUTURE. RISKS AND UNCERTAINTIES THAT MAY AFFECT OUR FUTURE
RESULTS ARE DISCUSSED IN MORE DETAIL IN THE SECTION TITLED "RISK FACTORS" IN
"ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."

ASSUMPTIONS RELATING TO OUR FORWARD-LOOKING STATEMENTS INVOLVE JUDGMENTS
WITH RESPECT TO, AMONG OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET
CONDITIONS, AND FUTURE BUSINESS DECISIONS, ALL OF WHICH ARE DIFFICULT OR
IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE BEYOND OUR CONTROL.
ALTHOUGH WE BELIEVE THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, OUR INDUSTRY, BUSINESS AND OPERATIONS ARE SUBJECT TO
SUBSTANTIAL RISKS, AND THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED
AS A REPRESENTATION BY MANAGEMENT THAT ANY PARTICULAR OBJECTIVE OR PLANS WILL BE
ACHIEVED. IN ADDITION, RISKS, UNCERTAINTIES AND ASSUMPTIONS CHANGE AS EVENTS OR
CIRCUMSTANCES CHANGE. WE DISCLAIM ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO
REFLECT EVENTS OR CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE FILING OF THIS
REPORT WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION OR OTHERWISE TO REVISE
OR UPDATE ANY ORAL OR WRITTEN FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM
TIME TO TIME BY US OR ON OUR BEHALF.

INTERPLAY (R), INTERPLAY PRODUCTIONS(R) AND CERTAIN OF OUR OTHER PRODUCT
NAMES AND PUBLISHING LABELS REFERRED TO IN THIS REPORT ARE OUR TRADEMARKS. THIS
REPORT ALSO CONTAINS TRADEMARKS BELONGING TO OTHERS.


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PART I

ITEM 1. BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS

Interplay Entertainment Corp., which we refer to in this Report as "we,"
"us," or "our," is a developer and publisher of interactive entertainment
software for both core gamers and the mass market. We were incorporated in the
State of California in 1982 and were reincorporated in the State of Delaware in
May 1998.

We are most widely known for our titles in the action/arcade,
adventure/role playing game ("RPG"), and strategy/puzzle categories. We have
produced titles for many of the most popular interactive entertainment software
platforms, and currently balance our publishing and distribution business by
developing interactive entertainment software for personal computers ("PCs") and
video game consoles, such as the Sony PlayStation 2 ("PS2"), Microsoft Xbox
("Xbox") and Nintendo GameCube.

We seek to publish interactive entertainment software titles that are, or
have the potential to become, franchise software titles that can be leveraged
across several releases and/or platforms, and have published many such
successful franchise titles to date, including our BALDUR'S GATE: DARK ALLIANCE
II which was a top 10 title sold through retail in the United States in January
2004, according to NPD Funworld Data.

We are a majority owned subsidiary of Titus Interactive S. A., which we
refer to as Titus. According to Titus' filings with the U.S. Securities and
Exchange Commission ("SEC"), Titus presently owns approximately 67 million
shares of common stock, which represents approximately 71% of our outstanding
common stock, our only voting security. In January 2004, Titus disclosed in
their annual report for the fiscal year ended June 30, 2003, filed with the
Autorite des Marches Financiers of France, that they were involved in litigation
with one of our former founders and officers and as a result had deposited
pursuant to a California Court Order approximately 8,679,306 shares of our
common stock held by them (representing approximately 9% of our issued and
outstanding common stock) with the court. Also disclosed was that Titus was
conducting settlement discussions at the time of the filing to resolve the
issue. To date, Titus has maintained voting control over the 8,679,306 million
shares of common stock and has not represented to us that a transfer of
beneficial ownership has occurred. Nevertheless, such transfer of shares may
occur in fiscal 2004

Our business and industry has certain risks and uncertainties. During 2003,
we continued to operate under limited cash flow from operations. We have been
operating without a credit facility since October 2001, which has adversely
affected our cash flow. We continue to review alternative sources of financing
for our business. We expect to operate under similar cash constraints during
2004. For a fuller discussion of the risk and uncertainties relating to our
financial results, our business and our industry, please see the section titled
"Risk Factors" in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

The majority of our sales and distribution is handled by Vivendi Universal
Games, Inc. ("Vivendi") in North America and select rest-of-world countries and
by Avalon Interactive Group Ltd. (formerly Virgin Interactive Entertainment
Limited), a wholly owned subsidiary of Titus, ("Avalon") in Europe, the
Commonwealth of Independent States, Africa and the Middle East and through
licensing strategies elsewhere. We also distribute our software products
directly through our websites located at www.interplay.com and
www.gamesonline.com.

In February 2003, we sold to Vivendi all future interactive entertainment
publishing rights to the HUNTER: THE RECKONING license for $15 million, payable
in installments, which was fully paid at June 30, 2003. We retain the rights to
the previously published HUNTER: THE RECKONING titles on Xbox and Nintendo
GameCube.

In May 2003, Avalon filed for a Company Voluntary Arrangement ("CVA"), a
process of reorganization, in the United Kingdom in which we participated in,
and were approved as a creditor of Avalon. As part of the Avalon CVA process, we
submitted our creditor's claim. We have received payments of approximately
$347,000 due to us as a creditor under the terms of the Avalon CVA plan. We
continue to operate under a distribution agreement with Avalon. Avalon
distributes substantially all of our titles in Europe, the Commonwealth of
Independent States, Africa, the Middle East, and select rest-of-world countries.
Avalon is current on their post-CVA payments to us. Our distribution


4



agreement with Avalon ends in February 2006. We continue to evaluate and adjust
as appropriate our claims against Avalon in the CVA process. However, the
effects of the approval of the Avalon CVA on our ability to collect amounts due
from Avalon are uncertain and consequently are fully reserved. As a result, we
cannot guarantee our ability to collect fully the debts we believe are due and
owed to us from Avalon. If Avalon is not able to continue to operate under the
new CVA, we expect Avalon to cease operations and liquidate, in which event we
will most likely not receive in full the amounts presently due us by Avalon. We
may also have to appoint another distributor or become our own distributor in
Europe and the other territories in which Avalon presently distributes our
products.

In February 2003, we amended our license agreement with the holder of the
interactive entertainment rights to DUNGEONS & DRAGONS ("D&D"). This license
allows us to publish the BALDUR'S GATE, BALDUR'S GATE: DARK ALLIANCE, and
ICEWIND DALE titles. Pursuant to this amendment, among other things, we (i)
extended the license term for approximately an additional two years to December
31, 2008 for an advance payment on future royalties of approximately $200,000
and (ii) extended our rights with respect to certain of the D&D properties. The
amendment terminated our rights to certain titles in the event we are unable to
obtain certain third-party waivers in accordance with the terms of the
amendment. We were unable to obtain the required waivers within the permitted
time period and as a result have lost rights to publish BALDUR'S GATE 3 and its
sequels on the PC. Subsequently, we relinquished the rights to publish any
future titles using the D&D license in exchange for the DARK ALLIANCE trademark.
We intend to publish future titles using the DARK ALLIANCE trademark name.

On or about February 23, 2004, we received correspondence from the holder
of the D&D license alleging that we had failed to pay royalties due under the
D&D license as of February 15, 2004. If we are unable to cure this alleged
breach of the license agreement, we may lose our remaining rights under the
license, including the rights to continued distribution of BALDUR'S GATE: DARK
ALLIANCE II. The loss of the remaining rights to distribute games created under
the D&D license could have a significant negative impact on our future operating
results.

In August 2002, we entered into a new distribution agreement with Vivendi,
an affiliate company of Universal Studios, Inc., who owns approximately 5% of
our common stock. In 2003, Vivendi's beneficial ownership in us decreased below
5%. In January 2003, we entered into an agreement with Vivendi to distribute
substantially all of our products in the following countries: Australia, New
Zealand, Korea, Taiwan, Sri Lanka, Malaysia, Philippines, Thailand, Singapore,
Hong Kong, China, Indonesia, Vietnam and India ("Select Rest-of-World
Countries").

In September 2003, we terminated our distribution agreement with Vivendi as
a result of their alleged breaches, including for non-payment of money owed to
us under the terms of this distribution agreement. In October 2003, Vivendi and
we reached a mutually agreed upon settlement and agreed to reinstate the 2002
distribution agreement. Vivendi distributed our games FALLOUT: BROTHERHOOD OF
STEEL and BALDURS GATE: DARK ALLIANCE II in North America and Asia-Pacific
(excluding Japan), and retained exclusive distribution rights in these regions
for all of our future titles through August 2005.

Based on sales and royalty statements received from Vivendi in April 2004,
we believe that Vivendi incorrectly reported gross sales of our products under
the 2002 distribution agreement as a result of its taking improper deductions
for price protections it offered its customers. Vivendi has acknowledged this
error. We currently believe the minimum amount due in additional proceeds is
approximately $66,000, which we are currently investigating.

PRODUCTS

We develop and publish interactive entertainment software titles that
provide immersive game experiences by combining advanced technology with
engaging content, vivid graphics and rich sound. We utilize the experience and
judgment of the avid gamers in our product development group to select and
produce the products we publish.

Our strategy is to invest in products for those platforms, whether PC or
video game console, that have or will have sufficient installed bases for the
investment to be economically viable. We currently develop and publish products
for the PC platform compatible with Microsoft Windows, and for video game
consoles such as the PS2, the Xbox and the Nintendo GameCube. In addition, we
anticipate continued substantial growth in the use of high-speed Internet
access, which could provide significantly expanded market potential for online
products.


5



We assess the potential acceptance and success of emerging platforms and
the anticipated continued viability of existing platforms based on many factors,
including, among others, the number of competing titles, the ratio of software
sales to hardware sales with respect to the platform, the platform's installed
base, changes in the rate of the platform's sales and the cost and timing of
development for the platform. We must continually anticipate and assess the
emergence of, and market acceptance of, new interactive entertainment hardware
platforms well in advance of the time the platform is introduced to consumers.
We are therefore required to make substantial product development and other
investments in a particular platform well in advance of the platform's
introduction. If a platform for which we develop software is not released on a
timely basis or does not attain significant market penetration, our business,
operating results and/or financial condition could be materially adversely
affected. Alternatively, if we fail to develop products for a platform that does
achieve significant market penetration then our business, operating results
and/or financial condition could also be materially adversely affected.

We have entered into license agreements with Sony Computer Entertainment,
Microsoft Corporation and Nintendo pursuant to which we have the right to
develop, sublicense, publish, and distribute products for the licensor's
respective platforms in specified territories. In certain cases, the products
are manufactured for us by the licensor. We pay the licensor a royalty or
manufacturing fee in exchange for such license and manufacturing services. Such
agreements grant the licensor certain approval rights over the products
developed for their platform, including packaging and marketing materials for
such products. There can be no assurance that we will be able to obtain future
licenses from platform companies on acceptable terms or that any existing or
future licenses will be renewed by the licensors. Our inability to obtain such
licenses or approvals could have a material adverse effect on our business,
operating results and/or financial condition. In fiscal 2003, our product
releases were for PS2, Xbox and PC. Our planned product introductions for fiscal
2004 are for the PS2, Xbox and PC. The products being developed are as follows:
a sequel to our title KINGPIN for the PC and Xbox platforms; a title based on
the FALLOUT universe for the PS2 and Xbox platforms; and a RPG for the PS2 and
Xbox platforms. We are also developing a casino game for the PS2, Xbox and PC
platforms.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

We regard our software as proprietary and rely primarily on a combination
of patent, copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights. We
own or license various copyrights and trademarks. We hold copyrights on our
products, product literature and advertising and other materials, and hold
trademark rights in our name and certain of our product names and publishing
labels. We have licensed certain products to third parties for distribution in
particular geographic markets or for particular platforms, and receive royalties
on such licenses. We also outsource some of our product development activities
to third party developers. We contractually retain all intellectual property
rights related to such projects. We also license certain products developed by
third parties and pay royalties on such products.

While we provide "shrink wrap" license agreements or limitations on use
with our software, the enforceability of such agreements or limitations is
uncertain. We are aware that unauthorized copying occurs, and if a significantly
greater amount of unauthorized copying of our interactive entertainment software
products were to occur, our operating results could be materially adversely
affected. We use copy protection on selected products and do not provide source
code to third parties unless they have signed nondisclosure agreements.

We rely on existing copyright laws to prevent the unauthorized distribution
of our software. Existing copyright laws afford only limited protection.
Policing unauthorized use of our products is difficult, and we expect software
piracy to be a persistent problem, especially in certain international markets.
Further, the laws of certain countries in which our products are or may be
distributed either do not protect our products and intellectual property rights
to the same extent as the laws of the United States or are weakly enforced.
Legal protection of our rights may be ineffective in such countries, and as we
leverage our software products using emerging technologies, such as the Internet
and on-line services, our ability to protect our intellectual property rights,
and to avoid infringing the intellectual property rights of others, becomes more
difficult. In addition, the intellectual property laws are less clear with
respect to such emerging technologies. There can be no assurance that existing
intellectual property laws will provide our products with adequate protection in
connection with such emerging technologies.

As the number of software products in the interactive entertainment
software industry increases and the features and content of these products
further overlap, interactive entertainment software developers may increasingly
become subject


6



to infringement claims. Although we take reasonable efforts to ensure that our
products do not violate the intellectual property rights of others, there can be
no assurance that claims of infringement will not be made. Any such claims, with
or without merit, can be time consuming and expensive to defend. From time to
time, we have received communications from third parties asserting that features
or content of certain of our products may infringe upon such party's
intellectual property rights. In some instances, we may need to engage in
litigation in the ordinary course of our business to defend against such claims.
There can be no assurance that existing or future infringement claims against us
will not result in costly litigation or require that we license the intellectual
property rights of third parties, either of which could have a material adverse
effect on our business, operating results and financial condition.

PRODUCT DEVELOPMENT

We develop or acquire our products from a variety of sources, including our
internal development studios and publishing relationships with leading
independent developers.

THE DEVELOPMENT PROCESS. We develop original products both internally,
using our in-house development staff, and externally, using third party software
developers working under contract with us. Producers on our internal staff
monitor the work of both inside and third party development teams through design
review, progress evaluation, milestone review, and quality assurance. In
particular, each milestone submission is thoroughly evaluated by our product
development staff to ensure compliance with the product's design specifications
and our quality standards. We enter into consulting or development agreements
with third party developers, generally on a flat-fee, work-for-hire basis or on
a royalty basis, whereby we pay development fees or royalty advances based on
the achievement of milestones. In royalty arrangements, we ultimately pay
continuation royalties to developers once our advances have been recouped. In
addition, in certain cases, we will utilize third party developers to convert
products for use with new platforms.

Our products typically have short life cycles, and we therefore depend on
the timely introduction of successful new products, including enhancements of,
or sequels to, existing products and conversions of previously released products
to additional platforms, to generate revenues to fund operations and to replace
declining revenues from existing products. The development cycle of new products
is difficult to predict, and involves a number of risks.

During the years ended December 31, 2003, 2002, and 2001, we spent $13.7
million, $16.2 million, and $20.6 million, respectively, on product research and
development activities. Those amounts represented 38%, 37%, and 36%
respectively, of net revenues in each of those periods.

INTERNAL PRODUCT DEVELOPMENT

U.S. PRODUCT DEVELOPMENT. Our internal product development group in the
United States consisted of approximately 75 people at December 31, 2003. Once we
select a design for a product, we establish a production team, development
schedule and budget for the product. Our internal development process includes
initial design and concept layout, computer graphic design, 2D and 3D artwork,
programming, prototype testing, sound engineering and quality control. The
development process for an original, internally developed product typically
takes from 12 to 24 months, and 6 to 12 months for the porting of a product to a
different technology platform. We utilize a variety of advanced hardware and
software development tools, including animation, sound compression utilities and
video compression for the production and development of our interactive
entertainment software titles. Our internal development organization is divided
into development teams, with each team assigned to a particular project. These
teams are generally led by a producer or associate producer and include game
designers, software programmers, artists, product managers and sound
technicians.

INTERNATIONAL DEVELOPMENT. In 2001, we reassigned the process for our
product development efforts in Europe from Interplay Productions Limited, our
European subsidiary, to our corporate headquarters in Irvine, California. Prior
to the reassignment, Interplay Productions Limited engaged and managed the
efforts of third party developers located in various European countries. We
currently do not have any original product under development in Europe.

EXTERNAL PRODUCT DEVELOPMENT

To expand our product offerings to include hit titles created by third
party developers and to leverage our publishing capabilities, we enter into
publishing arrangements with third party developers. In the years ended December
31, 2003,


7



2002, and 2001, approximately 0%, 67%, and 80%, respectively, of new products we
released and which we believe are or will become franchise titles were developed
by third party developers. We expect that the proportion of our new products
which are developed externally may vary significantly from period to period as
different products are released. In selecting external titles to publish, we
seek titles that combine advanced technologies with creative game design. Our
publishing agreements usually provide us with the exclusive right to distribute,
or license another party to distribute, a product on a worldwide basis
(although, in certain instances our rights are limited to a specified
territory). We typically fund external development through the payment of
advances upon the completion of milestones, which advances are credited against
future royalties based on sales of the products. Further, our publishing
arrangements typically provide us with ownership of the trademarks relating to
the product as well as exclusive rights to sequels to the product. We manage the
production of external development projects by appointing a producer from one of
our internal product development teams to oversee the development process and
work with the third party developer to design, develop and test the game. At
December 31, 2003, we had two titles being developed by third party developers.

We believe this strategy of cultivating relationships with talented third
party developers can be cost-effective and can provide an excellent source of
quality products. A number of our commercially successful products have been
developed under this strategy. However, our reliance on third party software
developers for the development of a significant number of our interactive
software entertainment products involves a number of risks. Our reliance on
third party software developers subjects us to the risks that these developers
will not supply us with high quality products in a timely manner or on
acceptable terms.

SEGMENT INFORMATION

We operate in one principal industry segment, the development, publishing
and distribution of interactive entertainment software. For information
regarding the revenues and assets associated with our geographic segments, see
Note 14 of the Notes to our Consolidated Financial Statements included elsewhere
in this Report.

We have two distributors as our two main customers: Vivendi and Avalon.
Vivendi and Avalon accounted for 82% and 12% of our net revenues in 2003,
respectively. Vivendi and Avalon have exclusive rights to distribute our product
in substantial parts of the world. If either Vivendi or Avalon fail to deliver
us the proceeds owed us from distribution or fail to effectively distribute our
products or perform under their respective distribution agreements, our business
and financial results could suffer material harm.

SALES AND DISTRIBUTION

NORTH AMERICA. In August 2002, we entered into a new distribution
arrangement with Vivendi, whereby Vivendi will distribute substantially all of
our products in North America for a period of three years as a whole and two
years with respect to each product providing for a potential maximum term of
five years. Under this distribution agreement, Vivendi will pay us sales
proceeds less amounts for distribution fees. Vivendi is responsible for all
manufacturing, marketing and distribution expenditures, and bears all credit,
price concessions and inventory risk, including product returns. Upon our
delivery of a product gold master, Vivendi will pay us a non-refundable minimum
guarantee which represents a specified percent of the estimated total amount due
to us based on projected initial shipment sales. Payments for sales that exceed
the projected initial shipment sales are paid on a monthly basis as sales occur.
We also continue to distribute products directly to end-users who can order
products by using a toll-free number or by accessing our web sites.

Vivendi provides terms of sale comparable to competitors in our industry.
In addition, we provide technical support for our products in North America
through our customer support and we provide a 90-day limited warranty to
end-users that our products will be free from manufacturing defects. In the
event of any manufacturing defects Vivendi provides us with the replacement
product free of charge. While to date we have not experienced any material
warranty claims, there can be no assurance that we will not experience material
warranty claims in the future.

INTERNATIONAL. Since February 1999, we have been operating under a
distribution agreement with Avalon, pursuant to which Avalon distributes
substantially all of our titles in Europe, the Commonwealth of Independent
States, Africa and the Middle East for a seven-year period. Under this
agreement, Avalon earns a distribution fee for its marketing and distribution of
our products, and we reimburse Avalon for certain direct costs and expenses.


8



In January 2003, we entered into an agreement with Vivendi to distribute
substantially all of our products in Select Rest-of-World Countries.

INTERPLAY OEM. Our wholly owned subsidiary, Interplay OEM, Inc. distributes
our interactive entertainment software titles, as well as those of other
software publishers, to computer and peripheral device manufacturers for use in
bundling arrangements. As a result of changes in market conditions for bundling
arrangements and the limited amount of resources we have available, we no longer
have any personnel applying their efforts towards bundling arrangements. In
December 2002, we assigned our original equipment manufacturer, or OEM,
distribution rights to Vivendi and will utilize Vivendi's resources in our
future OEM business. Under OEM arrangements, one or more software titles, which
are either limited-feature versions or the retail version of a game, are bundled
with computer or peripheral devices and are sold by an original equipment
manufacturer so that the purchaser of the hardware device obtains the software
as part of the hardware purchase. Although it is customary for OEM customers to
pay a lower per unit price on sales through OEM bundling contracts, such
arrangements involve a high unit volume commitment. Interplay OEM net revenues
generally are incremental net revenues to our business and do not have
significant additional product development or sales and marketing costs.

Our North American and International ultimate distribution channels are
characterized by continuous change, including consolidation, financial
difficulties of certain retailers, and the emergence of new distributors and new
retail channels such as warehouse chains, mass merchants, computer superstores
and Internet commerce sites. Under the terms of some of our distribution
agreements, excluding Vivendi in North America, we are exposed to the risk of
product returns, and markdown allowances by our distributors. Under the same
distribution agreements, we allow our distributors to return defective,
shelf-worn and damaged products in accordance with negotiated terms. We also
offer a 90-day limited warranty to our end users that our products will be free
from manufacturing defects. In addition, our distributors provide markdown
allowances, which consist of credits given to resellers to induce them to lower
the retail sales price of certain of our products to increase sell through and
to help the reseller manage its inventory levels. Although we maintain a reserve
for returns and markdown allowances, and although we manage our returns and
markdown allowances through an authorization procedure with our distributors,
our distributors could be forced to accept substantial product returns and
provide markdown allowances to maintain their access to certain distribution
channels. Our reserve for estimated returns, exchanges, markdowns, price
concessions, and warranty costs was $0.4 million and $1.1 million at December
31, 2003, and 2002 respectively. Product returns and markdown allowances that
exceed our reserves, if any, could have a material adverse effect on our
business, operating results and financial condition.

MARKETING

Our marketing department assists our distributors in the development and
implementation of marketing programs and campaigns for each of our titles and
product groups. Our distributors' marketing activities in preparation for a
product launch include print advertising, game reviews in consumer and trade
publications, retail in-store promotions, attendance at trade shows and public
relations. Our distributors also send direct and electronic mail promotional
materials to our database of gamers and may selectively use radio and television
advertisements in connection with the introduction of certain of our products.
Our distributors budget a portion of each product's sales for cooperative
advertising and market development funds with retailers. Every title and brand
is to be launched with a multi-tiered marketing campaign that is developed on an
individual basis to promote product awareness and customer pre-orders.

Our distributors engage in on-line marketing through Internet advertising.
We maintain several Internet web sites. These web sites provide news and
information of interest to our customers through free demonstration versions of
games, contests, games, tournaments and promotions. Also, to generate interest
in new product introductions, we provide free demonstration versions of upcoming
titles through magazines and game samples that consumers can download from our
web site. In addition, through our marketing department, we host on-line events
and maintain various message boards to keep customers informed on shipped and
upcoming titles.

COMPETITION

The interactive entertainment software industry is intensely competitive
and is characterized by the frequent introduction of new hardware systems and
software products. Our competitors vary in size from small companies to very
large corporations with significantly greater financial, marketing and product
development resources than ours.


9



Due to these greater resources, certain of our competitors are able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies, pay
higher fees to licensors of desirable motion picture, television, sports and
character properties and pay more to third party software developers than us. We
believe that the principal competitive factors in the interactive entertainment
software industry include product features, brand name recognition, access to
distribution channels, quality, ease of use, price, marketing support and
quality of customer service.

We compete primarily with other publishers of PC and video game console
interactive entertainment software. Significant competitors include Acclaim
Entertainment, Activision, Atari, Capcom, Eidos, Electronic Arts, Konami, Lucas
Arts, Midway, Namco, Sega, Take-Two Interactive, THQ, Ubi Soft. and Vivendi. In
addition, integrated video game console hardware/software companies such as Sony
Computer Entertainment, Microsoft Corporation, and Nintendo compete directly
with us in the development of software titles for their respective platforms.
Large diversified entertainment companies, such as The Walt Disney Company and
Time Warner Inc., many of which own substantial libraries of available content
and have substantially greater financial resources than us, may decide to
compete directly with us or to enter into exclusive relationships with our
competitors.

CONCENTRATION

For the years ended December 31, 2003, 2002 and 2001, Avalon accounted for
approximately 12%, 11% and 22%, respectively, of net revenues. Vivendi accounted
for 82%, 71%, and 17% of net revenues in the year ended December 31, 2003, 2002
and 2001, respectively.

Retailers of our products typically have a limited amount of shelf space
and promotional resources. Consequently, there is intense competition among
consumer software producers, and in particular interactive entertainment
software producers, for high quality retail shelf space and promotional support
from retailers. If the number of consumer software products and computer
platforms increase, competition for shelf space will intensify which may require
us to increase our marketing expenditures. This increased demand for limited
shelf space, places retailers and distributors in an increasingly better
position to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return policies. As our
products constitute a relatively small percentage of any retailer's sales
volume, there can be no assurance that retailers will continue to purchase our
products or provide our products with adequate shelf space and promotional
support. A prolonged failure by retailers to provide shelf space and promotional
support would have a material adverse effect on our business, operating results
and financial condition

SEASONALITY

The interactive entertainment software industry is highly seasonal as a
whole, with the highest levels of consumer demand occurring during the year-end
holiday buying season. As a result, our net revenues, gross profits and
operating income have historically been highest during the second half of the
year. Our business and financial results may be affected by the timing of our
introduction of new releases.

MANUFACTURING

Our PC-based products consist primarily of CD-ROMs and DVDs, manuals, and
packaging materials. Substantially all of our CD-ROM and DVD duplication is
performed by third parties through our distributors. Printing of manuals and
packaging materials, manufacturing of related materials and assembly of
completed packages are performed to our specifications by third parties. To
date, our distributors have not experienced any material difficulties or delays
in the manufacture and assembly of our CD-ROM and DVD based products, and our
distributors have not experienced significant returns due to manufacturing
defects.

Sony Computer Entertainment, Microsoft Corporation and Nintendo manufacture
and ship finished products that are compatible with their video game consoles to
our distributors for distribution. PS2, Xbox and GameCube products consist of
the game disks and include manuals and packaging and are typically delivered
within a relatively short lead-time. If we experience unanticipated delays in
the delivery of manufactured software products by our third party manufactures,
our net sales and operating results could be materially adversely affected.


10



BACKLOG

We typically do not carry large inventories because most of our sales and
distribution efforts are handled by Vivendi and Avalon under the terms of our
respective distribution agreements with them. To the extent we ship items, we
typically ship orders immediately upon receipt. To the extent we have any
backlog orders, we do not believe they would have a material adverse effect on
our business.

EMPLOYEES

As of December 31, 2003, we had 113 employees, including 75 in product
development, 3 in sales and marketing and 33 in finance, general and
administrative. We also retain independent contractors to provide certain
services, primarily in connection with our product development activities.
Neither we nor our full time employees are subject to any collective bargaining
agreements and we believe that our relations with our employees are good.

From time to time, we have retained actors and/or "voice over" talent to
perform in certain of our products, and we expect to continue this practice in
the future. These performers are typically members of the Screen Actors Guild or
other performers' guilds, which guilds have established collective bargaining
agreements governing their members' participation in interactive media projects.
We may be required to become subject to one or more of these collective
bargaining agreements in order to engage the services of these performers in
connection with future development projects.

ADDITIONAL INFORMATION

We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any documents we file at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that
contains annual, quarterly and current reports, proxy statements and other
information that issuers (including us) file electronically with the SEC.

We make available free of charge, through a direct link from our website at
www.interplay.com (by going to "Investor Relations") to the SEC's website, our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to the
Securities and Exchange Act of 1934 as soon as reasonably practicable after such
documents are electronically filed with, or furnished to, the SEC.

ITEM 2. PROPERTIES

Our headquarters are located in Irvine, California, where we lease
approximately 81,000 square feet of office space. This lease expires in June
2006 and provides us with one five year option to extend the term of the lease
and expansion rights, on an "as available basis," to approximately double the
size of the office space. We have subleased approximately 6,000 square feet of
office space and may sublease an additional 21,000 of office space. We believe
that our facilities are adequate for our current needs and that suitable
additional or substitute space will be available in the future to accommodate
potential expansion of our operations. As of April 1, 2004, we were currently
three months in arrears on the rent obligations for our corporate lease in
Irvine, California. On April 9, 2004, our lessor served us with a Three-Day
Notice to Pay Rent or Surrender Possession. If we are unable to pay our rent, we
may lose our office space, which would interrupt our operations and cause
substantial harm to our business.

ITEM 3. LEGAL PROCEEDINGS

We are occasionally involved in various legal proceedings, claims and
litigation arising in the ordinary course of business, including disputes
arising over the ownership of intellectual property rights and collection
matters. We do not believe the outcome of such routine claims will have a
material adverse effect on our business, financial condition or results of
operations. From time to time, we may also be engaged in legal proceedings
arising outside of the ordinary course of our business.


11



On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a $98.8
million complaint for damages against Atari Interactive, Inc. (formerly known as
Infogrames Interactive, Inc.) and other Atari Interactive affiliates as well as
our subsidiary GamesOnline.com, Inc., alleging, among other things, breach of
contract, misappropriation of trade secrets, breach of fiduciary duties and
breach of implied covenant of good faith in connection with an electronic
distribution agreement dated November 2001 between KBK and GamesOnline.com, Inc.
KBK has alleged that GamesOnline.com failed to timely deliver to KBK assets to a
product, and that it improperly disclosed confidential information about KBK to
Atari. KBK amended its complaint to add us as a separate defendant. We
counterclaimed against KBK and also against Atari Interactive for breach of
contract, among other claims. We believe this complaint is without merit and
will vigorously defend our position.

On November 25, 2002, Special Situations Fund III, Special Situations
Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special
Situations Technology Fund, L.P. (collectively, "Special Situations") initiated
legal proceedings against us seeking damages of approximately $1.3 million,
alleging, among other things, that we failed to secure a timely effective date
for a Registration Statement for our shares purchased by Special Situations
under a common stock subscription agreement dated March 29, 2001 and that we are
therefore liable to pay Special Situations $1.3 million. This matter was settled
and the case dismissed in December 2003.

In August 2003, we sent several notifications to Vivendi alleging that
Vivendi failed to perform in accordance with the distribution agreement,
including for the non-payment of money owed us. In September 2003, we terminated
the distribution agreement with Vivendi as a result of its alleged breaches.
Following the termination, Vivendi filed suit against us in the Superior Court
for the State of California, Los Angeles County, in an attempt to have the
license reinstated. In October 2003, Vivendi and we reached a mutually agreed
upon settlement and agreed to reinstate the 2002 distribution agreement. Under
the settlement, Vivendi resumed distribution of our products and will continue
distributing our titles through August 2005.

On September 19, 2003, we commenced a wrongful termination and breach of
contract action against Atari Interactive, Inc. and Atari, Inc. in New York
State Supreme Court, New York County. We sought, among other things, a judgment
declaring that a computer game license agreement between us and Atari
Interactive continues to be in full force and effect. On September 23, 2003, we
obtained a preliminary injunction that prevented termination of the computer
game license agreement. Atari Interactive answered the complaint, denying all
claims, asserting several affirmative defenses and counterclaims for breach of
contract and one counterclaim for a judgment declaring the computer game license
agreement terminated. Both sides sought damages in an amount to be determined at
trial. We, Atari Interactive and Atari, Inc. reached an agreement with respect
to the scope and terms of the computer game license agreement. The parties filed
with the court a Stipulation of Dismissal, dated December 22, 2003. The court
ordered dismissal of the matter on January 6, 2004.

On or about October 9, 2003, Warner Brothers Entertainment, Inc. ("Warner")
filed suit against us in the Superior Court for the State of California, County
of Orange, alleging default on an Amended and Restated Secured Convertible
Promissory Note held by Warner dated April 30, 2002, with an original principal
sum of $2.0 million. At the time the suit was filed, the current remaining
principal sum due under the note was $1.4 million in principal and interest.
Subsequently, we entered into a settlement agreement with Warner. We are
currently in default of the settlement agreement with Warner and have entered
into a payment plan, of which we are in default, for the balance of the $0.32
million owed payable in one remaining installment.

In March 2004, we instituted litigation in the Superior Court for the State
of California, Los Angeles County, against Battleborne Entertainment, Inc.
("Battleborne"). Battleborne was developing a console product for us tentatively
titled AIRBORNE: LIBERATION. Our complaint alleges that Battleborne repudiated
the contract with us and subsequently renamed the product and entered into a
development agreement with a different publisher. We are currently seeking a
declaration from the court that we retain rights to the product or damages.

On or about April 16, 2004, Arden Realty Finance IV LLC filed an unlawful
detainer action against us in the Superior Court for the State of California,
County of Orange, alleging our default under our corporate lease agreement. At
the time the suit was filed, the alleged outstanding rent totaled $431,823. If
we are unable to satisfy this obligation and reach an agreement with our
landlord, we could forfeit our lease, which would materially disrupt our
operations and cause substantial harm to our business.

On or about April 19, 2004, Bioware Corporation filed a breach of contract
action against us in the Superior Court for the State of California, County of
Orange, alleging failure to pay royalties when due. At the time of filing,
Bioware alleged that it was owed approximately $156,000 under various agreements
for which it secured a writ of attachment over our assets. If Bioware executes
the writ, it will negatively affect our cash flow, which could further restrict
our operations.


12



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

On December 18, 2003, we held our annual stockholders' meeting. There were
93,855,634 shares of common stock outstanding entitled to vote and a total of
82,704,487 shares (88.1%) were represented at the meeting in person or by proxy.
The following summarizes the voting results of proposals submitted to our
stockholders.

1. Proposal to elect directors, each for a term extending until the next
annual meeting of stockholders or until their successors are duly elected
and qualified.

FOR WITHHELD
--- --------
Herve Caen............................................ 82,104,025 600,462
Nathan Peck........................................... 82,095,025 609,462
Michel Welter......................................... 82,107,625 596,892
Gerald DeCiccio....................................... 82,097,225 607,262
Eric Caen............................................. 82,096,025 608,462
Michel H. Vulpillat................................... 82,105,075 599,412
Robert Stefanovich.................................... 82,117,525 586,962

2. Proposal to amend the Company's Amended and Restated Certificate of
Incorporation to increase the authorized shares of our common stock by
50,000,000 shares from 100,000,000 authorized shares to a total of
150,000,000 authorized shares.

FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
81,876,729 820,558 7,200 -0-

Based on stockholder approval of this proposal, on January 21, 2004, we filed
the certificate of amendment to increase our authorized shares of common stock
by 50,000,000 shares for a total of 150,000,000 authorized shares with the State
of Delaware.


PART II

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

On May 16, 2002, the listing of our common stock was moved from the Nasdaq
National Market System to the Nasdaq SmallCap Market System. On October 9, 2002,
our common stock was delisted and began being quoted on the NASD-operated
Over-the-Counter Bulletin Board. Our common stock is currently quoted on the
NASD-operated Over-the-Counter Bulletin Board under the symbol "IPLY." At
December 31, 2003, there were 145 holders of record of our common stock.

The following table sets forth the range of high and low bid prices for our
common stock for the periods indicated.

FOR THE YEAR ENDED DECEMBER 31, 2003 HIGH LOW
- ------------------------------------ ---- ---

First Quarter............................... $0.08 $0.05
Second Quarter.............................. 0.14 0.05
Third Quarter............................... 0.14 0.09
Fourth Quarter.............................. 0.12 0.07

FOR THE YEAR ENDED DECEMBER 31, 2002 HIGH LOW
- ------------------------------------ ---- ---

First Quarter............................... $0.61 $0.18
Second Quarter.............................. 0.59 0.24
Third Quarter............................... 0.41 0.12
Fourth Quarter.............................. 0.13 0.06


13



DIVIDEND POLICY

While we have never paid dividends in the past, we may decide to do in the
foreseeable future.

SECURITIES ISSUANCES

In February 2003, we issued to High Voltage Software Inc., an Illinois
corporation, 700,000 shares of our common stock as part of our development
agreement with High Voltage Software, Inc. for the game HUNTER: THE RECKONING.
The issuances of these shares are exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act"), and were made pursuant to
Regulation D of the Securities Act. Our reliance on the exemption from
registration provided by Regulation D of the Securities Act is based on High
Voltage Software's representations to us that they are an "accredited investor"
as that term is defined in Rule 501 of Regulation D and other requisite
representations. These shares were earned and accounted for in 2002.

EQUITY COMPENSATION PLANS INFORMATION

The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2003:



Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under equity
warrants and rights warrants and rights compensation plans
(excluding securities
reflected in column (a))
- --------------------------------------------------------------------------------------------------------

(a) (b) (c)
Equity compensation plans 425,985 1.95 7,614,447
approved by security
holders
Equity compensation plans 9,587,068 1.84 -
not approved by security
holders
----------------------------------------------------------------------------
Total 10,013,053 1.84 7,614,447
============================================================================



We have one stock option plan currently outstanding. Under the 1997 Stock
Incentive Plan, as amended (the "1997 Plan"), we may grant options to our
employees, consultants and directors, which generally vest from three to five
years. At our 2002 annual stockholders' meeting, our stockholders voted to
approve an amendment to the 1997 Plan to increase the number of authorized
shares of common stock available for issuance under the 1997 Plan from four
million to 10 million. Our Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan- 1991, as amended (the "1991 Plan"), and our
Incentive Stock Option and Nonqualified Stock Option Plan-1994, as amended (the
"1994 Plan"), have terminated. An aggregate of 9,050 stock options that remain
outstanding under the 1991 Plan and 1994 Plan have been transferred to our 1997
Plan.

We have treated the difference, if any, between the exercise price and the
estimated fair market value as compensation expense for financial reporting
purposes, pursuant to APB 25. Compensation expense for the vested portion
aggregated $0, $0 and $44,000 for the years ended December 31, 2003, 2002 and
2001, respectively.


14



ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended
December 31, 2003, 2002 and 2001 and the selected consolidated balance sheets
data as of December 31, 2003 and 2002 are derived from our audited consolidated
financial statements included elsewhere in this Report. The selected
consolidated statements of operations data for the years ended December 31, 2000
and 1999 and the selected consolidated balance sheets data as of December 31,
2001, 2000, and 1999 are derived from our audited consolidated financial
statements not included in this Report. Our historical results are not
necessarily indicative of the results that may be achieved for any other period.
The following data should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this Report.



YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)

STATEMENTS OF OPERATIONS DATA:
Net revenues ........................ $ 36,301 $ 43,999 $ 56,448 $ 101,426 $ 101,930
Cost of goods sold .................. 13,120 26,706 45,816 54,061 61,103
--------- --------- --------- --------- ---------
Gross profit ........................ 23,181 17,293 10,632 47,365 40,827
Operating expenses .................. 21,787 29,653 51,922 55,751 73,631
--------- --------- --------- --------- ---------
Operating (income) loss ............. 1,394 (12,360) (41,290) (8,386) (32,804)
Sale of Shiny ....................... -- 28,813 -- -- --
Other income (expense) .............. (82) (1,531) (4,526) (3,689) (3,471)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ... 1,312 14,922 (45,816) (12,075) (36,275)
Provision (benefit) for income taxes -- (225) 500 -- 5,410
--------- --------- --------- --------- ---------
Net income (loss) ................... $ 1,312 $ 15,147 $ (46,316) $ (12,075) $ (41,685)
========= ========= ========= ========= =========

Cumulative dividend on participating
preferred stock .................. $ -- $ 133 $ 966 $ 870 $ --
Accretion of warrant ................ -- -- 266 532 --
--------- --------- --------- --------- ---------
Net income (loss) available to
common stockholders .............. $ 1,312 $ 15,014 $ (47,548) $ (13,477) $ (41,685)
========= ========= ========= ========= =========
Net income (loss) per common share:
Basic .......................... $ 0.01 $ 0.18 $ (1.23) $ (0.45) $ (1.86)
Diluted ........................ $ 0.01 $ 0.16 $ (1.23) $ (0.45) $ (1.86)
Shares used in calculating net income
(loss) per common share - basic .. 93,852 83,585 38,670 30,047 22,418
Shares used in calculating net income
(loss) per common share - diluted 104,314 96,070 38,670 30,047 22,418

SELECTED OPERATING DATA:
Net revenues by geographic region:
North America .................. $ 13,541 $ 26,184 $ 34,998 $ 53,298 $ 49,443
International .................. 6,484 5,674 15,451 35,077 30,310
OEM, royalty and licensing ..... 16,276 12,141 5,999 13,051 22,177
Net revenues by platform:
Personal computer .............. $ 7,671 $ 15,802 $ 34,912 $ 73,730 $ 65,397
Video game console ............. 12,354 16,056 15,537 14,645 14,356
OEM, royalty and licensing ..... 16,276 12,141 5,999 13,051 22,177




DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)

BALANCE SHEETS DATA:
Working capital (deficiency) ........ $ (14,750) $ (17,060) $ (34,169) $ 123 $ (7,622)
Total assets ........................ 5,486 14,298 31,106 59,081 56,936
Total debt .......................... 837 2,082 4,794 25,433 19,630
Stockholders' equity (deficit) ..... (12,636) (13,930) (28,150) 6,398 (2,071)



15



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

You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements and notes thereto and other information
included or incorporated by reference herein.

EXECUTIVE OVERVIEW AND SUMMARY

Interplay Entertainment Corp. is a developer and publisher of interactive
entertainment software. We are known for our titles in the action/arcade,
adventure/role playing game ("RPG") and strategy/puzzle categories. We publish
titles for many popular interactive entertainment software platforms, including
for PC's and video game consoles such as PS2, Xbox, and Nintendo GameCube.
According to NPD Funworld data in January 2004, our BALDUR'S GATE: DARK ALLIANCE
II was in the top 10 of video games sold through retail in the United States.
All of our employees are located at our corporate headquarters in Irvine,
California.

During 2003, we continued to operate under limited cash flow from
operations. In February 2003, we sold all of our future interactive
entertainment publishing rights, to HUNTER: THE RECKONING for $15 million.
However, we retain the rights to the previously published HUNTER: THE RECKONING
titles on Xbox and Nintendo GameCube. We also sold the rights to GALLEON to a
third party publisher.

We also significantly reduced our operational costs and personnel in 2003.
We reduced our personnel by 94, from 207 in December 2002 to 113 in December
2003 by both involuntary termination and attrition. We also made reductions in
expenditures in other non-essential operational areas. As a result of these
cost-cutting measures, our ongoing cash needs to fund operations has been
greatly reduced for 2004. In 2003, we also greatly reduced our liabilities to
creditors by $10.1 million from $28.2 million at December 31, 2002 to $18.1
million at December 31, 2003.

Due in part to these cost-cutting measures and sales of certain titles, we
recorded operating income of $1.4 million for our fiscal year ended December 31,
2003 compared to $12.4 million operating loss for our fiscal year ended December
31, 2002. We achieved a net income of $1.3 million for our fiscal year ended
December 31, 2003 as compared to a net income of $15.1 million for our fiscal
year end December 31, 2002. Our net income achieved in fiscal 2003 was due in
large part to the sale of HUNTER: THE RECKONING license in February 2003 for $15
million. Our net income achieved in fiscal 2002 was due in large part to the
sale of our subsidiary Shiny Entertainment, Inc. in April 2002 for $47.2
million. Prior to that, we had $46.3 million in net losses for our fiscal year
end December 31, 2001.

We have been operating without a credit facility since October 2001, which
has adversely affected our cash flow. We continue to face difficulties in paying
our vendors and have pending lawsuits as a result of our continuing cash flow
difficulties. We expect to continue to operate under cash constraints during
2004.

The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
consolidated financial statements do not purport to represent realizable or
settlement values. The Report of our Independent Auditors for the year ended
December 31, 2003 consolidated financial statements includes an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern.

We derive net revenues primarily from sales of software products to our two
main distributors, Vivendi and Avalon. Vivendi and Avalon accounted for 82% and
12%, respectively of our net revenues in 2003. Vivendi distributes our products
in North America and Select Rest-of-World Countries. Vivendi also handles our
OEM distribution. Our distribution agreement with Vivendi expires in August
2005. Avalon distributes our products in Europe, the commonwealth of Independent
States, Africa and the Middle East. Our distribution agreement with Avalon ends
in February 2006. Upon expiration or termination of the Vivendi and Avalon
distribution agreements we will need to either renew the distribution
agreements, find new distribution partners, or resume distribution ourselves.


16



In addition, we derive royalty-based revenues from licensing arrangements
of intellectual property and products to third parties for distribution in
markets and through channels that are outside of our primary focus. We also
distribute products through our GamesOnline.com subsidiary over the Internet and
on our website.

Our products are either designed and created by our employees or by
external software developers. When we use external developers, we typically
advance development funds to the developers in installment payments based upon
the completion of certain milestones. These advances are typically considered
advances against future royalties, which are to be recouped against these
advances. We currently have one product in development with external developers.
We plan on creating additional products through external developers. We
currently have the capability of internally developing two games simultaneously.

Once we complete development of a product we create a product gold master
("gold master"). Under the terms of our distribution agreement with Vivendi,
once we deliver the gold master, Vivendi will pay us a non-refundable minimum
guarantee equal to an agreed upon percent of the projected initial shipment
sales. We are also entitled to receive from Vivendi additional payments based on
future sales that exceed the minimum guarantee. These additional payments are
paid to us on a monthly basis. Vivendi is responsible for all manufacturing,
marketing, and distribution expenditures, and bears all credit, price
concessions and inventory risk, including product returns.

Based on sales and royalty statements received from Vivendi, in April 2004
we believe that Vivendi incorrectly reported gross sales of our products under
the 2002 distribution Agreement as a result of its taking improper deductions
for price protections it offered its customers. Vivendi has acknowledged this
error. We currently believe the minimum amount due in additional proceeds is
approximately $66,000, which we are currently investigating.

In October 2003, Vivendi Universal S.A. and General Electric Company
announced the signing of a definitive agreement under which NBC will be merged
with Vivendi Universal. Our distribution agreement is with Vivendi Universal
Games, a subsidiary of the parent company Vivendi Universal S.A. and not Vivendi
Universal. We believe Vivendi Universal Games is not currently expected to be a
part of this merger. Consequently, we do not expect that this anticipated merger
will have a material impact on our distributor relationship with Vivendi
Universal Games. In addition as a result of this merger, we expect General
Electric Company to become a beneficial owner of the shares held by Universal
Studios.

Our wholly owned subsidiary, Interplay OEM, distributed our interactive
entertainment software titles, as well as those of other software publishers, to
computer and peripheral device manufacturers for use in bundling arrangements.
As a result of changes in the market conditions for bundling arrangements and
the limited amount of resources we have available, we no longer have any
personnel applying their efforts towards bundling arrangements. In December
2002, we licensed our OEM distribution rights to Vivendi and will utilize
Vivendi's resources in our future OEM business. This agreement expires August
2005.

Under the terms of our International Distribution Agreement with Avalon
once we complete the product gold master Avalon markets, sells, and distributes
the product for a specified percentage of net sales. We are responsible for all
manufacturing costs and bear all inventory, price concession, and credit risk,
including product returns. Avalon may manufacture inventory on our behalf under
prior authorization from us. Under the terms of our distribution agreement with
Avalon, once we complete the gold master Avalon markets, sells, and distributes
the product for a specified percent of net sales.

In February 2003, Avalon Interactive UK Ltd. (formerly named Virgin
Interactive Entertainment (Europe) Limited) ("Avalon Europe"), the operating
subsidiary of Avalon, filed for a CVA, a process of reorganization in the United
Kingdom. We are not creditors of Avalon Europe. In May 2003, Avalon filed for a
CVA in the United Kingdom in which we participated in, and were approved as a
creditor of Avalon. As part of the Avalon CVA process, we submitted our
creditor's claim. We have received payments of approximately $347,000 due to us
as a creditor under the terms of the Avalon CVA plan. We continue to operate
under a distribution agreement with Avalon. Avalon distributes substantially all
of our titles in Europe, the Commonwealth of Independent States, Africa, the
Middle East, and certain other select countries. Avalon is current on their
post-CVA payments to us. Our distribution agreement with Avalon ends in February
2006. We continue to evaluate and adjust as appropriate our claims against
Avalon in the CVA process. However, the effects of the approval of the Avalon
CVA and of the approval of the CVA of its operating subsidiary


17



Avalon Europe on our ability to collect amounts due from Avalon are uncertain
and consequently are fully reserved. As a result, we cannot guarantee our
ability to collect fully the debts we believe are due and owed to us from
Avalon. If Avalon is not able to continue to operate under the new CVA, we
expect Avalon to cease operations and liquidate, in which event we will most
likely not receive in full the amounts presently due us by Avalon. We may also
have to appoint another distributor or become our own distributor in Europe and
the other territories in which Avalon presently distributes our products.

In February 2003, we amended our license agreement with the holder of the
interactive entertainment rights to D&D. This license allows us to publish the
BALDUR'S GATE, BALDUR'S GATE: DARK ALLIANCE, and ICEWIND DALE titles. Pursuant
to this amendment, among other things, we (i) extended the license term for
approximately an additional two years to December 31, 2008 for an advance
payment on future royalties of approximately $200,000 and (ii) extended our
rights with respect to certain of the D&D properties. The amendment terminated
our rights to certain titles in the event we are unable to obtain certain
third-party waivers in accordance with the terms of the amendment.

We were unable to obtain the required waivers within the permitted time
period and as a result have lost rights to publish BALDUR'S GATE 3 and its
sequels on the PC. We historically invested in platforms such as the PC and
consoles such as the PlayStation and Nintendo 64, which was important
strategically in positioning us for the current generation platforms such as the
PS2, Xbox, and Nintendo GameCube. During fiscal years 2003, 2002, and 2001, the
video and computer games industry has experienced a platform transition from the
PC and PlayStation to the current generation platforms PS2, Xbox, and Nintendo
GameCube. The transition to the current generation systems was initiated by the
launch of Sony's PS2 in fiscal 2001, and continued with the launches of the
Nintendo GameCube and Microsoft's Xbox in fiscal 2002. As the market continues
to shift to the current generation systems, our sales of PC based products have
been declining. We expect this decline to continue in fiscal 2004. As a result,
we do not anticipate that losing the rights to publish BALDUR'S GATE 3 and its
sequels on the PC will have a significant impact on our future operating
results.

Subsequently, we also relinquished the rights to publish any future titles
using the D&D license in exchange for the continued rights to publish our DARK
ALLIANCE titles on console platforms such as the Xbox and PS2. As part of this
exchange, we secured ownership to the DARK ALLIANCE trademark. As a result of
securing the DARK ALLIANCE trademark we no longer pay licensing royalties on
this trademark. We do not anticipate the loss of the rights to publish future
titles using the D&D license will have a significant impact on our future
operating results. We intend to publish future DARK ALLIANCE titles on the PS2
and Xbox platforms.

On or about February 23, 2004, we received correspondence from the holder
of the D&D license alleging that we had failed to pay royalties due under the
D&D license as of February 15, 2004. If we are unable to cure this alleged
breach of the license agreement, we may lose our remaining rights under the
license, including the rights to continued distribution of BALDUR'S GATE: DARK
ALLIANCE II. The loss of the remaining rights to distribute games created under
the D&D license could have a significant negative impact on future operating
results.

The table below shows the number of titles on individual platforms we
released in 2003 and our estimated number of title releases on individual
platforms in 2004. We currently have the capability of working on two
simultaneous internal projects. The increased number of titles in future years
will be a combination of growing our internal development capacity and enlisting
additional outside developers. The number of future releases is contingent upon
our ability to continue as a going concern and also to raise additional capital
to fund the increase in titles. We expect in 2004 to have to raise capital
through sale of stock, debt financing, sale or merger of the company, the sale
of assets, the licensing of more product rights, selected distribution
agreements and/or other strategic transactions to provide us with short term
funding and potentially achieve our long term objectives. We have been able to
retain our third party developers to date, but if our current liquidity issues
continue, our future title development could be adversely affected.


Number of titles on individual platforms Year of Release
- ---------------------------------------- ---------------
6 2002
6 2003
6 2004


18



Our operating results will continue to be impacted by economic, industry
and business trends affecting the interactive entertainment industry. Our
industry is highly seasonal, with the highest levels of consumer demand
occurring during the year-end holiday buying season. We expect that with the
release of new console systems by Sony, Nintendo and Microsoft, our industry has
entered into a growth period that could be sustained for the next couple of
years.

Our operating results have fluctuated significantly in the past and likely
will fluctuate significantly in the future, both on a quarterly and an annual
basis. A number of factors may cause or contribute to such fluctuations, and
many of such factors are beyond our control.

As of December 31, 2003, we had a working capital deficit of $14.8 million,
and our cash balance was approximately $1.2 million. We anticipate our current
cash reserves, plus our expected generation of cash from existing operations
will only be sufficient to fund our anticipated expenditures into the second
quarter of fiscal 2004.

As of April 1, 2004, we were three months in arrears on the rent
obligations for our corporate lease in Irvine, California. On April 9, 2004, our
lessor served us with a Three-Day Notice to Pay Rent or Surrender Possession. If
we are unable to pay our rent, we may lose our office space, which would
interrupt our operations and cause substantial harm to our business. We have
received notice from the Internal Revenue Service ("IRS") that we owe
approximately $70,000 in payroll tax penalties. We estimate that we owe an
additional $10,000, which we have accrued in penalties for nonpayment of
approximately $99,000 in Federal and State payroll taxes, which were due on
March 31, 2004 and is still outstanding. We were unable to meet our April 15,
2004 payroll obligations to our employees. Our property, general liability,
auto, workers compensation, fiduciary liability, and employment practices
liability have been cancelled.

We are currently in default of the settlement agreement with Warner and
have entered into a payment plan, of which we are in default, for the balance of
the $0.32 million owed payable in one remaining installment. On or about
February 23, 2004, we received correspondence from Atari Interactive alleging
that Interplay had failed to pay royalties due under the D&D license as of
February 15, 2004. If we are unable to cure this alleged breach of the license
agreement, we may lose our remaining rights under the license, including the
rights to continued distribution of BALDUR'S GATE: DARK ALLIANCE II. The loss of
the remaining rights to distribute games created under the D&D license could
have a significant negative impact on our future operating results.

There can be no guarantee that we will be able to meet all contractual
obligations in the near future, including payroll obligations. We expect that we
will need to substantially reduce our working capital needs and/or raise
additional financing. If we do not receive sufficient financing we may (i)
liquidate assets, (ii) sell the company (iii) seek protection from our
creditors, and/or (iv) continue operations, but incur material harm to our
business, operations or financial conditions. However, no assurance can be given
that alternative sources of funding could be obtained on acceptable terms, or at
all. These conditions, combined with our historical operating losses and our
deficits in stockholders' equity and working capital, raise substantial doubt
about our ability to continue as a going concern.

In January 2004, Titus, our 71% majority shareholder, disclosed in their
annual report for the fiscal year ended June 30, 2003, filed with the Autorite
des Marches Financiers of France, that they were involved in a litigation with
one of our former founders and officers and as a result had deposited pursuant
to a California Court Order approximately 8,679,306 shares of our common stock
held by them (representing approximately 9% of our issued and outstanding common
stock) with the court. Also disclosed was that Titus was conducting settlement
discussions at the time of the filing to resolve the issue. To date, Titus has
maintained voting control over the 8,679,306 million shares of common stock and
has not represented to us that a transfer of beneficial ownership has occurred.
Nevertheless, such transfer of shares may occur in fiscal 2004.

MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including, among others, those related to revenue recognition, prepaid licenses
and royalties and software development costs. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in preparation of our consolidated financial statements.

REVENUE RECOGNITION

We record revenues when we deliver products to customers in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." and SEC
Staff Accounting Bulletin No. 101, Revenue Recognition.


19



Commencing in August 2001, substantially all of our sales are made by two
distributors, Vivendi, and Avalon, an affiliate of our majority shareholder
Titus. We recognize revenue from sales by distributors, net of sales
commissions, only as the distributor recognizes sales of our products to
unaffiliated third parties. For those agreements that provide the customers the
right to multiple copies of a product in exchange for guaranteed amounts, we
recognize revenue at the delivery and acceptance of the product gold master. We
recognize per copy royalties on sales that exceed the guarantee as copies are
sold.

We generally are not contractually obligated to accept returns, except for
defective, shelf-worn and damaged products. However, on a case-by-case
negotiated basis, we permit customers to return or exchange products and may
provide price concessions to our retail distribution customers on unsold or slow
moving products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," we record
revenue net of a provision for estimated returns, exchanges, markdowns, price
concessions, and warranty costs. We record such reserves based upon management's
evaluation of historical experience, current industry trends and estimated
costs. The amount of reserves ultimately required could differ materially in the
near term from the amounts provided in the accompanying consolidated financial
statements. 82 % of our revenues in fiscal 2003 were with Vivendi. Vivendi bears
the risk of returns and price concessions to our retail distribution customers
on unsold or slow moving products.

We provide customer support only via telephone and the Internet. Customer
support costs are not significant and we charge such costs to expenses as we
incur them.

We also engage in the sale of licensing rights on certain products. The
terms of the licensing rights differ, but normally include the right to develop
and distribute a product on a specific video game platform. We recognize revenue
when the rights have been transferred and no other obligations exist.

PREPAID LICENSES AND ROYALTIES

Prepaid licenses and royalties consist of license fees paid to intellectual
property rights holders for use of their trademarks or copyrights. Also included
in prepaid royalties are prepayments made to independent software developers
under developer arrangements that have alternative future uses. These payments
are contingent upon the successful completion of milestones, which generally
represent specific deliverables and advances are recoupable against future sales
based upon the contractual royalty rate. We amortize the cost of licenses,
prepaid royalties and other outside production costs to cost of goods sold over
six months commencing with the initial shipment in each region of the related
title. We amortize these amounts at a rate based upon the actual number of units
shipped with a minimum amortization of 75% in the first month of release and a
minimum of 5% for each of the next five months after release. This minimum
amortization rate reflects our typical product life cycle. Our management relies
on forecasted revenue to evaluate the future realization of prepaid royalties
and charges to cost of goods sold any amounts they deem unlikely to be fully
realized through future sales. Such costs are classified as current and non
current assets based upon estimated product release date. If actual revenue, or
revised sales forecasts, fall below the initial forecasted sales, the charge may
be larger than anticipated in any given quarter.

We evaluate the recoverability of prepaid licenses and royalties on a
product by product basis. Prepaid royalties for products that are cancelled are
expensed in the period of cancellation to cost of goods sold. In addition, a
charge to cost of sales is recorded when our forecast for a particular game
indicates that un-amortized capitalized costs exceed the net realizable value of
that asset. The net realizable value is the estimated net future proceeds from
our distributors that are reduced by previously capitalized cost and the
estimated future cost of completing the game. If a revised game sales forecast
is less than our current game sales forecast, or if actual game sales are less
than management's forecast, it is possible we could accelerate the amortization
of prepaid licenses and royalties previously capitalized. Once the charge has
been taken, that amount will not be expensed in future quarters when the product
has shipped.

During fiscal 2003 and 2002, we recorded prepaid licenses and royalties
impairment charges to cost of goods sold of $2.9 million and $4.1 million
respectively. Our prepaid royalty balances at December 31, 2003 and 2002 were
$0.2 million net of reserve and $4.1 million net of reserve respectively. Our
reserves for impaired prepaid royalty balances at December 31, 2003 and 2002
were $0.25 million and $0, respectively.


20



SOFTWARE DEVELOPMENT COSTS

Our internal research and development costs, which consist primarily of
software development costs, are expensed as incurred. Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed", provides for the
capitalization of certain software development costs incurred after
technological feasibility of the software is established or for development
costs that have alternative future uses. Under our current practice of
developing new products, the technological feasibility of the underlying
software is not established until substantially all of the product development
is complete. We have not capitalized any software development costs on internal
development projects, as the eligible costs were determined to be insignificant.

OTHER SIGNIFICANT ACCOUNTING POLICIES

Other significant accounting policies not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. The policies related to
consolidation and loss contingencies require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters are among topics currently under reexamination by
accounting standards setters and regulators. Although no specific conclusions
reached by these standard setters appear likely to cause a material change in
our accounting policies, outcomes cannot be predicted with confidence. Please
see Note 2 of the Notes to Consolidated Financial Statements, Summary of
Significant Accounting Policies, which discusses other significant accounting
policies.


21



RESULTS OF OPERATIONS

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

YEARS ENDED DECEMBER 31,
----------------------------
2003 2002 2001
---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Net revenues ............................... 100% 100% 100%
Cost of goods sold ......................... 36 61 81
---- ---- ----
Gross margin ............................... 64 39 19
Operating expenses:
Marketing and sales ................... 4 13 33
General and administrative ............ 18 17 22
Product development ................... 38 37 37
Other ................................. -- -- --
Total operating expenses .............. 60 67 92
---- ---- ----
Operating income (loss) .................... 4 (28) (73)
Other income (expense) ..................... -- 62 (8)
---- ---- ----
Income (loss) before provision
for income taxes ...................... 4 34 (81)
Provision for income taxes ................. -- -- 1
---- ---- ----
Net income (loss) .......................... 4% 34% (82)%
==== ==== ====

SELECTED OPERATING DATA:
Net revenues by segment:
North America ......................... 37% 60% 62%
International ......................... 18 13 27
OEM, royalty and licensing ............ 45 27 11
---- ---- ----
100% 100% 100%
==== ==== ====
Net revenues by platform:
Personal computer ..................... 21% 36% 62%
Video game console .................... 34 37 27
OEM, royalty and licensing ............ 45 27 11
---- ---- ----
100% 100% 100%
==== ==== ====


Geographically, our net revenues for the years ended December 31, 2003 and
2002 breakdown as follows: (in thousands)


2003 2002 Change % Change
---- ---- ------ --------
North America ................... 13,541 26,184 (12,643) (48%)
International ................... 6,484 5,674 810 14%
OEM, Royalty & Licensing ........ 16,276 12,141 4,135 34%
Net Revenues .................... 36,301 43,999 (7,698) (17%)


22



Geographically, our net revenues for the years ended December 31, 2002 and
2001 breakdown as follows: (in thousands)


2002 2001 Change % Change
---- ---- ------ --------
North America ................... 26,184 34,998 (8,814) (25%)
International ................... 5,674 15,451 (9,777) (63%)
OEM, Royalty & Licensing ........ 12,141 5,999 6,142 102%
Net Revenues .................... 43,999 56,448 (12,449) (22%)


NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES

Net revenues for the year ended December 31, 2003 were $36.3 million, a
decrease of 17% compared to the same period in 2002. This decrease resulted from
a 48% decrease in North American net revenues, offset by a 14% increase in
International net revenues and by a 34% increase in OEM, royalties and licensing
revenues. Net revenues for the year ended December 31, 2002 were $44.0 million,
a decrease of 22% compared to the same period in 2001. This decrease resulted
from a 25% decrease in North American net revenues, a 63% decrease in
International net revenues, offset by a 102% increase in OEM, royalties and
licensing revenues.

North American net revenues for the year ended December 31, 2003 were $13.5
million as compared to $26.2 million for the year ended December 31, 2002. The
decrease in North American net revenues in 2003 was mainly due to lower total
unit sales of both new release and catalog titles. Although we released or
delivered six product gold masters in each of 2003 and 2002, all six titles in
2003 were released by Vivendi, as compared to five in 2002, under the terms of
the 2002 distribution agreement, whereby Vivendi pays us a lower per unit rate
and in return assumes all credit, product return and price concession risks, as
well as being responsible for all manufacturing, marketing and distribution
expenditures. This resulted in a decrease in North American sales of $19.4
million in 2003, partially offset by a decrease in product returns and price
concessions of $6.7 million as compared to the 2002 period. Our product returns
were also lower in 2003 due primarily to the reduction in price concessions we
made in connection with our decreased catalog sales under our prior North
American Distribution Agreement we entered into with Vivendi in 2001.

We expect that our North American publishing net revenues will increase in
2004 compared to 2003, mainly due to increased unit sales on our new releases
and catalog products.

The decrease in North American net revenues in 2002 as compared to 2001 was
mainly due to lower total unit sales as a result of releasing six titles in 2002
compared to eight titles in 2001. Furthermore, the five titles released in 2002
by Vivendi were released under the terms of the new 2002 distribution agreement,
whereby Vivendi pays us a lower per unit rate and in return assumes all credit,
product return and price concession risks, as well as being responsible for all
manufacturing, marketing and distribution expenditures. This resulted in a
decrease in North American sales of $18.3 million in 2002, partially offset by a
decrease in product returns and price concessions of $9.5 million as compared to
the 2001 period. The decrease in title releases across all platforms is a result
of our continued focus on releasing fewer, higher quality titles.

International net revenues for the year ended December 31, 2003 were $6.5
million. The increase in International net revenues for the year ended December
31, 2002 was mainly due to a decrease in product returns and price concessions
of $3.1 million compared to the 2002 period and the recognition of $0.6 million
in revenues related to payments made to us by Avalon under their CVA, offset by
a decrease of both new release and catalog sales.

We expect that our International publishing net revenues will increase in
2004 as compared to 2003, mainly due to increased unit sales. Avalon our primary
international distributor is current on their post-CVA payments to us. However,
if Avalon is not able to continue its reorganization and liquidates, we may need
to obtain a new European distributor in a short amount of time. If we are not
able to engage a new distributor, it could have a material negative impact on
our European sales.

International net revenues for the year ended December 31, 2002 were $5.7
million. The decrease in International net revenues for the year ended December
31, 2002 was mainly due to the reduction in title releases during the year


23



which resulted in a $12.2 million decrease in revenue, partially offset by a
decrease in product returns and price concessions of $2.4 million compared to
the 2001 period. Our decision to reduce our product planning efforts during 2002
also contributed to the reduction of titles released in the International
markets. Furthermore, our returns as a percentage of revenue, continued to
increase as we experienced a high level of product returns and price concessions
due to certain titles not gaining broad market acceptance.

OEM, royalty and licensing net revenues for the year ended December 31,
2003 were $16.3 million, an increase of $4.1 million as compared to the same
period in 2002. The OEM business decreased $2.8 million as a result of our
efforts to focus on our core business of developing and publishing video game
titles for distribution directly to the end users and our continued focus on
video game console titles, which typically are not bundled with other products.
The year ended December 31, 2003 also included $15.0 million in revenues for the
sale of the HUNTER: THE RECKONING video game license in the first quarter of
2003. We expect that OEM, royalty and licensing net revenues in 2004 will
decrease compared to 2003 primarily due to our continued focus on our core
business of developing and publishing video game titles for distribution
directly to the end users and not having a comparable transaction as the sale of
the HUNTER: THE RECKONING license.

OEM, royalty and licensing net revenues for the year ended December 31,
2002 were $12.1 million, an increase of $6.1 million as compared to the same
period in 2001. Our OEM business decreased $1.3 million as a result of our
efforts to focus on our core business of developing and publishing video game
titles for distribution directly to end users and our continued focus on video
game console titles, which typically are not bundled with other products. The
year ended December 31, 2002 also included revenues related to the sale of
publishing rights for one of our products and the recognition of deferred
revenue for a licensing transaction. In January 2002, we sold the publishing
rights to this title to the distributor in connection with a settlement
agreement entered into with the third party developer. The settlement agreement
provided, among other things, that we assign our rights and obligations under
the product agreement to the third party distributor. As a result, we recorded
net revenues of $5.6 million in the three months ended March 31, 2002. In
February 2002, a licensing transaction we entered into in 1999 expired and we
recognized revenue of $1.2 million, the unearned portion of the minimum
guarantee.

PLATFORM NET REVENUES

Our platform net revenues for the years ended December 31, 2003 and 2002
breakdown as follows: (in thousands)

2003 2002 Change % Change
------ ------ ------ --------
Personal Computer ............... 7,671 15,802 (8,131) (52%)
Video Game Console .............. 12,354 16,056 (3,702) (23%)
OEM, Royalty & Licensing ........ 16,276 12,141 4,135 34%
Net Revenues .................... 36,301 43,999 (7,698) (17%)


PC net revenues for the year ended December 31, 2003 were $7.7 million, a
decrease of 52% compared to the same period in 2002. The decrease in PC net
revenues in 2003 was primarily due to the lower sales of our title LIONHEART in
2003 as compared to our 2002 release of ICEWIND DALE II. The decrease in PC net
revenues were further affected by a decrease in catalog sales. We expect our PC
net revenues to decrease in 2004 as compared to 2003 as we continue to focus on
video game console titles.

Our video game console net revenues decreased 23% for the year ended
December 31, 2003 compared to the same period in 2002. The decrease in video
game console net revenues was partially attributed to our releasing or
delivering five product gold masters to Vivendi, all under our 2002 distribution
agreement with them, whereby, we received a lower per unit rate in return for
Vivendi being responsible for all manufacturing, marketing, and distribution
expenditures. These five video game console titles were: RLH (Xbox), BALDUR'S
GATE: DARK ALLIANCE II (PS2), BALDUR'S GATE: DARK ALLIANCE II (Xbox), FALLOUT:
BROTHERHOOD OF STEEL (PS2) and FALLOUT: BROTHERHOOD OF STEEL (Xbox). We also
released five video game console titles in 2002 to Vivendi; however, only four
were under the 2002 distribution agreement. Furthermore, our video game console
net revenues were reduced in 2003 by not releasing BALDUR'S GATE: DARK ALLIANCE
II (PS2), BALDUR'S GATE: DARK ALLIANCE II (Xbox), FALLOUT: BROTHERHOOD OF STEEL
(PS2) and FALLOUT: BROTHERHOOD OF STEEL (Xbox) in Europe. We plan to release
these titles in Europe in the first half of 2004. Our catalog sales also
decreased in


24



2003 as compared to 2002. We expect our video game console net revenues to
increase in 2004 mainly due to an increase in unit sales as compared to 2003.

Our platform net revenues for the years ended December 31, 2002 and 2001
breakdown as follows: (in thousands)

2002 2001 Change % Change
------ ------ ------ --------
Personal Computer ............... 15,802 34,912 (19,110) (55%)
Video Game Console .............. 16,056 15,537 519 3%
OEM, Royalty & Licensing ........ 12,141 5,999 6,142 102%
Net Revenues .................... 43,999 56,448 (12,449) (22%)

PC net revenues for the year ended December 31, 2002 were $15.8 million
compared to $34.9 million for the year ended December 31, 2001, a decrease of
55%. The decrease in PC net revenues in 2002 can be attributed to our release of
only one title on PC in 2002 compared to a total of seven titles released on PC
in 2001, three of which were major titles, ICEWIND DALE: HEART OF WINTER,
FALLOUT TACTICS and BALDUR'S GATE II: THRONE OF BHAAL. In 2002, we released one
major hit title ICEWIND DALE II.

Our video game console net revenues increased 3% for the year ended
December 31, 2002 compared to the same period in 2001 due to sales generated
from the release of HUNTER: THE RECKONING (Xbox), and continued sales of
BALDUR'S GATE: DARK ALLIANCE (PlayStation 2), which was released in 2001. Our
other video game releases in 2002 included RLH (PlayStation 2), BALDUR'S GATE:
DARK ALLIANCE (Xbox), BALDUR'S GATE: DARK ALLIANCE (GameCube) and HUNTER
(GameCube). Even though we released five console titles in 2002 as compared to
three console titles in 2001, console net revenues did not increase
substantially mainly due to releasing titles under the new 2002 distribution
agreement with Vivendi, whereby, we receive a lower per unit rate and Vivendi is
responsible for all manufacturing, marketing, and distribution expenditures.

COST OF GOODS SOLD; GROSS MARGIN

Cost of goods sold related to PC and video game console net revenues
represents the manufacturing and related costs of interactive entertainment
software products, including costs of media, manuals, duplication, packaging
materials, assembly, freight and royalties paid to developers, licensors and
hardware manufacturers. For sales of titles under the new 2002 distribution
arrangement with Vivendi, our cost of goods consists of royalties paid to
developers. Cost of goods sold related to royalty-based net revenues primarily
represents third party licensing fees and royalties paid by us. Typically, cost
of goods sold as a percentage of net revenues for video game console products
are higher than cost of goods sold as a percentage of net revenues for PC based
products due to the relatively higher manufacturing and royalty costs associated
with video game console and affiliate label products. We also include in the
cost of goods sold the amortization of prepaid royalty and license fees we pay
to third party software developers. We expense prepaid royalties over a period
of six months commencing with the initial shipment of the title at a rate based
upon the numbers of units shipped. We evaluate the likelihood of future
realization of prepaid royalties and license fees quarterly, on a
product-by-product basis, and charge the cost of goods sold for any amounts that
we deem unlikely to realize through future product sales.

Our net revenues, cost of goods sold and gross margin for the years ended
December 31, 2003 and 2002 breakdown as follows: (in thousands)

2003 2002 Change % Change
------ ------ ------ --------
Net Revenues ................ 36,301 43,999 (7,698) (17%)
Cost of Goods Sold .......... 13,120 26,706 (13,586) (51%)
Gross Margin ................ 23,181 17,293 5,888 34%

Our cost of goods sold decreased 51% to $12.9 million in the year ended
December 31, 2003 compared to the same period in 2002. Furthermore, we incurred
$2.9 million of non-recurring charges related to the write-off of prepaid
royalties on titles that were cancelled or not expected to meet our desired
profit requirements as compared to $4.1 million in the 2002 period. In addition,
the decrease was mainly a result of lower product cost of goods associated with
lower


25



overall product sales. We expect our cost of goods sold to increase in 2004 as
compared to 2003 because we anticipate higher product cost of goods associated
with higher overall product sales.

Our gross margin increased to 64% in 2003 from 39% in 2002. This was due to
a decrease in our royalty expense as a result of a decrease of $1.2 million in
write-off of prepaid royalties, a decrease in our product cost of goods, a
decrease in product returns and price concessions as compared to the 2002 period
due to distributing all of our new releases in North America under the 2002
distribution agreement with Vivendi and the sale of the HUNTER: THE RECKONING
license, which yielded approximately an 80% profit margin on the sale in
February 2003. We expect our gross profit margin and gross profit to decrease in
2004 as compared to 2003 mainly due to the fact that we do not anticipate having
a comparable transaction such as the sale of the HUNTER: THE RECKONING license,
offset by the fact that we do not expect to incur any unusual product returns
and price concessions or any write-offs of prepaid royalties in 2004.

Our net revenues, cost of goods sold and gross margin for the years ended
December 31, 2002 and 2001 breakdown as follows: (in thousands)

2002 2001 Change % Change
------ ------ ------ --------
Net Revenues ................ 43,999 56,448 (12,449) (22%)
Cost of Goods Sold .......... 26,706 45,816 (19,110) (42%)
Gross Margin ................ 17,293 10,632 6,661 63%


Our cost of goods sold decreased 42% to $26.7 million in the year ended
December 31, 2002 compared to the same period in 2001. Furthermore, we incurred
$4.1 million of non-recurring charges related to the write-off of prepaid
royalties on titles that were not expected to meet our desired profit
requirements as compared to $8.1 million in the 2001 period. In addition, the
decrease was a result of distributing five titles with Vivendi under the new
2002 distribution agreement, in which the only cost of goods element we incur is
royalty expense. Under this current distribution agreement with Vivendi, Vivendi
pays us a lower per unit rate and is responsible for all manufacturing,
marketing and distribution expenditures.

Our gross margin increased to 39% in 2002 from 19% in 2001. This was due to
a decrease in our royalty expense as a result of a decrease of $4.0 million in
write-off of prepaid royalties, a decrease in our product cost of goods and a
decrease in product returns and price concessions as compared to the 2001 period
due to distributing the majority of our new releases in North America under the
new 2002 distribution agreement with Vivendi.

MARKETING AND SALES

Our marketing and sales expenses for the years ended December 31, 2003 and
2002 breakdown as follows: (in thousands)

2003 2002 Change % Change
------ ------ ------ --------
Marketing and Sales ......... 1,415 5,814 (4,399) (76%)


Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services and other related operating expenses. Marketing and sales
expenses for the year ended December 31, 2003 were $1.4 million, a 76% decrease
as compared to the 2002 period. The decrease in marketing and sales expenses is
due to a $2.3 million reduction in advertising and retail marketing support
expenditures and a decrease of $2.1 million in personnel costs and general
expenses. We expect our marketing and sales expenses to increase in 2004
compared to 2003, as we expect to increase our International sales efforts in
2004.

Our marketing and sales expenses for the years ended December 31, 2002 and
2001 breakdown as follows: (in thousands)

2002 2001 Change % Change
------ ------ ------ --------
Marketing and Sales ......... 5,814 18,697 (12,883) (69%)


26



Marketing and sales expenses for the year ended December 31, 2002 were $5.8
million, a 69% decrease as compared to the 2001 period. The decrease in
marketing and sales expenses is due to a $7.9 million reduction in advertising
and retail marketing support expenditures and a decrease of $4.5 million in
personnel costs and general expenses due to fewer product releases in 2002 and
our shift from a direct sales force for North America to a distribution
arrangement with Vivendi. Also, the decrease in marketing and sales expenses was
a result of a decrease of $0.5 million in overhead fees paid to Avalon under our
April 2001 settlement with Avalon.

GENERAL AND ADMINISTRATIVE

Our general and administrative expenses for the years ended December 31,
2003 and 2002 breakdown as follows: (in thousands)

2003 2002 Change % Change
------ ------ ------ --------
General and Administrative .......... 6,692 7,655 (963) (13%)


General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses for the
year ended December 31, 2003 were $6.7 million, a 13% decrease as compared to
the same period in 2002. The decrease is due to a $1.0 million decrease in
personnel costs and general expenses in 2003. In the 2002 period, we incurred
significant charges of $0.4 million in loan termination fees associated with the
termination of our line of credit and $0.5 million in consulting expenses
payable to Europlay 1, LLC, ("Europlay") an outside consulting firm hired in
2002 to assist us with the restructuring of the company and the sale of Shiny
Entertainment, Inc. Expense has been incurred, and will continue to be incurred,
with respect to the implementation of the requirements of the Sarbanes-Oxley Act
of 2002, in particular with respect to Section 404 requiring management to
report on, and the independent auditors to attest to, internal controls. We
expect our general and administrative expenses to remain relatively constant in
2004 compared to 2003.

Our general and administrative expenses for the years ended December 31,
2002 and 2001 breakdown as follows: (in thousands)

2002 2001 Change % Change
------ ------ ------ --------
General and Administrative ........ 7,655 12,622 (4,967) (39%)

General and administrative expenses for the year ended December 31, 2002
were $7.7 million, a 39% decrease as compared to the same period in 2001. The
decrease is due to a $4.9 million decrease in personnel costs and general
expenses. In the 2001 period, we incurred significant charges of $0.7 million
provision for the termination of a building lease in the United Kingdom and $0.5
million in legal, audit and investment banking fees and expenses incurred
principally in connection with the efforts of a proposed sale of us which was
terminated.

PRODUCT DEVELOPMENT

Our product development expenses for the years ended December 31, 2003 and
2002 breakdown as follows: (in thousands)

2003 2002 Change % Change
------ ------ ------ --------
Product Development ............... 13,680 16,184 (2,504) (16%)


We charge internal product development expenses, which consist primarily of
personnel and support costs, to operations in the period incurred. Product
development expenses for the year ended December 31, 2003 were $13.7 million, a
16% decrease as compared to the same period in 2002. This decrease was due to a
$2.5 million decrease in personnel costs as a result of a reduction in headcount
and the sale of Shiny Entertainment, Inc. in April 2002. We expect our product
development expenses to decrease in 2004 compared to 2003 as a result of
reductions of development personnel in 2003.


27



Our product development expenses for the years ended December 31, 2002 and
2001 breakdown as follows: (in thousands)

2002 2001 Change % Change
------ ------ ------ --------
Product Development ......... 16,184 20,603 (4,419) (21%)


Product development expenses for the year ended December 31, 2002 were
$16.2 million, a 21% decrease as compared to the same period in 2001. This
decrease was due to a $4.4 million decrease in development personnel costs as a
result of a reduction in headcount and the sale of Shiny Entertainment, Inc. in
April 2002.

SALE OF SHINY ENTERTAINMENT, INC.

In April 2002, we sold our subsidiary Shiny Entertainment, Inc. to
Infogrames Entertainment, Inc. for $47.2 million. We recognized a gain of $28.8
million on this sale.

OTHER EXPENSE, NET

Our other expense for the years ended December 31, 2003 and 2002 breakdown
as follows: (in thousands)

2003 2002 Change % Change
------ ------ ------ --------
Other Expense ............ 82 1,531 (1,449) (95%)


Other expense consists primarily of interest expense on our lines of credit
and foreign currency exchange transaction losses. Other expense for the year
ended December 31, 2003 was $0.1 million, a 95% decrease as compared to the same
period in 2002. The 2002 period included higher interest expense related to
higher net borrowings, a $1.8 million provision due to a delay in the
effectiveness of a registration statement in connection with our private
placement of 8,126,770 shares of common stock and a $0.9 million gain in the
settlement and termination of a building lease in the United Kingdom.

Our other expense for the years ended December 31, 2002 and 2001 breakdown
as follows: (in thousands)

2002 2001 Change % Change
------ ------ ------ --------
Other Expense ........... 1,531 4,526 (2,995) (66%)

Other expense for the year ended December 31, 2002 was $1.5 million, a 66%
decrease as compared to the same period in 2001. The decreases were due to a
reduction in interest expense related to lower net borrowings and a $0.9 million
gain in the settlement and termination of a building lease in the United
Kingdom.

PROVISION (BENEFIT) FOR INCOME TAXES

Our provision/(benefit) for income taxes for the years ended December 31,
2003 and 2002 breakdown as follows: (in thousands)

2003 2002 Change % Change
---- ---- ------ --------
Provision (Benefit) .............. 0 (225) 225 100%


We recorded no tax provision for the year ended December 31, 2003, compared
with a tax benefit of $225,000 for the year ended December 31, 2002. In June
2002, the IRS concluded their examination of our consolidated federal income tax
returns for the years ended April 30, 1992 through 1997. In fiscal 2001, we
established a reserve of $500,000, representing management's best estimate of
amounts to be paid in settlement of the IRS claims. With the executed
settlement, the actual amount owed was only $275,000. Accordingly, we adjusted
our reserve and, as a result, recognized an income tax benefit of $225,000. We
have a deferred tax asset of approximately $54.3 million that has been fully
reserved at December 31, 2003. This tax asset would reduce future provisions for
income taxes and related tax liabilities when realized, subject to limitations.


28



Our provision/(benefit) for income taxes for the years ended December 31,
2002 and 2001 breakdown as follows: (in thousands)

2002 2001 Change % Change
---- ---- ------ --------

Provision (Benefit) ............... (225) 500 (725) (145%)

We recorded a tax benefit of $0.2 million for the year ended December 31,
2002, compared with a tax provision of $0.5 million for the year ended December
31, 2001. In June 2002, the IRS concluded their examination of our consolidated
federal income tax returns for the years ended April 30, 1992 through 1997. In
fiscal 2001, we established a reserve of $500,000, representing management's
best estimate of amounts to be paid in settlement of the IRS claims. With the
executed settlement, the actual amount owed was only $275,000. Accordingly, we
adjusted our reserve and, as a result, recognized an income tax benefit of
$225,000.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2003, we had a working capital deficit of $14.8 million,
and our cash balance was $1.2 million. We anticipate our current cash reserves,
plus our expected generation of cash from existing operations will only be
sufficient to fund our anticipated expenditures into the second quarter of
fiscal 2004.

As of April 1, 2004, we were three months in arrears on the rent
obligations for our corporate lease in Irvine, California. On April 9, 2004, our
lessor served us with a Three-Day Notice to Pay Rent or Surrender Possession. If
we are unable to pay our rent, we may lose our office space, which would
interrupt our operations and cause substantial harm to our business. We have
received notice from the IRS that we owe approximately $70,000 in payroll tax
penalties. We estimate that we owe an additional $10,000, which we have accrued
in penalties for nonpayment of approximately $99,000 in Federal and State
payroll taxes, which were due on March 31, 2004 and is still outstanding. We
were unable to meet our April 15, 2004 payroll obligations to our employees. Our
property, general liability, auto, workers compensation, fiduciary liability,
and employment practices liability have been cancelled. There can be no
guarantee that we will be able to meet all contractual obligations in the near
future, including payroll obligations. We expect that we will need to
substantially reduce our working capital needs and/or raise additional
financing. If we do not receive sufficient financing we may (i) liquidate
assets, (ii) sell the company (iii) seek protection from our creditors including
the filing of voluntary bankruptcy or being the subject of involuntary
bankruptcy, and/or (iv) continue operations, but incur material harm to our
business, operations or financial conditions. However, no assurance can be given
that alternative sources of funding could be obtained on acceptable terms, or at
all. These conditions, combined with our historical operating losses and our
deficits in stockholders' equity and working capital, raise substantial doubt
about our ability to continue as a going concern.

During 2003, we continued to operate under limited cash flow from
operations. To improve our operating results, we have reduced our personnel by
94, from 207 in December 2002 to 113 in December 2003 by both involuntary
termination and attrition. We have also reviewed other operational costs and
have made reductions in expenditures in areas throughout the company.

Additionally, we have reduced our fixed overhead commitments, and cancelled
or suspended development on future titles which management believes do not meet
sufficient projected profit margins, and scaled back certain marketing programs
associated with the cancelled projects. Management will continue to pursue
various alternatives to improve future operating results and further expense
reductions.

We continue to seek external sources of funding, including but not limited
to, incurring debt, the sale of assets, the licensing of certain product rights
in selected territories, selected distribution agreements, and/or other
strategic transactions sufficient to provide short-term funding, and potentially
achieve our long-term strategic objectives.

We have been operating without a credit facility since October 2001, which
has adversely affected cash flow. We continue to face difficulties in paying our
vendors, employees, and have pending lawsuits as a result of our continuing cash
flow difficulties. We expect these difficulties to continue during 2004.

Historically, we have funded our operations primarily through the use of
lines of credit, income from operations, including royalty and distribution fee
advances, cash generated by the sale of securities, and the sale of assets.


29



Our primary capital needs have historically been to fund working capital
requirements necessary to fund our operations, the development and introduction
of products and related technologies and the acquisition or lease of equipment
and other assets used in the product development process. Our operating
activities provided cash of $2.6 million during the year ended December 31,
2003, primarily attributable to payments for accounts payable and other
liabilities, royalty liabilities and recoupment of advances received by
distributors. These uses of cash in operating activities were partially offset
by collections of accounts receivable from related parties and reductions of
inventory, which included the sales of finished goods to Vivendi.

Cash used by investing activities of $0.3 million for the year ended
December 31, 2003 consisted of normal capital expenditures, primarily for office
and computer equipment used in our operations. We do not currently have any
material commitments with respect to any future capital expenditures. Net cash
used by financing activities of $1.2 million for the year ended December 31,
2003, consisted primarily of repayments of our note payable to Warner Brothers
Entertainment, Inc.

In May 2003, Avalon filed for a CVA, a process of reorganization in the
United Kingdom. As part of the Avalon CVA process, we submitted our creditor's
claim. We have received the payments of approximately $347,000 due to us as a
creditor under the terms of the Avalon CVA plan. We continue to operate under a
distribution agreement with Avalon. Avalon distributes substantially all of our
titles in Europe, the Commonwealth of Independent States, Africa, the Middle
East, and certain other select countries. Avalon is current on their post-CVA
payments to us. Our distribution agreement with Avalon ends in February 2006. We
continue to evaluate and adjust as appropriate our claims against Avalon in the
CVA process. However, the effects of the approval of the Avalon CVA on our
ability to collect amounts due from Avalon are uncertain. As a result, we cannot
guarantee our ability to collect fully the debts we believe are due and owed to
us from Avalon. If Avalon is not able to continue to operate under the new CVA,
we expect Avalon to cease operations and liquidate, in which event we will most
likely not receive in full the amounts presently due us by Avalon. We may also
have to appoint another distributor or become our own distributor in Europe and
the other territories in which Avalon presently distributes our products.

In April 2002, we entered into a settlement agreement with the landlord of
an office facility in the United Kingdom, whereby we returned the property back
to the landlord and were released from any further lease obligations. This
settlement reduced our total contractual cash obligations by $1.3 million
through fiscal 2005.

Our main source of capital is from the release of new titles. Historically,
we have had some delays in the release of new titles and we anticipate that we
may continue to incur delays in the release of future titles. These delays can
have a negative impact on our short-term liquidity, but should not affect our
overall liquidity.

If operating revenues from product releases are not sufficient to fund our
operations, no assurance can be given that alternative sources of funding could
be obtained on acceptable terms, or at all. These conditions, combined with our
deficits in stockholders' equity and working capital, raise substantial doubt
about our ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and
liabilities that may result from the outcome of this uncertainty.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements under which we have
obligations under a guaranteed contract that has any of the characteristics
identified in paragraph 3 of FASB Interpretation No. 3 of FASB Interpretation
No. 45 "Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". We do not have any
retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or market risk
support to such entity for such assets. We also do not have any obligation,
including a contingent obligation, under a contract that would be accounted for
as a derivative instrument. We have no obligations, including a contingent
obligation arising out of a variable interest (as referenced in FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, as amended)
in an unconsolidated entity that is held by, and material to, us, where such
entity provides financing, liquidity, market risk or credit risk support to, or
engages in leasing, hedging or research and development services with us.


30



CONTRACTUAL OBLIGATIONS

The following table summarizes certain of our contractual obligations under
non-cancelable contracts and other commitments at December 31, 2003, and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods: (in thousands)

CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 - 3 3 - 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS
- --------------------------------------------------------------------------------
Developer Licensee
Commitments (1) ........... 4,607 2,262 2,345 -- --
Lease Commitments (2) ........ 3,708 1,533 2,175 -- --
Payroll Taxes (3) ............ 80 80 -- -- --
Other Commitments (4) ........ 2,603 2,097 506 -- --
------ ------ ------ ------ ------
Total ....................... 10,998 5,972 5,026 -- --


Our current cash reserves plus our expected cash from existing operations
will only be sufficient to fund our anticipated expenditures into the second
quarter of fiscal 2004. We will need to substantially reduce our working capital
needs, continue to consummate certain sales of assets and/or raise additional
financing to meet our contractual obligations.

(1) Developer/Licensee Commitments: The products produced by us are
designed and created by our employee designers and artists and by non-employee
software developers ("independent developers"). We typically advance development
funds to the independent developers during development of our games, usually in
installment payments made upon the completion of specified development
milestones, which payments are considered advances against subsequent royalties
based on the sales of the products. These terms are typically set forth in
written agreements entered into with the independent developers. In addition, we
have content license contracts that contain minimum guarantee payments and
marketing commitments that are not dependent on any deliverables. These
developer and content license commitments represent the sum of (1) minimum
marketing commitments under royalty bearing licensing agreements, and (2)
minimum payments and advances against royalties due under royalty-bearing
licenses and developer agreements.

(2) Lease Commitments: We lease certain of our current facilities and
certain equipment under non-cancelable operating lease agreements. We are
required to pay property taxes, insurance and normal maintenance costs for
certain of our facilities and will be required to pay any increases over the
base year of these expenses on the remainder of our facilities.

Our headquarters are located in Irvine, California, where we lease
approximately 81,000 square feet of office space. This lease expires in June
2006 and provides us with one five year option to extend the term of the lease
and expansion rights, on an "as available basis," to approximately double the
size of the office space. We have subleased approximately 6,000 square feet of
office space and may sublease an additional 21,000 of office space. As of April
1, 2004, we were currently three months in arrears on the rent obligations for
our corporate lease in Irvine, California. On April 9, 2004, our lessor served
us with a Three-Day Notice to Pay Rent or Surrender Possession. If we are unable
to pay our rent we may lose our office space, which would interrupt our
operations and cause substantial harm to our business.

(3) Payroll Taxes: At December 31, 2003, we have an accrual of $70,442 for
amounts related to past due interest and penalties on late payment of our
Federal payroll taxes. As of December 31, 2003, we are current on the principal
portion of our Federal payroll taxes. Additionally, in December 2003, we paid
the State of California $12,076 in penalties and interest for late payment of
payroll taxes. As of December 31, 2003, we owe no past due payroll tax
principal, penalties, or interest to the State of California. We estimate that
we owe an additional $10,000, which we have accrued in penalties for nonpayment
of approximately $99,000 in Federal and State payroll taxes, which were due on
March 31, 2004 and is still outstanding.

(4) Other Commitments: Consist of payment plans entered into with various
creditors and the amounts due under our insurance policy.


31



ACTIVITIES WITH RELATED PARTIES

It is our policy that related party transactions will be reviewed and
approved by a majority of our disinterested directors or our Independent
Committee.

Our operations involve significant transactions with our majority
stockholder Titus Interactive S.A. ("Titus") and its affiliates. We have a major
distribution agreement with Avalon, an affiliate of Titus. In addition, we have
a major distribution agreement with Vivendi whose affiliate Universal Studios,
Inc. owns less than 5% of our common stock at December 31, 2003. As a result,
Vivendi, an affiliate of Universal Studios, will no longer be considered a 5% or
more beneficial holder of our common stock and all future filings will no longer
disclose Vivendi as such. The disclosure in this section "Activities with
Related Parties" is being provided on the basis that for part of fiscal 2003
Vivendi's affiliate Universal Studios, Inc. was a 5% or more stockholder.

TRANSACTIONS WITH TITUS

Titus presently owns approximately 67 million shares of common stock, which
represents approximately 71% of our outstanding common stock, our only voting
security. In January 2004, Titus disclosed in their annual report for the fiscal
year ended June 30, 2003, filed with the Autorite des Marches Financiers of
France, that they were involved in litigation with one of our former founders
and officers and as a result had deposited pursuant to a California Court Order
approximately 8,679,306 shares of our common stock held by them (representing
approximately 9% of our issued and outstanding common stock) with the court.
Also disclosed was that Titus was conducting settlement discussions at the time
of the filing to resolve the issue. To date, Titus has maintained voting control
over the 8,679,306 million shares of common stock and has not represented to us
that a transfer of beneficial ownership has occurred. Nevertheless, such
transfer of shares may occur in fiscal 2004.

We perform certain distribution services on behalf of Titus for a fee. In
connection with such distribution services, we recognized fee income of $5,000,
$22,000, $21,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. As of December 31, 2003 and 2002, Titus and its affiliates
excluding Avalon owed us $362,000 and $200,000, respectively. We owed Titus and
its affiliates excluding Avalon $321,000 as of December 31, 2002 and $0 as of
December 31, 2003. Amounts we owed to Titus and its affiliates excluding Avalon
at December 31, 2002, and 2003 consisted primarily of trade payables.

In April 2002, we entered into an agreement with Titus, pursuant to which,
among other things, we sold to Titus all right, title and interest in the games
EARTHWORM JIM, MESSIAH, WILD 9, R/C STUNT COPTER, SACRIFICE, MDK, MDK II, and
KINGPIN, and Titus licensed from us the right to develop, publish, manufacture
and distribute the games HUNTER I, HUNTER II, ICEWIND DALE I, ICEWIND DALE II,
and BALDUR'S GATE DARK ALLIANCE II solely on Nintendo Advance GameBoy game
system for the life of the games. As consideration for these rights, Titus
issued to us a promissory note in the principal amount of $3.5 million, which
note bears interest at 6% per annum. The promissory note was due on August 31,
2002, and was to be paid, at Titus' option, in cash or in shares of Titus stock
with a per share value equal to 90% of the average trading price of Titus' stock
over the five days immediately preceding the payment date. Pursuant to an April
26, 2002 agreement with Titus, on or before July 25, 2002, we had the right to
solicit offers from and negotiate with third parties to sell certain rights and
licenses. Our efforts to enter into a binding agreement with a third party were
unsuccessful. Moreover, we provided Titus with a guarantee under this agreement,
which provides that in the event Titus did not achieve gross sales of at least
$3.5 million by June 25, 2003, and the shortfall was not the result of Titus'
failure to use best commercial efforts, we were to pay to Titus the difference
between $3.5 million and the actual gross sales achieved by Titus, not to exceed
$2 million. We entered into a rescission agreement in April 2003 with Titus to
repurchase these assets for a purchase price payable by canceling the $3.5
million promissory note, and any unpaid accrued interest thereon. Concurrently,
we terminated any executory obligations remaining, including, without
limitation, our obligation to pay Titus up to the $2 million guarantee.

Titus retained Europlay 1, LLC as outside consultants to assist with our
restructuring. This arrangement with Europlay is with Titus, however, we agreed
to reimburse Titus for consulting expenses incurred on our behalf. In connection
with the sale of Shiny Entertainment Inc., we agreed to pay Europlay directly
for their services with the proceeds received from the sale, which payment was
made to Europlay in 2002. In addition, we entered into a commission-based
agreement with Europlay to assist us with strategic transactions, such as debt
or equity financing, the


32



sale of assets or an acquisition of the company. Under this arrangement,
Europlay assisted us with the sale of Shiny. In April 2003, we paid Europlay,
$448,000 in connection with prior services provided by Europlay to us.

TRANSACTIONS WITH TITUS AFFILIATES

Transactions with Avalon, a wholly owned subsidiary of Titus

We have an International Distribution Agreement with Avalon, a wholly owned
subsidiary of Titus. Pursuant to this distribution agreement, Avalon provides
for the exclusive distribution of substantially all of our products in Europe,
Commonwealth of Independent States, Africa and the Middle East for a seven-year
period ending February 2006, cancelable under certain conditions, subject to
termination penalties and costs. Under this agreement, as amended, we pay Avalon
a distribution fee based on net sales, and Avalon provides certain market
preparation, warehousing, sales and fulfillment services on our behalf. In
September 2003, we amended this International Distribution Agreement to provide
Avalon with exclusive Australian rights to a product for $200,000. In November
2003, this amendment was rescinded and we paid Avalon a consideration of $50,000
for the rescission in addition to the refunding of the original $200,000 to
Avalon for the same rights, which rights were reinstated under the Vivendi
settlement.

In connection with this International Distribution Agreement, we incurred
distribution commission expense of $0.9 million, $0.9 million, and $2.3 million
for the years ended December 31, 2003, 2002, and 2001, respectively. In
addition, we recognized overhead fees of $0, $0.5 million, and $1.0 million and
certain minimum operating charges to Avalon of $0, $0, and $333,000 for the
years ended December 31, 2003, 2002, and 2001, respectively. Also in connection
with this International Distribution Agreement, we subleased office space from
Avalon. Rent expense paid to Avalon was $27,000, $104,000, and $104,000 for the
years ended December 31, 2003, 2002, and 2001, respectively. As of April 2003,
we no longer sublease office from Avalon.

In January 2003, we entered into a waiver with Avalon related to the
distribution of a video game title in which we sold the European distribution
rights to Vivendi. In consideration for Avalon relinquishing its rights, we paid
Avalon a $650,000 cash consideration and will pay Avalon 50% of all proceeds in
excess of the advance received from Vivendi. As of December 31, 2003, Vivendi
has not reported sales exceeding the minimum guarantee.

In May 2003, Avalon filed for a CVA, a process of reorganization in the
United Kingdom, in which we participated in, and were approved as a creditor of
Avalon. As part of the Avalon CVA process, we submitted our creditor's claim. We
have received the payments of approximately $347,000 due to us as a creditor
under the terms of the Avalon CVA plan. We continue to evaluate and adjust as
appropriate our claims against Avalon in the CVA process. However, the effects
of the approval of the Avalon CVA on our ability to collect amounts due from
Avalon are uncertain. As a result, we cannot guarantee our ability to collect
fully the debts we believe are due and owed to us from Avalon. If Avalon is not
able to continue to operate under the new CVA, we expect Avalon to cease
operations and liquidate, in which event we will most likely not receive in full
the amounts presently due us by Avalon. We may also have to appoint another
distributor or become our own distributor in Europe and the other territories in
which Avalon presently distributes our products.

In June 1997, we entered into a Development and Publishing Agreement with
Confounding Factor, a game developer, in which we agreed to commission the
development of the game GALLEON in exchange for an exclusive worldwide license
to fully exploit the game and all derivatives including all publishing and
distribution rights. Subsequently, in March 2002, we entered into a Term Sheet
with Avalon, pursuant to which Avalon assumed all responsibility for future
milestone payments to Confounding Factor to complete development of GALLEON and
Avalon acquired exclusive rights to ship the game in certain territories. Avalon
paid an initial $511,000 to Confounding Factor, but then ceased making the
required payments. While reserving our rights vis-a-vis Avalon, we then resumed
making payments to Confounding Factor to protect our interests in GALLEON. As of
March 2003, we met all of the remaining financial obligations to Confounding
Factor, however we continued to provide production assistance to the developer
in order to finalize the Xbox version of the game through December 2003. In
December 2003, we sold all rights to GALLEON to SCI Games Ltd., an affiliate of
SCi Entertainment Group of London. We paid Avalon $0.1 million representing a
portion of the proceeds relative to their contribution of development cost in
return for them relinquishing any rights to GALLEON.


33



In March 2003, we made a settlement payment of approximately $320,000 to a
third-party on behalf of Avalon Europe to protect the validity of certain of our
license rights and to avoid potential third-party liability from various
licensors of our products, and incurred legal fees in the amount of
approximately $80,000 in connection therewith. Consequently, Avalon owes us
$400,000 pursuant to the indemnification provisions of the International
Distribution Agreement. This amount was included in our claims against Avalon in
the Avalon CVA process.

We have also entered into a Product Publishing Agreement with Avalon, which
provides us with an exclusive license to publish and distribute substantially
all of Avalon's products within North America, Latin America and South America
for a royalty based on net sales. As part of terms of an April 2001 settlement
between Avalon and us, the Product Publishing Agreement was amended to provide
for us to publish only one future title developed by Avalon. In connection with
this Product Publishing Agreement with Avalon, we earned $2,000, $66,000 and
$36,000 for performing publishing and distribution services on behalf of Avalon
for the years ended December 31, 2003, 2002, and 2001, respectively.

Transactions with Titus Software

In March 2003, we entered into a note receivable with Titus Software Corp.,
("TSC"), a subsidiary of Titus, and advanced TSC $226,000. The note earns
interest at 8% per annum and was due in February 2004. In May 2003, our Board of
Directors rescinded the note receivable and demanded repayment of the $226,000
from TSC. As of the date of this filing the balance on the note with accrued
interest has not been paid. The balance on the note receivable, with accrued
interest, at December 31, 2003 was approximately $240,000. The total receivable
due from TSC is approximately $314,000 as of December 31, 2003. The majority of
the additional approximately $74,000 was due to TSC subletting office space and
miscellaneous other items.

In May 2003, we paid TSC $60,000 to cover legal fees in connection with a
lawsuit against Titus. As a result of the payment, our CEO requested that we
credit the $60,000 to amounts we owed to him arising from expenses incurred in
connection with providing services to us. Our Board of Directors is in the
process of investigating the details of the transaction, including independent
counsel review as appropriate, in order to properly record the transaction.

Transactions with Titus Japan

In June 2003, we began operating under a representation agreement with
Titus Japan K.K. ("Titus Japan"), a majority-controlled subsidiary of Titus,
pursuant to which Titus Japan represents us as an agent in regards to certain
sales transactions in Japan. This representation agreement has not yet been
approved by our Board of Directors and is currently being reviewed by them. Our
Board of Directors have approved the payments of certain amounts to Titus Japan
in connection with certain services already performed by them on our behalf. As
of December 31, 2003, we have received approximately $100,000 in revenues and
incurred approximately $20,000 in commission fees pursuant to this agreement. As
of December 31, 2003 Titus Japan owed us $6,000, which was recovered in the
first quarter of 2004.

Transactions with Titus Interactive Studio

In September 2003, we engaged the translation services of Titus Interactive
Studio, pursuant to which (i) we will first request a quote from Titus
Interactive Studio for each service needed and only if such quote compares
favorably with quotes from other companies for identical work will Titus
Interactive Studio be used, (ii) such services shall be based on work orders
submitted by us and (iii) each work order can not have a rate exceeding
$0.20/word (excluding voice over) without receiving additional prior Board of
Directors approval. We have paid approximately $11,000 to date under this
agreement.

Transactions with Titus SARL

As of December 31, 2003 we have a receivable of $42,000 for product
development services that we provided.


34



Transactions with Titus GIE

In February 2004, we engaged the services of GIE Titus Interactive Group, a
wholly owned subsidiary of Titus, for a three-month service agreement pursuant
to which GIE Titus or its agents shall provide to us certain foreign
administrative and legal services at a rate of $5,000 per month.

Transactions with Edge LLC

In September 2003, our Board of Directors ratified and approved our
engagement of Edge LLC to provide recommendations regarding the operation of our
legal department and strategies as well as interim executive functions. Mr.
Michel Vulpillat, a member of our Board of Directors, is a managing member for
Edge LLC. As of December 31, 2003, we have incurred an aggregate expense of
approximately $100,000 and had a payable of approximately $15,000 to Edge LLC.
As of March 31, 2004, we have incurred an additional aggregate expense of
approximately $50,000. Consequently, we have a payable of approximately $50,000
to Edge LLC.

TRANSACTIONS WITH VIVENDI

In August 2001, we entered into a distribution agreement with Vivendi
Universal Games, Inc. Neither Vivendi nor Universal has any representation on
our Board of Directors. This distribution agreement provided for Vivendi to
become our distributor in North America through December 31, 2003 for
substantially all of our products, with the exception of products with
pre-existing distribution agreements. OEM rights were not among the rights
granted to Vivendi under this agreement. Under the terms of this agreement, as
amended, Vivendi earns a distribution fee based on the net sales of the titles
distributed. Under this agreement, Vivendi made four advance payments to us
totaling $10.0 million. In amendments to this agreement, Vivendi agreed to
advance us an additional $3.5 million. The distribution agreement, as amended,
provides for the acceleration of the recoupment of the advances made to us, as
defined therein. During the three months ended March 31, 2002, Vivendi advanced
us an additional $3.0 million bringing the total amounts advanced to us under
the distribution agreement with Vivendi to $16.5 million. In April 2002, the
distribution agreement was further amended to provide for Vivendi to distribute
substantially all of our products through December 31, 2002, except certain
future products, which Vivendi would have the right to distribute for one year
from the date of release. As of August 1, 2002, all distribution advances
relating to the August 2001 agreement from Vivendi were fully earned or repaid.
As of December 31, 2003 this agreement has expired.

In August 2002, we entered into a new distribution agreement with Vivendi.
As of December 31, 2003, Vivendi's beneficial ownership in us decreased below
5%. Under this 2002 distribution agreement, Vivendi is to distribute
substantially all of our products in North America for a period of three years
as a whole and two years with respect to each product giving a potential maximum
term of five years. Vivendi will pay us sales proceeds less amounts for
distribution fees, price concessions and returns. Vivendi is responsible for all
manufacturing, marketing and distribution expenditures, and bears all credit,
price concessions and inventory risk, including product returns. Upon our
delivery of a product gold master, Vivendi will pay us, as a non-refundable
minimum guarantee and a specified percent of the projected amount due to us
based on projected initial shipment sales. The remaining amounts are due upon
shipment of the titles to Vivendi's customers. Payments for future sales that
exceed the projected initial shipment sales are paid on a monthly basis. In
December 2002, we granted OEM rights and select back catalog titles in North
America to Vivendi. In January 2003, we granted Vivendi the right to distribute
substantially all of our products in Select Rest-of-World Countries. As of
December 31, 2003, Vivendi had $2.9 million of its advance remaining to recoup
under the rest-of-world countries and OEM back catalog agreements.

In September 2003, we terminated our distribution agreement with Vivendi as
a result of their alleged breaches, including non-payment of money owed to us
under the terms of this distribution agreement. In October 2003, Vivendi and we
reached a mutually agreed upon settlement and agreed to reinstate the 2002
distribution agreement. Vivendi distributed our games FALLOUT: BROTHERHOOD OF
STEEL and BALDUR'S GATE: DARK ALLIANCE II in North America and Asia-Pacific
(excluding Japan), and retained exclusive distribution rights in these regions
for all of our future titles through August 2005.

In December 2002, we granted the distribution rights to BALDUR'S GATE: DARK
ALLIANCE (PS2, Xbox, and Nintendo GameCube) in Europe, excluding Spain and
Italy, to Vivendi. In connection with the agreement, we paid $650,000 cash


35



consideration for Avalon relinquishing its distribution rights to these products
and will pay Avalon 50% of all proceeds in excess of the advance received from
Vivendi. In March 2003, we met all obligations under this distribution
agreement. As of December 31, 2003, Vivendi has not reported sales exceeding the
minimum guarantee.

In February 2003, we sold to Vivendi all future interactive
entertainment-publishing rights to the HUNTER: THE RECKONING license for $15
million, payable in installments, which were fully paid at December 31, 2003. We
have retained the rights to the previously published HUNTER: THE RECKONING
titles on Xbox and Nintendo GameCube.

In February 2003, Vivendi advanced us $1.0 million pursuant to a letter of
intent. As of December 31, 2003, the advance was discharged and recouped in full
by Vivendi under the terms of the Vivendi settlement.


RISK FACTORS

Our future operating results depend upon many factors and are subject to
various risks and uncertainties. These major risks and uncertainties are
discussed below. There may be additional risks and uncertainties which we do not
believe are currently material or are not yet known to us but which may become
such in the future. Some of the risks and uncertainties which may cause our
operating results to vary from anticipated results or which may materially and
adversely affect our operating results are as follows:

RISKS RELATED TO OUR FINANCIAL RESULTS

WE CURRENTLY HAVE A NUMBER OF OBLIGATIONS THAT WE ARE UNABLE TO MEET WITHOUT
GENERATING ADDITIONAL REVENUES OR RAISING ADDITIONAL CAPITAL. IF WE CANNOT
GENERATE ADDITIONAL REVENUES OR RAISE ADDITIONAL CAPITAL IN THE NEAR FUTURE, WE
MAY BECOME INSOLVENT AND/OR OUR STOCK WOULD BECOME ILLIQUID OR WORTHLESS.

As of December 31, 2003, our cash balance was approximately $1.2 million
and our outstanding accounts payable and current liabilities totaled
approximately $18.1 million. The Report of our Independent Auditors for the year
ended December 31, 2003 consolidated financial statements includes an
explanatory paragraph expressing substantial doubt about our ability to continue
as a going concern. We anticipate our current cash reserves plus our expected
generation of cash from existing operations will only be sufficient to fund our
anticipated expenditures into the second quarter of fiscal 2004. As of April 9,
2004, we were currently three months in arrears on the rent obligations for our
corporate lease in Irvine, California. On April 9, 2004, our lessor served us
with a Three-Day Notice to Pay Rent or Surrender Possession. If we are unable to
pay our rent, we may lose our office space, which would interrupt our operations
and cause substantial harm to our business. We have received notice from the IRS
that we owe approximately $70,000 in payroll tax penalties. We estimate that we
owe an additional $10,000, which we have accrued in penalties for nonpayment of
approximately $99,000 in Federal and State payroll taxes, which were due on
March 31, 2004 and is still outstanding. We were unable to meet our April 15,
2004 payroll obligations to our employees. Our property, general liability,
auto, workers compensation, fiduciary liability, and employment practices
liability have been cancelled. There can be no guarantee that we will be able to
meet all contractual obligations in the near future, including payroll
obligations.

We expect that we will need to substantially reduce our working capital
needs and/or raise additional financing. If we do not receive sufficient
financing or sufficient funds from our operations we may (i) liquidate assets,
(ii) seek or be forced into bankruptcy and/or (iii) continue operations, but
incur material harm to our business, operations or financial condition. These
measures could have a material adverse effect on our ability to continue as a
going concern. Additionally, because of our financial condition, our Board of
Directors has a duty to our creditors that may conflict with the interests of
our stockholders. When a Delaware corporation is operating in the vicinity of
insolvency, the Delaware courts have imposed upon the corporation's directors a
fiduciary duty to the corporation's creditors. Our Board of Directors may be
required to make decisions that favor the interests of creditors at the expense
of our stockholders to fulfill its fiduciary duty. For instance, we may be
required to preserve our assets to maximize the repayment of debts versus
employing the assets to further grow our business and increase shareholder
value. If we cannot generate enough income from our operations or are unable to
locate additional funds through financing, we will only have sufficient
resources to continue operations into the second quarter.

WE HAVE A HISTORY OF LOSSES, AND MAY HAVE TO FURTHER REDUCE OUR COSTS BY
CURTAILING FUTURE OPERATIONS TO CONTINUE AS A BUSINESS.


36



For the year ended December 31, 2003, our net income from operations was
$1.4 million and for the year ended December 31, 2002, our net loss from
operations was $12.4 million. Since inception, we have incurred significant
losses and negative cash flow, and as of December 31, 2003, we had an
accumulated deficit of $134.5 million. Our ability to fund our capital
requirements out of our available cash and cash generated from our operations
depends on a number of factors. Some of these factors include the progress of
our product development programs, the rate of growth of our business, and our
products' commercial success. If we cannot generate positive cash flow from
operations, we will have to continue to reduce our costs and raise working
capital from other sources. These measures could include selling or
consolidating certain operations or assets, and delaying, canceling or scaling
back product development and marketing programs. These measures could materially
and adversely affect our ability to publish successful titles, and may not be
enough to permit us to operate profitability, or at all.

OUR ABILITY TO EFFECT A FINANCING TRANSACTION TO FUND OUR OPERATIONS COULD
ADVERSELY AFFECT THE VALUE OF YOUR STOCK.

If we are not acquired by or merge with another entity or if we are not
able to raise additional capital by sale or license of certain of our assets, we
may need to consummate a financing transaction to receive additional liquidity.
This additional financing may take the form of raising additional capital
through public or private equity offerings or debt financing. To the extent we
raise additional capital by issuing equity securities, we cannot be certain that
additional capital will be available to us on favorable terms and our
stockholders will likely experience substantial dilution. In April 2001, we
completed a private placement of our common stock which included the issuance of
warrants to purchase an aggregate of 8,126,770 shares of common stock at an
exercise price of $1.75 a share (the "Warrants"). The terms of the Warrants
provide that if we issue additional shares of common stock, options to purchase
common stock or securities convertible into common stock at a per share price
below the exercise price of the Warrants in certain types of transactions,
including, without limitation, a financing transaction, then the Warrants are to
be repriced, subject to stockholder approval. Consequently, if we were to issue
securities at a per share price below the exercise price of the Warrants in
certain transactions, including a financing transaction, these Warrants may be
exercised for a number of shares of our common stock which could be considerably
greater than the present 8,126,770 shares and which may result in significant
dilution to your shares. The Warrants expire in March 2006. Our certificate of
incorporation provides for the issuance of preferred stock however we currently
do not have any preferred stock issued and outstanding. Any new equity
securities issued may have greater rights, preferences or privileges than our
existing common stock. Material shortage of capital will require us to take
drastic steps such as reducing our level of operations, disposing of selected
assets, effecting financings on less than favorable terms or seeking protection
under federal bankruptcy laws.

RISKS RELATED TO OUR BUSINESS

TITUS INTERACTIVE SA CONTROLS A MAJORITY OF OUR VOTING STOCK AND CAN ELECT A
MAJORITY OF OUR BOARD OF DIRECTORS AND PREVENT AN ACQUISITION OF US THAT IS
FAVORABLE TO OUR OTHER STOCKHOLDERS. ALTERNATIVELY, TITUS CAN ALSO CAUSE A SALE
OF CONTROL OF OUR COMPANY THAT MAY NOT BE FAVORABLE TO OUR OTHER STOCKHOLDERS.

Titus owns approximately 67 million shares of common stock, which
represents approximately 71% of our outstanding common stock, our only voting
security. As a consequence, Titus can control substantially all matters
requiring stockholder approval, including the election of directors, subject to
our stockholders' cumulative voting rights, and the approval of mergers or other
business combination transactions. At our 2003 and 2002 annual stockholders
meetings, Titus exercised its voting power to elect a majority of our Board of
Directors. Currently, three of the seven members of our Board are employees or
directors of Titus or its affiliates, and our Chief Executive Officer and
interim Chief Financial Officer Herve Caen is a director of various Titus
affiliates. Furthermore, Titus' Chief Executive Officer Eric Caen serves as one
of our directors. This concentration of voting power could discourage or prevent
a change in control that otherwise could result in a premium in the price of our
common stock. Alternatively, Titus can also sell control of us to another party,
which may not be in the best interests of the other stockholders. In the event
we experience a greater than 50% change in ownership as defined in Section 382
of the Internal Revenue Code, the utilization of our tax net operating loss
carryforwards could be severely restricted in which case we may incur greater
tax liabilities in future periods.

In January 2004, Titus disclosed in their annual report for the fiscal year
ended June 30, 2003, filed with the Autorite des Marches Financiers of France,
that they were involved in litigation with one of our former founders and
officers and as a result had deposited pursuant to a California Court Order
approximately 8,679,306 shares of our common stock held


37



by them (representing approximately 9% of our issued and outstanding common
stock) with the court. Also disclosed was that Titus was conducting settlement
discussions at the time of the filing to resolve the issue. To date, Titus has
maintained voting control over the 8,679,306 million shares of common stock and
has not represented to us that a transfer of beneficial ownership has occurred.
Nevertheless, such transfer of shares may occur in fiscal 2004

THE TERMINATION OF OUR CREDIT AGREEMENT HAS RESULTED IN A SUBSTANTIAL REDUCTION
IN THE CASH AVAILABLE TO FINANCE OUR OPERATIONS.

We are currently operating without a credit agreement or credit facility.
The lack of a credit agreement or credit facility has significantly impeded our
ability to fund our operations and has caused material harm to our business. We
will need to enter into a new credit agreement or locate alternative sources of
financing to help fund our operations. There can be no assurance that we will be
able to enter into a new credit agreement or that if we do enter into a new
credit agreement, it will be on terms favorable to us.

ALMOST ALL OF OUR REVENUES DEPEND ON TWO DISTRIBUTORS, VIVENDI AND AVALON, AND
THEIR DILIGENT SALES EFFORTS AND OUR DISTRIBUTORS' AND RETAIL CUSTOMERS' TIMELY
PAYMENTS TO US.

Since February 1999, Avalon has been the exclusive distributor for most of
our products in Europe, the Commonwealth of Independent States, Africa and the
Middle East. Our agreement with Avalon expires in February 2006. In August 2002,
we entered into a new distribution agreement with Vivendi pursuant to which
Vivendi distributes substantially all our products in North America, as well as
in Select Rest-of-World Countries. Our agreement with Vivendi expires in August
2005.

Avalon and Vivendi each have exclusive rights to distribute our products in
substantial portions of the world. As a consequence, the distribution of our
products by Avalon and Vivendi will generate a substantial majority of our
revenues, and proceeds from Avalon and Vivendi from the distribution of our
products will constitute a substantial majority of our operating cash flows.
Vivendi and Avalon accounted for 82% and 12% respectively, of our net revenues
in 2003. Our revenues and cash flows could decrease significantly and our
business and/or financial results could suffer material harm if:

o either Avalon or Vivendi fails to deliver to us the full proceeds owed
us from distribution of our products;

o either Avalon or Vivendi fails to effectively distribute our products
in their respective territories; or

o either Avalon or Vivendi otherwise fails to perform under their
respective distribution agreement.

We typically sell to distributors and retailers on unsecured credit, with
terms that vary depending upon the customer and the nature of the product. We
confront the risk of non-payment from our customers, whether due to their
financial inability to pay us, or otherwise. In addition, while we maintain a
reserve for uncollectible receivables, the reserve may not be sufficient in
every circumstance. As a result, a payment default by a significant customer
could cause material harm to our business.

In May 2003, Avalon filed for a CVA, a process of reorganization in the
United Kingdom in which we participated in, and were approved as a creditor of
Avalon. As part of the Avalon CVA process, we submitted our creditor's claim. We
have received payments of approximately $347,000 due to us as a creditor under
the terms of the Avalon CVA plan. We continue to evaluate and adjust as
appropriate our claims against Avalon in the CVA process. However, the effects
of the approval of the Avalon CVA on our ability to collect amounts due from
Avalon are uncertain and consequently are fully reserved. As a result, we cannot
guarantee our ability to collect fully the debts we believe are due and owed to
us from Avalon. If Avalon is not able to continue to operate under the new CVA,
we expect Avalon to cease operations and liquidate, in which event we will most
likely not receive in full the amounts presently due us by Avalon. We may have
to appoint another distributor or become our own distributor in Europe and the
other territories in which Avalon presently distributes our products.


38



WE CONTINUE TO OPERATE WITHOUT A CHIEF FINANCIAL OFFICER, WHICH MAY AFFECT OUR
ABILITY TO MANAGE OUR FINANCIAL OPERATIONS.

Our former Chief Financial Officer ("CFO") Jeff Gonzalez resigned in
October 2002. Following Mr. Gonzalez' resignation, CEO Herve Caen assumed the
position of interim-CFO for a period of five months until March 3, 2003, at
which time we hired a replacement CFO. On March 21, 2003, our new CFO resigned
effectively immediately. Mr. Herve Caen has again assumed the position of
interim-CFO and continues as CFO to date until a replacement can be found.

OUR BUSINESS AND INDUSTRY IS BOTH SEASONAL AND CYCLICAL. IF WE FAIL TO DELIVER
OUR PRODUCTS AT THE RIGHT TIMES, OUR SALES WILL SUFFER.

Our business is highly seasonal, with the highest levels of consumer demand
occurring in the fourth quarter. Our industry is also cyclical. The timing of
hardware platform introduction is often tied to the year-end season and is not
within our control. As new platforms are being introduced into our industry,
consumers often choose to defer game software purchases until such new platforms
are available, which would cause sales of our products on current platforms to
decline. This decline may not be offset by increased sales of products for the
new platform.

THE UNPREDICTABILITY OF FUTURE RESULTS MAY CAUSE OUR STOCK PRICE TO REMAIN
DEPRESSED OR TO DECLINE FURTHER.

Our operating results have fluctuated in the past and may fluctuate in the
future due to several factors, some of which are beyond our control. These
factors include:

o demand for our products and our competitors' products;

o the size and rate of growth of the market for interactive
entertainment software;

o changes in PC and video game console platforms;

o the timing of announcements of new products by us and our competitors
and the number of new products and product enhancements released by us
and our competitors;

o changes in our product mix;

o the number of our products that are returned; and

o the level of our international and original equipment manufacturer
royalty and licensing net revenues.

Many factors make it difficult to accurately predict the quarter in which
we will ship our products. Some of these factors include:

o the uncertainties associated with the interactive entertainment
software development process;

o approvals required from content and technology licensors; and

o the timing of the release and market penetration of new game hardware
platforms.

It is likely that in future periods our operating results will not meet the
expectations of the public or of public market analysts. Any unanticipated
change in revenues or operating results is likely to cause our stock price to
fluctuate since such changes reflect new information available to investors and
analysts. New information may cause securities analysts and investors to revalue
our stock and this may cause fluctuations in our stock price.


39



THERE ARE HIGH FIXED COSTS TO DEVELOPING OUR PRODUCTS. IF OUR REVENUES DECLINE
BECAUSE OF DELAYS IN THE INTRODUCTION OF OUR PRODUCTS, OR IF THERE ARE
SIGNIFICANT DEFECTS OR DISSATISFACTION WITH OUR PRODUCTS, OUR BUSINESS COULD BE
HARMED.

For the year ended December 31, 2003, our net income from operations was
$1.4 million. We have incurred significant net losses in recent periods,
including a loss from operations of $12.4 million for the year ended December
31, 2002. Our losses in the past stemmed partly from the significant costs we
incur to develop our entertainment software products, product returns and price
concessions. Moreover, a significant portion of our operating expenses is
relatively fixed, with planned expenditures based largely on sales forecasts. At
the same time, most of our products have a relatively short life cycle and sell
for a limited period of time after their initial release, usually less than one
year.

Relatively fixed costs and short windows in which to earn revenues mean
that sales of new products are important in enabling us to recover our
development costs, to fund operations and to replace declining net revenues from
older products. Our failure to accurately assess the commercial success of our
new products, and our delays in releasing new products could reduce our net
revenues and our ability to recoup development and operational costs.

IF OUR PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR BUSINESS COULD BE
HARMED SIGNIFICANTLY.

Consumer preferences for interactive entertainment software are always
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved continued market acceptance.
Instead, a limited number of releases have become "hits" and have accounted for
a substantial portion of revenues in our industry. Further, publishers with a
history of producing hit titles have enjoyed a significant marketing advantage
because of their heightened brand recognition and consumer loyalty. We expect
the importance of introducing hit titles to increase in the future. We cannot
assure you that our new products will achieve significant market acceptance, or
that we will be able to sustain this acceptance for a significant length of time
if we achieve it.

We believe that our future revenue will continue to depend on the
successful production of hit titles on a continuous basis. Because we introduce
a relatively limited number of new products in a given period, the failure of
one or more of these products to achieve market acceptance could cause material
harm to our business. Further, if our products do not achieve market acceptance,
we could be forced to accept substantial product returns or grant significant
pricing concessions to maintain our relationship with retailers and our access
to distribution channels. If we are forced to accept significant product returns
or grant significant pricing concessions, our business and financial results
could suffer material harm.

OUR RELIANCE ON THIRD PARTY SOFTWARE DEVELOPERS SUBJECTS US TO THE RISKS THAT
THESE DEVELOPERS WILL NOT SUPPLY US WITH HIGH QUALITY PRODUCTS IN A TIMELY
MANNER OR ON ACCEPTABLE TERMS.

Third party interactive entertainment software developers develop various
software products for us. Since we depend on these developers in the aggregate,
we remain subject to the following risks:

o limited financial resources may force developers out of business prior
to their completion of projects for us or require us to fund
additional costs; and

o the possibility that developers could demand that we renegotiate our
arrangements with them to include new terms less favorable to us.

Increased competition for skilled third party software developers also has
compelled us to agree to make advance payments on royalties and to guarantee
minimum royalty payments to intellectual property licensors and game developers.
Moreover, if the products subject to these arrangements, are not delivered
timely, or with acceptable quality, or do not generate sufficient sales volumes
to recover these royalty advances and guaranteed payments, we would have to
write-off unrecovered portions of these payments, which could cause material
harm to our business and financial results.


40



WE COMPETE WITH A NUMBER OF COMPANIES THAT HAVE SUBSTANTIALLY GREATER FINANCIAL,
MARKETING AND PRODUCT DEVELOPMENT RESOURCES THAN WE DO.

The greater resources of our competitors permit them to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, pay
higher fees than we can to licensors of desirable motion picture, television,
sports and character properties and pay more to third party software developers.

We compete primarily with other publishers of PC and video game console
interactive entertainment software. Significant competitors include Electronic
Arts Inc. and Activision, Inc. Many of these competitors have substantially
greater financial, technical resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than we do.

In addition, integrated video game console hardware/software companies such
as Sony Computer Entertainment, Nintendo, and Microsoft Corporation compete
directly with us in the development of software titles for their respective
platforms and they have generally discretionary approval authority over the
products we develop for their platforms. Large diversified entertainment
companies, such as The Walt Disney Company and Time Warner Inc., many of which
own substantial libraries of available content and have substantially greater
financial resources, may decide to compete directly with us or to enter into
exclusive relationships with our competitors.

Retailers of our products typically have a limited amount of shelf space
and promotional resources. As our products constitute a relatively small
percentage of any retailer's sales volume, there can be no assurance that
retailers will continue to purchase our products or provide our products with
adequate shelf space and promotional support. A prolonged failure by retailers
to provide shelf space and promotional support could cause material harm to our
business and financial results.

WE HAVE RELIED ON LOANS FROM TITUS INTERACTIVE S.A. IN THE PAST TO ENABLE US TO
MEET OUR SHORT-TERM CASH NEEDS. TITUS INTERACTIVE S.A.'S CURRENT FINANCIAL
CONDITION MAY RESULT IN OUR INABILITY TO SECURE CASH TO FUND OPERATIONS, MAY
LEAD TO A SALE BY TITUS OF SHARES IT HOLDS IN US, AND MAY MAKE A SALE OF US MORE
DIFFICULT.

In the past, Titus, our majority shareholder, has loaned us money to enable
us to meet our short-term cash needs. Now it appears that, at least in the near
term, Titus will not have the ability to support us should we find ourselves
with insufficient cash to fund operations. In addition, on March 21, 2003, due
to Titus' lack of sufficient operating capital and need for immediate cash, we
loaned Titus Software Corp., ("TSC"), a subsidiary of Titus, the sum of
$226,000. Our Board of Directors has decided to revoke this loan. To date, we
continue to attempt to collect the $226,000 loan and accrued interest from TSC.
Further, should Titus ever be forced to cease operations due to lack of capital,
that situation could lead to a sale by Titus, or its administrator or other
representative in bankruptcy, of shares Titus holds in us, thereby potentially
reducing the value of our shares and market capitalization. Such a sale and
dispersion of shares to multiple stockholders further could have the effect of
making any business combination, or a sale of all of our shares as a whole, more
difficult.

WE HAVE A LIMITED NUMBER OF KEY MANAGEMENT AND OTHER PERSONNEL. THE LOSS OF ANY
SINGLE MEMBER OF MANAGEMENT OR KEY PERSON OR THE FAILURE TO HIRE AND INTEGRATE
CAPABLE NEW KEY PERSONNEL COULD HARM OUR BUSINESS.

Our business requires extensive time and creative effort to produce and
market. Our future success also will depend upon our ability to attract,
motivate and retain qualified employees and contractors, particularly software
design and development personnel. Competition for highly skilled employees is
intense, and we may fail to attract and retain such personnel. Alternatively, we
may incur increased costs in order to attract and retain skilled employees. Our
executive management team currently consists of CEO and interim CFO Herve Caen
and our President Phillip Adam. Our failure to recruit or retain the services of
key personnel, including competent executive management, or to attract and
retain additional qualified employees could cause material harm to our business.

OUR INTERNATIONAL SALES EXPOSE US TO RISKS OF UNSTABLE FOREIGN ECONOMIES,
DIFFICULTIES IN COLLECTION OF REVENUES, INCREASED COSTS OF ADMINISTERING
INTERNATIONAL BUSINESS TRANSACTIONS AND FLUCTUATIONS IN EXCHANGE RATES.


41



Our net revenues from international sales accounted for approximately 18%
and 13% of our total net revenues for years ended December 31, 2003 and 2002,
respectively. Most of these revenues come from our distribution relationship
with Avalon, pursuant to which Avalon became the exclusive distributor for most
of our products in Europe, the Commonwealth of Independent States, Africa and
the Middle East. To the extent our resources allow, we intend to continue to
expand our direct and indirect sales, marketing and product localization
activities worldwide.

Our international sales are subject to a number of inherent risks, including the
following:

o recessions in foreign economies may reduce purchases of our products;

o translating and localizing products for international markets is time
consuming and expensive;

o accounts receivable are more difficult to collect and when they are
collectible, they may take longer to collect;

o regulatory requirements may change unexpectedly;

o it is difficult and costly to staff and manage foreign operations;

o fluctuations in foreign currency exchange rates;

o political and economic instability;

o our dependence on Avalon as our exclusive distributor in Europe, the
Commonwealth of Independent States, Africa and the Middle East; and

o delays in market penetration of new platforms in foreign territories.

These factors may cause material declines in our future international net
revenues and, consequently, could cause material harm to our business.

A significant, continuing risk we face from our international sales and
operations stems from currency exchange rate fluctuations. Because we do not
engage in currency hedging activities, fluctuations in currency exchange rates
have caused significant reductions in our net revenues from international sales
and licensing due to the loss in value upon conversion into U.S. Dollars. We may
suffer similar losses in the future.

OUR CUSTOMERS HAVE THE ABILITY TO RETURN OUR PRODUCTS OR TO RECEIVE PRICING
CONCESSIONS AND SUCH RETURNS AND CONCESSIONS COULD REDUCE OUR NET REVENUES AND
RESULTS OF OPERATIONS.

We are exposed to the risk of product returns and pricing concessions with
respect to our distributors. Our distributors allow retailers to return
defective, shelf-worn and damaged products in accordance with negotiated terms,
and also offer a 90-day limited warranty to our end users that our products will
be free from manufacturing defects. In addition, our distributors provide
pricing concessions to our customers to manage our customers' inventory levels
in the distribution channel. Our distributors could be forced to accept
substantial product returns and provide pricing concessions to maintain our
relationships with retailers and their access to distribution channels. We have
mitigated this risk in North America under the new 2002 distribution arrangement
with Vivendi, as sales will be guaranteed with no offset for product returns and
price concessions.

WE DEPEND UPON THIRD PARTY LICENSES OF CONTENT FOR MANY OF OUR PRODUCTS.

Many of our current and planned products, are lines based on original ideas
or intellectual properties licensed from other parties. From time to time we may
not be in compliance with certain terms of these license agreements, and our
ability to market products based on these licenses may be negatively impacted.
Moreover, disputes regarding these license agreements may also negatively impact
our ability to market products based on these licenses. Additionally, we may not
be able to obtain new licenses, or maintain or renew existing licenses, on
commercially reasonable terms, if at all. If we are unable to maintain current
licenses or obtain new licenses for the underlying content that we believe
offers the greatest consumer appeal, we would either have to seek alternative,
potentially less appealing licenses, or release


42



products without the desired underlying content, either of which could limit our
commercial success and cause material harm to our business.

IF DISTRIBUTION CONTRACT CLAIMS CONTINUE TO BE ASSERTED AGAINST US, WE MAY BE
UNABLE TO SUSTAIN OUR BUSINESS OR MEET OUR CURRENT OBLIGATIONS.

During 2003, we were involved in disputes and litigation with our key
distributor Vivendi Universal Games. While we have since reached an amicable
settlement with Vivendi, other distribution-related contract claims may be
asserted against us in the future. Such claims can harm our business by
consuming our limited human and financial resources, regardless of the merits of
the claims. We incur substantial expenses in evaluating and defending against
such claims. In the event that there is a determination against us on any of
these types of claims, we could incur significant monetary liability and there
could be a negative impact on product release.

OUR LICENSORS ARE ALSO OFTEN OUR COMPETITORS. WE MAY FAIL TO MAINTAIN EXISTING
LICENSES, OR OBTAIN NEW LICENSES FROM PLATFORM COMPANIES ON ACCEPTABLE TERMS OR
TO OBTAIN RENEWALS OF EXISTING OR FUTURE LICENSES FROM LICENSORS.

We are required to obtain a license to develop and distribute software for
each of the video game console platforms for which we develop products,
including a separate license for each of North America, Japan and Europe. We
have obtained licenses to develop software for the Sony PlayStation and PS2, as
well as video game platforms from Nintendo and Microsoft, who are also our
competitors. Each of these companies has the right to approve the technical
functionality and content of our products for their platforms prior to
distribution. Typically, such license agreements give broad control to the
licensor over the approval, manufacturing and shipment of products on their
platform. There can be no assurance that we will be able to obtain future
licenses from platform companies on acceptable terms or that any existing or
future licenses will be renewed by the licensors. Due to the competitive nature
of the approval process, we typically must make significant product development
expenditures on a particular product prior to the time we seek these approvals.
Our inability to obtain these licenses or approvals or to obtain them on a
timely basis could cause material harm to our business.

OUR SALES VOLUME AND THE SUCCESS OF OUR PRODUCTS DEPEND IN PART UPON THE NUMBER
OF PRODUCT TITLES DISTRIBUTED BY HARDWARE COMPANIES FOR USE WITH THEIR VIDEO
GAME PLATFORMS.

Even after we have obtained licenses to develop and distribute software, we
depend upon hardware companies such as Sony Computer Entertainment, Nintendo and
Microsoft, or their designated licensees, to manufacture the CD-ROM or DVD-ROM
media discs that contain our software. These discs are then run on the
companies' video game consoles. This process subjects us to the following risks:

o we are required to submit and pay for minimum numbers of discs we want
produced containing our software, regardless of whether these discs
are sold, shifting onto us the financial risk associated with poor
sales of the software developed by us; and

o reorders of discs are expensive, reducing the gross margin we receive
from software releases that have stronger sales than initially
anticipated and that require the production of additional discs.

As a result, video game console hardware licensors can shift onto us the
risk that if actual retailer and consumer demand for our interactive
entertainment software differs from our forecasts, we must either bear the loss
from overproduction or the lower per-unit revenues associated with producing
additional discs. Either situation could lead to material reductions in our net
revenues and operating results.

RISKS RELATED TO OUR INDUSTRY

INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS COULD PREVENT US FROM ENFORCING OR
DEFENDING OUR PROPRIETARY TECHNOLOGY.


43



We regard our software as proprietary and rely on a combination of patent,
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights. We
own or license various copyrights and trademarks, and hold the rights to one
patent application related to one of our titles. While we provide "shrink-wrap"
license agreements or limitations on use with our software, it is uncertain to
what extent these agreements and limitations are enforceable. We are aware that
some unauthorized copying occurs within the computer software industry, and if a
significantly greater amount of unauthorized copying of our interactive
entertainment software products were to occur, it could cause material harm to
our business and financial results.

Policing unauthorized use of our products is difficult, and software piracy
can be a persistent problem, especially in some international markets. Further,
the laws of some countries where our products are or may be distributed either
do not protect our products and intellectual property rights to the same extent
as the laws of the United States, or are weakly enforced. Legal protection of
our rights may be ineffective in such countries, and as we leverage our software
products using emerging technologies such as the Internet and online services,
our ability to protect our intellectual property rights and to avoid infringing
others' intellectual property rights may diminish. We cannot assure you that
existing intellectual property laws will provide adequate protection for our
products in connection with these emerging technologies.

WE MAY UNINTENTIONALLY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH COULD EXPOSE US TO SUBSTANTIAL DAMAGES OR RESTRICT OUR OPERATIONS.

As the number of interactive entertainment software products increases and
the features and content of these products continue to overlap, software
developers increasingly may become subject to infringement claims. Although we
believe that we make reasonable efforts to ensure that our products do not
violate the intellectual property rights of others, it is possible that third
parties still may claim infringement. From time to time, we receive
communications from third parties regarding such claims. Existing or future
infringement claims against us, whether valid or not, may be time consuming and
expensive to defend. Intellectual property litigation or claims could force us
to do one or more of the following:

o cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;

o obtain a license from the holder of the infringed intellectual
property, which license, if available at all, may not be available on
commercially favorable terms; or

o redesign our interactive entertainment software products, possibly in
a manner that reduces their commercial appeal.

Any of these actions may cause material harm to our business and financial
results.

OUR BUSINESS IS INTENSELY COMPETITIVE AND PROFITABILITY IS INCREASINGLY DRIVEN
BY A FEW KEY TITLE RELEASES. IF WE ARE UNABLE TO DELIVER KEY TITLES, OUR
BUSINESS MAY BE HARMED.

Competition in our industry is intense. New videogame products are
regularly introduced. Increasingly, profits and revenues in our industry are
dominated by certain key product releases and are increasingly produced in
conjunction with the latest consumer and media trends. Many of our competitors
may have more finances and other resources for the development of product titles
than we do. If our competitors develop more successful products, or if we do not
continue to develop consistently high-quality products, our revenue will
decline.

IF WE FAIL TO ANTICIPATE CHANGES IN VIDEO GAME PLATFORMS AND TECHNOLOGY, OUR
BUSINESS MAY BE HARMED.

The interactive entertainment software industry is subject to rapid
technological change. New technologies could render our current products or
products in development obsolete or unmarketable. Some of these new technologies
include:

o operating systems such as Microsoft Windows XP;

o technologies that support games with multi-player and online features;


44



o new media formats;

o recent releases of new video game consoles and;

o future video game systems by Sony, Microsoft, Nintendo and others.

We must continually anticipate and assess the emergence of, and market
acceptance of, new interactive entertainment software platforms well in advance
of the time the platform is introduced to consumers. Because product development
cycles are difficult to predict, we must make substantial product development
and other investments in a particular platform well in advance of introduction
of the platform. If the platforms for which we develop new software products or
modify existing products are not released on a timely basis or do not attain
significant market penetration, or if we develop products for a delayed or
unsuccessful platform, our business and financial results could suffer material
harm.

New interactive entertainment software platforms and technologies also may
undermine demand for products based on older technologies. Our success will
depend in part on our ability to adapt our products to those emerging game
platforms that gain widespread consumer acceptance. Our business and financial
results may suffer material harm if we fail to:

o anticipate future technologies and platforms and the rate of market
penetration of those technologies and platforms;

o obtain licenses to develop products for those platforms on favorable
terms; or

o create software for those new platforms on a timely basis.

OUR SOFTWARE MAY BE SUBJECT TO GOVERNMENTAL RESTRICTIONS OR RATING SYSTEMS.

Legislation is periodically introduced at the state and federal levels in
the United States and in foreign countries to establish a system for providing
consumers with information about graphic violence and sexually explicit material
contained in interactive entertainment software products. In addition, many
foreign countries have laws that permit governmental entities to censor the
content of interactive entertainment software. We believe that mandatory
government-run rating systems eventually will be adopted in many countries that
are significant markets or potential markets for our products. We may be
required to modify our products to comply with new regulations, which could
delay the release of our products in those countries.

Due to the uncertainties regarding such rating systems, confusion in the
marketplace may occur, and we are unable to predict what effect, if any, such
rating systems would have on our business. In addition to such regulations,
certain retailers have in the past declined to stock some of our products
because they believed that the content of the packaging artwork or the products
would be offensive to the retailer's customer base. While to date these actions
have not caused material harm to our business, we cannot assure you that similar
actions by our distributors or retailers in the future would not cause material
harm to our business.

RISKS RELATED TO OUR STOCK

SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT OUR ABILITY TO RECEIVE A
PREMIUM PRICE FOR YOUR SHARES.

Our certificate of incorporation, as amended, provides for 150,000,000
authorized shares of common stock and 5,000,000 authorized shares of preferred
stock. Our Board of Directors has the authority, without any action by the
stockholders, to issue up to 4,280,576 shares of preferred stock and to fix the
rights and preferences of such shares. 719,424 shares of Series A Preferred
Stock was issued to Titus in the past, which amount has been fully converted
into our common stock. In addition, our certificate of incorporation and bylaws
contain provisions that:

o eliminate the ability of stockholders to act by written consent and to
call a special meeting of stockholders; and

o require stockholders to give advance notice if they wish to nominate
directors or submit proposals for stockholder approval.


45



These provisions may have the effect of delaying, deferring or preventing a
change in control, may discourage bids for our common stock at a premium over
its market price and may adversely affect the market price, and the voting and
other rights of the holders of our common stock.

OUR COMMON STOCK MAY BE SUBJECT TO THE "PENNY STOCK" RULES WHICH COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

"Penny stocks" generally include equity securities with a price of less
than $5.00 per share, which are not traded on a national stock exchange or on
Nasdaq, and are issued by a company that has tangible net assets of less than
$2,000,000 if the company has been operating for at least three years. The
"penny stock" rules require, among other things, broker-dealers to satisfy
special sales practice requirements, including making individualized written
suitability determinations and receiving a purchaser's written consent prior to
any transaction. In addition, additional disclosure in connection with trades in
the common stock are required, including the delivery of a disclosure schedule
prescribed by the SEC relating to the "penny stock" market. These additional
burdens imposed on broker-dealers may discourage them from effecting
transactions in our common stock, which may make it more difficult for an
investor to sell their shares and adversely affect the market price of our
common stock.

OUR STOCK PRICE IS VOLATILE.

The trading price of our common stock has previously fluctuated and could
continue to fluctuate in response to factors that are largely beyond our
control, and which may not be directly related to the actual operating
performance of our business, including:

o general conditions in the computer, software, entertainment, media or
electronics industries;

o changes in earnings estimates or buy/sell recommendations by analysts;

o investor perceptions and expectations regarding our products, plans
and strategic position and those of our competitors and customers; and

o price and trading volume volatility of the broader public markets,
particularly the high technology sections of the market.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have any derivative financial instruments as of December 31,
2003. However, we are exposed to certain market risks arising from transactions
in the normal course of business, principally the risk associated with foreign
currency fluctuations. We do not hedge our interest rate risk, or our risk
associated with foreign currency fluctuations.

INTEREST RATE RISK

Currently, we do not have a line of credit, but we anticipate establishing
a line of credit in the future.

FOREIGN CURRENCY RISK

Our earnings are affected by fluctuations in the value of our foreign
subsidiary's functional currency, and by fluctuations in the value of the
functional currency of our foreign receivables, primarily from Avalon.

We recognized a $58,000 gain, $104,000 loss and $237,000 loss during the
years ended December 31, 2003, 2002 and 2001, respectively, primarily in
connection with foreign exchange fluctuations in the timing of payments received
on accounts receivable from Avalon.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements begin on page F-1 of this report.


46



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

The information required by this Item 9 has been previously furnished and
is incorporated herein by reference to our form 8-K filed on February 25, 2003,
and amendment to such form 8-K filed on February 27, 2003.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and interim Chief Financial Officer of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
this evaluation, our Chief Executive Officer and interim Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting him to material information required to be included in this report.

There were no significant changes made in our internal controls over
financial reporting during the quarter ended December 31, 2003 that have
materially affected or are reasonably likely to materially affect these
controls. Thus, no corrective actions with regard to significant deficiencies or
material weaknesses were necessary.

Our management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors. An internal control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.

Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations on all internal
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, and/or by management
override of the control. The design of any system of internal control is also
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in circumstances, and/or the degree of
compliance with the policies and procedures may deteriorate. Because of the
inherent limitations in a cost-effective internal control system, financial
reporting misstatements due to error or fraud may occur and not be detected on a
timely basis.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 is incorporated herein by
reference to the information in our Proxy Statement for the 2004 Annual Meeting
of Stockholders, which is expected to be filed within 120 days of our fiscal
year end December 31, 2003.


ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated herein by
reference to the information in our Proxy Statement for the 2004 Annual Meeting
of Stockholders, which is expected to be filed within 120 days of our fiscal
year end December 31, 2003.


47



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated herein by
reference to the information in our Proxy Statement for the 2004 Annual Meeting
of Stockholders, which is expected to be filed within 120 days of our fiscal
year end December 31, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is incorporated herein by
reference to the information in our Proxy Statement for the 2004 Annual Meeting
of Stockholders, which is expected to be filed within 120 days of our fiscal
year end December 31, 2003.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is incorporated herein by
reference to the information in our Proxy Statement for the 2004 Annual Meeting
of Stockholders, which is expected to be filed within 120 days of our fiscal
year end December 31, 2003.


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents, except for exhibit 32.1 which is being furnished
herewith, are filed as part of this report:

(1) Financial Statements

The list of financial statements contained in the accompanying Index
to Consolidated Financial Statements covered by the Reports of Independent
Auditors is herein incorporated by reference.

(2) Financial Statement Schedules

The list of financial statement schedules contained in the
accompanying Index to Consolidated Financial Statements covered by the Reports
of Independent Auditors is herein incorporated by reference.

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

(3) Exhibits

The list of exhibits on the accompanying Exhibit Index is herein
incorporated by reference.

(b) Reports on Form 8-K.

On November 5, 2003, we filed a Form 8-K regarding items 5 and 7. Such
current report was provided in connection with our press release announcing
that we had reached a settlement with Vivendi Universal Games, Inc.
regarding the dispute under our distribution agreement.

On November 17, 2003, we filed a Form 8-K regarding items 12 and 7. Such
current report was provided in connection with our press release announcing
our financial results for the quarter ended September 30, 2003.

On December 15, 2003, we filed a Form 8-K regarding items 5 and 7. Such
current report was provided in connection with our press release involving
the sale of rights to the video game software called GALLEON.


48



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, thereto duly authorized, at Irvine, California
this 26th day of April 2004.

INTERPLAY ENTERTAINMENT CORP.


By: /s/ Herve Caen
---------------------------------
Herve Caen
Its: Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive and
Financial and Accounting Officer)

POWER OF ATTORNEY

The undersigned directors and officers of Interplay Entertainment Corp. do
hereby constitute and appoint Herve Caen with full power of substitution and
resubstitution, as their true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent, may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the U.S.
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto, and we do hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.

SIGNATURE TITLE DATE
--------- ----- ----


/s/ Herve Caen Chief Executive Officer, April 26, 2004
- ------------------------- Interim Chief Financial
Herve Caen Officer and Director
(Principal Executive and
Financial and Accounting
Officer)

/s/ Nathan Peck Director April 26, 2004
- -------------------------
Nathan Peck



/s/ Eric Caen Director April 26, 2004
- -------------------------
Eric Caen


49




/s/ Gerald DeCiccio Director April 26, 2004
- -------------------------
Gerald DeCiccio



/s/ Robert Stefanovich Director April 26, 2004
- -------------------------
Robert Stefanovich



/s/ Michel H. Vulpillat Director April 26, 2004
- -------------------------
Michel H. Vulpillat



/s/ Michel Welter Director April 26, 2004
- -------------------------
Michel Welter


50



EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------

2.1 Agreement and Plan of Reorganization and Merger, dated May 29, 1998,
between the Company and Interplay Productions. (incorporated herein
by reference to Exhibit 2.1 to the Company's Registration Statement
on Form S-1, No. 333-48473 (the "Form S-1"))

2.2 Stock Purchase Agreement by and between Infogrames, Inc., Shiny
Entertainment Inc., David Perry, Shiny Group, Inc., and the Company.
dated April 23, 2002. (incorporated herein by reference to Exhibit
2.1 to the Company's Form 8-K filed May 6, 2002)

2.3 Amendment Number 1 to the Stock Purchase Agreement by and between
the Company, Infogrames, Inc., Shiny Entertainment, Inc., David
Perry, and Shiny Group, Inc. dated April 30, 2002. (incorporated
herein by reference to Exhibit 2.2 to the Company's Form 8-K filed
May 6, 2002)

3.1 Amended and Restated Certificate of Incorporation of the Company.

3.2 Certificate of Designation of Preferences of Series A Preferred
Stock, as filed with the Delaware Secretary of State on April 14,
2000. (incorporated herein by reference to Exhibit 10.32 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999)

3.3 Certificate of Amendment of Certificate of Designation of Rights,
Preferences, Privileges and Restrictions of Series A Preferred
Stock, as filed with the Delaware Secretary of State on October 30,
2000.

3.4 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company, as filed with the Delaware Secretary
of State on November 2, 2000.

3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company, as filed with the Delaware Secretary
of State on January 21, 2004.

3.6 Amended and Restated Bylaws of the Company.

3.7 Amendment to the Amended and Restated Bylaws of the Company dated
March 9, 2004.

4.1 Specimen form of stock certificate for Common Stock. (incorporated
herein by reference to Exhibit 4.1 to the Form S-1)

4.2 Shareholders' Agreement among MCA Inc., the Company, and Brian
Fargo, dated March 30, 1994, as amended. (incorporated herein by
reference to Exhibit 4.2 to the Form S-1)

4.3 Investors' Rights Agreement dated October 10, 1996, as amended,
among the Company and holders of its Subordinated Secured Promissory
Notes and Warrants to purchase Common Stock. (incorporated herein by
reference to Exhibit 4.3 to the Form S-1)

10.01 Third Amended and Restated 1997 Stock Incentive Plan (the "1997
Plan"). (incorporated herein by reference to Appendix A of the
Definitive Proxy Statement filed on August 20, 2002)

10.02 Form of Stock Option Agreement pertaining to the 1997 Plan.

10.03 Form of Restricted Stock Purchase Agreement pertaining to the 1997
Plan. (incorporated herein by reference to Exhibit 10.3 to the Form
S-1)

10.04 Employee Stock Purchase Plan. (incorporated herein by reference to
Exhibit 10.10 to the Form S-1)

10.05 Form of Indemnification Agreement for Officers and Directors of the
Company. (incorporated herein by reference to Exhibit 10.11 to the
Form S-1)

10.06 Von Karman Corporate Center Office Building Lease between the
Company and Aetna Life Insurance Company of Illinois dated September
8, 1995, together with amendments thereto. (incorporated herein by
reference to Exhibit 10.14 to the Form S-1)

10.07 Heads of Agreement concerning Sales and Distribution between the
Company and Activision, Inc., dated November 19, 1998, as amended.
(incorporated herein by reference to Exhibit 10.23 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998)
(Portions omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential
treatment)

10.08 Stock Purchase Agreement between the Company and Titus Interactive
SA, dated March 18, 1999. (incorporated herein by reference to
Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998)

10.09 International Distribution Agreement between the Company and Virgin
Interactive Entertainment Limited, dated February 10, 1999.
(incorporated herein by reference to Exhibit 10.26 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998)
(Portions omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential
treatment)


51



EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------

10.10 Termination Agreement among the Company, Virgin Interactive
Entertainment Limited, VIE Acquisition Group, LLC and VIE
Acquisition Holdings, LLC, dated February 10, 1999. (incorporated
herein by reference to Exhibit 10.27 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998) (Portions omitted
and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment)

10.11 Fifth Amendment to Lease for Von Karman Corporate Center Office
Building between the Company and Arden Realty Finance IV, L.L.C.,
dated December 4, 1998. (incorporated herein by reference to Exhibit
10.29 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998)

10.12 Stock Purchase Agreement dated July 20, 1999, by and among the
Company, Titus Interactive S.A., and Brian Fargo. (incorporated
herein by reference to Exhibit 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999)

10.13 Exchange Agreement dated July 20, 1999, by and among Titus
Interactive S.A., Brian Fargo, Herve Caen and Eric Caen.
(incorporated herein by reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)

10.14 Employment Agreement between the Company and Herve Caen dated
November 9, 1999. (incorporated herein by reference to Exhibit 10.3
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)

10.15 Warrant (350,000 shares) for Common Stock between the Company and
Titus Interactive S.A., dated April 14, 2000. (incorporated herein
by reference to Exhibit 10.33 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999)

10.16 Warrant (50,000 shares) for Common Stock between the Company and
Titus Interactive S.A., dated April 14, 2000. (incorporated herein
by reference to Exhibit 10.34 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999)

10.17 Warrant (100,000 shares) for Common Stock between the Company and
Titus Interactive S.A., dated April 14, 2000. (incorporated herein
by reference to Exhibit 10.35 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999)

10.18 Amendment Number 1 to International Distribution Agreement between
the Company and Virgin Interactive Entertainment Limited, dated July
1, 1999. (incorporated herein by reference to Exhibit 10.39 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999)

10.19 Common Stock Subscription Agreement of the Company, dated March 29,
2001. (incorporated herein by reference to Exhibit 4.1 to the Form
S-3 filed on April 17, 2001)

10.20 Common Stock Purchase Warrant of the Company. (incorporated herein
by reference to Exhibit 4.2 to the Form S-3 filed on April 17, 2001)

10.21 Warrant to Purchase Common Stock of the Company, dated April 25,
2001. (incorporated herein by reference to Exhibit 10.4 to the Form
S-3 filed on May 4, 2001)

10.22 Agreement between the Company, Brian Fargo, Titus Interactive S.A.,
and Herve Caen, dated May 15, 2001. (incorporated herein by
reference to Exhibit 99 to Form SCD 13D/A)

10.23 Distribution Agreement, dated August 23, 2001. (Portions omitted and
filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment) (incorporated
herein by reference to Exhibit 10.1 to the Form 10-Q for the quarter
ending September 30, 2001)

10.24 Letter Agreement re: Amendment #1 to Distribution Agreement dated
August 23, 2001, dated September 14, 2001. (Portions omitted and
filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment) (incorporated
herein by reference to Exhibit 10.2 to the Form 10-Q for the quarter
ending September 30, 2001)

10.25 Letter Agreement re: Secured Advance and Amendment #2 to
Distribution Agreement, dated November 20, 2001 by and between the
Company, and Vivendi Universal Interactive Publishing North America,
Inc. (incorporated herein by reference to Exhibit 10.47 to the Form
10-K for the year ended December 31, 2001)

10.26 Letter Agreement re: Secured Advance and Amendment #3 to
Distribution Agreement, dated December 13, 2001 by and between the
Company, and Vivendi Universal Interactive Publishing North America,
Inc. (incorporated herein by reference to Exhibit 10.48 to the Form
10-K for the year ended December 31, 2001)

10.27 Third Amendment to Computer License Agreement, dated July 25, 2001
by and between the Company, and Infogrames, Inc. (incorporated
herein by reference to Exhibit 10.49 to the Form 10-K for the year
ended December 31, 2001)


52



EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------

10.28 Letter Agreement and Amendment Number 4 to Distribution Agreement by
and between Vivendi Universal Games, Inc. and the Company, dated
January 18, 2002. (Incorporated herein by reference to Exhibit 10.1
to Form 10-Q filed on May 15, 2002)

10.29 Fourth Amendment To Computer License Agreement by and between the
Company, and Infogrames Interactive, Inc. dated January 23, 2002.
(Portions omitted and filed separately with the Securities and
Exchange Commission pursuant to request for confidential treatment)
(incorporated herein by reference to Exhibit 10.2 to Form 10-Q filed
on May 15, 2002)

10.30 Amendment Number Four to the Product Agreement by and between the
Company, Infogrames Interactive, Inc., and Bioware Corp. dated
January 24, 2002. (incorporated herein by reference to Exhibit 10.3
to Form 10-Q filed on May 15, 2002)

10.31 Amended and Restated Amendment Number 1 to Product Agreement by and
between the Company, and High Voltage Software, Inc. dated March 5,
2002. (Portions omitted and filed separately with the Securities and
Exchange Commission pursuant to request for confidential treatment)
(incorporated herein by reference to Exhibit 10.4 to Form 10-Q filed
on May 15, 2002)

10.32 Settlement Agreement and Release by and between Brian Fargo, the
Company, Interplay OEM, Inc., Gamesonline.com, Inc., Shiny
Entertainment, Inc., and Titus Interactive S.A. dated March 13,
2002. (incorporated herein by reference to Exhibit 10.6 to Form 10-Q
filed on May 15, 2002)

10.33 Agreement by and between Vivendi Universal Games Inc., the Company,
and Shiny Entertainment, Inc. dated April of 2002. (incorporated
herein by reference to Exhibit 10.7 to Form 10-Q filed on May 15,
2002)

10.34 Term Sheet by and between Titus Interactive S.A., and the Company,
dated April 26, 2002. (incorporated herein by reference to Exhibit
10.8 to Form 10-Q filed on May 15, 2002)

10.35 Promissory Note by Titus Interactive S.A. in favor of the Company,
dated April 26, 2002. (incorporated herein by reference to Exhibit
10.9 to Form 10-Q filed on May 15, 2002)

10.36 Amended and Restated Secured Convertible Promissory Note, dated
April 30, 2002, in favor of Warner Bros., a division of Time Warner
Entertainment Company, L.P. (incorporated herein by reference to
Exhibit 10.10 to Form 10-Q filed on May 15, 2002)

10.37 Video Game Distribution Agreement by and between Vivendi Universal
Games, Inc. and the Company, dated August 9, 2002. (Portions omitted
and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment) (incorporated
herein by reference to Exhibit 10.1 to Form 10-Q filed on November
19, 2002)

10.38 Letter of Intent by and between Vivendi Universal Games, Inc. and
the Company, dated August 9, 2002. (Portions omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment) (incorporated herein by
reference to Exhibit 10.2 to Form 10-Q filed on November 19, 2002)

10.39 Letter Agreement and Amendment #2 by and between Vivendi Universal
Games, Inc. and the Company, dated August 29, 2002. (Portions
omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment)
(incorporated herein by reference to Exhibit 10.3 to Form 10-Q filed
on November 19, 2002)

10.40 Letter Agreement and Amendment #3 by and between Vivendi Universal
Games, Inc. and the Company, dated September 12, 2002. (Portions
omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment)
(incorporated herein by reference to Exhibit 10.4 to Form 10-Q filed
on November 19, 2002)

10.41 Letter Agreement and Amendment # 4 (OEM & Back-Catalog) to Video
Game Distribution Agreement dated August 9, 2002 by and between
Vivendi Universal Games, Inc. and the Company, dated December 20,
2002. (Portions omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential
treatment)

10.42 Letter Agreement and Amendment # 5 (Asia Pacific & Australia) to
Video Game Distribution Agreement dated August 9, 2002 by and
between Vivendi Universal Games, Inc. and the Company dated January
13, 2003. (Portions omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential
treatment)

10.43 Purchase & Sale Agreement by and between Vivendi Universal Games,
Inc. and the Company dated February 26, 2003. (Portions omitted and
filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment) (incorporated
herein by reference to Exhibit 10.1 to the Form 10-Q for the quarter
ending March 31, 2003)


53



EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------

10.44 Amendment Number 2 of International Distribution Agreement by and
between Virgin Interactive Entertainment Limited (renamed Avalon
Interactive Group Ltd.) and the Company, dated January 1, 2000.

10.45 Amendment to International Distribution Agreement, by and between
Virgin Interactive Entertainment Limited (renamed Avalon Interactive
Group Ltd.) and the Company, dated April 2001.

10.46 Avalon Amendment Number 4 of International Distribution Agreement,
by and between Avalon Interactive Group Limited and the Company,
dated August 6, 2003.

10.47 Mutual Release Settlement Agreement by and between Warner Bros.
Entertainment, Inc. and the Company, dated October 13, 2003.

21.1 Subsidiaries of the Company.

23.1 Consent of Squar Milner, Reehl and Williamson, LLP Independent
Auditors.

23.2 Consent of Ernst & Young, LLP, Independent Auditors.

24.1 Power of Attorney (included on signature page 49 to this Annual
Report on Form 10-K).

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) under the Securities Exchange Act of 1934, as
amended.

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) under the Securities Exchange Act of 1934, as
amended.

32.1 Certification of Chief Executive Officer and interim Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

99.1 Press Release dated August 15, 2002. (Incorporated herein by
reference to Exhibit 99.2 to Form 10-Q filed August 19, 2002).


54



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
AND REPORTS OF INDEPENDENT AUDITORS




PAGE
----

Reports of Independent Auditors F-2

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2003 and 2002 F-4

Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-5

Consolidated Statements of Stockholder's Equity (Deficit)
and accumulated other comprehensive income (loss) for
the years ended December 31, 2003, 2002, 2001 F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-7

Notes to Consolidated Financial Statements F-9

Schedule II - Valuation and Qualifying Accounts S-1


F-1



INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders
Interplay Entertainment Corp.

We have audited the accompanying consolidated balance sheets of Interplay
Entertainment Corp. (a majority-owned subsidiary of Titus Interactive S.A.), and
subsidiaries (the "Company"), as of December 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity (deficit) and other
comprehensive income (loss) and cash flows each of the years in the two-year
period then ended. Our audits also included the financial statement schedule
listed in the Index at Item 15(a) (2) for the year ended December 31, 2003 and
2002. These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 Interplay
Entertainment Corp. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule for the years ended December 31, 2003 and
2002, when considered in relation to the basic financial statements, taken as a
whole, presents fairly in all material respects the information set forth
therein.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company has negative working capital of $14.8 million and a stockholders'
deficit of $12.6 million at December 31, 2003. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Squar Milner Reehl & Williamson, LLP

Newport Beach, California
March 25, 2004


F-2



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Shareholders
Interplay Entertainment Corp.

We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and comprehensive income (loss), and cash flows
of Interplay Entertainment Corp. (a majority-owned subsidiary of Titus
Interactive S.A.) and subsidiaries (the Company) for the year ended December 31,
2001. Our audit also included the financial statement schedule listed in the
Index at Item 15(a)(2) for the year ended December 31, 2001. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Interplay Entertainment Corp. and subsidiaries for the year ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule for the
year ended December 31, 2001, when considered in relation to the basic 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 Interplay
Entertainment Corp. and subsidiaries will continue as a going concern. As more
fully described in Note 1, the Company's recurring losses from operations and
its stockholders' and working capital deficits raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.


/s/ Ernst & Young LLP


Orange County, California
March 18, 2002


F-3



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)


DECEMBER 31,
ASSETS 2003 2002
--------- ---------
Current Assets:
Cash .......................................... $ 1,171 $ 134
Trade receivables from related parties,
net of allowances of $691 and $231,
respectively .............................. 564 2,506
Trade receivables, net of allowances
of $34 and $855, respectively ............. 6 170
Inventories ................................... 146 2,029
Prepaid licenses and royalties ................ 209 5,129
Deposits ...................................... 600 77
Prepaid expenses .............................. 673 1,113
Other current assets .......................... 3 10
--------- ---------
Total current assets ....................... 3,372 11,168

Property and equipment, net ........................ 2,114 3,130
--------- ---------
$ 5,486 $ 14,298
========= =========


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


Current Liabilities:
Current debt .................................. $ 837 $ 2,082
Accounts payable .............................. 7,093 10,280
Accrued royalties ............................. 5,067 4,775
Advances from distributors and others ......... 629 101
Advances from related parties ................. 2,862 3,550
Payables to related parties ................... 1,634 7,440
--------- ---------
Total current liabilities ................ 18,122 28,228
--------- ---------
Commitments and contingencies

Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value
5,000,000 shares authorized; no shares
issued or outstanding, respectively,
Common stock, $0.001 par value 150,000,000
shares authorized; 93,855,634 and
93,849,176 shares issued and
outstanding, respectively .................. 94 94
Paid-in capital ............................... 121,640 121,637
Accumulated deficit ........................... (134,481) (135,793)
Accumulated other comprehensive income ........ 111 132
--------- ---------
Total stockholders' equity (deficit) ..... (12,636) (13,930)
--------- ---------
$ 5,486 $ 14,298
========= =========


See accompanying notes.


F-4



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)


YEARS ENDED DECEMBER 31,
2003 2002 2001
(Unaudited)
--------- --------- ---------

Net revenues ............................ $ 2,286 $ 15,021 $ 33,795
Net revenues from related party
distributors ......................... 34,015 28,978 22,653
--------- --------- ---------
Total net revenues ................... 36,301 43,999 56,448
Cost of goods sold ...................... 13,120 26,706 45,816
--------- --------- ---------
Gross profit ......................... 23,181 17,293 10,632
--------- --------- ---------

Operating expenses:
Marketing and sales .................. 1,415 5,814 18,697
General and administrative ........... 6,692 7,655 12,622
Product development .................. 13,680 16,184 20,603
--------- --------- ---------
Total operating expenses .......... 21,787 29,653 51,922
--------- --------- ---------
Operating income (loss) .......... 1,394 (12,360) (41,290)
--------- --------- ---------

Other income (expense):
Interest expense ..................... (218) (2,214) (4,285)
Gain on sale of Shiny ................ -- 28,813 --
Other ................................ 136 683 (241)
--------- --------- ---------
Total other income (expense) ..... (82) 27,282 (4,526)
--------- --------- ---------

Income (loss) before provision
(benefit) for income taxes ........... 1,312 14,922 (45,816)
Provision (benefit) for income taxes .... -- (225) 500
--------- --------- ---------
Net income (loss) ....................... $ 1,312 $ 15,147 $ (46,316)


Cumulative dividend on participating
preferred stock ...................... $ -- $ 133 $ 966
Accretion of warrant .................... -- -- 266
--------- --------- ---------
Net income (loss) available to common
stockholders ......................... $ 1,312 $ 15,014 $ (47,548)
========= ========= =========


Net income (loss) per common share:
Basic ................................... $ 0.01 $ 0.18 $ (1.23)
========= ========= =========
Diluted ................................. $ 0.01 $ 0.16 $ (1.23)
========= ========= =========

Weighted average number of shares
used in calculating net income (loss)
per common share:
Basic ................................... 93,852 83,585 38,670
========= ========= =========
Diluted ................................. 104,314 96,070 38,670
========= ========= =========


See accompanying notes.


F-5




INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND OTHER COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands)


ACCUMULATED
OTHER
COMPRE-
PREFERRED STOCK COMMON STOCK HENSIVE
------------------------ ----------------------- PAID-IN ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS)
---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance, December 31, 2000 ....... 719,424 $ 20,604 30,143,636 $ 30 $ 88,759 $ (103,259) $ 264
Issuance of common stock,
net of issuance costs ...... -- -- 8,151,253 8 11,743 -- --
Conversion of Series A
preferred stock into common
stock ...................... (336,070) (9,343) 6,679,306 7 9,336 -- --
Dividend payable in connection
with preferred stock
conversion ................. -- (740) -- -- -- -- --
Issuance of warrants .......... -- -- -- -- 675 -- --
Exercise of stock options ..... -- -- 21,626 -- 9 -- --
Accretion of warrant .......... -- 266 -- -- -- (266) --
Accumulated accrued dividend on
Series A preferred stock ... -- 966 -- -- -- (966) --
Compensation for stock options
granted .................... -- -- -- -- 4 -- --
Capital contribution by Titus . -- -- -- -- 75 -- --
Option issued in connection
with settlement ............ -- -- -- -- 100 -- --
Net loss ...................... -- -- -- -- -- (46,316) --
Other comprehensive loss, net
of income taxes:
Foreign currency
translation
adjustment .......... -- -- -- -- -- -- (106)

Comprehensive loss .
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 ....... 383,354 11,753 44,995,821 45 110,701 (150,807) 158
Issuance of common stock,
net of issuance costs ..... -- -- 721,652 1 208 -- --
Accumulated accrued dividend on
Series A preferred stock ... -- 133 -- -- -- (133) --
Conversion of Series A
preferred stock into common
stock ...................... (383,354) (10,657) 47,492,162 47 10,610 -- --
Dividend payable in connection
with preferred stock
conversion ................. -- (1,229) -- -- -- -- --
Issuance of warrants .......... -- -- -- -- 33 -- --
Exercise of stock options ..... -- -- 639,541 1 85 -- --
Net income .................... -- -- -- -- -- 15,147 --
Other comprehensive income,
net of income taxes:
Foreign currency
translation
adjustment ............ -- -- -- -- -- -- (26)

Comprehensive income
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 ....... -- -- 93,849,176 94 121,637 (135,793) 132
Issuance of common stock,
net of issuance costs ..... -- -- 6,458 -- 3 -- --
Net income .................... -- -- -- -- -- 1,312 --
Other comprehensive income, net
of income taxes:
Foreign currency
translation adjustment -- -- -- -- -- -- (21)

Comprehensive income
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 ....... -- $ -- 93,855,634 $ 94 $ 121,640 $ (134,481) $ 111
========== ========== ========== ========== ========== ========== ==========




OTHER
COMPRE-
HENSIVE
INCOME
(LOSS) TOTAL
---------- ---------

Balance, December 31, 2000 ....... $ 6,398
Issuance of common stock,
net of issuance costs ...... 11,751
Conversion of Series A
preferred stock into common
stock ...................... --
Dividend payable in connection
with preferred stock
conversion ................. (740)
Issuance of warrants .......... 675
Exercise of stock options ..... 9
Accretion of warrant .......... --
Accumulated accrued dividend on
Series A preferred stock ... --
Compensation for stock options
granted .................... 4
Capital contribution by Titus . 75
Option issued in connection
with settlement ............ 100
Net loss ...................... $ (46,316) (46,316)
Other comprehensive loss, net
of income taxes:
Foreign currency
translation
adjustment .......... (106) (106)
---------
Comprehensive loss . $ (46,422)
========= ---------
Balance, December 31, 2001 ....... (28,150)
Issuance of common stock,
net of issuance costs ..... 209
Accumulated accrued dividend on
Series A preferred stock ... --
Conversion of Series A
preferred stock into common
stock ...................... --
Dividend payable in connection
with preferred stock
conversion ................. (1,229)
Issuance of warrants .......... 33
Exercise of stock options ..... 86
Net income .................... 15,147 15,147
Other comprehensive income,
net of income taxes:
Foreign currency
translation
adjustment ............ (26) (26)
---------
Comprehensive income 15,121
========= ---------
Balance, December 31, 2002 ....... (13,930)
Issuance of common stock,
net of issuance costs ..... 3
Net income .................... 1,312 1,312
Other comprehensive income, net
of income taxes:
Foreign currency
translation adjustment (21) (21)
---------
Comprehensive income $ 1,291
========= ---------
Balance, December 31, 2003 ....... $ (12,636)



See accompanying notes.


F-6




INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


YEARS ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------

Cash flows from operating activities:
Net income (loss) ........................................... $ 1,312 $ 15,147 $(46,316)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities--
Depreciation and amortization ............................ 1,353 1,671 2,613
Noncash expense for stock compensation ................... -- 238 679
Noncash interest expense ................................. 6 1,860 --
Amortization of prepaid licenses and royalties ........... 5,163 5,095 8,071
Writeoff of prepaid licenses and royalties ............... 2,857 4,100 8,124
Gain on sale of Shiny .................................... -- (28,813) --
Other .................................................... (21) (26) (6)
Changes in assets and liabilities:
Trade receivables, net ................................ 164 3,139 14,360
Trade receivables from related parties ................ 1,942 3,669 4,239
Inventories ........................................... 1,883 1,949 (619)
Prepaid licenses and royalties ........................ (3,100) (5,628) (8,832)
Other current assets .................................. (76) (51) (390)
Accounts payable ...................................... (2,148) (5,777) 3,246
Accrued royalties ..................................... 292 (2,887) (10)
Other accrued liabilities ............................. (1,039) (1,806) (425)
Payables to related parties ........................... (5,806) (887) 2,185
Advances from distributors and others ................. (160) (19,201) 21,144
-------- -------- --------
Net cash provided by (used in) operating activities 2,622 (28,208) 8,063
-------- -------- --------

Cash flows from investing activities:
Purchases of property and equipment ......................... (337) (207) (1,757)
Proceeds from sale of Shiny ................................. -- 33,134 --
-------- -------- --------
Net cash (used in) provided by investing activities ... (337) 32,927 (1,757)
-------- -------- --------

Cash flows from financing activities:
Net borrowings (payments) on line of credit ................. -- (1,576) 1,576
Net borrowings (payments) of previous line of credit ........ -- -- (24,433)
Net borrowings (payments) of supplemental line of credit .... -- -- (1,000)
(Repayment) borrowings from former Chairman ................. -- (3,218) 3,000
Net proceeds from issuance of common stock .................. 3 4 11,751
Repayment of note payable ................................... (1,251) -- --
Proceeds from exercise of stock options ..................... -- 86 9
Other financing activities .................................. -- -- 75
-------- -------- --------
Net cash used in financing activities ................ (1,248) (4,704) (9,022)
-------- -------- --------
Net increase (decrease) in cash ................................ 1,037 15 (2,716)
Cash, beginning of year ........................................ 134 119 2,835
-------- -------- --------
Cash, end of year .............................................. $ 1,171 $ 134 $ 119
======== ======== ========



See accompanying notes.


F-7




INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)


YEARS ENDED DECEMBER 31,
2003 2002 2001
------ ------ ------

Supplemental cash flow information:

Cash paid during the year for interest .................. $ 212 $ 344 $1,592

Supplemental disclosure of non-cash investing and financing
activities:
Acquisition of remaining interest in Shiny for
options on common stock ............................ -- -- 100
Accretion of preferred stock to redemption value ........ -- -- 266
Dividend payable on partial conversion of preferred stock -- 1,229 740
Accrued dividend on participating preferred stock ....... -- 133 966
Common stock issued under Product Agreement ............. -- 205 --



See accompanying notes.


F-8



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003


1. DESCRIPTION OF BUSINESS AND OPERATIONS

Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(the "Company"), develop and publish interactive entertainment software. The
Company's software is developed for use on various interactive entertainment
software platforms, including personal computers and video game consoles, such
as the Sony PlayStation 2, Microsoft Xbox and Nintendo GameCube. As of December
31, 2003, Titus Interactive, S.A. ("Titus"), a France-based developer, publisher
and distributor of interactive entertainment software, owned 71% of the
Company's common stock. In January 2004, Titus disclosed in their annual report
for the fiscal year ended June 30, 2003, filed with the Autorite des Marches
Financiers of France, that they were involved in litigation with one of our
former founders and officers and as a result had deposited pursuant to a
California Court Order approximately 8,679,306 shares of our common stock held
by them (representing approximately 9% of our issued and outstanding common
stock) with the court. Also disclosed was that Titus was conducting settlement
discussions at the time of the filing to resolve the issue. To date, Titus has
maintained voting control over the 8,679,306 shares of common stock and has not
represented to us that a transfer of beneficial ownership has occurred.
Nevertheless, such transfer of shares may occur in fiscal 2004. The Company's
common stock is quoted on the NASDAQ OTC Bulletin Board under the symbol "IPLY."

GOING CONCERN

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company had operating income of $1.4 million in
2003 and operating losses of $12.4 million and $41.3 million in 2002 and 2001,
respectively. Also at December 31, 2003, the Company had a stockholders' deficit
of $12.6 million and a working capital deficit of $14.8 million. The Company has
historically funded its operations primarily through the use of lines of credit
(which the Company has not had the availability of such lines since October
2001), royalty and distribution fee advances, cash generated by the private sale
of securities, and proceeds of its initial public offering.

To reduce working capital needs, the Company has implemented various
measures including a reduction of personnel, a reduction of fixed overhead
commitments, cancellation or suspension of development on future titles, which
management believes do not meet sufficient projected profit margins, and the
scaling back of certain marketing programs. Management will continue to pursue
various alternatives to improve future operating results, and further expense
reductions, some of which may have a long-term adverse impact on the Company's
ability to generate successful future business activities.

In addition, the Company continues to seek and expects to require external
sources of funding, including but not limited to, a sale or merger of the
Company, a private placement of the Company's capital stock, the sale of
selected assets, the licensing of certain product rights in selected
territories, selected distribution agreements, and/or other strategic
transactions sufficient to provide short-term funding, and potentially achieve
the Company's long-term strategic objectives. In this regard, the Company
completed the sale of the HUNTER: THE RECKONING license in February 2003, for
$15.0 million. In November 2003, the Company sold the rights to a title in
development.

In August 2002, the Company entered into a new three-year North American
distribution agreement (the "2002 Agreement") with Vivendi Universal Games, Inc.
("Vivendi"), which substantially replaces the August 2001 agreement with Vivendi
(Note 6). Under the new 2002 agreement, the Company receives cash payments from
Vivendi for distributed products sooner than under the Company's original August
2001 agreement with Vivendi. The Company has amended its agreement with Vivendi
to increase the number of territories in which Vivendi can distribute the
Company's products. In return, the Company has received additional advances from
Vivendi for these additional rights. In February 2003, the Company sold to
Vivendi the rights to develop and publish future titles under the Company's
HUNTER: THE RECKONING license (Note 17).


F-9




INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


The Company anticipates its current cash reserves, proceeds from the sale
of the HUNTER: THE RECKONING license, plus its expected generation of cash from
existing operations, will only be sufficient to fund its anticipated
expenditures into the second quarter of fiscal 2004.

As of April 1, 2004, the Company was three months in arrears on the rent
obligations for its corporate lease in Irvine, California. On April 9, 2004, the
Company's lessor served it with a Three-Day Notice to Pay Rent or Surrender
Possession. If the Company is unable to pay its rent, the Company may lose its
office space, which would interrupt its operations and cause substantial harm to
its business.

The Company has received notice from the IRS that it owes approximately
$70,000 in payroll tax penalties. The Company estimates that it owes an
additional $10,000, which it has accrued in penalties for nonpayment of
approximately $99,000 in Federal and State payroll taxes, which were due on
March 31, 2004 and is still outstanding. The Company was unable to meet its
April 15, 2004 payroll obligations to its employees. The Company's property,
general liability, auto, workers compensation, fiduciary liability, and
employment practices liability have been cancelled. The Company is currently in
default of the settlement agreement with Warner and has entered into a payment
plan, of which it is in default, for the balance of the $0.32 million owed
payable in one remaining installment.

On or about February 23, 2004, the Company received correspondence from
Atari Interactive alleging that it had failed to pay royalties due under the D&D
license as of February 15, 2004. If the Company is unable to cure this alleged
breach of the license agreement, it may lose its remaining rights under the
license, including the rights to continued distribution of BALDUR'S GATE: DARK
ALLIANCE II. The loss of the remaining rights to distribute games created under
the D&D license could have a significant negative impact on its future operating
results. There can be no guarantee that the Company will be able to meet all
contractual obligations in the near future, including payroll obligations. The
Company expects that it will need to substantially reduce its working capital
needs and/or raise additional financing. If the Company does not receive
sufficient financing it may (i) liquidate assets, (ii) sell the company (iii)
seek protection from our creditors, and/or (iv) continue operations, but incur
material harm to its business, operations or financial conditions. However, no
assurance can be given that alternative sources of funding could be obtained on
acceptable terms, or at all. These conditions, combined with the Company's
historical operating losses and its deficits in stockholders' equity and working
capital, raise substantial doubts about its ability to continue as a going
concern. Consequently, the Company expects that it will need to substantially
reduce its working capital needs and/or raise additional financing. However, no
assurance can be given that alternative sources of funding could be obtained on
acceptable terms, or at all. These conditions, combined with the Company's
historical operating losses and its deficits in stockholders' equity and working
capital, raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets and liabilities that might result from the outcome of
this uncertainty.

AUTHORIZED COMMON STOCK

Based on stockholder approval, the Company filed the certificate of
amendment to increase its authorized shares of Common Stock by 50,000,000 shares
for a total of 150,000,000 authorized shares with the State of Delaware.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay
Productions Limited (U.K.), Interplay OEM, Inc., Interplay Productions Pty Ltd
(Australia), Interplay Co., Ltd., (Japan) and Games On-line. Shiny
Entertainment, Inc., which was sold by the Company in April 2002, is included in
the consolidated financial statements up to the date of the sale. All
significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates made in
preparing the consolidated financial statements include, among others, sales
returns and allowances, cash flows used to evaluate the recoverability of
prepaid licenses and royalties and long-lived assets, and certain accrued
liabilities related to restructuring activities and litigation. Actual results
could differ from those estimates.

RISKS AND UNCERTAINTIES

The Company operates in a highly competitive industry that is subject to
intense competition, potential government regulation and rapid technological
change. The Company's operations are subject to significant risks and
uncertainties including financial, operational, technological, regulatory and
other business risks associated with such a company.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to classifications used in the current year.

INVENTORIES

Inventories consist of packaged software ready for shipment, including
video game console software. Inventories are valued at the lower of cost
(first-in, first-out) or market. The Company regularly monitors inventory for
excess or obsolete items and makes any valuation corrections when such
adjustments are known. Based on management's evaluation, the Company has
established a reserve of approximately $30,000.


F-10



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


Net realizable value is based on management's forecast for sales of the
Company's products in the ensuing years. The industry in which the Company
operates is characterized by technological advancement and changes. Should
demand for the Company's products prove to be significantly less than
anticipated, the ultimate realizable value of the Company's inventories could be
substantially less than the amount shown on the accompanying consolidated
balance sheets.

PREPAID LICENSES AND ROYALTIES

Prepaid licenses and royalties consist of fees paid to intellectual
property rights holders for use of their trademarks or copyrights. Also included
in prepaid royalties are prepayments made to independent software developers
under development arrangements that have alternative future uses. These payments
are contingent upon the successful completion of milestones, which generally
represent specific deliverables. Royalty advances are recoupable against future
sales based upon the contractual royalty rate. The Company amortizes the cost of
licenses, prepaid royalties and other outside production costs to cost of goods
sold over six months commencing with the initial shipment in each region of the
related title. The Company amortizes these amounts at a rate based upon the
actual number of units shipped with a minimum amortization of 75% in the first
month of release and a minimum of 5% for each of the next five months after
release. This minimum amortization rate reflects the Company's typical product
life cycle. Management evaluates the future realization of such costs quarterly
and charges to cost of goods sold any amounts that management deems unlikely to
be fully realized through future sales. Such costs are classified as current and
noncurrent assets based upon estimated product release date.

SOFTWARE DEVELOPMENT COSTS

Research and development costs, which consist primarily of software
development costs, are expensed as incurred. Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased, or Otherwise Marketed", provides for the capitalization of certain
software development costs incurred after technological feasibility of the
software is established or for development costs that have alternative future
uses. Under the Company's current practice of developing new products, the
technological feasibility of the underlying software is not established until
substantially all product development is complete, which generally includes the
development of a working model. The Company has not capitalized any software
development costs on internal development projects, as the eligible costs were
determined to be insignificant.

ACCRUED ROYALTIES

Accrued royalties consist of amounts due to outside developers and
licensors based on contractual royalty rates for sales of shipped titles. The
Company records a royalty expense based upon a contractual royalty rate after it
has fully recouped the royalty advances paid to the outside developer, if any,
prior to shipping a title.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation of computers,
equipment and furniture and fixtures is provided using the straight-line method
over a period of five to seven years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful life or the
remaining lease term. Upon the sale or retirement of property and equipment, the
accounts are relieved of the cost and the related accumulated depreciation, with
any resulting gain or loss included in the consolidated statements of
operations.

LONG-LIVED ASSETS

On January 1, 2002, the Company adopted Financial Accounting Statements
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. If the cost basis of a long-lived asset
is greater than the estimated fair value, based on many models, including
projected future undiscounted net cash flows from such asset (excluding
interest) and replacement value, an impairment loss is


F-11



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


recognized. Impairment losses are calculated as the difference between the cost
basis of an asset and its estimated fair value. SFAS 144, which supercedes SFAS
121, also requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to shareholders) or is classified
as held for sale. Assets to be disposed are reported at the lower of the
carrying amount or fair value less costs to sell. The adoption of SFAS 144 did
not have a material impact on the Company's financial position or results of
operations. To date, management has determined that no impairment exists and
therefore, no adjustments have been made to the carrying values of long-lived
assets. There can be no assurance, however, that market conditions will not
change or demand for the Company's products or services will continue which
could result in impairment of long-lived assets in the future.

GOODWILL AND INTANGIBLE ASSETS

On January 1, 2002, the Company adopted SFAS 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS," which addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in the
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS 142 requires that goodwill and
identifiable intangible assets that have indefinite useful lives not be
amortized but rather be tested at least annually for impairment, and
identifiable intangible assets that have finite useful lives be amortized over
their useful lives. SFAS 142 provides specific guidance for testing goodwill and
identifiable intangible assets that will not be amortized for impairment. In
addition, SFAS 142 expands the disclosure requirements about goodwill and other
intangible assets in the years subsequent to their acquisition. At December 31,
2003, the Company had no goodwill or intangible items subject to amortization.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash, accounts receivable and accounts payable
approximates the fair value. In addition, the carrying value of all borrowings
approximates fair value based on interest rates currently available to the
Company. The fair value of trade receivable from related parties, advances from
related party distributor, loans to/from related parties and payables to related
parties are not determinable as these transactions are with related parties.

REVENUE RECOGNITION

Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" and SEC Staff Accounting Bulletin No. 101, Revenue Recognition.
With the signing of the new Vivendi distribution agreement in August 2002,
substantially all of the Company's sales are made by two related party
distributors (Notes 6 and 12), Vivendi, which owns less than 5% of the
outstanding shares of the Company's common stock at December 31, 2003, and
Avalon Interactive Group Ltd. ("Avalon"), formerly Virgin Interactive
Entertainment Limited, a wholly owned subsidiary of Titus, the Company's largest
stockholder.

The Company recognizes revenue from sales by distributors, net of sales
commissions, only as the distributor recognizes sales of the Company's products
to unaffiliated third parties. For those agreements that provide the customers
the right to multiple copies of a product in exchange for guaranteed amounts,
revenue is recognized at the delivery and acceptance of the product gold master.
Per copy royalties on sales that exceed the guarantee are recognized as earned.
Guaranteed minimum royalties on sales, where the guarantee is not recognizable
upon delivery, are recognized as the minimum payments come due.

The Company is generally not contractually obligated to accept returns,
except for defective, shelf-worn and damaged products in accordance with
negotiated terms. However, on a case by case basis, the Company may permit
customers to return or exchange product and may provide markdown allowances on
products unsold by a customer. In accordance with SFAS No. 48, "Revenue
Recognition when Right of Return Exists," revenue is recorded net of an
allowance for estimated returns, exchanges, markdowns, price concessions and
warranty costs. Such reserves are based upon management's evaluation of
historical experience, current industry trends and estimated costs. The reserve
for estimated returns, exchanges, markdowns, price concessions and warranty
costs was $0.4 million and


F-12



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


$1.1 million at December 31, 2003 and 2002, respectively. The amount of reserves
ultimately required could differ materially in the near term from the amounts
included in the accompanying consolidated financial statements.

Customer support provided by the Company is limited to telephone and
Internet support. These costs are not significant and are charged to expenses as
incurred.

The Company also engages in the sale of licensing rights on certain
products. The terms of the licensing rights differ, but normally include the
right to develop and distribute a product on a specific video game platform. For
these activities, revenue is recognized when the rights have been transferred
and no other obligations exist.

In November 2001, the Emerging Issues Task Force (EITF) issued EITF 01-09,
"Accounting for Consideration given by a Vendor to a Customer". The
pronouncement codifies and reconciles the consensus reached on EITF 00-14, 00-22
and 00-25, which addresses the recognition, measurement and profit and loss
account classification of certain selling expenses. The adoption of this issue
has resulted in the reclassification of certain selling expenses including sales
incentives, slotting fees, buy downs and distributor payments from cost of sales
and administrative expenses to a reduction in sales. Additionally, prior period
amounts were reclassified to conform to the new requirements. The impact of this
pronouncement resulted in a reduction of net sales of $0, $0.1 million, and $1.3
million for the years ended December 31, 2003, 2002 and 2001, respectively.
These amounts, consisting principally of promotional allowances to the Company's
retail customers were previously recorded as sales and marketing expenses;
therefore, there was no impact to net income for any period.

ADVERTISING COSTS

The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns that are deferred and charged
to expense at the first run of the ad. Cooperative advertising with distributors
and retailers is accrued when revenue is recognized. Cooperative advertising
credits are reimbursed when qualifying claims are submitted. Advertising costs
approximated $0.6 million, $3.0 million and $6.7 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

INCOME TAXES

The Company accounts for income taxes using the liability method as
prescribed by the SFAS No. 109, "Accounting for Income Taxes." The statement
requires an asset and liability approach for financial accounting and reporting
of income taxes. Deferred income taxes are provided for temporary differences in
the recognition of certain income and expense items for financial reporting and
tax purposes given the provisions of the enacted tax laws. A valuation allowance
is provided for significant deferred tax assets when it is more likely than not
those assets will not be recovered.

FOREIGN CURRENCY

The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the United
States are translated into U.S. dollars at the rate of exchange in effect at the
balance sheet date. Income and expense items are translated at the weighted
average exchange rate prevailing during the period. Gains or losses arising from
the translation of the foreign subsidiaries' financial statements are included
in the accompanying consolidated financial statements as a component of other
comprehensive loss. Gains and Losses resulting from foreign currency
transactions amounted to a $58,000 gain, $104,000 loss and $237,000 loss during
the years ended December 31, 2003, 2002 and 2001, respectively, and are included
in other income (expense) in the consolidated statements of operations.

NET INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is computed by dividing income
(loss) attributable to common stockholders by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share is
computed by dividing income (loss) attributable to common stockholders by the
weighted average number of


F-13



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


common shares outstanding plus the effect of any convertible debt, dilutive
stock options and common stock warrants. For the years ended December 31, 2003
and 2002, all options and warrants outstanding to purchase common stock were
excluded from the earnings per share computation as the exercise price was
greater than the average market price of the common shares and for year ended
December 31, 2001, all options and warrants to purchase common stock were
excluded from the diluted loss per share calculation, as the effect of such
inclusion would be antidilutive.

GEOGRAPHIC SEGMENT INFORMATION

The Company discloses information regarding segments in accordance with
SFAS No. 131 DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 establishes standards for reporting of financial information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports. The
Company is managed, and financial information is developed on a geographical
basis, rather than a product line basis. Thus, the Company has provided segment
information on a geographical basis (see Note 14).

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Management establishes an allowance for doubtful accounts based on
qualitative and quantitative review of credit profiles of our customers,
contractual terms and conditions, current economic trends and historical
payment, return and discount experience. Management reassesses the allowance for
doubtful accounts each period. If management made different judgments or
utilized different estimates for any period material differences in the amount
and timing of revenue recognized could result.

COST OF SOFTWARE REVENUE AND SUPPORT

Cost of software revenue primarily reflects the manufacture expense and
royalties to third party developers, which are recognized upon delivery of the
product. Cost of support includes (i) sales commissions and salaries paid to
employees who provide support to clients and (ii) fees paid to consultants,
which are recognized as the services are performed. Sales commissions are
expensed as incurred.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) of the Company includes net income (loss)
adjusted for the change in foreign currency translation adjustments. The net
effect of income taxes on comprehensive income (loss) is immaterial.

STOCK-BASED COMPENSATION

The Company accounts for employee stock options in accordance with the
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and related Interpretations and makes the necessary pro forma
disclosures mandated by SFAS No. 123 "Accounting for Stock-based Compensation".

In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25". This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective July 1, 2000, but
certain conclusions in FIN 44 cover specific events that occur after either
December 15, 1998, or January 12, 2000. Management believes that the Company
accounts for its employee stock based compensation in accordance with FIN 44.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123". SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for an entity that
voluntarily changes to the fair-value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects on reported net
income and earnings per share and the entity's accounting policy decisions with
respect to stock-based employee compensation. Certain of the disclosure
requirements are required for all companies, regardless of whether the fair
value method or intrinsic value method is used to account for stock-based
employee compensation arrangements. The Company continues to account for its
employee incentive stock option plans using the intrinsic value method in


F-14



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


accordance with the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS 148 is effective for financial statements for fiscal years ended after
December 15, 2002 and for interim periods beginning after December 15, 2002. The
Company adopted the disclosure provisions of this statement during the year
ended December 31, 2002.

At December 31, 2003, the Company has one stock-based employee compensation
plan, which is described more fully in Note 11. The Company accounts for this
plan under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Stock-based employee compensation cost reflected in net income was $0, $0, and
$4,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The
following table illustrates the effect on net income (loss) and earnings (loss)
per common share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.

YEARS ENDED DECEMBER 31,
2003 2002 2001
---------- ---------- -----------
(Dollars in thousands,
except per share amounts)
Net income (loss) available to
common stockholders,
as reported ...................... $ 1,404 $ 15,014 $ (47,548)
Pro forma estimated fair value
compensation expense ............. (177) (232) (1,177)
---------- ---------- -----------
Pro forma net income (loss)
available to common
stockholders ..................... $ 1,227 $ 14,782 $ (48,725)
========== ========== ===========
Basic net income (loss) per
common share as reported ......... $ 0.01 $ 0.18 $ (1.23)
Diluted net income (loss) per
common share as reported ......... $ 0.01 $ 0.16 $ (1.23)
Basic pro forma net income (loss)
per common share ................. $ 0.01 $ 0.16 $ (1.26)
Diluted pro forma net income
(loss) per common share .......... $ 0.01 $ 0.15 $ (1.26)


RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal
Activities," was issued in June 2002 and is effective for exit and disposal
activities initiated after December 31, 2002. The Company is complying with SFAS
No. 146.

SFAS No. 147 relates exclusively to certain financial institutions, and
thus does not apply to the Company.


In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
while the disclosure requirements became applicable in 2002. The Company is
complying with the disclosure requirements of FIN No. 45. The other requirements
of this pronouncement did not materially affect the Company's consolidated
financial statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." The primary objectives of
FIN No. 46 are to provide guidance on the identification of entities for which
control is achieved through means other than voting rights (variable interest
entities, or "VIEs"), and how to determine when and which business enterprise
should consolidate the VIE. This new model for consolidation applies to an
entity for which either: (a) the equity investors do not have a controlling
financial interest; or (b) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN No. 46 requires that both
the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. As amended in December 2003, the
effective dates of FIN No. 46 for public entities that are not small business
issuers are as follows: (a) For interests in special-purpose entities ("SPEs"):
the first period ended after December 15, 2003; and (b) For all other types of
VIEs: the first period ended after March 15, 2004. Management has determined
that the Company does not have any


F-15



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


SPEs (as defined), and is presently evaluating the other potential effects of
FIN No. 46 (as amended) on its consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133
on Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. This pronouncement is effective for contracts entered into
or modified after June 30, 2003 (with certain exceptions), and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for public companies as follows: (i) in November 2003, the FASB
issued FASB Staff Position ("FSP") FAS 150-03 ("FSP 150-3"), which defers
indefinitely (a) the measurement and classification guidance of SFAS No. 150 for
all mandatorily redeemable non-controlling interests in (and issued by)
limited-life consolidated subsidiaries, and (b) SFAS No. 150's measurement
guidance for other types of mandatorily redeemable non-controlling interests,
provided they were created before November 5, 2003; (ii) for financial
instruments entered into or modified after May 31, 2003 that are outside the
scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the
aforementioned effective dates. The adoption of this pronouncement did not have
a material impact on the Company's results of operations or financial condition.

Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a
material impact on the Company's present or future consolidated financial
statements.

3. SHINY ENTERTAINMENT, INC

In 1995, the Company acquired a 91% interest in Shiny Entertainment, Inc.
("Shiny") for $3.6 million in cash and stock. The acquisition was accounted for
using the purchase method. The allocation of purchase price included $3 million
of goodwill. The purchase agreement required the Company to pay the former owner
of Shiny additional cash payments of up to $5.6 million upon the delivery and
acceptance of five future Shiny interactive entertainment software titles (the
"Earnout Payments"). In March 2001, the Company entered into an amendment to the
Shiny purchase agreement, which, among other things, settled all outstanding
claims under the Earnout Payments, and resulted in the Company acquiring the
remaining 9% equity interest in Shiny for $600,000, payable in installments of
cash and options on common stock. The amendment also provided for additional
cash payments to the former owner of Shiny for two interactive entertainment
software titles to be delivered in the future. The former owner of Shiny would
have earned royalties after the future delivery of the two titles to the
Company.

On April 30, 2002, the Company consummated the sale of Shiny, pursuant to
the terms of a Stock Purchase Agreement, dated April 23, 2002, as amended, among
the Company, Infogrames, Inc., Shiny, Shiny's president and Shiny Group, Inc.
Pursuant to the purchase agreement, Infogrames acquired all of the outstanding
common stock of Shiny for approximately $47.2 million, which was paid to or for
the benefit of the Company as follows:

o $3.0 million in cash paid to the Company at closing;

o $10.8 million to be paid to the Company pursuant to a promissory note
from Infogrames providing for scheduled payments with the final
payment due July 31, 2002;

o $26.1 million paid directly to third party creditors of the Company;
and

o $7.3 million paid to Shiny's president and Shiny Group for Shiny
common stock that was issued to such parties to settle claims relating
to the Company's original acquisition of Shiny.


F-16



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


The promissory note receivable from Infogrames was paid in full in August
2002.

The Company recognized a gain of $28.8 million on the sale of Shiny. The
details of the sale are as follows:


(In millions)
Sale price of Shiny ............................................ $ 47.2
Net assets of Shiny at April 30, 2002 .......................... 2.3
Transaction related costs:
Cash payment to Warner Brothers Entertainment, Inc.
for consent to transfer Matrix license ................... 2.2
Note payable issued to Warner Brothers Entertainment,
Inc. for consent to transfer Matrix
license (Note 5) ......................................... 2.0
Payment to Shiny's President & Shiny Group, Inc. ............ 7.1
Commission fees to Europlay I, LLC .......................... 3.9
Legal fees .................................................. 0.9
-------
Gain on sale ................................................... $ 28.8
=======


In addition, the Company recorded a tax provision of $150,000 in connection with
the sale of Shiny.

Concurrently with the closing of the sale, the Company settled a legal
dispute with Vivendi, relating to the parties' August 2001 distribution
agreement. The Company also settled legal disputes with its former bank and its
former Chairman, relating to the Company's April 2001 credit facility with its
former bank that was partially guaranteed by its former Chairman. The disputes
with Vivendi, the bank and the former Chairman were settled and dismissed, with
prejudice, following consummation of the sale.

4. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS

PREPAID LICENSES AND ROYALTIES

Prepaid licenses and royalties consist of the following:

DECEMBER 31,
2003 2002
------ ------
(Dollars in thousands)
Prepaid royalties for titles in development .......... $ 100 $4,644
Prepaid royalties for shipped titles ................. -- 431
Prepaid licenses and trademarks ...................... 109 54
------ ------
$ 209 $5,129
====== ======


Amortization of prepaid licenses and royalties is included in cost of goods
sold and totaled $5.2 million, $5.7 million and $8.0 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

During the years ended December 31, 2003, 2002 and 2001, the Company
wrote-off $2.9 million $4.1 million and $8.1 million, respectively, of prepaid
royalties for titles in development that were impaired due to the cancellation
of certain development projects, which the Company has recorded under cost of
goods sold in the accompanying consolidated statements of operations.


F-17



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

DECEMBER 31,
2003 2002
-------- --------
(Dollars in thousands)
Computers and equipment ........................ $ 6,071 $ 9,125
Furniture and fixtures ......................... 48 107
Leasehold improvements ......................... 102 1,232
-------- --------
6,221 10,464
Less: Accumulated depreciation and amortization (4,107) (7,334)
-------- --------
$ 2,114 $ 3,130
======== ========


For the years ended December 31, 2003, 2002 and 2001, the Company incurred
depreciation and amortization expense of $1.4 million, $1.7 million and $2.1
million, respectively. Shiny's property and equipment, which had accumulated
depreciation of $0.4 million at December 31, 2001, was sold with the sale of
Shiny. During the years ended December 31, 2003, 2002 and 2001, the Company
disposed of fully depreciated equipment having an original cost of $4.6 million,
$0 and $2.3 million, respectively.

5. PROMISSORY NOTE

The Company issued to Warner Brothers Entertainment, Inc. ("Warner") a
Secured Convertible Promissory Note bearing interest at 6% per annum, due April
30, 2003, in the principal amount of $2.0 million in connection with the sale of
Shiny (Note 3). The note was issued in partial payment of amounts due Warner
under the parties' license agreement for the video game based on the motion
picture THE MATRIX, which was being developed by Shiny. The note is secured by
all of the Company's assets, and may be converted by the holder thereof into
shares of the Company's common stock on the maturity date or, to the extent
there is any proposed prepayment, within the 30 day period prior to such
prepayment. The conversion price is equal to the lower of (a) $0.304 or (b) an
amount equal to the average closing price of a share of the Company's common
stock for the five business days ending on the day prior to the conversion date,
provided that in no event can the note be converted into more than 18,600,000
shares. If any amount remains due following conversion of the note into
18,600,000 shares, the remaining amount will be payable in cash. The Company
agrees to register with the Securities and Exchange Commission the shares of
common stock to be issued in the event Warner exercises its conversion option.
At December 31, 2003, the balance owed to Warner, including accrued interest, is
$0.84 million. On or about October 9, 2003, Warner filed suit against the
Company in the Superior Court for the State of California, County of Orange,
alleging default on an Amended and Restated Secured Convertible Promissory Note
held by Warner dated April 30, 2002, with an original principal sum of $2.0
million. At the time the suit was filed, the current remaining principal sum due
under the note was $1.4 million in principal and interest. The Company entered
into a settlement agreement on this litigation and entered into a payment plan
with Warner to satisfy the balance of the note by January 30, 2004. The Company
is currently in default of the settlement agreement with Warner and has entered
into a payment plan, of which the Company is in default, for the remaining
balance of $0.32 million payable in one remaining installment.


F-18



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


6. ADVANCES FROM DISTRIBUTORS, RELATED PARTIES AND OTHERS

Advances from distributors and OEMs consist of the following:

DECEMBER 31,
2003 2002
------ ------
(Dollars in thousands)

Advances for other distribution rights ......... $ 629 $ 101
====== ======
Net advance from Vivendi distribution
agreement (related party) .................. $2,862 $3,550
====== ======


In April 2002, the Company entered into an agreement with Titus, pursuant
to which, among other things, the Company sold to Titus all right, title and
interest in the games EARTHWORM JIM, MESSIAH, WILD 9, R/C STUNT Copter,
SACRIFICE, MDK, MDK II, and KINGPIN, and Titus licensed from the Company the
right to develop, publish, manufacture and distribute the games HUNTER I, HUNTER
II, ICEWIND DALE I, ICEWIND DALE II, and BG: DARK ALLIANCE II solely on the
Nintendo Advance GameBoy game system for the life of the games. As consideration
for these rights, Titus issued to the Company a promissory note in the principal
amount of $3.5 million, which note bears interest at 6% per annum. The
promissory note was due on August 31, 2002, and may be paid, at Titus' option,
in cash or in shares of Titus common stock with a per share value equal to 90%
of the average trading price of Titus' common stock over the 5 days immediately
preceding the payment date. The Company has provided Titus with a guarantee
under this agreement, which provides that in the event Titus does not achieve
gross sales of at least $3.5 million by June 25, 2003, and the shortfall is not
the result of Titus' failure to use best commercial efforts, the Company will
pay to Titus the difference between $3.5 million and the actual gross sales
achieved by Titus, not to exceed $2.0 million. In April 2003, the Company
entered into a rescission agreement with Titus to repurchase these assets for a
purchase price payable by canceling the $3.5 million promissory note, and any
unpaid accrued interest thereon. Concurrently, the Company and Titus terminated
all executory obligations including, without limitation, the Company's
obligation to pay Titus up to the $2 million guarantee.

In August 2001, the Company entered into a distribution agreement with
Vivendi providing for Vivendi to become the Company's distributor in North
America through December 31, 2002, as amended, for substantially all of its
products, with the exception of products with pre-existing distribution
agreements. Under the terms of the agreement, as amended, Vivendi earned a
distribution fee based on the net sales of the titles distributed. The agreement
provided for advance payments from Vivendi totaling $10.0 million. In amendments
to the agreement, Vivendi agreed to advance the Company an additional $3.5
million. The distribution agreement, as amended, provides for the acceleration
of the recoupment of the advances made to the Company, as defined. During the
three months ended March 31, 2002, Vivendi advanced the Company an additional
$3.0 million bringing the total amounts advanced to the Company under the
distribution agreement with Vivendi to $16.5 million. In April 2002, the
distribution agreement was further amended to provide for Vivendi to distribute
substantially all of the Company's products through December 31, 2002, except
certain future products, which Vivendi would have the right to distribute for
one year from the date of release. As of August 1, 2002, all distribution
advances relating to the August 2001 agreement from Vivendi were fully earned or
repaid. As of December 31, 2003 this agreement has expired.

In August 2002, the Company entered into a new distribution agreement with
Vivendi whereby Vivendi will distribute substantially all of the Company
products in North America for a period of three years as a whole and two years
with respect to each product giving a potential maximum term of five years.
Under the August 2002 agreement, Vivendi will pay the Company sales proceeds
less amounts for distribution fees. Vivendi is responsible for all
manufacturing, marketing and distribution expenditures, and bears all credit,
price concessions and inventory risk, including product returns. Upon the
Company's delivery of a gold master to Vivendi, Vivendi will pay the Company as
a non-refundable minimum guarantee, a specified percent of the projected amount
due the Company based on projected initial shipment sales, which are established
by Vivendi in accordance with the terms of the agreement. The remaining amounts
are due upon shipment of the titles to Vivendi's customers. Payments for future
sales that exceed the projected initial shipment sales are paid on a monthly
basis. In December 2002, the Company granted


F-19



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


OEM rights and selected back catalog titles in North America to Vivendi. In
January 2003, the Company granted Vivendi the right to distribute substantially
all of our products in select rest-of-world countries. As of December 31, 2003,
Vivendi had $2.9 million of its advance remaining to recoup under the
rest-of-world countries and OEM back catalog agreements. As of December 2003,
the Company earned $0.7 million of the $3.6 million advance related to future
minimum guarantees on undelivered products.

In February 2003, the Company sold to Vivendi all future interactive
entertainment-publishing rights to the HUNTER: THE RECKONING license for $15
million, payable in installments, which were fully paid at June 30, 2003. The
Company retained the rights to the previously published HUNTER: THE RECKONING
titles on Microsoft Xbox and Nintendo GameCube.

In February 2003, Vivendi advanced the Company $1.0 million pursuant to a
letter of intent. As of December 31, 2003, the advance was discharged and
recouped in full by Vivendi under the terms of the Vivendi settlement.

In September 2003, the Company terminated its distribution agreement with
Vivendi as a result of their alleged breaches, including for non-payment of
money owed to the Company under the terms of this distribution agreement. In
October 2003, Vivendi and the Company reached a mutually agreed upon settlement
and agreed to reinstate the 2002 distribution agreement. Vivendi distributed the
Company's games FALLOUT: BROTHERHOOD OF STEEL and BALDURS GATE: DARK ALLIANCE II
in North America and Asia-Pacific (excluding Japan), and retained exclusive
distribution rights in these regions for all of the Company's future titles
through August 2005.

Based on recent sales and royalty statements received in April 2004 from
Vivendi, the Company believes that Vivendi incorrectly reported gross sales of
its products under the 2002 Agreement as a result of its taking improper
deductions for price protections it offered its customers. Vivendi has
acknowledged this error. The Company currently believes the minimum amount due
in additional proceeds is approximately $66,000, which we are currently
investigating.

During 2003, the Company entered into two distribution agreements granting
the distribution rights to certain titles for a total of $0.8 million in cash
advance payments. As of December 31, 2003, approximately $0.2 million of the
advance has been earned.

In March 2001, the Company entered into a supplement to a licensing
agreement with a console hardware and software manufacturer under which it
received an advance of $5.0 million. This advance was repaid with proceeds from
the sale of Shiny.

In July 2001, the Company entered into a distribution agreement with a
distributor whereby the distributor would have the North American distribution
rights to a future title. In return, the distributor paid the Company an advance
of $4.0 million to be recouped against future amounts due to the Company based
on net sales of the future title. In January 2002, the Company sold the
publishing rights to this title to the distributor in connection with a
settlement agreement entered into with the third party developer. The settlement
agreement provided, among other things, that the Company assign its rights and
obligations under the product agreement to the third party distributor. In
consideration for assigning the product agreement to the distributor, the
Company was not required to repay the $4.0 million advance nor repay $1.6
million related to past royalties and interest owed to the distributor. In
addition, the Company agreed to forgive $0.6 million in advances previously paid
to the developer. As a result, the Company recorded net revenues of $5.6 million
and a related cost of sales of $0.6 million in the year ended December 31, 2002.

Other advances from distributors are repayable as products covered by those
agreements are sold.

7. INCOME TAXES

Income (loss) before provision for income taxes consists of the following:


YEARS ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Domestic ............ $ 1,289 $ 14,922 $(44,264)
Foreign ............. 23 -- (1,552)
-------- -------- --------
Total ............... $ 1,312 $ 14,922 $(45,816)
======== ======== ========


F-20



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


The provision for income taxes is comprised of the following:


YEARS ENDED DECEMBER 31,
2003 2002 2001
----- ----- -----
(Dollars in Thousands)
Current:
Federal ............... $ -- $(225) $ 500
State ................. -- -- --
Foreign ............... -- -- --
----- ----- -----
-- (225) 500
Deferred:
Federal ............... -- -- --
State ................. -- -- --
----- ----- -----
-- -- --
----- ----- -----
$ -- $(225) $ 500
===== ===== =====


The Company files a consolidated U.S. Federal income tax return, which
includes all of its domestic operations. The Company files separate tax returns
for each of its foreign subsidiaries in the countries in which they reside. The
Company's available net operating loss ("NOL") carryforward for Federal tax
reporting purposes approximates $128 million and expires through the year 2023.
The Company's NOL's for State tax reporting purposes approximate $64 million and
expires through the year 2013. The utilization of the federal and state net
operating losses may be limited by Internal Revenue Code Section 382. Further,
utilization of the Company's state NOLs for tax years beginning in 2002 and
2003, were suspended under provisions of California law.

In June 2002, the Internal Revenue Service ("the IRS") concluded its
examination of the Company's consolidated federal income tax returns for the
years ended April 30, 1992 through 1997. In 2001, the Company established a
reserve of $500,000, representing management's best estimate of amounts to be
paid in settlement of the IRS claims. In the second quarter of 2002, the Company
reached a settlement with the IRS and agreed to pay $275,000 to settle all
outstanding issues. With the executed settlement, the Company has adjusted its
reserve and, as a result, recorded an income tax benefit of $225,000 in the year
ended December 31, 2002.

A reconciliation of the statutory Federal income tax rate and the effective tax
rate as a percentage of pretax loss is as follows:


YEARS ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Statutory income tax rate ............. 34.0 % 34.0 % (34.0)%
State and local income taxes, net of
Federal income tax benefit ......... -- 2.0 (6.0)
Valuation allowance ................ (39.5) (36.0) 40.0
Other ................................. 5.5 (1.5) 1.1
-------- -------- --------
-- % (1.5)% 1.1 %
======== ======== ========


F-21



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


The components of the Company's net deferred income tax asset (liability)
are as follows:


DECEMBER 31,
2003 2002
-------- --------
(Dollars in thousands)
Current deferred tax asset (liability):
Prepaid royalties ............................... $ (1,343) $ 422
Nondeductible reserves .......................... 1,843 468
Reserve for advances ............................ (1,685) (2,041)
Accrued expenses ................................ 1,089 (1,297
Foreign loss and credit carryforward ............ 2,556 2,556
Federal and state net operating losses .......... 49,735 51,192
Research and development credit carryforward .... 2,374 2,374
Other ........................................... (119) 909
-------- --------
54,450 54,583
-------- --------

Non-current deferred tax asset (liability):
Depreciation expense ............................ (117) (192)
Nondeductible reserves .......................... -- --
-------- --------
(117) (192)
-------- --------

Net deferred tax asset before valuation allowance .... 54,333 54,391
Valuation allowance .................................. (54,333) (54,391)
-------- --------
Net deferred tax asset ............................... $ -- $ --
======== ========


The Company maintains a valuation allowance against its deferred tax assets
due to the uncertainty regarding future realization. In assessing the
realizability of its deferred tax assets, management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies. The valuation allowance on deferred tax assets decreased
$0.05 million during December 31, 2003 and decreased $1.5 million during
December 31, 2002.

8. COMMITMENTS AND CONTINGENCIES

ATARI BREACH

On or about February 23, 2004 the Company received correspondence from
Atari Interactive alleging that Interplay had failed to pay royalties due under
the D&D license as of February 15, 2004. If the Company is unable to cure this
alleged breach of the license agreement, the Company may lose its remaining
rights under the license, including the rights to continued distribution of
BALDUR'S GATE: DARK ALLIANCE II. The loss of the remaining rights to distribute
games created under the D&D license could have a significant negative impact on
future operating results.

PAYROLL TAXES

At December 31, 2003, the Company had accrued approximately $70,000 for
past due interest and penalties on the late payment of federal payroll taxes. As
of December 31, 2003, the Company is current on the principal portion of Federal
payroll taxes. Additionally, in December 2003, the Company paid the State of
California $12,076 in penalties and interest for late payment of state payroll
taxes. As of December 31, 2003, the Company did not have any past due payroll
tax principal, penalties, or interest to the State of California. As of April
2004, the Company estimates that it owes an additional $10,000 in payroll tax
penalties, which the Company has accrued for nonpayment of approximately $99,000
in Federal and State payroll taxes, which were due on March 31, 2004 and is
still outstanding. The Company was unable to meet its April 15, 2004 payroll
obligations to its employees.

INSURANCE

The Company's property, general liability, auto, workers compensation,
fiduciary liability, and employment practices liability have been cancelled.


F-22



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


LEASES

The Company has various leases for the office space it occupies including
its corporate offices in Irvine, California. The lease for corporate offices
expires in June 2006 with one five-year option to extend the term of the lease.
The Company has also entered into various office equipment operating leases.
Future minimum lease payments under noncancelable operating leases are as
follows:


Year ending December 31 (Dollars in thousands):
2004 ............................. 1,533
2005 ............................. 1,533
2006 ............................. 642
--------
$ 3,708
========

Total rent expense was $1.8 million, $2.1 million, and $2.7 million for the
years ended December 31, 2003, 2002 and 2001, respectively.

On or about April 16, 2004, Arden Realty Finance IV LLC filed an unlawful
detainer action against the Company in the Superior Court for the State of
California, County of Orange, alleging the Company's default under its corporate
lease agreement. At the time the suit was filed, the alleged outstanding rent
totaled $431,823. If the Company is unable to pay its rent, it may lose its
office space, which would interrupt its operations and cause substantial harm to
its business.

LITIGATION

The Company is involved in various legal proceedings, claims and litigation
arising in the ordinary course of business, including disputes arising over the
ownership of intellectual property rights and collection matters. In the opinion
of management, the outcome of known routine claims will not have a material
adverse effect on the Company's business, financial condition or results of
operations.

On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a $98.8
million complaint for damages against Atari Interactive, Inc. (formerly known as
Infogrames Interactive, Inc.) and other Atari Interactive affiliates as well as
the Company's subsidiary GamesOnline.com, Inc., alleging, among other things,
breach of contract, misappropriation of trade secrets, breach of fiduciary
duties and breach of implied covenant of good faith in connection with an
electronic distribution agreement dated November 2001 between KBK and
GamesOnline.com, Inc. KBK has alleged that GamesOnline.com failed to timely
deliver to KBK assets to a product, and that it improperly disclosed
confidential information about KBK to Atari. KBK amended its complaint to add
the Company as a separate defendant. The Company counterclaimed against KBK and
also against Atari Interactive for breach of contract, among other claims. The
Company believes this complaint is without merit and will vigorously defend its
position.

On November 25, 2002, Special Situations Fund III, Special Situations
Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special
Situations Technology Fund, L.P. (collectively, "Special Situations") initiated
legal proceedings against the Company seeking damages of approximately $1.3
million, alleging, among other things, that the Company failed to secure a
timely effective date for a Registration Statement for the Company's shares
purchased by Special Situations under a common stock subscription agreement
dated March 29, 2002 and that the Company is therefore liable to pay Special
Situations $1.3 million. This matter was settled and the case dismissed in
December 2003.

In August 2003, the Company sent several notifications to Vivendi accusing
Vivendi of failing to perform in accordance with the distribution agreement,
including for the non-payment of money owed the Company, but the Company did not
receive a response acceptable to it. In September 2003, the Company terminated
the distribution agreement with Vivendi as a result of its alleged breaches.
Following the termination, Vivendi filed suit against the Company in the
Superior Court for the State of California, Los Angeles County, in an attempt to
have the license reinstated. In October 2003, Vivendi and the Company reached a
mutually agreed upon settlement and agreed to reinstate the August 2002
distribution agreement. Under the settlement, Vivendi resumed distribution of
the Company's products and will continue distributing its titles through August
2005.


F-23



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


On September 19, 2003, the Company commenced a wrongful termination and
breach of contract action against Atari Interactive, Inc. and Atari, Inc. in New
York State Supreme Court, New York County. The Company sought, among other
things, a judgment declaring that a computer game license agreement between The
Company and Atari Interactive continues to be in full force and effect. On
September 23, 2003, the Company obtained a preliminary injunction that prevented
termination of the computer game license agreement. Atari Interactive answered
the complaint, denying all claims, asserting several affirmative defenses and
counterclaims for breach of contract and one counterclaim for a judgment
declaring the computer game license agreement terminated. Both sides sought
damages in an amount to be determined at trial. The Company, Atari Interactive
and Atari, Inc. reached an agreement with respect to the scope and terms of the
computer game license agreement. The parties filed with the court a Stipulation
of Dismissal, dated December 22, 2003. The court ordered dismissal of the matter
on January 6, 2004.

On or about October 9, 2003, Warner Brothers Entertainment, Inc. filed suit
against the Company in the Superior Court for the State of California, County of
Orange, alleging default on an Amended and Restated Secured Convertible
Promissory Note held by Warner dated April 30, 2002, with an original principal
sum of $2.0 million. At the time the suit was filed, the current remaining
principal sum due under the note was $1.4 million in principal and interest. The
Company stipulated to a judgment in favor of Warner Brothers and are in the
process of satisfying the judgment, of which approximately $837,000 remained to
be paid as of December 31, 2003. The Company is currently in default of the
settlement agreement with Warner and has entered into a payment plan, of which
the Company is in default, for the remaining balance of $0.32 million payable in
one remaining installment.

In March 2004, the Company instituted litigation in the Superior Court for
the State of California, Los Angeles County, against Battleborne Entertainment,
Inc. ("Battleborne"). Battleborne was developing a console product for us
tentatively titled "Airborne: Liberation." The Company's complaint alleges that
Battleborne repudiated the contract with the Company and subsequently renamed
the product and entered into a development agreement with a different publisher.
The Company seeks a declaration from the court that it retain rights to the
product, or damages.

On or about April 16, 2004, Arden Realty Finance IV LLC filed an unlawful
detainer action against the Company in the Superior Court for the State of
California, County of Orange, alleging the Company's default under its corporate
lease agreement. At the time the suit was filed, the alleged outstanding rent
totaled $431,823. If the Company is unable to satisfy this obligation and reach
an agreement with its landlord, the Company could forfeit its lease, which would
materially disrupt its operations and cause substantial harm to its business.

On or about April 19, 2004, Bioware Corporation filed a breach of contract
action against the Company in the Superior Court for the State of California,
County of Orange, alleging failure to pay royalties when due. At the time of
filing, Bioware alleged that it was owed approximately $156,000 under various
agreements for which it secured a writ of attachment over the Company's assets.
If Bioware executes the writ, it will negatively affect the Company's cash flow,
which could further restrict its operations.

EMPLOYMENT AGREEMENTS

The Company has entered into various employment agreements with certain key
employees providing for, among other things, salary, bonuses and the right to
participate in certain incentive compensation and other employee benefit plans
established by the Company. Under these agreements, upon termination without
cause or resignation for good reason, the employees may be entitled to certain
severance benefits, as defined. These agreements expire through 2006.

9. STOCKHOLDERS' EQUITY

PREFERRED STOCK AND COMMON STOCK

The Company's articles of incorporation authorize up to 5,000,000 shares of
$0.001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time as the Board of Directors determine. As
of December 31, 2003, there were no shares of preferred stock outstanding.

In 2002, the Company amended a development agreement with a developer
whereby the developer would receive shares of the Company's common stock in
return for meeting certain milestones. As a result of the developer meeting
these milestones, the Company agreed to issue 700,000 shares of its restricted
common stock. The accompanying statement of operations includes royalty expense
of $205,000 based on the estimated fair value of the common stock on the day the
restricted common stock was earned in 2002. The Company issued the restricted
common stock in February 2003.


F-24



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


In April 2001, the Company completed a private placement of 8,126,770 units
at $1.5625 per unit for total proceeds of $12.7 million, and net proceeds of
approximately $11.7 million. Each unit consisted of one share of common stock
and a warrant to purchase one share of common stock at $1.75 per share, which
are currently exercisable. If the Company issues additional shares of common
stock at a per share price below the exercise price of the warrants, then the
warrants are to be repriced, as defined, subject to stockholder approval. The
warrants expire in March 2006. In addition to the warrants issued in the private
placement, the Company granted the investment banker associated with the
transaction a warrant for 500,000 shares of the Company's common stock. The
warrant has an exercise price of $1.5625 per share and vests one year after the
registration statement for the shares of common stock issued under the private
placement becomes effective. The warrant expires four years after it vests. The
registration statement was not declared effective by May 31, 2001 and in
accordance with the terms of the agreement, the Company incurred a penalty of
approximately $254,000 per month, payable in cash, until June 2002, when the
registration statement was declared effective. During 2003, the Company settled
with certain of these investors with respect to payment. During the year ended
December 31, 2003, 2002, and 2001, the Company accrued a provision of $0, $1.8
million and $1.8 million, respectively, payable to these stockholders, which was
charged to results of operations and classified as interest expense. The total
amount accrued at December 31, 2003 and 2002 is $3.1 million and $3.6 million,
respectively, which is included in accounts payable in the accompanying
consolidated balance sheet.

In April 2000, the Company completed a $20 million transaction with Titus
under a Stock Purchase Agreement and issued 719,424 shares of newly designated
Series A Preferred Stock ("Preferred Stock") and a warrant for 350,000 shares of
the Company's Common Stock, which had preferences under certain events, as
defined. The Preferred Stock was convertible by Titus, redeemable by the
Company, and accrued a 6% cumulative dividend per annum payable in cash or, at
the option of Titus, in shares of the Company's Common Stock as declared by the
Company's Board of Directors. The Company held rights to redeem the Preferred
Stock shares at the original issue price plus all accrued but unpaid dividends.
Titus was entitled to convert the Preferred Stock shares into shares of Common
Stock at any time after May 2001. The conversion rate was the lesser of $2.78
(7,194,240 shares of Common Stock) or 85% of the market price per share at the
time of conversion, as defined. The Preferred Stock was entitled to the same
voting rights as if it had been converted to Common Stock shares subject to a
maximum of 7,619,047 votes. In October 2000, the Company's stockholders approved
the issuance of the Preferred Stock to Titus. In connection with this
transaction, Titus received a warrant for 350,000 shares of the Company's Common
Stock exercisable at $3.79 per share at anytime. The fair value of the warrant
was estimated on the date of the grant using the Black-Scholes pricing model.
This resulted in the Company allocating $19,202,000 to the Preferred Stock and
$798,000 to the warrant, which is included in paid in capital. The discount on
the Preferred Stock was accreted over a one-year period as a dividend to the
Preferred Stock in the amount of $532,000 and $266,000 during the year ended
December 31, 2001 and 2000, respectively. As of December 31, 2001, the Company
had accreted the full amount. In addition, Titus received a warrant for 50,000
shares of the Company's Common Stock exercisable at $3.79 per share, because the
Company did not meet certain financial operating performance targets for the
year ended December 31, 2000. The fair value of this warrant was recorded as
additional interest expense. Both warrants expire in April 2010.

In August 2001, Titus converted 336,070 shares of Series A Preferred Stock
into 6,679,306 shares of Common Stock. This conversion did not include
accumulated dividends of $740,000 on the Preferred Stock, these were
reclassified as an accrued liability as Titus had elected to receive the
dividends in cash. In March 2002, Titus converted its remaining 383,354 shares
of Series A Preferred Stock into 47,492,162 shares of Common Stock. This
conversion did not include accumulated dividends of $1.2 million on the
Preferred Stock, these were reclassified as an accrued liability as Titus had
elected to receive the dividends in cash. Collectively, Titus has 71% of the
total voting power of the Company's capital stock at December 31, 2003. There
were no accrued dividends as of December 31, 2003.

EMPLOYEE STOCK PURCHASE PLAN

Under this plan, eligible employees may purchase shares of the Company's
Common Stock at 85% of fair market value at specific, predetermined dates. In
2000, the Board of Directors increased the number of shares authorized to
300,000. Of the 300,000 shares authorized to be issued under the plan,
approximately 84,877 shares


F-25



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


remain available for issuance at December 31, 2002. Employees purchased 6,458,
21,652 and 24,483 shares in 2003, 2002 and 2001 for $323, $4,000 and $31,000,
respectively. In 2003 the employee stock purchase plan was terminated.

SHARES RESERVED FOR FUTURE ISSUANCE

Common stock reserved for future issuance at December 31, 2003 is as
follows:

Stock option plans:
Outstanding .................................... 425,985
Available for future grants .................... 7,614,447
Employee Stock Purchase Plan ...................... --
Warrants .......................................... 9,587,068
----------
Total ............................................. 17,627,500
==========


10. NET EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is computed as net earnings (loss)
available to common stockholders divided by the weighted average number of
common shares outstanding for the period and does not include the impact of any
potentially dilutive securities. Diluted earnings per common share is computed
by dividing the net earnings available to the common stockholders by the
weighted average number of common shares outstanding plus the effect of any
dilutive stock options and common stock warrants and the conversion of
outstanding convertible debentures.

YEARS ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
(Amounts in thousands,
except per share amounts)
Net income (loss) available to common
stockholders ............................ $ 1,312 $ 15,014 $(47,548)
Interest related to conversion of secured
convertible promissory note ............. 92 82 --
-------- -------- --------
Dilutive net income (loss) available
to common stockholders .................. $ 1,404 $ 15,096 $(47,548)
-------- -------- --------
Shares used to compute net income (loss) per
common share:
Weighted-average common shares ............ 93,852 83,585 38,670
Dilutive stock equivalents ................ 10,462 12,485 --
-------- -------- --------
Dilutive potential common shares .......... 104,314 96,070 38,670
======== ======== ========
Net income (loss) per common share:
Basic ..................................... $ 0.01 $ 0.18 $ (1.23)
Diluted ................................... $ 0.01 $ 0.16 $ (1.23)
-------- -------- ---------


There were options and warrants outstanding to purchase 10,013,053 shares
of common stock at December 31, 2003, which were excluded from the earnings per
common share computation as the exercise price was greater than the average
market price of the common shares. The dilutive stock equivalents in the above
calculation related to the outstanding convertible debentures at December 31,
2003, which the Company utilized the "if converted" method pursuant to SFAS 128.

Due to the net loss attributable for the year ended December 31, 2001, on a
diluted basis to common stockholders, stock options and warrants have been
excluded from the diluted earnings per share calculation as their inclusion
would have been antidilutive. Had net income been reported for the year ended
December 31, 2001, an additional 13,694,739 shares would have been added to
dilutive potential common shares. The weighted average exercise price at
December 31, 2003, 2002 and 2001 was $1.84, $1.99 and $2.07, respectively, for
the options and warrants outstanding.


F-26



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


In August 2000, the Company issued a warrant to purchase up to 100,000
shares of the Company's Common Stock. The warrant vested at certain dates over a
one year period and had exercise prices between $3.00 per share and $6.00 per
share. The warrant expired in August 2003 unexercised.

A detail of the warrants outstanding and exercisable as of December 31,
2003 is as follows:


WARRANTS OUTSTANDING AND EXERCISABLE
--------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF EXERCISE CONTRACT EXERCISE
PRICES NUMBER OUTSTANDING LIFE PRICE
- ----------------------- ------------------ ---------- ---------

$ 1.56 - $ 1.56 500,000 3.50 $ 1.56
$ 1.75 - $ 1.75 8,626,770 2.47 1.75
$ 3.79 - $ 3.79 460,298 6.29 3.79
$ 3.00 - $ 6.00
------------------ ---------- ---------
$ 1.56 - $ 6.00 9,587,068 2.70 $ 1.84
================== ========== =========


F-27



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


11. EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

The Company has one stock option plan currently outstanding. Under the 1997
Stock Incentive Plan, as amended (the "1997 Plan"), the Company may grant
options to its employees, consultants and directors, which generally vest from
three to five years. At the Company's 2002 annual stockholders' meeting, its
stockholders voted to approve an amendment to the 1997 Plan to increase the
number of authorized shares of common stock available for issuance under the
1997 Plan from four million to 10 million. The Company's Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan- 1991, as amended
(the "1991 Plan"), and the Company's Incentive Stock Option and Nonqualified
Stock Option Plan-1994, as amended (the "1994 Plan"), have terminated. An
aggregate of 9,050 stock options that remain outstanding under the 1991 Plan and
1994 Plan have been transferred to its 1997 Plan.

The Company has treated the difference, if any, between the exercise price
and the estimated fair market value as compensation expense for financial
reporting purposes, pursuant to APB 25. Compensation expense for the vested
portion aggregated $0, $0 and $4,000 for the years ended December 31, 2003, 2002
and 2001, respectively.

The following is a summary of option activity pursuant to the Company's
stock option plans:



YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------

Options outstanding at
beginning of year 1,091,697 $ 3.10 4,007,969 $ 2.57 3,539,828 $ 2.90
Granted 130,000 0.09 -- -- 739,667 1.25
Exercised -- -- (639,541) 0.14 (21,626) 0.47
Canceled (795,712) 3.22 (2,276,731) 3.44 (249,900) 3.36
--------- ---------- ---------
Options outstanding at
end of year 425,985 $ 1.95 1,091,697 $ 3.10 4,007,969 $ 2.57
========= ========== =========
Options exercisable 243,890 744,892 2,093,606
========= ========== =========



The following outlines the significant assumptions used to estimate the
fair value information presented utilizing the Black-Scholes Single Option
approach with ratable amortization. There were 130,000 and zero options granted
in 2003 and 2002, respectively. The 2003 grants of stock options were to members
of the Board of Directors at a price of $0.09, vesting within 3 years, and
expiring in 2013.




YEARS ENDED DECEMBER 31,
2003 2002 2001
--------- -------- ---------

Risk free rate ............................. 4.0% 0.0% 4.5%
Expected life .............................. 7.2 years -- 6.7 years
Expected volatility ........................ 164% 0% 94%
Expected dividends ......................... -- -- --
Weighted- average grant-date fair value
of warrants granted ..................... $ 0.09 $ -- $ 1.02
--------- -------- ---------


F-28



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


A detail of the options outstanding and exercisable as of December 31, 2003
is as follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contract Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$ 0.09 - $ 2.31 218,001 8.81 $ 0.53 70,671 $ 0.98
$ 2.44 - $ 2.64 31,000 6.63 $ 2.59 27,800 2.61
$ 2.69 - $ 2.69 100,500 5.52 $ 2.69 85,600 2.69
$ 3.25 - $ 8.00 76,484 5.28 $ 4.78 59,819 5.15
--------------------------------------------------------------
$ 0.09 - $ 8.00 425,985 7.24 $ 1.95 243,890 $ 2.79
==============================================================


PROFIT SHARING 401(K) PLAN

The Company sponsors a 401(k) plan ("the Plan") for most full-time
employees. The Company matches 50% of the participant's contributions up to 6%
of the participant's base compensation. The profit sharing contribution amount
is at the sole discretion of the Company's Board of Directors. Current year
contributions were zero. Participants vest at a rate of 20% per year after the
first year of service for profit sharing contributions and 20% per year after
the first two years of service for matching contributions. Participants become
100% vested upon death, permanent disability or termination of the Plan. Benefit
expense for the years ended December 31, 2003, 2002 and 2001 was $150,000,
$79,000 and $255,000, respectively.

12. RELATED PARTY TRANSACTIONS

Amounts receivable from and payable to related parties are as follows:

DECEMBER 31,
2003 2002
------- -------
(Dollars in thousands)
Receivables from related parties:
Avalon .................................. $ 893 $ 2,050
Vivendi ................................. -- 487
Titus ................................... 362 200
Return allowance ........................ (691) (231)
------- -------
Total ................................... $ 564 $ 2,506
======= =======

Payables to related parties:
Avalon .................................. $ -- $ 1,797
Vivendi ................................. 1,634 5,322
Titus ................................... -- 321
------- -------
Total ................................... $ 1,634 $ 7,440
======= =======


The Company's operations involve significant transactions with its majority
stockholder Titus Interactive S.A. ("Titus") and its affiliates. The Company has
a major distribution agreement with Avalon, an affiliate of Titus. In addition,
the Company has a major distribution agreement with Vivendi, which owns
approximately less than 5% of the Company's common stock as of December 31,
2003. It is the Company's policy that related party transactions are to be
reviewed and approved by a majority of our disinterested directors or our
Independent Committee.


F-29



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


In fiscal 2003, Vivendi's ownership decreased below 5%. As a result,
Vivendi will no longer be considered a 5% or more beneficial holder of the
Company's common stock and all future filings will no longer disclose Vivendi as
such. Consequently, all future filings involving disclosure of Vivendi will no
longer be made on the basis of disclosures of an affiliate of a 5% or more
beneficial holder of the Company's common stock. The disclosure in this section
"Activities with Related Parties" is being provided on the basis that for part
of fiscal 2003 Universal Studios, Inc., an affiliate of Vivendi, was a 5% or
more stockholder.

TRANSACTIONS WITH TITUS

The Company is a majority owned subsidiary of Titus. According to Titus'
filings with the Securities and Exchange Commission ("SEC"), Titus presently
owns approximately 67 million shares of common stock, which represents
approximately 71% of the Company's outstanding common stock, our only voting
security. In January 2004, Titus disclosed in their annual report for the fiscal
year ended June 30, 2003, filed with the Autorite des Marches Financiers of
France, that they were involved in a litigation with one of Interplay's former
founders and officers and as result had deposited pursuant to a California Court
Order approximately 8,679,306 shares of the Company's common stock held by them
(representing approximately 9% of our issued and outstanding common stock) with
the court. Also disclosed was that Titus was conducting settlement discussions
at the time of the filing to resolve the issue. To date, Titus has maintained
voting control over the 8,679,306 million shares of common stock and has not
represented to the Company that a transfer of beneficial ownership has occurred.
Nevertheless, such transfer of shares may occur in fiscal 2004

In connection with the equity investments by Titus, the Company performs
distribution services on behalf of Titus for a fee. In connection with such
distribution services, the Company recognized fee income of $5,000, $22,000,
$21,000 for the years ended December 31, 2003, 2002, and 2001, respectively. As
of December 31, 2003 and 2002, Titus and its affiliates, excluding Avalon, owed
the Company $362,000 and $200,000, with a reserve of $356,000 and $0,
respectively. The Company owed Titus and its affiliates, excluding Avalon,
$321,000 as of December 31, 2002 and $0 as of December 31, 2003. Amounts the
Company owed to Titus and its affiliates, excluding Avalon, at December 31, 2002
and 2003 consisted primarily of trade payables.

On September 5, 2001, the Company entered into a Support Agreement with
Titus providing for the nomination to the Company's Board of Directors a slate
of six individuals mutually acceptable to Titus and the Company for election as
directors at the Company's 2001 annual meeting of stockholders, and appointing a
Chief Administrative Officer ("CAO") to the Company. Also on September 5, 2001,
as part of the Support Agreement, three of the existing directors resigned and
three new directors acceptable to Titus were appointed by the remaining
directors to fill the three vacancies. As a consequence, from September 6, 2001
until the 2001 annual meeting on September 18, 2001, the Board of Directors
consisted of five individuals nominated by Titus, and two directors previously
nominated by management.

On September 13, 2001, the Company's Board of Directors established an
Executive Committee, consisting of the Company's President and CAO, to
administer and oversee all aspects of the Company's day-to-day operations,
including, without limitation, (a) the relationship with lenders, including
LaSalle Business Credit, Inc.; (b) relations with Europlay I, LLC ("Europlay"),
consultants retained to effect a restructuring of the Company; (c) capital
raising efforts; (d) relationships with vendors and licensors; (e) employment of
officers and employees; (f) retaining and managing outside professionals and
consultants; and (g) directing management.

The Company's 2001 annual meeting was held on September 18, 2001. At the
annual meeting, the five Titus nominees and one of the directors previously
nominated by management were elected to continue to serve as directors.
Subsequent to September 18, 2001, two additional independent directors were
elected to the Board of Directors.

In September 2001, Titus retained Europlay as consultants to assist with
the restructuring of the Company. Because the arrangement with Europlay is with
Titus and Europlay's services have a direct benefit to the Company, the Company
has recorded an expense and a capital contribution by Titus of $75,000 for the
year ended December 31, 2001 in accordance with the SEC's Staff Accounting
Bulletin No. 79 "Accounting for Expenses and Liabilities Paid by Principal
Stockholders." Beginning in October 2001, the Company agreed to reimburse Titus
for consulting expense incurred on behalf of the Company. As of December 31,
2001, the Company owed Titus $450,000 as a result of this arrangement. The
amounts owed to Europlay by Titus under this arrangement, were paid directly to
Europlay with the sale of Shiny in April 2002 (Note 3). The Company has also
entered into a commission-based agreement with Europlay where Europlay will
assist the Company with strategic transactions, such as debt financing or equity
financing, the sale of assets or an acquisition of the Company. Europlay
assisted the Company with the sale of Shiny, and as a result, earned a
commission based on the sales price of Shiny.

In April 2002, the Company entered into an agreement with Titus, pursuant
to which, among other things, the Company sold to Titus all right, title and
interest in the games EARTHWORM JIM, MESSIAH, WILD 9, R/C STUNT COPTER,
SACRIFICE, MDK, MDK II, AND KINGPIN, and Titus licensed from the Company the
right to develop, publish, manufacture and distribute the games HUNTER I, HUNTER
II, ICEWIND DALE I, ICEWIND DALE II, and BG: DARK ALLIANCE II solely on Nintendo
Advance GameBoy game system for the life of the games. As consideration for
these rights, Titus issued to the Company a promissory note in the principal
amount of $3.5 million, which note bears interest at 6% per annum. The
promissory note was due on August 31, 2002, and was to be paid, at Titus'
option, in cash or in shares of Titus common stock with a per share value equal
to 90% of the average trading price of Titus' common stock over the 5 days
immediately preceding the payment date. Pursuant to an April 26, 2002 agreement
with Titus, on or before July 25, 2002, the Company had the right to solicit
offers from and negotiate with third parties to sell certain rights and
licenses. The Company's efforts to enter into a binding agreement with a third
party were unsuccessful. Moreover, the Company provided Titus with a guarantee
under this agreement, which provides that in the event Titus did not achieve
gross sales of at least $3.5 million by June 25, 2003, and the shortfall was not
the result of Titus' failure to use best commercial efforts, the Company was to
pay to Titus the difference between $3.5 million and the actual gross sales
achieved by Titus, not to exceed $2 million. The Company entered into a
rescission agreement in April 2003 with Titus to repurchase these assets for a
purchase price payable by canceling the $3.5 million promissory note, and any
unpaid accrued interest thereon. Concurrently, the Company terminated any
executory obligations remaining, including, without limitation, our obligation
to pay Titus up to the $2 million guarantee.

Titus retained Europlay 1, LLC ("Europlay") as outside consultants to
assist with the Company's restructuring. This arrangement with Europlay is with
Titus, however, we agreed to reimburse Titus for consulting expenses incurred on
our behalf. In connection with the sale of Shiny (see Note 3), the Company
agreed to pay Europlay directly for their services with the proceeds received
from the sale, payment of which was made to Europlay in 2002. In addition, the
Company has entered into a commission-based agreement with Europlay to assist
the Company with


F-30



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


strategic transactions, such as debt or equity financing, the sale of assets or
an acquisition of the Company. Under this arrangement, Europlay assisted the
Company with the sale of Shiny. In April 2003, the Company paid Europlay, a
financial advisor originally retained by Titus, and subsequently retained by the
Company, $448,000 in connection with prior services provided by Europlay to the
Company.

TRANSACTIONS WITH TITUS AFFILIATES

Transactions with Avalon, a wholly owned subsidiary of Titus

The Company has an International Distribution Agreement with Avalon, a
wholly owned subsidiary of Titus. Pursuant to this distribution agreement,
Avalon provides for the exclusive distribution of substantially all of the
Company's products in Europe, Commonwealth of Independent States, Africa and the
Middle East for a seven-year period ending February 2006, cancelable under
certain conditions, subject to termination penalties and costs. Under this
agreement, as amended, the Company pays Avalon a distribution fee based on net
sales, and Avalon provides certain market preparation, warehousing, sales and
fulfillment services on the Company's behalf. In September 2003, the Company
amended this International Distribution Agreement to provide Avalon with
exclusive Australian rights to a product for $200,000. In November 2003, this
amendment was rescinded and the Company paid Avalon consideration of $50,000 for
the rescission in addition to the refunding of the original $200,000 to Avalon
for the same rights which were reinstated under the Vivendi settlement.

In February 1999, the Company entered into an International Distribution
Agreement with Avalon, which provided for the exclusive distribution of
substantially all of the Company's products in Europe, Commonwealth of
Independent States, Africa and the Middle East for a seven-year period,
cancelable under certain conditions, subject to termination penalties and costs.
Under the Agreement, the Company paid Avalon a monthly overhead fee, certain
minimum operating charges, a distribution fee based on net sales, and Avalon
provided certain market preparation, warehousing, sales and fulfillment services
on behalf of the Company.

The Company amended its International Distribution Agreement with Avalon
effective January 1, 2000. Under the amended Agreement, the Company no longer
paid Avalon an overhead fee or minimum commissions. In addition, the Company
extended the term of the agreement through February 2007 and implemented an
incentive plan that will allow Avalon to earn a higher commission rate, as
defined. Avalon disputed the amendment to the International Distribution
Agreement with the Company, and claimed that the Company was obligated, among
other things, to pay for a portion of Avalon's overhead of up to approximately
$9.3 million annually, subject to decrease by the amount of commissions earned
by Avalon on its distribution of the Company's products.

The Company settled this dispute with Avalon in April 2001 and further
amended the International Distribution Agreement and amended the Termination
Agreement and the Product Publishing Agreement, all of which were entered into
on February 10, 1999 when the Company acquired an equity interest in VIE
Acquisition Group LLC ("VIE"), the parent entity of Avalon. As a result of the
April 2001 settlement, Avalon dismissed its claim for overhead fees, VIE fully
redeemed the Company's ownership interest in VIE and Avalon paid the Company
$3.1 million in net past due balances owed under the International Distribution
Agreement. In addition, the Company paid Avalon a one-time marketing fee of
$333,000 for the period ending June 30, 2001 and the monthly overhead fee was
revised for the Company to pay $111,000 per month for the nine month period
beginning April 2001, and $83,000 per month for the six month period beginning
January 2002, with no further overhead commitment for the remainder of the term
of the International Distribution Agreement. The Company no longer has an equity
interest in VIE or Avalon as of April 2001.

In connection with this International Distribution Agreement, the Company
incurred distribution commission expense of $0.9 million, $0.9 million, and $2.3
million for the years ended December 31, 2003, 2002, and 2001, respectively. In
addition, the Company recognized overhead fees of $0, $0.5 million, and $1.0
million and certain minimum operating charges to Avalon of $0, $0, and $333,000
for the years ended December 31, 2003, 2002, and 2001, respectively. Also in
connection with this International Distribution Agreement, the Company subleased
office space from Avalon. Rent expense paid to Avalon was $27,000, $104,000, and
$104,000 for the years ended December 31, 2003, 2002, and 2001, respectively. As
of April 2003, the Company no longer sublease office from Avalon.

In January 2003, the Company entered into a waiver with Avalon related to
the distribution of a video game title in which the Company sold the European
distribution rights to Vivendi. In consideration for Avalon relinquishing its
rights, the Company paid Avalon a $650,000 cash consideration and will pay
Avalon 50% of all proceeds in excess of the advance received from Vivendi. As of
December 31, 2003, Vivendi has not reported sales exceeding the minimum
guarantee.

In May 2003, Avalon filed for a Company Voluntary Arrangement, ("CVA") a
process of reorganization in the United Kingdom in which the Company
participated in, and were approved as a creditor of Avalon. As part of the
Avalon CVA process, the Company submitted our creditor's claim. The Company
received the first payment due to it as a creditor under the terms of the Avalon
CVA plan. The Company continues to evaluate and adjust as appropriate its claims
against Avalon in the CVA process. However, the effects of the approval of the
Avalon CVA on its ability to collect amounts due from Avalon are uncertain. As a
result, the Company cannot guarantee its ability to collect fully the debts the
Company believes are due and owed to it from Avalon. If Avalon is not able to
continue to operate under the new CVA, the Company expects Avalon to cease
operations and liquidate, in which event the Company will most likely not
receive in full the amounts presently due it by Avalon. The Company may have to
appoint another distributor or become its own distributor in Europe and the
other territories in which Avalon presently distributes its products.

In June 1997, the Company entered into a Development and Publishing
Agreement with Confounding Factor, a game developer, in which the Company agreed
to commission the development of the game GALLEON in exchange for an exclusive
worldwide license to fully exploit the game and all derivates including all
publishing and distribution rights. Subsequently, in March 2002, the Company
entered into a Term Sheet with Avalon, pursuant to which Avalon assumed all
responsibility for future milestone payments to Confounding Factor to complete
development of GALLEON and Avalon acquired exclusive rights to ship the game in
certain territories. Avalon paid an initial $511,000 to Confounding Factor, but
then ceased making the required payments. While reserving the Company's rights
vis-a-


F-31



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


vis Avalon, the Company then resumed making payments to Confounding Factor to
protect its interests in GALLEON. As of March 2003, the Company met all of the
remaining financial obligations to Confounding Factor, however we continued to
provide production assistance to the developer in order to finalize the
Microsoft Xbox version of the game through December 2003. In December 2003, the
Company sold all rights to GALLEON to SCi Games Ltd., an affiliate of SCi
Entertainment Group of London. The Company paid Avalon a portion of the proceeds
relative to Avalon's contribution of development costs in return for them
relinquishing any rights to GALLEON.

In March 2003, the Company made a settlement payment of approximately
$320,000 to a third-party on behalf of Avalon Europe to protect the validity of
certain of the Company's license rights and to avoid potential third-party
liability from various licensors of the Company's products, and incurred legal
fees in the amount of approximately $80,000 in connection therewith.
Consequently, Avalon owes the Company $400,000 pursuant to the indemnification
provisions of the International Distribution Agreement. This amount was included
in the Company's claims against Avalon in the Avalon CVA process.

The Company has also entered into a Product Publishing Agreement with
Avalon, which provides us with an exclusive license to publish and distribute
substantially all of Avalon's products within North America, Latin America and
South America for a royalty based on net sales. As part of terms of an April
2001 settlement between Avalon and the Company, the Product Publishing Agreement
was amended to provide for the Company to publish only one future title
developed by Avalon. In connection with the Product Publishing Agreement with
Avalon, the Company earned $2,000, $66,000, $36,000 for performing publishing
and distribution services on behalf of Avalon for the years ended December 31,
2003, 2002, and 2001, respectively.

In connection with the International Distribution Agreement and Product
Publishing Agreement, the Company had also entered into an Operating Agreement
with Virgin Acquisition Holdings, LLC, renamed Avalon Interactive Acquisition
Holdings LLC ("Avalon Holding"), which among other terms and conditions,
provided the Company with a 43.9 percent equity interest in Avalon. During 1999,
Titus acquired a 50.1 percent equity interest in Avalon. In 2000, Titus acquired
the 6 percent originally owned by the two former members of the management of
Interplay Productions Limited, the Company's United Kingdom subsidiary. The
Company and Titus together held a 100 percent equity interest in Avalon as of
December 31, 2000. As part of the terms of the April 2001 settlement with Avalon
Holding, Avalon redeemed the Company's ownership interest in Avalon. The Company
no longer has any equity interest in Avalon or Avalon Holding as of April 2001.

The Company accounted for its investment in Avalon in accordance with the
equity method of accounting. The Company did not recognize any material income
or loss in connection with its investment in Avalon for the years ended December
31, 2001 and 2000.

Transactions with Titus Software

In March 2003, the Company entered into a note receivable with Titus
Software Corp., or "TSC", a subsidiary of Titus, for $226,000. The note earns
interest at 8% per annum and is due in February 2004. In May 2003, the Company's
board of directors rescinded the note receivable and demanded repayment of the
$226,000 from TSC. As of the date of this filing, the balance on the note with
accrued interest has not been paid. The balance on the note receivable, with
accrued interest, at December 31, 2003 was approximately $240,000. The total
receivable due from TSC is approximately $314,000 as of December 31, 2003. The
majority of the additional receivable, approximately $74,000, was due to TSC
subletting office space from Interplay and miscellaneous other items.

In May 2003, the Company's CEO instructed us to pay TSC $60,000 to cover
legal fees in connection with a lawsuit against Titus. As a result of the
payment, the CEO requested that the Company credit the $60,000 to amounts the
Company owed to him arising from expenses incurred in connection with providing
services to us. The Company's board of directors is in the process of
investigating the details of the transaction, including independent counsel
review as appropriate, in order to properly record the transaction.

Transactions with Titus Japan

In June 2003, the Company began operating under a representation agreement
with Titus Japan K.K. ("Titus Japan"), a majority-controlled subsidiary of
Titus, pursuant to which Titus Japan represents the Company as an agent in
regards to certain sales transactions in Japan. This representation agreement
has not yet been approved by the Company's board of directors and is currently
being reviewed by them. The Company' boards of directors has approved the
payments of certain amounts to Titus Japan in connection with certain services
already performed by them on the Company's behalf. As of December 31, 2003, the
Company has received approximately $100,000 in revenue and incurred
approximately $20,000 in commission fees pursuant to this agreement. As of
December 31, 2003 Titus Japan owed the Company $6,000, which was recovered in
the first quarter of 2004.

Transactions with Titus Interactive Studio

In September 2003, the Board approved the Company to engage the translation
services of Titus Interactive Studio. The Company, pursuant to the agreement,
must (i) request a quote from Titus Interactive Studio for each


F-32



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


service needed and only if such quote compares favorably with quotes from other
companies for identical work will Titus Interactive Studio be used, (ii) such
services shall be based on work orders submitted by the Company and (iii) each
work order can not have a rate exceeding $0.20/word (excluding voice over)
without receiving additional prior Board approval.

Transactions with Titus SARL

At December 31, 2003, the Company had a receivable of $42,000 for product
development services that it provided to Titus SARL during 2003 and for prior
years.

Transactions with Titus GIE

In February 2004, the Company engaged the services of GIE Titus Interactive
Group, an affiliate of Titus, for a three-month service agreement pursuant to
which GIE Titus or its agents shall provide to us certain foreign administrative
and legal services at a rate of $5,000 per month.

Transactions with Edge LLC

In September 2003, the Company's Board of Directors ratified and approved
the Company's engagement of Edge LLC to provide recommendations regarding the
operation of the Company's legal department and strategies as well as interim
executive functions. Mr. Vulpillat, a member of the board of directors, is the
managing member for Edge LLC. As of December 31, 2003, the Company has incurred
an aggregate expense of approximately $100,000 and has a payable of
approximately $15,000 to Edge LLC.

TRANSACTIONS WITH VIVENDI

In August 2001, the Company entered into a distribution agreement with
Vivendi providing for Vivendi to become the Company's distributor in North
America through December 31, 2002, as amended, for substantially all of its
products, with the exception of products with pre-existing distribution
agreements. Under the terms of the agreement, as amended, Vivendi earned a
distribution fee based on the net sales of the titles distributed. The agreement
provided for advance payments from Vivendi totaling $10.0 million. In amendments
to the agreement, Vivendi agreed to advance the Company an additional $3.5
million. The distribution agreement, as amended, provides for the acceleration
of the recoupment of the advances made to the Company, as defined. During the
three months ended March 31, 2002, Vivendi advanced the Company an additional
$3.0 million bringing the total amounts advanced to the Company under the
distribution agreement with Vivendi to $16.5 million. In April 2002, the
distribution agreement was further amended to provide for Vivendi to distribute
substantially all of the Company's products through December 31, 2002, except
certain future products, which Vivendi would have the right to distribute for
one year from the date of release. As of August 1, 2002, all distribution
advances relating to the August 2001 agreement from Vivendi were fully earned or
repaid. As of December 31, 2003 this agreement has expired.

In connection with the distribution agreements with Vivendi, the Company
incurred distribution commission expense of $16.2 million, $14.0 million and
$2.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Distribution commission expense in for titles released under the August 2002
agreement, were inclusive of all marketing, manufacturing and distribution
expenditures.

In August 2002, the Company entered into a new distribution agreement with
Vivendi whereby Vivendi will distribute substantially all of the Company
products in North America for a period of three years as a whole and two years
with respect to each product giving a potential maximum term of five years.
Under the August 2002 agreement, Vivendi will pay the Company sales proceeds
less amounts for distribution fees, price concessions and returns. Vivendi is
responsible for all manufacturing, marketing and distribution expenditures, and
bears all credit, price concessions and inventory risk, including product
returns. Upon the Company's delivery of a gold master to Vivendi, Vivendi will
pay the Company as a non-refundable minimum guarantee, a specified percent of
the projected amount due the Company based on projected initial shipment sales,
which are established by Vivendi in accordance with the terms of the agreement.
The remaining amounts are due upon shipment of the titles to Vivendi's
customers. Payments for future sales that exceed the projected initial shipment
sales are paid on a monthly basis. In December 2002, the Company granted OEM
rights and selected back catalog titles in North America to Vivendi. In January
2003, the Company granted Vivendi the right to distribute substantially all of
our products in select rest-of-world countries. As of December 31, 2003, Vivendi
had $2.9 million of its advance remaining to recoup under the rest-of-


F-33



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


world countries and OEM back catalog agreements. As of December 2003, the
Company earned $0.7 million of the $3.6 million advance related to future
minimum guarantees on undelivered products.

In September 2003, the Company terminated its distribution agreement with
Vivendi as a result of Vivendi's alleged breaches, including for non-payment of
money owed to the Company under the terms of this distribution agreement. In
October 2003, Vivendi and the Company reached a mutually agreed upon settlement
as to the Company's dispute under this distribution agreement and agreed to
reinstate the 2002 distribution agreement. Vivendi distributed the Company's
games FALLOUT: BROTHERHOOD OF STEEL and BALDURS: GATE DARK ALLIANCE II in North
America and Asia-Pacific (excluding Japan), and retained exclusive distribution
rights in these regions for all of the Company's future titles through August
2005.

In December 2002, the Company granted the distribution rights to BALDURS
GATE: DARK ALLIANCE (PlayStation 2, Microsoft Xbox, and GameCube) in Europe,
excluding Spain and Italy to Vivendi. In connection with the agreement, the
Company paid Avalon cash consideration for Avalon relinquishing its distribution
rights to these products and will pay Avalon 50% of all proceeds in excess of
the advance the Company received from Vivendi. In March 2003, the Company met
all obligations under this distribution agreement. As of December 31, 2003,
Vivendi has not reported sales exceeding the minimum guarantee.

In February 2003, the Company sold to Vivendi all future interactive
entertainment-publishing rights to the HUNTER: THE RECKONING license for $15
million, payable in installments, which were fully paid in 2003. The Company has
retained the rights to the previously published HUNTER: THE RECKONING titles on
Microsoft Xbox and Nintendo GameCube.

In February 2003, Vivendi advanced the Company $1.0 million pursuant to a
letter of intent. As of December 31, 2003, the advance was discharged and
recouped in full by Vivendi under the terms of the Vivendi settlement.

13. CONCENTRATION OF CREDIT RISK

As of December 31, 2003, substantially all of the Company's sales were to
its distributors, Avalon and Vivendi. Avalon and Vivendi each have exclusive
rights to distribute the Company's products in substantial portions of the
world. As a consequence, the distribution of the Company's products by Avalon
and Vivendi will generate a substantial majority of the Company's revenues, and
proceeds from Avalon and Vivendi from the distribution of the Company's products
will constitute a majority of the Company's operating cash flows. Therefore, the
Company's revenues and cash flows could decrease significantly and the Company's
business and/or financial results could suffer material harm if:

o either Avalon or Vivendi fails to deliver to the Company the full
proceeds owed it from distribution of its products;
o either Avalon or Vivendi fails to effectively distribute the Company's
products in their respective territories; or
o either Avalon or Vivendi otherwise fails to perform under their
respective distribution agreements.

The Company typically sells to distributors and retailers on unsecured
credit, with terms that vary depending upon the customer and the nature of the
product. The Company confronts the risk of non-payment from its customers,
whether due to their financial inability to pay the Company, or otherwise. In
addition, while the Company maintains a reserve for uncollectible receivables,
the reserve may not be sufficient in every circumstance. As a result, a payment
default by a significant customer could cause material harm to the Company's
business.

For the years ended December 31, 2003, 2002 and 2001, Avalon accounted for
approximately 12%, 11% and 22%, respectively, of net revenues in connection with
the International Distribution Agreement (Note 12). Vivendi accounted for 82%,
71%, and 17% of net revenues in the year ended December 31, 2003, 2002 and 2001,
respectively.


F-34



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2003


14. SEGMENT AND GEOGRAPHICAL INFORMATION

The Company operates in one principal business segment, which is managed
primarily from the Company's U.S. headquarters.

Net revenues by geographic regions were as follows:

YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(Dollars in thousands)

North America .. $ 13,541 37 % $ 26,184 60 % $ 34,998 62 %
Europe ......... 5,682 16 4,988 11 12,597 22
Rest of World .. 802 2 686 2 2,854 5
OEM, royalty and
licensing ... 16,276 45 12,141 27 5,999 11
-------- ------- -------- ------- -------- -------
$ 36,301 100 % $ 43,999 100 % $ 56,448 100 %
======== ======= ======== ======= ======== =======


15. OTHER EXPENSE, NET

In April 2002, the Company entered into a settlement agreement with the
landlord of its office facility in the United Kingdom, whereby the Company
returned the property back to the landlord and was released from any further
lease obligations. As a result of this settlement, the Company reduced its
amounts accrued for this contractual obligation by $0.9 million in the year
ended December 31, 2002.

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company's summarized quarterly financial data is as follow:



MAR. 31 JUN. 30 SEP. 30 DEC. 31
-------- --------- -------- --------
(Dollars in thousands, except
per share amounts)

Year ended December 31, 2003:
Net revenues ............................. $ 18,762 $ 1,269 $ 4,727 $ 11,543
======== ========= ======== ========
Gross profit ............................. $ 11,777 $ 155 $ 2,878 $ 8,371
======== ========= ======== ========
Net income (loss) ........................ $ 5,576 $ (5,376) $ (2,189) $ 3,301
======== ========= ======== ========

Net income (loss) per common share basic . $ 0.06 $ 0.06 $ (0.02) $ 0.04
======== ========= ======== ========
Net income (loss) per common share diluted $ 0.06 $ 0.06 $ (0.02) $ 0.04
======== ========= ======== ========

Year ended December 31, 2002:
Net revenues ............................. $ 15,375 $ 11,842 $ 9,677 $ 7,105
======== ========= ======== ========
Gross profit ............................. $ 10,898 $ 1,240 $ 4,002 $ 1,153
======== ========= ======== ========
Net income (loss) ........................ $ 1,495 $ 20,868 $ (1,847) $ (5,369)
======== ========= ======== ========

Net income (loss) per common share
basic/diluted ............................ $ 0.02 $ 0.22 $ (0.02) $ (0.09)
======== ========= ======== ========



F-35



INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)




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

Year ended December 31, 2001 $ 6,543 $ 19,875 $ (18,877) $ 7,541
========== ========== ========== =========

Year ended December 31, 2002 $ 7,541 $ 2,586 $ (9,041) $ 1,086
========== ========== ========== =========

Year ended December 31, 2003 $ 1,086 $ 864 $ (1,225) $ 725
========== ========== ========== =========



S-1