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, 2001

                                       or

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

             For the transition period from __________ to __________

                         Commission File Number 0-24363

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

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

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

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

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

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

                         COMMON STOCK, $0.001 PAR VALUE

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

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

     As of April 10, 2002, 93,060,857 shares of Common Stock of the Registrant
were issued and outstanding and the aggregate market value of voting common
stock held by non-affiliates was $3,032,659.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the issuer's 2002 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Report.


<PAGE>


                          INTERPLAY ENTERTAINMENT CORP.

             INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001


                                                                            PAGE
PART I

        Item 1.  Business                                                      4

        Item 2.  Properties                                                   11

        Item 3.  Legal Proceedings                                            12

        Item 4.  Submission of Matters to a Vote of Security Holders          12

PART II

        Item 5.  Market for Registrant's Common Equity and Related
                 Stockholder Matters                                          12

        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                                                  36

        Item 8.  Consolidated Financial Statements and
                 Supplementary Data                                           37

        Item 9.  Changes in and Disagreements with Accountants
                 on Accounting and Financial Disclosure                       37

PART III

        Item 10. Directors and Executive Officers of the Registrant           37

        Item 11. Executive Compensation                                       37

        Item 12. Security Ownership of Certain Beneficial Owners
                 and Management                                               37

        Item 13. Certain Relationships and Related Transactions               37

PART IV

        Item 14. Exhibits, Financial Statement Schedules, and
                 Reports on Form 8-K                                          38

Signatures                                                                    39

Exhibit Index                                                                 41


                                     Page 2
<PAGE>


     THIS FORM 10-K 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 FORM 10-K EXCEPT FOR HISTORICAL INFORMATION MAY BE DEEMED TO
BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND,"
"COULD," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO 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 FORM 10-K 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,
FINANCING ACTIVITIES, COST REDUCTION MEASURES, REPLACEMENT OF THE COMPANY'S
TERMINATED LINE OF CREDIT ARE FORWARD-LOOKING STATEMENTS AND THERE CAN BE NO
ASSURANCE THAT THE COMPANY WILL GENERATE POSITIVE CASH FLOW IN THE FUTURE OR
THAT THE COMPANY WILL BE ABLE TO OBTAIN FINANCING ON SATISFACTORY TERMS, IF AT
ALL, OR THAT ANY COST REDUCTIONS EFFECTED BY THE COMPANY WILL BE SUFFICIENT TO
OFFSET ANY NEGATIVE CASH FLOW FROM OPERATIONS; OR THAT THE COMPANY WILL BE ABLE
TO RENEW OR REPLACE ITS LINE OF CREDIT. ADDITIONAL RISKS AND UNCERTAINTIES
INCLUDE POSSIBLE DELAYS IN THE COMPLETION OF PRODUCTS, THE POSSIBLE LACK OF
CONSUMER APPEAL AND ACCEPTANCE OF PRODUCTS RELEASED BY THE COMPANY, FLUCTUATIONS
IN DEMAND, LOST SALES BECAUSE OF THE RESCHEDULING OF PRODUCT LAUNCHES OR ORDER
DELIVERIES, FAILURE OF THE COMPANY'S MARKETS TO CONTINUE TO GROW, THAT THE
COMPANY'S PRODUCTS WILL REMAIN ACCEPTED WITHIN THEIR RESPECTIVE MARKETS, THAT
COMPETITIVE CONDITIONS WITHIN THE COMPANY'S MARKETS WILL NOT CHANGE MATERIALLY
OR ADVERSELY, THAT THE COMPANY WILL RETAIN KEY DEVELOPMENT AND MANAGEMENT
PERSONNEL, THAT THE COMPANY'S FORECASTS WILL ACCURATELY ANTICIPATE MARKET DEMAND
AND THAT THERE WILL BE NO MATERIAL ADVERSE CHANGES IN THE COMPANY'S OPERATIONS
OR BUSINESS. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS ARE
DISCUSSED IN MORE DETAIL IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--FACTORS AFFECTING FUTURE PERFORMANCE".
ASSUMPTIONS RELATING TO THE FOREGOING 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 THE CONTROL OF THE COMPANY. ALTHOUGH THE
COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS
ARE REASONABLE, THE BUSINESS AND OPERATIONS OF THE COMPANY ARE SUBJECT TO
SUBSTANTIAL RISKS THAT INCREASE THE UNCERTAINTY INHERENT IN THE FORWARD-LOOKING
STATEMENTS, AND THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS
OF THE COMPANY WILL BE ACHIEVED. IN ADDITION, RISKS, UNCERTAINTIES AND
ASSUMPTIONS CHANGE AS EVENTS OR CIRCUMSTANCES CHANGE. THE COMPANY DISCLAIMS 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 FORM 10-K 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 OR ON BEHALF OF THE COMPANY.

     INTERPLAY (R), INTERPLAY PRODUCTIONS(R) AND CERTAIN OF THE COMPANY'S
PRODUCT NAMES AND PUBLISHING LABELS REFERRED TO IN THIS FORM 10-K ARE THE
COMPANY'S TRADEMARKS. THIS ANNUAL REPORT ON FORM 10-K ALSO CONTAINS TRADEMARKS
BELONGING TO OTHERS.


                                     Page 3
<PAGE>


                                     PART I

ITEM 1.  BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS

     Interplay Entertainment Corp. is a leading developer and publisher of
interactive entertainment software for both core gamers and the mass market. We
were incorporated in the State of California in 1982 and were reincorporated in
the State of Delaware in May 1998. We are most widely known for our titles in
the action/arcade, adventure/role playing game (RPG), and strategy/puzzle
categories. We have produced titles for many of the most popular interactive
entertainment software platforms, and currently balance our publishing and
distribution business by developing interactive entertainment software for PCs
and next generation video game consoles, such as the Sony PlayStation 2,
Microsoft Xbox and Nintendo GameCube.

     We seek to publish interactive entertainment software titles that are, or
have the potential to become, franchise software titles that can be leveraged
across several releases and/or platforms, and have published many such
successful franchise titles to date. In addition, we hold licenses to use
popular brands, such as Advanced Dungeons and Dragons, Matrix, Star Trek and
Caesars Palace, for incorporation into certain of our products.

     In April 2001, we completed a private placement of 8,126,770 units
consisting of one share of common stock and one warrant to purchase an
additional share of common stock for total proceeds of $12.7 million, and
received net proceeds of approximately $11.7 million. In April 2001, we also
obtained a new line of credit to fund our operations. Due to our failure to meet
certain financial covenants, the bank terminated the line of credit in October
2001. The termination of the line of credit has had, and continues to have, a
material negative impact on our capital resources, and has required us to take
many cost-cutting measures including a 32 percent reduction in our personnel
during 2001.

     In August 2001, we entered into a distribution agreement with Vivendi
Universal Games, Inc., formerly known as Vivendi Universal Interactive
Publishing North America, Inc., providing for Vivendi to become our distributor
in North America through December 31, 2003 for substantially all of our
products, with the exception of products with pre-existing distribution
agreements. As a result of engaging Vivendi as our North America distributor, we
now distribute substantially all of our products through distributors. Our other
major distributor is Virgin Interactive Entertainment Limited, a wholly owned
subsidiary of Titus Interactive S.A. that distributes substantially all of our
titles in Europe, the Commonwealth of Independent States, Africa and the Middle
East. Consequently, we have substantially reduced our internal product
distribution capacity, including our sales and marketing capacity and are
allocating our resources towards product development and publishing.

     In addition to our agreement with Vivendi, in fiscal 2001, we experienced a
number of significant changes in our business and operations. In August 2001,
Titus Interactive S.A., which currently holds 72 percent of our outstanding
common stock, converted a portion of its Series A Preferred Stock into common
stock and used the increased voting power resulting form this conversion to
elect a new board of directors at our 2001 annual meeting. Once in place, our
newly constituted board appointed new members to our senior management team,
including a Chief Administration Officer, a new Chief Executive Officer and a
new Chief Financial Officer. Furthermore, Titus engaged Europlay I, LLC, an
investment banking firm with experience in the interactive entertainment
industry, to assist us with restructuring our operations.

     In late 2001, we determined that it was in our best interest to raise money
through the sale of some of our significant assets. With the assistance of
Europlay, in early 2002, we began an auction process for the sale of our product
development subsidiary, Shiny Entertainment, Inc., which has developed past
successful video games including MESSIAH, SACRIFICE and MDK, and currently is
developing video games based on the motion picture currently titled "THE MATRIX
II: RELOADED." We are currently in the advanced stages of negotiation with a
potential buyer.


                                     Page 4
<PAGE>


PRODUCTS

     We develop and publish interactive entertainment software titles that
provide immersive game experiences by combining advanced technology with
engaging content, vivid graphics and rich sound. We utilize the experience and
judgment of the avid gamers in our product development group to select and
produce the products we publish. Our strategy is to invest in products for those
platforms, whether PC or video game console, that have or will have sufficient
installed bases for the investment to be economically viable. We currently
develop and publish products for the PC platform compatible with Microsoft
Windows, and for video game consoles such as the Sony PlayStation 2. We also
develop and have plans to publish products for the Microsoft Xbox and Nintendo
GameCube video game consoles. In addition, we anticipate substantial growth in
the use of high-speed Internet access, which could possibly provide
significantly expanded technical capabilities for the PC platform.

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

     We have entered into license agreements with Sega, Sony Computer
Entertainment, Microsoft Corporation and Nintendo pursuant to which the Company
has the right to develop, sublicense, publish, and distribute products for the
licensor's respective platforms in specified territories. In certain cases, the
products are manufactured for us by the licensor. We pay the licensor a royalty
or manufacturing fee in exchange for such license and manufacturing services.
Such agreements grant the licensor certain approval rights over the products
developed for their platform, including packaging and marketing materials for
such products. There can be no assurance that we will be able to obtain future
licenses from platform companies on acceptable terms or that any existing or
future licenses will be renewed by the licensors. Our inability to obtain such
licenses or approvals could have a material adverse effect on our business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Dependence on Licenses from and Manufacturing by Hardware
Companies."

     The interactive entertainment software industry is highly seasonal, with
the highest levels of consumer demand occurring during the year-end holiday
buying season. As a result, our net revenues, gross profits and operating income
have historically been highest during the second half of the year. The impact of
this seasonality will increase as we rely more heavily on game console net
revenues in the future. Seasonal fluctuations in revenues from game console
products may cause material harm to our business and financial results.

PRODUCT DEVELOPMENT

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

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


                                     Page 5
<PAGE>


we ultimately pay continuation royalties to developers once our advances have
been recouped. In addition, in certain cases, we will utilize third party
developers to convert products for use with new platforms.

     Our products typically have short life cycles, and we therefore depend on
the timely introduction of successful new products, including enhancements of or
sequels to existing products and conversions of previously-released products to
additional platforms, to generate revenues to fund operations and to replace
declining revenues from existing products. The development cycle of new products
is difficult to predict, and involves a number of risks. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance--Dependence on New Product
Introductions; Risk of Product Delays and Product Defects."

     During the years ended December 31, 2001, 2000 and 1999, we spent $20.6
million, $22.2 million and $20.6 million, respectively, on product research and
development activities. Those amounts represented 36 percent, 21 percent and 20
percent, respectively, of revenue in each of those periods.

INTERNAL PRODUCT DEVELOPMENT

     U.S. PRODUCT DEVELOPMENT. Our internal product development group in the
United States (excluding Shiny's development group) consisted of approximately
147 people at December 31, 2001. Once we select a design for a product, we
establish a production team, development schedule and budget for the product.
Our internal development process includes initial design and concept layout,
computer graphic design, 2D and 3D artwork, programming, prototype testing,
sound engineering and quality control. The development process for an original,
internally developed product typically takes from 12 to 24 months, and six to 12
months for the porting of a product to a different technology platform. We
utilize a variety of advanced hardware and software development tools, including
animation, sound compression utilities and video compression for the production
and development of our interactive entertainment software titles. Our internal
development organization is divided into separate studios, each dedicated to the
production and development of products for a particular product category. Within
each studio, development teams are assigned to a particular project. These teams
are generally led by a producer or associate producer and include game
designers, software programmers, artists, product managers and sound
technicians. We believe that the separate studios approach promotes the creative
and entrepreneurial environment necessary to develop innovative and successful
titles. In addition, we believe that breaking down the development function into
separate studios enables us to improve our software design capabilities, to
better manage our internal and external development processes and to create and
enhance our software development tools and techniques, thereby enabling us to
obtain greater efficiency and improved predictability in the software
development process.

     SHINY ENTERTAINMENT. David Perry, Shiny's President and founder, has
produced a number of highly successful interactive entertainment software
titles, including CoolSpot, Aladdin, Earthworm Jim, Earthworm Jim II and MDK.
Shiny currently has one original title in development based on the motion
picture currently titled "THE MATRIX II: RELOADED." Shiny's development group at
December 31, 2001 consisted of approximately 33 people. In early 2002, we began
an auction process for the sale of Shiny, and currently are in the advanced
stages of negotiation with a potential buyer. If the sale is consummated, we
will have no further rights to the MATRIX title.

     INTERNATIONAL DEVELOPMENT. During 2001, we discontinued operations of
Interplay Productions Limited, our European subsidiary responsible for our
product development efforts in Europe. Prior to discontinuing its operations,
Interplay Productions Limited engaged and managed the efforts of third party
developers located in various European countries. We currently have one original
product under development in Europe, which we now manage from our corporate
headquarters in Irvine, California.

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 February 1999, we
entered into a Product Publishing Agreement with Virgin pursuant to which we
agreed to publish substantially all of Virgin's titles in North and South
America and Japan. As part of our April 2001 settlement with Virgin we amended
the Product Publishing Agreement to provide that we would only publish one
future title developed by Virgin. In the years ended December 31, 2001, 2000 and
1999, approximately 80 percent, 70 percent and 75 percent, respectively, of new
products


                                     Page 6
<PAGE>


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 one of our internal
product development studios to oversee the development process and work with the
third party developer to design, develop and test the game.

     We believe this strategy of cultivating relationships with talented third
party developers, such as the developers of Baldur's Gate and TombRaider,
provides an excellent source of quality products, and 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Dependence on Third Party Software Developers."

     For information regarding the revenues, profits, losses and total assets
associated with our various business segments, and 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.

SALES AND DISTRIBUTION

     Our sales and distribution efforts are designed to broaden product
distribution, to control product placement and to increase the penetration of
our products in domestic and international markets. Over the past several years,
we have increased our sales and distribution efforts in international markets
through the formation of Interplay Productions, Limited ("Interplay UK"), our
European subsidiary, through our distribution agreement with Virgin covering
Europe, Commonwealth of Independent States, Africa and the Middle East, and
through licensing and third party distribution strategies elsewhere. In 2001, we
discontinued operations at Interplay Productions Limited. We also distribute our
software products through Interplay OEM in bundling transactions with computer,
peripheral and various other companies, as well as through on-line services.

     NORTH AMERICA. Prior to entering into our North America distribution
agreement with Vivendi, in North America we sold our products primarily to mass
merchants, warehouse club stores, large computer and software specialty retail
chains and through catalogs and Internet commerce sites. A majority of our North
American retail sales were to direct accounts, and a lesser percentage were to
third party distributors. Our principal direct retail accounts included CompUSA,
Best Buy, Electronics Boutique, Wal-Mart, K-Mart, Target, Toys-r-us and GameStop
(Babbages). Our principal distributors in North America included Navarre and
Softek.

     In August 2001, we entered into a distribution agreement with Vivendi,
whereby Vivendi agreed to distribute substantially all of our titles in North
America through December 31, 2003. We continue to distribute products through
catalogs and related promotional materials directly to end-users who can order
products by direct mail, by using a toll-free number, or by accessing our web
site. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Future Performance--Dependence on
Distribution Channels; Risk of Customer Business Failures; Product Returns."

     We seek to extend the life cycle and financial return of many of our
products by marketing those products differently during the various stages of
the product's sales cycle. Although the product sales cycle for a title varies
based on a number of factors, including the quality of the title, the number and
quality of competing titles, and in certain instances seasonality, we typically
consider a title to be a "back catalog" item once it incurs its first price drop
after its initial release. We utilize marketing programs appropriate for each
particular title, which generally include progressive price reductions over time
to increase the product's longevity in the retail channel as we shift our
advertising support to newer releases.


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     We provide terms of sale comparable to competitors in our industry. In
addition, we provide technical support for our products in North America through
our customer support department and 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance--Dependence on Distribution
Channels; Risk of Customer Business Failures; Product Returns."

     INTERNATIONAL. Prior to February 1999, we distributed our titles in Europe
through Interplay UK, and employed approximately 21 people dedicated to sales
and marketing in the European market. Interplay UK had an agreement with
Infogrames U.K. and Virgin to pool resources in order to distribute PC and video
game console software products to independent software retailers in the United
Kingdom. Interplay UK also had distribution agreements with Acclaim
Entertainment pursuant to which Acclaim distributed certain of our titles in
selected European countries. Net revenues from our distribution agreements with
Acclaim represented 3 percent of our net revenues in the year ended December
31, 1999. In February 1999, we completed an agreement to acquire a 44 percent
ownership interest in VIE Acquisition Group LLC ("VIE"), the parent entity of
Virgin. In connection with this acquisition, we entered into a distribution
agreement with Virgin , pursuant to which Virgin hired Interplay UK's sales and
marketing personnel and commenced distributing substantially all of our titles
in Europe, Commonwealth of Independent States, Africa and the Middle East for a
seven year period. Under the agreement as amended, Virgin earns a distribution
fee for its marketing and distribution of our products, and we reimburse Virgin
for certain direct costs and expenses. As part of our April 2001 settlement with
Virgin, VIE redeemed our ownership interest. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Distribution Agreement."

     We have built a distribution capability in certain of the developed markets
in Asia and the Americas utilizing third party distribution arrangements for
specified products and platforms. In July 1997, we initiated a licensing
strategy in Japan to expand Japanese sales. We have also licensed a number of
our titles to Sony Computer Entertainment to publish in Japan on the PlayStation
console. In fiscal 2000, we terminated our agreement with Roadshow Entertainment
Pty. Ltd. ("Roadshow") for the Australian market and entered into an agreement
with Tech Pacific Australia Pty Ltd. ("Tech Pacific"), pursuant to which Tech
Pacific acquired the exclusive right to sell and distribute our ongoing PC and
video game console products in Australia. Roadshow continues to market and
distribute our PC and video game console products in New Zealand.

     INTERPLAY OEM. Interplay OEM employs approximately 16 people, including 5
in Europe and 2 in Singapore, focused on the distribution of interactive
entertainment software in bundling transactions to the computer hardware
industry. Under these 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. In addition, Interplay OEM has established a
development capability to create modified versions of titles, which support its
customers' technologies. 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. There can be no assurance that OEM
sales will generate consistent profits for us, and a decrease in OEM sales or
margins could have a material adverse effect on our business, operating results
and financial condition. In addition to distributing our titles, Interplay OEM
serves as an exclusive OEM distributor for a number of interactive entertainment
software publishers, including Virgin, Grin Inc., MacPlay and Titus. Interplay
OEM's hardware customers include many of the industry's largest computer and
peripheral manufacturers including IBM, Compaq, Packard Bell/NEC, Creative Labs,
Pioneer Electronics, Canon, Dell and Logitech. OEM devotes four employees to
modifying existing products into suitable OEM products. Interplay OEM expanded
its business model to include licensing of the represented software as a premium
to the non-Information Technology marketplace, as well as continuing its
licensing and merchandising activities on behalf of Interplay and Shiny
including television animation, novelizations, strategy guides and other
merchandise tied to our entertainment properties.

     Our North American and International ultimate distribution channels are
characterized by continuous change, including consolidation, financial
difficulties of certain retailers, and the emergence of new distributors and new
retail channels such as warehouse chains, mass merchants, computer superstores
and Internet commerce sites. We are exposed


                                     Page 8
<PAGE>


to the risk of product returns and markdown allowances by our distributors. We
allow our distributors to return defective, shelf-worn and damaged products in
accordance with negotiated terms. We also offer a 90-day limited warranty to our
end users that our products will be free from manufacturing defects. In
addition, we provide markdown allowances, which consist of credits given to
resellers to induce them to lower the retail sales price of certain of our
products to increase sell through and to help the reseller manage its inventory
levels. Although we maintain a reserve for returns and markdown allowances, and
although we manage our returns and markdown allowances through an authorization
procedure, we could be forced to accept substantial product returns and provide
markdown allowances to maintain our access to certain distribution channels. Our
reserve for estimated returns, exchanges, markdowns, price concessions, and
warranty costs was $7.5 million and $6.5 million at December 31, 2001 and 2000,
respectively. Product returns and markdown allowances that exceed our reserves,
if any, could have a material adverse effect on our business, operating results
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future
Performance--Dependence on Distribution Channels; Risk of Customer Business
Failures; Product Returns."

MARKETING

     Our marketing department is organized into product groups aligned with our
three product development studios and Shiny to promote a focused marketing
strategy and brand image for each studio. Integrated into these product groups
are public relations for each studio. In addition, the marketing department has
four functional groups (web department, event coordination, creative services
and advertising) that support the product groups.

     Our marketing department develops and implements marketing programs and
campaigns for each of our titles and product groups. Our 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. We also send direct and electronic mail promotional
materials to our database of gamers, and have selectively used radio and
television advertisements in connection with the introduction of certain of our
products. We budget a portion of each product's sales for cooperative
advertising and market development funds with retailers. Every title and brand
is launched with a multi-tiered marketing campaign that is developed on an
individual basis to promote product awareness and customer pre-orders.

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

COMPETITION

     The interactive entertainment software industry is intensely competitive
and is characterized by the frequent introduction of new hardware systems and
software products. Our competitors vary in size from small companies to very
large corporations with significantly greater financial, marketing and product
development resources than those 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 Electronic
Arts Inc., Take Two Interactive Software Inc, THQ Inc., The 3DO Company, Eidos
PLC, Infogrames Entertainment, Activision, Inc., Microsoft Corporation,
LucasArts Entertainment Company, Midway Games Inc., Acclaim Entertainment, Inc.,
Vivendi Universal Games, Inc. and Ubi Soft Entertainment Inc. In addition,
integrated video game console hardware/software companies such as Sony Computer
Entertainment, Microsoft Corporation, Nintendo and Sega compete directly with us
in the development of software titles for their respective platforms. Large
diversified entertainment companies, such as The Walt Disney Company, many of
which own


                                     Page 9
<PAGE>


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. We also believe that the
overall growth in the use of the Internet and on-line services by consumers may
pose a competitive threat if customers and potential customers spend less of
their available time using interactive entertainment software and more time on
the Internet and on-line services.

     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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future
Performance--Industry Competition; Competition for Shelf Space."

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 unaffiliated third parties. Printing of manuals and packaging
materials, manufacturing of related materials and assembly of completed packages
are performed to our specifications by unaffiliated 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 manufactures and ships finished products that
are compatible with its video game consoles to us for distribution. PlayStation
2 products consist of DVDs and include manuals and packaging and are typically
delivered by Sony Computer Entertainment within a relatively short lead-time.

     If we experience unanticipated delays in the delivery of manufactured
software products by our third party manufactures, our net sales and operating
results could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Dependence on Licenses from and Manufacturing by Hardware
Companies."

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

     We hold copyrights on our products, product literature and advertising and
other materials, and hold trademark rights in our name, the Interplay logo, our
"By Gamers. For Gamers. (TM)" slogan and certain of our product names and
publishing labels. We also hold rights under a patent application related to the
software engine for one of our products. 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,
contractually retaining all intellectual property rights related to such
projects. We also license certain products developed by third parties and pay
royalties on such products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Dependence on Third Party
Software Developers."

     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. While we provide "shrinkwrap"
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 within the computer software industry, 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


                                    Page 10
<PAGE>


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 its 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. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Protection of Proprietary Rights."

EMPLOYEES

     As of December 31, 2001, we had 277 employees, including 190 in product
development, 40 in sales and marketing and 47 in finance, general and
administrative. Included in these counts are 36 employees of Shiny, 16 employees
of Interplay OEM and 2 employees of Interplay UK. We also retain independent
contractors to provide certain services, primarily in connection with our
product development activities. Neither we nor our full time employees are
subject to any collective bargaining agreements and we believe that our
relations with our employees are good.

     From time to time, we have retained actors and/or "voice over" talent to
perform in certain of our products, and we expect to continue this practice in
the future. These performers are typically members of the Screen Actors Guild
("SAG") 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.

ITEM 2.  PROPERTIES

     Our headquarters are located in Irvine, California, where we lease
approximately 81,000 square feet of office space. This lease expires in June
2006 and provides us with one five year option to extend the term of the lease
and expansion rights, on an "as available basis," to approximately double the
size of the office space. We lease approximately 10,000 square feet of space in
Buckinghamshire, England. This lease expires in October 2014 and, we have the
option for early termination of the lease in November 2005. In addition, we rent
approximately 1,700 square feet of office space in Central London, England from
Virgin. This agreement is on a quarter by quarter basis. We lease approximately
4,100 square feet of space in Laguna Beach, California, which lease expires in
October 2002. We believe that our facilities are
adequate for our current needs and that suitable additional or substitute space
will be available in the future to accommodate potential expansion of our
operations.


                                    Page 11
<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

     The Company is 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. In the opinion of management, the outcome of such routine claims will
not have a material adverse effect on the Company's business, financial
condition or results of operations.


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

     None.


                                     PART II

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

     Our common stock is traded on The NASDAQ Stock Market National Market
System under the symbol "IPLY". At December 31, 2001, there were 98 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.

<TABLE>
<CAPTION>

    FOR THE YEAR ENDED DECEMBER 31, 2001                HIGH           LOW
    ------------------------------------                ----           ---
<S>                                                    <C>           <C>
    First Quarter................................      $3.25         $1.50
    Second Quarter...............................       3.11          1.33
    Third Quarter................................       2.20          0.33
    Fourth Quarter...............................       0.96          0.31


    FOR THE YEAR ENDED DECEMBER 31, 2000                HIGH           LOW
    ------------------------------------                ----           ---

    First Quarter................................      $4.50         $2.91
    Second Quarter...............................       3.31          1.75
    Third Quarter................................       3.81          2.25
    Fourth Quarter...............................       4.00          2.56
</TABLE>


DIVIDEND POLICY

     We have never paid any dividends on our common stock. We intend to retain
any earnings for use in our business and do not intend to pay any cash dividends
on our common stock in the foreseeable future.


                                    Page 12
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

     The selected consolidated statements of operations data for the years ended
December 31, 2001, 2000 and 1999 and the selected consolidated balance sheets
data as of December 31, 2001 and 2000 are derived from our audited consolidated
financial statements included elsewhere in this Form 10-K. The selected
consolidated statements of operations data for the year ended December 31, 1998,
the eight months ended December 31, 1997 and for the year ended April 30, 1997,
and the selected consolidated balance sheets data as of December 31, 1999, 1998,
1997 and April 30, 1997 are derived from our audited consolidated financial
statements not included in this Form 10-K. 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                                                      EIGHT MONTHS
                                                                                                          ENDED       YEAR ENDED
                                                          YEARS ENDED DECEMBER 31,                     DECEMBER 31,    APRIL 30,
                                            -----------------------------------------------------    --------------- -------------
                                               2001          2000          1999          1998             1997(1)        1997
                                            ------------  ------------  ------------ -------------   --------------- -------------
<S>                                        <C>            <C>           <C>           <C>               <C>           <C>
                                                              (Dollars in thousands, except per share amounts)
STATEMENTS OF OPERATIONS DATA:
Net revenues                                $    57,789   $   104,582   $   101,930   $   126,862       $    85,961   $    83,262
Cost of goods sold                               45,816        54,061        61,103        71,928            44,864        62,480
                                            ------------  ------------  ------------  ------------      ------------  ------------
Gross profit                                     11,973        50,521        40,827        54,934            41,097        20,782
Operating expenses:
     Marketing and sales                         20,038        26,482        32,432        39,471            20,603        24,627
     General and administrative                  12,622        10,249        18,155        12,841             8,989         9,408
     Product development                         20,603        22,176        20,629        24,472            14,291        21,431
     Other                                                          -         2,415             -                 -             -
                                            ------------  ------------  ------------  ------------      ------------  ------------
     Total operating expenses                    53,263        58,907        73,631        76,784            43,883        55,466
                                            ------------  ------------  ------------  ------------      ------------  ------------
Operating loss                                  (41,290)       (8,386)      (32,804)      (21,850)           (2,786)      (34,684)
Other expense                                    (4,526)       (3,689)       (3,471)       (4,933)           (2,273)       (1,600)
                                            ------------  ------------  ------------  ------------      ------------  ------------
Loss before income taxes                        (45,816)      (12,075)      (36,275)      (26,783)           (5,059)      (36,284)
Provision (benefit) for income taxes                500             -         5,410         1,437                 -        (9,065)
                                            ------------  ------------  ------------  ------------      ------------  ------------
Net loss                                    $   (46,316)  $   (12,075)  $   (41,685)  $   (28,220)      $    (5,059)  $   (27,219)
                                            ------------  ------------  ------------  ------------      ------------  ------------
Cumulative dividend on participating
   preferred stock                          $       966   $       870   $         -   $         -       $         -   $         -
Accretion of warrant                                266           532             -             -                 -             -
                                            ------------  ------------  ------------  ------------      ------------  ------------
Net loss available to common
   stockholders                             $   (47,548)  $   (13,477)  $   (41,685)  $   (28,220)      $    (5,059)  $   (27,219)
                                            ============  ============  ============  ============      ============  ============
Net loss per common share:
     Basic/diluted                          $     (1.23)  $     (0.45)  $     (1.86)  $     (1.91)      $     (0.45)  $     (2.46)
Shares used in calculating net loss
   per common share                          38,670,343    30,046,701    22,418,463    14,762,644        11,123,327    11,085,632
SELECTED OPERATING DATA:
Net revenues by geographic region:
     North America                          $    36,339   $    56,454   $    49,443   $    73,865       $    51,833   $    38,606
     International                               15,451        35,077        30,310        35,793            24,642        32,006
     OEM, royalty and licensing                   5,999        13,051        22,177        17,204             9,486        12,650
Net revenues by platform:
     Personal computer                      $    36,253   $    76,886   $    65,397   $    67,406       $    42,520   $    45,192
     Video game console                          15,537        14,645        14,356        42,252            33,955        25,420
     OEM, royalty and licensing                   5,999        13,051        22,177        17,204             9,486        12,650


                                                                            DECEMBER 31,                                APRIL 30,
                                            ------------------------------------------------------------------------  ------------
                                                2001          2000          1999          1998              1997          1997
                                            ------------  ------------  ------------  ------------      ------------  ------------

Balance Sheets Data:                                                       (Dollars in thousands)
Working capital                             $  (34,169)   $      123    $   (7,622)   $   (3,135)       $    13,616   $     7,890
Total assets                                    31,106        59,081        56,936        74,944             77,821        69,005
Total debt                                       4,794        25,433        19,630        24,651             38,154        14,970
Stockholders' equity  (deficit)                (28,150)        6,398        (2,071)        4,193             (1,267)        3,401
<FN>

(1)  Effective May 1, 1997, the Company changed its year end from April 30 to
     December 31.
</FN>
</TABLE>


                                    Page 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.

GENERAL

     We derive net revenues primarily from sales of software products to
distributors in North America and internationally, and from sales of software
products to end-users through our catalogs and the Internet. We also derive
royalty-based revenues from licensing arrangements, from the sale of products by
third party distributors in North America and international markets, and from
original equipment manufacturing, or OEM bundling transactions.

     In order to expand our distribution channels and engage in software
development in overseas markets, in 1995 we established operations in the United
Kingdom and in 1997, we initiated a licensing strategy in Japan. In February
1999, we undertook a restructuring of our operations in the United Kingdom that
included our investment in VIE Acquisition Group LLC, or VIE. In connection with
our investment in VIE, we entered into an exclusive distribution agreement with
Virgin Interactive Entertainment Limited, or Virgin, an entity controlled by
VIE, and integrated our distribution operations with Virgin. This substantially
reduced our sales and marketing personnel in Europe. As part of our April 2001
settlement with Virgin, VIE redeemed our equity interest in the company and we
agreed to assume responsibility for marketing functions in Europe for our
products. We also maintain European OEM and product development operations.
International net revenues accounted for approximately 27 percent of our net
revenues for the year ended December 31, 2001, 34 percent of our net revenues
for the year ended December 31, 2000, and 30 percent of our net revenues for the
year ended December 31, 1999.

     In August 2001, we entered into a distribution agreement with Vivendi
Universal Games, Inc., formerly known as Vivendi Universal Interactive
Publishing North America, Inc. (the parent company of Universal Studios, Inc.,
who as of today owns approximately 5 percent of our common stock) providing for
Vivendi to become our distributor in North America through December 31, 2003 for
substantially all of our products, with the exception of products with
pre-existing distribution agreements. OEM rights were not among the rights
granted to Vivendi under the distribution agreement. Under the terms of the
agreement, as amended, Vivendi earns a distribution fee based on the net
sales of the titles distributed. Under the agreement, as amended, Vivendi made
four advance payments to us totaling $13.5 million. Vivendi will recoup these
advances from future sales of our products, which will reduce our future cash
receipts from Vivendi. In an effort to minimize the number of product returns
following the transition of our North America distribution to Vivendi, we
granted large price concessions to resellers on products in their inventory. As
a consequence, we substantially increased our sales allowances from 19 percent
of our total accounts receivable in 2000 to 44 percent of our total accounts
receivable in 2001.

     As a result of engaging Vivendi as our North America distributor, we now
distribute substantially all of our products through distributors. We have
therefore substantially discontinued our internal product distribution capacity,
including our sales and marketing capacity. Following this change, we have
re-oriented our business towards product development and publishing. In October
2001, we reduced our headcount by approximately 15 percent, which included the
elimination of redundant positions resulting from the distribution agreement.

     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.
Additionally, in 2000 Interplay OEM created a division named bundledirect.com,
which sold fixed bundle packs to Value-Added Resellers and system builders.
Bundledirect.com did not meet our expectations and, as a result, was disbanded
in 2001. Our results of operations were not materially impacted by the creation
or disbanding of Bundledirect.com. We also derive net revenues from the
licensing of intellectual property and products to third parties for
distribution in markets and through channels that are outside of our primary
focus. OEM, royalty and licensing net revenues collectively accounted for 10
percent of net revenues for the year ended December 31, 2001, 12 percent for the
year ended December 31, 2000, and 22 percent for the year ended December 31,
1999. OEM, royalty and licensing net revenues generally are incremental net
revenues and do not have significant additional product development or sales and
marketing costs.


                                    Page 14
<PAGE>


     Cost of goods sold related to PC and video game console net revenues
represents the manufacturing and related costs of interactive entertainment
software products, including costs of media, manuals, duplication, packaging
materials, assembly, freight and royalties paid to developers, licensors and
hardware manufacturers. Cost of goods sold related to royalty-based net revenues
primarily represents third party licensing fees and royalties paid by us.
Typically, cost of goods sold as a percentage of net revenues for video game
console products and affiliate label products are higher than cost of goods sold
as a percentage of net revenues for PC based products due to the relatively
higher manufacturing and royalty costs associated with video game console and
affiliate label products. We also include in the cost of goods sold amortization
of prepaid royalty and license fees we pay to third party software developers.
We expense prepaid royalties over a period of six months commencing with the
initial shipment of the title at a rate based upon the numbers of units shipped.
We evaluate the likelihood of future realization of prepaid royalties 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.

     For the year ended December 31, 2001, our net loss was $46.3 million. Our
results from operations were adversely affected by several factors. We incurred
$8.1 million of non-recurring write-offs of prepaid royalties relating to titles
that had been canceled mainly due to discontinued projects that did not meet our
desired profit requirements. Our returns represented a higher percentage of
sales due to the price concessions we granted in connection with the North
America Distribution Agreement we entered into with Vivendi. The termination of
our bank line of credit had a negative affect on our capital resources and as a
result we had to implement cost reduction programs, which delayed the release
of certain titles and caused the sale of a title in development to a third party
publisher resulting from a dispute with a third party developer. Furthermore, we
have had to delay payments to vendors, which has negatively impacted our
relations with our vendors, but has not affected our operations, as our
distributors Vivendi and Virgin are responsible for our manufacturing and
marketing expenditures. We have been able to retain our third party developers
to date, but if our current liquidity issues continue, our future title
development could be adversely affected. As a result of these factors, we
experienced lower unit sales volume than we expected in 2001. We expect our unit
sales volumes on next generation video console platforms to increase and our
unit sales volume on personal computer platforms to decrease in the 12 months
ending December 31, 2002 as compared to the same period in 2001 as we focus more
on next generation video game console titles.

     Our operating results have fluctuated significantly in the past and likely
will fluctuate significantly in the future, both on a quarterly and an annual
basis. A number of factors may cause or contribute to such fluctuations, and
many of such factors are beyond our control. We cannot assure you that we will
be profitable in any particular period. It is likely that our operating results
in one or more future periods will fail to meet or exceed the expectations of
securities analysts or investors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors Affecting Future
Performance - Fluctuations in Operating Results; Uncertainty of Future Results;
Seasonality."

     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. With the release of next
generation console systems by Sony, Nintendo and Microsoft, our industry has
entered into a growth period that could be sustained for the next couple of
years.

     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, 2001
consolidated financial statements includes an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern.

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-


                                    Page 15
<PAGE>


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.

REVENUE RECOGNITION

     We record revenues when we deliver products to customers in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." and SEC
Staff Accounting Bulletin No. 101, Revenue Recognition. With the signing of the
Vivendi distribution agreement in August 2001, substantially all of our sales
are made by two related party distributors. 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, we recognize revenue at the delivery
of the product master or the first copy. We recognize per copy royalties on
sales that exceed the guarantee as copies are duplicated. We generally are not
contractually obligated to accept returns, except for defective, shelf-worn and
damaged products. However, on a case-by-case negotiated basis, we permit
customers to return or exchange product and may provide price concessions to our
retail distribution customers on unsold or slow moving products. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue
Recognition when Right of Return Exists," we record revenue net of a provision
for estimated returns, exchanges, markdowns, price concessions, and warranty
costs. We record such reserves based upon management's evaluation of historical
experience, current industry trends and estimated costs. During 2001, we
substantially increased our sales allowances as a result of the granting of
price concessions to resellers on products in their inventory, in an effort to
minimize product returns following the transition of our North American
distribution rights to Vivendi. As a result, sales allowances as a percentage of
our total accounts receivable increased to 44 percent at December 31, 2001 from
19 percent at December 31, 2000. The amount of reserves ultimately required
could differ materially in the near term from the amounts provided in the
accompanying consolidated financial statements. We provide customer support only
via telephone and the Internet. Customer support costs are not material and we
charge such costs to expenses as we incur them.

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 percent in the first month of release
and a minimum of 5 percent for each of the next five months after release. This
minimum amortization rate reflects our typical product life cycle. Management
evaluates the future realization of such costs quarterly and charges to cost of
goods sold any amounts that management deems unlikely to be fully realized
through future sales. Such costs are classified as current and noncurrent assets
based upon estimated product release date.

SOFTWARE DEVELOPMENT COSTS

     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.


                                    Page 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. Also 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:

<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                                      ---------------------------------
                                         2001        2000        1999
                                      ---------    --------   ---------
<S>                                   <C>          <C>        <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues                               100 %       100 %       100 %
Cost of goods sold                          79          52          60
                                      ---------    --------   ---------
Gross margin                                21          48          40
Operating expenses:
     Marketing and sales                    34          25          32
     General and administrative             22          10          18
     Product development                    36          21          20
     Other                                   -           -           2
                                      ---------    --------   ---------
     Total operating expenses               92          56          72
                                      ---------    --------   ---------
Operating loss                             (71)         (8)        (32)
Other expense                               (8)         (4)         (4)
                                      ---------    --------   ---------
Loss before provision for  income taxes    (79)        (12)        (36)
Provision for income taxes                   1           -           5
                                      ---------    --------   ---------
Net loss                                   (80) %      (12)%       (41)%
                                      =========    ========   =========

SELECTED OPERATING DATA:
Net revenues by segment:
     North America                          63 %        54 %        48 %
     International                          27          34          30
     OEM, royalty and licensing             10          12          22
                                      ---------    --------    --------
                                           100 %       100 %       100 %
                                      =========    ========    ========
Net revenues by platform:
     Personal computer                      63 %        74 %        64 %
     Video game console                     27          14          14
     OEM, royalty and licensing             10          12          22
                                      ---------    --------    --------
                                           100 %       100 %       100 %
                                      =========    ========    ========
</TABLE>


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

     Net revenues for the year ended December 31, 2001 were $57.8 million, a
decrease of 45 percent compared to the same period in 2000. This decrease
resulted from a 36 percent decrease in North American net revenues, a 56 percent
decrease in International net revenues and a 54 percent decrease in OEM,
royalties and licensing revenues. Our overall net revenues for the year ended
December 31, 2000 increased 3 percent compared to the same period in 1999. This
increase resulted from a 14 percent increase in North American net revenues and
a 16 percent increase in International net revenues, offset by a 41 percent
decrease in OEM, royalties and licensing.


                                    Page 17
<PAGE>


     North American net revenues for the year ended December 31, 2001 were $36.3
million. The decrease in North American net revenues in 2001 was mainly due to
our release of only 8 titles in 2001 compared to 26 titles in 2000 resulting in
a decrease in North American sales of $21.6 million, partially offset by a
decrease in product returns and price concessions of $1.0 million as compared to
the 2000 period. The decrease in title releases across all platforms is a result
of our continued focus on product planning and the releasing of fewer, higher
quality titles. Our returns were a higher percentage of sales due primarily to
price concessions we granted in connection with the North American Distribution
Agreement we entered into with Vivendi.

     International net revenues for the year ended December 31, 2001 were $15.5
million. The decrease in International net revenues for the year ended December
31, 2001 was mainly due to the reduction in title releases during the year which
resulted in a $17.4 million decrease in revenue and an increase in product
returns and price concessions of $1.8 million compared to the 2000 period. Our
product planning efforts during 2001 also contributed to the reduction of titles
released in the International markets. Furthermore, our returns as a percentage
of revenue, increased as we experienced a high level of product returns and
price concessions due to certain titles not gaining broad market acceptance.

     We expect that both our North American and International publishing net
revenues in 2002 will increase compared to 2001, as we anticipate releasing more
major titles than in 2001.

     North American net revenues were $56.5 million and International net
revenues were $35.1 million for the year ended December 31, 2000. The increase
in North American and International net revenues in 2000 was mainly because the
titles released this year generated $5.7 million more sales volume and because
of a decrease by $6.1 million in product returns and price concessions compared
to 1999. Our efforts to focus on product planning and release fewer, but higher
quality titles resulted in five fewer title releases across multiple platforms
in 2000 as compared to 1999.

     OEM, royalty and licensing net revenues for the year ended December 31,
2001 were $6.0 million, a decrease of $7.1 million as compared to the same
period in 2000. The OEM business decreased $3.9 million as a result of general
market decreases in personal computer sales. The year ended December 31, 2000
also included $3 million of revenues related to a multi-product licensing
transaction with Titus Interactive S.A., our majority stockholder, which did not
recur in 2001. We expect that OEM, royalty and licensing net revenues in 2002
will increase compared to 2001 primarily related to the recording of $1.3
million in revenue resulting from the expiration of a licensing agreement
combined with a consistent level of OEM business.

     OEM, royalty and licensing net revenues for the year ended December 31,
2000 were $13.1 million. The decrease in 2000 compared to the same period in
1999 was due to decreased net revenues in the OEM business and in licensing
transactions. The $5.1 million decrease in the OEM business was primarily due to
a decrease in the volume of transactions which relates to the general market
decrease in personal computer sales, and the decrease in licensing transactions
is primarily due to the recognition of $2.3 million of deferred revenue for the
shipment of a major title to a customer in 1999 without a comparable transaction
in 2000.

PLATFORM NET REVENUES

     PC net revenues for the year ended December 31, 2001 were $36.3 million, a
decrease of 53 percent compared to the same period in 2000. The decrease in PC
net revenues in 2001 was primarily due to the release of three major hit titles
in 2001 (Icewind Dale: Heart of Winter, Fallout Tactics and Baldur's Gate II:
Throne of Bhaal), as compared to seven major hit titles released in 2000. The
decrease in PC net revenues was further affected by releasing only a total of 7
titles in 2001 compared to a total of 18 titles in 2000. We expect our PC net
revenues to decrease in 2002 as compared to 2001 as we expect to release only
two to three new titles and as we continue to focus on next generation console
titles. Video game console net revenues increased 6 percent for the year ended
December 31, 2001 compared to the same period in 2000, due to sales generated
from the release of Baldur's Gate: Dark Alliance (PlayStation 2). Our other
video game releases include MDK 2: Armageddon (PlayStation 2) and Giants
(PlayStation 2). In 2001, our 3 title releases were developed for next
generation video game consoles and as a result price points for the 2001
releases were higher than the 4 title releases in 2000. We anticipate releasing
four to eight new titles in 2002 and expect net revenues to increase in 2002
partly due to the fact that we anticipate releasing sequels to the major title
release Baldur's Gate: Dark Alliance (PlayStation 2) on Xbox and Gamecube in the
latter half of 2002.


                                    Page 18
<PAGE>


     PC net revenues for the year ended December 31, 2000 increased 18 percent
to $76.9 million as compared to the same period in 1999 primarily due to the
release of seven major hit titles such as Star Trek Klingon Academy, Icewind
Dale, Sacrifice, Baldur's Gate II, Giants, Star Trek StarFleet Command II and
Star Trek New Worlds, compared to six major hit titles released in 1999. In
addition, we continue to experience strong sales from Baldur's Gate and Baldur's
Gate: Tales of the Sword Coast, both of which were released prior to 2000. The
increase in PC net revenues was partially offset by our release of 18 titles in
2000 compared to 28 titles in 1999. Video game console net revenues increased 2
percent in the year ended December 31, 2000 compared to the same period in 1999,
due to higher unit sales of our major console title releases, partially offset
by approximately 10 percent lower price points for current generation console
titles. We released four major video game console titles in 2000, including MDK
2 (Dreamcast), Gekido (PlayStation), Caesar's Palace 2000 (PlayStation) and Wild
Wild Racing (PlayStation 2), compared to three major video game console titles
released in 1999.

COST OF GOODS SOLD; GROSS MARGIN

     Our cost of goods sold decreased 15 percent to $45.8 million in the year
ended December 31, 2001 compared to the same period in 2000. Furthermore, we
incurred $8.1 million of non-recurring charges related to the write-off of
prepaid royalties on titles that we decided to cancel because these titles were
not expected to meet our desired profit requirements. We expect our cost of
goods sold to increase in 2002 as compared to 2001 due to our expected higher
gross revenues from the planned release of more titles in 2002. Our gross margin
decreased to 21 percent for 2001 from 48 percent in 2000. This was due to an
increase in our royalty expense as a result of the $8.1 million write-off of
prepaid royalties, an increase in our product cost of goods due to our increase
in video game console title sales, which typically have a higher per unit cost,
and an increase in our product returns and price concessions as compared to
2000. We expect our gross profit margin and gross profit to increase in 2002 as
compared to 2001 as we expect not to incur any unusual product returns and price
concessions or any write-offs of prepaid royalties in 2002.

     Cost of goods sold decreased to $54.1 million, a 12 percent decrease, in
the year ended December 31, 2000 compared to the same period in 1999, due to
releasing a higher percentage of internally developed titles and the
discontinuation of the affiliate label distribution business that typically has
a higher cost of goods component relative to net sales. The 1999 period also
reflects $1.7 million of non-recurring charges related to the write-off of
prepaid royalties on titles that had been canceled mainly due to our
discontinuation of our licensed sports product line during 1999. The 24 percent
increase in gross profit was primarily due to a 33 percent increase in
internally developed titles sold without a royalty component in cost of goods
sold, and a 25 percent decrease in product returns and price concessions
compared to the 1999 period.

MARKETING AND SALES

     Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services and other related operating expenses. Marketing and sales
expenses for the year ended December 31, 2001 were $20.0 million, a 24 percent
decrease as compared to the 2000 period. The decrease in marketing and sales
expenses is due to a $5.7 million reduction in advertising and retail marketing
support expenditures due to fewer product releases in 2001 and a $2.0 million
decrease in personnel costs and general expenses due in part to our shift from a
direct sales force for North America to a distribution arrangement with Vivendi.
The decrease in marketing and sales expenses was partially offset by $1.3
million in overhead fees paid to Virgin under our April 2001 settlement with
Virgin (See Activities with Related Parties). We expect our marketing and sales
expenses to decrease in 2002 compared to 2001, due to fewer overall planned
title releases in 2002 across all platforms, lower personnel costs due to our
reduced headcount and a reduction in overhead fees paid to Virgin pursuant to
the April 2001 settlement.

     Marketing and sales expenses for the year ended December 31, 2000 were
$26.5 million. The 18 percent decrease in marketing and sales expenses for 2000
compared to the 1999 period is attributable primarily to $2.9 million for
minimum operating charges payable to Virgin which did not repeat in 2000, a $1.3
million decrease in personnel costs and a $0.5 million decrease in advertising
and retail marketing support expenditures. In addition, we amended our
International Distribution Agreement with Virgin effective January 1, 2000,
which eliminated the fixed monthly overhead fees of approximately $2.3 million
we incurred in the 1999 period.


                                    Page 19
<PAGE>


GENERAL AND ADMINISTRATIVE

     General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses for the
year ended December 31, 2001 were $12.6 million, a 23 percent increase as
compared to the same period in 2000. The increase is due in part to a $0.7
million provision for the termination of a building lease in the United Kingdom,
$0.1 million increase in the provision for bad debt, $0.5 million in legal,
accounting and investment banking fees and expenses incurred principally in
connection with efforts to sell the company which has been terminated, $0.5
million in consulting expenses payable to Titus, incurred to assist us with the
restructuring of the company and $0.6 million increase in personnel costs and
general expenses. We expect our general and administrative expenses to decrease
slightly in 2002 compared to 2001 primarily due to the reduction in head count.

     The 44 percent decrease in general and administrative expenses to $10.2
million for the year ended December 31, 2000 compared to the same period in 1999
is primarily attributable to a $6.6 million decrease in bad debt expense and a
$1.1 million decrease in personnel costs.

     PRODUCT DEVELOPMENT

     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, 2001 were $20.6 million, a
7 percent decrease as compared to the same period in 2000. This decrease is due
to a $1.7 million decrease in expenditures associated with resources dedicated
to completing four major internally developed titles in the 2000 period, which
did not recur in the 2001 period as well as a reduction in headcount. We expect
our product development expenses to decrease in 2002 compared to 2001 as we plan
on releasing fewer titles in 2002.

     Product development expenses for the year ended December 31, 2000 were
$22.2 million, a 7 percent increase as compared to the same period in 1999 is
due to a $1.5 million increase in expenditures devoted to our focus on
developing next generation video game console platforms.

     OTHER OPERATING EXPENSE

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

     OTHER EXPENSE, NET

     Other expense consists primarily of interest expense on our lines of credit
and foreign currency exchange transaction losses. Other expenses for the year
ended December 31, 2001 were $4.5 million, a 23 percent increase as compared to
the same period in 2000 was due to a $0.2 million expense associated with
foreign tax withholdings, $0.4 million in loan fees paid to our former bank
associated with the transition of our line of credit to a new bank, a $0.7
million in expense related to the issuance of a warrant to a former officer in
connection with his personal guarantee on our new line of credit and a $1.8
million penalty 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,
offset by a $1.6 million decrease in interest expense related to lower net
borrowings on our line of credit and a $0.7 million decrease in losses
associated with foreign currency exchanges.

     Other expense for the year ended December 31, 2000 was $3.7 million, a 6
percent increase as compared to the same period in 1999. The increase was due to
a $0.6 million decrease in interest expense on lower average borrowings under


                                    Page 20
<PAGE>


our line of credit, offset by a $0.7 million increase in foreign currency
exchange transaction losses incurred in connection with European distribution
activities.

     PROVISION (BENEFIT) FOR INCOME TAXES

     We recorded a tax provision of $0.5 million for the year ended December 31,
2001, compared with a tax provision of zero for the year ended December 31,
2000. The tax provision recorded during 2001 represents estimated tax
liabilities resulting from an Internal Revenue Service examination. We have a
deferred tax asset of approximately $56 million that has been fully reserved at
December 31, 2001. This tax asset would reduce future provisions for income
taxes and related tax liabilities when realized, subject to limitations.

     We did not record a tax provision for the year ended December 31, 2000,
compared with a tax provision of $5.4 million for the year ended December 31,
1999. The tax provision recorded during 1999 represents an increase to the
valuation allowance on the deferred tax asset due to the uncertainty of
realization of the deferred tax asset in future periods.

LIQUIDITY AND CAPITAL RESOURCES

     We have funded our operations to date primarily through the use of lines of
credit, royalty and distribution fee advances, cash generated by the private
sale of securities, proceeds of the initial public offering and from results of
operations. As of December 31, 2001, our principal resources included cash of
$119,000.

     In April 2001, we secured a working capital line of credit from a bank
bearing interest at the bank's prime rate or LIBOR plus 2.5 percent. At December
31, 2001, borrowings under the new working capital line of credit bore interest
at 6.75 percent. Our line of credit provided for borrowings and letters of
credit of up to $15.0 million based in part upon qualifying receivables and
inventory. Under the line of credit, we are required to maintain a $2.0 million
personal guarantee by our former Chairman, secured by $1 million in cash. The
line of credit had a term of three years, subject to review and renewal by the
bank on April 30 of each subsequent year.

     At September 30, 2001, we were not in compliance with some of the covenants
under the line of credit. On October 26, 2001, the bank notified us that the
credit agreement was being terminated, that all related amounts outstanding were
due and payable and that we would no longer be able to continue to draw on the
credit facility to fund future operations. Because we depend on a credit
facility to fund our operations, the bank's termination of the credit agreement
had, and continues to have a material adverse effect on our business. At
December 31, 2001, $1.6 million was outstanding on the line of credit. In
February 2002, the bank drew-down on $1.0 million of the $2.0 million personal
guarantee provided by our former Chairman, which in combination with cash paid
by the Company, substantially paid off the remaining outstanding balance on the
line of credit. In March 2002, the Company entered into a forbearance agreement
with the bank and its former Chairman, and subsequent to that agreement repaid
all remaining amounts due the bank under the line of credit, and agreed to repay
its former Chairman for the $1.0 million paid to the bank pursuant to the former
Chairman's guarantee.

     In April 2001, we completed a private placement of 8,126,770 units
consisting of one share of common stock and one warrant to purchase an
additional share of common stock for $12.7 million, and received net proceeds of
approximately $11.7 million. The units were issued at $1.5625 per share. The
warrants are exercisable at $1.75 per share, and the warrants can be exercised
immediately. The warrants expire in March 2006. The transaction provided for a
registration statement covering the shares sold or issuable upon exercise of
such warrants to be filed by April 16, 2001 and become effective by May 31,
2001. In the event that the agreed effective date of the registration statement
was not met, we are subject to a penalty of approximately $254,000 per month,
payable in cash, until the registration statement is effective. We did not meet
the effective date of the registration statement and as of the date of this
filing, the registration statement has not yet been declared effective. This
obligation will continue to accrue each month that the registration statement is
not declared effective until the registration becomes effective or shares fall
under rule 144(K), which would go into effect on April 16, 2003. Because this
payment is cumulative, this obligation could have a material adverse effect on
our consolidated financial condition and results of operations. As of December
31, 2001, the amount accrued was $1.8 million. We may be unable to pay the total
penalty due to the investors.


                                    Page 21
<PAGE>


     In April 2001, the Chairman provided us with a $3.0 million loan, payable
in May 2002, with interest at 10 percent. In connection with this loan and the
$2.0 million personal guarantee he provided under the new line of credit from a
bank, the Chairman received warrants to purchase 500,000 shares of our common
stock at $1.75 per share, which vested upon issuance, expiring in April 2004.

     Our primary capital needs have historically been to fund working capital
requirements necessary to fund our net losses, our sales growth, the development
and introduction of products and related technologies and the acquisition or
lease of equipment and other assets used in the product development process. Our
operating activities provided cash of $8.1 million during the year ended
December 31, 2001, primarily attributable to collections of accounts receivable,
advances from distribution agreements and an increase in accounts payable due to
delays in payments to vendors, substantially offset by the net loss for the year
and payments of royalty liabilities. Net cash used by financing activities of
$9.0 million for the year ended December 31, 2001, consisted primarily of
repayments of our previous line of credit and supplemental line of credit from
Titus offset by the proceeds from the private placement of 8,126,770 shares of
our common stock, an advance for the development of future titles on a next
generation video game console, borrowings under our new working capital line of
credit and borrowings under a loan payable to our Chairman. Cash used in
investing activities of $1.8 million for the year ended December 31, 2001
consisted of normal capital expenditures, primarily for office and computer
equipment used in our operations. We do not currently have any material
commitments with respect to any future capital expenditures.

     The following summarizes our contractual obligations at December 31, 2001,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.

<TABLE>
<CAPTION>
                                                    Less Than   1 - 3      After
December 31, 2001                        Total      1 Year      Years     3 Years
                                       ----------  ----------  ---------  ---------
<S>                                    <C>         <C>         <C>        <C>
                                                        (In thousands)
Contractual cash obligations:
   Line of credit                       $  1,576     $ 1,576    $     -    $     -
   Other borrowings                        3,218       3,218          -          -
   Non-cancelable operating
     lease obligations                     7,992       1,835      3,665      2,492
                                        ---------    --------   --------   --------
Total contractual cash obligations      $ 12,786     $ 6,629    $ 3,665    $ 2,492
                                        =========    ========   ========   ========
</TABLE>


     During the last six months of 2001, we have not released sufficient
products to generate a profitable level of revenues, or sufficient accounts
receivable to obtain an alternative to our terminated credit line. We also
anticipate that delays in product releases could continue in the short-term, and
funds available from ongoing operations will not be sufficient to satisfy our
projected working capital and capital expenditure requirements.

     As a result, we have implemented various measures including a reduction of
personnel, a reduction of fixed overhead commitments, cancellation or suspension
of development on future titles, which we believe do not meet sufficient
projected profit margins, and the scaling back of certain marketing programs. We
will continue to pursue various alternatives to improve future operating
results, including strategic alliances such as the distribution agreement with
Vivendi and further expense reductions, some of which may have a long-term
adverse impact on our ability to generate successful future business activities.
In addition, we continue to seek external sources of funding, including but not
limited to, a sale or merger of the company, a private placement of our 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
our long-term strategic objectives.

     We are currently in the advanced stages of negotiation with a potential
buyer of our product development subsidiary, Shiny Entertainment, Inc. If this
sale is consummated, we believe that the proceeds from the sale, following the
repayment of third party obligations, which are a condition to the transaction,
should fund our operations at least through the end of 2002.

     However, there is no assurance that we will be able to complete the sale of
Shiny, or that the net proceeds from the sale will be sufficient to fund our
operations through December 31, 2002. Furthermore, if we are unable to complete
the


                                    Page 22
<PAGE>


sale of Shiny, we will not have sufficient funds to repay our outstanding
liabilities, and no assurances can be given that alternative sources of funding
could be obtained on acceptable terms to us, or at all. These conditions,
combined with our historical operating losses and our deficits in stockholders'
equity and working capital, raise substantial doubt about our ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result from
the outcome of this uncertainty.

ACTIVITIES WITH RELATED PARTIES

     Our operations involve significant transactions with Titus, our majority
stockholder, Virgin, a wholly-owned subsidiary of Titus, and Vivendi, an owner
of 5 percent of our common stock. In addition, we obtained financing from the
former Chairman of the company.

TRANSACTIONS WITH TITUS

     In March 2002, Titus converted its remaining 383,354 shares of Series A
preferred stock into approximately 47.5 million shares of our common stock.
Titus now owns approximately 67 million shares of common stock, which represents
approximately 72% of our outstanding common stock, our only voting security,
immediately following the conversion.

     In September 2001, Titus retained Europlay as consultants to assist with
the restructuring of the company. Because the arrangement with Europlay is with
Titus and Europlay's services have a direct benefit to us, we recorded an
expense and a capital contribution by Titus of $75,000 for the year ended
December 31, 2001 in accordance with the SEC's Staff Accounting Bulletin No. 79
"Accounting for Expenses and Liabilities Paid by Principal Stockholders." In
December 2001, we agreed to reimburse Titus for consulting expenses incurred on
our behalf since October 2001. As of December 31, 2001, we owed Titus $450,000
as a result of this arrangement. We have also entered into a commission-based
agreement with Europlay where Europlay will assist us with strategic
transactions, such as debt or equity financing, the sale of assets or an
acquisition of the company.

     In connection with the equity investments by Titus, we perform distribution
services on behalf of Titus for a fee. In connection with such distribution
services, we recognized fee income of $21,000, $435,000 and $200,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.

     During the year ended December 31, 2000, we recognized $3 million in
licensing revenue under a multi-product license agreement with Titus for the
technology underlying one title and the content of three titles for multiple
game platforms, extended for a maximum period of twelve years, with variable
royalties payable to us from five to ten percent, as defined. We earned a $3
million non-refundable fully-recoupable advance against royalties upon signing
and completing all of our obligations under the agreement. During the year ended
December 31, 1999, we executed publishing agreements with Titus for three
titles. As a result of these agreements, we recognized revenue of $2.6 million
for delivery of these titles to Titus.

     As of December 31, 2001 and 2000, Titus owed us $260,000 and $280,000,
respectively, and we owed Titus $1.3 million and $1.1 million, respectively.
Amounts due to Titus at December 31, 2001 include dividends payable of $740,000
and $450,000 for services rendered by Europlay. Amounts due to Titus at December
31, 2000 include borrowings of $1.0 million under the supplemental line of
credit. In March 2002, Titus paid the outstanding balance due to us.

TRANSACTIONS WITH VIRGIN, A WHOLLY OWNED SUBSIDIARY OF TITUS

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


                                    Page 23
<PAGE>


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

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

     In connection with the International Distribution Agreement, we incurred
distribution commission expense of $2.3 million, $4.6 million and $3.4 million
for the years ended December 31, 2001, 2000 and 1999, respectively. In addition,
we recognized overhead fees of $1.0 million, zero and $3.9 million and certain
minimum operating charges to Virgin of $333,000, zero and $2.9 million for the
years ended December 31, 2001, 2000 and 1999, respectively.

     We have also entered into a Product Publishing Agreement with Virgin, which
provides us with an exclusive license to publish and distribute substantially
all of Virgin's products within North America, Latin America and South America
for a royalty based on net sales. As part of terms of the April 2001 settlement
between Virgin and us, the Product Publishing Agreement was amended to provide
for us to publish only one future title developed by Virgin. In connection with
the Product Publishing Agreement with Virgin, we earned $36,000, $63,000 and
$41,000 for performing publishing and distribution services on behalf of Virgin
for the years ended December 31, 2001, 2000 and 1999, respectively.

     In connection with the International Distribution Agreement, we sublease
office space from Virgin. Rent expense paid to Virgin was $104,000, $101,000 and
$50,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

     As of December 31, 2001 and 2000, Virgin owed us $7.5 million and $12.1
million, and we owed Virgin $5.8 million and $4.8 million, respectively.

TRANSACTIONS WITH VIVENDI

     In August 2001, we entered into a distribution agreement with Vivendi (the
parent company of Universal Studios, Inc., which currently owns approximately 5
percent of our common stock at March 31, 2002 but does not have representation
on our Board of Directors) providing for Vivendi to become our distributor in
North America through December 31, 2003 for substantially all of our products,
with the exception of products with pre-existing distribution agreements. OEM
rights were not among the rights granted to Vivendi under the distribution
agreement. Under the terms of the agreement, as amended, Vivendi earns a
distribution fee based on the net sales of the titles distributed. Under the
agreement, Vivendi made four advance payments to us totaling $13.5 million.
Vivendi will recoup their advances from future sales of our products, which will
reduce our future cash in-flows. As of December 31, 2001, Vivendi has recouped
$3.4 million of the advance payments.

     In connection with the distribution agreement with Vivendi, we incurred
distribution commission expense of $2.2 million for the year ended December 31,
2001. As of December 31, 2001, Vivendi owed us $2.4 million.


                                    Page 24
<PAGE>


TRANSACTIONS WITH A BRIAN FARGO, A FORMER OFFICER OF THE COMPANY

     In connection with our working capital line of credit obtained in April
2001, we obtained a $2 million personal guarantee in favor of the bank, secured
by $1.0 million in cash, from Brian Fargo, the former Chairman of the company.
In addition, Mr. Fargo provided us with a $3 million loan, payable in May 2002,
with interest at 10 percent. In connection with the guarantee and loan, Mr.
Fargo received warrants to purchase 500,000 shares of our common stock at $1.75
per share, expiring in April 2011. In January 2002, the bank redeemed the $1.0
million in cash pledged by Mr. Fargo in connection with his personal guarantee,
and subsequently we agreed to pay that amount back to Mr. Fargo.

     We had amounts due from a business controlled by Mr. Fargo. Net amounts
due, prior to reserves, at December 31, 2000 were $2.5 million. Such amounts at
December 31, 2000 are fully reserved. In 2001, we wrote off this receivable.

RECENT ACCOUNTING PRONOUNCEMENTS

     On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments. The statement requires that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value,
and that changes in the derivative's fair value be recognized currently in the
earnings unless specific hedge accounting criteria are met. The adoption of this
standard did not have a material impact on our consolidated financial position
or results of operations.

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

     In March 2000, the Financial Accounting Standards Board ("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. The adoption of FIN 44 did
not have a material effect on our consolidated financial position or results of
operations.

     In April 2001, the Emerging Issues Task Force reached a consensus on Issue
No. 00-25 ("EITF 00-25"), "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products",
which requires that amounts paid by a vendor to a reseller of the vendor's
products is presumed to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement. That presumption is overcome and
the consideration can be categorized as a cost incurred if, and to the extent
that, a benefit is or will be received from the recipient of the consideration.
That benefit must meet certain conditions described in EITF 00-25. We will adopt
the provisions of the consensus on January 1, 2002 and are currently evaluating
the impact of this consensus on our consolidated statement of
operations. Financial statements of prior periods will be conformed to the
presentation requirements of EITF 00-25 upon its adoption.

     In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" Under the new rules, all
acquisition transactions entered into after June 30, 2001, must be accounted for
on the purchase method and goodwill will no longer be amortized but will be
subject to annual impairment tests in accordance with SFAS 142. Other intangible
assets will continue to be amortized over their useful lives. We will apply


                                    Page 25
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the new rules on accounting for goodwill and other intangible assets beginning
in the first quarter of 2002 and will perform the first of the required
impairment tests of goodwill as of January 1, 2002. We do not expect the
adoption of these statements to have a material effect on our consolidated
financial position or results of operations.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). We will adopt the provisions of SFAS No. 144 on
January 1, 2002, and do not expect the adoption to have a material impact on our
consolidated financial position or results of operations.

FACTORS THAT MAY AFFECT FINANCIAL CONDITION AND FUTURE RESULTS

     Our financial condition and future operating results depend upon many
factors and are subject to various risks and uncertainties. Some risks and
uncertainties that may cause our operating results to vary from anticipated
results or which may materially and adversely affect our operating results are
as follows:

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

     As of December 31, 2001, our cash balance was approximately $119,000 and
our outstanding accounts payable and current debt totaled approximately $59.3
million. If we do not receive sufficient financing we may (i) liquidate assets,
(ii) seek or be forced into bankruptcy and/or (iii) continue operations, but
incur material harm to our business, operations or financial condition. 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. If we cannot obtain additional
capital and become unable to pay our debts as they become due, our Board of
Directors may be required to make decisions that favor the interests of
creditors at the expense of our stockholders to fulfill its fiduciary duty. For
instance, we may be required to preserve our assets to maximize the repayment of
debts versus employing the assets to further grow our business and increase
shareholder value.

WE HAVE A HISTORY OF LOSSES, MAY NEVER GENERATE POSITIVE CASH FLOW FROM
OPERATIONS AND MAY HAVE TO FURTHER REDUCE OUR COSTS BY CURTAILING FUTURE
OPERATIONS.

     For the year ended December 31, 2001, our net loss was $46.3 million. Since
inception, we have incurred significant losses and negative cash flow, and as of
December 31, 2001 we had an accumulated deficit of $151 million. We cannot
assure you that we will ever generate positive cash flow from operations. 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, 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.

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

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


                                    Page 26
<PAGE>


industry, and our credit rating. If we cannot raise additional capital on
favorable terms, we will have to reduce our costs and sell or consolidate
operations.

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

     Our common stock currently is quoted on the Nasdaq National Market System.
On February 14, 2002, we received a deficiency notice from Nasdaq stating that
for the last 30 consecutive trading days, our common stock has not maintained a
minimum market value of publicly held shares of $15,000,000 and a minimum bid
price per share of $3.00, as required for continued listing on the Nasdaq
National Market. Additionally, we do not meet Nasdaq's alternative listing
requirements, which require, among other things, that we have a stockholder's
equity of $10 million, a minimum market value of publicly held shares of
$5,000,000 and a minimum bid price per share of $1.00. We have been provided 90
calendar days, or until May 15, 2002, to regain compliance.

     If we fail to regain compliance, the Company expects to be notified by
Nasdaq that its securities will be delisted. If this occurs, trading of our
common stock may be conducted on the Nasdaq SmallCap Market, if we qualify for
listing at that time, in the over-the-counter market on the "pink sheets" or, if
available, the NASD's "Electronic Bulletin Board." In any of those cases,
investors could find it more difficult to buy or sell, or to obtain accurate
quotations as to the value of our common stock. The trading price per share of
our common stock likely would be reduced as a result.

TITUS INTERACTIVE, SA CONVERTED ITS REMAINING SERIES A PREFERRED SHARES INTO A
SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK, WHICH COULD INCREASE OUR RISK
OF BEING DELISTED FROM THE NASDAQ NATIONAL MARKET.

     On March 15, 2002, Titus converted its remaining shares of Series A
Preferred Stock into shares of our common stock. The variable conversion price
of the Series A Preferred Stock resulted in a significant number of shares of
our common stock being issued to Titus at a discount to the then prevailing
market price of our common stock. Such conversion increases our risk of being
delisted from the Nasdaq National Market in several ways:

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

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

     o    If Nasdaq determines that the issuance of common stock to Titus upon
          the conversion constituted a change in control of the company or a
          change in its financial structure, we will need to satisfy all initial
          listing requirements as of that time, which currently we are unable to
          do.

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 INTERPLAY THAT
IS FAVORABLE TO OUR OTHER STOCKHOLDERS.

     On March 15, 2002, Titus converted its remaining 383,354 shares of Series A
Preferred Stock into approximately 47.5 million shares of our common stock.
Titus now owns approximately 67 million shares of common stock, which represents
approximately 72 percent of our outstanding common stock, our only voting
security, immediately following the conversion. As a consequence, Titus can
control substantially all matters requiring stockholder approval, including the
election of directors, subject to our stockholders' cumulative voting rights,
and the approval of mergers or other business


                                    Page 27
<PAGE>


combination transactions. At our 2001 annual stockholders meeting on September
18, 2001, Titus exercised its voting power to elect a majority of our Board of
Directors. Three of the seven members of the Board are employees or directors of
Titus, and Titus' Chief Executive Officer serves as our President and interim
Chief Executive Officer. 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.

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

     Since February 1999, Virgin has been the exclusive distributor for most of
our products in Europe, the Commonwealth of Independent States, Africa and the
Middle East. Our agreement with Virgin expires in February 2006. In August 2001,
we entered into a Distribution Agreement with Vivendi Universal Games, Inc.,
(formerly known as Vivendi Universal Interactive Publishing North America), or
Vivendi, pursuant to which Vivendi distributes substantially all our products in
North America, as well as in South America, South Africa, Korea, Taiwan and
Australia. Our agreement with Vivendi expires in December 2003, but may be
extended with respect to certain named products.

     Virgin and Vivendi each have exclusive rights to distribute our products in
substantial portions of the world. As a consequence, the distribution of our
products by Virgin and Vivendi will generate a substantial majority of our
revenues, and proceeds from Virgin and Vivendi from the distribution of our
products will constitute a substantial majority of our operating cash flows.
Therefore, our revenues and cash flows could fall significantly and our business
and financial results could suffer material harm if:

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

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

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

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

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

     Pursuant to our credit agreement with LaSalle Business Credit Inc., or
"LaSalle", entered into in April 2001, we agreed to certain covenants. In
October 2001, LaSalle notified us that the credit agreement was being terminated
as a result of our failure to comply with some of those covenants and we would
no longer be able to continue to draw on the credit facility to fund future
operations. Because we depend on a credit agreement to fund our operations,
LaSalle's termination of the credit agreement has significantly impeded our
ability to fund our operations and has caused material harm to our business. We
will need to enter into a new credit agreement to fund our operations. There can
be no assurance that we will be able to enter into a new credit agreement or
that if we do enter into a new credit agreement, it will be on terms favorable
to us.

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

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

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


                                    Page 28
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A CHANGE OF CONTROL MAY CAUSE THE TERMINATION OF SOME OF OUR MATERIAL CONTRACTS
WITH OUR LICENSORS AND DISTRIBUTORS.

     Some of our license, development and distribution agreements contain
provisions that allow the other party to terminate the agreement upon a change
in control of Interplay. Titus recently converted its remaining Series A
Preferred Stock into common stock, which as of March 15, 2002 gave Titus 72
percent of our total voting power. Some of our third-party developers and
licensors may assert that these events constitute a change in control of
Interplay and attempt to terminate their respective agreements with us. In
particular, our license for "the Matrix" allows for the licensor to terminate
the license if there is a substantial change of ownership or control without
their approval. The loss of the Matrix license in this manner could materially
harm our ability to complete the sale of our product development subsidiary,
Shiny Entertainment, Inc. and could harm our projected operating results and
financial condition.

THE UNPREDICTABILITY OF FUTURE RESULTS MAY CAUSE OUR STOCK PRICE 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.

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

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

     We have incurred significant net losses in recent periods, including net
losses of $46.3 million and $12.1 million for the years ended December 31, 2001
and 2000, respectively. Our losses stem partly from the significant costs we
incur to develop our entertainment software products. 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.


                                    Page 29
<PAGE>


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

     The interactive entertainment software industry is highly seasonal, with
the highest levels of consumer demand occurring during the year-end holiday
buying season. As a result, our net revenues, gross profits and operating income
have historically been highest during the second half of the year. The impact of
this seasonality will increase as we rely more heavily on game console net
revenues in the future. Seasonal fluctuations in revenues from game console
products may cause material harm to our business and financial results.

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

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

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

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

     Third party interactive entertainment software developers, such as High
Voltage 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.

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

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

     o    operating systems such as Microsoft Windows XP;

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

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


                                    Page 30
<PAGE>


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

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

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

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

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

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

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

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

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

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

     In addition, integrated video game console hardware/software companies such
as Sony Computer Entertainment, Nintendo, and Microsoft Corporation compete
directly with us in the development of software titles for their respective
platforms and they have generally discretionary approval authority over the
products we develop for their platforms. Large diversified entertainment
companies, such as The Walt Disney Company, many of which own substantial
libraries of available content and have substantially greater financial
resources, may decide to compete directly with us or to enter into exclusive
relationships with our competitors. We also believe that the overall growth in
the use of the Internet and online services by consumers may pose a competitive
threat if customers and potential customers spend less of their available home
personal computing time using interactive entertainment software and more time
using the Internet and online services.

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

     Retailers typically have a limited amount of shelf space and promotional
resources, and there is intense competition among consumer software producers,
and in particular producers of interactive entertainment software products, for
high quality retail shelf space and promotional support from retailers. To the
extent that the number of consumer software products and computer platforms
increases, competition for shelf space may intensify and require us to increase
our


                                    Page 31
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marketing expenditures. Due to increased competition for limited shelf space,
retailers and distributors are in an improving position to negotiate favorable
terms of sale, including price discounts, price protection, marketing and
display fees and product return policies. Our products constitute a relatively
small percentage of any retailer's sales volume, and we cannot assure you that
retailers will continue to purchase our products or to provide our products with
adequate levels of shelf space and promotional support. A prolonged failure in
this regard may cause material harm to our business.

     We currently sell our products to retailers through external distribution
partners and co-publishing deals. We also derive revenues from licensing of our
products to hardware companies (or OEM), selling subscriptions on our online
gaming services, selling advertisements on our online web pages and selling our
packaged goods through our online store. The loss of, or significant reduction
in sales to, any of our principal distributors could cause material harm to our
business.

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

     We are exposed to the risk of product returns and pricing concessions with
respect to our distributors and retailers. We allow distributors and retailers
to return defective, shelf-worn and damaged products in accordance with
negotiated terms, and also offer a 90-day limited warranty to our end users that
our products will be free from manufacturing defects. In addition, we provide
pricing concessions to our customers to manage our customers' inventory levels
in the distribution channel. We could be forced to accept substantial product
returns and provide pricing concessions to maintain our relationships with
retailers and our access to distribution channels. Product return and pricing
concessions that exceed our reserves have caused material harm to our results of
operations in the recent past and may do so again in the future.

SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS MAY REDUCE
THE PRICE OF OUR STOCK AND DILUTE EXISTING STOCKHOLDERS.

     We have filed registration statements covering a total of approximately
49.5 million shares of our common stock for the benefit of those shareholders.
Assuming the effectiveness of these registration statements, these shares would
be eligible for immediate resale in the public market. Including in these
registrations are shares of common stock owned by Universal Studios, Inc. (now
owned by Vivendi), which holds approximately 5% of our outstanding common stock,
Titus Interactive S.A., which holds approximately 72% of our outstanding common
stock, and investors that acquired shares of common stock in our April 2000
financing.

     Future sales of common stock by these holders could substantially increase
the volume of shares being publicly traded and could decrease the trading price
of our common stock and, therefore, the price at which you could resell your
shares. A lower market price for our shares also might impair our ability to
raise additional capital through the sale of our equity securities. Any future
sales of our stock would also dilute existing stockholders.

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

     Many of our current and planned products, such as our Star Trek, Advanced
Dungeons and Dragons, Matrix and Caesars Palace titles, are lines based on
original ideas or intellectual properties licensed from other parties. From time
to time we may not be in compliance with certain terms of these license
agreements, and our ability to market products based on these licenses may be
negatively impacted. Moreover, disputes regarding these license agreements may
also negatively impact our ability to market products based on these licenses.
Additionally, we may not be able to obtain new licenses, or maintain or renew
existing licenses, on commercially reasonable terms, if at all. For example,
Viacom Consumer Products, Inc. has granted the Star Trek license to another
party upon the expiration of our rights in 2002. If we are unable to maintain
current licenses or obtain new licenses for the underlying content that we
believe offers the greatest consumer appeal, we would either have to seek
alternative, potentially less appealing licenses, or release products without
the desired underlying content, either of which could limit our commercial
success and cause material harm to our business.


                                    Page 32
<PAGE>


WE MAY FAIL TO MAINTAIN EXISTING LICENSES, OR OBTAIN NEW LICENSES FROM HARDWARE
COMPANIES ON ACCEPTABLE TERMS OR TO OBTAIN RENEWALS OF EXISTING OR FUTURE
LICENSES FROM LICENSORS.

     We are required to obtain a license to develop and distribute software for
each of the video game console platforms for which we develop products,
including a separate license for each of North America, Japan and Europe. We
have obtained licenses to develop software for the Sony PlayStation and
PlayStation 2, as well as video game platforms from Nintendo and Microsoft. In
addition, each of these companies has the right to approve the technical
functionality and content of our products for their platforms prior to
distribution. Due to the competitive nature of the approval process, we must
make significant product development expenditures on a particular product prior
to the time we seek these approvals. Our inability to obtain these approvals
could cause material harm to our business.

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

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

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

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

     As a result, video game console hardware licensors can shift onto us the
risk that if actual retailer and consumer demand for our interactive
entertainment software differs from our forecasts, we must either 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.

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

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

     Our interactive entertainment software requires extensive time and creative
effort to produce and market. The production of this software is closely tied to
the continued service of our key product design, development, sales, marketing
and management personnel. Our future success also will depend upon our ability
to attract, motivate and retain qualified employees and contractors,
particularly software design and development personnel. Competition for


                                    Page 33
<PAGE>


highly skilled employees is intense, and we may fail to attract and retain such
personnel. Alternatively, we may incur increased costs in order to attract and
retain skilled employees. Our failure to retain the services of key personnel,
including competent executive management, or to attract and retain additional
qualified employees could cause material harm to our business.

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

     Our net revenues from international sales accounted for approximately 27
percent and 34 percent of our total net revenues for years ended December 31,
2001 and 2000, respectively. Most of these revenues come from our distribution
relationship with Virgin, pursuant to which Virgin became the exclusive
distributor for most of our products in Europe, the Commonwealth of Independent
States, Africa and the Middle East. To the extent our resources allow, we intend
to continue to expand our direct and indirect sales, marketing and product
localization activities worldwide.

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

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

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

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

     o    regulatory requirements may change unexpectedly;

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

     o    fluctuations in foreign currency exchange rates;

     o    political and economic instability;

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

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

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

     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.

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

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

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


                                    Page 34
<PAGE>


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

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

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

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

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

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

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

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

     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.

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

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

     o    increases in the Internet's data transmission capability;

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

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

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


                                    Page 35
<PAGE>


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

     Our Board of Directors has the authority, without any action by the
stockholders, to issue up to 5,000,000 shares of preferred stock and to fix the
rights and preferences of such shares. In addition, our certificate of
incorporation and bylaws contain provisions that:

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

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

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

OUR STOCK PRICE IS VOLATILE.

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

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

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

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

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

WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not have any derivative financial instruments as of December 31,
2001. However, we are exposed to certain market risks arising from transactions
in the normal course of business, principally the risk associated with interest
rate fluctuations on any revolving line of credit agreement we maintain, and the
risk associated with foreign currency fluctuations. We do not hedge our interest
rate risk, or our risk associated with foreign currency fluctuations.

     INTEREST RATE RISK

     Our interest rate risk is due to our working capital lines of credit
typically having an interest rate based on either the bank's prime rate or
LIBOR. Currently, we do not have a line of credit, but we anticipate
establishing a line of credit in the future. We have no fixed rate debt.

     FOREIGN CURRENCY RISK

     Our earnings are affected by fluctuations in the value of our foreign
subsidiary's functional currency, and by fluctuations in the value of the
functional currency of our foreign receivables, primarily from Virgin. We
recognized losses of $237,000, $935,000 and $125,000 during the years ended
December 31, 2001, 2000 and 1999, respectively, primarily in connection with
foreign exchange fluctuations in the timing of payments received on accounts
receivable from Virgin.


                                    Page 36
<PAGE>



ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company's Consolidated Financial Statements begin on page F-1 of this
report.

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

     None.


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required by this Item 10 will appear in our proxy statement for
the 2002 Annual Meeting of Stockholders, and is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

     Information required by this Item 11 will appear in our proxy statement for
the 2002 Annual Meeting of Stockholders, and is incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this Item 12 will appear in our proxy statement for
the 2002 Annual Meeting of Stockholders, and is incorporated herein by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this Item 13 will appear in our proxy statement for
the 2002 Annual Meeting of Stockholders, and is incorporated herein by
reference.


                                    Page 37
<PAGE>


                                     PART IV

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

(a)  The following documents are filed as part of this report:

     (1)  Financial Statements

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

     (2)  Financial Statement Schedules

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

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

     (3)  Exhibits

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

(b)  Reports on Form 8-K.

     Current Report on Form 8-K filed on October 26, 2001, reporting under Item
     4 that we and our independent auditor, Arthur Andersen LLP had reached a
     mutual understanding that, as of November 15, 2001, Arthur Andersen LLP
     would no longer be engaged as our independent auditor.

     Current Report on Form 8-K filed on November 20, 2001, reporting under Item
     4 that Arthur Andersen LLP no longer served as our independent auditor and
     that, on November 13, 2001, our board of directors approved and authorized
     the engagement of Ernst & Young LLP as our new independent auditor.


                                    Page 38
<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 12th day of April 2002.

                                            INTERPLAY ENTERTAINMENT CORP.


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


                                POWER OF ATTORNEY

     The undersigned directors and officers of Interplay Entertainment Corp. do
hereby constitute and appoint Herve Caen and Jeff Gonzalez, or either of them,
with full power of substitution and resubstitution, as their true and lawful
attorneys and agents, to do any and all acts and things in our name and behalf
in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorney and agent, may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this 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.

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


/s/ Herve Caen
-------------------------    Chief Executive Officer, President     April 12, 2002
Herve Caen                   and Director (Principal Executive
                             Officer)


/s/ Jeff Gonzalez
-------------------------    Chief Financial Officer                April 12, 2002
Jeff Gonzalez                (Principal Financial and
                             Accounting Officer)


/s/ Nathan Peck
-------------------------    Chief Administrative Officer and       April 12, 2002
Nathan Peck                  Director


/s/ Eric Caen
-------------------------    Director                               April 12, 2002
Eric Caen


                                    Page 39
<PAGE>



/s/ R. Parker Jones, Jr.
-------------------------    Director                               April 12, 2002
R. Parker Jones, Jr.


/s/ Maren Stenseth
-------------------------    Director                               April 12, 2002
Maren Stenseth


/s/ Michel H. Vulpillat
-------------------------    Director                               April 12, 2002
Michel H. Vulpillat


/s/ Michel Welter
-------------------------    Director                               April 12, 2002
Michel Welter
</TABLE>



                                    Page 40
<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"))

3.1     Amended and Restated Certificate of Incorporation of the Company.
        (incorporated herein by reference to Exhibit 3.1 to the Form S-1)

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

3.3     Amended and Restated Bylaws of the Company. (incorporated herein by
        reference to Exhibit 3.2 to the Form S-1)

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)

10.1    Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan").
        (incorporated herein by reference to Exhibit 10.1 to the Form S-1)

10.2    Form of Stock Option Agreement pertaining to the 1997 Plan.
        (incorporated herein by reference to Exhibit 10.2 to the Form S-1)

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

10.4    Incentive Stock Option and Nonqualified Stock Option Plan--1994, as
        amended (the "1994 Plan"). (incorporated herein by reference to Exhibit
        10.4 to the Form S-1)

10.5    Form of Nonqualified Stock Option Agreement pertaining to the 1994 Plan.
        (incorporated herein by reference to Exhibit 10.5 to the Form S-1)

10.6    Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
        Purchase Plan--1991, as amended (the "1991 Plan"). (incorporated herein
        by reference to Exhibit 10.6 to the Form S-1)

10.7    Form of Incentive Stock Option Agreement pertaining to the 1991 Plan.
        (incorporated herein by reference to Exhibit 10.7 to the Form S-1)

10.8    Form of Nonqualified Stock Option Agreement pertaining to the 1991 Plan.
        (incorporated herein by reference to Exhibit 10.8 to the Form S-1)

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

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

10.11   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)

10.12   Loan and Security Agreement among Greyrock Business Credit, a Division
        of NationsCredit Commercial Corporation ("Greyrock"), the Company, and
        Interplay OEM, Inc. ("Interplay OEM"), dated June 16, 1997, as amended,
        with Schedules. (incorporated herein by reference to Exhibit 10.15 to
        the Form S-1)

10.13   Letter of Credit Agreement among Greyrock, the Company and Interplay
        OEM, dated September 10, 1997. (incorporated herein by reference to
        Exhibit 10.18 to the Form S-1)

10.14   Letter of Credit Agreement among Greyrock, the Company and Interplay
        OEM, dated September 24, 1997. (incorporated herein by reference to
        Exhibit 10.19 to the Form S-1)

10.15   Master Equipment Lease between Brentwood Credit Corporation and the
        Company, dated March 28, 1996, with Schedules. (incorporated herein by
        reference to Exhibit 10.20 to the Form S-1)

10.16   Master Equipment Lease Agreement between General Electric Capital
        Computer Leasing Corporation and the Company, dated December 14, 1994,
        as amended, with Schedules. (incorporated herein by reference to Exhibit
        10.22 to the Form S-1)


                                    Page 41
<PAGE>


10.17   Confidential License Agreement for Nintendo 64 Video Game System,
        between the Company and Nintendo of America, Inc., dated October 7,
        1997. (Portions omitted pursuant to a request for confidential
        treatment.) (incorporated herein by reference to Exhibit 10.23 to the
        Form S-1)

10.18   PlayStation License Agreement, between Sony Computer Entertainment of
        America and the Company, dated February 16, 1995. (Portions omitted
        pursuant to a request for confidential treatment.) (incorporated herein
        by reference to Exhibit 10.24 to the Form S-1)

10.19   Master Merchandising License Agreement between Paramount Pictures
        Corporation and the Company, dated as of June 16, 1992. (Portions
        omitted pursuant to a request for confidential treatment.) (incorporated
        herein by reference to Exhibit 10.25 to the Form S-1)

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

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

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

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

10.24   Amendment to Loan Documents among the Company, Interplay OEM, Inc. and
        Greyrock, dated March 18, 1999 (incorporated herein by reference to
        Exhibit 10.28 to Registrant's Annual Report on Form 10-K for the year
        ended December 31, 1998.)

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

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

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

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

10.29   Employment Agreement between the Company and Brian Fargo dated November
        9, 1999 (incorporated herein by reference to Exhibit 10.2 to
        Registrant's Quarterly Report on Form 10-Q for the quarter ended
        September 30, 1999.)

10.30   Stockholder Agreement among the Company, Titus Interactive S.A. and
        Brian Fargo dated November 9, 1999 (incorporated herein by reference to
        Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
        quarter ended September 30, 1999.)

10.31   Stock Purchase Agreement between the Company and Titus Interactive S.A.,
        dated April 14, 2000. (incorporated herein by reference to Exhibit 10.31
        to Registrant's Annual Report on Form 10-K for the year ended December
        31, 1999.)

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

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


                                    Page 42
<PAGE>


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

10.35   Amendment to Loan Documents among the Company, Interplay OEM, Inc. and
        Greyrock, dated April 14, 2000. (incorporated herein by reference to
        Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year
        ended December 31, 1999.)

10.36   Revolving Note between the Company and Titus Interactive S.A., dated
        April 14, 2000. (incorporated herein by reference to Exhibit 10.37 to
        Registrant's Annual Report on Form 10-K for the year ended December 31,
        1999.)

10.37   Reimbursement and Security Agreement between the Company and Titus
        Interactive S.A., dated April 14, 2000. (incorporated herein by
        reference to Exhibit 10.38 to Registrant's Annual Report on Form 10-K
        for the year ended December 31, 1999.)

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

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

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

10.41   Microsoft Corporation Xbox Publisher License Agreement, dated October
        12, 2000. (incorporated herein by reference to Exhibit 10.39 to Form
        10-K/A for the year ended December 31, 2000.)

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

10.43   Financial Public Relations Agreement, dated August 7, 2000.
        (incorporated herein by reference to Exhibit 10.5 of the Form S-3 filed
        on May 4, 2001.)

10.44   Agreement between Interplay Entertainment Corp., 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.)

10.45   Distribution Agreement, dated August 23, 2001. (Portions omitted
        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.)

10.46   Letter Agreement re: Amendment #1 to Distribution Agreement dated August
        23, 2001, dated September 14, 2001. (Portions omitted 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.)

10.47   Letter Agreement re: Secured Advance and Amendment #2 to Distribution
        Agreement, dated November 20, 2001 by and between Interplay
        Entertainment Corp. and Vivendi Universal Interactive Publishing North
        America, Inc.

10.48   Letter Agreement re: Secured Advance and Amendment #3 to Distribution
        Agreement, dated December 13, 2001 by and between Interplay
        Entertainment Corp. and Vivendi Universal Interactive Publishing North
        America, Inc.

10.49   Third Amendment to Computer License Agreement, dated July 25, 2001 by
        and between Interplay Entertainment Corp. and Infogrames, Inc.

21.1    Subsidiaries of the Company. (incorporated herein by reference to
        Exhibit 21.1. to the Form S-1)

23.1    Consent of Ernst & Young LLP, Independent Auditors.

23.2    Consent of Arthur Andersen LLP, Independent Public Accountants.

24.1    Power of Attorney (included as page 37 to this Form 10-K).


                                    Page 43
<PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                       AND REPORTS OF INDEPENDENT AUDITORS



                                                                           PAGE

Reports of Independent Auditors                                             F-2

Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2001 and 2000                   F-4

Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999                                            F-5

Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2001, 2000 and 1999                        F-6

Consolidated Statements of Cash Flows for
the years ended December 31, 2001, 2000 and 1999                            F-7

Notes to Consolidated Financial Statements                                  F-9

Schedule II - Valuation and Qualifying Accounts                             S-1


                                    Page F-1
<PAGE>


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


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, 2001, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. Our audit also included the financial statement
schedule listed in the Index at Item 14(a)(2) for the year ended December 31,
2001. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.

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

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

The accompanying financial statements have been prepared assuming Interplay
Entertainment Corp. will continue as a going concern. As more fully described in
Note 1, the Company's recurring losses from operations and its stockholders' and
working capital deficits at December 31, 2001 raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.


                                               /s/ ERNST & YOUNG LLP


Orange County, California
March 18, 2002



                                    Page F-2
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Interplay Entertainment Corp.:

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

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

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

     As discussed further in Notes 1 and 15, subsequent to April 16, 2001, the
date of our original report, the Company incurred losses of $20.8 million during
the six months ended June 30, 2001, and as of that date, based on unaudited
financial statements, the Company's current liabilities exceeded its current
assets by $9.2 million and the Company has experienced, and expects to continue
to experience, negative operating cash flows which will require the need for
additional financing. Additionally, the Company is in violation of its debt
covenants. These factors, among others, as described in Notes 1 and 15, create a
substantial doubt about the Company's ability to continue as a going concern and
an uncertainty as to the recoverability and classification of recorded asset
amounts and the amounts and classification of liabilities. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

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




/s/  Arthur Andersen LLP

ARTHUR ANDERSEN LLP
Orange County, California

April 16, 2001, except for the matters discussed in Note 15 as to which
the date is August 23, 2001


                                    Page F-3
<PAGE>


<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

                                                                                          December 31,
                                                                                  ---------------------------
                                                                                     2001             2000
                                                                                  ----------        ---------
<S>                                                                               <C>               <C>
                                   ASSETS
Current Assets:
     Cash                                                                         $     119         $  2,835
     Trade receivables from related parties, net of allowances
         of $4,025 and $1,988, respectively                                           6,175           10,414
     Trade receivables, net of allowances
         of $3,516 and $4,555, respectively                                           3,312           17,722
     Inventories                                                                      3,978            3,359
     Prepaid licenses and royalties                                                  10,341           17,704
     Other current assets                                                             1,162              772
                                                                                  ----------        ---------
        Total current assets                                                         25,087           52,806

Property and equipment, net                                                           5,038            5,331
Other assets                                                                            981              944
                                                                                  ----------        ---------
                                                                                  $  31,106         $ 59,081
                                                                                  ==========        =========

               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
     Current debt                                                                 $   1,576         $ 24,433
     Accounts payable                                                                13,718           10,472
     Accrued royalties                                                                7,795            7,805
     Other accrued liabilities                                                        2,999            2,352
     Advances from distributors and others                                           12,792            1,708
     Advances from related party distributor                                         10,060                -
     Loans from related parties                                                       3,218            1,000
     Payables to related parties                                                      7,098            4,913
                                                                                  ----------        ---------
          Total current liabilities                                                  59,256           52,683
                                                                                  ----------        ---------

Commitments and contingencies (Notes 1, 6, 7, 8 and 9)
Stockholders' Equity (Deficit):
     Series A preferred stock, $.001 par value, authorized 5,000,000 shares;
        issued and outstanding 383,354 and 719,424 shares, respectively              11,753           20,604
     Common stock, $.001 par value, authorized 100,000,000
       issued and outstanding 44,995,821 and 30,143,636 shares, respectively             45               30
     Paid-in capital                                                                110,701           88,759
     Accumulated deficit                                                           (150,807)        (103,259)
     Accumulated other comprehensive income                                             158              264
                                                                                  ----------        ---------
          Total stockholders' equity (deficit)                                      (28,150)           6,398
                                                                                  ----------        ---------
                                                                                  $  31,106         $ 59,081
                                                                                  ==========        =========
</TABLE>


                             See accompanying notes.


                                    Page F-4
<PAGE>


<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                     YEARS ENDED DECEMBER 31,
                                                         --------------------------------------------------
                                                            2001               2000                 1999
                                                         -----------        -----------          ----------
<S>                                                      <C>                <C>                  <C>
Net revenues                                             $   35,136         $   76,475           $  82,584
Net revenues from related party distributors                 22,653             28,107              19,346
                                                         -----------        -----------          ----------
   Total net revenues                                        57,789            104,582             101,930
Cost of goods sold                                           45,816             54,061              61,103
                                                         -----------        -----------          ----------
   Gross profit                                              11,973             50,521              40,827
                                                         -----------        -----------          ----------
Operating expenses:
   Marketing and sales                                       20,038             26,482              32,432
   General and administrative                                12,622             10,249              18,155
   Product development                                       20,603             22,176              20,629
   Other                                                          -                  -               2,415
                                                         -----------        -----------          ----------
      Total operating expenses                               53,263             58,907              73,631
                                                         -----------        -----------          ----------
      Operating loss                                        (41,290)            (8,386)            (32,804)
                                                         -----------        -----------          ----------
Other income (expense):
   Interest expense                                          (4,285)            (2,992)             (3,640)
   Other                                                       (241)              (697)                169
                                                         -----------        -----------          ----------
       Total other income (expense)                          (4,526)            (3,689)             (3,471)
                                                         -----------        -----------          ----------
Loss before provision
     for income taxes                                       (45,816)           (12,075)            (36,275)
Provision for income taxes                                      500                  -               5,410
                                                         -----------        -----------          ----------
Net loss                                                 $  (46,316)        $  (12,075)          $ (41,685)
                                                         -----------        -----------          ----------
Cumulative dividend on participating preferred stock     $      966         $      870           $       -
Accretion of warrant                                            266                532                   -
                                                         -----------        -----------          ----------
Net loss available to common stockholders                $  (47,548)        $  (13,477)          $ (41,685)
                                                         ===========        ===========          ==========
Net loss per common share:
Basic and diluted                                        $    (1.23)        $    (0.45)          $   (1.86)
                                                         ===========        ===========          ==========
Shares used in calculating net loss per common share:
Basic and diluted                                         38,670,343         30,046,701          22,418,463
                                                         ===========        ===========          ==========
</TABLE>



                             See accompanying notes.



                                    Page F-5
<PAGE>


<TABLE>
<CAPTION>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                             (DOLLARS IN THOUSANDS)
                                                                                                  ACCUMU
                                                                                                  LATED
                                                                                                  OTHER
                                                                                                  COMPRE-    COMPRE-
                                  PREFERRED STOCK      COMMON STOCK                               HENSIVE    HENSIVE
                               -------------------  ------------------    PAID-IN   ACCUMULATED   INCOME     INCOME
                                 SHARES    AMOUNT     SHARES    AMOUNT    CAPITAL     DEFICIT     (LOSS)      (L0SS)       TOTAL
                               ---------  --------  ----------  ------   ---------  -----------   -------    --------   ----------
<S>                            <C>        <C>       <C>         <C>      <C>        <C>           <C>        <C>        <C>
Balance, December 31, 1998            -   $     -   18,292,431   $ 18    $ 51,918   $ (48,097)    $ 354                  $  4,193
   Issuance of common stock,
     net of issuance costs            -         -   11,408,736     12      34,838                     -                    34,850
   Exercise of stock options          -         -      287,958      -         608           -         -                       608
   Compensation for stock
     options granted                  -         -            -      -          26           -         -                        26
   Net loss                           -         -            -      -           -     (41,685)        -     $(41,685)     (41,685)
   Other comprehensive loss,
     net of income taxes:
       Foreign currency
         translation
           adjustment                 -         -            -      -           -           -       (63)         (63)         (63)
                                                                                                            ---------
         Comprehensive loss                                                                                 $(41,748)
                                                                                                            =========
                               ---------  --------  ----------  ------   ---------  ----------   -------                 ---------
Balance, December 31, 1999            -         -   29,989,125     30      87,390     (89,782)      291                    (2,071)
   Issuance of common stock,
     net of issuance costs            -         -       40,661      -         439           -         -            -          439
   Issuance of Series A
     preferred stock            719,424    19,202            -      -           -           -         -            -       19,202
   Issuance of warrants               -         -            -      -         798           -         -            -          798
   Exercise of stock options          -         -      113,850      -          42           -         -            -           42
   Accretion of warrant               -       532            -      -           -        (532)        -            -            -
   Accumulated accrued
     dividend on Series A
       preferred stock                -       870            -      -           -        (870)        -            -            -
   Compensation for stock
     options granted                  -         -            -      -          90           -         -                        90
   Net loss                           -         -            -      -           -     (12,075)        -     $(12,075)     (12,075)
   Other comprehensive loss,
      net of income taxes:
         Foreign currency
           translation
           adjustment                 -         -            -      -           -           -       (27)         (27)         (27)
                                                                                                             ---------
         Comprehensive loss                                                                                 $(12,102)
                               ---------  --------  ----------  ------   ---------  ----------   -------    =========
                                                                                                                          ---------
Balance, December 31, 2000      719,424    20,604   30,143,636     30      88,759    (103,259)      264                     6,398
   Issuance of common stock,
     net of issuance costs            -         -    8,151,253      8      11,743           -         -                    11,751
   Conversion of Series A
       preferred stock
         into common stock     (336,070)   (9,343)   6,679,306      7       9,336           -         -                         -
   Dividend payable in
     connection with
     preferred stock
       conversion                     -      (740)           -      -                       -         -                      (740)
   Issuance of warrants               -         -            -      -         675           -         -                       675
   Exercise of stock options          -         -       21,626      -           9           -         -                         9
   Accretion of warrant               -       266            -      -           -        (266)        -                         -
   Accumulated accrued
     dividend on Series A
       preferred stock                -       966            -      -           -        (966)        -             -           -
   Compensation for stock
     options granted                  -         -            -      -           4           -         -                         4
   Capital contribution
     by Titus                         -         -            -      -          75           -         -                        75
   Option issued in
     connection with
       settlement                     -         -            -      -         100           -         -                       100
   Net loss                           -         -            -      -           -     (46,316)        -     $ (46,316)    (46,316)
   Other comprehensive loss,
      net of income taxes:
         Foreign currency
           translation
             adjustment               -         -            -      -           -           -      (106)         (106)       (106)
                                                                                                            ----------
         Comprehensive loss                                                                                 $ (46,422)
                               ---------  --------  ----------  ------   ---------  ----------   -------    ==========
                                                                                                                         ---------
Balance, December 31, 2001      383,354   $11,753   44,995,821   $ 45    $110,701   $(150,807)    $ 158                  $(28,150)
                               =========  ========  ==========  ======   =========  ==========   =======                 =========
</TABLE>



                             See accompanying notes.


                                    Page F-6
<PAGE>



<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


                                                                                      Years Ended December 31,
                                                                               2001             2000            1999
                                                                            ----------       ----------      ----------
<S>                                                                         <C>              <C>             <C>
Cash flows from operating activities:
   Net loss                                                                 $ (46,316)       $ (12,075)      $ (41,685)
   Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities--
      Depreciation and amortization                                             2,613            2,512           3,023
      Noncash expense for stock compensation                                      679               90              26
      Write-off of prepaid royalties and licenses                               8,124                -               -
      Deferred income taxes                                                         -                -           5,336
      Other                                                                        (6)             (27)            600
      Changes in assets and liabilities:
         Trade receivables, net                                                14,360           (3,428)         22,113
         Trade receivables from related parties                                 4,239           (2,499)         (7,915)
         Inventories                                                             (619)           2,698             246
         Prepaid licenses and royalties                                          (761)           1,545          (1,121)
         Other current assets                                                    (390)             102            (489)
         Accounts payable                                                       3,246           (2,875)        (10,056)
         Accrued royalties                                                        (10)            (145)              -
         Other accrued liabilities                                               (425)          (5,905)         (4,653)
         Payables to related parties                                            2,185           (3,202)          8,115
         Advances from distributors and others                                 21,144                -               -
                                                                            ----------       ----------      ----------
             Net cash provided by (used in) operating activities                8,063          (23,209)        (26,460)
                                                                            ----------       ----------      ----------
Cash flows used in investing activities:
   Purchase of property and equipment                                          (1,757)          (3,236)         (1,595)
                                                                            ----------       ----------      ----------
         Net cash used in investing activities                                 (1,757)          (3,236)         (1,595)
                                                                            ----------       ----------      ----------
Cash flows from financing activities:
   Net borrowings on line of credit                                             1,576                -               -
   Net borrowings (payments) of previous line of credit                       (24,433)           5,215          (5,257)
   Net borrowings (payments) of supplemental line of credit                    (1,000)           1,000               -
   Proceeds (payments) on notes payable                                         3,000             (412)              -
   Net proceeds from issuance of common stock                                  11,751              439          35,450
   Net proceeds from issuance of Series A preferred stock and warrants              -           20,000               -
   Proceeds from exercise of stock options                                          9               42               8
   Reductions (additions) to restricted cash                                        -            2,597          (2,597)
   Other financing activities                                                      75                -             236
                                                                            ----------       ----------      ----------
         Net cash (used in) provided by financing activities                   (9,022)          28,881          27,840
                                                                            ----------       ----------      ----------
Net increase (decrease) in cash                                                (2,716)           2,436            (215)
Cash, beginning of year                                                         2,835              399             614
                                                                            ----------       ----------      ----------
Cash, end of year                                                           $     119        $   2,835       $     399
                                                                            ==========       ==========      ==========
</TABLE>



                             See accompanying notes.


                                    Page F-7
<PAGE>



<TABLE>
<CAPTION>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF OF CASH FLOWS - CONTINUED
                             (DOLLARS IN THOUSANDS)

                                                                          Years Ended December 31,
                                                                        2001        2000        1999
                                                                      --------    --------    --------
<S>                                                                   <C>         <C>         <C>
Supplemental cash flow information:
    Cash paid during the year for interest                            $ 1,592     $ 3,027     $ 3,608

Suplemental disclosure of non-cash investing and
  financing activities:
    Acquisition of remaining interest in Shiny for
         options on common stock                                        $ 100         $ -         $ -
    Accretion of preferred stock to redemption value                      266         532           -
    Dividend payable on partial conversion of preferred stock             740           -           -
    Accrued dividend on participating preferred stock                     966         870           -
    Common stock issued under Multi-Product Agreement                       -           -       1,000
</TABLE>



                             See accompanying notes.


                                    Page F-8
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2001


1.  DESCRIPTION OF BUSINESS AND OPERATIONS

    Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(the "Company"), develop and publish interactive entertainment software; and
distribute selected software to computer and peripheral device manufacturers for
use in bundling arrangements. The Company's software is developed for use on
various interactive entertainment software platforms, including personal
computers and video game consoles, such as the Sony PlayStation 2, Microsoft
Xbox and Nintendo GameCube. As of December 31, 2001, Titus Interactive, S.A.
("Titus"), a France-based developer, publisher and distributor of interactive
entertainment software, owned 43 percent of the Company's common stock. In March
2002, Titus converted its remaining 383,354 shares of Series A preferred stock
into approximately 47.5 million shares of the Company's common stock, and its
common stock ownership increased to approximately 67 million shares, which
represents approximately 72% of the Company's outstanding common stock, its only
voting security immediately following the conversion.

    The Company has incurred substantial operating losses during the last three
years, and at December 31, 2001, has a stockholders' deficit of $28.2 million
and a working capital deficit of $34.2 million. The Company has historically
funded its operations primarily through the use of lines of credit, royalty and
distribution fee advances, cash generated by the private sale of securities, and
proceeds of its initial public offering.

    In April 2001, the Company raised net proceeds of $11.7 million in a private
placement of its common stock (Note 9). In addition, the Company's obtained a
$3.0 million loan from its former Chairman, payable in May 2002, and secured a
working capital line of credit from a bank which provided for borrowings and
letters of credit of up to $15.0 million. In connection with obtaining the line
of credit, the Company obtained a $2.0 million personal guarantee in favor of
the bank, secured by $1 million in cash, from its former Chairman. The line of
credit had a term of three years, subject to review and renewal by the bank on
April 30 of each subsequent year (Note 5).

    At September 30, 2001, the Company was not in compliance with some of the
financial covenants under the line of credit. On October 26, 2001, the bank
notified the Company that the credit agreement was being terminated, that all
related amounts outstanding were immediately due and payable and that the
Company would no longer be able to draw on the credit facility to fund future
operations. At December 31, 2001, $1.6 million was outstanding on the line of
credit. In February 2002, the bank drew-down on $1.0 million of the $2.0 million
personal guarantee provided by the Company's former Chairman, which in
combination with cash paid by the Company, substantially paid off the remaining
outstanding balance on the line of credit. In March 2002, the Company entered
into a forbearance agreement with the bank and its former Chairman; subsequent
to that agreement, the Company repaid all remaining amounts due the bank under
the line of credit and agreed to repay its former Chairman for the $1.0 million
drawn down by the bank pursuant to the former Chairman's guarantee.

    To reduce its working capital needs, the Company has implemented various
measures including a reduction of personnel, a reduction of fixed overhead
commitments, cancellation or suspension of development on future titles, which
management believes do not meet sufficient projected profit margins, and the
scaling back certain marketing programs. Management will continue to pursue
various alternatives to improve future operating results, including strategic
alliances such as the distribution agreement with Vivendi (Note 6) 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 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 is currently in the advanced stages of
negotiation with a potential buyer of its product development subsidiary, Shiny
Entertainment, Inc. (Shiny). If this sale is consummated, management believes
that the proceeds from the sale, following the repayment of third party
obligations, which are a condition to the transaction, should be sufficient to
fund the Company's operations at least through December 31, 2002.


                                    Page F-9
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


    However, if the Company is unable to complete the sale of Shiny, the
Company will not have sufficient funds to repay its outstanding liabilities, and
no assurances 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 may result from the outcome of
this uncertainty.

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), Games On-line and Shiny
Entertainment, Inc. All significant intercompany accounts and transactions have
been eliminated.

USE OF ESTIMATES

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

RECLASSIFICATIONS

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

INVENTORIES

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

PREPAID LICENSES AND ROYALTIES

    Prepaid licenses and royalties consist of 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 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 percent in the
first month of release and a minimum of 5 percent for each of the next five
months after release. This minimum amortization rate reflects the Company's
typical product life cycle. Management evaluates the future realization of such
costs quarterly and charges to cost of goods sold any amounts that management
deems unlikely to be fully realized through future sales. Such costs are
classified as current and noncurrent assets based upon estimated product release
date.


                                   Page F-10
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


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

OTHER NON-CURRENT ASSETS

    Other non-current assets consist primarily of goodwill, which the Company is
amortizing on a straight-line basis over eight years (Note 3). Accumulated
amortization as of December 31, 2001 and 2000 was $2.7 million and $2.1 million,
respectively.

LONG-LIVED ASSETS

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

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.

REVENUE RECOGNITION

     Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" and SEC Staff Accounting Bulletin No. 101, Revenue Recognition.
With the signing of the Vivendi distribution agreement in August 2001,
substantially all of the Company's sales are made by two related party
distributors (Notes 6 and 12). 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 of the product
master or the first copy. Per copy royalties on sales that exceed the guarantee
are recognized as earned. Guaranteed minimum royalties on sales


                                   Page F-11
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


that do not meet the guarantee are recognized as the minimum payments come due.
The Company is generally not contractually obligated to accept returns, except
for defective, shelf-worn and damaged products in accordance with negotiated
terms. However, on a case by case negotiated basis, the Company permits
customers to return or exchange product and may provide markdown allowances on
products unsold by a customer. In accordance with SFAS No. 48, "Revenue
Recognition when Right of Return Exists", revenue is recorded net of an
allowance for estimated returns, exchanges, markdowns, price concessions and
warranty costs. Such reserves are based upon management's evaluation of
historical experience, current industry trends and estimated costs. During 2001,
the Company substantially increased its sales allowances as a result of the
granting of price concessions to resellers on products in their inventory, in an
effort to minimize product returns following the transition of the Company's
North American distribution rights to Vivendi. As a result, sales allowances as
a percentage of total accounts receivable increased to 44 percent at December
31, 2001 from 19 percent at December 31, 2000. The amount of reserves ultimately
required could differ materially in the near term from the amounts included in
the accompanying consolidated financial statements. Customer support provided by
the Company is limited to telephone and Internet support. These costs are not
material and are charged to expenses as incurred.

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 $6.7 million, $8.8 million and $12.0 million for the years ended
December 31, 2001, 2000 and 1999, 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.

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. Losses resulting from foreign currency transactions amounted
to $237,000, $935,000 and $125,000 during the years ended December 31, 2001,
2000 and 1999, respectively, and are included in other income (expense) in the
consolidated statements of operations.

NET LOSS PER SHARE

    Basic net loss per share is computed by dividing loss attributable to common
stockholders by the weighted average number of common shares outstanding.
Diluted net loss per share is computed by dividing loss attributable to common
stockholders by the weighted average number of common shares outstanding plus
the effect of any dilutive stock options and common stock warrants. For years
ended December 31, 2001, 2000 and 1999, all options and warrants to purchase
common stock were excluded from the diluted loss per share calculation, as the
effect of such inclusion would be antidilutive.

COMPREHENSIVE LOSS

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


                                   Page F-12
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


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"
(Note 11).

RECENT ACCOUNTING PRONOUNCEMENTS

    On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments. The statement
requires that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value, and that changes in the
derivative's fair value be recognized currently in the earnings unless specific
hedge accounting criteria are met. The adoption of this standard did not have a
material impact on the Company's consolidated financial position or results of
operations.

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

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

    In April 2001, the Emerging Issues Task Force reached a consensus on Issue
No. 00-25 ("EITF 00-25"), "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products",
which requires that amounts paid by a vendor to a reseller of the vendor's
products is presumed to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement. That presumption is overcome and
the consideration can be categorized as a cost incurred if, and to the extent
that, a benefit is or will be received from the recipient of the consideration.
That benefit must meet certain conditions described in EITF 00-25. The Company
will adopt the provisions of the consensus on January 1, 2002 and is currently
evaluating the impact of this consensus on its consolidated statement of
operations. Financial statements of prior periods will be conformed to the
presentation requirements of EITF 00-25 upon its adoption.

    In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" Under the new rules, all
acquisition transactions entered into after June 30, 2001, must be accounted for
on the purchase method and goodwill will no longer be amortized but will be
subject to annual impairment tests in accordance with SFAS 142. Other intangible
assets will continue to be amortized over their useful lives. The Company will
apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002 and will perform the first of the
required impairment tests of goodwill as of January 1,


                                   Page F-13
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


2002. The Company does not expect the adoption of these statements to have a
material effect on its consolidated financial position or results of operations.

    In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business (as previously defined in that Opinion). The Company
will adopt the provisions of SFAS No. 144 on January 1, 2002, and does not
expect the adoption to have a material impact on its consolidated financial
position or results of operations.

3.  ACQUISITION

    In 1995, the Company acquired a 91 percent interest in Shiny Entertainment,
Inc. ("Shiny") for $3.6 million in cash and stock. The acquisition was accounted
for using the purchase method. The allocation of purchase price included $3
million of goodwill. The purchase agreement 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 nine percent 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 will earn royalties after the future 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.

4.  DETAIL OF SELECTED BALANCE SHEET ACCOUNTS

INVENTORIES

    Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                         --------------------------
                                                            2001             2000
                                                         ----------      ----------
<S>                                                      <C>             <C>
                                                            (DOLLARS IN THOUSANDS)

Packaged software                                          $ 3,230         $ 2,628
CD-ROMs, DVDs, manuals,
     packaging and supplies                                    748             731
                                                         ----------      ----------
                                                           $ 3,978         $ 3,359
                                                         ==========      ==========
</TABLE>


PREPAID LICENSES AND ROYALTIES

    Prepaid licenses and royalties consist of the following:


                                    Page F-14
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                         --------------------------
                                                            2001             2000
                                                         ----------      ----------
<S>                                                      <C>             <C>
Prepaid royalties for titles in development               $  7,539       $   9,254
Prepaid royalties for shipped titles                           710           6,174
Prepaid licenses and trademarks                              2,092           2,276
                                                         ----------      ----------
                                                          $ 10,341        $ 17,704
                                                         ==========      ==========
</TABLE>

    Amortization of prepaid licenses and royalties is included in cost of goods
sold and totaled $8.0 million, $14.7 million and $11.7 million for the years
ended December 31, 2001, 2000 and 1999, respectively.

    During the year ended December 31, 2001, the Company wrote-off $8.1 million
of prepaid royalties for titles in development that were impaired due to the
cancellation of certain development projects. No amounts were written-off during
the year ended December 31, 2000 and the Company wrote-off $1.7 million during
the year ended December 31, 1999.

PROPERTY AND EQUIPMENT

    Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                         --------------------------
                                                            2001             2000
                                                         ----------      ----------
<S>                                                      <C>             <C>
Computers and equipment                                    $ 9,756        $ 10,175
Furniture and fixtures                                         107             123
Leasehold improvements                                       1,226           1,380
                                                         ----------      ----------
                                                            11,089          11,678
Less:  Accumulated depreciation and amortization            (6,051)         (6,347)
                                                         ----------      ----------
                                                           $ 5,038         $ 5,331
                                                         ==========      ==========
</TABLE>

    For the years ended December 31, 2001, 2000 and 1999, the Company incurred
depreciation expense of $2.1 million, $2.1 million and $2.6 million,
respectively. During the years ended December 31, 2001 and 2000, the Company
disposed of fully depreciated equipment having an original cost of $2.3 million
and $8.3 million, respectively.

5.  WORKING CAPITAL LINE OF CREDIT AND LOANS FROM RELATED PARTIES

     In April 2001, the Company entered into a three year loan and security
agreement ("L&S Agreement") with a bank providing for a $15.0 million working
capital line of credit secured by all the assets of the Company. The L&S
Agreement replaced an expiring agreement with another bank that was repaid and
terminated. Advances under the new line of credit are limited to an amount based
on qualified accounts receivable and inventory and bear interest at the bank's
prime rate (4.75 percent at December 31, 2001), or LIBOR plus 2.5 percent. The
default rate under the line of credit is the bank's prime rate plus 2 percent.
At December 31, 2001, the Company was in default and borrowings under the
working capital line of credit bore interest at 6.75 percent.

     In connection with the L&S Agreement, and the retirement of the former line
of credit, a secured personal guarantee of $5 million previously provided by the
Company's former Chairman was released, and a new personal guarantee for $2
million, secured by $1 million in cash, was provided to the new bank by the
former Chairman. In addition, the former Chairman provided the Company with a $3
million loan, payable in May 2002, with interest at 10 percent secured by all
the assets of the Company. In connection with the new guarantee and loan, the
former Chairman received a warrant to purchase 500,000 shares of the Company's
Common Stock at $1.75 per share,


                                   Page F-15
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001



expiring in April 2011. The fair value of the warrant of $675,000 was deferred
and is being amortized over the term of the L&S agreement.

    At December 31, 2001, the Company was in violation of certain financial
covenants set forth under the L&S Agreement and the bank has exercised its right
to terminate the agreement effective October 26, 2001 (Note 1). Accordingly, the
remaining unamortized value of the warrant issued to the former Chairman was
charged to interest expense during the fourth quarter of 2001.

     In April 2000, the Company secured a $5 million supplemental line of credit
with Titus, of which $1 million was outstanding at December 31, 2000. In
connection with this line of credit, Titus received a warrant to purchase 60,000
shares of the Company's Common Stock at $3.79 per share that will expire in
April 2010. The Company expensed the fair value of the warrant as interest
expense. In April 2001, the total outstanding balance plus accrued interest was
paid in full and the agreement was canceled.

6.  ADVANCES FROM DISTRIBUTORS AND OTHERS

Advances from distributors and OEMs consist of the following:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                         --------------------------
                                                            2001             2000
                                                         ----------      ----------
<S>                                                      <C>             <C>
Advance from console hardware manufacturer                $  5,000        $     -
Advances for distribution rights to a future title           4,000              -
Advances for other distribution rights                       3,792          1,708
                                                         ----------      ----------
                                                           $12,792        $ 1,708
                                                         ==========      ==========
Net advance from Vivendi distribution agreement            $10,060        $     -
                                                         ==========      ==========
</TABLE>


     In August 2001, the Company entered into a distribution agreement with
Vivendi Universal Games, Inc. ("Vivendi") (which indirectly owned approximately
10.4 percent of the Company's Common Stock at December 31, 2001) providing for
Vivendi to become the Company's distributor in North America through December
31, 2003 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 earns a distribution fee based on the net sales of the titles
distributed. The agreement provided for three advance payments from Vivendi
totaling $10.0 million. In amendments to the agreement, Vivendi agreed to
advance the Company an additional $3.5 million. The distribution agreement, as
amended, provides for the acceleration of the recoupment of the advances made to
the Company, as defined. As of December 31, 2001, Vivendi has recouped $3.4
million of their advance as a result of sales it has made of the Company's
product.

     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. The advance is to be repaid based on unit
sales of the products under this agreement, as defined. If the full amount of
the advance is not repaid by June 2003, then the remaining outstanding balance
is subject to interest at the prime rate plus one percent and is due by July 15,
2003.  The advance is secured by all the assets of the Company.

    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. Subsequent to December 31, 2001, the Company
sold the publishing rights to this title to the distributor in connection with a
settlement agreement entered into with the third party developer of the title.
The settlement agreement provided, among other things, that the Company pay past
due royalties to the developer and 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 and received


                                   Page F-16
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


a credit of $1.6 million for past royalties owed to the distributor for other
products. Lastly, the Company received an extension of one year on the term of
the license agreement for other products.

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

    In the event the Company does not perform its obligations under any of the
agreements noted above, it would be obligated to refund any advances not
recouped against future sales.


7.  INCOME TAXES

    Loss before provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                          YEARS ENDED DECEMBER 31,
                                  --------------------------------------
                                      2001         2000         1999
                                  ------------  -----------  -----------
<S>                               <C>           <C>          <C>
                                          (DOLLARS IN THOUSANDS)
Domestic                            $ (44,264)   $ (10,801)   $ (32,294)
Foreign                                (1,552)      (1,274)      (3,981)
                                  ------------  -----------  -----------
Total                               $ (45,816)   $ (12,075)   $ (36,275)
                                  ============  ===========  ===========
</TABLE>

    The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                          YEARS ENDED DECEMBER 31,
                                  --------------------------------------
                                      2001         2000         1999
                                  ----------    ---------     ---------
<S>                               <C>           <C>           <C>
                                          (DOLLARS IN THOUSANDS)
Current:
   Federal                         $  500        $     -       $     -
   State                                -              -             8
   Foreign                              -              -            66
                                  ----------    ---------     ---------
                                      500              -            74
Deferred:
   Federal                              -              -         4,536
   State                                -              -           800
                                  ----------    ---------     ---------
                                        -              -         5,336
                                  ----------    ---------     ---------
                                   $  500        $     -       $ 5,410
                                  ==========    =========     =========
</TABLE>


    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 $144 million and expires through the year 2021.
The Company's NOL's for State tax reporting purposes approximate $74 million and
expires through the year 2011. The utilization of the federal and state net
operating losses may be limited by Internal Revenue Code Section 382.

    The Internal Revenue Service ("the IRS") is currently examining the
Company's consolidated federal income tax returns for the years ended April 30,
1992 through 1997. The IRS has challenged the timing of certain tax deductions
taken by the Company, and has asserted that an additional tax liability is due.
As a result, in the third quarter of 2001, the Company established a reserve of
$500,000, representing management's best estimate of amounts to be paid in
settlement of the IRS claims.


                                   Page F-17
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


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

<TABLE>
<CAPTION>

                                               YEARS ENDED DECEMBER 31,
                                        ---------------------------------------
                                           2001          2000           1999
                                        ---------     ----------     ----------
<S>                                     <C>           <C>            <C>
Statutory income tax rate                  (34.0)%        (34.0)%       (34.0)%
State and local income taxes, net of
   Federal income tax benefit               (6.0)          (3.0)         (3.0)
Valuation allowance                         40.0           37.0          51.9
Other                                        1.1              -             -
                                        ---------     ----------     ---------
                                             1.1 %            - %        14.9 %
                                        =========     ==========     =========
</TABLE>

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

<TABLE>
<CAPTION>

                                                               DECEMBER 31,
                                                       ---------------------------
                                                          2001             2000
                                                       -----------      ----------
<S>                                                    <C>              <C>

                                                          (DOLLARS IN THOUSANDS)
Current deferred tax asset (liability):
     Prepaid royalties                                   $ (4,485)       $ (7,081)
     Nondeductible reserves                                 3,645           3,135
     Accrued expenses                                         666             763
     Foreign loss and credit carryforward                     867             965
     Federal and state net operating losses                53,741          39,672
     Research and development credit carryforward             831             831
     Other                                                    305             294
                                                       -----------      ----------
                                                           55,570          38,579
                                                       -----------      ----------
Non-current deferred tax asset (liability):
     Depreciation expense                                    (181)             50
     Nondeductible reserves                                   532             389
     Other                                                      -              (6)
                                                       -----------      ----------
                                                              351             433
                                                       -----------      ----------
Net deferred tax asset before
     valuation allowance                                   55,921          39,012
Valuation allowance                                       (55,921)        (39,012)
                                                       -----------      ----------
Net deferred tax asset                                   $      -         $     -
                                                       ===========      ==========
</TABLE>


    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.


                                   Page F-18
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


8.  COMMITMENTS AND CONTINGENCIES

LEASES

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

            Year ending December 31 (Dollars in thousands):

             2002                             $ 1,835
             2003                               1,758
             2004                               1,907
             2005                               1,762
             2006                                 730
                                             ---------
                                              $ 7,992
                                             =========


    Total rent expense was $2.7 million, $2.8 million and $3.2 million for the
years ended December 31, 2001, 2000 and 1999, respectively.

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.

CONTINGENCIES

     Some of the Company's license, development and distribution agreements
contain provisions that allow the other party to terminate the agreement upon a
change in control of the Company. In August 2001, Titus converted a portion of
its Preferred Stock into Common Stock, which as of December 31, 2001 gave Titus
48 percent of the Company's total voting power. At the 2001 annual stockholders
meeting on September 18, 2001, Titus exercised its voting power to elect a
majority of the Board of Directors. In March 2002, Titus converted its remaining
shares of preferred stock into common stock. Titus now owns approximately 72% of
the Company's outstanding common stock. Some of the Company's third-party
developers and licensors may assert that these events constitute a change in
control of the Company and attempt to terminate their respective agreements with
the Company. In particular, the Company's license for "Matrix" allows for the
licensor to terminate the license if there is a substantial change of ownership
or control without their approval. The agreements with a console hardware and
software manufacturer (Note 6) require, among other things, that the Company
continues development of the Matrix product, and that the L&S Agreement (Note 5)
be maintained. As a result of the potential for termination of the Matrix
license and the termination of the L&S Agreement, the Company may be required to
repay the advance. In adddition, the loss of the Matrix license in this matter
would materially harm the Company's ability to complete the sale of Shiny
Entertainment, Inc. (Notes 1 and 16) and harm the Company's projected operating
results and financial condition.

EMPLOYMENT AGREEMENTS

    The Company has entered into employment agreements with certain key
employees providing for, among other things, salary, bonuses and the right to
participate in certain incentive compensation and other employee benefit plans
established by the Company. Under these agreements, upon termination without
cause or resignation for good reason, as defined, the employees may be entitled
to certain severance benefits, as defined. These agreements expire between 2002
and 2003.


                                   Page F-19
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


DEFICIENCY NOTICE FROM NASDAQ

     The Company's common stock currently is quoted on the Nasdaq National
Market System. On February 14, 2002, the Company received a deficiency notice
from Nasdaq stating that for the last 30 consecutive trading days, its common
stock has not maintained a minimum market value of publicly held shares of
$15,000,000 and a minimum bid price per share of $3.00, as required for
continued listing on the Nasdaq National Market. Additionally, the Company does
not meet Nasdaq's alternative listing requirements, which require, among other
things, that it have a stockholder's equity of $10 million, a minimum market
value of publicly held shares of $5,000,000 and a minimum bid price per share of
$1.00. The Company has been provided 90 calendar days, or until May 15, 2002, to
regain compliance.

     If the Company fails to regain compliance, the Company expects to be
notified by Nasdaq that its securities will be delisted. If this occurs, trading
of the Company's common stock may be conducted on the Nasdaq SmallCap Market, if
it qualifies for listing at that time, in the over-the-counter market on the
"pink sheets" or, if available, the NASD's "Electronic Bulletin Board."

9.  STOCKHOLDERS' EQUITY

PREFERRED STOCK AND COMMON STOCK

    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
was exercisable immediately. If the Company issues additional shares of common
stock at a per share price below the exercise price of the warrants, then the
warrants are to be repriced, as defined, subject to stockholder approval. The
warrants expire in March 2006. In addition to the warrants issued in the private
placement, the Company granted the investment banker associated with the
transaction a warrant for 500,000 shares of the Company's common stock. The
warrant has an exercise price of $1.5625 per share and vests one year after the
registration statement for the shares of Common Stock issued under the private
placement becomes effective. The warrant expires four years after it vests. The
transaction provided for registration rights with a registration statement to be
filed by April 16, 2001 and become effective by May 31, 2001. The effective date
of the registration statement was not met and the Company is incurring a penalty
of approximately $254,000 per month, payable in cash, until the effectiveness of
the registration. This obligation will continue to accrue each month that the
registration statement is not declared effective and does not have a limit on
the amount payable to these stockholders. Because the payment for non-compliance
is cumulative, such obligation could have a material adverse effect on the
consolidated financial condition of the Company. Moreover, the Company may be
unable to pay these stockholders the amount of money due to them. During the
year ended December 31, 2001, the Company accrued penalties of $1.8 million,
payable to these stockholders, which was charged to results of operations and
classified as interest expense.

    During 1999, the Company completed two equity transactions with Titus which
provided for the issuance of 10,795,455 shares of the Company's Common Stock for
$35 million. In April 2000, the Company completed a $20 million transaction with
Titus under a Stock Purchase Agreement and issued 719,424 shares of newly
designated Series A Preferred Stock ("Preferred Stock") and a warrant for
350,000 shares of the Company's Common Stock, which has preferences under
certain events, as defined. The Preferred Stock is convertible by Titus,
redeemable by the Company, and accrues a 6 percent cumulative dividend per annum
payable in cash or, at the option of Titus, in shares of the Company's Common
Stock as declared by the Company's Board of Directors. The Company may redeem
the Preferred Stock shares at the original issue price plus all accrued but
unpaid dividends at any time. Titus may convert the Preferred Stock shares into
shares of Common Stock at any time after May 2001. The conversion rate is the
lesser of $2.78 (7,194,240 shares of Common Stock) or 85 percent of the market
price per share at the time of conversion, as defined. The Preferred Stock is
entitled to the same voting rights as if it had been converted to Common Stock
shares subject to a maximum of 7,619,047 votes. In October 2000, the Company's
stockholders approved the issuance of the Preferred Stock to Titus. In
connection with this transaction, Titus received a warrant for 350,000 shares of
the Company's Common Stock exercisable at $3.79 per share at anytime. The fair
value of the warrant was estimated on the date of the grant using the
Black-Scholes pricing model. This resulted in the Company


                                   Page F-20
<PAGE>



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


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. 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. The Preferred Stock accrues a six percent
cumulative dividend per annum payable in cash or, at the option of Titus, in
shares of the Company's Common Stock as declared by the Company's Board of
Directors. This conversion did not include accumulated dividends of $740,000 on
the Preferred Stock, these were reclassified as an accrued liability as Titus
has 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. Collectively, Titus has 72 percent of the total voting power of
the Company's capital stock as of March 18, 2002.

    In August 2000, the Company issued a warrant to purchase up to 100,000
shares of the Company's Common Stock to a vendor in connection with public
relations services they provided to the Company. The fair value of the warrant
was expensed as general and administrative expenses. The warrant vests at
certain dates over a one year period and has exercise prices between $3.00 per
share and $6.00 per share, as defined. The warrant expires in August 2003.

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

    In April 1999, the Company entered into a multi-product development
agreement with a developer which provides for the delivery of ten titles to the
Company during 1999 and 2000 in exchange for $0.5 million paid in cash
installments and the issuance of 484,848 shares of the Company's Common Stock.

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

EMPLOYEE STOCK PURCHASE PLAN

    Under this plan, eligible employees may purchase shares of the Company's
Common Stock at 85% of fair market value at specific, predetermined dates. In
2000, the Board of Directors increased the number of shares authorized to
300,000. Of the 300,000 shares authorized to be issued under the plan,
approximately 106,529 shares remained available for issuance at December 31,
2001. Employees purchased 24,483 and 40,661 shares in 2001 and 2000 for $31,000
and $89,000, respectively.

SHARES RESERVED FOR FUTURE ISSUANCE

    Common stock reserved for future issuance at December 31, 2001 is as
follows:

Convertible preferred stock                       20,741,007
Stock option plans:
       Outstanding                                 4,007,969
       Available for future grants                   253,031
Employee Stock Purchase Plan                         106,529
Warrants                                           9,686,770
                                                 ------------
Total                                             34,795,306
                                                 ============


                                   Page F-21
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


10.  LOSS PER SHARE

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

    There were options and warrants outstanding to purchase 13,694,739,
4,449,967 and 3,740,780 shares of Common Stock at December 31, 2001, 2000 and
1999, respectively, and there were 484,848 shares of restricted Common Stock at
December 31, 2000 and 1999, which were excluded from the loss per share
computation. The weighted average exercise price at December 31, 2001, 2000 and
1999 was $2.07, $3.03 and $3.30, respectively, for the options and warrants
outstanding.

11.  EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

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

    Options under all three plans generally vest from three to five years.
Holders of options under the 1991 Plan and the 1994 Plan shall be deemed 100
percent vested in the event of a merger in which the Company is not the
surviving entity, a sale of substantially all of the assets of the Company, or a
sale of all shares of Common Stock of the Company. The Company has treated the
difference, if any, between the exercise price and the estimated fair market
value as compensation expense for financial reporting purposes. Compensation
expense for the vested portion aggregated $4,000, $90,000 and $26,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.

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

<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                         ------------------------------------------------------------------
                                 2001                   2000                   1999
                         ----------------------  --------------------  --------------------
                                      WEIGHTED               WEIGHTED              WEIGHTED
                                      AVERAGE                AVERAGE               AVERAGE
                                      EXERCISE               EXERCISE              EXERCISE
                          SHARES       PRICE       SHARES     PRICE      SHARES      PRICE
                         ----------  ----------  ----------  --------  ----------  --------
<S>                      <C>         <C>         <C>         <C>       <C>         <C>
Options outstanding at
  beginning of period    3,539,828        $2.90  3,340,780      $3.30  2,132,738      $4.73
  Granted                  739,667         1.25    968,498       2.64  2,208,028       2.14
  Exercised                (21,626)        0.47   (113,850)      0.37   (287,958)      0.04
  Canceled                (249,900)        3.36   (655,600)      5.14   (712,028)      5.29
                         ----------  ----------  ----------  --------  ----------  --------
  Options outstanding
    at end of period     4,007,969        $2.57  3,539,828      $2.90  3,340,780      $3.30
                         ==========  ==========  ==========  ========  ==========  ========
  Options exercisable    2,093,606               1,496,007             1,209,734
                         ==========              ==========            ==========
</TABLE>


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


                                   Page F-22
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                                    -------------------------------------------------
                                        2001               2000             1999
                                    --------------     ------------     -------------
<S>                                 <C>                <C>              <C>
Risk free rate                               4.5%             6.2%              6.3%
Expected life                           6.7 years        7.3 years        7.12 years
Expected volatility                           94%              90%               90%
Expected dividends                              -                -                 -
Weighted-average grant-date
   fair value of options granted           $ 1.02           $ 2.14            $ 1.91
</TABLE>


    A detail of the options outstanding and exercisable as of December 31, 2001
is as follows:

<TABLE>
<CAPTION>

                                       OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                            ------------------------------------------    ------------------------
                                              WEIGHTED       WEIGHTED                   WEIGHTED
                                              AVERAGE        AVERAGE                    AVERAGE
                               NUMBER        REMAINING       EXERCISE        NUMBER     EXERCISE
RANGE OF EXERCISE PRICES    OUTSTANDING    CONTRACT LIFE       PRICE      OUTSTANDING     PRICE
------------------------    -----------    -------------    ----------    -----------   ---------
<S>                         <C>            <C>              <C>           <C>           <C>
 $ 0.01 -   $   0.47            634,541         1.19          $ 0.14         634,541      $ 0.14
 $ 0.68 -   $   2.28          1,427,765         8.37            1.74         485,165        2.06
 $ 2.31 -   $   2.69          1,163,100         8.08            2.60         478,840        2.60
 $ 2.85 -   $  10.00            782,563         6.07            6.04         495,060        6.90
                            -----------    -------------   -------------  -----------   ----------
 $ 0.01 -   $  10.00          4,007,969        6.69          $ 2.57        2,093,606      $ 2.74
                            ===========    ============  ===============  ===========   ==========
</TABLE>


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

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                     ---------------------------------------------
                                                        2001              2000             1999
                                                     ----------         ---------       ----------
<S>                                                  <C>                <C>             <C>
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss available to common stockholders,
  as reported                                        $ (47,548)         $ (13,477)      $ (41,685)
Pro forma compensation expense                          (1,177)            (1,370)         (1,242)
                                                     ----------         ---------       ----------
Pro forma net loss available to common
  stockholders                                       $ (48,725)         $ (14,847)      $ (42,927)
                                                     ==========         =========       ==========
Basic and diluted net loss as reported               $   (1.23)         $   (0.45)      $   (1.86)
Basic and diluted pro forma net loss                 $   (1.26)         $   (0.49)      $   (1.91)
</TABLE>


PROFIT SHARING 401(K) PLAN

    The Company sponsors a 401(k) plan ("the Plan") for most full-time
employees. The Company matches 50 percent of the participant's contributions up
to six percent of the participant's base compensation. The profit sharing
contribution amount is at the sole discretion of the Company's Board of
Directors. Participants vest at a rate of 20 percent per year after the first
year of service for profit sharing contributions and 20 percent per year after
the first two years of service for matching contributions. Participants become
100 percent vested upon death, permanent disability or termination of the Plan.
Benefit expense for the years ended December 31, 2001, 2000 and 1999 was
$255,000, $267,000 and $257,000, respectively.


                                   Page F-23
<PAGE>



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


12.  RELATED PARTY TRANSACTIONS

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

<TABLE>
<CAPTION>
                                           DECEMBER 31,        DECEMBER 31,
                                              2001                2000
                                           ------------        ------------
<S>                                        <C>                 <C>
                                                 (DOLLARS IN THOUSANDS)
Receivables from related parties:
        Virgin                                $ 7,504             $ 12,122
        Vivendi (Note 6)                        2,437                    -
        Titus                                     260                  280
        Return allowance                       (4,026)              (1,988)
                                           -----------         ------------
        Total                                 $ 6,175             $ 10,414
                                           ===========         ============
Payables to related parties:
        Virgin                                $ 5,790              $ 4,832
        Titus                                   1,308                   81
                                           -----------         ------------
        Total                                 $ 7,098              $ 4,913
                                           ===========         ============
</TABLE>


EVENTS WITH TITUS INTERACTIVE S.A.

    Titus, the Company's largest stockholder, recently gained a majority of the
Company's stockholders' voting power, providing Titus with the ability to
control the outcome of votes on proposals presented to the Company's
stockholders, as well as the ability to elect a majority of the Company's
directors. The events relating to Titus' gaining of majority voting power are as
follows:

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

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

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

    In September 2001, Titus retained Europlay as consultants to assist with the
restructuring of the Company. Because the arrangement with Europlay is with
Titus and Europlay's services have a direct benefit to the Company, the Company
has recorded an expense and a capital contribution by Titus of $75,000 for the
year ended December 31, 2001 in accordance with the SEC's Staff Accounting
Bulletin No. 79 "Accounting for Expenses and Liabilities Paid by Principal
Stockholders." Beginning in October 2001, the Company agreed to reimburse Titus
for consulting expense incurred on behalf of the Company. As of December 31,
2001, the Company owed Titus $450,000 as a


                                   Page F-24
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


result of this arrangement. The Company has also entered into a commission-based
agreement with Europlay where Europlay will assist the Company with strategic
transactions, such as debt financing or equity financing, the sale of assets or
an acquisition of the Company.

DISTRIBUTION AND PUBLISHING AGREEMENTS

TITUS INTERACTIVE S.A.

    In connection with the equity investments by Titus (Note 9), the Company
performs distribution services on behalf of Titus for a fee. In connection with
such distribution services, the Company recognized fee income of $21,000,
$435,000 and $200,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

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

    Amounts due to Titus at December 31, 2001 include dividends payable of
$740,000 and $450,000 for services rendered by Europlay. Amounts due to Titus at
December 31, 2000 include borrowings of $1.0 million under the supplemental line
of credit. In March 2002, Titus paid the outstanding balance due to the Company.

VIRGIN INTERACTIVE ENTERTAINMENT LIMITED

    In February 1999, the Company entered into an International Distribution
Agreement with Virgin Interactive Entertainment Limited ("Virgin"), a wholly
owned subsidiary of Titus, which 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,
cancelable under certain conditions, subject to termination penalties and costs.
Under the Agreement, the Company pays Virgin a monthly overhead fee, certain
minimum operating charges, a distribution fee based on net sales, and Virgin
provides certain market preparation, warehousing, sales and fulfillment services
on behalf of the Company.

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

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


                                   Page F-25
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


    In connection with the International Distribution Agreement, the Company
incurred distribution commission expense of $2.3 million, $4.6 million and $3.4
million for the years ended December 31, 2001, 2000 and 1999, respectively. In
addition, the Company recognized overhead fees of $1.0 million, zero and $3.9
million and certain minimum operating charges to Virgin of $333,000, zero and
$2.9 million for the years ended December 31, 2001, 2000 and 1999, respectively.

    The Company has also entered into a Product Publishing Agreement with Virgin
which provides the Company with an exclusive license to publish and distribute
substantially all of Virgin's products within North America, Latin America and
South America for a royalty based on net sales. As part of terms of the April
2001 settlement between Virgin and the Company, the Product Publishing Agreement
was amended to provide for the Company to publish only one future title
developed by Virgin. In connection with the Product Publishing Agreement with
Virgin, the Company earned $36,000, $63,000 and $41,000 for performing
publishing and distribution services on behalf of Virgin for the years ended
December 31, 2001, 2000 and 1999, respectively.

    In connection with the International Distribution Agreement, the Company
subleases office space from Virgin. Rent expense paid to Virgin was $104,000,
$101,000 and $50,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

VIVENDI UNIVERSAL GAMES, INC.

    In connection with the distribution agreement with Vivendi (Note 6), the
Company incurred distribution commission expense of $2.2 million for the year
ended December 31, 2001.

INVESTMENT IN AFFILIATE

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

    The Company accounted for its investment in VIE in accordance with the
equity method of accounting. The Company did not recognize any material income
or loss in connection with its investment in VIE for the years ended December
31, 2001, 2000 and 1999.

RESTRUCTURING OF EUROPEAN OPERATIONS

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


                                   Page F-26
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


OTHER

    The Company had amounts due from a business controlled by the former
Chairman of the Company. Net amounts due, prior to reserves, at December 31,
2000 were $2.5 million. Such amounts at December 31, 2000 are fully reserved. In
2001, the Company wrote off this receivable.

13.  CONCENTRATION OF CREDIT RISK

    As of December 31, 2001, substantially all of the Company's sales were to
its distributors Virgin and Vivendi. Virgin and Vivendi each have exclusive
rights to distribute the Company's products in substantial portions of the
world. As a consequence, the distribution of the Company's products by Virgin
and Vivendi will generate a substantial majority of the Company's revenues, and
proceeds from Virgin and Vivendi from the distribution of the Company's products
will constitute a substantial majority of the Company's operating cash flows.
Therefore, the Company's revenues and cash flows could fall significantly and
the Company's business and financial results could suffer material harm if:

     o    either Virgin or Vivendi fails to deliver to the Company the full
          proceeds owed it from distribution of its products;

     o    either Virgin or Vivendi fails to effectively distribute the Company's
          products in their respective territories; or

     o    either Virgin or Vivendi otherwise fails to perform under their
          respective distribution agreements.

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

    For the years ended December 31, 2001, 2000 and 1999, Virgin accounted for
approximately 22, 29 and 22 percent, respectively, of net revenues in connection
with the International Distribution Agreement (Note 12). Vivendi accounted for
17 percent of net revenues in the year ended December 31, 2001.


                                   Page F-27
<PAGE>



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


14.  SEGMENT AND GEOGRAPHICAL INFORMATION

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

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                --------------------------------------------------
                                                   2001                2000                1999
                                                ----------          ----------          ----------
<S>                                             <C>                 <C>                 <C>
Net revenues:                                                  (DOLLARS IN THOUSANDS)
     United States                              $   57,784          $ 104,377           $  92,244
     United Kingdom                                      5                205               9,686
                                                ----------          ----------          ----------
       Consolidated net revenues                $   57,789          $ 104,582           $ 101,930
                                                ----------          ----------          ----------
 Loss from operations:
   United States                                $  (39,533)         $  (7,057)          $ (28,824)
   United Kingdom                                   (1,757)            (1,329)             (3,980)
                                                ----------          ----------          ----------
       Consolidated loss from operations        $  (41,290)         $  (8,386)          $ (32,804)
                                                ----------          ----------          ----------
 Expenditures made for the acquisition
    of long-lived assets:
      United States                             $    1,736          $   3,177           $   1,595
      United Kingdom                                    21                 59                   -
                                                ----------          ----------          ----------
        Total expenditures for
          long-lived assets                     $    1,757          $   3,236           $   1,595
                                                ==========          ==========          ==========
</TABLE>


    Net revenues were made to geographic regions as follows:

<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                       ---------------------------------------------------------------------
                              2001                   2000                     1999
                       ------------------   ---------------------     ----------------------
                         AMOUNT   PERCENT     AMOUNT      PERCENT      AMOUNT       PERCENT
                       ---------  -------   ----------    -------     ----------    --------
<S>                    <C>        <C>       <C>           <C>         <C>           <C>
                                              (DOLLARS IN THOUSANDS)
North America          $ 36,339       63 %   $ 56,454         54 %    $  49,443          49 %
Europe                   12,597       22       28,107         27         23,901          23
Rest of World             2,854        5        6,970          7          6,409           6
OEM, royalty and
   licensing              5,999       10       13,051         12         22,177          22
                       ---------  -------   ----------    -------     ----------    --------
                       $ 57,789      100 %  $ 104,582        100 %    $ 101,930         100 %
                       =========  =======   ==========    =======     ==========    ========
</TABLE>

Long-lived assets by geographic regions, net:

<TABLE>
<CAPTION>
                           DECEMBER 31,               DECEMBER 31,
                              2001                       2000
                      ------------------------   --------------------
                       AMOUNT       PERCENT       AMOUNT      PERCENT
                      --------      -------      --------     -------
<S>                   <C>           <C>          <C>          <C>
                                   (DOLLARS IN THOUSANDS)

North America          $ 5,894          98 %      $ 6,139         98 %
Europe                      75           1             76          1
OEM, royalty and
   licensing                50           1             60          1
                      --------      -------      --------     -------
                       $ 6,019         100 %      $ 6,275        100 %
                      ========      =======      ========     =======
</TABLE>


                                   Page F-28
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                                DECEMBER 31, 2001


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
                                                ----------      -----------       ------------       -----------
<S>                                             <C>             <C>               <C>                <C>
                                                          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 2001:
Net revenues                                      $ 17,313         $ 14,802            $ 4,166          $ 21,508
                                                ===========     ============      =============      ============
Gross profit (loss)                                $ 6,828          $ 3,809           $ (7,282)          $ 8,618
                                                ===========     ============      =============      ============
Net loss                                          $ (8,422)       $ (12,398)         $ (20,648)         $ (4,848)
                                                ===========     ============      =============      ============

Net loss per common share basic/diluted            $ (0.30)         $ (0.34)           $ (0.50)          $ (0.09)
                                                ===========     ============      =============      ============
Year ended December 31, 2000:
Net revenues                                      $ 18,143         $ 24,921           $ 31,631          $ 29,887
                                                ===========     ============      =============      ============
Gross profit                                       $ 8,571         $ 13,465           $ 15,436          $ 13,049
                                                ===========     ============      =============      ============
Net income (loss)                                 $ (5,498)        $ (1,903)             $ 113          $ (4,787)
                                                ===========     ============      =============      ============

Net loss per common share basic/diluted            $ (0.18)         $ (0.08)           $ (0.01)          $ (0.18)
                                                ===========     ============      =============      ============
</TABLE>


16.  SUBSEQUENT EVENTS

PENDING ASSET SALE

    The Company is in the advanced stages of negotiation with a potential buyer
of its product development subsidiary, Shiny. If this sale is consummated, the
Company believes that the proceeds from the sale, following the repayment of
third party obligations, which are a condition to the transaction, should fund
its operations at least through the end of 2002. However, there is no assurance
that the Company will be able to complete the sale or that the net proceeds from
the sale will fund its operations through the end of the year. Furthermore, if
the Company is not able to complete the transaction, the Company may not be able
to fund its operations or continue as a going concern without receiving
immediate alternative financing.

CONVERSION OF SERIES A PREFERRED STOCK

    In March 2002, Titus converted its remaining 383,354 shares of Series A
Preferred Stock into approximately 47.5 million shares of the Company's Common
Stock. Titus now owns approximately 67 million shares of Common Stock, which
represents approximately 72% of the Company's outstanding Common Stock, its only
voting security, immediately following the conversion.



                                   Page F-29
<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, 1999        $   18,431       $    25,187      $  (34,457)     $    9,161
                                  =============    ==============     ============    ==========

Year ended December 31, 2000        $    9,161       $    19,016      $  (21,634)     $    6,543
                                  =============    ==============     ============    ==========

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


                                   Page S-1