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, 2004

                                       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.)

                  1682 LANGLEY AVENUE, IRVINE, CALIFORNIA 92606
                    (Address of principal executive offices)

                                 (310) 432-1958
              (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 [_] No [X]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [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 December 31, 2004, the aggregate  market value of voting common stock held
by non-affiliates was approximately $270,000 based upon the closing price of the
Common Stock on that date.

As of May 19, 2005,  93,855,634  shares of Common Stock of the  Registrant  were
issued and outstanding.


<PAGE>


                          INTERPLAY ENTERTAINMENT CORP.

             INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004

                                                                            PAGE
                                                                            ----
PART I

   Item 1.    Business                                                         4

   Item 2.    Properties                                                       9

   Item 3.    Legal Proceedings                                                9

PART II

   Item 5.    Market for Registrant's Common Equity and Related
              Stockholder Matters                                             11

   Item 6.    Selected Financial Data                                         13

   Item 7.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations                             14

   Item 7A.   Quantitative and Qualitative Disclosure about
              Market Risk                                                     37

   Item 8.    Consolidated Financial Statements and Supplementary
              Data                                                            37

   Item 9.    Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure                             38

   Item 9A    Controls and Procedures                                         38

PART III

   Item 10.   Directors and Executive Officers of the Registrant              38

   Item 11.   Executive Compensation                                          40

   Item 12.   Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters                      44

   Item 13.   Certain Relationships and Related Transactions                  45

   Item 14.   Principal Accountant Fees and Services                          47

PART IV

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

Signatures                                                                    49

Exhibit Index                                                                 50


                                       2
<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,
CASH CONSTRAINTS,  FINANCING ACTIVITIES, COST REDUCTION MEASURES, REPLACEMENT OF
OUR 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. ADDITIONAL 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 SEC 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), GAMES ON LINE(R) AND CERTAIN OF OUR
OTHER PRODUCT  NAMES AND  PUBLISHING  LABELS  REFERRED TO IN THIS REPORT ARE THE
COMPANY'S 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,   publisher  and  licensor  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 are focusing our publishing and
distribution business by developing  interactive  entertainment software for the
On Line Massively Multiplayer market.

     We seek to publish or license out 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.

     Our business and industry has certain risks and uncertainties.  During 2004
we continued to operate  under limited cash flow from  operations.  We expect to
operate under similar cash constraints  during 2005. 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 selected  rest-of-world  countries
and was  handled  by Avalon  Interactive  Group  Ltd.  ("Avalon")  in Europe the
Commonwealth  of  Independent  States,  Africa  and the  Middle  East  until the
liquidation  of Avalon in February of 2005,  and  through  licensing  strategies
elsewhere.  Subsequently  Avalon ceased  operations  following  its  involuntary
liquidation  in  February  2005.  We will most  likely not  receive  the amounts
presently due us by Avalon. Following the liquidation of Avalon, we appointed in
March  2005 our wholly  owned  subsidiary,  Interplay  Productions  Ltd,  as our
distributor in Europe and other selected territories.

     In June 2004, we licensed to Bethesda Softworks LLC ("Bethesda") the rights
to develop  Fallout 3 on all  platforms  for a non  refundable  advance  against
royalties of $1.175 million. Bethesda also has an option to develop two sequels,
Fallout 4 and Fallout 5 for $1.0  million  minimum  guaranteed  advance  against
royalties  per  sequel.  Interplay  retained  the  right  to  develop  massively
multiplayer online games (MMOLG) using the Fallout trademark.

     In July 2004, we sold the Redneck Rampage  intellectual  property rights to
Vivendi for $300,000.

     In December 2004, we licensed from Majorem the exclusive worldwide, outside
of Taiwan, publishing and distribution rights to the MMOLG, Ballerium.

     In January 2005, our majority shareholder,  Titus Interactive SA, who holds
approximately 58 million shares of our common stock, representing  approximately
62% of our outstanding common stock, was placed into involuntary liquidation.

PRODUCTS

     We publish and distribute  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 experienced gamers in our production 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 or a large
enough number of potential  subscribers  for the  investment to be  economically
viable. We do not currently  internally  develop new products.  As we anticipate
continued  substantial  growth in the use of high-speed  Internet access,  which
could provide  significantly  expanded market potential for online products,  we
are focusing our efforts to launching an online service,  entitled  GamesOnLine,
allowing  consumers  to become part of a unique  online  community of gamers and
access  selected  content.  We  currently  have one online game in  development,
Ballerium.


                                       4
<PAGE>


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  U.S.  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 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  publishing  relationships  with
leading independent developers.

     THE DEVELOPMENT  PROCESS.  We develop original products  externally,  using
third party software developers working under contract with us. Producers on our
internal staff monitor the work of 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


                                       5
<PAGE>


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, 2004,  2003,  and 2002,  we spent $2.6
million, $13.7 million, and $16.2 million, respectively, on product research and
development   activities.   Those   amounts   represented   20%,  38%,  and  37%
respectively, of net revenues in each of those periods.

INTERNAL PRODUCT DEVELOPMENT

     In May 2004,  we had to close  down our  internal  development  studio as a
result of our inability to meet our payroll  obligations on a timely basis.  All
internal  projects were  discontinued  at that time and we currently do not have
any product under development internally.

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, 2004, 2003, and 2002,  approximately 0%, 0%, and 67%,  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
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 our  internal
production team to oversee the development process and work with the third party
developer to design, develop and test the game. At December 31, 2004, we had one
title, Ballerium, being developed by a third party developer.

     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 primarily in one 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 had during 2004 two distributors as our two main customers:  Vivendi and
Avalon.  Vivendi and Avalon accounted for 19.8% and 79.6% of our net revenues in
2004.  Vivendi have and Avalon had exclusive rights to distribute our product in
substantial parts of the world.  Avalon was liquidated in February 2005 and as a
result, we took over distribution of our products in Europe. If Vivendi fails to
deliver  the  proceeds  owed  us  from  distribution  or  fails  to  effectively
distribute  our products or perform  under their  distribution  agreements,  our
business and financial results could suffer material harm.

SALES AND DISTRIBUTION

     NORTH AMERICA.  In August 2002, we entered into a distribution  arrangement
with Vivendi,  whereby Vivendi distributes  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


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<PAGE>


pays  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 to Vivendi, Vivendi pays us,
as a non-refundable  minimum  guarantee and which is a specified  percent of the
projected 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. Other than for products covered by the tri-party agreement
with Atari, the Vivendi distribution agreement expires in August 2005.

     Vivendi  provides terms of sale  comparable to competitors in our industry.
In addition, we provide a 90-day limited warranty to end-users that our products
will be free from manufacturing  defects.  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. We were operating during 2004 under a distribution agreement
with  Avalon,  pursuant to which  Avalon  distributed  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 earned a distribution
fee for its marketing and distribution of our products, and we reimbursed Avalon
for certain direct costs and expenses.

     Following the liquidation of Avalon,  in March 2005 we appointed our wholly
owned  subsidiary,  Interplay  Productions Ltd, as our distributor in Europe and
other selected territories.

     In January  2003,  we entered into an agreement  with Vivendi to distribute
substantially  all of our  products  in  select  rest-of-world  countries.  This
agreement expires in August 2005.

     INTERPLAY OEM. Our wholly owned subsidiary,  Interplay OEM, distributes our
interactive  entertainment  software titles,  as well as those of other software
publishers,  to computer and peripheral device manufacturers for use in bundling
arrangements.  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 and do not have  significant  additional
product development or sales and marketing costs. The OEM distribution agreement
with Vivendi expires in August 2005.

MARKETING

     We  assist  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 maintained  several Internet web sites and discontinued all web sites in June
of 2004.  These web sites  provided  news and  information  of  interest  to our
customers  through  free  demonstration  versions  of  games,  contests,  games,
tournaments and promotions. We expect to resume online activities as part of our
upcoming GamesOnLine service. To generate interest in new product introductions,
we will provide demonstration  versions of upcoming titles through magazines and
will  provide  game  samples  that  consumers  will  be able  to  download  from
GamesOnline.com.  In addition,  we will host on-line events and maintain various
message boards to keep customers informed on shipped and upcoming titles.


                                       7
<PAGE>


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. 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 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.

     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 therefore 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.  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,  we  have  not
experienced any material  difficulties or delays in the manufacture and assembly
of our CD-ROM and DVD based products,  and we 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.  PlayStation 2, 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 manufacturers,  our net sales and operating
results could be materially adversely affected.


                                       8
<PAGE>


BACKLOG

     We typically do not carry large  inventories  because most of our sales and
distribution efforts have been handled by Vivendi and International distributors
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,  2004,  we had 12  employees,  including  2 in product
development,   1  in  sales  and  marketing  and  9  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 may 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 U.S.  Securities  and Exchange  Commission or SEC. You may
obtain copies of these reports via the Internet at the SEC's homepage located at
www.sec.gov.  Our Website is currently  unavailable  and when  available you may
also go to our Internet address located at www.interplay.com and go to "Investor
Relations"  which will link you to the SEC's homepage for our filed reports.  In
addition, copies of the reports we file with the SEC may also be obtained 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.

ITEM 2.    PROPERTIES

     Our  headquarters  are  located  in  Irvine,  California,  where we  leased
approximately  81,000  square feet of office  space.  We were  evicted  from our
building  by  our   Landlord  in  early  June  2004  and   subsequently   leased
approximately  500 square feet of office  space to relocate our  operations.  We
also lease on a short  term basis  approximately  1,200  square  feet in Beverly
Hills, California, for GamesOnLine.

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 the  Company's  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.

     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.,  ("GOL")  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 GOL. KBK
has alleged  that GOL 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.  GOL  counterclaimed
against  KBK for  breach of  contract  as KBK owes GOL  $700,000  in  guaranteed
advanced fees under the term of the agreement. In addition, the Company filed an
action against Atari  Interactive for breach  indemnity,  among other claims. In
October 2004, the


                                       9
<PAGE>


California  Superior court dismissed the legal action of KBK against the Company
and its subsidiary GOL and granted a judgment to GOL in the cross complaint from
GOL against KBK for $890,730. GOL dismissed its action against Atari Interactive
in April 2005.

     On  October  24,  2002,  Synnex  Information  Technologies  Inc  ("Synnex")
initiated  legal  proceedings  against  the  company  for  various  claims.  The
Company's  attorney's have filed and obtained a motion to be relieved as counsel
on August 10, 2004. The company has not yet retained replacement counsel in this
action.

     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, 2002 and that we are
therefore liable to pay Special Situations $1.3 million. This matter was settled
and the case dismissed in December 2003.  Special  Situations had entered into a
settlement agreement with us contemplating  payments over time. We are currently
in default of the settlement agreement.

     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  including
interest.  Subsequently  the company  entered into a settlement  agreement  with
Warner. The Company is currently in default of the settlement agreement.

     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 seek a declaration from the
court that we retain rights to the product, or damages.

     In April 2004,  Arden  Realty  Finance IV LLC  ("Arden")  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. The Company was unable to pay the rent, and vacated the office
space during the month of June 2004. On June 3, 2004,  Arden obtained a judgment
of approximately  $588,000 exclusive of interest.  In addition the Company is in
the  process of  resolving a prior  claim with the  landlord in the  approximate
amount of  $148,000,  exclusive  of  interest.  The  Company  has  negotiated  a
forbearance  agreement whereby Arden has agreed to accept payments commencing in
January  2005 in the amount of $60,000  per month until the full amount is paid.
The  Company  has not accrued  any amount for any  remaining  lease  obligation,
should such  obligation  exist.  We are currently in default of the  forbearance
agreement.

     In April 2004,  Bioware  Corporation filed an action against the Company in
the  Superior  Court for the State of  California,  County of  Orange,  alleging
breach of contract for failure to pay royalties.  At the time of filing, Bioware
alleged that it was owed  approximately  $156,000  under various  agreements for
which  it  obtained  a writ of  attachment  to  secure  payment  of the  alleged
obligation  if it is  successful  at trial.  Bioware  also sought and obtained a
temporary  restraining order prohibiting the Company from transferring assets up
to the amount  sought in the writ of  attachment.  We  successfully  opposed the
preliminary  injunction  and vacated the temporary  restraining  order.  Bioware
subsequently dismissed their action.

     Monte Cristo Multimedia, a French video game developer and publisher, filed
a breach of contract complaint against the Company in the Superior Court for the
State of California,  County of Orange,  on August 6, 2002,  alleging damages in
the  amount  of  $886,406  plus  interest,   in  connection  with  an  exclusive
distribution agreement.  This claim was settled for $100,000,  payable in twelve
installments, however, the Company was unable to satisfy its payment obligations
and  consequently,  Monte  Cristo has filed a  stipulated  judgment  against the
Company in the amount of $100,000.  If Monte Cristo  executes the  judgment,  it
will negatively affect the Company's cash flow, which could further restrict the
Company's operations and cause material harm to our business.

     Snowblind  entered  into a partial  settlement  agreement  on June 23, 2004
following  the suit filed by Snowblind on November 19, 2003.  Snowblind  filed a
second amended  complaint against the Company on or about July 12, 2004 claiming
various  causes of action  including  but not  limited to,  breach of  contract,
account  stated,  open book account,  and  recission.  The action was settled in
April 2005 and we granted Snowblind the exclusive license to develop games using


                                       10
<PAGE>


the DARK ALLIANCE Trademark under certain  conditions.  We retained the right to
develop massively multiplayer online games using the DARK ALLIANCE trademark.

     In August 2003, Reflexive  Entertainment,  Inc. filed an action against the
Company in the Orange County  Superior  Court that was settled in July 2004. The
Company  was unable to make the  payments  and  Reflexive  sought  and  obtained
judgment against the company.

     On March 27, 2003, KDG France SAS ("KDG") filed an action against Interplay
OEM, Inc. and Herve Caen for various  claims.  On December 29, 2003 a settlement
agreement  was entered into whereby  Herve Caen was  dismissed  from the action.
Further the settlement was entered into with Interplay OEM only in the amount of
$170,000,  however KDG reserved its rights to proceed against the Company if the
settlement  payment was not made. As of this date the settlement payment was not
made.

     The Company  received notice from the Internal Revenue Service ("IRS") that
it owes approximately $117,000 in payroll tax penalties which it has accrued for
at December 31, 2004.

     The Company was unable to meet  certain  2004  payroll  obligations  to its
employees;  as a  result  several  employees  filed  claims  with  the  State of
California  Labor Board ("Labor  Board").  The Labor Board has fined the Company
approximately  $10,000 for failure to meet its payroll obligations and set trial
dates for August 2005.

     The Company's  property,  general  liability,  auto,  fiduciary  liability,
workers compensation and employment  practices  liability,  have been cancelled.
The Company subsequently entered into a new workers compensation insurance plan.
The Labor Board fined the Company  approximately $79,000 for having lost workers
compensation  insurance for a period of time. The Company is appealing the Labor
Board fines.

     On December 29, 2004,  Piper Rudnick LLP ("Piper  Rudnick") filed an action
against Interplay Entertainment Corp. for various claims for unpaid services. We
are currently evaluating the merit of this lawsuit.

                                     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   trading  on  the   NASD-operated
Over-the-Counter  Bulletin  Board.  Our common stock is currently  traded on the
NASD-operated  Over-the-Counter  Bulletin Board under the symbol "IPLY" or while
non-compliant  "IPLYE". At May 27, 2005, there were 144 holders of record of our
common stock.

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

FOR THE YEAR ENDED DECEMBER 31, 2004                    HIGH             LOW
------------------------------------                   -------         -------

     First Quarter ........................            $   .14         $   .10
     Second Quarter .......................                .14             .03
     Third Quarter ........................                .05             .02
     Fourth Quarter .......................                .03             .01


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

     First Quarter ........................            $   .08         $   .05
     Second Quarter .......................                .14             .05
     Third Quarter ........................                .14             .09
     Fourth Quarter .......................                .12             .07


                                       11
<PAGE>


DIVIDEND POLICY

It is not currently our policy to pay dividends.

SECURITIES ISSUANCES

     No new shares were issued during FY 2004

EQUITY COMPENSATION PLANS INFORMATION

     The  following  table sets forth certain  information  regarding our equity
compensation plans as of December 31, 2004:

<TABLE>
                                                                                Number of securities
                                                                               remaining available for
                            Number of securities to     Weighted-average    future issuance under equity
                            be issued upon exercise    exercise price of         compensation plans
                            of outstanding options,   outstanding options,      (excluding securities
      Plan Category           warrants and rights     warrants and rights     reflected in column (a))
----------------------------------------------------------------------------------------------------------
                                      (a)                     (b)                         (c)
<S>                                       <C>                       <C>                      <C>
Equity compensation plans                 211,150                   2.02                     7,609,447
   approved by security
         holders

Equity compensation plans                       -                      -                             -
 not approved by security
         holders
                           ----------------------------------------------------------------------------
Total                                     211,150                   2.02                     7,609,447
                           ============================================================================
</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 2004, 2003 and 2002 respectively.


                                       12
<PAGE>


ITEM 6.    SELECTED FINANCIAL DATA

     The selected consolidated statements of operations data for the years ended
December 31, 2004,  2003 and 2002 and the selected  consolidated  balance sheets
data as of December 31, 2004 and 2003 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, 2001
and 2000 and the selected  consolidated  balance  sheets data as of December 31,
2002,  2001,  and  2000 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,
                                        -------------------------------------------------------------
                                           2004         2003         2002         2001         2000
                                        ---------    ---------    ---------    ---------    ---------
                                                                              (Unaudited)
                                          (Dollars in thousands, except share and per share amounts)
<S>                                     <C>          <C>          <C>          <C>          <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues ........................   $  13,197    $  36,301    $  43,999    $  56,448    $ 101,426
Cost of goods sold ..................       6,826       13,120       26,706       45,816       54,061
                                        ---------    ---------    ---------    ---------    ---------
Gross profit ........................       6,371       23,181       17,293       10,632       47,365
Operating expenses ..................       8,853       21,787       29,653       51,922       55,751
                                        ---------    ---------    ---------    ---------    ---------
Operating (income) loss .............      (2,482)       1,394      (12,360)     (41,290)      (8,386)
Sale of Shiny .......................        --           --         28,813         --           --
Other income (expense) ..............      (2,094)         (82)      (1,531)      (4,526)      (3,689)
                                        ---------    ---------    ---------    ---------    ---------
Income (loss) before income taxes ...      (4,576)       1,312       14,922      (45,816)     (12,075)
Provision (benefit) for income taxes          154         --           (225)         500         --
                                        ---------    ---------    ---------    ---------    ---------
Net income (loss) ...................   $  (4,730)   $   1,312    $  15,147    $ (46,316)   $ (12,075)
                                        =========    =========    =========    =========    =========

Cumulative dividend on participating
   preferred stock ..................   $    --      $    --      $     133    $     966    $     870
Accretion of warrant ................        --           --           --            266          532
                                        ---------    ---------    ---------    ---------    ---------
Net income (loss) available to common
   stockholders .....................   $  (4,730)   $   1,312    $  15,014    $ (47,548)   $ (13,477)
                                        =========    =========    =========    =========    =========
Net income (loss) per common share:
     Basic ..........................   $   (0.05)   $    0.01    $    0.18    $   (1.23)   $   (0.45)
     Diluted ........................   $   (0.05)   $    0.01    $    0.16    $   (1.23)   $   (0.45)
Shares used in calculating net income
   (loss) per common share - basic ..      93,856       93,852       83,585       38,670       30,047
Shares used in calculating net income
   (loss) per common share - diluted       93,856      104,314       96,070       38,670       30,047
SELECTED OPERATING DATA:
Net revenues by geographic region:
     North America ..................   $   1,544    $  13,541    $  26,184    $  34,998    $  53,298
     International ..................       9,934        6,484        5,674       15,451       35,077
     OEM, royalty and licensing .....       1,720       16,276       12,141        5,999       13,051
Net revenues by platform:
     Personal computer ..............   $   1,817    $   7,671    $  15,802    $  34,912    $  73,730
     Video game console .............       9,660       12,354       16,056       15,537       14,645
     OEM, royalty and licensing .....       1,720       16,276       12,141        5,999       13,051
</TABLE>

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                        -------------------------------------------------------------
                                           2004         2003         2002         2001         2000
                                        ---------    ---------    ---------    ---------    ---------
                                                                              (Unaudited)
BALANCE SHEETS DATA:                                        (Dollars in thousands)
<S>                                     <C>          <C>          <C>          <C>          <C>
Working capital (deficiency)            $ (17,852)   $ (14,750)   $ (17,060)   $ (34,169)   $    123
Total assets                                  834        5,486       14,298       31,106      59,081
Total debt                                  1,575          837        2,082        4,794      25,433
Stockholders' equity  (deficit)           (17,362)     (12,636)     (13,930)     (28,150)      6,398
</TABLE>


                                       13
<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,  publisher and licensor of
interactive  entertainment software for both core gamers and the mass market. 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 are focusing our  publishing and  distribution  business by developing
interactive entertainment software for the On Line Massively Multiplayer market.

     During  2004  we  continued  to  operate   under  limited  cash  flow  from
operations. We expect to operate under similar cash constraints during 2005.

     On or about  February  23,  2004,  we  received  correspondence  from Atari
Interactive,  Inc, 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.  Our rights to
distribute  titles under the D&D license were  terminated  by Atari on April 23,
2004.

     In June 2004 we licensed to Bethesda  Softworks  LLC, the rights to develop
FALLOUT 3 on all platforms for $1.175 million minimum guaranteed advance against
royalties.  Bethesda  also has an option to develop two sequels,  FALLOUT 4, and
FALLOUT 5 for $1.0 million  minimum  guaranteed  advance  against  royalties per
sequel.  Interplay retained the rights to develop a massively multiplayer online
game ("MMORPG") using the Fallout Trademark.

     In July 2004,  we granted an option to  Vivendi  to  purchase  the  REDNECK
RAMPAGE  intellectual  property rights for $300,000.  Later that month,  Vivendi
exercised the option.

     In July 2004, we entered into a tri-party agreement with Atari Interactive,
Inc and Vivendi that allows Vivendi to resume North  American and  international
distribution  pursuant  to  their  pre-existing  agreements  with us of  certain
Dungeons  & Dragons  games,  including  Baldur's  Gate  Dark  Alliance  II.  The
agreement  provided for proceeds due us to be paid directly to Atari by Vivendi,
up to an amount of $1.0  million of which  approximately  $.3  million was still
oustanding  as of December 31, 2004. As a result we did not receive any proceeds
from  Vivendi  since July 2004 and will most  likely not  receive  any  proceeds
during 2005.

     In  August  2004,  we  entered  into  a  tri-party   agreement  with  Atari
Interactive,  Inc and Avalon that allows Avalon to resume European  distribution
pursuant to their pre-existing  agreements with us of certain Dungeons & Dragons
games,  including  Baldur's Gate Dark  Alliance II. The  agreement  provided for
proceeds due us to be paid  directly to Atari by Avalon,  as a result we did not
receive any proceeds from this agreement in 2004.  This agreement was terminated
following Avalon's liquidation in February 2005.

     We also  continued  to  significantly  reduce  our  operational  costs  and
personnel in 2004. We reduced our personnel by 101, from 113 in December 2003 to
12 in December 2004 by both involuntary  termination and attrition. We also made
reductions in  expenditures  in other areas.  As a result of these  cost-cutting
measures, our ongoing cash needs to fund operations has been greatly reduced for
2005.

     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 2005.

     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
financial  statements  do not  purport to  represent  realizable  or  settlement
values.  The  Report of our  Independent  Auditors  for the  December  31,  2004
consolidated financial


                                       14
<PAGE>


statements includes an explanatory paragraph expressing  substantial doubt about
our ability to continue as a going concern.

     We derived net revenues  primarily  from sales of software  products to our
two main distributors,  Vivendi and Avalon.  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
except  for  certain  products  subject  to a  tri-party  agreement  with  Atari
Interactive  Inc which expires in December 2006.  Upon expiration of the Vivendi
distribution   agreements  we  will  need  to  either  renew  the   distribution
agreements,  find new distribution  partners, or resume distribution  ourselves.
Avalon  distributed  our products in Europe,  the  commonwealth  of  Independent
States,  Africa and the Middle East. Our distribution  agreement with Avalon was
terminated following Avalon's involuntary judicial liquidation in February 2005.
In March 2005 we appointed our wholly owned  subsidiary,  Interplay  Productions
Ltd, as our distributor in Europe and other selected territories.

     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 no longer
distribute products through our Games Online subsidiary and this subsidiary will
host our online gaming service.

     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.

     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 may  utilize
Vivendi's resources in our future OEM business. This agreement expires in August
2005.

     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
upcoming  release of new console  systems by Sony,  Nintendo and Microsoft,  our
industry has entered into a transition period that could affect marketability of
new products.

     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.

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 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 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.


                                       15
<PAGE>


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. 104, Revenue Recognition.

     Substantially  all of our  sales  were  made by two  distributors,  Vivendi
Universal  Games,  Inc.  and Avalon  Interactive  Group Ltd, an affiliate of our
majority  shareholder  Titus Interactive S.A. 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 duplicated.

     We generally are not contractually  obligated to accept returns, except for
defective,   shelf-worn  and  damaged  products.   However,  on  a  case-by-case
negotiated  basis,  we permit  customers to return or exchange  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.

     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.  Royalty 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. Once the charge has been taken,
that  amount  will not be  expensed  in future  quarters  when the  product  has
shipped.

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. As a result, we have not capitalized any software development costs
on internal  development  projects,  as the eligible costs were determined to be
insignificant.


                                       16
<PAGE>


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 Notes to Consolidated Financial Statements, Summary of Significant
Accounting  Policies,  which discusses accounting policies that must be selected
by management when there are acceptable alternatives.

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,
                                                       -------------------------
                                                       2004       2003      2002
                                                       -----      -----    -----
STATEMENTS OF OPERATIONS DATA:
Net revenues ....................................      100 %      100 %    100 %
Cost of goods sold ..............................       52         36       61
                                                       -----      -----    -----
Gross margin ....................................       48         64       39
Operating expenses:
     Marketing and sales ........................       13          4       13
     General and administrative .................       34         18       17
     Product development ........................       20         38       37
     Other ......................................      --         --       --
                                                       -----      -----    -----
     Total operating expenses ...................       67         60       67
                                                       -----      -----    -----
Operating income (loss) .........................      (19)         4      (28)
Other income (expense) ..........................      (16)       --        62
                                                       -----      -----    -----
Income (loss) before provision
     for income taxes ...........................      (35)         4       34
Provision for income taxes ......................        1        --       --
                                                       -----      -----    -----
Net income (loss) ...............................      (36)%        4 %     34 %
                                                       =====      =====    =====

SELECTED OPERATING DATA:
Net revenues by segment:
     North America ..............................       12 %       38 %     60 %
     International ..............................       75         18       13
     OEM, royalty and licensing .................       13         44       27
                                                       -----      -----    -----
                                                       100 %      100 %    100 %
                                                       =====      =====    =====
Net revenues by platform:
     Personal computer ..........................       14 %       21 %     36 %
     Video game console .........................       73         35       37
     OEM, royalty and licensing .................       13         44       27
                                                       -----      -----    -----
                                                       100 %      100 %    100 %
                                                       =====      =====    =====


                                       17
<PAGE>


     Geographically,  our net revenues for the years ended December 31, 2004 and
2003 breakdown as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
North America                    1,544      13,541      (11,997)      (88.6%)
International                    9,934       6,484        3,450        53.2%
OEM, Royalty & Licensing         1,720      16,276      (14,306)      (89.2%)
Net Revenues                    13,197      36,301      (22,854)      (63.9%)


     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        3,885         32%
Net Revenues                    36,301      43,999      (7,948)        (18%)

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

     Net revenues for the year ended  December  31, 2004 were $13.2  million,  a
decrease of 63.9%  compared to the same period in 2003.  This decrease  resulted
from a 88%  decrease in North  American  net revenues and a 89% decrease in OEM,
royalties and licensing revenues,  offset by a 53% increase in International net
revenues.  Net revenues for the year ended December 31, 2003 were $36.1 million,
a decrease of 18% 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 a 32% increase in OEM,  royalties  and licensing
revenues.

     North  American net revenues for the year ended December 31, 2004 were $1.5
million as compared to $13.5 million for the year ended  December 31, 2003.  The
decrease in North American net revenues in 2004 was mainly due to releasing zero
product gold masters in 2004 as compared to delivering  six product gold masters
in 2003.

     We expect that our North American  publishing net revenues will decrease in
2005 compared to 2004, mainly due to decreased catalog sales.

     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
six  titles 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.

     International  net revenues for the year ended  December 31, 2004 were $9.9
million an increase of 3.4 million as compared to International net revenues for
the year ended  December 31, 2003.  The increase in  International  net revenues
compared  to the year  ended  December  31,  2003 was  mainly  due to  releasing
BALDUR'S  GATE DARK  ALLIANCE II and  FALLOUT:  BROTHERHOOD  OF STEEL during the
twelve months ended  December 31, 2004 and not having  comparable  titles during
2003.

     We expect that our  International  publishing net revenues will decrease in
2005 as compared to 2004, mainly due to decreased unit sales.

     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


                                       18
<PAGE>


concessions of $3.1 million  compared to the 2002 period and the  recognition of
$0.6 million in revenues  related to Avalon's CVA,  offset by a decrease of both
new release and catalog sales.

     OEM,  royalty and  licensing  net revenues for the year ended  December 31,
2004 were $1.7  million,  a decrease  of $14.3  million as  compared to the same
period in 2003. The OEM business decreased $14.3 million as a consequence of our
reorganization.

     OEM,  royalty and  licensing  net revenues for the year ended  December 31,
2003 were $16.0  million,  an increase  of $3.9  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 franchise in the first quarter of
2003 and $0.5 million in net revenues  related to the sale of the GALLEON  video
game in the fourth quarter of 2003.

PLATFORM NET REVENUES

     Our platform  net  revenues for the years ended  December 31, 2004 and 2003
breakdown as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
Personal Computer                1,817       7,671       (5,854)      (76.3%)
Video Game Console               9,660      12,354       (2,694)      (21.8%)
OEM, Royalty & Licensing         1,720      16,276      (14,306)      (89.2%)
Net Revenues                    13,197      36,301      (22,854)      (63.4%)

     PC net revenues for the year ended  December 31, 2004 were $1.8 million,  a
decrease of 76.3%  compared to the same period in 2003.  The  decrease in PC net
revenues  in 2004 was  primarily  due to no new  releases.  We expect our PC net
revenues to  decrease  in 2005 as compared to 2004 as we continue to  reorganize
the company.

     Our video game console net  revenues  for the year ended  December 31, 2004
were $9.6 million a decrease of 21.8%  compared to the same period in 2003.  The
decrease in video game  console net  revenues was  partially  attributed  to our
releasing  or  delivering  no gold  masters to Vivendi.  Our catalog  sales also
decreased  in 2004 as compared to 2003.  Since we  anticipate  releasing  no new
console  titles in 2005,  we expect  our video  game  console  net  revenues  to
decrease in 2005.

     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       3,885          31%
Net Revenues                    36,301      43,999      (7,948)        (18%)

     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.

     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 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 titles were: RLH (XBOX),  BALDUR'S GATE: DARK ALLIANCE
II (PLAYSTATION 2), BALDUR'S GATE: DARK ALLIANCE II (XBOX), FALLOUT: BROTHERHOOD
OF STEEL  (PLAYSTATION  2) AND FALLOUT:  BROTHERHOOD  OF STEEL  (XBOX).  We also
released five titles in 2002 to Vivendi;  however, only four were under the 2002
distribution agreement. Furthermore, our video game console


                                       19
<PAGE>


net revenues were reduced in 2003 by not releasing  BALDUR'S GATE: DARK ALLIANCE
II (PLAYSTATION 2), BALDUR'S GATE: DARK ALLIANCE II (XBOX), FALLOUT: BROTHERHOOD
OF STEEL (PLAYSTATION 2) and FALLOUT: BROTHERHOOD OF STEEL (XBOX) in Europe. Our
catalog sales also decreased in 2003 as compared to 2002.

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  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, 2004 and 2003 breakdown as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
Net Revenues                    13,197      36,301      (23,104)      (63.6%)
Cost of Goods Sold               6,826      13,120       (6,294)        (48%)
Gross Margin                     6,371      23,181      (16,810)      (72.5%)


     Our cost of goods  sold  decreased  48% to $6.8  million  in the year ended
December  31,  2004  compared  to  $12.9  million  in the same  period  in 2003.
Furthermore,  in 2003 we  incurred  $2.9  million  in  amortization  of  prepaid
royalties  associated  with the sale of the HUNTER:  THE  RECKONING  license and
approximately  $2.9 million in  write-offs  of  development  projects  that were
impaired  because  the  titles  were not  expected  to meet our  desired  profit
requirements.  In addition,  the  decrease was mainly a result of lower  product
cost of goods associated with lower overall product sales. We expect our cost of
goods sold to decrease in 2005 as compared to 2004 because we  anticipate  lower
overall product sales.

     Our gross margin  decreased to 48.3% for the twelve  months ended  December
31, 2004 from 63.9% in the comparable  period in 2003. This was primarily due to
the sale of the HUNTER:  THE RECKONING license,  which yielded  approximately an
80% profit margin in 2003 partially  offset by the sale of the rights to develop
FALLOUT 3 and the sale of REDNECK RAMPAGE in 2004.

     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      (7,948)        (18%)
Cost of Goods Sold              13,120      26,706      (13,786)       (52%)
Gross Margin                    23,181      17,293       5,838          34%

     Our cost of goods  sold  decreased  52% 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 overall product sales.


                                       20
<PAGE>


     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
franchise in February 2003.

MARKETING AND SALES

     Our marketing and sales  expenses for the years ended December 31, 2004 and
2003 breakdown as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
Marketing and Sales              1,703       1,415         288          20.4%

     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 twelve  months ended  December  31, 2004 were $1.7  million,  a
20.4%  increase as compared to the 2003 period.  The  increase in marketing  and
sales expenses is due primarily to increased advertising costs for Baldur's Gate
DARK ALLIANCE 2 on the PS2 and Xbox platforms in Europe. We expect our marketing
and sales  expenses to decrease in 2005  compared to 2004,  as we expect to ship
release fewer titles in 2005 as compared to 2004.

     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 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.

GENERAL AND ADMINISTRATIVE

     Our general and  administrative  expenses for the years ended  December 31,
2004 and 2003 breakdown as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
General and Administrative       4,514       6,692       (2,178)       (32.6%)

     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, 2004 were $4.5 million,  a 32.6% decrease as compared to
the same period in 2003.  The  decrease is mainly due to  decreases in personnel
costs  and  general  expenses  as a  result  of a  reduction  in  administrative
personnel  during  2004.  We expect our general and  administrative  expenses to
decrease in 2005 compared to 2004.

     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 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


                                       21
<PAGE>


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.

PRODUCT DEVELOPMENT

     Our product development  expenses for the years ended December 31, 2004 and
2003 breakdown as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
Product Development              2,636      13,680      (11,044)       (80.7%)

     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, 2004 were $2.6 million,  a
80.7% decrease as compared to the same period in 2003.  This decrease was mainly
due to a $11 million  decrease  in  personnel  costs and  general  expenses as a
result of a reduction in headcount  and the closure of our internal  development
studio during the year. We expect our product  development  expenses to decrease
in 2005  compared to 2004 as a result of  reductions  of  development  personnel
during 2004.

     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%)

     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.

OTHER EXPENSE, NET

     Our other expense for the years ended  December 31, 2004 and 2003 breakdown
as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
Other Expense                    2,248          82       (2,166)       (278%)

     Other expense  consists  primarily of interest  expense,  bad debt expense,
payroll tax penalties,  write-off of fixed assets and foreign currency  exchange
transaction losses.  Other expense for the year ended December 31, 2004 was $2.2
million,  a 278% decrease as compared to the same period in 2003.  This increase
is due  primarily  to a write-off of fixed assets and a write down of the Avalon
accounts receivable balance.

     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 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.


                                       22
<PAGE>


PROVISION (BENEFIT) FOR INCOME TAXES

     Our  provision/(benefit)  for income taxes for the years ended December 31,
2004 and 2003 breakdown as follows: (in thousands)

                                 2004        2003        Change      % Change
                                ------      ------      -------       -------
Provision (Benefit)                0          (0)           0             0%

     We recorded no tax  provision  for the years  ended  December  31, 2004 and
2003.

     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 Internal Revenue Service ("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.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2004, we had a working capital deficit of  approximately
$18 million,  and our cash balance was approximately  $29,000. We currently have
no cash reserves and are unable to pay current  liabilities.  The Company cannot
continue in its current form without obtaining additional financing or income.

     On April 16, 2004,  Arden Realty,  our landlord filed an unlawful  detainer
action against us alleging unpaid rent of approximately $432,000. We were unable
to pay our rent,  and vacated the office space during the month of June 2004. On
June 3,  2004,  our  Landlord  obtained  a judgment  of  approximately  $588,000
exclusive of interest.  We also owe an  additional  approximately  $148,000 on a
prior  settlement  with the  Landlord.  We  negotiated a  forbearance  agreement
whereby  Arden has agreed to accept  payments  commencing in January 2005 in the
amount of $60,000 per month until the full amount is paid.  We are  currently in
default of this agreement.

     We have received  notice from the Internal  Revenue Service ("IRS") that we
owe approximately  $117,000 in payroll tax penalties for late payment of payroll
taxes in the 3rd and 4th  quarters of 2003 and the 1st and 2nd quarters of 2004.
Such amount has been accrued at December 31, 2004. We have received  notice from
the California Employment  Development  Department that we owe payroll taxes and
penalties of  approximately  $101,000.  We have  received  notice from the State
Board of  Equalization  that we owe  approximately  $64,000 in State Use Tax. We
have  also  received  notice  from  the  Orange  County  Treasurer  that  we owe
approximately  $28,000 in property  taxes.  Such  amounts  have been  accrued at
December 31, 2004.

     We were unable to meet certain 2004 payroll  obligations  to our employees,
as a result several  employees  filed claims with the State of California  Labor
Board ("Labor Board").  The Labor Board has fined us  approximately  $10,000 for
failure to meet our payroll obligations and set trial dates for August 2005.

     Since we were having difficulty meeting our payroll obligations on a timely
basis to our employees a large number of our employees stopped reporting to work
in late May and early June 2004. We were subsequently  evicted from our building
at 16815 Von Karman Avenue in Irvine, California in mid June 2004. We had a core
group of  approximately  12 employees  on payroll on December 31, 2004,  some of
whom are actively working from the new company locations in


                                       23
<PAGE>


Irvine  and  Beverly  Hills,  California  and some  have  subsequently  left the
Company.  Substantially  all employees  have not been paid for the period August
through  December  31, 2004.  Since we have been unable to pay the  employees we
have continuing  liability to them and there is a high  probability that some or
all of them will seek  employment  elsewhere.  There may be some liability to us
arising from employees, including those who have left.

     Our  property,  general  liability,  auto,  fiduciary  liability,   workers
compensation,   directors  and  officers,  and  employment  practices  liability
insurance policies, have been cancelled. We obtained a new workers' compensation
insurance policy. The Labor Board fined us approximately  $79,000 for not having
worker's  compensation  coverage for a period of time. Our health  insurance was
also cancelled but was subsequently reinstated. We are appealing the Labor Board
fines.

     On July 2,  2004,we  granted an option to Vivendi to  purchase  the REDNECK
RAMPAGE  intellectual  property rights for $300,000.  On July 19, 2004,  Vivendi
exercised the option and paid the $300,000 on July 23, 2004.

     We entered  into  tri-party  agreements  with Atari  Interactive,  Inc. and
Vivendi and Avalon that allows  Vivendi to resume North  American  distribution,
and Avalon to resume International  distribution  pursuant to their pre-existing
agreements with us of certain Dungeons & Dragons games, including BALDUR'S GATE:
DARK  ALLIANCE  II. In  September  2004 Atari  notified  Vivendi that Vivendi is
currently in breach of its  obligations to remit  royalties to Atari pursuant to
the terms of the agreement.  Atari Interactive  notified Vivendi that if Vivendi
did not cure the breach set forth in the letter by  September  30, 2004 that the
letter shall be deemed  notice of  termination  of the  agreement.  According to
reports  we  received  from  Vivendi  we  believe  Atari  was  paid  by  Vivendi
approximately  $742,000 as of December 31, 2004. We will most likely not receive
any proceeds from Vivendi during 2005.

     Interplay  licensed to Bethesda  Softworks  LLC,  "Bethesda"  the rights to
develop FALLOUT 3 on all platforms for $1.175 million minimum guaranteed advance
against royalties.  Bethesda also has an option to develop two sequels,  FALLOUT
4, and FALLOUT 5 for $1.0 million minimum  guaranteed  advance against royalties
per sequel.  Interplay  retained  the rights to develop a massively  multiplayer
online game using the Fallout Trademark.

     We have substantially reduced our operating expenses. We need to reduce our
continuing liabilities.  We have to raise additional capital or 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.  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.

     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.

     We continue to seek external sources of funding,  including but not limited
to,  incurring  debt,  the sale of assets or stock,  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, and employees,  and have pending lawsuits as a result of our continuing
cash flow difficulties. We expect these difficulties to continue during 2005.

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

     Our  primary   capital  needs  have   historically   been  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 used cash of $2.9 million during the twelve months ended December 31,
2004,  primarily   attributable  to  fees  incurred  for  lawsuits,   and  other
liabilities, and


                                       24
<PAGE>


recoupment of advances received by distributors.

     Cash  provided by  investing  activities  of $28,000 for the twelve  months
ended  December 31, 2004  consisted of normal  capital  expenditures  and sales,
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  provided by  financing  activities  of $738,000 for the
twelve months ended December 31, 2004,  consisted primarily of repayments of our
notes payable.

     Avalon  distributed our products in Europe, the commonwealth of Independent
States,  Africa and the Middle East. Our distribution  agreement with Avalon was
terminated following Avalon's involuntary judicial liquidation in February 2005.
In March 2005 we appointed our wholly owned  subsidiary,  Interplay  Productions
Ltd, as our distributor in Europe and other selected  territories.  As a result,
we cannot  guarantee  our ability to collect  fully the debts we believe are due
and  owed  to  us  from  Avalon.  We  subsequently  fully  reserved  the  Avalon
receivable.

     Currently there is no internal development of new titles going on.

     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  condensed
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.  There can be
no  guarantee  that we will be able  to  meet  all  contractual  obligations  or
liabilities in the future, including payroll obligations.

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 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 (January 2003), as may be modified
or supplemented) in an  unconsolidated  entity that is held by, and material to,
the registrant, where such entity provides financing,  liquidity, market risk or
credit  risk  support  to, or  engages  in  leasing,  hedging  or  research  and
development services with the registrant.

CONTRACTUAL OBLIGATIONS

     The following table summarizes certain of our contractual obligations under
non-cancelable  contracts and other  commitments  at December 31, 2004,  and the
effect such  obligations  are expected to have on our liquidity and cash flow in
future periods. (in thousands)

<TABLE>
<CAPTION>
                                                 LESS THAN    1 - 3     3 - 5   MORE THAN
CONTRACTUAL OBLIGATIONS                 TOTAL     1 YEAR      YEARS     YEARS    5 YEARS
-----------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>         <C>      <C>
Developer Licensee Commitments (1)      4,694      3,051      1,643       --       --
Lease Commitments (2) ............        737        737       --         --       --
Taxes (3) ........................        310        310       --         --       --
Other Commitments (4) ............      1,476        970        506       --       --
-----------------------------------------------------------------------------------------
 Total ...........................      7,217      5,068      2,149       --       --
</TABLE>

     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 2005. We will need to substantially reduce our working capital


                                       25
<PAGE>


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:  The company's  headquarters were located in Irvine,
California where the Company leased  approximately  81,000 square feet of office
space.  This lease would have expired in June 2006.  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.  The Company
was unable to satisfy this  obligation and reach an agreement with its landlord,
the Company  subsequently  forfeited its lease and vacated the  building.  Arden
Realty obtained a judgment for approximately $588,000 exclusive of interest. The
Company also owes an additional  approximately  $149,000  making a total owed to
Arden by the  Company  of  approximately  $737,000.  The  Company  negotiated  a
forbearance  agreement whereby Arden has agreed to accept payments commencing in
January  2005 in the amount of $60,000  per month until the full amount is paid.
The Company has been  unable to make any of the $60,000 per month  payments.  We
have monthly rental agreements in Irvine,  CA and Beverly Hills,  California for
our operations.

     (3) We have received notice from the Internal  Revenue Service ("IRS") that
we owe  approximately  $117,000 in payroll  tax  penalties  for late  payment of
payroll  taxes in the 3rd and 4th  quarters of 2003 and the 1st and 2nd quarters
of 2004.  Such amount has been accrued at December 31,  2004.  We have  received
notice  from the  California  Unemployment  Development  Department  that we owe
payroll taxes and penalties of approximately  $101,000.  We have received notice
from the State Board of Equalization that we owe approximately  $64,000 in State
Use Tax. We have also received  notice from the Orange County  Treasurer that we
owe  approximately  $28,000 in property taxes. Such amounts have been accrued at
December 31, 2004.

     (4) Other  Commitments:  Consist of payment plans entered into with various
creditors.

ACTIVITIES WITH RELATED PARTIES

     It is our policy that  related  party  transactions  are to 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 and its affiliates. We had a major distribution agreement with
Avalon, an affiliate of Titus.

TRANSACTIONS WITH TITUS

     Titus presently owns approximately 58 million shares of common stock, which
represents  approximately  62% of our outstanding  common stock, our only voting
security.

     We performed certain distribution services on behalf of Titus for a fee. In
connection with such distribution  services,  we recognized fee income of $0 and
$5,000 for the twelve months ended December 31, 2004, and 2003, respectively.

     As of December 31, 2004 and December  31,  2003,  Titus and its  affiliates
excluding Avalon owed us $370,000 and $362,000,  respectively. We owed Titus and
its  affiliates  excluding  Avalon  $30,000 and $0 as of  December  31, 2004 and
December 31, 2003 respectively.


                                       26
<PAGE>


TRANSACTIONS WITH TITUS AFFILIATES

TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS

     We had an International  Distribution Agreement with Avalon, a wholly owned
subsidiary of Titus.  Pursuant to this distribution  agreement,  Avalon provided
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 paid
Avalon a distribution fee based on net sales, and Avalon provides certain market
preparation,  warehousing,  sales and  fulfillment  services on our  behalf.  In
connection  with  the  International  Distribution  Agreement  with  Avalon,  we
incurred  distribution  commission  expense of $62,000 and $.9 million,  for the
twelve months ended December 31, 2004, and 2003 respectively. This agreement was
terminated as a result of Avalon's liquidation in February 2005.

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 September 30, 2004 was approximately $254,000. The total receivable
due from TSC is approximately $327,000 as of September 30, 2004. The majority of
the additional  approximately $73,000 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  has 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, 2004 we had a zero  balance with Titus Japan.  During the twelve
months  ending  December  31, 2004 our Japanese  subsidiary  paid to Titus Japan
approximately $209,000 in commissions,  marketing and publishing staff services.
Our  Japanese  subsidiary  had  approximately  $369,000 in revenue in the twelve
months ending December 31, 2004.

TRANSACTIONS WITH TITUS SARL

     As of  December  31,  2004,  we have a  receivable  of $18,000  and $43,000
respectively for product development  services that we provided.  Titus SARL was
placed into involuntary liquidation in January 2005.

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 for three
months.  As of  December  31,  2004,  we  had a  zero  balance  with  Titus  GIE
Interactive Group. Titus GIE was placed into involuntary  liquidation in January
2005.


                                       27
<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs -
An  Amendment  of ARB No. 43,  Chapter 4." This new  standard is the result of a
broader  effort  by the  FASB to  improve  financial  reporting  by  eliminating
differences  between Generally Accepted  Accounting  Principles  ("GAAP") in the
United  States  and  accounting   principles   developed  by  the  International
Accounting  Standards Board ("IASB").  As part of this effort,  the FASB and the
IASB  identified  opportunities  to improve  financial  reporting by eliminating
certain narrow differences between their existing accounting standards. SFAS No.
151 clarifies that abnormal amounts of idle facility  expense,  freight handling
costs and  spoilage  costs  should be expensed as incurred  and not  included in
overhead.  Further,  SFAS No. 151 requires that  allocation of fixed  production
overheads  to  conversion  costs  should  be based  on  normal  capacity  of the
production  facilities.  The  provisions  in  SFAS  No.  151 are  effective  for
inventory  costs  incurred  during fiscal years  beginning  after June 15, 2005.
Companies must apply the standard prospectively.  Management does not expect the
adoption of SFAS No. 151 to have a material  impact on the  Company's  financial
position, results of operations or cash flows.

     In December 2004, the FASB issued SFAS No. 123R,  "Share Based  Payment," a
revision to SFAS 123, "Accounting for Stock-Based  Compensation," and supersedes
APB Opinion No. 25,  "Accounting for Stock Issued to Employees," and its related
implementation  guidance. SFAS No. 123R establishes standards for the accounting
for transactions in which an entity exchanges instruments for goods or services.
It also addresses transactions in which an entity incurs liabilities in exchange
for goods or services  that are based on the fair value of the  entity's  equity
instruments or that may be settled by the issuance of those equity  instruments.
SFAS 123R  established  the accounting  treatment for  transactions  in which an
entity obtains employee services in share-based payment transactions.  SFAS 123R
requires  companies to recognize in the statement of operations  the  grant-date
fair  value of stock  options  and  other  equity-based  compensation  issued to
employees.  SFAS 123R requires the Company to value the share-based compensation
based on the  classification of the share-based  award. If the share-based award
is to be classified  as a liability,  the Company must  re-measure  the award at
each balance sheet date until the award is settled.  If the share-based award is
to be  classified  as  equity,  the  Company  will  measure  the  value  of  the
share-based  award on the date of grant but the award will not be re-measured at
each balance sheet date.  SFAS 123R does not change the accounting  guidance for
share-based  payment  transactions with parties other than employees provided in
SFAS 123 as originally  issued and EITF Issue No. 96-18,  "Accounting for Equity
Instruments  that are  Issued  to Other  than  Employees  for  Acquiring,  or in
Conjunction with Selling,  Goods or Services." SFAS 123R is effective for public
companies with calendar year ends no later than the beginning of the next fiscal
year. All public companies must use either the modified  prospective or modified
retrospective  transition method. Under the modified prospective method,  awards
that are  granted,  modified,  or settled  after the date of adoption  should be
measured  and  accounted  for in  accordance  with SFAS  123R.  Unvested  equity
classified  awards that were granted prior to the effective date should continue
to be accounted  for in  accordance  to SFAS 123 except that the amounts must be
recognized  in the  statement of  operations.  Under the modified  retrospective
method, the previously reported amounts are restated (either to the beginning of
the year of adoption or for all periods  presented)  to reflect SFAS 123 amounts
in the statement of operations.  Management is in the process of determining the
effect SFAS 123R will have upon the Company's  financial  position and statement
of operations and the method of transition adoption.

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

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:


                                       28
<PAGE>


RISKS RELATED TO OUR FINANCIAL RESULTS

WE  CURRENTLY  HAVE A NUMBER OF  OBLIGATIONS  THAT WE ARE UNABLE TO MEET WITHOUT
GENERATING  ADDITIONAL  INCOME  OR  RAISING  ADDITIONAL  CAPITAL.  IF WE  CANNOT
GENERATE  ADDITIONAL  INCOME 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, 2004, our cash balance was approximately $29,000 and our
outstanding accounts payable and current liabilities totaled approximately $13.2
million.  In  particular  we have some  significant  creditors  that  comprise a
substantial  proportion of outstanding  obligations that we might not be able to
satisfy. 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 not have sufficient resources to continue operations.

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

     For the year ended December 31, 2004, our net loss from operations was $2.5
million and for the year ended December 31, 2003,  our net loss from  operations
was $1.3  million.  Since  inception,  we have incurred  significant  losses and
negative cash flow, and as of December 31, 2004 we had an accumulated deficit of
$139 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.  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  58  million  shares  of  common  stock,  which
represents  approximately  62% of our outstanding  common stock, our only voting
security.  As  a  consequence,  Titus  can  control  substantially  all  matters


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<PAGE>


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,  our Chief Executive  Officer and interim Chief Financial
Officer Herve Caen is a director of various Titus affiliates. 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.  Further,  Titus'
bankruptcy  could lead to a sale by its  liquidator 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.

THE LACK OF ANY 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.
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.

A  SIGNIFICANT   PERCENTAGE  OF  OUR  REVENUES   HISTORICALLY  DEPENDED  ON  OUR
DISTRIBUTORS' DILIGENT SALES EFFORTS.

     Avalon was the  exclusive  distributor  for most of our products in Europe,
the  Commonwealth  of  Independent  States,  Africa  and the  Middle  East.  Our
agreement  with Avalon was  terminated  following the  liquidation  of Avalon in
February 2005. We subsequently  appointed our wholly owned subsidiary  Interplay
Productions Ltd as our distributor for Europe.

     Vivendi has exclusive  rights to  distribute  our products in North America
and selected International  territories.  Our agreement with Vivendi will expire
in August 2005 for most of our products.

     Our revenues and cash flows could fall  significantly  and our business and
financial results could suffer material harm if: o We fail to replace Vivendi as
our distributor;  or o Interplay Productions Ltd fails to effectively distribute
our products.

     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.

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

     We are  presently  without a CFO,  and Mr. Caen has 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.


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<PAGE>


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 personal computer and video game console platforms;

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

     o    changes in our product mix;

     o    the number of our products that are returned; and

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

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

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

     o    approvals required from content and technology licensors; and

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

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, 2004, our net loss from operations was $2.5
million. We have incurred  significant net losses in previous years periods. Our
losses in the past  stemmed  partly  from the  significant  costs we  incured 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


                                       31
<PAGE>


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 many of
our software products.  Since we depend on these developers in the aggregate, we
remain subject to the following risks:

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

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

INCREASED  COMPETITION  FOR SKILLED  THIRD PARTY  SOFTWARE  DEVELOPERS  ALSO HAS
COMPELLED  US TO AGREE TO MAKE ADVANCE  PAYMENTS ON  ROYALTIES  AND TO GUARANTEE
MINIMUM ROYALTY PAYMENTS TO INTELLECTUAL PROPERTY LICENSORS AND GAME DEVELOPERS.
MOREOVER,  IF THE  PRODUCTS  SUBJECT TO THESE  ARRANGEMENTS,  ARE NOT  DELIVERED
TIMELY, OR WITH ACCEPTABLE  QUALITY, OR DO NOT GENERATE SUFFICIENT SALES VOLUMES
TO RECOVER  THESE ROYALTY  ADVANCES AND  GUARANTEED  PAYMENTS,  WE WOULD HAVE TO
WRITE-OFF  UNRECOVERED  PORTIONS OF THESE  PAYMENTS,  WHICH COULD CAUSE MATERIAL
HARM TO OUR  BUSINESS  AND  FINANCIAL  RESULTS.  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 pay higher fees
than we can to licensors of desirable  motion  picture,  television,  sports and
character properties and to third party software developers.

     We compete  primarily with other publishers of personal  computer and video
game console interactive entertainment software. Significant competitors include
Electronic  Arts  Inc.  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.

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.
Our failure to recruit or retain the services of


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<PAGE>


key  personnel,  including  competent  executive  management,  or to attract and
retain additional qualified employees could cause material harm to our business.

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

     Our net revenues from  international  sales accounted for approximately 75%
and 18% of our total net  revenues  for years ended  December 31, 2004 and 2003,
respectively.  Most of these  revenues came 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; 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 our current 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


                                       33
<PAGE>


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 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  calendar  year 2004,  we were  involved  in  disputes  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 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
PlayStation 2, 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.  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
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 Longhorn;

     o    new media formats


                                       35
<PAGE>


     o    releases of new video game consoles;

     o    new 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  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.


                                       36
<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 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,
2004.  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 risk associated with foreign currency
fluctuations.

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,  which primarily have been from
Avalon.

     We  recognized a $33,000  loss,  $58,000 gain and $104,000  loss during the
years  ended  December  31,  2004,  2003 and 2002,  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.


                                       37
<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 forms 8-K filed on (i) February 25,
2003,  and amendment to such form 8-K filed on February 27, 2003, and (ii) March
30, 2005.

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   were  of  limited
effectiveness,  at the reasonable  assurance  level,  in timely  alerting him to
material information required to be included in this report.

     Due to the departure of numerous key employees  during June 2004, there was
significant  change in our  internal  controls  over  financial  reporting  that
occurred  during the quarter  ended  September  30,  2004 and the quarter  ended
December  31, 2004 that have  materially  affected or are  reasonably  likely to
materially affect these controls.

     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 absolute 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.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

SUMMARY  INFORMATION  CONCERNING  DIRECTORS,   EXECUTIVE  OFFICERS  AND  CERTAIN
SIGNIFICANT EMPLOYEES

         The  following  table  sets forth  certain  information  regarding  our
directors and executive officers and their ages as of May 27, 2005:

     DIRECTORS                    AGE       PRESENT POSITION

     Herve Caen                    43       Chairman of the Board of Directors,
                                            Chief Executive Officer and Interim
                                            Chief Financial Officer
     Eric Caen                     39       Director
     Michel Welter (1)(2)(3)       46       Director

     (1)  Member of the Audit Committee of the Board of Directors.

     (2)  Member of the Compensation Committee of the Board of Directors.

     (3)  Member of the Independent Committee of the Board of Directors.


                                       38
<PAGE>


     Herve  Caen  and  Eric  Caen  are  brothers.  There  are  no  other  family
relationships  between any director and/or any executive  officer.  The Board of
Directors  has  determined  that there are no other  significant  employees  for
purposes of this Item 10.

BACKGROUND INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS

     HERVE CAEN joined us as President and as a director in November  1999.  Mr.
Caen was appointed interim Chief Executive Officer in January 2002 and currently
serves as our Chief  Executive  Officer and interim Chief  Financial  Officer to
date. Mr. Caen has served as Chairman of our Board of Directors  since September
2001.  Mr.  Caen has  served  as  Chairman  of the Board of  Directors  of Titus
Interactive S.A., an interactive  entertainment software company since 1991. Mr.
Caen was also  Chief  Executive  Officer  of Titus  Interactive  S.A.  from 1991
through  December 31, 2002.  Mr. Caen also serves as Managing  Director of Titus
Interactive Studio, Titus SARL and Digital Integration Services, which positions
he has held since  1985,  1991 and 1998,  respectively.  Mr. Caen also serves as
Chief  Executive  Officer  of  Titus  Software  Corporation,  Chairman  of Titus
Software UK Limited  and  Representative  Director  of Titus  Japan K.K.,  which
positions he has held since 1988, 1991 and 1998, respectively.

     ERIC CAEN has served as a director since November 1999. Mr. Caen has served
as a Director and as President of Titus Interactive S.A. since 1991. Mr. Caen is
also currently the Chief Executive  Officer of Titus  Interactive  S.A. Mr. Caen
also serves as Vice  President  of Titus  Software  Corporation,  Secretary  and
Director  of Titus  Software UK Limited  and  Director  of Titus Japan K.K.  and
Digital Integration Limited,  which positions he has held since 1988, 1991, 1998
and 1998,  respectively.  Mr. Caen has also served as Managing Director of Total
Fun 2, a French  record  production  company,  since  1998.  Mr.  Caen served as
Managing director of Titus SARL from 1988 to 1991.

     MICHEL WELTER joined our Board of Directors in September  2001. Mr. Welter,
together  with his  company  Weltertainment,  is  involved  in the  trading  and
exploitation of animated TV series.  From 2000 to 2002 he served as President of
CineGroupe  International,  a Canadian  company,  which  develops,  produces and
distributes animated television series and movies. From 1990 to the end of 2000,
Mr.  Welter  served as  President  of Saban  Enterprises  where he launched  the
international merchandising for the hit series "Power Rangers" and was in charge
of  international   business   development   where  he  put  together   numerous
co-productions with companies in Europe and Asia.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
our  executive  officers,  directors,  and  persons  who own more  than 10% of a
registered  class of our equity  securities  to file  reports of  ownership  and
changes in ownership  with the SEC.  Executive  officers,  directors and greater
than 10%  stockholders  are required by SEC rules and  regulations to furnish us
with all Section 16(a) forms they file. Based solely on our review of the copies
of the forms received by us and  representations  from certain reporting persons
that they have complied with the relevant filing requirements,  we believe that,
during the year ended December 31, 2004, all our executive  officers,  directors
and  greater  than 10%  stockholders  complied  with all  Section  16(a)  filing
requirements.

AUDIT COMMITTEE INDEPENDENCE AND AUDIT COMMITTEE FINANCIAL EXPERT.

     The Audit  Committee  currently  consists of Michel  Welter.  The Board has
determined that since October 2004 when Mr. Stefanovich resigned from the board,
who was until that time the "audit committee  financial expert", as that term is
defined in Section  407 of the  Sarbanes-Oxley  Act of 2002 and  pursuant to the
rules and  regulations  of the SEC,  the Audit  Committee  no longer has such an
expert.  The Board determined that Mr.  Stefanovich was, and has also determined
that Mr.  Welter is,  "independent",  as that term is defined under the rules of
the National Association of Securities Dealers, Inc.

CODE OF ETHICS

     We have adopted a Code of Ethics for all of our  employees,  including  our
principal executive officer,  principal financial officer,  principal accounting
officer or controller and any person performing similar  functions.  The Code of
Ethics was filed as an exhibit to the  Amendment No. 1 to the 10K for the period
ended December 31, 2003.


                                       39
<PAGE>


ITEM 11.   EXECUTIVE COMPENSATION

     The following table sets forth certain information concerning  compensation
earned during the last three fiscal years ended  December 31, 2004, by our Chief
Executive  Officer and  President  whose total  salary and bonus during the year
ended December 31, 2004 exceeded  $100,000  (collectively,  the "Named Executive
Officers").  No other executive  officer serving at December 31, 2004,  received
total salary and bonus during 2004 in excess of $100,000.

<TABLE>
                      SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                       LONG-TERM
                                                                      COMPENSATION
                                                                      ------------
                                          ANNUAL COMPENSATION          SECURITIES
                                    -------------------------------    UNDERLYING     ALL OTHER
  NAME AND PRINCIPAL POSITION       YEAR       SALARY         BONUS     OPTIONS(#)   COMPENSATION
--------------------------------    ----     ---------        -----   ------------   ------------
<S>                                 <C>      <C>                <C>         <C>       <C>
Herve Caen (1)..................    2004     $ 260,330 (2)      --          --        $    --
    Chairman of the Board of        2003       487,147          --          --              (3)
    Directors,  Chief  Executive    2002       250,000          --          --             --
    Officer and Interim Chief
    Financial Officer

Phillip Adam....................    2004       116,276 (4)      --          --           2,000 (5)
    President                       2003       200,000          --          --          12,000 (5)
                                    2002       168,000          --          --           5,331 (5)
----------
<FN>
(1)      Mr.  Caen  joined  us as  President  in  November  1999.  Mr.  Caen was
         appointed Chief Executive  Officer in January 2002 and currently serves
         as our Chief Executive Officer and interim Chief Financial Officer. Mr.
         Caen has served as Chairman of our Board of Directors  since  September
         2001. In March 2003, our Compensation Committee approved an annual base
         salary of $360,000 as Chief  Executive  officer and  $100,000  per year
         while serving as interim Chief Financial Officer.
(2)      Mr.  Caen was only paid a portion of his  salary  during FY 2004 due to
         the  limited  cash  available.  We accrued  the balance due Mr. Caen of
         $199,670 as of December 31, 2004.
(3)      Mr.  Caen  received  2,000  shares of our common  stock  pursuant  to a
         non-discretionary  grant  made  under the terms of our  Employee  Stock
         Purchase Program.
(4)      Mr.  Adam was only paid a portion of his  salary  during FY 2004 due to
         the  limited  cash  available.  We accrued  the balance due Mr. Adam of
         $75,391 as of December 31,  2004.  Mr. Adam  resigned on January  15th,
         2005.
(5)      Mr. Adam's other compensation consists of matching payments  made under
         our 401(k) plan.
</FN>
</TABLE>


                                       40
<PAGE>


                       STOCK OPTION GRANTS IN FISCAL 2004

     There were no stock  options or stock  appreciation  rights  granted to the
Named Executive Officers during the year ended December 31, 2004.

                         AGGREGATE OPTION/ SAR EXERCISES
                         AND 2004 YEAR-END OPTION VALUES

     There  were no  exercises  of stock  options or stock  appreciation  rights
during the year ended December 31, 2004 for any of the Named Executive Officers.

<TABLE>
<CAPTION>
                                                         NUMBER OF SECURITIES        VALUE OF
                                                              UNDERLYING        UNEXERCISED IN-THE-
                                                         UNEXERCISED OPTIONS     MONEY OPTIONS AT
                                                             AT YEAR-END             YEAR-END
                     SHARES ACQUIRED                        (EXERCISABLE/          (EXERCISABLE/
          NAME         ON EXERCISE      VALUE REALIZED      UNEXERCISABLE)      UNEXERCISABLE) (1)
          ----         -----------      --------------      --------------      ------------------
<S>                        <C>                <C>             <C>                     <C>
Herve Caen                 --                 --                  --                    --
Phillip Adam               --                 --              10,000/0                $0/$0

----------
<FN>
(1)      Represents an amount equal to the  difference  between the closing sale
         price for our common  stock  ($0.08) on the  Over-The-Counter  Bulletin
         Board on December 31, 2003, and the option exercise  price,  multiplied
         by the number of unexercised  in-the-money options. None of the options
         held by the Named Executive Officers were in-the-money at year-end.
</FN>
</TABLE>

DIRECTOR COMPENSATION

     Currently,  we accrue for  payment to each of our  non-employee  directors'
compensation as follows:

     o    $5,000 in cash  compensation  per quarter for  attendance  at Board of
          Directors meetings.

     o    $5,000  in cash  compensation  per annum for each  Board  committee  a
          director is a member of and participates in.

     o    Upon election and  appointment to the Board,  or upon loss of employee
          status of an  employee  director,  an option to  purchase up to 25,000
          shares of our common stock under the Third  Amended and Restated  1997
          Stock  Incentive Plan.  These director  options are each for a term of
          ten years and vest over the first three years.

     o    An option to purchase 5,000 shares of our common stock under the Third
          Amended and Restated  1997 Stock  Incentive  Plan for each  subsequent
          year of director  service.  These director options are each for a term
          of ten years and vest over the first three years.

EMPLOYMENT AGREEMENTS

     Mr. Herve Caen currently serves as our Chief Executive  Officer and interim
Chief Financial Officer. We previously entered into an employment agreement with
Mr.  Herve Caen for a term of three years  through  November  2002,  pursuant to
which he currently  serves as our  Chairman of the Board of Directors  and Chief
Executive Officer.  The employment  agreement provided for an annual base salary
of  $250,000,  with  such  annual  raises  as may be  approved  by the  Board of
Directors,  plus annual bonuses at the discretion of the Board of Directors. Mr.
Caen is also entitled to  participate  in the incentive  compensation  and other
employee  benefit plans  established by us from time to time. In March 2003, our
Compensation Committee approved an annual base salary increase for Mr. Caen from
$250,000 to $360,000.  The Compensation Committee is currently negotiating a new
employment agreement with Mr. Caen.

     Mr.  Phillip Adam served as our President  during 2004. In March 2003,  our
Compensation  Committee approved a three-year employment agreement with Mr. Adam
as President  for an annual base salary of $200,000.  Mr. Adam resigned from the
company on January 15, 2005.


                                       41
<PAGE>


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The  Compensation  Committee  currently  consists  of Michel  Welter.  From
January to August  2004,  the  Compensation  Committee  was  comprised of Michel
Welter,  Jerry  DeCiccio  and Robert  Stefanovich.  Mr.  DeCiccio  resigned as a
director in August  2004.  From August  2004 to Ortober  2004,  Mr Welter and Mr
Stefanovich served on our Compensation Committee.  Mr. Stefanovich resigned as a
director  in  October  2004.   During  2004,   decisions   regarding   executive
compensation were made by our Compensation  Committee.  None of the current 2004
members of our Compensation  Committee nor any of our 2004 executive officers or
directors had a relationship that would constitute an interlocking  relationship
with executive officers and directors of another entity.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

     The following is the Report of the  Compensation  Committee  describing the
compensation  policies  applicable to the  Company's  executive  officers.  This
information  shall not be deemed to be  "soliciting  material"  or to be "filed"
with the SEC nor shall this  information be  incorporated  by reference into any
future filing under the  Securities  Act of 1933, as amended,  or the Securities
Exchange  Act of 1934,  as  amended,  except  to the  extent  that  the  company
specifically incorporates it by reference into a filing.

Compensation Policies and Objectives

     The Compensation  Committee  reviews and approves the annual salary,  bonus
and other benefits,  including incentive  compensation  awards, of our executive
officers, including the Chief Executive Officer. The Compensation Committee also
reviews the employee benefit plans and recommends  changes to the existing plans
to the Board of  Directors.  The  executive  compensation  policy is designed to
attract and retain exceptional  executives by offering compensation for superior
performance  that is  competitive  with other  well-managed  organizations.  The
Compensation  Committee  measures  executive  performance  on an individual  and
corporate basis.

     There  are three  components  to the  executive  compensation  program,  as
follows:

            Base Salary.  Base salaries for  executives  and other key employees
are determined by individual financial and non-financial performance and general
economic conditions of the company and of the industry. In recommending salaries
for executive  officers,  the Compensation  Committee (i) reviews the historical
performance of the executives, and (ii) reviews specific information provided by
its  accountants  and other  consultants,  as  necessary,  with  respect  to the
competitiveness of salaries paid to the our executives.

            Annual Bonus.  Annual bonuses for executives and other key employees
are tied directly to the company's  financial  performance as well as individual
performance.  The purpose of annual  cash  bonuses is to reward  executives  for
achievements of corporate,  financial and operational goals. Annual cash bonuses
are intended to reward the  achievement of outstanding  performance.  If certain
objective  and  subjective  performance  goals are not met,  annual  bonuses are
reduced or not paid.

            Long-Term  Incentives.  The  purpose of these  plans is to create an
opportunity  for executives and other key employees to share in the  enhancement
of stockholder  value through stock options.  The overall goal of this component
of pay is to create a strong link between the  management of the company and its
stockholders  through management stock ownership and the achievement of specific
corporate financial measures that result in the appreciation of our share price.
Stock options are awarded in order to tie the executive  officers'  interests to
the company's  performance and align those  interests  closely with those of our
stockholders.  The Compensation Committee generally has followed the practice of
granting  options on terms that provide that the options  become  exercisable in
installments over a two to five year period. The Compensation Committee believes
that this feature not only provides an employee  retention factor but also makes
longer-term growth in share prices important for those receiving options.

     No stock  options  were  granted to our  executive  officers  in 2004.  The
Compensation  Committee  continues to review the  desirability  of issuing stock
options to its executive officers in any given fiscal year to provide incentives
in connection with our corporate objectives.


                                       42
<PAGE>


Fiscal Year 2004 Chief Executive Officer Compensation

     The  salary,  annual  raises  and  annual  bonus of Herve  Caen,  our Chief
Executive  Officer  and interim  Chief  Financial  Officer,  are  determined  in
accordance with Mr. Caen's  employment  agreement with us. Mr. Caen's employment
agreement  provides for a base salary of $360,000 per year,  with annual  raises
and bonuses as may be approved at the  discretion  of our Board of Directors and
$100,000 per year while serving as interim Chief Financial Officer.  The amounts
of any annual raises or bonuses are  determined in accordance  with the policies
and objectives set forth above. For the fiscal year ended December 31, 2004, Mr.
Caen received  $260,330 in compensation  as Chief Executive  Officer and interim
Chief Financial Officer.  The Compensation  Committee did not award Mr. Caen any
options during 2004. The Compensation  Committee is currently  negotiating a new
employment agreement with Mr. Herve Caen.

Tax Law Implications for Executive Compensation

     Section  162(m) of the Internal  Revenue Code limits us to a deduction  for
federal income tax purposes of no more than $1 million of  compensation  paid to
certain  Named  Executive  Officers  in a taxable  year.  Compensation  above $1
million  may be deducted if it is  "performance-based  compensation"  within the
meaning of the Code.  The  Compensation  Committee  believes that at present the
compensation  paid to each Named  Executive  Officer in a taxable  year will not
exceed the  deduction  limit of $1 million under Section  162(m).  However,  the
Compensation  Committee  has  determined  that stock  awards  granted  under the
long-term  incentive  plans with an  exercise  price at least  equal to the fair
market  value  of our  common  stock on the date of  grant  will be  treated  as
"performance-based compensation."

                                     The Compensation Committee*

                                     Michel Welter

               * From January to August 2004,  the  Compensation  Committee  was
               comprised   of  Michel   Welter,   Jerry   DeCiccio   and  Robert
               Stefanovich.  Mr. DeCiccio resigned as a director in August 2004.
               Mr. Stefanovich resigned as a director in October 2004.

PERFORMANCE GRAPH

     The following  graph sets forth the percentage  change in cumulative  total
stockholder  return of our common stock during the period from December 31, 1999
to December 31, 2004,  compared with the cumulative  returns of the NASDAQ Stock
Market (U.S.  Companies)  Index and the Media General Index 820*. The comparison
assumes  $100 was  invested on December 31, 1999 in our common stock and in each
of the foregoing  indices.  Information  presented below is as of the end of the
fiscal year ended December 31, 2004.

     This performance  graph and the data related thereto shall not be deemed to
be "soliciting  material" or "filed" with the SEC nor shall this  information be
incorporated  by reference  into any future filing under the  Securities  Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended,  except to
the extent that we specifically incorporate it by reference into a filing.

                          [PERFORMANCE GRAPH OMITTED]

<TABLE>
<CAPTION>
                                                                Cumulative Total Return
                                  --------------------------------------------------------------------------------------
                                  12/99    3/00    6/00    9/00   12/00    3/01    6/01    9/01   12/01    3/02    6/02
                                  -----   -----   -----   -----   -----   -----   -----   -----   -----   -----   -----
<S>                               <C>     <C>      <C>    <C>      <C>     <C>     <C>     <C>     <C>     <C>     <C>
INTERPLAY ENTERTAINMENT CORP      100.00  119.13   89.35  129.78   87.24   53.20   74.88   14.30   15.66   10.89   12.93
NASDAQ STOCK MARKET (U.S.) ..     100.00  106.34   91.13   76.62   58.64   50.19   51.16   33.34   45.16   44.30   34.32
MEDIA GENERAL INDEX 820 .....     100.00   97.40   96.44  112.07   89.88   81.82   99.20   71.03   92.37   93.67   87.36


<CAPTION>
                                                                Cumulative Total Return
                                  -----------------------------------------------------------------------------
                                   9/02   12/02    3/03    6/03    9/03   12/03    3/04    6/04    9/04    12/04
                                  -----   -----   -----   -----   -----   -----   -----   -----   -----   ------
<S>                                <C>     <C>     <C>     <C>    <C>     <C>     <C>     <C>     <C>     <C>
INTERPLAY ENTERTAINMENT CORP        4.08    2.04    2.38    4.42    3.74    2.55    4.08    0.99    0.75    0.48
NASDAQ STOCK MARKET (U.S.) ..      28.13   26.34   23.80   29.32   35.67   38.12   41.12   39.67   37.83   40.57
MEDIA GENERAL INDEX 820 .....      79.27   62.83   69.73   91.72  107.97  111.75  128.21  128.73  110.12  148.02
</TABLE>


                                       43
<PAGE>


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table sets  forth as of March 31,  2005,  unless  otherwise
indicated,  certain information relating to the ownership of our common stock by
(i) each person  known by us to be the  beneficial  owner of more than 5% of the
outstanding  shares of our common stock, (ii) each of our directors,  (iii) each
of the Named  Executive  Officers,  and (iv) all of our  executive  officers and
directors as a group.  Except as may be indicated in the  footnotes to the table
and subject to applicable community property laws, each such person has the sole
voting and  investment  power with respect to the shares  owned.  The address of
each person  listed is in care of us, 1682 Langley  Avenue,  Irvine,  California
92606, unless otherwise set forth below such person's name.

                                              NUMBER OF SHARES
                                               OF COMMON STOCK
NAME AND ADDRESS                           BENEFICIALLY OWNED (1)    PERCENT (2)
----------------                           ----------------------    -----------

DIRECTORS:
Herve Caen..............................          8,681,306  (4)        9.2%
Eric Caen...............................             30,001  (5)          *
Michel Welter...........................             60,001  (6)          *

NON-DIRECTOR NAMED EXECUTIVE OFFICERS:
Phillip Adam                                        208,779  (7)          *

5% HOLDERS:
Titus Interactive SA....................         58,426,293  (3)       62.3%
     Parc de l'Esplanade
     12, rue Enrico Fermi
    St-Thibault-des-Vignes
    77462 Lagny-sur-Marne Cedex
    France

Directors and Executive Officers
   as a Group (4 persons)...............          8,961,754             9.5%
----------
     * Less than one percent.

(1)  Beneficial  ownership  is  determined  in  accordance  with the  rules  and
     regulations of the SEC and generally  includes  voting or investment  power
     with  respect  to  securities.  Shares of common  stock  subject to options
     currently exercisable,  or exercisable within 60 days of March 31, 2005 are
     deemed  outstanding for computing the percentage of the person holding such
     options but are not deemed  outstanding for computing the percentage of any
     other  person.  Except as  indicated  by footnote  and subject to community
     property  laws where  applicable,  the persons named in the table have sole
     voting  and  investment  power with  respect to all shares of common  stock
     shown  as  beneficially  owned  by  them.  The  information  as  to  shares
     beneficially  owned  has  been  individually  furnished  by the  respective
     directors, Named Executive Officers, and other stockholders,  or taken from
     documents filed with the SEC.

(2)  Based on  93,855,634  shares of common  stock  outstanding  as of March 31,
     2005. Percentages are rounded to the nearest tenth of a percent.

(3)  Includes 460,298 shares subject to warrants  exercisable  within 60 days of
     March 31,  2005.  (4)  Includes  8,681,306  shares of our common stock held
     directly by Mr. Herve Caen.  (5) Includes  30,001  shares  subject to stock
     options  exercisable  within 60 days of March 31, 2005. (6) Includes 20,001
     shares  subject to stock  options  exercisable  within 60 days of March 31,
     2005.  (7) Includes  10,000  shares  subject to stock  options  exercisable
     within 60 days of March 31, 2005.


                                       44
<PAGE>


EQUITY COMPENSATION PLANS INFORMATION

     The  following  table sets forth certain  information  regarding our equity
compensation plans as of December 31, 2004:

<TABLE>
<CAPTION>
                                                                                Number of securities
                                                                               remaining available for
                            Number of securities to     Weighted-average    future issuance under equity
                            be issued upon exercise    exercise price of         compensation plans
                            of outstanding options,   outstanding options,      (excluding securities
      Plan Category           warrants and rights     warrants and rights     reflected in column (a))
--------------------------------------------------------------------------------------------------------
                                      (a)                      (b)                        (c)
<S>                                  <C>                       <C>                      <C>
Equity compensation plans            211,150                   2.02                     7,609,447
   approved by security
         holders
Equity compensation plans              --                       --                          --
    not approved by
    security holders
                           -----------------------------------------------------------------------------
Total                                211,150                   2.02                     7,609,447
                           =============================================================================
</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.  Our  employee  stock  purchase  plan has been
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 $0 for the years ended  December 31, 2004,  2003 and 2002,
respectively.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     It is our policy that  related  party  transactions  are to 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 and its affiliates. We had a major distribution agreement with
Avalon, an affiliate of Titus.

TRANSACTIONS WITH TITUS

     Titus presently owns approximately 58 million shares of common stock, which
represents  approximately  62% of our outstanding  common stock, our only voting
security.

     We performed certain distribution services on behalf of Titus for a fee. In
connection with such distribution  services,  we recognized fee income of $0 and
$5,000 for the twelve months ended December 31, 2004, and 2003, respectively.

     As of December 31, 2004 and December  31,  2003,  Titus and its  affiliates
excluding Avalon owed us $370,000 and $362,000,  respectively. We owed Titus and
its  affiliates  excluding  Avalon  $30,000 and $0 as of  December  31, 2004 and
December 31, 2003 respectively.


                                       45
<PAGE>


TRANSACTIONS WITH TITUS AFFILIATES

TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS

     We had an International  Distribution Agreement with Avalon, a wholly owned
subsidiary of Titus.  Pursuant to this distribution  agreement,  Avalon provided
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 paid
Avalon a distribution fee based on net sales, and Avalon provides certain market
preparation,  warehousing,  sales and  fulfillment  services on our  behalf.  In
connection  with  the  International  Distribution  Agreement  with  Avalon,  we
incurred  distribution  commission  expense of $62,000 and $.9 million,  for the
twelve months ended December 31, 2004, and 2003 respectively. This agreement was
terminated as a result of Avalon's liquidation in February 2005.

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 September 30, 2004 was approximately $254,000. The total receivable
due from TSC is approximately $327,000 as of September 30, 2004. The majority of
the additional  approximately $73,000 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  has 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, 2004 we had a  zerobalance  with Titus Japan.  During the twelve
months  ending  December  31, 2004 our Japanese  subsidiary  paid to Titus Japan
approximately $209,000 in commissions,  marketing and publishing staff services.
Our  Japanese  subsidiary  had  approximately  $369,000 in revenue in the twelve
months ending December 31, 2004.

TRANSACTIONS WITH TITUS SARL

     As of  December  31,  2004,  we have a  receivable  of $18,000  and $43,000
respectively for product development  services that we provided.  Titus SARL was
placed into involuntary liquidation in January 2005.

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 for three
months.  As of  December  31,  2004,  we  had a  zero  balance  with  Titus  GIE
Interactive Group. Titus GIE was placed into involuntary  liquidation in January
2005.


                                       46
<PAGE>


ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

     Rose, Snyder & Jacobs ("RSJ") served as our independent auditors for fiscal
year 2004. For fiscal year 2003, Squar,  Milner, Reehl & Williamson LLP ("SMRW")
served as our independent auditors.

     Aggregate fees billed by our independent auditors for professional services
rendered for the audit of fiscal years 2004 and 2003 and for other  professional
services billed in fiscal years 2004 and 2003 are as follows:

                                              YEAR ENDED
                            ------------------------------------------------
DESCRIPTION OF FEES         DECEMBER 31, 2004              DECEMBER 31, 2003
-------------------         -----------------              -----------------
Audit Fees                   $16,097 (1)(4)                  $100,860 (3)

Audit-Related Fees                 --                          56,000 (2)

Tax Fees (3)                       --                            --

All Other Fees                     --                            --
--------------------------------------------------------------------------------

          TOTAL:              $16,097                        $227,372
          ======

(1)  This entire amount was paid to SMRW.
(2)  We  paid  SMRW  $45,000  for a  12-month  audit  ending  June  30,  2003 in
     connection with the audit  requirements of our majority  stockholder  Titus
     Interactive S.A. ("Titus"), of which $37,500 was reimbursed to us by Titus.
     The $7,500 balance was determined by SMRW to be savings applied towards our
     regular  annual  company  audit.  This  semi-annual  audit and the  related
     reimbursement   amount  was   pre-approved  and  authorized  by  our  Audit
     Committee.
(3)  Of this  amount,  $85,000  was paid to SMRW and $96,972 was paid to Ernst &
     Young.
(4)  We expect to incur  additional  fees in connection  with the review of this
     form 10-K for the year ended December 31, 2004.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

     Our Audit  Committee  has a policy  that all audit  and  non-audit  related
services  provided  by our  independent  auditor is to be  approved by our Audit
Committee.  Specifically,  the  Audit  Committee  requires  that  prior  to  the
engagement of our independent auditor for any specified service, the approval of
the Audit  Committee must be received.  All such matters are to be approved in a
scheduled  meeting of the Audit  Committee  consisting  of a quorum of the Audit
Committee.  All of the above aggregate fees billed by our  independent  auditors
have been approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation
S-X.


                                       47
<PAGE>


                                     PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(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.


                                       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 3rd day of June 2005.

                                            INTERPLAY ENTERTAINMENT CORP.


                                                     /s/ Herve Caen
                                            By:_________________________________
                                                        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
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 and 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, Interim Chief      June 3, 2005
Herve Caen              Financial Officer and Director
                        (Principal Executive and Financial and
                        Accounting Officer)


/s/ Eric Caen
____________________    Director                                    June 3, 2005
Eric Caen


/s/ Michel Welter
____________________    Director                                    June 3, 2005
Michel Welter


                                       49
<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;
         (incorporated  herein by  reference  to  Exhibit  3.1 to the  Company's
         Annual Report on Form 10-K for the year ended December 31, 2003).

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 the  Company'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;
         (incorporated  herein by  reference  to  Exhibit  3.3 to the  Company's
         Annual Report on Form 10-K for the year ended December 31, 2003).

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; (incorporated herein by reference to Exhibit
         3.4 to the  Company's  Annual  Report on Form  10-K for the year  ended
         December 31, 2003).

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; (incorporated herein by reference to Exhibit
         3.5 to the  Company's  Annual  Report on Form  10-K for the year  ended
         December 31, 2003).

3.6      Amended and  Restated  Bylaws of the Company;  (incorporated  herein by
         reference to Exhibit 3.6 to the  Company's  Annual  Report on Form 10-K
         for the year ended December 31, 2003).

3.7      Amendment to the Amended and Restated Bylaws of the Company dated March
         9,  2004;  (incorporated  herein by  reference  to  Exhibit  3.7 to the
         Company's  Annual  Report on Form 10-K for the year ended  December 31,
         2003).

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).


                                       50
<PAGE>


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 The  Company'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 The  Company'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 the  Company'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).

10.10    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 the Company'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
         the Company'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 the  Company'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 the  Company'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 the
         Company'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 The Company'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 the Company's  Annual Report on Form 10-K
         for the year ended December 31, 1999).


                                       51
<PAGE>


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 the Company'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 the
         Company'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).

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).


                                       52
<PAGE>


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);
         (incorporated  herein by  reference to Exhibit  10.64 to the  Company's
         Annual Report on Form 10-K for the year ended December 31, 2002).

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);
         (incorporated  herein by  reference to Exhibit  10.65 to the  Company's
         Annual Report on Form 10-K for the year ended December 31, 2002).


                                       53
<PAGE>


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).

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;
         (incorporated  herein by  reference to Exhibit  10.44 to the  Company's
         Annual Report on Form 10-K for the year ended December 31, 2003).

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;  (incorporated herein by
         reference to Exhibit 10.45 to the Company's  Annual Report on Form 10-K
         for the year ended December 31, 2003).

10.46    Avalon Amendment Number 4 of International  Distribution  Agreement, by
         and between  Avalon  Interactive  Group Limited and the Company,  dated
         August 6, 2003;  (incorporated  herein by reference to Exhibit 10.46 to
         the Company's  Annual  Report on Form 10-K for the year ended  December
         31, 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;  (incorporated  herein by  reference  to
         Exhibit 10.47 to the Company's  Annual Report on Form 10-K for the year
         ended December 31, 2003).

10.48    Letter  Agreement  by and between  Majorem Ltd and the  Company,  dated
         December 21, 2004.

14.1     Code of Ethics of the  Company;  (incorporated  herein by  reference to
         Exhibit 14.1 to Amendment No. 1 to the Company's  Annual Report on Form
         10-K for the year ended December 31, 2003).

21.1     Subsidiaries of the Company

23.1     Consent of Squar, Milner LLP, Independent  Registered Public Accounting
         Firm.

23.2     Consent  of  Rose,  Snyder  &  Jacobs,  Independent  Registered  Public
         Accounting Firm.

24.1     Power of Attorney (included on signature page to this 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 by Herve Caen.

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 Registered Public Accounting Firms                    F-2

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets at December 31, 2004 and 2003                    F-4

Consolidated Statements of Operations for the years ended
     December 31, 2004, 2003 and 2002                                        F-5

Consolidated Statements of Stockholder's Equity (Deficit)
     for the years ended December 31, 2004, 2003, 2002                       F-6

Consolidated Statements of Cash Flows for the years ended
     December 31, 2004, 2003 and 2002                                        F-7

Notes to Consolidated Financial Statements                                   F-9

Schedule II - Valuation and Qualifying Accounts                              S-1


                                      F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders
Interplay Entertainment Corp.

     We have audited the  accompanying  consolidated  balance sheet of Interplay
Entertainment Corp. (a majority-owned subsidiary of Titus Interactive S.A.), and
subsidiaries  (the  "Company"),  as  of  December  31,  2004,  and  the  related
consolidated  statement of operations,  shareholders' equity (deficit) and other
comprehensive  income  (loss) and cash flows for the year then ended.  Our audit
also  included the schedule of valuation  and  qualifying  accounts for the year
ended December 31, 2004. These  consolidated  financial  statements and schedule
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 audit.

     We  conducted  our audit in  accordance  with the  standards of the  Public
Company Accounting Oversight Board (United States). 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 audit  provides a  reasonable  basis for our
opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial  position of Interplay
Entertainment Corp. and subsidiaries as of December 31, 2004, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.  Also,
in our  opinion,  the related  financial  statement  schedule for the year ended
December  31,  2004,   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 $17.8 million and a stockholders'
deficit of $17.3  million at December 31, 2004.  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/ Rose, Snyder & Jacobs, A Corporation of Public Accountants

Encino, California
May 31, 2005


                                       F-2
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders
Interplay Entertainment Corp.

     We have audited the  accompanying  consolidated  balance sheet of Interplay
Entertainment Corp. (a majority-owned subsidiary of Titus Interactive S.A.), and
subsidiaries  (the  "Company"),  as  of  December  31,  2003,  and  the  related
consolidated statements of operations,  shareholders' equity (deficit) and other
comprehensive income and cash flows for each of the years in the two year period
then ended. Our audit also included the financial  statement  schedule listed in
the Index at Item  15(a) (2) for the years  ended  December  31,  2003 and 2002.
These consolidated  financial  statements and schedule 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 audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). 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 the results of
their  operations  and  their  cash  flows for each of the years in the two year
period then ended 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,
present 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 $12.7 million at December 31, 2003,  losses from  operations  through
December  31,  2003 and  negative  operating  cash flow for the year then ended.
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-3
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

                                                             DECEMBER 31,
                                                      -------------------------
                       ASSETS                            2004            2003
                                                      ---------       ---------
Current Assets:
     Cash ......................................      $      29       $   1,171
     Restricted Cash ...........................              2            --
     Trade receivables from related parties,
         net of allowances of $2,370 and $691,
         respectively ..........................             10             564
     Trade receivables, net of allowances
         of $36 and $34, respectively ..........            139               6
     Inventories ...............................             26             146
     Prepaid licenses and royalties ............           --               209
     Deposits ..................................           --               600
     Prepaid expenses ..........................           --               673
     Other receivables .........................            137               3
                                                      ---------       ---------
        Total current assets ...................            343           3,372

Property and equipment, net ....................            490           2,114
                                                      ---------       ---------
                                                      $     833       $   5,486
                                                      =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
     Current debt ..............................      $   1,575       $     837
     Accounts payable ..........................          8,772           7,093
     Accrued royalties .........................          3,501           5,067
     Advances from distributors and others .....            883             629
     Advances from related party distributors ..          2,989           2,862
     Deferred Income ...........................            475           1,634
                                                      ---------       ---------
          Total current liabilities ............         18,195          18,122
                                                      =========       =========

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 shares issued and
        outstanding, respectively ..............             94              94
     Paid-in capital ...........................        121,640         121,640
     Accumulated deficit .......................       (139,211)       (134,481)
     Accumulated other comprehensive income ....            115             111
                                                      ---------       ---------
          Total stockholders' equity (deficit)
                                                        (17,362)        (12,636)
                                                      ---------       ---------
                                                      $     833       $   5,486
                                                      =========       =========


                             See accompanying notes.


                                      F-4
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                          --------------------------------------
                                                            2004           2003           2002
                                                          --------       --------       --------
<S>                                                       <C>            <C>            <C>
Net revenues .......................................      $  1,932       $  2,286       $ 15,021
Net revenues from related party distributors .......        11,265         34,015         28,978
                                                          --------       --------       --------
   Total net revenues ..............................        13,197         36,301         43,999
Cost of goods sold .................................         6,826         13,120         26,706
                                                          --------       --------       --------
   Gross profit ....................................         6,371         23,181         17,293
                                                          --------       --------       --------

Operating expenses:
   Marketing and sales .............................         1,703          1,415          5,814
   General and administrative ......................         4,514          6,692          7,655
   Product development .............................         2,636         13,680         16,184
                                                          --------       --------       --------
      Total operating expenses .....................         8,853         21,787         29,653
                                                          --------       --------       --------

      Operating income  (loss) .....................        (2,482)         1,394        (12,360)
                                                          --------       --------       --------

Other income (expense):
   Interest expense
                                                              (249)          (218)        (2,214)
   Gain on sale of Shiny ...........................          --             --           28,813
   Other ...........................................        (1,999)           136            683
                                                          --------       --------       --------
       Total other income (expense) ................        (2,248)           (82)        27,282
                                                          --------       --------       --------

Income (loss) before provision (benefit) for
     income taxes ..................................        (4,730)         1,312         14,922
Provision (benefit) for income taxes ...............          --             --             (225)
                                                          --------       --------       --------

Net income (loss) ..................................      $ (4,730)      $  1,312       $ 15,147
                                                          --------       --------       --------

Cumulative dividend on participating preferred stock      $   --         $   --         $    133
Accretion of warrant ...............................          --             --             --
                                                          --------       --------       --------

Net income (loss) available to common stockholders .      $ (4,730)      $  1,312       $ 15,014
                                                          ========       ========       ========

Net income (loss) per common share:
Basic ..............................................      $  (0.05)      $   0.01       $   0.18
                                                          ========       ========       ========
Diluted ............................................      $  (0.05)      $   0.01       $   0.16
                                                          ========       ========       ========

Weighted average number of shares used in
   calculating net income (loss) per
   common share:
Basic                                                       93,856         93,852         83,585
                                                          ========       ========       ========
Diluted                                                     93,856        104,314         96,070
                                                          ========       ========       ========
</TABLE>


                             See accompanying notes.


                                      F-5
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                         AND COMPRESENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                             (Dollars in thousands)

<CAPTION>


                                                    PREFERRED STOCK                    COMMON STOCK
                                               ---------------------------       --------------------------       PAID-IN
                                                 SHARES           AMOUNT           SHARES          AMOUNT         CAPITAL
                                               ----------       ----------       ----------      ----------      ----------
<S>                                            <C>              <C>              <C>             <C>             <C>
Balance, December 31, 2001 (Unaudited) ..         383,354           11,753       44,995,821              45         110,701
   Issuance of common stock,
      net of issuance costs .............            --               --            721,652               1             208
   Accumulated accrued dividend on
      Series A preferred stock ..........            --                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 ...........................            --               --               --              --              --
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation
            adjustment ..................            --               --               --              --              --

              Comprehensive income ......
                                               ----------       ----------       ----------      ----------      ----------
Balance, December 31, 2002 ..............            --               --         93,849,176              94         121,637
   Issuance of common stock,
      net of issuance costs .............            --               --              6,458            --                 3
   Net Income ...........................            --               --               --              --              --
   Other comprehensive income,
   net of income taxes:
         Foreign currency translation
            adjustment ..................            --               --               --              --              --

              Comprehensive income ......
                                               ----------       ----------       ----------      ----------      ----------
Balance, December 31, 2003 ..............            --         $     --         93,855,634      $       94      $  121,640
                                               ==========       ==========       ==========      ==========      ==========
   Issuance of common stock,
       net of issuance costs ............            --               --               --              --              --
   Net Income ...........................            --               --               --              --              --
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation
            adjustment ..................            --               --               --              --              --

           Other comprehensive income ...            --               --               --              --              --

              Comprehensive income ......
                                               ----------       ----------       ----------      ----------      ----------
Balance, December 31, 2004 ..............            --         $     --         93,855,634      $       94      $  121,640
                                               ==========       ==========       ==========      ==========      ==========


<CAPTION>
                                                                  OTHER            OTHER
                                               ACCUMULATED    COMPREHENSIVE     COMPREHENSIVE
                                                DEFICIT        INCOME (LOSS)    INCOME (LOSS)       TOTAL
                                               ----------       ----------       ----------      ----------
<S>                                            <C>              <C>              <C>             <C>
Balance, December 31, 2001 (Unaudited) ..        (150,807)             158                          (28,150)
   Issuance of common stock,
      net of issuance costs .............            --               --                                209
   Accumulated accrued dividend on
      Series A preferred stock ..........            (133)            --                               --
   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          15,147
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation
            adjustment ..................            --                (26)             (26)            (26)
                                                                                 ----------
              Comprehensive income ......                                            15,121
                                               ----------       ----------       ==========      ----------
Balance, December 31, 2002 ..............        (135,793)             132                         (13,930)
   Issuance of common stock,
      net of issuance costs .............            --               --                                  3
   Net Income ...........................           1,312             --              1,312           1,312
   Other comprehensive income,
   net of income taxes:
         Foreign currency translation
            adjustment ..................            --                (21)             (21)            (21)
                                                                                 ----------
              Comprehensive income ......                                        $    1,291
                                               ----------       ----------       ==========      ----------
Balance, December 31, 2003 ..............      $ (134,481)      $      111                       $  (12,636)
                                               ==========       ==========                       ==========
   Issuance of common stock,
       net of issuance costs ............            --               --                                 --
   Net Income ...........................          (4,730)            --               --            (4,730)
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation
            adjustment ..................            --                  4             --                 4
                                                                                 ----------
           Other comprehensive income ...            --                                                  --
                                                                                 ----------
              Comprehensive income ......                                        $     --
                                               ----------       ----------       ==========      ----------
Balance, December 31, 2004 ..............      $ (139,211)      $      115                       $  (17,362)
                                               ==========       ==========                       ==========
</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,
                                                                      --------------------------------------
                                                                        2004           2003           2002
                                                                      --------       --------       --------
<S>                                                                   <C>            <C>            <C>
Cash flows from operating activities:
   Net income (loss) ...........................................      $ (4,730)      $  1,312       $ 15,147
   Adjustments to reconcile net income (loss) to
      cash provided by (used in) operating activities--
      Depreciation and amortization ............................           734          1,353          1,671
      Noncash expense for stock compensation ...................          --             --              238
      Deposit ..................................................           600           --             --
      Noncash interest expense .................................          --                6          1,860
      Amortization of prepaid licenses and royalties ...........          --            5,163          5,095
      Writeoff of prepaid licenses and royalties ...............           209          2,857          4,100
      Gain on sale of Shiny ....................................          --             --          (28,813)
      Other ....................................................          --              (21)           (26)
      Changes in assets and liabilities:
         Trade receivables, net ................................          (133)           164          3,139
         Trade receivables from related parties ................           554          1,942          3,669
         Inventories ...........................................           120          1,883          1,949
         Prepaid licenses and royalties ........................          --           (3,100)        (5,628)
         Prepaid expenses ......................................           673           --             --
         Loss on sale of assets ................................            28           --             --
         Loss on abandonment of assets .........................           862           --             --
         Other current assets/receivables ......................          (134)           (76)           (51)
         Accounts payable ......................................         1,704         (2,148)        (5,777)
         Accrued current debt ..................................          --              292         (2,887)
         Accrued royalties .....................................        (1,566)          --             --
         Other accrued liabilities .............................          --           (1,039)        (1,806)
         Payables to related parties ...........................          --           (5,806)          (887)
         Advances from distributors and others .................          --             (160)       (19,201)
         Advances - Vivendi ....................................           996           --             --
         Deferred revenue - Vivendi ............................         1,385           --             --
         Deferred income .......................................        (1,923)          --             --
         Accumulated other comprehensive income ................             4           --             --
                                                                      --------       --------       --------
             Net cash provided by (used in) operating activities          (617)         2,622        (28,208)
                                                                      --------       --------       --------

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

Cash flows from financing activities:
   Net borrowings (payments) on line of credit .................          --             --           (1,576)
   (Repayment) borrowings from former Chairman .................          --             --           (3,218)
   Net proceeds from issuance of common stock ..................          --                3              4
   Repayment of note payable ...................................          --           (1,251)          --
   Repayment of debt ...........................................            61           --             --
   Proceeds from debt ..........................................          (586)          --             --
   Proceeds from exercise of stock options .....................          --             --               86
   Other financing activities ..................................          --             --             --
                                                                      --------       --------       --------
         Net cash used in financing activities .................          (525)        (1,248)        (4,704)
                                                                      --------       --------       --------
Net increase (decrease) in cash ................................        (1,142)         1,037             15
Cash, beginning of year ........................................         1,171            134            119
                                                                      --------       --------       --------
Cash, end of year ..............................................      $     29       $  1,171       $    134
                                                                      ========       ========       ========
</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,
                                                                            ------------------------------
                                                                             2004        2003        2002
                                                                            ------      ------      ------
<S>                                                                         <C>         <C>         <C>
Supplemental cash flow information:
    Cash paid during the year for interest ...........................      $ --        $  212      $  344

Suplemental disclosure of non-cash investing and financing activities:
    Dividend payable on partial conversion of preferred stock ........        --          --         1,229
    Accrued dividend on participating preferred stock ................        --          --           133
    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, 2004


1.   DESCRIPTION OF BUSINESS AND OPERATIONS

     Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(the  "Company"),  develop,  publish and license out  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, 2004,  Titus  Interactive,  S.A.  ("Titus"),  a  France-based
developer,  publisher and  distributor  of interactive  entertainment  software,
owned 62% of the Company's common stock. The Company's common stock is quoted on
the NASDAQ OTC  Bulletin  Board under the symbol  "IPLY" or while  non-compliant
"IPLYE".

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 a net operating loss of $4.7 million
in 2004. Also at December 31, 2004, the Company had a  stockholders'  deficit of
$17.4 million and a working  capital  deficit of $17.3 million.  The Company has
historically funded its operations  primarily through the use of lines of credit
(although the Company has not had the  availability  of such lines since October
2001), licensing fees, 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.
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
licensed to Bethesda  Softworks LLC ("Bethesda") the rights to develop Fallout 3
on all  platforms  for a non  refundable  advance  against  royalties  of $1.175
million and sold the Redneck Rampage intellectual property rights to Vivendi for
$300,000.

     The  Company  anticipates  its  current  cash  reserves  plus its  expected
generation of cash from existing operations, will only be sufficient to fund its
anticipated  expenditures into the second quarter of fiscal 2005.  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

     The Company has a total of 150,000,000 authorized shares of common stock.


                                      F-9
<PAGE>


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.  All  significant
inter-company 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,  allowances for  uncollectible  receivables,  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.

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 at  December  31, 2004 and 2003 of  approximately  $0 and
$30,000 respectively.

     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


                                      F-10
<PAGE>


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 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.  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


                                      F-11
<PAGE>


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,  2004,  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. 104,  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,  2004,  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 and $0.4 million at December 31, 2004 and 2003,  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, and $0.1 million
for the years  ended  December  31,  2004,  2003 and 2002,  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.


                                      F-12
<PAGE>


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  $1.2  million,  $0.6  million and $3.0 million for the years ended
December 31, 2004, 2003 and 2002, 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 $33,000 loss,  $58,000 gain and $104,000 loss during
the years ended December 31, 2004, 2003 and 2002, 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 common  shares  outstanding  plus the effect of any
convertible  debt,  dilutive  stock options and common stock  warrants.  For the
years  ended  December  31,  2004,  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.

     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).

     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.  Accounts  receivable are written
off when all collection attempts have failed.

     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.


                                      F-13
<PAGE>


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
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, 2004, 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
$0 for the years ended  December  31,  2004,  2003 and 2002,  respectively.  The
following  table  illustrates  the effect on net income and  earnings 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.

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                                 --------------------------------------
                                                                    2004          2003          2002
                                                                 ----------    ----------    ----------
                                                                      (Dollars in thousands, except
                                                                            per share amounts)
<S>                                                              <C>           <C>           <C>
Net income (loss) available to common stockholders, as reported  $   (4,730)   $    1,404    $   15,014
Pro forma estimated fair value compensation expense ...........        --            (177)         (232)
                                                                 ----------    ----------    ----------
Pro forma net income (loss) available to common stockholders ..  $   (4,730)   $    1,227    $   14,782
                                                                 ==========    ==========    ==========
Basic net income (loss) per common share as reported ..........  $    (0.05)   $     0.01    $     0.18
Diluted net income (loss) per common share as reported ........  $    (0.05)   $     0.01    $     0.16
Basic pro forma net income (loss) per common share ............  $    (0.05)   $     0.01    $     0.16
Diluted pro forma net income (loss) per common share ..........  $    (0.05)   $     0.01    $     0.15
</TABLE>


                                      F-14
<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs -
An  Amendment  of ARB No. 43,  Chapter 4." This new  standard is the result of a
broader  effort  by the  FASB to  improve  financial  reporting  by  eliminating
differences  between Generally Accepted  Accounting  Principles  ("GAAP") in the
United  States  and  accounting   principles   developed  by  the  International
Accounting  Standards Board ("IASB").  As part of this effort,  the FASB and the
IASB  identified  opportunities  to improve  financial  reporting by eliminating
certain narrow differences between their existing accounting standards. SFAS No.
151 clarifies that abnormal amounts of idle facility  expense,  freight handling
costs and  spoilage  costs  should be expensed as incurred  and not  included in
overhead.  Further,  SFAS No. 151 requires that  allocation of fixed  production
overheads  to  conversion  costs  should  be based  on  normal  capacity  of the
production  facilities.  The  provisions  in  SFAS  No.  151 are  effective  for
inventory  costs  incurred  during fiscal years  beginning  after June 15, 2005.
Companies must apply the standard prospectively.  Management does not expect the
adoption of SFAS No. 151 to have a material  impact on the  Company's  financial
position, results of operations or cash flows.

     In December 2004, the FASB issued SFAS No. 123R,  "Share Based  Payment," a
revision to SFAS 123, "Accounting for Stock-Based  Compensation," and supersedes
APB Opinion No. 25,  "Accounting for Stock Issued to Employees," and its related
implementation  guidance. SFAS No. 123R establishes standards for the accounting
for transactions in which an entity exchanges instruments for goods or services.
It also addresses transactions in which an entity incurs liabilities in exchange
for goods or services  that are based on the fair value of the  entity's  equity
instruments or that may be settled by the issuance of those equity  instruments.
SFAS 123R  established  the accounting  treatment for  transactions  in which an
entity obtains employee services in share-based payment transactions.  SFAS 123R
requires  companies to recognize in the statement of operations  the  grant-date
fair  value of stock  options  and  other  equity-based  compensation  issued to
employees.  SFAS 123R requires the Company to value the share-based compensation
based on the  classification of the share-based  award. If the share-based award
is to be classified  as a liability,  the Company must  re-measure  the award at
each balance sheet date until the award is settled.  If the share-based award is
to be  classified  as  equity,  the  Company  will  measure  the  value  of  the
share-based  award on the date of grant but the award will not be re-measured at
each balance sheet date.  SFAS 123R does not change the accounting  guidance for
share-based  payment  transactions with parties other than employees provided in
SFAS 123 as originally  issued and EITF Issue No. 96-18,  "Accounting for Equity
Instruments  that are  Issued  to Other  than  Employees  for  Acquiring,  or in
Conjunction with Selling,  Goods or Services." SFAS 123R is effective for public
companies with calendar year ends no later than the beginning of the next fiscal
year. All public companies must use either the modified  prospective or modified
retrospective  transition method. Under the modified prospective method,  awards
that are  granted,  modified,  or settled  after the date of adoption  should be
measured  and  accounted  for in  accordance  with SFAS  123R.  Unvested  equity
classified  awards that were granted prior to the effective date should continue
to be accounted  for in  accordance  to SFAS 123 except that the amounts must be
recognized  in the  statement of  operations.  Under the modified  retrospective
method, the previously reported amounts are restated (either to the beginning of
the year of adoption or for all periods  presented)  to reflect SFAS 123 amounts
in the statement of operations.  Management is in the process of determining the
effect SFAS 123R will have upon the Company's  financial  position and statement
of operations and the method of transition adoption.

     Other recent  accounting  pronouncements  issued by the FASB (including its
Emerging  Issues  Task  Force),  the  American  Institute  of  Certified  Public
Accountants  and  the  Securities  and  Exchange  Commission  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


                                      F-15
<PAGE>


delivery of the two titles to the Company.  At December  31,  2001,  the Company
owed the former  owner of Shiny  $200,000  related to this  amendment,  which is
recorded under accounts payable in the accompanying consolidated balance sheets.

     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.

     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.


                                      F-16
<PAGE>


4.   DETAIL OF SELECTED BALANCE SHEET ACCOUNTS

PREPAID LICENSES AND ROYALTIES

     Prepaid licenses and royalties consist of the following:

                                                           DECEMBER 31,
                                                        -----------------
                                                         2004       2003
                                                        ------     ------
                                                      (Dollars in thousands)
Prepaid royalties for titles in development ..          $ --       $  100
Prepaid royalties for shipped titles .........            --         --
Prepaid licenses and trademarks ..............            --          109
                                                        ------     ------
                                                        $ --       $  209
                                                        ======     ======


     Amortization of prepaid licenses and royalties is included in cost of goods
sold and totaled $2, $5.2 million and $5.7 million for the years ended  December
31, 2004, 2003 and 2002, respectively.

     During the years  ended  December  31,  2004,  2003 and 2002,  the  Company
wrote-off $.2 million, $2.9 million and $4.1 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.

PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

                                                              DECEMBER 31,
                                                       ------------------------
                                                         2004             2003
                                                       -------          -------
                                                        (Dollars in thousands)
Computers and equipment ......................         $ 1,463          $ 6,071
Furniture and fixtures .......................               8               48
Leasehold improvements .......................            --                102
                                                       -------          -------
                                                         1,471            6,221
Less: Accumulated depreciation
   and amortization ..........................            (981)          (4,107)
                                                       -------          -------
                                                       $   490          $ 2,114
                                                       =======          =======


     For the years ended December 31, 2004, 2003 and 2002, the Company  incurred
depreciation  and  amortization  expense of $.8  million,  $1.4 million and $1.7
million, respectively.  During the years ended December 31, 2004, 2003 and 2002,
the Company disposed of fully  depreciated  equipment having an original cost of
$4.7 million, $4.6 and $0 million,  respectively.  Disposition of assets in 2004
generated a loss of $.9 million.

5.   PROMISSORY NOTES

     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  30day  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


                                      F-17
<PAGE>


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, 2004,  the balance  owed to Warner,  including  accrued
interest,  is $0.34  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 $0.34 million payable in one remaining installment.

     The Company issued to Atari  Interactive,  Inc. ("Atari") a Promissory Note
bearing no interest,  due December 31,  2006,  in the  principal  amount of $2.0
million in connection  with Atari  entering into tri-party  agreements  with the
Company and its main  distributors,  Vivendi and Avalon.  The note was issued in
payment of all  outstanding  accrued  royalties  due Atari under the D&D license
agreement  which license was  terminated by Atari on April 23, 2004. At December
31,  2004,  the balance  owed to Atari,  is $1.3 million as a result of payments
made by Vivendi and Avalon on the Company's behalf to Atari.

6.   ADVANCES FROM DISTRIBUTORS, RELATED PARTIES AND OTHERS

     Advances from distributors and OEMs consist of the following:

                                                                DECEMBER 31,
                                                           ---------------------
                                                            2004          2003
                                                           ------        -------
                                                          (Dollars in thousands)
Advances for other distribution rights .............       $  476        $  629
                                                           ======        ======

Net advance from Vivendi distribution
   agreement (related party) .......................       $2,989        $2,862
                                                           ======        ======


     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


                                      F-18
<PAGE>


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  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, 2004,  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 2004, 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, 2004, approximately $0.2 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


                                      F-19
<PAGE>


2002, the Company sold the publishing rights to this title to the distributor in
connection  with a  settlement  agreement  entered  into  with the  thrid  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 $0.6  million in the year ended  December
31, 2002.

7.   INCOME TAXES

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

                                             YEARS ENDED DECEMBER 31,
                                  ----------------------------------------------
                                    2004               2003                2002
                                  -------             -------            -------
                                              (Dollars in thousands)
Domestic .............            $(4,574)            $ 1,289            $14,922
Foreign ..............                 (3)                 23               --
                                  -------             -------            -------
Total ................            $(4,577)            $ 1,312            $14,922
                                  =======             =======            =======


     The provision for income taxes is comprised of the following:

                                              YEARS ENDED DECEMBER 31,
                                     ------------------------------------------
                                      2004              2003              2002
                                     ------            ------            ------
                                               (Dollars in thousands)
Current:
   Federal ...............           $ --              $ --              $ (225)
   State .................             --                --                --
   Foreign ...............             --                --                --
                                     ------            ------            ------
                                       --                --                (225)
Deferred:
   Federal ...............             --                --                --
   State .................             --                --                --
                                     ------            ------            ------
                                       --                --                --
                                     ------            ------            ------
                                     $ --              $ --              $ (225)
                                     ======            ======            ======


     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 $135 million and expires through the year 2023.
The Company's NOL's for State tax reporting purposes approximate $70 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.

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


                                      F-20
<PAGE>


                                             2004         2003          2002
                                            ------       ------        ------
Statutory income tax rate .............       34.0 %       34.0 %        34.0 %
State and local income taxes, net of
   Federal income tax benefit .........       --           --             2.0
   Valuation allowance ................      (39.5)       (39.5)        (36.0)
Other .................................                     5.5           5.5
                                                                         (1.5)
                                            ------       ------        ------
                                              --   %       --   %        (1.5)%
                                            ======       ======        ======


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

                                                                DECEMBER 31,
                                                          ---------------------
                                                            2004         2003
                                                          --------     --------
                                                          (Dollars in thousands)
Current deferred tax asset (liability):
     Prepaid royalties ...............................    $   --       $ (1,343)
     Nondeductible reserves ..........................         938        1,843
     Reserve for advances ............................        (789)      (1,685)
     Accrued expenses ................................         870        1,089
     Foreign loss and credit carryforward ............       2,556        2,556
     Federal and state net operating losses ..........      51,753       49,735
     Research and development credit carryforward ....       2,374        2,374
     Other ...........................................        --           (119)
                                                          --------     --------
                                                            57,712       54,450
                                                          --------     --------

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

Net deferred tax asset before
     valuation allowance .............................      57,712       54,334
Valuation allowance ..................................     (57,712)     (54,334)
                                                          --------     --------
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 increased
$3.4  million  during the year  ending  December  31, 2004 and  decreased  $0.05
million during the year ending December 31, 2003.

8.   COMMITMENTS AND CONTINGENCIES

ATARI TERMINATION

     On or about February 23, 2004,  the Company  received  correspondence  from
Atari Interactive, Inc, the holder of the D&D license, alleging that the Company
had failed to pay  royalties  due under the D&D license as of February 15, 2004.
The company's rights to distribute  titles under the D&D license were terminated
by Atari on April 23, 2004.


                                      F-21
<PAGE>


     In July 2004, we entered into a tri-party agreement with Atari Interactive,
Inc and Vivendi that allows Vivendi to resume North  American and  international
distribution  pursuant  to  their  pre-existing  agreements  with us of  certain
Dungeons  & Dragons  games,  including  Baldur's  Gate  Dark  Alliance  II.  The
agreement  provided for proceeds due us to be paid directly to Atari by Vivendi,
up to an amount of $1.0  million of which  approximately  $.3  million was still
oustanding  as of December 31, 2004. As a result we did not receive any proceeds
from  Vivendi  since July 2004 and will most  likely not  receive  any  proceeds
during 2005.

     In  August  2004,  we  entered  into  a  tri-party   agreement  with  Atari
Interactive,  Inc and Avalon that allows Avalon to resume European  distribution
pursuant to their pre-existing  agreements with us of certain Dungeons & Dragons
games,  including  Baldur's Gate Dark  Alliance II. The  agreement  provided for
proceeds due us to be paid  directly to Atari by Avalon,  as a result we did not
receive any proceeds from this agreement in 2004.  This agreement was terminated
following Avalon's liquidation in February 2005.

PAYROLL TAXES

     At December 31, 2004,  the Company had accrued  approximately  $117,000 for
past due interest and  penalties on the late payment of federal  payroll  taxes.
The Company owes approximately  $20,000 in past due Federal payroll taxes. As of
December 31, 2004, the Company owes  approximately  $101,000 in past due payroll
tax principal,  penalties,  or interest to the State of California.  The Company
owes approximately $64,000 in State Use tax. The Company also owes approximately
$28,000 in property tax.

INSURANCE

     The Company's  property,  general liability,  auto,  workers  compensation,
fiduciary liability,  Directors and Officers, and employment practices liability
have been  cancelled  during the year ending  December 31, 2004.  The Company is
current on its workers comp and employee health insurance premiums.

LEASES

     The Company has a month to month rental  agreement  for the office space it
occupies including its corporate offices in Irvine, California.

     Total rent expense was $.4 million,  $1.8 million, and $2.1 million for the
years ended December 31, 2004, 2003 and 2002, respectively.

     The company's  headquarters  were located in Irvine,  California  where the
Company  leased  approximately  81,000 square feet of office  space.  This lease
would have  expired in June  2006.  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.  The Company was unable to
satisfy this  obligation and reach an agreement  with its landlord,  the Company
subsequently forfeited its lease and vacated the building. Arden Realty obtained
a judgment for approximately  $588,000  exclusive of interest.  The Company also
owes an additional  approximately  $149,000  making a total owed to Arden by the
Company  of  approximately   $737,000.  The  Company  negotiated  a  forbearance
agreement whereby Arden has agreed to accept payments commencing in January 2005
in the amount of $60,000 per month  until the full  amount is paid.  The Company
has been  unable to make any of the  $60,000  per month  payments.  The  Company
signed a monthly rental  agreement  beginning in August 2004 at 1682 Langley Ave
in Irvine, CA for its operations.  The monthly payments are approximately $1,300
per month.

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


                                      F-22
<PAGE>


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.  GOL
counterclaimed  against KBK for breach of  contract as KBK owes GOL  $700,000 in
guaranteed  advanced  fees under the term of the  agreement.  In  addition,  the
Company filed an action against Atari  Interactive for breach  indemnity,  among
other claims. In October 2004, the California Superior court dismissed the legal
action of KBK against the Company and its  subsidiary GOL and granted a judgment
to GOL in the cross  complaint from GOL against KBK for $890,730.  GOL dismissed
its action against Atari Interactive in April 2005.

     On  October  24,  2002,  Synnex  Information  Technologies  Inc  ("Synnex")
initiated  legal  proceedings  against  the  company  for  various  claims.  The
Company's  attorney's have filed and obtained a motion to be relieved as counsel
on August 10, 2004. The company has not yet retained replacement counsel in this
action.

     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. Special  Situations had entered into a settlement  agreement with
the Company contemplating payments over time. We are currently in default of the
settlement agreement.

     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,  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 $0.34 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. The Company was unable to pay the rent, and vacated the office
space during the month of June 2004. On June 3, 2004,  Arden obtained a judgment
of approximately  $588,000 exclusive of interest.  In addition the Company is in
the  process of  resolving a prior  claim with the  landlord in the  approximate
amount of  $148,000,  exclusive  of  interest.  The  Company  has  negotiated  a
forbearance  agreement whereby Arden has agreed to accept payments commencing in
January  2005 in the amount of $60,000  per month until the full amount is paid.
The  Company  has not accrued  any amount for any  remaining  lease  obligation,
should  such  obligation  exist.  The  Company  is  currently  in default of the
forbearance agreement.

     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 obtained a writ of attachment to secure  payment of the
alleged  obligation  if it is  successful  at trial.  Bioware  also  sought  and
obtained a temporary restraining order prohibiting the Company from transferring
assets  up to  the  amount  sought  in  the  writ  of  attachment.  The  Company
successfully  opposed the  preliminary  injunction  and  vacated  the  temporary
restraining order. Bioware subsequently dismissed their action.

     Monte Cristo Multimedia, a French video game developer and publisher, filed
a breach of contract complaint against the Company in the Superior Court for the
State of California,  County of Orange,  on August 6, 2002,  alleging damages in
the  amount  of  $886,406  plus  interest,   in  connection  with  an  exclusive
distribution agreement.  This claim was settled for $100,000,  payable in twelve
installments, however, the Company was unable to satisfy its payment obligations
and


                                      F-23
<PAGE>


consequently,  Monte Cristo has filed a stipulated  judgment against the Company
in the amount of  $100,000.  If Monte  Cristo  executes  the  judgment,  it will
negatively  affect the Company's  cash flow,  which could  further  restrict the
Company's operations and cause material harm to its business.

     Snowblind  entered  into a partial  settlement  agreement  on June 23, 2004
following  the suit filed by Snowblind on November 19, 2003.  Snowblind  filed a
second amended  complaint against the Company on or about July 12, 2004 claiming
various  causes of action  including  but not  limited to,  breach of  contract,
account  stated,  open book account,  and  recission.  The action was settled in
April 2005 and the Company  granted  Snowblind the exclusive  license to develop
games using the DARK ALLIANCE  Trademark under certain  conditions.  The Company
retained the right to develop massively  multiplayer online games using the DARK
ALLIANCE trademark.

     In August 2003, Reflexive  Entertainment,  Inc. filed an action against the
Company in the Orange County  Superior  Court that was settled in July 2004. The
Company  was unable to make the  payments  and  Reflexive  sought  and  obtained
judgment against the company.

     On March 27, 2003, KDG France SAS ("KDG") filed an action against Interplay
OEM, Inc. and Herve Caen for various  claims.  On December 29, 2003 a settlement
agreement  was entered into whereby  Herve Caen was  dismissed  from the action.
Further the settlement was entered into with Interplay OEM only in the amount of
$170,000,  however KDG reserved its rights to proceed against the Company if the
settlement  payment was not made. As of this date the settlement payment was not
made.

     The Company  received notice from the Internal Revenue Service ("IRS") that
it owes approximately  $90,000 in payroll tax penalties which it has accrued for
at December 31, 2004. The Company has requested the abatement by the IRS of such
penalties.

     The Company was unable to meet  certain  2004  payroll  obligations  to its
employees,  as a  result  several  employees  filed  claims  with  the  State of
California  Labor Board ("Labor  Board").  The Labor Board has fined the Company
approximately  $10,000 for failure to meet its payroll obligations and set trial
dates for August 2005.

     The Company's  property,  general  liability,  auto,  fiduciary  liability,
workers compensation and employment  practices  liability,  have been cancelled.
The Company subsequently entered into a new workers compensation insurance plan.
The Labor Board fined the Company  approximately $79,000 for having lost workers
compensation  insurance for a period of time. The Company is appealing the Labor
Board fines.

     On December 29, 2004,  Piper Rudnick LLP ("Piper  Rudnick") filed an action
against  Interplay  Entertainment  Corp. for various claims for unpaid services.
The Company is currently evaluating the merit of this lawsuit.

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, 2004, there were no shares of preferred stock outstanding.

     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


                                      F-24
<PAGE>


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 years ended  December 31, 2004,  2003, and 2002,
the  Company   accrued  a  provision  of  $0,  $0  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, 2004 and 2003 is $3.1 million and $3.1 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 62% of the
total voting power of the Company's  capital  stock at December 31, 2004.  There
were no accrued dividends as of December 31, 2004.

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  for  issuance  under  the  plan,
approximately  84,877  shares  remained  available  for issuance at December 31,
2003.  Employees purchased zero, 6,458, and 21,652 shares in 2004, 2003 and 2002
for $0, $323 and $4,000, respectively.  In 2003 the employee stock purchase plan
was terminated.


                                      F-25
<PAGE>


SHARES RESERVED FOR FUTURE ISSUANCE

     Common  stock  reserved  for future  issuance  at  December  31, 2004 is as
follows:

Stock option plans:
       Outstanding ........................................              211,150
       Available for future grants ........................            7,829,282
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.

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                                 -------------------------------
                                                                   2004        2003       2002
                                                                 --------    --------   --------
                                                                       (Amounts in thousands,
                                                                     except per share amounts)
<S>                                                              <C>         <C>        <C>
Net income (loss) available to common stockholders ...........   $ (4,730)   $  1,312   $ 15,014
   Interest related to conversion of secured convertible
      promissory note ........................................       --            92         82
                                                                 --------    --------   --------
   Dilutive net income (loss) available to common stockholders   $ (4,730)   $  1,404   $ 15,096
                                                                 --------    --------   --------
Shares used to compute net income (loss) per common share:

   Weighted-average common shares ............................     93,856      93,852     83,585

   Dilutive stock equivalents ................................       --        10,462     12,485
                                                                 --------    --------   --------
   Dilutive potential common shares ..........................     93,856     104,314     96,070
                                                                 ========    ========   ========
Net income (loss) per common share:
   Basic .....................................................   $  (0.05)   $   0.01   $   0.18
   Diluted ...................................................   $  (0.05)   $   0.01   $   0.16
</TABLE>

     There were options and warrants outstanding to purchase 9,798,218 shares of
common  stock at December 31, 2004,  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,
2004, which the Company utilized the "if converted" method pursuant to SFAS 128.

     Due to the net loss attributable for the year ended December 31, 2004, 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, 2004,  an  additional  13,694,739  shares would have been added to
dilutive  potential  common  shares.  The  weighted  average  exercise  price at
December 31, 2004, 2003 and 2002 was $1.84, $1.84 and $1.99,  respectively,  for
the options and warrants outstanding.

     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.


                                      F-26
<PAGE>


<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                         ----------------------------------------------------------------------------------
                                    2004                         2003                         2002
                         ---------------------------- ---------------------------- ------------------------
                                           WEIGHTED                      WEIGHTED                  WEIGHTED
                                           AVERAGE                        AVERAGE                   AVERAGE
                                           EXERCISE                      EXERCISE                  EXERCISE
                            SHARES          PRICE         SHARES           PRICE       SHARES        PRICE
                         ---------------------------- ---------------------------- -------------  ---------
<S>                         <C>               <C>         <C>               <C>       <C>             <C>
Warrants outstanding at
  beginning of year         9,587,068         $1.84       9,687,068         $1.99     9,687,068       $1.99
   Granted                      --              --            --              --          --            --
   Exercised                    --              --            --              --          --            --
   Canceled                     --              --        (100,000)          4.50         --            --
                         -------------                --------------               -------------
Warrants outstanding
   at end of year           9,587,068         $1.84       9,587,068         $1.84     9,687,068       $1.99
                         =============                ==============               =============
Warrants exercisable        9,587,068                     9,587,068                   9,187,068
                         =============                ==============               =============
</TABLE>


     There were no warrants granted in 2004, 2003, and 2002 respectively.

     A detail of the warrants  outstanding  and  exercisable  as of December 31,
2004 is as follows:

                                          WARRANTS OUTSTANDING AND EXERCISABLE
                                          -------------------------------------
                                                        WEIGHTED
                                                         AVERAGE      WEIGHTED
                                                        REMAINING      AVERAGE
                                           NUMBER        CONTRACT     EXERCISE
RANGE OF EXERCISE PRICES                 OUTSTANDING      LIFE          PRICE
--------------------------------          ---------     ---------     ---------
$1.56 - $1.56 ..................            500,000          2.50     $    1.56
$1.75 - $1.75 ..................          8,626,770          1.47          1.75
$3.79 - $3.79 ..................            460,298          5.29          3.79
$3.00 - $6.00
                                          ---------     ---------     ---------
$1.56 - $6.00 ..................          9,587,068          3.09     $    1.84
                                          =========     =========     =========


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.

     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 $0 for the years ended December 31, 2004, 2003 and
2002, respectively.


                                      F-27
<PAGE>


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


<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                         ----------------------------------------------------------------------------------
                                    2004                         2003                         2002
                         ---------------------------- ---------------------------- ------------------------
                                           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           425,985         $1.95      1,091,697        $3.10      4,007,969      $2.57
   Granted                      5,000          0.08        130,000         0.09            --          --
   Exercised                     --             --            --            --        (639,541)      0.14
   Canceled                  (219,835)         1.85       (795,712)        3.22     (2,276,731)      3.44
                         ------------                 ------------                 -----------
Options outstanding
  at end of year              211,150         $2.02        425,985        $1.95      1,091,697      $3.10
                         ============                 ============                 ===========
   Options exercisable        171,686                      243,890                     744,892
                         ============                 ============                 ===========
</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 5,000 and 130,000 options granted
in 2004 and 2003, respectively. The 2004 grants of stock options were granted to
a member of the Board of Directors at the time and have since been canceled.


                                                        YEAR ENDED DECEMBER 31,
                                                       -----------------------
                                                         2004           2003
                                                       --------       --------
Risk free rate .................................           4.0%           4.0%
Expected life ..................................            10        7.2 years
Expected volatility ............................           160%           164%
Expected dividends .............................          --             --
Weighted- average grant-date fair value
   of options granted ..........................       $   0.08       $   0.09



     A detail of the options outstanding and exercisable as of December 31, 2004
is as follows:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                            --------------------------------      --------------------
                                         WEIGHTED
                                         AVERAGE      WEIGHTED                 WEIGHTED
                                         REMAINING    AVERAGE                  AVERAGE
RANGE OF EXERCISE           NUMBER       CONTRACT     EXERCISE    NUMBER       EXERCISE
     PRICES               OUTSTANDING      LIFE        PRICE    OUTSTANDING     PRICE
----------------------      -------      -------      -------     -------      -------
<C>                          <C>            <C>       <C>          <C>         <C>
$0.09 - $0.09 ........       70,000         8.86      $  0.09      43,336      $  0.09

$0.68 - $2.69 ........      100,500         5.23         2.06      89,700         2.22

$3.25 - $4.94 ........       28,500         4.81         4.02      26,500         4.06

$8.00 - $8.00 ........       12,150         1.91         8.00      12,150         8.00
                            -------      -------      -------     -------      -------
$0.09 - $8.00 ........      211,150         6.19      $  2.02     171,686      $  2.37
                            =======      =======      =======     =======      =======
</TABLE>


                                      F-28
<PAGE>


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,  2004,  2003 and 2002 was  $29,000,
$150,000 and $79,000, respectively. The 401(k) plan was cancelled during 2004.

12.  RELATED PARTY TRANSACTIONS

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

                                                           DECEMBER 31,
                                                 ------------------------------
                                                     2004              2003
                                                 ------------      ------------
                                                    (Dollars in thousands)
Receivables from related parties:
        Titus TSC .....................          $        327      $        313
        Titus KK ......................                  --        $          6
        Titus SARL ....................                    18                43
        VIE Acquisition group .........                    10              --
        Avalon ........................                 2,025               893
        Less Reserves .................                (2,370)             (691)
                                                 ------------      ------------
        Total .........................          $         10      $        564
                                                 ============      ============

Payables to related parties:
        Vivendi .......................          $       --        $      1,634
                                                 ------------      ------------
        Total .........................          $       --        $      1,634
                                                 ============      ============


ACTIVITIES WITH RELATED PARTIES

     It is the  Company's  policy  that  related  party  transactions  shall  be
reviewed and approved by a majority of the Company's  disinterested directors or
its Independent Committee.

     The Company's operations involve significant transactions with its majority
stockholder  Titus and its  affiliates.  The  Company  has a major  distribution
agreement with Avalon, an affiliate of Titus.

TRANSACTIONS WITH TITUS

      Titus  presently  owns  approximately  58 million shares of Company common
stock,  which represents  approximately 62% of the Company's  outstanding common
stock, its only voting security.

     The Company performed certain distribution  services on behalf of Titus for
a fee. In connection with such distribution services, the Company recognized fee
income of $0, $5,000,  and $22,000 for the years ended December 31, 2004,  2003,
and 2002.

     As of December 31, 2004 and December  31,  2003,  Titus and its  affiliates
excluding  Avalon owed the Company  $370,000  and  $362,000,  respectively.  The
Company  owed Titus and its  affiliates  excluding  Avalon  $30,000 and $0 as of
December 31, 2004 and December 31, 2003 respectively.


                                      F-29
<PAGE>


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 its  behalf.  In  connection  with  the  International
Distribution Agreement with Avalon, the Company incurred distribution commission
expense of $62,000 and $.9 million, and $.9 million, for the twelve months ended
December  31,  2004,  2003,  and 2002  respectively.  In  addition,  the Company
recognized  overhead  fees of $0, $0 and $.5 million for the twelve months ended
December 31, 2004,  2003, and 2002  respectively.  Also in connection  with this
International  Distribution  Agreement,  the Company subleased office space from
Avalon.  Rent expense paid to Avalon was $0,  $27,000 and $104,000 for the years
ended  December 31, 2004,  2003,  and 2002.  This  agreement was terminated as a
result of Avalon's liquidation in February 2005.

TRANSACTIONS WITH TITUS SOFTWARE

     In March  2003,  the  Company  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,
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,  2004 was  approximately
$254,000.  The total  receivable  due from TSC is  approximately  $327,000 as of
December  31,  2004.  The  majority  of the  additional  $73,000  was due to TSC
subletting office space and miscellaneous other items.

     In May 2003, the Company paid TSC $60,000 to cover legal fees in connection
with a lawsuit  against  Titus.  As a result of the payment,  the  Company's CEO
requested  that the Company credit the $60,000 to amounts it owed to him arising
from expenses incurred in connection with providing services to the Company. 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
regard 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's  Board 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, 2004 the Company
had a zero balance with Titus Japan.  During the twelve months  ending  December
31,  2004 the  Company's  Japan  subsidiary  paid to Titus  Japan  approximately
$209,000 in commissions and publishing and staff  services.  The Company's Japan
subsidiary  had  approximately  $369,000 in revenue in the twelve  months ending
December 31, 2004.

TRANSACTIONS WITH TITUS SARL

     As  of  December  31,  2004  and  2003  the  Company  has a  receivable  of
approximately  $18,000 and $43,000 respectively for product development services
that the Company provided. Titus SARL was placed into involuntary liquidation in
January 2005.

TRANSACTIONS WITH TITUS GIE

     In February 2004, the Company engaged the services of GIE Titus Interactive
Group, a wholly owned subsidiary of Titus, for a three-month  agreement pursuant
to which GIE Titus or its agents shall  provide to the Company  certain


                                      F-30
<PAGE>


foreign  administrative  and legal  services  at a rate of $5,000 per month.  At
December 31, 2004 the Company had payables  and  receivables  of $0 to GIE Titus
Interactive  Group.  The agreement was terminated in the fourth quarter of 2004.
Titus GIE was placed into involuntary liquidation in January 2005

TRANSACTIONS WITH VIE ACQUISITION GROUP

     Approximately  $42,000  and  $0  was  paid  to VIE  Acquisition  Group  for
management  services  provided  during the twelve months ended December 31, 2004
and 2003.

13.  CONCENTRATION OF CREDIT RISK

     Avalon was the exclusive  distributor for most of the Company's products in
Europe, the Commonwealth of Independent States,  Africa and the Middle East. The
Company's  agreement  with Avalon was  terminated  following the  liquidation of
Avalon in February  2005.  The Company  subsequently  appointed its wholly owned
subsidiary Interplay Productions Ltd as its distributor for Europe.

     Vivendi has exclusive rights to distribute the Company's  products in North
America and selected  International  territories.  The Company's  agreement with
Vivendi will expire in August 2005 for most of its products.

     The  Company's  revenues  and cash flows could fall  significantly  and its
business and financial results could suffer material harm if:

     o    The Company fail to replace Vivendi as our distributor; or

     o    Interplay   Productions  Ltd  fails  to  effectively   distribute  the
          Company's products.

     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, or  otherwise.  In addition,
while the  Company's  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, 2004, 2003 and 2002,  Avalon accounted for
approximately 70%, 12% and 11%, respectively, of net revenues in connection with
the International  Distribution  Agreement (Note 12). Vivendi accounted for 21%,
82%,  and 71% of net revenues in the years ended  December  31,  2004,  2003 and
2002, respectively.

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:

<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                      ----------------------------------------------------------------------------
                              2004                        2003                        2002
                      ---------------------       --------------------       ---------------------
                       AMOUNT       PERCENT        AMOUNT      PERCENT        AMOUNT       PERCENT
                      -------       -------       -------      -------       -------       -------
                      (Dollars in thousands)     (Dollars in thousands)      (Dollars in thousands)
<S>                   <C>               <C>       <C>              <C>       <C>               <C>
North America ..      $ 1,544           100%      $13,541           37%      $26,184            60%
Europe .........        8,706          --           5,682           16         4,988            11
Rest of World ..        1,228          --             802            2           686             2
OEM, royalty and
   licensing ...        1,720          --          16,276           45        12,141            27
                      -------       -------       -------      -------       -------       -------
                      $13,198           100%      $36,301          100%      $43,999           100%
                      =======       =======       =======      =======       =======       =======
</TABLE>


                                      F-31
<PAGE>


15.  QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
<CAPTION>
                                                  MARCH 31       JUNE 30      SEPTEMBER 30   DECEMBER 31
                                                -----------    -----------    -----------    -----------
                                                     (Dollars in thousands, except per share amounts)
<S>                                             <C>            <C>            <C>            <C>
Year ended December 31, 2004:
Net revenues .............................      $     6,917    $     1,201    $       268    $     4,811
                                                ===========    ===========    ===========    ===========
Gross profit .............................      $     3,326    $     1,783    $       679    $       583
                                                ===========    ===========    ===========    ===========
Net income (loss) ........................      $      (903)   $    (1,954)   $    (1,467)   $      (406)
                                                ===========    ===========    ===========    ===========

Net income (loss) per common share basic .      $     (0.01)   $     (0.02)   $     (0.02)   $     (0.00)
                                                ===========    ===========    ===========    ===========
Net income (loss) per common share diluted      $     (0.01)   $     (0.02)   $     (0.02)   $     (0.00)
                                                ===========    ===========    ===========    ===========

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
                                                ===========    ===========    ===========    ===========
</TABLE>


                                      F-32
<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, 2002      $    7,541      $    2,586      $   (9,041)   $    1,086
                                  ==========      ==========      ==========    =========

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

Year ended December 31, 2004       $     725      $    1,681      $     --      $   2,406
                                  ==========      ==========      ==========    =========
</TABLE>


                                      S-1