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

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                       or

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

             For the transition period from __________ to __________

                         Commission File Number 0-24363

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

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

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

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

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

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

                         COMMON STOCK, $0.001 PAR VALUE

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

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

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

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

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

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


<PAGE>


                          INTERPLAY ENTERTAINMENT CORP.

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


                                                                            PAGE
                                                                            ----
PART I

     Item 1.    Business                                                       4

     Item 2.    Properties                                                    11

     Item 3.    Legal Proceedings                                             11

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

PART II

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

     Item 6.    Selected Financial Data                                       15

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

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

     Item 8.    Consolidated Financial Statements and Supplementary
                Data                                                          46

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

     Item 9A    Controls and Procedures                                       47

PART III

     Item 10.   Directors and Executive Officers of the Registrant            47

     Item 11.   Executive Compensation                                        47

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

     Item 13.   Certain Relationships and Related Transactions                48

     Item 14.   Principal Accountant Fees and Services                        48

PART IV

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

Signatures                                                                    49

Exhibit Index                                                                 51


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<PAGE>


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

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

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

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


                                       3
<PAGE>


                                     PART I

ITEM 1.    BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS

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

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

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

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

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

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

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

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


                                       4
<PAGE>


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

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

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

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

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

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

PRODUCTS

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

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


                                       5
<PAGE>


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

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

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

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

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

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

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


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<PAGE>


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

PRODUCT DEVELOPMENT

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

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

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

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

INTERNAL PRODUCT DEVELOPMENT

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

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

EXTERNAL PRODUCT DEVELOPMENT

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


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<PAGE>


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

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

SEGMENT INFORMATION

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

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

SALES AND DISTRIBUTION

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

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

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


                                       8
<PAGE>


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

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

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

MARKETING

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

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

COMPETITION

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


                                       9
<PAGE>


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

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

CONCENTRATION

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

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

SEASONALITY

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

MANUFACTURING

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

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


                                       10
<PAGE>


BACKLOG

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

EMPLOYEES

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

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

ADDITIONAL INFORMATION

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

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

ITEM 2.    PROPERTIES

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

ITEM 3.    LEGAL PROCEEDINGS

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


                                       11
<PAGE>


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

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

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

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

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

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

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

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


                                       12
<PAGE>


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

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

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

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

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

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

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


                                     PART II

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

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

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

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

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

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

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


                                       13
<PAGE>


DIVIDEND POLICY

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

SECURITIES ISSUANCES

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

EQUITY COMPENSATION PLANS INFORMATION

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

<TABLE>
<CAPTION>
      Plan Category         Number of securities to     Weighted-average        Number of securities
                            be issued upon exercise    exercise price of       remaining available for
                            of outstanding options,   outstanding options,  future issuance under equity
                              warrants and rights     warrants and rights        compensation plans
                                                                                (excluding securities
                                                                              reflected in column (a))
--------------------------------------------------------------------------------------------------------
<S>                               <C>                        <C>                      <C>
                                      (a)                     (b)                        (c)
Equity compensation plans            425,985                 1.95                     7,614,447
   approved by security
         holders
Equity compensation plans          9,587,068                 1.84                             -
 not approved by security
         holders
                            ----------------------------------------------------------------------------
Total                             10,013,053                 1.84                     7,614,447
                            ============================================================================
</TABLE>


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

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


                                       14
<PAGE>


ITEM 6.    SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                        -------------------------------------------------------------
                                           2003         2002         2001        2000         1999
                                        ---------    ---------    ---------    ---------    ---------
                                                (Dollars in thousands, except per share amounts)
<S>                                     <C>          <C>          <C>          <C>          <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues ........................   $  36,301    $  43,999    $  56,448    $ 101,426    $ 101,930
Cost of goods sold ..................      13,120       26,706       45,816       54,061       61,103
                                        ---------    ---------    ---------    ---------    ---------
Gross profit ........................      23,181       17,293       10,632       47,365       40,827
Operating expenses ..................      21,787       29,653       51,922       55,751       73,631
                                        ---------    ---------    ---------    ---------    ---------
Operating (income) loss .............       1,394      (12,360)     (41,290)      (8,386)     (32,804)
Sale of Shiny .......................        --         28,813         --           --           --
Other income (expense) ..............         (82)      (1,531)      (4,526)      (3,689)      (3,471)
                                        ---------    ---------    ---------    ---------    ---------
Income (loss) before income taxes ...       1,312       14,922      (45,816)     (12,075)     (36,275)
Provision (benefit) for income taxes         --           (225)         500         --          5,410
                                        ---------    ---------    ---------    ---------    ---------
Net income (loss) ...................   $   1,312    $  15,147    $ (46,316)   $ (12,075)   $ (41,685)
                                        =========    =========    =========    =========    =========

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

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

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                        -------------------------------------------------------------
                                           2003         2002         2001        2000         1999
                                        ---------    ---------    ---------    ---------    ---------
                                                             (Dollars in thousands)
<S>                                     <C>          <C>          <C>          <C>          <C>
BALANCE SHEETS DATA:
Working capital (deficiency) ........   $ (14,750)   $ (17,060)   $ (34,169)   $     123    $  (7,622)
Total assets ........................       5,486       14,298       31,106       59,081       56,936
Total debt ..........................         837        2,082        4,794       25,433       19,630
Stockholders' equity  (deficit) .....     (12,636)     (13,930)     (28,150)       6,398       (2,071)
</TABLE>


                                       15
<PAGE>


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

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

EXECUTIVE OVERVIEW AND SUMMARY

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

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

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

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

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

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

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


                                       16
<PAGE>


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

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

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

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

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

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

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

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


                                       17
<PAGE>


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

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

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

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

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

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


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


                                       18
<PAGE>


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

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

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

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

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

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

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

MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

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


                                       19
<PAGE>


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

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

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

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

PREPAID LICENSES AND ROYALTIES

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

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

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


                                       20
<PAGE>


SOFTWARE DEVELOPMENT COSTS

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

OTHER SIGNIFICANT ACCOUNTING POLICIES

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


                                       21
<PAGE>


RESULTS OF OPERATIONS

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

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

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


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


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


                                       22
<PAGE>


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


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


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

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

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

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

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

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

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

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


                                       23
<PAGE>


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

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

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

PLATFORM NET REVENUES

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

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


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

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


                                       24
<PAGE>


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

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

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

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

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

COST OF GOODS SOLD; GROSS MARGIN

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

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

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

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


                                       25
<PAGE>


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

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

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

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


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

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

MARKETING AND SALES

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

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


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

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

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


                                       26
<PAGE>


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

GENERAL AND ADMINISTRATIVE

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

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


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

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

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

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

PRODUCT DEVELOPMENT

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

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


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


                                       27
<PAGE>


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

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


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

SALE OF SHINY ENTERTAINMENT, INC.

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

OTHER EXPENSE, NET

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

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


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

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

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

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

PROVISION (BENEFIT) FOR INCOME TAXES

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

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


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


                                       28
<PAGE>


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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

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


                                       29
<PAGE>


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

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

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

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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


                                       30
<PAGE>


CONTRACTUAL OBLIGATIONS

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

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


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

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

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

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

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

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


                                       31
<PAGE>


ACTIVITIES WITH RELATED PARTIES

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

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

TRANSACTIONS WITH TITUS

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

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

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

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


                                       32
<PAGE>


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

TRANSACTIONS WITH TITUS AFFILIATES

Transactions with Avalon, a wholly owned subsidiary of Titus

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

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

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

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

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


                                       33
<PAGE>


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

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

Transactions with Titus Software

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

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

Transactions with Titus Japan

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

Transactions with Titus Interactive Studio

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

Transactions with Titus SARL

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


                                       34
<PAGE>


Transactions with Titus GIE

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

Transactions with Edge LLC

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

TRANSACTIONS WITH VIVENDI

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

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

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

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


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<PAGE>


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

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

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


RISK FACTORS

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

RISKS RELATED TO OUR FINANCIAL RESULTS

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

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

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

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


                                       36
<PAGE>


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

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

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

RISKS RELATED TO OUR BUSINESS

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

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

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


                                       37
<PAGE>


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

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

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

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

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

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

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

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

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

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

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


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<PAGE>


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

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

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

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

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

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

     o    demand for our products and our competitors' products;

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

     o    changes in PC and video game console platforms;

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

     o    changes in our product mix;

     o    the number of our products that are returned; and

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

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

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

     o    approvals required from content and technology licensors; and

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

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


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<PAGE>


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

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

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

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

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

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

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

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

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

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

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


                                       40
<PAGE>


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

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

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

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

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

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

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

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

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

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


                                       41
<PAGE>


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

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

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

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

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

     o    regulatory requirements may change unexpectedly;

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

     o    fluctuations in foreign currency exchange rates;

     o    political and economic instability;

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

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

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

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

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

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

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

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


                                       42
<PAGE>


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

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

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

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

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

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

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

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

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

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

RISKS RELATED TO OUR INDUSTRY

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


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<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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

     o    operating systems such as Microsoft Windows XP;

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


                                       44
<PAGE>


     o    new media formats;

     o    recent releases of new video game consoles and;

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

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

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

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

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

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

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

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

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

RISKS RELATED TO OUR STOCK

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

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

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

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


                                       45
<PAGE>


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

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

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

OUR STOCK PRICE IS VOLATILE.

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

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

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

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

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

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     INTEREST RATE RISK

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

     FOREIGN CURRENCY RISK

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

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

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


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<PAGE>


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

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

ITEM 9A.   CONTROLS AND PROCEDURES

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

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

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

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

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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


ITEM 11.   EXECUTIVE COMPENSATION

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


                                       47
<PAGE>


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

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


                                     PART IV

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

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

     (1)  Financial Statements

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

     (2)  Financial Statement Schedules

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

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

     (3)  Exhibits

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

(b)  Reports on Form 8-K.

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

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

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


                                       48
<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,  at Irvine,  California
this 26th day of April 2004.

                                       INTERPLAY ENTERTAINMENT CORP.


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

                                POWER OF ATTORNEY

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

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

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


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

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



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


                                       49
<PAGE>



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



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



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



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


                                       50
<PAGE>


EXHIBIT INDEX

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

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

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

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

3.1         Amended and Restated Certificate of Incorporation of the Company.

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

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

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

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

3.6         Amended and Restated Bylaws of the Company.

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       51
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       52
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       53
<PAGE>


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

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

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

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

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

21.1        Subsidiaries of the Company.

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

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

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

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

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

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

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


                                       54
<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                       AND REPORTS OF INDEPENDENT AUDITORS




                                                                            PAGE
                                                                            ----

Reports of Independent Auditors                                              F-2

Consolidated Financial Statements

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

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

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

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

Notes to Consolidated Financial Statements                                   F-9

Schedule II - Valuation and Qualifying Accounts                              S-1


                                      F-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders
Interplay Entertainment Corp.

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

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial  position of Interplay
Entertainment  Corp. and  subsidiaries as of December 31, 2003 and 2002, and the
results  of their  operations  and their cash flows for each of the years in the
two-year period ended December 31, 2003 in conformity with accounting principles
generally  accepted in the United States of America.  Also, in our opinion,  the
related financial  statement  schedule for the years ended December 31, 2003 and
2002, when considered in relation to the basic financial statements,  taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.

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

/s/ Squar Milner Reehl & Williamson, LLP

Newport Beach, California
March 25, 2004


                                      F-2
<PAGE>


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Shareholders
Interplay Entertainment Corp.

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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated results of operations and cash flows of
Interplay  Entertainment  Corp. and subsidiaries for the year ended December 31,
2001, in conformity with accounting  principles generally accepted in the United
States.  Also, in our opinion,  the related financial statement schedule for the
year ended December 31, 2001, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

The  accompanying  financial  statements have been prepared  assuming  Interplay
Entertainment  Corp. and subsidiaries will continue as a going concern.  As more
fully  described in Note 1, the Company's  recurring  losses from operations and
its stockholders' and working capital deficits raise substantial doubt about its
ability to continue  as a going  concern.  Management's  plans  regarding  these
matters are also described in Note 1. The consolidated  financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.


                                                          /s/ Ernst & Young LLP


Orange County, California
March 18, 2002


                                      F-3
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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


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

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


   LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


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

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


                             See accompanying notes.


                                      F-4
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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


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

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

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

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

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


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


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

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


                             See accompanying notes.


                                      F-5
<PAGE>


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

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

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

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

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



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


                             See accompanying notes.


                                      F-6
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                                     2003        2002        2001
                                                                   --------    --------    --------
<S>                                                                <C>         <C>         <C>
Cash flows from operating activities:
   Net income (loss) ...........................................   $  1,312    $ 15,147    $(46,316)
   Adjustments to reconcile net income (loss) to
      cash provided by (used in) operating activities--
      Depreciation and amortization ............................      1,353       1,671       2,613
      Noncash expense for stock compensation ...................       --           238         679
      Noncash interest expense .................................          6       1,860        --
      Amortization of prepaid licenses and royalties ...........      5,163       5,095       8,071
      Writeoff of prepaid licenses and royalties ...............      2,857       4,100       8,124
      Gain on sale of Shiny ....................................       --       (28,813)       --
      Other ....................................................        (21)        (26)         (6)
      Changes in assets and liabilities:
         Trade receivables, net ................................        164       3,139      14,360
         Trade receivables from related parties ................      1,942       3,669       4,239
         Inventories ...........................................      1,883       1,949        (619)
         Prepaid licenses and royalties ........................     (3,100)     (5,628)     (8,832)
         Other current assets ..................................        (76)        (51)       (390)
         Accounts payable ......................................     (2,148)     (5,777)      3,246
         Accrued royalties .....................................        292      (2,887)        (10)
         Other accrued liabilities .............................     (1,039)     (1,806)       (425)
         Payables to related parties ...........................     (5,806)       (887)      2,185
         Advances from distributors and others .................       (160)    (19,201)     21,144
                                                                   --------    --------    --------
             Net cash provided by (used in) operating activities      2,622     (28,208)      8,063
                                                                   --------    --------    --------

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

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


                             See accompanying notes.


                                      F-7
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                                 2003     2002     2001
                                                                ------   ------   ------
<S>                                                             <C>      <C>      <C>
Supplemental cash flow information:

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

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


                             See accompanying notes.


                                      F-8
<PAGE>


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


1.   DESCRIPTION OF BUSINESS AND OPERATIONS

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

GOING CONCERN

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

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

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

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


                                      F-9
<PAGE>



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


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

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

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

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

AUTHORIZED COMMON STOCK

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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

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

USE OF ESTIMATES

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

RISKS AND UNCERTAINTIES

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

RECLASSIFICATIONS

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

INVENTORIES

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


                                      F-10
<PAGE>


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


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

PREPAID LICENSES AND ROYALTIES

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

SOFTWARE DEVELOPMENT COSTS

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

ACCRUED ROYALTIES

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

PROPERTY AND EQUIPMENT

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

LONG-LIVED ASSETS

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


                                      F-11
<PAGE>


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


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

GOODWILL AND INTANGIBLE ASSETS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

REVENUE RECOGNITION

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

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

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


                                      F-12
<PAGE>


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


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

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

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

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

ADVERTISING COSTS

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

INCOME TAXES

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

FOREIGN CURRENCY

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

NET INCOME (LOSS) PER SHARE

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


                                      F-13
<PAGE>


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


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

GEOGRAPHIC SEGMENT INFORMATION

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

COST OF SOFTWARE REVENUE AND SUPPORT

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

COMPREHENSIVE INCOME (LOSS)

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

STOCK-BASED COMPENSATION

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

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

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


                                      F-14
<PAGE>


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


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

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

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


RECENT ACCOUNTING PRONOUNCEMENTS

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

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


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

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


                                      F-15
<PAGE>


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


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

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

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

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

3.   SHINY ENTERTAINMENT, INC

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

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

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

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

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

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


                                      F-16
<PAGE>


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


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

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


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


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

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

4.   DETAIL OF SELECTED BALANCE SHEET ACCOUNTS

PREPAID LICENSES AND ROYALTIES

     Prepaid licenses and royalties consist of the following:

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


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

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


                                      F-17
<PAGE>


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


PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

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


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

5.   PROMISSORY NOTE

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


                                      F-18
<PAGE>


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


6.   ADVANCES FROM DISTRIBUTORS, RELATED PARTIES AND OTHERS

     Advances from distributors and OEMs consist of the following:

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

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


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

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

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


                                      F-19
<PAGE>


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


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

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

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

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

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

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

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

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

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

7.  INCOME TAXES

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


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


                                      F-20
<PAGE>


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


     The provision for income taxes is comprised of the following:


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


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

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

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


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


                                      F-21
<PAGE>


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


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


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

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

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


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

8.   COMMITMENTS AND CONTINGENCIES

ATARI BREACH

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

PAYROLL TAXES

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

INSURANCE

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


                                      F-22
<PAGE>


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


LEASES

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


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

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

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

LITIGATION

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

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

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

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


                                      F-23
<PAGE>


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


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

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

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

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

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

EMPLOYMENT AGREEMENTS

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

9.   STOCKHOLDERS' EQUITY

PREFERRED STOCK AND COMMON STOCK

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

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


                                      F-24
<PAGE>


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


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

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

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

EMPLOYEE STOCK PURCHASE PLAN

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


                                      F-25
<PAGE>


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


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

SHARES RESERVED FOR FUTURE ISSUANCE

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

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


10.  NET EARNINGS (LOSS) PER COMMON SHARE

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

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


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

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


                                      F-26
<PAGE>


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


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

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


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

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


                                      F-27
<PAGE>


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


11.  EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

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

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

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

<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                         -------------------------------------------------------------------------
                                   2003                      2002                     2001
                         ----------------------    ----------------------    ---------------------
                                       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 year      1,091,697      $ 3.10     4,007,969     $ 2.57      3,539,828     $ 2.90
   Granted                  130,000        0.09          --          --         739,667       1.25
   Exercised                   --           --       (639,541)      0.14        (21,626)      0.47
   Canceled                (795,712)       3.22    (2,276,731)      3.44       (249,900)      3.36
                          ---------                ----------                 ---------
Options outstanding at
    end of year             425,985      $ 1.95     1,091,697     $ 3.10      4,007,969     $ 2.57
                          =========                ==========                 =========
   Options exercisable      243,890                   744,892                 2,093,606
                          =========                ==========                 =========
</TABLE>


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


<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                   2003             2002            2001
                                                 ---------        --------       ---------
<S>                                              <C>              <C>            <C>
Risk free rate .............................           4.0%            0.0%           4.5%
Expected life ..............................      7.2 years             --       6.7 years
Expected volatility ........................           164%              0%            94%
Expected dividends .........................            --              --              --
Weighted- average grant-date fair value
   of warrants granted .....................     $    0.09        $     --       $    1.02
                                                 ---------        --------       ---------
</TABLE>

                                      F-28
<PAGE>


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


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

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


PROFIT SHARING 401(K) PLAN

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

12.  RELATED PARTY TRANSACTIONS

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

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

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


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


                                      F-29
<PAGE>


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


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

TRANSACTIONS WITH TITUS

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

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

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

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

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

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

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

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


                                      F-30
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                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                DECEMBER 31, 2003


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

TRANSACTIONS WITH TITUS AFFILIATES

Transactions with Avalon, a wholly owned subsidiary of Titus

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

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

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

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

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

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

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

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


                                      F-31
<PAGE>


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


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

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

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

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

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

Transactions with Titus Software

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

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

Transactions with Titus Japan

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

Transactions with Titus Interactive Studio

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


                                      F-32
<PAGE>


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


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

Transactions with Titus SARL

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

Transactions with Titus GIE

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

Transactions with Edge LLC

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

TRANSACTIONS WITH VIVENDI

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

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

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


                                      F-33
<PAGE>


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


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

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

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

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

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

13.  CONCENTRATION OF CREDIT RISK

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

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

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

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


                                      F-34
<PAGE>


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


14.  SEGMENT AND GEOGRAPHICAL INFORMATION

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

     Net revenues by geographic regions were as follows:

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

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


15.  OTHER EXPENSE, NET

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

16.  QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
<CAPTION>
                                              MAR. 31    JUN. 30     SEP. 30     DEC. 31
                                             --------   ---------   --------    --------
                                                      (Dollars in thousands, except
                                                          per share amounts)
<S>                                          <C>        <C>         <C>         <C>
Year ended December 31, 2003:
Net revenues .............................   $ 18,762   $   1,269   $  4,727    $ 11,543
                                             ========   =========   ========    ========
Gross profit .............................   $ 11,777   $     155   $  2,878    $  8,371
                                             ========   =========   ========    ========
Net income (loss) ........................   $  5,576   $  (5,376)  $ (2,189)   $  3,301
                                             ========   =========   ========    ========

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

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

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


                                      F-35
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                   TRADE RECEIVABLES ALLOWANCE
                                 ---------------------------------------------------------
                                   BALANCE AT     PROVISIONS FOR                BALANCE AT
                                  BEGINNING OF       RETURNS      RETURNS AND     END OF
            PERIOD                   PERIOD       AND DISCOUNTS    DISCOUNTS      PERIOD
            ------                ------------    ------------    ----------    ----------
<S>                               <C>             <C>             <C>           <C>
Year ended December 31, 2001      $    6,543      $   19,875      $  (18,877)   $   7,541
                                  ==========      ==========      ==========    =========

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

Year ended December 31, 2003      $    1,086      $      864      $   (1,225)   $    725
                                  ==========      ==========      ==========    =========
</TABLE>


                                      S-1