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


                                AMENDMENT NO. 3

                                  FORM 10-K/A


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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       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 of Section 12 (b) of the Act: None

          Securities registered pursuant of 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]

As of November 26, 2001, 44,985,708 shares of Common Stock of the Registrant
were issued and outstanding and the aggregate market value of voting common
stock held by non-affiliates was $15,593,907.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.


<PAGE>


                                 AMENDMENT NO. 3
                   TO THE ANNUAL REPORT ON FORM 10-K FILED BY
                INTERPLAY ENTERTAINMENT CORP. ON APRIL 17, 2001,
              AS AMENDED ON APRIL 30, 2001 AND ON AUGUST 31, 2001.

     The following Items amend the Annual Report on Form 10-K filed by Interplay
Entertainment Corp. (the "Company") on April 17, 2001, as amended by Form 10-K/A
on April 30, 2001 and August 31, 2001 (the "Form 10-K"), as permitted by rules
and regulations promulgated by the Securities Exchange Commission. That Form
10-K is hereby amended and restated to insert those Items as set forth herein.
All capitalized terms used herein but not defined shall have the meanings
ascribed to them in the Form 10-K.

ITEM 6.  SELECTED FINANCIAL DATA

    The selected consolidated statements of operations data for the years ended
December 31, 2000, 1999 and 1998 and the selected consolidated balance sheets
data as of December 31, 2000 and 1999 are derived from the Company's audited
consolidated financial statements included elsewhere in this Form 10-K. The
selected consolidated statements of operations data for the eight months ended
December 31, 1997 and for the years ended April 30, 1997 and 1996, and the
selected consolidated balance sheets data as of December 31, 1998, 1997, April
30, 1997 and 1996 are derived from the Company's audited consolidated financial
statements not included in this Form 10-K. The Company's 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this Form 10-K.


                                     Page 2
<PAGE>


<TABLE>
<CAPTION>
                                                                                     EIGHT MONTHS
                                                                                         ENDED
                                                    YEARS ENDED DECEMBER 31,         DECEMBER 31,      YEARS ENDED APRIL 30,
                                               -----------------------------------   -------------     ---------------------
                                                 2000         1999         1998          1997            1997          1996
                                               ---------    ---------    ---------   -------------     ---------    ---------
                                                           (Dollars in thousands, except per share amounts)
<S>                                            <C>          <C>          <C>             <C>           <C>          <C>
STATEMENTS OF OPERATIONS DATA(1):
Net revenues                                   $ 104,582    $101,930     $ 126,862       $ 85,961      $ 83,262     $ 96,952
Cost of goods sold                                54,061      61,103        71,928         44,864        62,480       49,939
                                               ----------   ---------    ----------      ---------     ---------    ---------
Gross profit                                      50,521      40,827        54,934         41,097        20,782       47,013
Operating expenses:
     Marketing and sales                          26,482      32,432        39,471         20,603        24,627       23,285
     General and administrative                   10,249      18,155        12,841          8,989         9,408        9,025
     Product development                          22,176      20,629        24,472         14,291        21,431       15,120
     Other                                             -       2,415             -              -             -            -
                                               ----------   ---------    ----------      ---------     ---------    ---------
     Total operating expenses                     58,907      73,631        76,784         43,883        55,466       47,430
                                               ----------   ---------    ----------      ---------     ---------    ---------
Operating loss                                    (8,386)    (32,804)      (21,850)        (2,786)      (34,684)        (417)
Other expense                                     (3,689)     (3,471)       (4,933)        (2,273)       (1,600)        (807)
                                               ----------   ---------    ----------      ---------     ---------    ---------
Loss before income taxes                         (12,075)    (36,275)      (26,783)        (5,059)      (36,284)      (1,224)
Provision (benefit) for income taxes                   -       5,410         1,437              -        (9,065)        (480)
                                               ----------   ---------    ----------      ---------     ---------    ---------
Net loss                                       $ (12,075)   $(41,685)    $ (28,220)      $ (5,059)     $(27,219)      $ (744)
                                               ==========   =========    ==========      =========     =========    =========
Cumulative dividend on participating
   preferred stock                                 $ 870         $ -           $ -            $ -           $ -          $ -
Accretion of warrant                                 532           -             -              -             -            -
                                               ----------   ---------    ----------      ---------     ---------    ---------
Net loss available to common stockholders      $ (13,477)  $ (41,685)    $ (28,220)      $ (5,059)    $ (27,219)      $ (744)
                                               ==========   =========    ==========      =========     =========    =========
Net loss per share (2):
     Basic                                       $ (0.45)    $ (1.86)      $ (1.91)       $ (0.45)      $ (2.46)     $ (0.07)
     Diluted                                     $ (0.45)    $ (1.86)      $ (1.91)       $ (0.45)      $ (2.46)     $ (0.07)
                                               ==========   =========    ==========      =========     =========    =========
SELECTED OPERATING DATA:
Net revenues by geographic region:
     North America                              $ 56,454    $ 49,443      $ 73,865       $ 51,833      $ 38,606     $ 54,702
     International                                35,077      30,310        35,793         24,642        32,006       24,579
     OEM, royalty and licensing                   13,051      22,177        17,204          9,486        12,650       17,671
Net revenues by platform:
     Personal computer                          $ 76,886    $ 65,397      $ 67,406       $ 42,520      $ 45,192     $ 60,254
     Video game console                           14,645      14,356        42,252         33,955        25,420       19,027
     OEM, royalty and licensing                   13,051      22,177        17,204          9,486        12,650       17,671

                                                                     DECEMBER 31,                             APRIL 30,
                                                ---------------------------------------------------     ----------------------
                                                  2000        1999          1998           1997            1997        1996
                                                ---------   ---------     ---------   -------------     ---------    ---------
Balance Sheets Data:                                                       (Dollars in thousands)
Working capital                                 $    123    $ (7,622)     $ (3,135)      $ 13,616       $  7,890     $ 18,485
Total assets                                      59,081      56,936        74,944         77,821         69,005       68,511
Total debt                                        25,433      19,630        24,651         38,154         14,970          108
Stockholders' equity  (deficit)                    6,398      (2,071)        4,193         (1,267)         3,401       30,195

<FN>

(1)  Effective May 1, 1997, the Company changed its year end from April 30 to
     December 31.
(2)  See Note 9 of Notes to Consolidated Financial Statements for an explanation
     of the number of shares used in computing net income (loss) per share.
</FN>
</TABLE>


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.

GENERAL

     We derive net revenues primarily from direct sales of interactive
entertainment software for PCs and video game consoles to retailers and mass
merchants, from indirect sales to software distributors in North America and
internationally, and from direct sales to end-users through our catalogs and the
Internet. We also derive royalty-based revenues from licensing arrangements,
from the sale of products by third party distributors in North America and
international markets, and from OEM bundling transactions.


                                     Page 3
<PAGE>


     We record revenues when we deliver products to customers in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." For those
agreements that provide the customers the right to create and sell multiple
copies of a product in exchange for guaranteed amounts, we recognize revenue at
the delivery of the product master or the first copy. We recognize per copy
royalties on sales that exceed the guarantee as copies are duplicated. 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 product 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. We provide customer support only via telephone and the Internet.
Customer support costs are not material and we charge such costs to expenses as
we incur them.

     In order to expand our distribution channels and engage in software
development in overseas markets, in 1995 we established operations in the United
Kingdom and in 1997, we initiated a licensing strategy in Japan. In February
1999, we undertook a restructuring of our operations in the United Kingdom that
included our investment in VIE Acquisition Group LLC, or VIE. In connection with
our investment in VIE, we entered into an exclusive distribution agreement with
Virgin Entertainment Interactive Limited, or Virgin, an entity controlled by
VIE, and integrated our distribution operations with Virgin, which substantially
reduced our sales and marketing personnel in Europe. As part of an April 2001
settlement between us and Virgin, VIE redeemed our LLC membership interest in
VIE. Pursuant to such settlement, we agreed to assume responsibility for
marketing functions in Europe. We also maintain European OEM and product
development operations. International net revenues accounted for approximately
33.5% of our net revenues for the year ended December 31, 2000, 29.7% of our net
revenues for the year ended December 31, 1999, and 28.2% of our net revenues for
the year ended December 31, 1998.

     In January 1997, we formed a wholly-owned subsidiary, Interplay OEM, which
had previously operated as a division of ours. Interplay OEM 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. During 2000, Interplay OEM expanded its bundling arrangements into
the non-Information Technology marketplace and created a division named
bundledirect.com, which transacts with value-added resellers and system
builders. We also derive net revenues from the licensing of intellectual
property and products to third parties for distribution in markets and through
channels that are outside of our primary focus. OEM, royalty and licensing net
revenues collectively accounted for net revenues of 12.5% for the year ended
December 31, 2000, 21.8% for the year ended December 31, 1999, and 13.6% for the
year ended December 31, 1998. OEM, royalty and licensing net revenues generally
are incremental net revenues and do not have significant additional product
development or sales and marketing costs, and accordingly do not have a
significant impact on our operating losses. 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. 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 and affiliate label 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 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 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.

     For the year ended December 31, 2000, our net loss was $12.1 million. Our
results from operations were adversely affected by several factors. The
interactive entertainment software industry experienced lower prices for titles,
especially with current generation video console platforms, such as Sony
PlayStation and Nintendo N64. Sony introduced the PlayStation 2 in October 2000
but did not ship the number of units it originally forecasted. In addition, the
sales of personal computers decreased for the year ended December 31, 2000 as
compared to the same period in 1999. As a result of these factors, we
experienced lower unit sales volume than we expected. We expect our unit sales
volumes on next generation video console platforms to increase and our unit
sales volume on personal


                                     Page 4
<PAGE>


computer platforms to remain relatively constant in the 12 months ended December
31, 2001 as compared to the same period in 2000.

     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. We cannot assure you that we will
be profitable in any particular period. It is likely that our operating results
in one or more future periods will fail to meet or exceed the expectations of
securities analysts or investors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors Affecting Future
Performance - Fluctuations in Operating Results; Uncertainty of Future Results;
Seasonality."

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                        -----------------------------------------
                                            2000           1999          1998
                                        -----------    -----------    -----------
STATEMENTS OF OPERATIONS DATA:
<S>                                     <C>            <C>            <C>
Net revenues                                 100.0 %        100.0 %        100.0 %
Cost of goods sold                            51.7           59.9           56.7
                                        -----------    -----------    -----------
Gross margin                                  48.3           40.1           43.3
Operating expenses:
     Marketing and sales                      25.3           31.8           31.1
     General and administrative                9.8           17.8           10.1
     Product development                      21.2           20.2           19.3
     Other                                       -            2.4              -
                                        -----------    -----------    -----------
     Total operating expenses                 56.3           72.2           60.5
                                        -----------    -----------    -----------
Operating loss                                (8.0)         (32.1)         (17.2)
Other expense                                 (3.5)          (3.4)          (3.9)
                                        -----------    -----------    -----------
Loss before income taxes                     (11.5)         (35.5)         (21.1)
Provision for income taxes                       -            5.3            1.1
                                        -----------    -----------    -----------
Net loss                                     (11.5)%        (40.8)%        (22.2)%
                                        ===========    ===========    ===========
SELECTED OPERATING DATA:
Net revenues by segment:
     North America                            54.0 %         48.5 %         58.2 %
     International                            33.5           29.7           28.2
     OEM, royalty and licensing               12.5           21.8           13.6
                                        -----------    -----------    -----------
                                             100.0 %        100.0 %        100.0 %
                                        ===========    ===========    ===========
Net revenues by platform:
     Personal computer                        73.5 %         64.1 %         53.1 %
     Video game console                       14.0           14.1           33.3
     OEM, royalty and licensing               12.5           21.8           13.6
                                        -----------    -----------    -----------
                                             100.0 %        100.0 %        100.0 %
                                        ===========    ===========    ===========
</TABLE>

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

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

     Overall net revenues for the year ended December 31, 2000 increased 3
percent compared to the same period in 1999. This increase resulted from a 14
percent increase in North American net revenues and a 16 percent increase in
International net revenues, offset by a 41 percent decrease in OEM, royalties
and licensing, as described below.

     The increase in North American and International net revenues for the year
ended December 31, 2000 was mainly because the titles released this year
generated $5.7 million more sales volume and because of a decrease by $6.1
million in product returns and price concessions compared to 1999. Our efforts
to focus on product planning and release fewer, but higher quality titles
resulted in five fewer title releases across multiple platforms this year as


                                     Page 5
<PAGE>


compared to last year. We expect that North American and International
publishing net revenues in 2001 will increase compared to 2000.

     The decrease in OEM, royalty and licensing net revenues in the year ended
December 31, 2000 compared to the same period in 1999 was due to decreased net
revenues in the OEM business and in licensing transactions. The $5.1 million
decrease in the OEM business was primarily due to a decrease in the volume of
transactions which relates to the general market decrease in personal computer
sales, and the decrease in licensing transactions is primarily due to the
recognition of $2.3 million of deferred revenue for the shipment of a major
title to a customer in 1999 without a comparable transaction in 2000. We expect
that OEM, royalty and licensing net revenues in 2001 will increase compared to
2000.

PLATFORM NET REVENUES

     PC net revenues increased 18 percent during the year ended December 31,
2000 compared to the same period in 1999 primarily due to the release of seven
major hit titles such as Star Trek Klingon Academy, Icewind Dale, Sacrifice,
Baldur's Gate II, Giants, Star Trek StarFleet Command II and Star Trek New
Worlds, compared to six major hit titles released in 1999. In addition, we
continue to experience strong sales from Baldur's Gate and Baldur's Gate: Tales
of the Sword Coast, both of which were released prior to 2000. The increase in
PC net revenues was partially offset by our release of 18 titles in 2000
compared to 28 titles in 1999. We expect our PC net revenues to decrease in 2001
due to our increased focus on next generation console titles. Video game console
net revenues increased 2 percent in the year ended December 31, 2000 compared to
the same period in 1999, due to higher unit sales of our major console title
releases, partially offset by approximately 10 percent lower price points for
current generation console titles. We released four major video game console
titles in 2000, including MDK 2 (Dreamcast), Gekido (PlayStation), Caesar's
Palace 2000 (PlayStation) and Wild Wild Racing (PlayStation 2), compared to
three major video game console titles released in 1999. We expect our video game
console net revenues to increase in 2001 as a result of a substantial increase
in planned major title releases for new generation game consoles in 2001
compared to 2000.

COST OF GOODS SOLD; GROSS MARGIN

     Cost of goods sold decreased 12 percent in the year ended December 31, 2000
compared to the same period in 1999, due to releasing a higher percentage of
internally developed titles and the discontinuation of the affiliate label
distribution business that typically has a higher cost of goods component
relative to net sales. The 1999 period also reflects $1.7 million of
non-recurring write-offs of prepaid royalties relating to titles that had been
canceled mainly due to our discontinuation of our licensed sports product line
during 1999. We expect our cost of goods sold to increase in 2001 as compared to
2000 due to an expected higher net revenues base from the planned release of
more major next generation game console titles in the 2001 period. The 24
percent increase in gross profit margin was primarily due to a 33 percent
increase in internally developed titles sold without a royalty component in cost
of goods sold, and a 25 percent decrease in product returns and price
concessions compared to the 1999 period. We expect our future gross profit
margin to decrease in 2001 as compared to 2000 due to an increase in next
generation video game console title releases, which typically have a higher cost
of goods relative to net revenues. However, we expect a higher dollar gross
profit on an increased net revenue base in 2001 compared to 2000.

MARKETING AND SALES

     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. The 18 percent decrease
in marketing and sales expenses for the year ended December 31, 2000 compared to
the 1999 period is attributable primarily to $2.9 million for minimum operating
charges payable to Virgin which did not repeat in 2000, a $1.3 million decrease
in personnel costs and a $0.5 million decrease in advertising and retail
marketing support expenditures. In addition, we amended our International
Distribution Agreement with Virgin Interactive Entertainment Limited, or Virgin,
effective January 1, 2000, which eliminated the fixed monthly overhead fees of
approximately $2.3 million we incurred in the 1999 period. We expect our
marketing and sales expenses to remain about the same in 2001 compared to 2000,
due to continued planned decreases in advertising and retail marketing support
expenditures and lower personnel costs, offset by the $1.3 million in overhead
fees payable to Virgin in 2001 to be incurred in connection with the terms of
our April 2001 settlement with Virgin.



                                     Page 6
<PAGE>


GENERAL AND ADMINISTRATIVE

     General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. The 44 percent decrease in general and
administrative expenses for the year ended December 31, 2000 compared to the
same period in 1999 is primarily attributable to a $6.6 million decrease in bad
debt expense and a $1.1 million decrease in personnel costs. We are continuing
our efforts to reduce North American operating expenses and expect our general
and administrative expenses to decrease in 2001 compared to 2000.

PRODUCT DEVELOPMENT

     We charge product development expenses, which consist primarily of
personnel and support costs, to operations in the period incurred. The 8 percent
increase in product development expenses for the year ended December 31, 2000
compared to the same period in 1999 is due to a $1.5 million increase in
expenditures devoted to our focus on developing next generation video game
console platforms. We expect our product development expenses to remain
approximately constant in absolute dollars in 2001 compared to 2000.

OTHER OPERATING EXPENSE

    In 1999, we discontinued our direct and then existing affiliate distribution
activities in Europe and appointed Virgin as our exclusive distributor in
Europe. In connection with our exiting direct and then existing affiliated
distribution activities, we restructured our operations by terminating
employees, closing facilities, retiring redundant assets, and transitioning
selected employees to the Virgin organization. We recorded a provision of $2.4
million as restructuring expenses and costs associated with the merger and
integration of our European operations and the departure of two members of
senior management. We recorded costs associated with closing facilities, related
asset valuation issues, and costs associated with the write-down of redundant
equipment in the aggregate amount of $1.6 million and severance and other
employee related costs of $0.8 million. These amounts were recorded as a charge
to operating expenses, classified as Other Operating Expense on the Statement of
Operations.

OTHER EXPENSE, NET

     Other expense consists primarily of interest expense on our lines of credit
and foreign currency exchange transaction losses. The 6 percent decrease for the
year ended December 31, 2000 compared to the same period in 1999 was due to a
$0.6 million decrease in interest expense on lower average borrowings under our
line of credit, partially by $0.7 million in foreign currency exchange
transaction losses incurred in connection with European distribution activities.

PROVISION (BENEFIT) FOR INCOME TAXES

     We did not record a tax provision for the year ended December 31, 2000,
compared with a tax provision of $5.4 million for the year ended December 31,
1999. The tax provision recorded during 1999 represents an increase to the
valuation allowance on the deferred tax asset due to the uncertainty of
realization of the deferred tax asset in future periods. We have a deferred tax
asset of approximately $39 million that has been fully reserved at December 31,
2000. This tax asset would reduce future provisions for income taxes and related
tax liabilities when realized, subject to limitations.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

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

     Overall net revenues for the year ended December 31, 1999 decreased 20
percent compared to the same period in 1998. This decrease resulted from a 33
percent decrease in North American net revenues and a 15 percent decrease in
International net revenues, offset by a 29 percent increase in OEM, royalties
and licensing, as described below.

     The decrease in North American and International net revenues for the year
ended December 31, 1999 was due primarily to the release of four fewer major
titles across multiple platforms and the resulting $46.9 million decrease in
sales volume in the 1999 period.


                                     Page 7
<PAGE>


     OEM, royalty and licensing net revenues increased $5.0 million in the year
ended December 31, 1999 compared to the same period in 1998 due to a $1.8
million increase in net revenues in the OEM business and a $3.2 million increase
in net revenues in licensing.

PLATFORM NET REVENUES

     PC net revenues decreased 3 percent in the year ended December 31, 1999
compared to the same period in 1998 due to the release of four fewer titles
overall, including one less major title, offset by continued sales of Baldur's
Gate. We released six new major titles in 1999, such as Baldur's Gate: Tales of
the Sword Coast, Descent 3, Freespace 2, Kingpin, Starfleet Command and Torment,
compared to seven new major titles in 1998. Video game console net revenues
decreased 66 percent in the year ended December 31, 1999 compared to the same
period in 1998 due to our release of three fewer major titles. Major console
title releases in the 1999 period included Baseball 2000 (PlayStation), Caesar's
Palace II (Game Boy Color) and Incoming (Dreamcast).

COST OF GOODS SOLD; GROSS MARGIN

     Cost of goods sold decreased 15 percent in the year ended December 31, 1999
compared to the same period in 1998 due to a 20 percent decrease in net
revenues, which may have a higher cost of goods sold, and a shift in product
mix. Video game console revenues, comprised 14 percent of total net revenues in
1999 compared to 33 percent in 1998. The decrease in cost of goods sold was
offset by $1.7 million write-offs of prepaid royalties relating to titles that
we canceled due to our discontinuation of our licensed sports product line. The
26 percent decrease in gross margin was due primarily to a high level of product
returns and price concessions attributable to the inability of some of our
titles to gain broad, market acceptance from customers, which reduced net sales
substantially.

MARKETING AND SALES

     Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services, monthly overhead and distribution fees payable to Virgin, and
other related operating expenses. Marketing and sales expenses decreased 18
percent in the year ended December 31, 1999 compared to the same period in 1998.
The decrease is attributable primarily to a $7.4 million decrease in
advertising, specifically television advertising, and other marketing costs
associated with fewer major titles released during the 1999 period. In addition,
we reduced personnel and commission expense by $2.5 million in connection with
the restructuring of European operations, including the new distribution
arrangements we made with Virgin starting in February 1999. These decreases were
offset by a $2.9 million provision for minimum operating charges payable to
Virgin.

GENERAL AND ADMINISTRATIVE

     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 increased
41 percent in the year ended December 31, 1999 compared to the same period in
1998. The increase is attributable primarily to a provision for bad debt expense
of $6.9 million in 1999 in response to, among other things, the deteriorating
financial condition of some of our customers, which placed serious doubts on
their ability and intent to pay. General and administrative expenses other than
bad debt expense decreased $1.6 million in the 1999 period. This decrease is due
primarily to the reorganization of our European operations and successful
efforts to reduce North American general and administrative expenses.

PRODUCT DEVELOPMENT

     We charge product development expenses, which consist primarily of
personnel and support costs, to operations in the period incurred. Product
development expenses decreased 16 percent in the year ended December 31, 1999
compared to the same period in 1998. The decrease is due to a $3.8 million
reduction in expense achieved as a result of the reorganization of the
development process.


                                     Page 8
<PAGE>


OTHER OPERATING EXPENSE

        In 1999, we discontinued our direct and then existing affiliate
distribution activities in Europe and appointed Virgin as our exclusive
distributor in Europe. In connection with our exiting direct and then existing
affiliated distribution activities, we restructured our operations by
terminating employees, closing facilities, retiring redundant assets, and
transitioning selected employees to the Virgin organization. We recorded a
provision of $2.4 million as restructuring expenses and costs associated with
the merger and integration of our European operations and the departure of two
members of senior management. We recorded costs associated with closing
facilities, related asset valuation issues, and costs associated with the
write-down of redundant equipment in the aggregate amount of $1.6 million and
severance and other employee related costs of $0.8 million. These amounts were
recorded as a charge to operating expenses, classified as Other Operating
Expense on the Statement of Operations.

OTHER INCOME (EXPENSE)

     Other income (expense) primarily consists of interest expense on our line
of credit. Other expense decreased in the year ended December 31, 1999 compared
to the same period in 1998. This decrease was due primarily to decreased
interest expense of $1 million on lower borrowings under our line of credit and
the repayment of the Subordinated Secured Promissory Notes in June 1998. We
repaid these borrowings with the proceeds of our initial public offering in June
1998 and the equity investments by Titus Interactive, S.A. in 1999.

PROVISION (BENEFIT) FOR INCOME TAXES

     We recorded a tax provision of $5.4 million in the year ended December 31,
1999, compared with a tax provision of $1.4 million in the year ended December
31, 1998. The tax provision recorded during both periods represents an increase
of the valuation allowance on the deferred tax asset due to the uncertainty of
realization of the deferred tax asset in future periods. At the end of 1999, we
had fully reserved for all deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

     We have funded our operations to date primarily through the use of lines of
credit and equipment leases, through cash generated by the private sale of
securities, from the proceeds from our initial public offering, from the
proceeds from licensing agreements, and from operations.

     As of December 31, 2000 our principal sources of liquidity included cash of
$2.8 million and our line of credit that expired on April 30, 2001. In addition,
$4 million was available under on our supplemental line of credit with Titus. In
April 2001, we repaid all amounts outstanding on the Titus line of credit and
terminated the line of credit.

     In April 2001, we secured a new working capital line of credit from a bank
and repaid all amounts outstanding on our former line of credit and supplemental
line of credit. These lines of credit were terminated upon full payment. Our new
working capital line of credit line bears interest at the bank's prime rate, or,
at our option, a portion of the outstanding balance bears interest at LIBOR plus
2.5%, for a fixed short-term. At June 30, 2001, borrowings under the new working
capital line of credit bore interest at various interest rates between 6.39
percent and 7 percent. Our new line of credit provides for borrowings and
letters of credit of up to $15 million based in part upon qualifying receivables
and inventory. Under the new line of credit the Company is required to maintain
a $2 million personal guarantee by the Company's Chairman and Chief Executive
Officer ("Chairman"). The new line of credit has a term of three years, subject
to review and renewal by the bank on April 30 of each subsequent year. As of
June 30, 2001, we are not in compliance with the financial covenants under the
new line of credit pertaining to net worth and minimum earnings before interest,
taxes, depreciation and amortization. If the bank does not waive compliance with
the required covenants under the credit agreement, the bank could terminate the
credit agreement and accelerate payment of all outstanding amounts. Because we
depend on this credit agreement to fund our operations, the bank's termination
of the credit agreement could cause material harm to our business, including our
ability to continue as a going concern.

     In addition, in April 2001, we completed a private placement of 8,126,770
shares of Common Stock for $12.7 million, and received net proceeds of
approximately $11.9 million. The shares were issued at $1.5625 per share, and
included warrants to purchase one share of Common Stock for each share sold. The
warrants are exercisable at $1.75 per share, and the warrants can be exercised
immediately. The warrants expire in March 2006. The transaction provides for a
registration statement covering the shares sold or issuable upon exercise of
such warrants to be filed by April 16, 2001 and become effective by May 31,
2001. In the event that the agreed effective date of the registration statement
is not met, we are subject to a two percent penalty per month, payable in cash,
until the


                                     Page 9
<PAGE>


registration statement is effective. We did not meet the effective date of the
registration statement and we are incurring a monthly penalty of $254,000,
payable in cash, until the effectiveness of the registration. This obligation
will continue to accrue each month that the registration statement is not
declared effective and does not have a limit on the amount payable to these
investors. Because this payment is cumulative, this obligation could have a
material adverse effect on our financial condition. Moreover, we may be unable
to pay the total penalty due to the investors.

     In April 2001, our Chairman provided us with a $3 million loan, payable in
May 2002, with interest at 10 percent. In connection with this loan to us and
the $2 million guarantee he provided under the new line of credit from a bank,
the Chairman received warrants to purchase 500,000 shares of our Common Stock at
$1.75 per share, vesting upon issuance and expiring in April 2004.

     Our primary capital needs historically have been to fund working capital
requirements necessary to fund our net losses, our sales growth, 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 used cash of $23.2 million during the year ended
December 31, 2000, primarily attributable to the $12.1 million net loss for the
year, a $5.9 million increase in trade receivables, and a $12.1 million decrease
in accounts payable and accrued liabilities, partially offset by a $2.7 million
decrease in inventory. The increase in trade receivables at December 31, 2000
compared to December 31, 1999 was due to a $3.5 million increase in sales during
the fourth quarter of 2000 compared to the same quarter in 1999 and a $2.6
million decrease in allowances for doubtful trade accounts receivable. We
believe that our allowances for doubtful accounts receivable are adequate based
on historical experience, and our current estimate of potential sales allowances
and doubtful accounts. The decrease in accounts payable and accrued liabilities
is due to increased borrowings under our line of credit and collections of
increased trade receivables, along with reductions to these liabilities, which
resulted from overall decreases in the related operating expenditures. The
decrease in inventory is due to successful efforts to manage inventory, which
reduced purchasing lead times and improved inventory turns.

     Cash provided by financing activities of $28.9 million for the year ended
December 31, 2000 consisted primarily of the proceeds from the equity
investments by Titus, borrowings on our line of credit and the release of
restricted cash by the our senior creditor. Cash used in investing activities of
$3.2 million for the year ended December 31, 2000 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.

     We have incurred significant net losses in recent periods, including losses
of $12.1 million during fiscal 2000 and $41.7 million during fiscal 1999. These
losses are due in part to the high fixed costs to developing our products, to
the relatively short life cycle and limited period for sales of our products,
and to failure of game console manufactures to timely introduce their products
which use our software. To reduce our working capital needs, we have implemented
various measures including a reduction of personnel, a reduction of fixed
overhead commitments, and a scaling back of marketing programs. We will continue
to pursue various alternatives to improve future operating results, including
further expense reductions as long as they do not have an adverse impact on our
ability to develop, market and sell successful new interactive entertainment
software.

     We believe that funds available under our new line of credit, amounts
received from the equity financings transactions discussed above, amounts to be
received under various product license and distribution agreements and
anticipated funds from operations will be sufficient to satisfy our short-term
capital and commitments in the normal course of business at least through
December 31, 2001. Our long-term capital commitments consist of lease
commitments and potential loss contingencies. Historically, we have funded these
requirements from normal operating cash flows and available balances from the
existing line of credit. Should these funds be insufficient, additional funding
may not be available or may only be available on unfavorable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors Affecting Future Performance - Liquidity, Future Capital
Requirements."

FACTORS AFFECTING FUTURE PERFORMANCE

     Our future operating results depend upon many factors and are subject to
various risks and uncertainties. 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:


                                    Page 10
<PAGE>


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 OUR STOCK WOULD BECOME ILLIQUID OR WORTHLESS.

     As of September 30, 2001, our cash balance was approximately $2.2 million
and our outstanding accounts payable and current debt totaled approximately
$23.0 million. If we do not receive sufficient financing 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.
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. If we cannot obtain additional capital and
become unable to pay our debts as they become due, 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.

WE DEPEND, IN PART, ON EXTERNAL FINANCING TO FUND OUR CAPITAL NEEDS. IF WE ARE
UNABLE TO OBTAIN SUFFICIENT FINANCING ON FAVORABLE TERMS, WE MAY NOT BE ABLE TO
CONTINUE TO OPERATE OUR BUSINESS.

     Historically, our business has not generated revenues sufficient to create
operating profits. To supplement our revenues, we have funded our capital
requirements with debt and equity financing. Our ability to obtain additional
equity or debt financing depends on a number of factors including our financial
performance, the overall conditions in our industry, and our credit rating.

     If we cannot raise additional capital on favorable terms, we will have to
reduce our costs by delaying, canceling, suspending or scaling back product
development and marketing programs. We may also be forced to sell or consolidate
operations. These measures could materially limit our ability to publish
successful titles and may not decrease our costs enough to permit us to operate
profitability, or at all.

OUR STOCK PRICE MAY DECLINE SIGNIFICANTLY IF WE ARE DELISTED FROM THE NASDAQ
NATIONAL MARKET.

     Our common stock currently is quoted on the Nasdaq National Market System.
For continued inclusion on the Nasdaq National Market, we must meet certain
tests, including a bid price of at least $1.00 and net tangible assets of at
least $4 million. Although Nasdaq has suspended the bid price requirement until
January 2, 2002, we would likely be subject to that requirement thereafter. We
currently are not in compliance with either the net tangible assets requirement
or the bid price requirement. Moreover, Nasdaq requires that we maintain an
Audit Committee of our Board of Directors, composed of at least three
independent directors. We currently do not meet the Audit Committee requirement.

     If we continue to fail to satisfy the listing standards on a continuous
basis, Nasdaq may delist our common stock from its National Market System. If
this occurs, trading of our common stock may be conducted on the Nasdaq SmallCap
Market, if we qualify for listing at that time, in the over-the-counter market
on the "pink sheets" or, if available, the NASD's "Electronic Bulletin Board."
In any of those cases, investors could find it more difficult to buy or sell, or
to obtain accurate quotations as to the value of our common stock. The trading
price per share of our common stock likely would be reduced as a result.

THE VARIABLE CONVERSION PRICE OF OUR SERIES A PREFERRED STOCK INCREASES OUR RISK
OF BEING DELISTED FROM THE NASDAQ NATIONAL MARKET.

     The variable conversion price of our Series A Preferred Stock increases our
risk of being delisted from the Nasdaq National Market in several ways (see "The
variable conversion price of our Series A Preferred Stock could result in the
issuance of a significant number of shares of our common stock if our stock
price declines, which will have a dilutive impact on our stockholders"):

     o    The substantial number of shares that are potentially issuable upon
          conversion of the Series A Preferred Stock and the short selling that
          may occur as a result of the future priced nature of those shares
          increases the risk that our stock price will stay below Nasdaq's
          minimum bid price requirement.


                                    Page 11
<PAGE>


     o    If the returns on our Series A Preferred Stock are deemed "excessive"
          compared with those of public investors in our common stock, Nasdaq
          may deny inclusion or apply more stringent criteria to the continued
          listing of our common stock.

     o    If Nasdaq determines that the past and prospective future issuances of
          common stock upon conversion by Titus of its Series A Preferred Stock
          constitutes a change in control of the Company or a change in its
          financial structure, we would need to satisfy all initial listing
          requirements as of that time, which currently we are unable to do.

A SIGNIFICANT PERCENTAGE OF OUR REVENUES DEPEND ON OUR DISTRIBUTORS' DILIGENT
SALES EFFORTS AND OUR DISTRIBUTORS' AND RETAIL CUSTOMERS' TIMELY PAYMENTS TO US.

     Since February 1999, Virgin 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 Virgin expires in February 2006. In August 2001,
we entered into a Distribution Agreement with Vivendi Universal Interactive
Publishing North America, or Vivendi, pursuant to which Vivendi will distribute
substantially all our products in North America commencing in October 2001. Our
agreement with Vivendi expires in December 2003, but may be extended with
respect to certain named products.

     Virgin 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 Virgin and Vivendi will generate a substantial majority of our
revenues, and proceeds from Virgin and Vivendi from the distribution of our
products will constitute a substantial majority of our operating cash flows.
Therefore, our revenues and cash flows could fall significantly and our business
and financial results could suffer material harm if:

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

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

     o    either Virgin or Vivendi otherwise fails to perform under the
          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.

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

     Pursuant to our credit agreement with LaSalle Business Credit Inc., or
"LaSalle", entered into in April 2001, we agreed to certain covenants. We
currently are not in compliance with some of those covenants. In October 2001,
LaSalle notified us that the credit agreement was being terminated and we would
no longer be able to continue to draw on the credit facility to fund future
operations. We are currently negotiating with LaSalle the payment of the
outstanding balance under the credit agreement, which is currently due and
payable and is approximately $2.7 million on November 9, 2001. There can be no
assurance that our discussions with LaSalle will result in a forbearance of
amounts due. Because we depend on our credit agreement to fund our operations,
LaSalle's termination of the credit agreement 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 facility to 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.

THE VARIABLE CONVERSION PRICE OF OUR SERIES A PREFERRED STOCK COULD RESULT IN
THE ISSUANCE OF A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK IF OUR STOCK
PRICE DECLINES, WHICH WILL HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS.

     Titus Interactive S.A. may convert each share of its Series A Preferred
Stock into a number of shares of our common stock determined by dividing $27.80
by the lesser of (i) $2.78 or (ii) 85 percent of the average closing price


                                    Page 12
<PAGE>


per share as reported by Nasdaq for the twenty trading days preceding the date
of conversion. Consequently, the number of shares issuable to Titus upon
conversion of its Series A Preferred Stock increase as our stock price declines.

         The table below sets forth the number of shares and the percentages of
our common stock that Titus would own if Titus elected to convert its remaining
383,354 shares of Series A Preferred Stock. The share amounts and the
percentages include, in addition to the shares of common stock Titus has the
right to acquire upon conversion of its remaining Series A Preferred Stock,
19,474,761 shares of common stock already owned by Titus and 460,298 shares of
common stock that Titus has the right to acquire upon exercise of warrants that
currently are exercisable. The share amounts and percentages do not include any
shares of common stock that Titus may elect to receive for accrued dividends on
the Series A Preferred Stock at the time of its conversion to common stock. The
share amounts and the percentages are based on the average closing price per
share of the Company's common stock for the 20 trading days immediately
preceding November 12, 2001, which was $0.61 per share, and on assumed average
prices of $0.458, $0.305 and $0.153, which prices represent a 25%, 50% and 75%
decline, respectively, in the November 12, 2001 average price. The percentages
are also based on 44,985,708 shares of our common stock outstanding on November
12, 2001.

<TABLE>
<CAPTION>
PERCENTAGE DECLINE IN        ASSUMED                           PERCENTAGE OF
  November 12, 2001          AVERAGE         SHARES OF          OUTSTANDING
    Average Price             PRICE         COMMON STOCK       COMMON STOCK
---------------------       ---------       ------------       -------------
<S>                         <C>             <C>                <C>
         --                   $0.61          40,489,044           61.35%
         25%                  $0.46          47,340,372           64.98%
         50%                  $0.31          61,043,029           70.53%
         75%                  $0.15         101,882,319           79.97%
</TABLE>

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 THE COMPANY
THAT IS FAVORABLE TO OUR OTHER STOCKHOLDERS.

     As of November 9, 2001, Titus owned approximately 52 percent of the total
voting power of our capital stock. If Titus converted its remaining Series A
Preferred Stock on November 9, 2001, Titus would own 61 percent of the total
voting power of our capital stock. 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. Additionally,
pursuant to the terms of our Series A Preferred Stock, Titus also has the
ability to block approval of a merger or change in control that the other
holders of our common stock may deem beneficial. At our 2001 annual stockholders
meeting on September 18, 2001, Titus exercised its voting power to elect a
majority of our Board of Directors. Three of the 6 members of the Board
employees or directors of Titus, and Titus' Chief Executive Officer serves as
our President.

OUR LONG-TERM EXCLUSIVE DISTRIBUTION AGREEMENT WITH VIRGIN INTERACTIVE
ENTERTAINMENT LIMITED MAY DISCOURAGE POTENTIAL ACQUIRORS FROM ACQUIRING US.

     Pursuant to the settlement agreement we entered into with Titus, Virgin
Interactive Entertainment Limited, or Virgin, and their affiliate on April 11,
2001, during the seven-year term of our February 1999 distribution agreement
with Virgin, we agreed not to sell, license our publishing rights, or enter into
any agreement to either sell or license our publishing rights with respect to
any products covered by the distribution agreement in the territory covered by
the distribution agreement, with the exception of two qualified sales each year.
The restrictions on sales and licensing of publishing rights until 2006 may
discourage potential acquirors from entering into an acquisition transaction
with us, or may cause potential acquirors to demand terms that are less
favorable to our stockholders.

     In addition, we cannot terminate the distribution agreement without
incurring penalties of a minimum of $10 million, subject to substantial
increases pursuant to the terms of the distribution agreement, which also may
discourage potential acquirors that already have their own distribution
capabilities in territories covered by the distribution agreement.


                                    Page 13
<PAGE>


A CHANGE OF CONTROL MAY CAUSE THE TERMINATION OF SOME OF OUR MATERIAL CONTRACTS
WITH OUR LICENSORS AND DISTRIBUTORS.

     Some of our license, development and distribution agreements contain
provisions that allow the other party to terminate the agreement upon a change
in control of the Company. Titus recently converted a portion of their preferred
stock into common stock, which as of November 9, 2001 gave Titus 52% of our
total voting power. At our 2001 annual stockholders meeting on September 18,
2001, Titus exercised its voting power to elect a majority of our Board of
Directors. Some of our third-party developers and licensors may assert that
these events constitute a change in control of the Company and attempt to
terminate their respective agreements with us. In particular, our license for
"the Matrix" allows for the licensor to terminate the license if there is a
substantial change of ownership or control without their approval. The loss of
the Matrix license would materially harm our projected operating results and
financial condition.

THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.

     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 personal computer 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 some 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.

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.

     We have incurred significant net losses in recent periods, including a net
loss of $41.4 million in the nine months ended September 30, 2001, $12.1 million
during 2000 and $41.7 million during 1999. Our losses stem partly from the
significant costs we incur to develop our entertainment software products.
Moreover, a significant portion of our operating expenses are 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.


                                    Page 14
<PAGE>


     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.

OUR GROWING DEPENDENCE ON REVENUES FROM GAME CONSOLE SOFTWARE PRODUCTS INCREASES
OUR EXPOSURE TO SEASONAL FLUCTUATIONS IN THE PURCHASES OF GAME CONSOLES.

     The interactive entertainment software industry is highly seasonal, 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. The impact of
this seasonality will increase as we rely more heavily on game console net
revenues in the future. Moreover, delays in game console software products
largely depend on the timeliness of introduction of game console platforms by
the manufacturers of those platforms, such as Microsoft and Nintendo. The
introduction by a manufacturer of a new game platform too late in the holiday
buying season could result in a substantial loss of revenues by us. Seasonal
fluctuations in revenues from game console products may cause material harm to
our business and financial results.

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 IN A TIMELY MANNER WITH HIGH QUALITY
PRODUCTS OR ON ACCEPTABLE TERMS.

     Third party interactive entertainment software developers, such as Bioware
Corp. and Planet Moon Studios develop many of our software products. 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.


                                    Page 15
<PAGE>


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 2000;

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

     o    new media formats such as online delivery and digital video disks, or
          DVDs; and

     o    recent releases or planned releases in the near future of new video
          game consoles such as the Sony Playstation 2, the Nintendo Gamecube
          and the Microsoft Xbox.

     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.

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

     The interactive entertainment software industry is intensely competitive
and new interactive entertainment software programs and platforms are regularly
introduced. The greater resources of our competitors permit them to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies, and
pay higher fees than we can to licensors of desirable motion picture,
television, sports and character properties and to third party software
developers.

     We compete primarily with other publishers of personal computer and video
game console interactive entertainment software. Significant competitors include
Electronic Arts Inc., Activision, Inc., and Vivendi Universal Interactive
Publishing.

     Many of these competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the industry than
we do. Competitors with more extensive customer bases, broader customer
relationships and broader industry alliances may be able to use such resources
to their advantage in competitive situations, including establishing
relationships with many of our current and potential customers.

     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, many of which own substantial
libraries of available content and have substantially greater financial
resources, may decide to


                                    Page 16
<PAGE>


compete directly with us or to enter into exclusive relationships with our
competitors. We also believe that the overall growth in the use of the Internet
and online services by consumers may pose a competitive threat if customers and
potential customers spend less of their available home personal computing time
using interactive entertainment software and more time using the Internet and
online services.

WE MAY FACE DIFFICULTY OBTAINING ACCESS TO RETAILERS NECESSARY TO MARKET AND
SELL OUR PRODUCTS EFFECTIVELY.

     Retailers typically have a limited amount of shelf space and promotional
resources, and there is intense competition among consumer software producers,
and in particular producers of interactive entertainment software products, for
high quality retail shelf space and promotional support from retailers. To the
extent that the number of consumer software products and computer platforms
increases, competition for shelf space may intensify and require us to increase
our marketing expenditures. Due to increased competition for limited shelf
space, retailers and distributors are in an improving position to negotiate
favorable terms of sale, including price discounts, price protection, marketing
and display fees and product return policies. Our products constitute a
relatively small percentage of any retailer's sales volume, and we cannot assure
you that retailers will continue to purchase our products or to provide our
products with adequate levels of shelf space and promotional support. A
prolonged failure in this regard may cause material harm to our business.

BECAUSE WE SELL A SUBSTANTIAL PORTION OF OUR PRODUCTS ON A PURCHASE ORDER BASIS,
OUR SALES MAY DECLINE SUBSTANTIALLY WITHOUT WARNING AND IN A BRIEF PERIOD OF
TIME.

     We currently sell our products through our sales force to mass merchants,
warehouse club stores, large computer and software specialty chains and through
catalogs in the United States and Canada, as well as to certain distributors.
Outside North America, we generally sell products to third party distributors.
We make our sales primarily on a purchase order basis, without long-term
agreements. The loss of, or significant reduction in sales to, any of our
principal retail customers or distributors could cause material harm to our
business.

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 and retailers. We allow distributors and 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, we provide
pricing concessions to our customers to manage our customers' inventory levels
in the distribution channel. We could be forced to accept substantial product
returns and provide pricing concessions to maintain our relationships with
retailers and our access to distribution channels. Product return and pricing
concessions that exceed our reserves have caused material harm to our results of
operations in the recent past and may do so again in the future.

Substantial sales of our common stock by our existing stockholders may reduce
the price of our stock and dilute existing stockholders.

     We have filed registration statements covering a total of approximately
49.5 million shares of our common stock for the benefit of the holders we
describe below. Assuming the effectiveness of these registration statements,
these shares would be eligible for immediate resale in the public market.

     o    Universal Studios, Inc. (now owned by Vivendi) holds approximately
          10.4%, of our outstanding common stock, all of which are being
          registered pursuant to registration statement number 333-59088, filed
          on April 17, 2001.

     o    Titus currently holds approximately 43.3% of our outstanding common
          stock and, if Titus converted all of its shares of Series A Preferred
          Stock on November 9, 2001, would own approximately 61.1% of our common
          stock. All of the shares of common stock issuable to Titus upon the
          conversion of the preferred stock, and common stock issuable to Titus
          upon exercise of warrants, are being registered in our pending
          registration statements.

     o    Pursuant to registration statement 333-59088, filed on April 17, 2001,
          we intend to register shares equal to approximately 38% of our
          currently outstanding common stock, held by a number of our investors
          as set forth in that registration statement.


                                    Page 17
<PAGE>


     o    Employees and directors hold options and warrants to purchase 10.8% of
          our common stock, most of which are eligible for immediate resale. We
          may issue options to purchase up to an additional 2.2% of our common
          stock to employees and directors, which we anticipate will be freely
          tradable when issued.

     Although the holders described above are subject to restrictions on the
transfer of our common stock, future sales by such holders could decrease the
trading price of our common stock and, therefore, the price at which you could
resell your shares. A lower market price for our shares also might impair our
ability to raise additional capital through the sale of our equity securities.
Any future sales of our stock would also dilute existing stockholders.

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

     Many of our current and planned products, such as our Star Trek, Advanced
Dungeons and Dragons, Matrix and Caesars Palace titles, 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.
For instance, we are in discussion with Infogrames about our failure to make
scheduled royalty payments. If these discussions are not successful, Infogrames
may terminate our agreement which would significantly impact our ability to
market many of our most successful products. Additionally, we may not be able to
obtain new licenses, or maintain or renew existing licenses, on commercially
reasonable terms, if at all. For example, Viacom Consumer Products, Inc. has
granted the Star Trek license to another party upon the expiration of our rights
in 2002. 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 products without the desired underlying content, either of which
could limit our commercial success and cause material harm to our business .

WE MAY FAIL TO MAINTAIN EXISTING LICENSES, OR OBTAIN NEW LICENSES FROM HARDWARE
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
PlayStation 2, as well as video game platforms from Nintendo and Microsoft. In
addition, each of these companies has the right to approve the technical
functionality and content of our products for their platforms prior to
distribution. Due to the competitive nature of the approval process, we must
make significant product development expenditures on a particular product prior
to the time we seek these approvals. Our inability to obtain these approvals
could cause material harm to our business.

     Our sales volume and the success of our products depends 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 the bear the
loss from overproduction or the lesser per-unit revenues associated with
producing additional discs. Either situation could lead to material reductions
in our net revenues.


                                    Page 18
<PAGE>


     If we fail to maintain any of our current licenses for console hardware, we
will be unable to publish products for that console. Moreover, if we fail to
maintain our license for the Microsoft Xbox, Microsoft could require us to repay
an advance from them. Our agreements with Microsoft ancillary to our Xbox
license require, among other things, that we continue development of our Matrix
product, and that we maintain our credit agreement with LaSalle. Microsoft may
consider the potential for termination of our Matrix license and our current
non-compliances with the LaSalle credit agreement to be of sufficient
materiality to require repayment of the advance. (See "A change of control may
cause the termination of some of our material contracts with our licensors and
distributors" and "Our failure to comply with the covenants in our existing
credit agreement could result in the termination of the agreement and a
substantial reduction in the cash available to finance our operations.") Our
failure to maintain any console hardware license, or any requirement by
Microsoft that we repay the advance to them, could cause material harm to our
business.

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

     Our interactive entertainment software requires extensive time and creative
effort to produce and market. The production of this software is closely tied to
the continued service of our key product design, development, sales, marketing
and management personnel. 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 failure to 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.

     Our net revenues from international sales accounted for approximately 20
percent of our total net revenues for the nine months ended September 30, 2001
and approximately 28 percent for the nine months ended September 30, 2000. Most
of these revenues come from our distribution relationship with Virgin, pursuant
to which Virgin 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 and operations 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 Virgin 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.


                                    Page 19
<PAGE>


     A significant, continuing risk we face from our international sales and
operations stems from 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.

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

     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 "shrinkwrap"
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 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.


                                    Page 20
<PAGE>


     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.

OUR DIRECTORS AND OFFICERS CONTROL A LARGE PERCENTAGE OF OUR VOTING STOCK AND
MAY USE THIS CONTROL TO COMPEL CORPORATE ACTIONS THAT ARE NOT IN THE BEST
INTERESTS OF OUR STOCKHOLDERS AS A WHOLE.

     Including Titus, our directors and executive officers beneficially own
approximately 58 percent of our aggregate common stock. In the event Titus
converts all of its shares of Series A Preferred Stock into common stock, the
additional shares could increase Titus' ownership to approximately 66 percent.
These stockholders 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. 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.

WE MAY FAIL TO IMPLEMENT INTERNET-BASED PRODUCT OFFERINGS SUCCESSFULLY.

     We seek to establish an online presence by creating and supporting sites on
the Internet and by offering our products through these sites. Our ability to
establish an online presence and to offer online products successfully depends
on:

     o    increases in the Internet's data transmission capability;

     o    growth in an online market sizeable enough to make commercial
          transactions profitable.

     Because global commerce and the exchange of information on the Internet and
other open networks are relatively new and evolving, a viable commercial
marketplace on the Internet may not emerge and complementary products for
providing and carrying Internet traffic and commerce may not be developed. Even
with the proper infrastructure, we may fail to develop a profitable online
presence or to generate any significant revenue from online product offerings in
the near future, or at all.

     If the Internet does not become a viable commercial marketplace, or if this
development occurs but is insufficient to meet our needs or if such development
is delayed beyond the point where we plan to have established an online service,
our business and financial condition could suffer material harm.

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 Board of Directors has the authority, without any action by the
stockholders, to issue up to 4,616,646 shares of preferred stock and to fix the
rights and preferences of such shares. 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.

     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.


                                    Page 21
<PAGE>


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.

WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.

     We have not paid any cash dividends on our common stock and do not
anticipate paying dividends in the foreseeable future.

INCREASES IN INTEREST RATES WILL INCREASE THE COST OF OUR DEBT.

     Our working capital line of credit bears interest at either the bank's
prime rate or LIBOR, at our option, both of which are variable rates. As such,
if interest rates increase, we will have to use more cash to service our debt,
which could impede our ability to meet other expenses as they become due and
could cause material harm to our business and financial condition.


                                    Page 22
<PAGE>


                                   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, in the City of Irvine,
State of California, on the 29th day of November, 2001.

                                            INTERPLAY ENTERTAINMENT CORP.


                                            By: /S/ HERVE CAEN
                                                ----------------------------
                                                   Herve Caen, President

                                POWER OF ATTORNEY

     The undersigned directors and officers of Interplay Entertainment Corp. do
hereby constitute and appoint Herve Caen and Nathan Peck, or either of them,
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 Securities and Exchange
Commission, in connection with this Amendment No. 3 to Annual Report on Form
10-K/A, 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 Amendment No. 3 to Annual Report on Form 10-K/A has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.

<TABLE>
<CAPTION>
            SIGNATURE                               TITLE                          DATE
-----------------------------       -----------------------------------      -----------------
<S>                                 <C>                                      <C>

/S/ HERVE CAEN
-----------------------------       President and Director                   November 29, 2001
Herve Caen                          (Principal Executive Officer)

/S/ JEFFREY GONZALEZ
-----------------------------       Chief Financial Officer                  November 29, 2001
Jeffrey Gonzalez                    (Principal Financial Officer and
                                    Principal Accounting Officer)


-----------------------------       Director                                 November 29, 2001
Eric Caen

/S/ NATHAN PECK
-----------------------------       Director                                 November 29, 2001
Nathan Peck


-----------------------------       Director                                 November 29, 2001
Michel Henri Vulpillat

/S/ MICHEL WELTER
-----------------------------       Director                                 November 29, 2001
Michel Welter


-----------------------------       Director                                 November 29, 2001
Brian Fargo

/S/ MAREN STENSETH
-----------------------------       Director                                 November 29, 2001
Maren Stenseth
</TABLE>


                                    Page 23
<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                  AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



                                                                          PAGE
                                                                          ----
Report of Independent Public Accountants                                   F-2

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2000 and 1999                  F-3

Consolidated Statements of Operations for the years ended
  December 31, 2000, 1999 and 1998                                         F-4

Consolidated Statements of Stockholders' Equity (Deficit)
  for the years ended December 31, 2000, 1999 and 1998                     F-5

Consolidated Statements of Cash Flows for the years ended
  December 31, 2000, 1999 and 1998                                         F-6

Notes to Consolidated Financial Statements                                 F-7

Schedule II - Valuation and Qualifying Accounts                            S-1


                                    Page F-1
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Interplay Entertainment Corp.:

    We have audited the accompanying consolidated balance sheets of Interplay
Entertainment Corp. (a Delaware corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

    We conducted our audits in accordance with 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 audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interplay Entertainment
Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.

    As discussed further in Note 15, subsequent to April 16, 2001, the date of
our original report, the Company incurred losses of $20.8 million during the six
months ended June 30, 2001, and as of that date, based on unaudited financial
statements, the Company's current liabilities exceeded its current assets by
$9.2 million and the Company has experienced, and expects to continue to
experience, negative operating cash flows which will require the need for
additional financing. Additionally, the Company is in violation of its debt
covenants. These factors, among others, as described in Note 15, create a
substantial doubt about the Company's ability to continue as a going concern and
an uncertainty as to the recoverability and classification of recorded asset
amounts and the amounts and classification of liabilities. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

    Our audits were made for the purpose of forming an opinion on the
accompanying financial statements taken as a whole. The supplemental Schedule II
as shown on page S-1 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.


/s/  Arthur Andersen LLP

ARTHUR ANDERSEN LLP
Orange County, California
April 16, 2001, except for the matters discussed in Note 15 as to which the date
  is August 23, 2001


                                    Page F-2
<PAGE>


<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

                                                                        December 31,
                                                                 --------------------------
                            ASSETS                                  2000            1999
                                                                 ----------      ----------
<S>                                                              <C>             <C>
Current Assets:
     Cash                                                        $   2,835       $    399
     Restricted Cash                                                     -          2,597
     Trade receivables, net of allowances
         of $6,543 and $9,161, respectively                         28,136         22,209
     Inventories                                                     3,359          6,057
     Prepaid licenses and royalties                                 17,704         19,249
     Other                                                             772            874
                                                                 ----------      ---------
        Total current assets                                        52,806         51,385
Property and Equipment, net                                          5,331          4,225
Other Assets                                                           944          1,326
                                                                 ----------      ---------
                                                                 $  59,081       $ 56,936
        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
     Current debt                                                $  25,433       $ 19,630
     Accounts payable                                               12,270         21,462
     Accrued liabilities                                            14,980         17,915
                                                                 ----------      ---------
          Total current liabilities                                 52,683         59,007
                                                                 ----------      ---------
Commitments and Contingencies (see Note 7)
Stockholders' Equity (Deficit):
     Series A Preferred Stock, $.001 par value,
     authorized 5,000,000 shares; issued and outstanding
     719,424 and zero shares, respectively                          20,604              -
     Common Stock, $.001 par value, authorized 100,000,000
       and 50,000,000 shares, respectively; issued and
       outstanding 30,143,636 and 29,989,125 shares,
       respectively                                                     30             30
     Paid-in capital                                                88,759         87,390
     Accumulated deficit                                          (103,259)       (89,782)
     Accumulated other comprehensive income                            264            291
                                                                 ----------      ---------
          Total stockholders' equity (deficit)                       6,398         (2,071)
                                                                 ----------      ---------
                                                                 $  59,081       $ 56,936
                                                                 ==========      =========
</TABLE>



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


                                    Page F-3
<PAGE>


<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                            YEARS ENDED DECEMBER 31,
                                                  -------------------------------------------
                                                      2000            1999            1998
                                                  -----------     -----------     -----------
<S>                                               <C>             <C>             <C>
Net revenues                                       $ 104,582       $ 101,930       $ 126,862
Cost of goods sold                                    54,061          61,103          71,928
                                                  -----------     -----------     -----------
   Gross profit                                       50,521          40,827          54,934
                                                  -----------     -----------     -----------
Operating expenses:
   Marketing and sales                                26,482          32,432          39,471
   General and administrative                         10,249          18,155          12,841
   Product development                                22,176          20,629          24,472
   Other                                                   -           2,415               -
                                                  -----------     -----------     -----------
      Total operating expenses                        58,907          73,631          76,784
                                                  -----------     -----------     -----------
      Operating loss                                  (8,386)        (32,804)        (21,850)
                                                  -----------     -----------     -----------
Other income (expense):
   Interest expense                                   (2,992)         (3,640)         (4,620)
   Other                                                (697)            169            (313)
                                                  -----------     -----------     -----------
       Total other income (expense)                   (3,689)         (3,471)         (4,933)
                                                  -----------     -----------     -----------
Loss before provision
     for income taxes                                (12,075)        (36,275)        (26,783)
Provision for income taxes                                 -           5,410           1,437
                                                  -----------     -----------     -----------
Net loss                                           $ (12,075)      $ (41,685)      $ (28,220)
                                                  ===========     ===========     ===========
Cumulative dividend on participating
   preferred stock                                 $     870       $       -       $       -
Accretion of warrant                                     532               -               -
                                                  -----------     -----------     -----------
Net loss available to common stockholders          $ (13,477)      $ (41,685)      $ (28,220)
                                                  ===========     ===========     ===========
Net loss per share:
Basic/diluted                                      $   (0.45)      $   (1.86)        $ (1.91)
                                                  ===========     ===========     ===========
Weighted average number of
    common shares outstanding:

Basic/diluted                                     30,046,701      22,418,463      14,762,644
                                                  ===========     ===========     ===========
</TABLE>



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


                                    Page F-4
<PAGE>


<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                             (DOLLARS IN THOUSANDS)

                                                                                                  ACCUMU-
                                                                                                  LATED
                                                                                                  OTHER
                                                                                                  COMPRE-   COMPRE-
                                        PREFERRED STOCK     COMMON STOCK               ACCUMU-    HENSIVE   HENSIVE
                                       ----------------  ------------------  PAID-IN   LATED      INCOME    INCOME
                                        SHARES   AMOUNT    SHARES    AMOUNT  CAPITAL   DEFICIT    (LOSS)    (LOSS)      TOTAL
                                       -------  -------  ----------  ------  -------- ----------  --------  ---------  ---------
<S>                                    <C>      <C>      <C>         <C>     <C>      <C>         <C>       <C>        <C>
Balance, December 31, 1997                   -  $     -  10,951,828  $   11  $ 18,408 $ (19,877)    $ 191          -   $ (1,267)
  Issuance of common stock,
    net of issuance costs                    -        -   5,056,102       5    24,390         -         -          -     24,395
  Issuance of warrants                       -        -           -       -       316         -         -          -        316
  Exercise of warrants                       -        -   2,272,417       2     8,599         -         -          -      8,601
  Exercise of stock options                  -        -      12,084       -        15         -         -          -         15
  Proceeds from warrants                                                                                                      -
  Compensation for stock options
    granted                                  -        -           -       -       190         -         -          -        190
  Net loss                                   -        -           -       -         -   (28,220)        -          -    (28,220)
  Other comprehensive income,
    net of income taxes:                                                                                    $(28,220)
      Foreign currency translation
        adjustment                           -        -           -       -         -         -         -        163
                                                                                                            ---------
        Other comprehensive income           -        -           -       -         -         -       163        163        163
                                                                                                            ---------
           Comprehensive loss                -        -           -       -         -         -         -   $(28,057)
                                       -------  -------  ----------  ------  -------- ----------  --------  =========  ---------
Balance, December 31, 1998                   -        -  18,292,431      18    51,918   (48,097)      354                  4,193
  Issuance of common stock                   -        -  11,408,736      12    34,838         -         -                 34,850
  Exercise of stock options                  -        -     287,958       -       608         -         -                    608
  Compensation for stock options
    granted                                  -        -           -       -        26         -         -                     26
  Net loss                                   -        -           -       -         -   (41,685)        -   $(41,685)    (41,685)
  Other comprehensive income,
    net of income taxes:
      Foreign currency translation
        adjustment                           -        -           -       -         -         -         -        (63)
                                                                                                            ---------
        Other comprehensive income           -        -           -       -         -         -       (63)       (63)        (63)
                                                                                                            ---------
           Comprehensive loss                -        -           -       -         -         -         -   $(41,748)
                                       -------  -------  ----------  ------  -------- ----------  --------  =========  ----------
Balance, December 31, 1999                   -        -  29,989,125      30    87,390   (89,782)      291          -      (2,071)
  Issuance of common stock,
    net of issuance costs                    -        -      40,661       -       439         -         -          -         439
  Issuance of Series A preferred
    stock                              719,424   19,202           -       -         -         -         -          -      19,202
  Issuance of warrants                       -        -           -       -       798         -         -          -         798
  Exercise of stock options                  -        -     113,850       -        42         -         -          -          42
  Accretion of warrant                       -      532           -       -         -      (532)        -          -           -
  Accumulated accrued dividend on
    Series A Preferred Stock                 -      870           -       -         -      (870)        -          -           -
  Compensation for stock options
    granted                                  -        -           -       -        90         -         -                     90
  Net loss                                   -        -           -       -         -   (12,075)        -   $(12,075)    (12,075)
  Other comprehensive income,
    net of income taxes:
      Foreign currency translation
        adjustment                           -        -           -       -         -         -         -        (27)
                                                                                                            ---------
        Other comprehensive income           -        -           -       -         -         -       (27)       (27)        (27)
                                                                                                            ---------
           Comprehensive loss                -        -           -       -         -         -         -   $(12,102)
                                       -------  -------  ----------  ------  -------- ----------  --------  =========  ----------
Balance, December 31, 2000             719,424  $20,604  30,143,636  $   30  $ 88,759 $(103,259)    $ 264              $   6,398
                                       =======  =======  ==========  ======  ======== ==========  ========             ==========
</TABLE>


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


                                    Page F-5
<PAGE>


<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                                                                           Years Ended December 31,
                                                                    2000            1999            1998
                                                                 -----------      ----------      ----------
<S>                                                              <C>              <C>             <C>
Cash flows from operating activities:
   Net loss                                                       $ (12,075)      $ (41,685)      $ (28,220)
   Adjustments to reconcile net loss to net
      cash used in operating activities--
      Depreciation and amortization                                   2,512           3,023           3,415
      Noncash expense for stock options                                  90              26             190
      Noncash interest expense                                            -             300              68
      Write-off of other assets                                           -              82               -
      Loss on asset valuation, restructuring                              -             410               -
      Deferred income taxes                                               -           5,336           2,022
      Minority interest in loss of subsidiary                             -            (143)           (117)
      Changes in assets and liabilities:
         Trade receivables, net                                      (5,927)         14,198             693
         Inventories                                                  2,698             246              35
         Income taxes receivable                                          -               -           1,427
         Prepaid licenses and royalties                               1,545          (1,121)         (5,501)
         Other current assets                                           102            (489)          1,657
         Other assets                                                     -               -              (3)
         Accounts payable                                            (9,192)         (1,941)          6,282
         Accrued liabilities                                         (2,935)         (4,653)           (166)
         Income taxes payable                                             -              14            (607)
                                                                 -----------      ----------      ----------
             Net cash used in operating activities                  (23,182)        (26,397)        (18,825)
                                                                 -----------      ----------      ----------
Cash flows used in investing activities:
   Purchase of property and equipment                                (3,236)         (1,595)         (1,684)
                                                                 -----------      ----------      ----------
         Net cash used in investing activities                       (3,236)         (1,595)         (1,684)
                                                                 -----------      ----------      ----------
Cash flows from financing activities:
   Net borrowings (payments) on line of credit                        6,215          (5,257)          1,229
   Payments of subordinated secured promissory notes
     and warrants                                                         -               -          (6,054)
   Repayments on notes payable                                         (412)              -             (76)
   Net proceeds from issuance of common stock                           439          35,450          24,310
   Net proceeds from issuance of Series A Preferred Stock
     and warrant                                                     20,000               -               -
   Proceeds from exercise of stock options                               42               8              15
   Reductions (additions) to restricted cash                          2,597          (2,597)              -
   Other financing activities                                             -             236               -
                                                                 -----------      ----------      ----------
         Net cash provided by financing activities                   28,881          27,840          19,424
                                                                 -----------      ----------      ----------
Effect of exchange rate changes on cash                                 (27)            (63)            163
                                                                 -----------      ----------      ----------
Net increase (decrease) in cash                                       2,436            (215)           (922)
Cash, beginning of year                                                 399             614           1,536
                                                                 -----------      ----------      ----------
Cash, end of year                                                   $ 2,835           $ 399           $ 614
                                                                 ===========      ==========      ==========
Supplemental cash flow information:
    Cash paid during the year for interest                          $ 3,027         $ 3,608         $ 4,671
                                                                 ===========      ==========      ==========
Suplemental disclosure of non-cash financing activity:
    Common Stock issued under Multi-Product Agreement                   $ -         $ 1,000             $ -
                                                                 ===========      ==========      ==========
</TABLE>


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


                                    Page F-6
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


1.  LINE OF BUSINESS; RISK FACTORS

     Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(the "Company"), develop, publish, and distribute interactive entertainment
software; and distribute selected software to computer and peripheral device
manufacturers for use in bundling arrangements. The Company's software is
developed for use on various interactive entertainment software platforms,
including personal computers and next generation video game consoles, such as
the Sony PlayStation 2, Microsoft Xbox and Nintendo GameCube.

     The Company incurred a net loss of $12.1 million and used cash in operating
activities of $23.2 million for the year ended December 31, 2000. During 2000,
the Company's working capital improved to a positive $123,000 at year end
compared to a negative $7.6 million at the end of 1999.

     In April 2001, the Company obtained a new three year working capital line
of credit with a bank and completed the sale of $12.7 million of Common Stock in
a private placement transaction (see Notes 5, 8 and 14).

     The Company believes that funds available under its new line of credit,
funds received from the sale of equity securities and anticipated funds from
operations including licensing and distribution transactions, if any, will be
sufficient to satisfy the Company's projected working capital and capital
expenditure needs in the normal course of business at least through the end of
2001 (See Notes 5, 14 and 15). However, there can be no assurance that the
Company will have or be able to raise sufficient funds to satisfy its projected
working capital and capital expenditure needs beyond 2001.

     In addition to the continuing risks related to the Company's future
liquidity, the Company also faces numerous other risks associated with its
industry. These risks include dependence on new platform introductions by
hardware manufactures, new product introductions by the Company, product delays,
rapidly changing technology, intense competition, dependence on distribution
channels and risk of customer returns.

     The Company's consolidated financial statements have been presented on the
basis that the Company is a going concern. Accordingly, the consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities or any other adjustments that might result should
the Company be unable to continue as a going concern.

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 its 91 percent-owned subsidiary
Shiny Entertainment, Inc. All significant intercompany accounts and transactions
have been eliminated.

REINCORPORATION

     On March 2, 1998, the Board of Directors of Interplay Productions approved
a reincorporation plan. Under the reincorporation plan Interplay Productions
formed a new entity in Delaware into which Interplay Productions was merged on
May 29, 1998. The new entity was named Interplay Entertainment Corp.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


                                    Page F-7
<PAGE>


RECLASSIFICATIONS

     Certain reclassifications have been made to the prior period's financial
statements to conform to classifications used in the current period. For the
1999 period, the Company has reclassified $2.9 million of nonrecurring costs
previously recorded as Other Expense on the Statement of Operations as Marketing
and Sales Expense. These costs are associated with the 1999 Virgin Distribution
agreement for certain minimum operating charges payable to Virgin of $2.9
million (see Note 11).

RESTRICTED CASH

     Restricted cash as of December 31, 1999, represents cash collateral
deposits made in accordance with the Company's amended Loan and Security
Agreement (see Note 5). The restricted cash was released during 2000.

INVENTORIES

     Inventories consist of CD-ROMs or DVDs, manuals, packaging materials and
supplies, and packaged software finished goods ready for shipment, including
video game console software. Inventories are valued at the lower of cost
(first-in, first-out) or market.

PREPAID LICENSES AND ROYALTIES

     Prepaid licenses and royalties consist of payments for intellectual
property rights and advanced royalty payments to outside developers. In
addition, such costs include certain other outside production costs generally
consisting of film cost and amounts paid for digitized motion data with
alternative future uses. Payments to developers represent contractual advanced
payments made for future royalties. 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 percent in the first
month of release and a minimum of 5 percent 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.

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 five year period. Leasehold improvements are amortized on a straight-line
basis over the lesser of the estimated useful life or the remaining lease term.

OTHER NON-CURRENT ASSETS

     Other non-current assets consist primarily of goodwill which the Company is
amortizing on a straight-line basis over seven years (see Note 3). Accumulated
amortization as of December 31, 2000 and 1999 was $2.1 million and $1.7 million,
respectively.

LONG-LIVED ASSETS

     As prescribed by Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of", the Company assesses the recoverability of its
long-lived assets (including goodwill) by determining whether the asset balance
can be recovered over the remaining depreciation or amortization period through
projected undiscounted future cash flows. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.


                                    Page F-8
<PAGE>


FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying value of cash, accounts receivable, accounts payable and notes
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.

REVENUE RECOGNITION

     Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition". For those agreements that provide the customers the right to
multiple copies in exchange for guaranteed amounts, revenue is recognized at the
delivery of the product master or the first copy. Per copy royalties on sales
that exceed the guarantee are recognized as earned. Guaranteed minimum royalties
on sales that do not meet the guarantee 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, the Company permits 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 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 material and are
charged to expenses as incurred.

PRODUCT DEVELOPMENT

     Product development expenses are charged to operations in the period
incurred and consist primarily of payroll and payroll related costs.

ADVERTISING COSTS

     The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which 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.

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.

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 other comprehensive
income (loss). Losses resulting from foreign currency transactions amounted to
$935,000, $125,000 and $288,000 during the years ended December 31, 2000, 1999
and 1998, respectively, and are included in other income (expense) in the
consolidated statements of operations.


                                    Page F-9
<PAGE>


NET LOSS PER SHARE

     The Company accounts for net loss per share in accordance with SFAS No. 128
"Earnings Per Share." Basic net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding plus the effect of any dilutive stock options and common
stock warrants.

     For years ended December 31, 2000, 1999 and 1998, 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.

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 makes the necessary pro forma disclosures mandated by SFAS No.
123 "Accounting for Stock-based Compensation" (see Note 10).

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities", which is
effective for fiscal years beginning after June 15, 2000 as amended by SFAS No.
137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments. The statement requires that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value, and that changes in the derivative's fair
value be recognized currently in the earnings unless specific hedge accounting
criteria are met. The adoption of this standard did not have a material impact
on the Company's results of operations.

     In December 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," as
amended by SAB No. 101A and SAB No. 101B, to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements. SAB
No. 101 explains the SEC staff's general framework for revenue recognition,
stating that certain criteria be met in order to recognize revenue. SAB No. 101
also addresses the question of gross versus net revenue presentation and
financial statement and Management's Discussion and Analysis disclosures related
to revenue recognition. The Company adopted SAB No. 101 effective January 1,
2000 and the adoption of this standard reduced net sales and cost of sales by
approximately $1.7 million for the year ended December 31, 2000, but did not
have an impact on the Company's gross profit or net loss. The Company did not
apply this standard to the 1999 period as the impact would have been immaterial
to the financial statements taken as a whole.

     In March 2000, the Financial Accounting Standards Board 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. The adoption of FIN 44 did
not have a material effect on the Company's financial position or results of
operations.

3.  ACQUISITION

     In 1995, the Company acquired a 91 percent 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 requires the Company to pay the
former owner of Shiny


                                   Page F-10
<PAGE>


additional cash payments of up to $5.6 million upon the delivery and acceptance
of five future Shiny interactive entertainment software titles, as defined. As
of December 31, 2000, the Company had not been required to make any additional
payments in accordance with the purchase agreement (see Note 7). In March 2001,
the Company acquired the remaining nine percent equity interest in Shiny for
$600,000 (see Note 14).

4.  DETAIL OF SELECTED BALANCE SHEET ACCOUNTS

INVENTORIES

     Inventories are stated at the lower of cost or market. Inventories consist
of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                            ----------------------
                                              2000         1999
                                            ---------    ---------
                                            (DOLLARS IN THOUSANDS)
<S>                                          <C>          <C>
Packaged software finished goods             $ 2,628      $ 4,394
CD-ROMs, DVDs, manuals,
     packaging and supplies                      731        1,663
                                            ---------    ---------
                                             $ 3,359      $ 6,057
                                            =========    =========
</TABLE>

OTHER CURRENT ASSETS

     Other current assets consist of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                            ----------------------
                                              2000         1999
                                            ---------    ---------
                                            (DOLLARS IN THOUSANDS)
<S>                                          <C>          <C>
Prepaid expenses                             $   689      $   764
Deposits                                          83          110
                                            ---------    ---------
                                             $   772      $   874
                                            =========    =========
</TABLE>

PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                   ------------------------
                                                      2000           1999
                                                   ----------     ---------
                                                    (DOLLARS IN THOUSANDS)
<S>                                                 <C>           <C>
Computers and equipment                             $ 10,175      $ 14,651
Furniture and fixtures                                   123           849
Leasehold improvements                                 1,380         1,348
                                                   ----------     ---------
                                                      11,678        16,848
Less: Accumulated depreciation and amortization       (6,347)      (12,623)
                                                   ----------     ---------
                                                     $ 5,331       $ 4,225
                                                   ==========     =========
</TABLE>


     For the years ended December 31, 2000, 1999 and 1998, the Company incurred
depreciation expense of $2.1 million, $2.6 million and $3 million, respectively.
During the year ended December 31, 2000, the Company disposed of fully
depreciated equipment having an original cost of $8.3 million.


                                   Page F-11
<PAGE>


ACCRUED LIABILITIES

    Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                            ----------------------
                                              2000         1999
                                            ---------    ---------
                                            (DOLLARS IN THOUSANDS)
<S>                                          <C>          <C>
Royalties payable                             $ 7,258      $ 7,950
Accrued payroll                                 1,441        2,337
Payable to distributor                          3,115        2,908
Accrued bundle and affiliate                      547        1,563
Deferred revenue                                1,708        2,039
Other                                             911        1,118
                                            ---------    ---------
                                             $ 14,980     $ 17,915
                                            =========    =========
</TABLE>


5.  CURRENT DEBT

    Current debt consists of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                            ----------------------
                                              2000         1999
                                            ---------    ---------
                                            (DOLLARS IN THOUSANDS)
<S>                                          <C>          <C>
Loan Agreement                               $ 24,433     $ 19,218
Supplemental line of credit from Titus          1,000            -
Other                                               -          412
                                            ---------    ---------
                                             $ 25,433     $ 19,630
                                            =========    =========
</TABLE>


LOAN AGREEMENT

     Borrowings under the Loan and Security Agreement ("Loan Agreement") bear
interest at LIBOR (6.78 percent at December 31, 2000 and 6.48 percent at
December 31, 1999) plus 4.87 percent (11.65 percent at December 31, 2000 and
11.35 percent at December 31, 1999). In April 2000, the Company amended its line
of credit under the Loan Agreement with a financial institution to extend its
current line of credit through April 2001. Under the terms of the Amendment the
maximum credit line is $25 million. Within the total credit limit, the Company
may borrow up to $7 million in excess of its borrowing base, which is based on
qualifying receivables and inventory. At December 31, 2000, the Company had
availability of $600,000 on its line of credit. In addition, the Company is
required to maintain the $5 million personal guarantee by the Company's Chairman
and Chief Executive Officer ("Chairman") and Titus is required to provide a $20
million corporate guarantee. The Company is currently in compliance with the
terms of the Loan Agreement. In April 2001, the Company replaced its line of
credit under a loan and security agreement with a new bank (see Note 14).

SUPPLEMENTAL LINE OF CREDIT FROM TITUS

     In April 2000, the Company secured a $5 million supplemental line of credit
with Titus expiring in May 2001. Amounts borrowed under this line are subject to
interest at the maximum legal rate for parties other than financial
institutions, currently 10 percent per annum, payable quarterly. In connection
with this line of credit, Titus received a warrant for up to 100,000 shares of
the Company's Common Stock at $3.79 per share that will expire in April 2010 and
is exercisable if and to the extent that the Company borrows under the line of
credit, as defined. At December 31, 2000, the Company had availability of $4
million on its supplemental line of credit. Subsequent to December 31, 2000, the
Company borrowed an additional $2 million under the supplemental line, and
during April 2001, the total outstanding balance plus accrued interest in the
aggregate amount of approximately $3.1 million was paid in full.


                                   Page F-12
<PAGE>


6.  INCOME TAXES

     Loss before provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                        YEARS ENDED DECEMBER 31,
                               --------------------------------------------
                                  2000             1999            1998
                               -----------     ------------    ------------
                                        (DOLLARS IN THOUSANDS)
<S>                            <C>             <C>             <C>
Domestic                        $ (10,801)       $ (32,294)      $ (25,038)
Foreign                            (1,274)          (3,981)         (1,745)
                               -----------     ------------    ------------
Total                           $ (12,075)       $ (36,275)      $ (26,783)
                               ===========     ============    ============
</TABLE>


     The provision (benefit) for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                               YEARS ENDED DECEMBER 31,
                                        ------------------------------------
                                          2000          1999          1998
                                        --------     ---------      ---------
                                                (DOLLARS IN THOUSANDS)
<S>                                     <C>         <C>             <C>
Current:
   Federal                               $ -         $     -         $     -
   State                                   -               8               8
   Foreign                                 -              66            (571)
                                        -------      --------        --------
                                           -              74            (563)
Deferred:
   Federal                                 -           4,536           2,000
   State                                   -             800               -
                                        -------      --------        --------
                                           -           5,336           2,000
                                        -------      --------        --------
                                         $ -         $ 5,410         $ 1,437
                                        =======      ========        ========
</TABLE>

     The Company files a consolidated U.S. Federal income tax return which
includes substantially 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 $107.8 million and
may be subject to certain limitations as defined under Section 382 of the
Internal Revenue Code. The Federal NOL carryforwards expire through the year
2020. The Company's NOL's for State tax reporting purposes approximate $50.2
million and expire through the year 2005.

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

<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                      ------------------------------------------
                                         2000           1999            1998
                                      -----------    -----------    ------------
<S>                                   <C>            <C>            <C>
Statutory income tax rate
State and local income taxes, net of     (34.0)%        (34.0)%        (34.0)%
   Federal income tax benefit             (3.0)          (3.0)          (3.0)
Valuation allowance                       37.0           51.9           39.8
Other                                        -              -            2.6
                                      -----------    -----------    ------------
                                             - %         14.9 %          5.4 %
                                      ===========    ===========    ============
</TABLE>


                                   Page F-13
<PAGE>


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

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                      ------------------------
                                                          2000          1999
                                                      -----------   ----------
                                                        (DOLLARS IN THOUSANDS)
Current deferred tax asset (liability):
<S>                                                    <C>          <C>
     Prepaid royalties                                 $ (7,081)    $ (7,652)
     Nondeductible reserves                               3,135        4,184
     Accrued expenses                                       763        1,007
     Foreign loss and credit carryforward                   965          454
     Federal and state net operating losses              39,672       35,952
     Research and development credit carryforward           831          831
     Other                                                  294          314
                                                      -----------   ----------
                                                       $ 38,579     $ 35,090
                                                      ===========   ==========
Non-current deferred tax asset (liability):
     Depreciation expense                                  $ 50       $ (126)
     Nondeductible reserves                                 389          318
     Other                                                   (6)          (5)
                                                      -----------   ----------
                                                          $ 433        $ 187
                                                      ===========   ==========
Total deferred tax asset before
     valuation allowance                               $ 39,012     $ 35,277
Valuation allowance                                     (39,012)     (35,277)
                                                      -----------   ----------
Net deferred tax asset                                      $ -          $ -
                                                      ===========   ==========
</TABLE>


     The valuation allowance relates primarily to net operating loss and tax
credit carryforwards. Due to the uncertainty surrounding the realization of the
favorable tax attributes in the short term, the Company recorded a valuation
allowance against its net deferred tax assets at this time.

7.  COMMITMENTS AND CONTINGENCIES

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):

    2001                           $  1,864
    2002                              1,755
    2003                              1,758
    2004                              1,907
    2005                              1,789
     Thereafter                       3,648
                                  ----------
                                   $ 12,721
                                  ==========


     Total rent expense was $2.8 million, $3.2 million and $2.4 million for the
years ended December 31, 2000, 1999 and 1998, respectively.


                                   Page F-14
<PAGE>


PENDING INTERNAL REVENUE SERVICE EXAMINATION

     The Internal Revenue Service ("the IRS") is currently examining the
Company's consolidated federal income tax returns for the years ended April 30,
1992 through 1997 and December 31, 1997 and 1998. The IRS has challenged the
timing of certain tax deductions taken by the Company, and has asserted that an
additional tax liability is due. The Company disagrees with the IRS challenge,
and is currently contesting such challenges. The potential losses to the Company
as a result of these challenges are not reasonably estimable. Accordingly, no
reserve has been established in the accompanying consolidated financial
statements. Any losses which might be suffered by the Company as a result of
this examination that could not be offset by the Company's NOL, could impact the
Company's future cashflows and profitability.

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.

     The Company and the former owner of Shiny have a dispute over additional
cash payments upon the delivery and acceptance of interactive entertainment
software titles that Shiny was committed to deliver over time (see Note 3). The
Company believes that no amounts are due under the applicable agreements. In
March 2001, the Company settled this dispute with the former owner of Shiny
which, among other things, amended the original purchase agreement of Shiny and
modified the terms of additional cash payments for the delivery of future
software titles (see Note 14).

     Virgin Interactive Entertainment Limited ("Virgin") has disputed an
amendment effective as of January 2000 to the International Distribution
Agreement with the Company, and claims that the Company is obligated, among
other things, to pay a contribution to their overhead of up to approximately
$9.3 million annually, subject to decrease by the amount of commissions earned
by Virgin on its distribution of the Company's products. The Company settled
this dispute with Virgin in April 2001 (see Note 14).

EMPLOYMENT AGREEMENTS

     The Company has entered into 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, as defined, the employees may be entitled
to certain severance benefits, as defined. These agreements expire between 2002
and 2004.

NEW EUROPEAN CURRENCY

     On January 1, 1999, eleven of the fifteen member countries of the European
Union ("Participating Countries") established fixed conversion rates between
their existing sovereign currencies and a new European currency, the "euro". The
euro was adopted by the Participating Countries as the common legal currency on
that date. A significant portion of the Company's sales are made to
Participating Countries and consequently, the Company anticipates that the euro
conversion will, among other things, create technical challenges to adapt
information technology and other systems to accommodate euro-denominated
transactions and limit the Company's ability to charge different prices for its
producers in different markets. While the Company believes that the conversion
will not cause material disruption of its business, there can be no assurance
that the conversion will not have a material effect on the Company's business or
financial condition.


                                   Page F-15
<PAGE>


8.  STOCKHOLDERS' EQUITY

PREFERRED STOCK AND COMMON STOCK

     In connection with the amendment of the Company's line of credit agreement
in November 1998 (see Note 5), the Company issued its Chairman warrants to
purchase 400,000 shares of the Company's Common Stock (the "Warrants") at an
exercise price of $3.00 per share exercisable after May 20, 1999. The Warrants
have a three year term and have no registration rights. The shares issuable upon
exercise of the warrants are subject to the twelve month lockup agreement the
employee entered into in connection with the Company's IPO. In connection with
the issuance of the Warrants, the Company recorded an expense equal to the fair
market value of the Warrants, which is approximately $316,000, with such expense
being amortized as additional debt cost in 1999, which was the term of the
guarantee.

     As consideration for the extension of a $5 million personal guarantee by
the Company's Chairman under the Company's Loan Agreement (see Note 5), the
Company agreed to assume the obligation of the Chairman under an agreement
between the Chairman and the Company's former President, pursuant to which the
Chairman granted certain put rights to the former President with respect to the
271,528 common stock options held by the former President. The Company recorded
compensation expense of approximately $700,000 through December 31, 1998 related
to these options and interest expense of $300,000 for the year ended 1999, in
connection with the assumption of the put right. In May 1999, the Company issued
271,528 shares of Common Stock for the exercise of the former President's stock
options in conjunction with an Agreement and General Release executed with the
former President. The Company guaranteed the former President a value of $1
million for the stock through periodic sales or guarantee payments through
January 2000. On the due dates of the payments, the Company has the option to
either require that the former President sell shares on the open market or the
Company may purchase the shares from the former president and retire them. Under
the agreement, the Company did not repurchase any shares.

     In April 1999, the Company entered into a multi-product development
agreement with a developer which provides for the delivery of ten titles to the
Company during 1999 and 2000 in exchange for $0.5 million paid in cash
installments and the issuance of 484,848 shares of the Company's Common Stock.
The shares of Common Stock will be restricted as to transfer rights until such
products are delivered and accepted by the Company. The arrangement also
includes certain penalties to the developer in the event of noncompliance and
the terms and conditions are subject to the approval by the Company's
underwriters and lenders, if necessary.

     In 1999, the Company entered into an Agreement and Release with an employee
and director of the Company. As a result of the Agreement and Release, the
Company issued 56,208 shares of its Common Stock in consideration for payments
of deferred compensation.

     During 1999, the Company completed two equity transactions with Titus which
provided for the issuance of 10,795,455 shares of the Company's Common Stock for
$35 million. 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 has preferences under
certain events, as defined. The Preferred Stock is convertible by Titus,
redeemable by the Company, and accrues a 6 percent 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 may redeem
the Preferred Stock shares at the original issue price plus all accrued but
unpaid dividends at any time after termination of Titus's guarantee of the
Company's principal line of credit. Titus may convert the Preferred Stock shares
into shares of Common Stock at any time after May 2001 or earlier under certain
events as defined. The conversion rate is the lesser of $2.78 (7,194,240 shares
of Common Stock) or 85 percent of the market price per share at the time of
conversion, as defined. The Preferred Stock is 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 with
the following weighted average assumptions: dividend yield of zero percent;
expected volatility of 92 percent; risk-free interest rate of 5.85 percent; and
an expected life of one-year. 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 is being accreted over a
one-year period as a dividend to the Preferred Stock. As of December 31,


                                   Page F-16
<PAGE>


2000, the Company had accreted $532,000. In addition, Titus received a warrant
for 50,000 shares of the Company's Common Stock exercisable at $3.79 per share
which became by Titus since the Company did not meet certain financial operating
performance targets for the year ending December 31, 2000, as defined. Both
warrants expire in April 2010. In April 2001, Titus' guarantee of the Company's
principal line of credit was released and the Company may redeem the Preferred
Stock at anytime thereafter (see Note 14).

     In connection with the $20 million corporate guarantee provided by Titus on
the extension of the Company's line of credit (see Note 5), if the Company
defaults on the line of credit agreement, and Titus is forced to pay on its
corporate guarantee of such line, the Series A Preferred Stock conversion rights
will be adjusted so as to make such shares convertible into and up to
approximately 42.8 million shares of Common Stock. In the event that the Company
is able to repay to Titus the amounts paid under the guarantee within six
months, the conversion rate shall be returned to the level at which it existed
prior to such adjustment. In the event that the Company is unable to repay such
amounts within six months, the conversion rate shall be readjusted at the end of
such six month period based on the average closing price of the Company's Common
Stock for the last 20 trading days during such period. If such average price is
$10.00 per share, the shares would be convertible into 7,194,240 shares of
Common Stock, and if less than $10.00, the shares would be convertible into
approximately an additional 5,000,000 shares for each dollar the average price
is below $10.00, up to a maximum of approximately 42.8 million shares. The
Common Stock shares issuable upon conversion of the Preferred Stock or the
exercise of the warrants are subject to certain registration rights. In April
2001, Titus' guarantee of the Company's principal line of credit was released
eliminating the potential for adjustment to the conversion rights into and up to
approximately 42.8 million shares of Common Stock (see Note 14).

     In connection with this line of credit, Titus received a warrant to acquire
up to 100,000 shares of the Company's Common Stock at $3.79 per share that will
expire in April 2010 and is exercisable if and to the extent that the Company
borrows under the line of credit, as defined (see Note 5). As of December 31,
2000, part of the warrant became exercisable for 20,000 shares of the Company's
Common Stock.

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

     During 2000, the Company's Board of Directors approved a resolution that
increased the number of authorized shares of the Company's Common Stock from 50
million to 100 million.

     In March 2001, the Company completed a private placement of 8,126,770
shares of Common Stock for $12.7 million, and received net proceeds of
approximately $11.5 million. The shares were issued at $1.5625 per share, and
included warrants to purchase one share of Common Stock for each share sold. The
warrants are exercisable at $1.75, and one half of the warrants can be exercised
immediately with the other half exercisable after June 27, 2001, only if prior
to this date, the Company's Common Stock trading price does not exceed $2.75 for
a period of 20 consecutive trading days, as defined. The warrants also have a
call provision by the Company if the Company's Common Stock trades at or above
$3.00, as defined. 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. The transaction provides for registration rights with a
registration statement to be filed by April 16, 2001 and become effective by May
31, 2001. In the event that the filing and effective dates of the registration
statement are not met, the Company is subject to a two percent penalty per
month, payable in cash or stock, until the filing and effective dates are met.
(see Note 14).

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.
During the year, 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 131,000 shares remained available for issuance at December
31, 2000. Employees purchased 40,661 and 72,225 shares in 2000 and 1999 for
$89,000 and $127,000, respectively.


                                   Page F-17
<PAGE>


9.  LOSS PER SHARE

     Basic loss per share is calculated by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding and
does not include the impact of any potentially dilutive securities. Diluted loss
per share is the same as basic because the effect of outstanding stock options
and warrants is anti-dillutive.

     There were options and warrants outstanding to purchase 4,449,967 and
3,740,780 shares of Common Stock at December 31, 2000 and 1999, respectively,
and there were 484,848 shares of restricted Common Stock at December 31, 2000
and 1999, which were excluded from the loss per share computation. At December
31, 1998 there were options to purchase 2,132,738 shares of common stock, which
were not included in the loss per share computation. The weighted average
exercise price at December 31, 2000, 1999 and 1998 was $3.03, $3.30 and $4.73,
respectively, for the options and warrants outstanding.

10.  EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

     The Company has three stock option plans. Under the Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan--1991 ("1991
Plan"), the Company was authorized to grant options to its employees to purchase
up to 111,000 shares of common stock. Under the Incentive Stock Option and
Nonqualified Stock Option Plan--1994 ("1994 Plan"), the Company was authorized
to grant options to its employees to purchase up to 150,000 shares of common
stock. Under the 1997 Stock Incentive Plan the Company may grant options to its
employees, consultants and directors to purchase up to 4,000,000 shares of
common stock.

     Options under all three plans generally vest from three to five years.
Holders of options under the 1991 Plan and the 1994 Plan shall be deemed 100
percent vested in the event of a merger in which the Company is not the
surviving entity, a sale of substantially all of the assets of the Company, or a
sale of all shares of Common Stock of the Company. The Company has treated the
difference, if any, between the exercise price and the estimated fair market
value, as determined by the board of directors on the date of grant, as
compensation expense for financial reporting purposes. Compensation expense for
the vested portion aggregated $90,000, $26,000 and $190,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

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

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                             -------------------------------------------------------------------
                                  2000                      1999                     1998
                             ---------------------  ----------------------  --------------------
                                         WEIGHTED                WEIGHTED               WEIGHTED
                                         AVERAGE                 AVERAGE                AVERAGE
                                         EXERCISE                EXERCISE               EXERCISE
                               SHARES     PRICE       SHARES      PRICE      SHARES      PRICE
                             ----------  ---------  -----------  --------   ---------   --------
<S>                          <C>            <C>      <C>           <C>      <C>           <C>
Options outstanding at
    beginning of period      3,340,780      $3.30    2,132,738     $4.73    1,838,972     $5.29
   Granted                     968,498       2.64    2,208,028      2.14      451,100      6.91
   Exercised                  (123,711)      0.37     (287,958)     0.04      (12,084)     1.27
   Canceled                   (655,600)      5.14     (712,028)     5.29     (139,750)     8.44
   Rescinded                         -          -            -         -       (5,500)     8.00
                             ----------  ---------  -----------  --------   ----------   -------
   Options outstanding
    at end of period         3,529,967      $2.90    3,340,780     $3.30    2,132,738     $4.73
                             ==========  =========  ===========  ========   ==========   =======
   Options exercisable       1,496,007               1,209,734              1,448,143
                             ==========             ===========             ==========
</TABLE>


                                   Page F-18
<PAGE>


     The following outlines the significant assumptions used to calculate the
fair value information presented utilizing the Black-Scholes Single Option
approach with ratable amortization:

<TABLE>
<CAPTION>
                                               YEARS ENDED DECEMBER 31,
                                      ----------------------------------------
                                          2000          1999         1998
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Risk free rate                               6.2%          6.3%          5.1%
Expected life                           7.3 years    7.12 years    7.74 years
Expected volatility                           90%           90%           70%
Expected dividends                              -             -             -
Weighted-average grant-date
   fair value of options granted           $ 2.14        $ 1.91        $ 2.95
</TABLE>

     A detail of the options outstanding and exercisable as of December 31, 2000
is as follows:

<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                         --------------------------------------------  -----------------------
                                             WEIGHTED       WEIGHTED                  WEIGHTED
                                             AVERAGE        AVERAGE                   AVERAGE
RANGE OF EXERCISE          NUMBER            REMAINING      EXERCISE     NUMBER       EXERCISE
     PRICES              OUTSTANDING       CONTRACT LIFE      PRICE    OUTSTANDING     PRICE
-----------------        -----------       -------------    ---------  -----------    ---------
<S>                      <C>               <C>              <C>        <C>            <C>
$ 0.15 - $  0.47             572,874             1.24         $ 0.15      572,874      $ 0.15
$ 1.94 - $  4.44           2,469,143             8.72           2.58      594,943        2.47
$ 4.50 - $  6.66              96,500             6.99           5.18       53,100        5.38
$ 7.00 - $ 10.00             391,450             6.04           8.40      275,090        8.57
                         -----------       -------------    ---------  -----------    ---------
$ 0.15 - $ 10.00           3,529,967             7.16         $ 2.90    1,496,007      $ 2.81
                         ===========       =============    =========  ===========    =========
</TABLE>

     The following table shows pro forma net loss as if the fair value based
accounting method prescribed by SFAS No. 123 had been used to account for stock
based compensation cost:

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                           ------------------------------------------------
                                                               2000              1999               1998
                                                           -----------        ----------         ----------
                                                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                         <C>               <C>                <C>
Net loss available to common stockholders, as reported      $ (13,477)        $ (41,685)         $ (28,220)
Pro forma compensation expense                                 (1,370)           (1,242)            (1,011)
                                                           -----------        ----------         ----------
Pro forma net loss available to common stockholders         $ (14,847)        $ (42,927)         $ (29,231)
                                                           ===========        ==========         ==========
Basic and diluted net loss as reported                      $   (0.45)        $   (1.86)         $   (1.91)
Basic and diluted pro forma net loss                        $   (0.49)        $   (1.91)         $   (1.98)
                                                           ===========        ==========         ==========
</TABLE>


PROFIT SHARING 401(K) PLAN

     The Company sponsors a 401(k) plan ("the Plan") for most full-time
employees. The Company matches 50 percent of the participant's contributions up
to six percent of the participant's base compensation. The profit sharing
contribution amount is at the sole discretion of the Company's board of
directors. Participants vest at a rate of 20 percent per year after the first
year of service for profit sharing contributions and 20 percent per year after
the first two years of service for matching contributions. Participants become
100 percent vested upon death, permanent disability or termination of the Plan.
Benefit expense for the years ended December 31, 2000, 1999 and 1998 was
$267,000, $257,000 and $256,000, respectively.


                                   Page F-19
<PAGE>


11.  RELATED PARTIES

     The Company has amounts due from a business controlled by the Chairman of
the Company. Net amounts due, prior to reserves, at December 31, 2000 and 1999
were $2.5 million. Such amounts at December 31, 2000 and 1999 are fully
reserved.

     In connection with the amendment of the Company's line of credit agreement
in November 1998 (see Note 5), the Company's Chairman provided a personal
guarantee of $5 million secured by certain of the Chairman's personal assets. As
consideration for making such guarantee, the Chairman received warrants to
purchase 400,000 shares of the Company's Common Stock at an exercise price of
$3.00 per share exercisable after May 1999 (see Note 8). The Company amended its
line of credit in March 1999 and in conjunction with the amendment, the personal
guarantee was extended. As consideration for extending the guarantee, the
Company assumed an obligation to the Company's former President by the Chairman
(see Note 8). The Company did not repurchase any shares from the former
President under this obligation.

     In connection with the Company's new working capital line of credit
obtained subsequent to year end and the retirement of the current debt existing
under the Company's previous working capital line of credit arrangements (see
Notes 5 and 15), the secured personal guarantee of $5 million previously
provided by the Chairman was released, and a new personal guarantee for $2
million, secured by $1 million in cash, was provided to the new bank by the
Chairman. In addition, the Chairman provided the Company with a $3 million loan,
payable in May 2002, with interest at 10 percent. In connection with the new
guarantee and loan, the Chairman received warrants to purchase 500,000 shares of
the Company's Common Stock at $1.75 per share, expiring in April 2011.

     In connection with the International Distribution Agreement executed in
February 1999, the Company subleases office space from Virgin. Rent expense paid
to Virgin was $101,000 and $50,000 for the years ended December 31, 2000 and
1999.

Restructuring of European Operations

     In 1999, the Company discontinued its direct and then existing affiliate
distribution activities in Europe and appointed Virgin as its exclusive
distributor in Europe. In connection with exiting its direct and then existing
affiliated distribution activities, the Company restructured its operations by
terminating employees, closing facilities, retiring redundant assets, and
transitioning selected employees to the Virgin organization. In accordance with
Emerging Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs Incurred in a
Restructuring," the Company recorded a provision of $2.4 million as
restructuring expenses and costs associated with the merger and integration of
its European operations and the departure of two members of senior management.
The Company recorded costs associated with closing facilities, related asset
valuation issues, and costs associated with the write-down of redundant
equipment in the aggregate amount of $1.6 million and severance and other
employee related costs of $0.8 million. These amounts were recorded as a charge
to operating expenses, classified as Other Operating Expense on the Statement of
Operations.

DISTRIBUTION AND PUBLISHING AGREEMENTS

     In February 1999, the Company entered into an International Distribution
Agreement with Virgin which provides for the exclusive distribution of
substantially all of the Company's products in Europe, CIS, 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
pays Virgin a monthly overhead fee, certain minimum operating charges, a
distribution fee based on net sales, and Virgin provides certain market
preparation, warehousing, sales and fulfillment services on behalf of the
Company. The Company amended its International Distribution Agreement with
Virgin effective January 1, 2000. Under the amended Agreement, the Company no
longer pays Virgin 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 Virgin to earn a higher commission rate, as
defined. Virgin disputed the amendment to the International Distribution
Agreement with the Company, and claimed that the Company was obligated, among
other things, to pay a contribution to their overhead of up to approximately
$9.3 million annually, subject to decrease by the amount of commissions earned
by Virgin on its distribution of our products. The Company settled this dispute
with Virgin in April 2001 (see Note 14). In connection with the International
Distribution Agreement, the Company incurred distribution commission expense


                                   Page F-20
<PAGE>


of $4.6 million and $3.4 million for the years ended December 31, 2000 and 1999,
respectively. In addition, the Company recognized overhead fees of $3.9 million
and certain minimum operating charges to Virgin of $2.9 million for the year
ended December 31, 1999.

     The Company has also entered into a Product Publishing Agreement with
Virgin which provides the Company with an exclusive license to publish and
distribute substantially all of Virgin's products within North America, Latin
America and South America for a royalty based on net sales. As part of terms of
the April 2001 settlement between Virgin and the Company the Product Publishing
Agreement was amended to provide for the Company to publish only one future
title developed by Virgin (see Note 14). In connection with the Product
Publishing Agreement with Virgin, the Company earned $63,000 and $41,000 for
performing publishing and distribution services on behalf of Virgin for the
years ended December 31, 2000 and 1999, respectively.

     As of December 31, 2000 and 1999, Virgin owed the Company $12.1 million and
$9.1 million, and the Company owed Virgin $4.8 million and $7.8 million,
respectively. The net amount outstanding as of December 31, 2000 was fully paid
by Virgin in April 2001.

     In connection with the equity investments by Titus (see Note 8), the
Company performs distribution services on behalf of Titus for a fee. In
connection with such distribution services, the Company recognized fee income of
$435,000 and $200,000 for the years ended December 31, 2000 and 1999,
respectively.

     During the year ended December 31, 2000, the Company recognized $3 million
in licensing revenue under a multi-product license agreement with Titus for the
technology underlying one title and the content of three titles for multiple
game platforms, extended for a maximum period of twelve years, with variable
royalties payable to the Company from five to ten percent, as defined. The
Company earned a $3 million non-refundable fully-recoupable advance against
royalties upon signing and completing all of its obligations under the
agreement. During the year ended December 31, 1999, the Company executed
publishing agreements with Titus for three titles. As a result of these
agreements, the Company recognized revenue of $2.6 million for delivery of these
titles to Titus. In addition, during 2000 the Company borrowed $1 million from
Titus under the supplemental line of credit (see Note 5).

     As of December 31, 2000 and 1999, Titus owed the Company $280,000 and zero
and the Company owed Titus $1.1 million and $0.3 million, respectively.

INVESTMENT IN AFFILIATE

     In connection with the International Distribution Agreement and Product
Publishing Agreement, the Company has also entered into an Operating Agreement
with Virgin Acquisition Holdings, LLC, which, among other terms and conditions,
provides the Company with a 43.9 percent equity interest in VIE Acquisition
Group LLC ("VIE"), the parent entity of Virgin. Under the Operating Agreement,
the Company was obligated to make a cash payment of $9,000. However, the Company
is not obligated to make any future contributions to the working capital of
Virgin other than the monthly overhead fee discussed above. During 1999, Titus
acquired a 50.1 percent equity interest in VIE and 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 VIE as of
December 31, 2000. As part of the terms of the April 2001 settlement , VIE
redeemed the Company's membership interest in VIE (see Note 14).

     The Company accounted for its investment in VIE in accordance with the
equity method of accounting. The Company did not recognize any material income
or loss in connection with its investment in VIE for the years ended December
31, 2000 and 1999. The Company recognizes sales to Virgin, net of sales
commissions, only after Virgin recognizes sales of the Company's products to
unaffiliated third parties.

12.  CONCENTRATION OF CREDIT RISK

     The Company extends credit to various companies in the retail and mass
merchandising industry. Collection of trade receivables may be affected by
changes in economic or other industry conditions and could impact the Company's
overall credit risk. Although the Company generally does not require collateral,
the Company performs ongoing credit evaluations of its customers and reserves
for potential credit losses are maintained.


                                   Page F-21
<PAGE>


     For the years ended December 31, 2000 and 1999, Virgin accounted for
approximately 29 and 22 percent, respectively, of net revenues in connection
with the International Distribution Agreement (see Note 11). No single customer
accounted for ten percent or more of net revenues in the year ended December 31,
1998.

13.  SEGMENT AND GEOGRAPHICAL INFORMATION

     The Company operates in one principal business segment. Information about
the Company's operations in the United States and foreign markets is presented
below:

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                              ------------------------------------------
                                                2000            1999             1998
                                              ----------      ----------      ----------
<S>                                           <C>             <C>             <C>
Net revenues:                                           (DOLLARS IN THOUSANDS)
     United States                            $ 104,377       $  92,244       $  94,727
     United Kingdom                                 205           9,686          32,135
                                              ----------      ----------      ----------
       Consolidated net revenues              $ 104,582       $ 101,930       $ 126,862
                                              ==========      ==========      ==========
 Income (loss) from operations:
   United States                              $  (7,057)      $ (28,824)      $ (20,315)
   United Kingdom                                (1,329)         (3,980)         (1,535)
                                              ----------      ----------      ----------
       Consolidated loss from operations      $  (8,386)      $ (32,804)      $ (21,850)
                                              ==========      ==========      ==========
 Expenditures made for the acquisition
    of long-lived assets:
      United States                           $   3,177       $   1,595       $   1,067
      United Kingdom                                 59               -             422
      Other                                           -               -             195
                                              ----------      ----------      ----------
        Total expenditures for
          long-lived assets                   $   3,236       $   1,595       $   1,684
                                              ==========      ==========      ==========
</TABLE>


     Net revenues were made to geographic regions as follows:

<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                           ---------------------------------------------------------------------
                                   2000                     1999                    1998
                           ---------------------    ---------------------    -------------------
                             AMOUNT     PERCENT       AMOUNT     PERCENT       AMOUNT    PERCENT
                           ----------  ---------    ----------  ---------    ----------  -------
                                                    (DOLLARS IN THOUSANDS)
<S>                        <C>         <C>          <C>         <C>          <C>         <C>
North America               $ 56,454       54.0 %    $ 49,443      48.5 %     $ 73,865     58.2 %
Europe                        28,107       26.9        23,901      23.4         28,777     22.7
Rest of World                  6,970        6.6         6,409       6.3          7,016      5.5
OEM, royalty and
   licensing                  13,051       12.5        22,177      21.8         17,204     13.6
                           ----------  ---------    ----------  ---------    ----------  --------
                            $104,582      100.0 %   $ 101,930    100.0 %      $126,862     100.0 %
                           ==========  =========    ==========  =========    ==========  =========
</TABLE>


                                   Page F-22
<PAGE>


Long-lived assets by geographic regions, net:

<TABLE>
<CAPTION>
                              DECEMBER 31,               DECEMBER 31,
                                 2000                       1999
                         --------------------       ---------------------
                           AMOUNT     PERCENT          AMOUNT     PERCENT
                         ---------    -------       ----------    -------
                                      (DOLLARS IN THOUSANDS)
<S>                      <C>          <C>           <C>           <C>
North America            $ 6,139       97.8 %        $ 5,435       97.9 %
Europe                        76        1.2               47        0.9
Rest of World                  -          -                -          -
OEM, royalty and
   licensing                  60        1.0               69        1.2
                         ---------    -------       ----------    -------
                         $ 6,275      100.0 %        $ 5,551      100.0 %
                         =========    =======       ==========    =======
</TABLE>


14.  SUBSEQUENT EVENTS

REPLACEMENT OF CREDIT FACILITY

     In April 2001, the Company entered into a new three year loan and security
agreement with a bank providing for a $15 million working capital line of
credit. Advances under the line are limited to an advance formula of qualified
accounts receivable and inventory, and bear interest at the banks prime rate, or
at LIBOR plus 2.5% at the Company's option, as defined. The line is subject to
review and renewal by the bank on April 30, 2002 and 2003, and is secured by
substantially all of the Company's assets, plus a personal guarantee from the
Chairman of $2 million, secured by $1 million in cash. The line requires that
the Company meet certain financial covenants, as defined. The funds available
from this transaction have been used to retire current debt under the Loan
Agreement (see Note 5) existing at December 31, 2000, and to fund future
operations. The working capital line of credit balance as of April 13, 2001 was
$6.1 million.

SALE OF COMMON STOCK

     In April 2001, the Company completed a private placement of 8,126,770
shares of Common Stock for 12.7 million, and received net proceeds of
approximately $11.5 million. The shares were issued at $1.5625 per share, and
included warrants to purchase one share of Common Stock for each share sold. The
warrants are exercisable at $1.75 per share, and one-half of the warrants can be
exercised immediately with the other half exercisable after June 27, 2001, if
(and only if) the closing price of the Company's Common Stock as reported on
Nasdaq does not equal or exceed $2.75 for 20 consecutive trading days prior to
June 27, 2001. The Company may also require the holder to exercise the warrants
if the closing price of the Company's Common Stock as reported on Nasdaq does
not equal or exceed $3.00 for 20 consecutive trading days prior to June 27,
2001. The warrants expire in March 2006. The transaction provides for a
registration statement covering the shares sold or issuable upon exercise of
such warrants to be filed by April 16, 2001 and become effective by May 31,
2001. In the event that the filing and effective dates of the registration
statement are not met, the Company is subject to a two percent penalty per
month, payable in cash or stock, until the filing and effective dates are met.
The funds available from this transaction have been used to retire current debt
under the Loan Agreement (see Note 5) existing at December 31, 2000, and to fund
future operations.


                                   Page F-23
<PAGE>


UNAUDITED PRO-FORMA CONDENSED BALANCE SHEET

    In April 2001, current debt was reduced by approximately $11.5 million. The
following pro-forma balance sheet reflects the Company's financial position as
if the new financing, including the private placement of Common Stock, and the
new working capital line of credit had been completed as of December 31, 2000.

<TABLE>
<CAPTION>
                          UNAUDITED PRO-FORMA CONDENSED
                           CONSOLIDATED BALANCE SHEET
                                December 31, 2000

                                     ASSETS
                                                           Actual       Pro-forma
                                                        ------------   ------------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                     <C>            <C>
Current Assets:
     Cash                                                   $ 2,835        $ 2,835
     Trade receivables, net                                  28,136         28,136
     Inventories                                              3,359          3,359
     Prepaid licenses and royalties                          17,704         17,704
     Other                                                      772            772
                                                        ------------   ------------
     Total current assets                                    52,806         52,806
                                                        ------------   ------------
Property and Equipment, net                                   5,331          5,331
Other Assets                                                    944            944
                                                        ------------   ------------
                                                           $ 59,081       $ 59,081
                                                        ============   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Current debt                                          $ 25,433       $ 13,887
     Accounts payable                                        12,270         12,270
     Accrued liabilities                                     14,980         14,980
                                                        ------------   ------------
          Total current liabilities                          52,683         41,137
                                                        ------------   ------------
Commitments and Contingencies

Stockholders' Equity:
     Series A Preferred stock, $.001 par value,
        authorized 5,000,000 shares;
        issued and outstanding 719,424 shares                19,735         19,735
     Common stock, $.001 par value, authorized
        50,000,000 shares; issued and outstanding
        30,143,636 and 37,979,906 proforma  shares               30             38
     Paid-in capital                                         88,759        100,297
     Accumulated deficit                                   (102,390)      (102,390)
     Accumulated other comprehensive income                     264            264
                                                        ------------   ------------
          Total stockholders' equity                          6,398         17,944
                                                        ------------   ------------
                                                           $ 59,081       $ 59,081
                                                        ============   ============
</TABLE>


LOAN FROM CHAIRMAN AND CHIEF EXECUTIVE OFFICER

     In April 2001, the Chairman provided the Company with a $3 million loan,
payable in May 2002, with interest at 10 percent. In connection with this loan
to the Company and the $2 million guarantee on behalf of the Company for the
credit facility, the Chairman received warrants to purchase 500,000 shares of
the Company's Common Stock at $1.75 per share, expiring in April 2011.

AMENDMENT TO SHINY PURCHASE AGREEMENT

     In March 2001, the Company entered into an amendment to the Shiny purchase
agreement (see Notes 3 and 7) which, among other things, settles a dispute with
the former owner of Shiny, and provide for the Company to


                                   Page F-24
<PAGE>


acquire the remaining nine percent equity interest in Shiny for $600,000. The
amendment also provides 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 will earn royalties after the future delivery
of the two titles to the Company.

SETTLEMENT OF DISPUTE WITH VIRGIN INTERACTIVE ENTERTAINMENT LIMITED

     In April 2001, the Company settled its dispute with Virgin (see Note 7) and
amended the International Distribution Agreement, the Termination Agreement and
the Product Publishing Agreement entered into in February 10, 1999 (see Note
11). As a result of the settlement, Virgin dismissed its claim for overhead
fees, VIE Acquisition Group LLC ("VIE") redeemed the Company's membership
interest in VIE and Virgin paid the Company $3.1 million in net past due
balances owed under the International Distribution Agreement. In addition, the
Company will pay Virgin a one-time marketing 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 a nine month period beginning April 2001, and $83,000 per
month for a six month period beginning January 2002, with no further overhead
commitment for the remainder of the term of the International Distribution
Agreement.

15. SUBSEQUENT EVENT - FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN

     As of June 30, 2001, the Company's current liabilities exceeded its current
assets by $9.2 million. For the six months ended June 30, 2001, the Company
incurred a net loss of $20.8 million based on its unaudited financial
statements. However, net cash used in operating activities was $1.7 million as
the Company's negative operating results were largely offset by strong trade
receivable collections and conservative management of inventories and
disbursements. During the same period last year, the net cash used in operating
activities was $19.7 million.

     In June 2001, the Company experienced significant delays in the production
and release of certain titles. These delays resulted in significant declines in
the operating revenues of the Company as compared to budget for the quarter
ended June 30, 2001. The Company has not released sufficient product during the
three month period ended June 30, 2001 to generate a profitable level of
revenues, or sufficient accounts receivable to maximize the use of its line of
credit. The Company also anticipates that delays in product releases could
continue in the short-term, and funds available under its new line of credit and
from ongoing operations are not sufficient to satisfy the projected working
capital and capital expenditure needs in the normal course of business. In
addition, the Company is not in compliance with certain financial covenants set
forth in the new line of credit agreement as of June 30, 2001 and these
violations have not been cured as of August 23, 2001. If the bank does not waive
compliance with the required covenants, terminates the credit agreement and
demands acceleration of payment of the outstanding amounts, the Company would
not have the funds to repay the bank and would be unable to continue to draw on
the credit facility to fund future operations.

     The Company continues to implement cost reduction programs including a
reduction of personnel, a reduction of fixed overhead commitments, cancelled or
suspended development on future titles and have scaled back certain marketing
programs. During the six months ended June 30, 2001, the Company incurred $2.2
million in write-offs of prepaid royalties for titles in development that have
been canceled. The Company may continue to incur write-offs if additional
projects are canceled in order to reduce future operating expenditures. The
Company has, and expects to continue to, incur costs related to penalties
arising from the April 2001 private placement registration statement not being
declared effective (see Note 14). This obligation will continue to accrue each
month that the registration statement is not declared effective and does not
have a limit on the amount payable to these investors. As of August 23, 2001,
this registration statement is not declared effective and the Company has
accrued penalties of $508,000.

     The Company is seeking external sources of funding, including but not
limited to, a sale or merger of the Company, a private placement of Company
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
carry out management's long-term strategic objectives. However, there can be no
assurance that the Company can complete the transactions necessary to provide
the required funding on a timely basis in order to continue ongoing operations
in the normal course of business.


                                   Page F-25
<PAGE>


     If the Company is unable to secure the required funding on a timely basis,
it will continue to reduce its costs by selling or consolidating its operations,
and by continuing to delay or cancel product development and marketing programs.

     In addition to the continuing risks related to the Company's future
liquidity, the Company also faces numerous other risks associated with its
industry. These risks include dependence on new platform introductions by
hardware manufacturers, commercially successful new product introductions by the
Company, new product introduction delays, rapidly changing technology, intense
competition, dependence on distribution channels and risk of customer returns.

CONVERSION OF SERIES A PREFERRED STOCK

     On August 13, 2001, Titus converted 336,070 shares of Series A Preferred
Stock into 6,679,306 shares of Common Stock (See Note 8). Subsequent to this
partial conversion, Titus owns 19,496,561 shares of Common Stock and 383,354
shares of Series A Preferred Stock with voting rights equivalent to 4,059,903
shares of Common Stock. Collectively, Titus has 48 percent of the total voting
power of the Company capital stock as of August 13, 2001.

DISTRIBUTION AGREEMENT

     In August 2001, the Company received an advance of $4 million for the North
American distribution rights of a future title. The advance will be recouped
against future distribution commissions payable, based on the future sales of
the title.


QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
<CAPTION>

                                    MARCH 31      JUNE 30    SEPTEMBER 30  DECEMBER 31
                                   ----------   ----------   ------------  -----------
                                        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                <C>          <C>           <C>           <C>
Year ended December 31, 2000:

Net revenues                        $ 18,143     $ 24,921      $ 31,631      $ 30,773
                                   ==========   ==========   ===========   ===========
Gross profit                        $  8,571     $ 13,465      $ 15,436      $ 13,061
                                   ==========   ==========   ===========   ===========
Net loss                            $ (5,498)    $ (1,903)        $ 113      $ (4,772)
                                   ==========   ==========   ===========   ===========
Net loss per share basic/diluted    $  (0.18)    $  (0.08)      $ (0.01)      $ (0.18)
                                   ==========   ==========   ===========   ===========
Year ended December 31, 1999:
Net revenues                        $ 21,620     $ 29,430      $ 23,636      $ 27,323
                                   ==========   ==========   ===========   ===========
Gross profit                        $  9,054     $ 11,814       $ 8,303      $ 11,609
                                   ==========   ==========   ===========   ===========
Net loss                            $ (8,278)    $ (6,921)    $ (16,976)     $ (9,563)
                                   ==========   ==========   ===========   ===========
Net loss per share basic/diluted    $  (0.44)    $  (0.33)      $ (0.75)      $ (0.35)
                                   ==========   ==========   ===========   ===========
</TABLE>


                                   Page F-26
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                   TRADE RECEIVABLES ALLOWANCE
                                  ------------------------------------------------------------
                                                   PROVISIONS
                                   BALANCE AT          FOR
                                  BEGINNING OF       RETURNS         RETURNS       BALANCE AT
                                       OF              AND             AND             END
             PERIOD                  PERIOD         DISCOUNTS       DISCOUNTS      OF PERIOD
----------------------------      ------------    ------------     ----------      ----------
<S>                               <C>             <C>              <C>             <C>
Year ended December 31, 1998       $  14,461       $   43,596      $ (39,626)       $ 18,431
                                  ============    ============     ==========      ==========
Year ended December 31, 1999       $  18,431       $   25,187      $ (34,457)       $  9,161
                                  ============    ============     ==========      ==========
Year ended December 31, 2000       $   9,161       $   19,016      $ (21,634)       $  6,543
                                  ============    ============     ==========      ==========
</TABLE>


                                   Page S-1