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

                               ----------------

                                   FORM 10-K

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

  For the Fiscal Year Ended December 31, 2000

                                      or

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

  For the transition period from _____ to ______

                        Commission File Number 0-24363

                               ----------------

                         Interplay Entertainment Corp.
          (Exact name of the registrant as specified in its charter)

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

               16815 Von Karman Avenue, Irvine, California 92606
                   (Address of principal executive offices)

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

                               ----------------

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

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

                        Common Stock, $0.001 par value

                               ----------------

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

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

   As of April 12, 2001, 38,280,267 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 $26,123,631.

                      Documents Incorporated by Reference

   Portions of the definitive proxy statement for the Company's 2000 Annual
Meeting of Stockholders, to be held in June 2001, are incorporated by
reference into Part III.

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                         INTERPLAY ENTERTAINMENT CORP.

            INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000

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 <C>      <S>                                                             <C>
                                      PART I

 Item 1.  Business......................................................    4

 Item 2.  Properties....................................................   12

 Item 3.  Legal Proceedings.............................................   12

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

                                      PART II

 Item 5.  Market for Registrant's Common Equity and Related Stockholder
          Matters.......................................................   14

 Item 6.  Selected Financial Data.......................................   15

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

 Item 7A. Quantitative and Qualitative Disclosure about Market Risk.....   36

 Item 8.  Consolidated Financial Statements and Supplementary Data......   36

 Item 9.  Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure......................................   36

                                     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
</TABLE>

                                       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, compliance with the
Company's line of credit and the continuation, extension or replacement of
such line 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 remain in
compliance with its line of credit or be able to continue, renew or replace
such line. 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.

                                       3
<PAGE>

                                    PART I

ITEM 1. BUSINESS

Overview

   Interplay Entertainment Corp., a Delaware corporation, (together with its
subsidiaries, the "Company" or "Interplay") is a leading developer, publisher
and distributor of interactive entertainment software for both core gamers and
the mass market. Interplay was incorporated in the State of California in 1982
and was reincorporated in the State of Delaware in May 1998. The Company,
which commenced operations in 1983, is most widely known for its titles in the
action/arcade, adventure/RPG, and strategy/puzzle categories. The Company has
produced titles for many of the most popular interactive entertainment
software platforms, and currently balances its publishing and distribution
business by developing interactive entertainment software for PCs and current
and next generation video game consoles, such as the Sony PlayStation and
PlayStation 2, Microsoft Xbox and Nintendo GameCube.

   The Company seeks 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 has published many
such successful franchise titles to date. In addition, the Company holds
licenses to use popular brands, such as Advanced Dungeons and Dragons, Matrix,
Star Trek and Caesars Palace, for incorporation into certain of its products.
Of the more than 20 titles currently in development by the Company, more than
half are sequels to successful titles or incorporate licensed intellectual
properties.

   In February 1999, in connection with the Company's acquisition of a
minority membership interest in the parent entity of Virgin Interactive
Entertainment Limited ("Virgin"), the Company entered into an International
Distribution Agreement with Virgin (the "Virgin Distribution Agreement").
Pursuant to the Virgin Distribution Agreement, Virgin hired the Company's
European sales and marketing personnel and is distributing substantially all
of the Company's titles in Europe, CIS, Africa and the Middle East. As part of
the terms of the April 2001 settlement between Virgin and the Company, VIE
Acquisition Group LLC ("VIE") redeemed the Company's membership interest in
VIE. See "Business--Sales and Distribution--International" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Distribution Agreement".

   The Company completed equity transactions in 1999 and 2000 with Titus
Interactive S.A. ("Titus"), a significant shareholder, which provided for the
issuance of 10,795,455 shares of the Company's Common Stock and 719,424 shares
of the Company's Preferred Stock for approximately $55 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance--Control by Titus". In April
2001, the Company completed a private placement of 8,126,770 shares of Common
Stock for $12.7 million, and received net proceeds of approximately $11.5
million.

Products

   The Company develops, publishes and distributes interactive entertainment
software titles that provide immersive game experiences by combining advanced
technology with engaging content, vivid graphics and rich sound. The Company
utilizes the experience and judgment of the avid gamers in its product
development group to select and produce the products it publishes. The
Company's 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. The Company currently develops and
publishes products compatible with multiple variations of the PC platform
including Microsoft Windows, and for video game consoles such as the Sony
PlayStation and PlayStation 2. The Company also develops and has plans to
publish products for the Microsoft Xbox and Nintendo GameCube video game
consoles, which are scheduled for release in the latter part of 2001. In
addition, the Company anticipates substantial growth in installed base for
high-speed Internet access, with the possibility of significantly expanded
technical capabilities for the PC platform.

                                       4
<PAGE>

   The Company assesses 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. The Company 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, the Company is 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 the Company develops
software is not released on a timely basis or does not attain significant
market penetration, the Company's business, operating results and financial
condition could be materially adversely affected. Alternatively, if the
Company fails to develop products for a platform that does achieve significant
market penetration, then the Company's business, operating results and
financial condition could also be materially adversely affected.

   The Company has entered into license agreements with Sega, Sony Computer
Entertainment, Microsoft 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 the Company by the licensor. The Company
pays 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 the Company 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. The inability of the Company to obtain such licenses
or approvals could have a material adverse effect on the Company's 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."

Product Development

   The Company develops or acquires its products from a variety of sources,
including its internal development studios, its subsidiary Shiny Entertainment
Inc. ("Shiny") and publishing relationships with leading independent
developers.

   The Development Process. The Company develops original products both
internally, using its in-house development staff, and externally, using third
party software developers working under contract with the Company. Producers
on the Company's 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 the Company's product development staff to ensure
compliance with the product's design specifications and the Company's quality
standards. The Company enters into consulting or development agreements with
third party developers, generally on a flat-fee, work-for-hire basis or on a
royalty basis, whereby the Company pays development fees or royalty advances
based on the achievement of milestones. In royalty arrangements, the Company
ultimately pays continuation royalties to developers once the Company's
advances have been recouped. In addition, in certain cases, the Company will
utilize third party developers to convert products for use with new platforms.

   The Company's products typically have short life cycles, and the Company
depends 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."

                                       5
<PAGE>

   During the years ended December 31, 2000, 1999 and 1998, the Company spent
$22.2 million, $20.6 million and $24.5 million, respectively, on product
research and development activities. Those amounts represented 21.2%, 20.2%
and 19.3%, respectively, of revenue in each of those periods.

 Internal Product Development

   U.S. Product Development. The Company's U.S. internal product development
group (excluding Shiny's development group) consisted of approximately 210
people at December 31, 2000. Once a design is selected by the Company, a
production team, development schedule and budget are established. The
Company's 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. The Company utilizes a variety of advanced hardware and software
development tools, including animation, sound compression utilities and video
compression for the production and development of its interactive
entertainment software titles. The Company's internal development organization
is divided into separate studios, each dedicated to the production and
development of products for a particular product category. The Company also
undertakes development activities through its subsidiary, Shiny. 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. The Company believes that the separate studios approach promotes
the creative and entrepreneurial environment necessary to develop innovative
and successful titles. In addition, the Company believes that breaking down
the development function into separate studios enables it to improve its
software design capabilities, to better manage its internal and external
development processes and to create and enhance its software development tools
and techniques, thereby enabling the Company to obtain greater efficiency and
improved predictability in the software development process.

   Shiny. 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 under the Matrix license. The Company
plans to publish and distribute this title worldwide under the Shiny label.
Shiny's development group consisted of approximately 24 people at December 31,
2000.

   International Development. The Company has international development
resources through its European subsidiary, Interplay Productions Limited
("Interplay Europe"), whose software producers manage the efforts of third
party developers in various European countries. The Company currently has
several original products, under development through Interplay Europe.
Interplay Europe's development group consisted of approximately 3 people at
December 31, 2000.

 External Product Development

   In order to expand its product offerings to include hit titles created by
third party developers, and to leverage its publishing and distribution
capabilities, the Company enters into publishing arrangements with third party
developers, including foreign developers and publishers who wish to utilize
the Company's sales and distribution network in North America. In February
1999, the Company entered into a Product Publishing Agreement with Virgin
Interactive Entertainment Limited pursuant to which the Company will publish
substantially all of Virgin's titles in North and South America and Japan. As
part 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 the years ended December 31, 2000,
1999 and 1998, approximately 70%, 75% and 70%, respectively, of new products
released by the Company which the Company believes are or will become
franchise titles were developed by third party developers. The Company expects
that the proportion of its new products which are developed externally may
vary significantly from period to period as different products are released.
The Company's focus in obtaining publishing products is to select titles that
combine advanced technologies with creative game design. The publishing
agreements usually provide the Company with

                                       6
<PAGE>

the exclusive right to distribute a product on a worldwide basis (however, in
certain instances the agreement provides for a specified territory). The
Company typically funds 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, the Company's publishing
arrangements typically provide the Company with ownership of the trademarks
relating to the product as well as exclusive rights to sequels to the product.
The Company manages the production of external development projects by
appointing a producer from one of its internal product development studios to
oversee the development process and work with the third party developer to
design, develop and test the game.

   The Company believes 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
the Company's commercially successful products have been developed under this
strategy. However, the Company's reliance on third party software developers
for the development of a significant number of its 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."

Sales And Distribution

   The Company's sales and distribution efforts are designed to broaden
product distribution, to control product placement and to increase the
penetration of the Company's products in domestic and international markets.
Over the past several years, the Company has increased its sales and
distribution efforts in international markets through the formation of
Interplay Europe, through the Virgin Distribution Agreement covering Europe,
CIS, Africa and the Middle East, and through licensing and third party
distribution strategies elsewhere. The Company also distributes its software
products through Interplay OEM in bundling transactions with computer,
peripheral and various other companies, as well as through on-line services.

   North America. In North America, the Company sells its products primarily
to mass merchants, warehouse club stores, large computer and software
specialty retail chains, through catalogs and through Internet commerce sites.
A majority of the Company's North American retail sales are to direct
accounts, and a lesser percentage are to third party distributors. The
Company's principal direct retail accounts include CompUSA, Best Buy,
Electronics Boutique, Wal-Mart, K-Mart, Target, Toys-r-us and Software
Acquisitions (Babbages). The Company's principal distributors in North America
include Navarre and Softek. The Company also distributes product catalogs and
related promotional material to end-users who can order products by direct
mail, by using a toll-free number, or by accessing the Company's 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."

   The Company sells to retailers and distributors through its North American
sales organization. The Company's North American sales force is largely
responsible for generating retail demand for the Company's products by
presenting new products to the Company's retail customers in advance of the
products' scheduled release dates, by providing technical advice with respect
to the Company's products and by working closely with retailers and
distributors to place the Company's products in the appropriate channels for
distribution. The Company typically ships its products within a short period
of time after acceptance of purchase orders from distributors and other
customers. Accordingly, the Company typically does not have a material backlog
of unfilled orders, and net sales in any period are substantially dependent on
orders received in that period. Any significant weakening in customer demand
would therefore have a material adverse impact on the Company's operating
results and on the Company's ability to achieve or maintain profitability. 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."

   The Company seeks to extend the life cycle and financial return of many of
its products by marketing those products differently along the product's sales
life cycle. Although the product life cycle for each title varies based on a
number of factors, including the quality of the title, the number and quality
of competing titles, and in

                                       7
<PAGE>

certain instances seasonality, the Company typically considers a title to be
"back catalog" item once it incurs its first price drop after its initial
release. The Company utilizes 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 the Company
shifts its advertising support to newer releases.

   The Company provides terms of sale comparable to competitors in its
industry. In addition, the Company provides technical support in North America
for its products through its customer support department and a 90-day limited
warranty to end-users that its products will be free from manufacturing
defects. While to date the Company has not experienced any material warranty
claims, there can be no assurance that the Company 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, the Company distributed its titles
in Europe through Interplay Europe, and employed approximately 21 people
dedicated to sales and marketing in the European market. Interplay Europe had
an agreement with Infogrames U.K. and Virgin to pool resources in order to
distribute PC and video game console software to independent software
retailers in the United Kingdom, and had distribution agreements with Acclaim
Entertainment pursuant to which Acclaim Entertainment distributes certain of
the Company's titles in selected European countries. Net revenues from such
distribution agreements with Acclaim Entertainment represented 3.4% and 9.6%
of the Company's net revenues in the years ended December 31, 1999 and 1998,
respectively. In February 1999, the Company completed an agreement to acquire
a 43.9% membership interest in VIE Acquisition Group LLC, the parent entity of
Virgin. In connection with such acquisition, the Company entered into the
Virgin Distribution Agreement, pursuant to which Virgin hired Interplay
Europe's sales and marketing personnel and is distributing substantially all
of the Company's titles in Europe, CIS, Africa and the Middle East for a seven
year period. Under such agreement as amended, the Company pays Virgin a
distribution fee for its marketing and distribution of the Company's products,
as well as certain direct costs and expenses. As part of the April 2001
settlement between Virgin and the Company, VIE redeemed the Company's
membership interest in VIE. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Performance--Distribution Agreement."

   The Company has 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, the Company
initiated a licensing strategy in Japan in order to expand its Japanese sales.
The Company has also licensed a number of its titles to Sony Computer
Entertainment to publish in Japan on the PlayStation console. The Company has
entered into an agreement with Tech Pacific Australia Pty Ltd ("Tech Pacific")
in 2000 and terminated its agreement with Roadshow Entertainment Pty.
Ltd.("Roadshow"), pursuant to which Tech Pacific has the exclusive right to
sell and distribute the Company's ongoing PC and video game console products
in Australia. The Company has an agreement with Roadshow to market and
distribute its PC and video game console products in New Zealand.

   OEM. Interplay OEM employs approximately 22 people, including 6 in Europe
and one 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 continue to generate consistent profits for the Company, and a
decrease in OEM sales or margins could have a material adverse effect on the
Company's business, operating results and financial condition. In addition to
distributing the Company's titles, Interplay OEM serves as an exclusive OEM
distributor for a number of

                                       8
<PAGE>

interactive entertainment software publishers, including LucasArts
Entertainment Company, Fox Interactive, Virgin, Gathering of Developers, Rage
Software, 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. In 2000, Interplay OEM launched a new division,
bundledirect.com, which sells fixed bundle packs to Value-Added Resellers and
System Builders. 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 Interplay's
entertainment properties.

   The Company's North American and International distribution channels are
characterized by continuous change, including consolidation, financial
difficulties of certain distributors and retailers, and the emergence of new
distributors and new retail channels such as warehouse chains, mass merchants,
computer superstores and Internet commerce sites. The Company is exposed to
the risk of product returns and markdown allowances with respect to its
distributors and retailers. The Company allows distributors and retailers to
return defective, shelf-worn and damaged products in accordance with
negotiated terms. The Company considers return requests on a case-by-case
basis, taking into consideration factors such as the products involved, the
customer's historical sales volume and the customer's credit status. The
Company also offers a 90-day limited warranty to its end users that its
products will be free from manufacturing defects. In addition, the Company
provides markdown allowances, which consist of credits given to customers to
induce them to lower the retail sales price of certain products in an effort
to increase sales to consumers and to help manage its customers' inventory
levels in the distribution channel. Although the Company maintains a reserve
for returns and markdown allowances, and although the Company manages its
returns and markdown allowances through its authorization procedure, the
Company could be forced to accept substantial product returns and provide
markdown allowances to maintain its relationships with retailers and its
access to certain distribution channels. The Company's reserve for estimated
returns, exchanges, markdowns, price concessions, and warranty costs was $6.5
million and $9.2 million at December 31, 2000 and 1999, respectively. Product
returns and markdown allowances that exceed the Company's reserves could have
a material adverse effect on the Company's 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

   The Company's marketing department is organized into product groups aligned
with its 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.

   The Company's marketing department develops and implements marketing
programs and campaigns for each of the Company's titles and product groups.
The Company's 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. The Company
also sends direct and electronic mail promotional materials to its database of
gamers, and has selectively used radio and television advertisements in
connection with the introduction of certain of its products. The Company
budgets 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. The Company
anticipates that over time, as the market for its products matures and
competition becomes more intense, it will become necessary to devote more
overall resources to marketing its products but marketing costs for its
products should remain proportional to revenues.

                                       9
<PAGE>

   The Company maximizes on-line marketing through web advertising and the
maintenance of several web sites. These sites provide news and information of
interest to its customers through free demonstration versions, contests,
games, tournaments and promotions. Also, to generate interest in new product
introductions, the Company provides free demonstration versions of upcoming
titles both through magazines and through game samples that consumers can
download from the Company's web site. In addition, marketing hosts on-line
events and maintains 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. The Company's competitors vary in size from small companies
to very large corporations with significantly greater financial, marketing and
product development resources than those of the Company. Due to these greater
resources, certain of the Company's 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 the
Company. The Company believes 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.

   The Company competes 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 Interactive Publishing 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 the Company in the
development of software titles for their respective 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 than the Company, may decide to compete directly
with the Company or to enter into exclusive relationships with competitors of
the Company. The Company also believes 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 the Company's products typically have a limited amount of
shelf space and promotional resources, and there is intense competition among
consumer software producers, and in particular 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 may require the Company to increase its marketing expenditures. Due to
increased competition for limited shelf space, retailers and distributors are
in an increasingly better position to negotiate favorable terms of sale,
including price discounts, price protection, marketing and display fees and
product return policies. The Company's products constitute a relatively small
percentage of any retailer's sales volume, and there can be no assurance that
retailers will continue to purchase the Company's products or to provide the
Company's products with adequate levels of shelf space and promotional
support, and a prolonged failure in this regard may have a material adverse
effect on the Company's 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

   The Company's PC-based products consist primarily of CD-ROMs and DVDs,
manuals, and packaging materials. Substantially all of the Company's CD-ROM
and DVDs duplication is performed by unaffiliated third parties. Printing of
the manuals and packaging materials, manufacturing of related materials and
assembly of

                                      10
<PAGE>

completed packages are performed to the Company's specifications by
unaffiliated third parties. To date, the Company has not experienced any
material difficulties or delays in the manufacture and assembly of its CD-ROM
or DVD based products, and has 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 the Company for distribution.
PlayStation 2 products consist of DVDs and PlayStation products consist of CD-
ROMs. Both products include manuals and packaging and are typically delivered
by Sony Computer Entertainment within a relatively short lead-time.

   If the Company experiences unanticipated delays in the delivery of
manufactured software products by the manufacturers, its 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

   The Company holds copyrights on its products, product literature and
advertising and other materials, and holds trademark rights in the Company's
name, the Interplay logo, its "By Gamers. For Gamers.(TM)" slogan and certain
of its product names and publishing labels. The Company also holds rights
under a patent application related to the software engine for one of its
products. The Company has licensed certain products to third parties for
distribution in particular geographic markets or for particular platforms, and
receives royalties on such licenses. The Company also outsources some of its
product development to third party developers, contractually retaining all
intellectual property rights related to such projects. The Company also
licenses certain products developed by third parties and pays royalties on
such products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Dependence on Third Party Software
Developers."

   The Company regards its software as proprietary and relies primarily on a
combination of patent, copyright, trademark and trade secret laws, employee
and third party nondisclosure agreements and other methods to protect its
proprietary rights. The Company owns or licenses various copyrights and
trademarks. While the Company provides "shrinkwrap" license agreements or
limitations on use with its software, the enforceability of such agreements or
limitations is uncertain. The Company is aware that unauthorized copying
occurs within the computer software industry, and if a significantly greater
amount of unauthorized copying of the Company's interactive entertainment
software products were to occur, the Company's operating results could be
materially adversely affected. The Company uses copy protection on selected
products and it does not provide source code to third parties unless they have
signed nondisclosure agreements.

   The Company relies on existing copyright laws to prevent unauthorized
distribution of its software. Existing copyright laws afford only limited
protection. Policing unauthorized use of the Company's products is difficult,
and software piracy can be expected to be a persistent problem, especially in
certain international markets. Further, the laws of certain countries in which
the Company's products are or may be distributed either do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the U.S. or are weakly enforced. Legal protection of the Company's
rights may be ineffective in such countries, and as the Company leverages its
software products using emerging technologies, such as the Internet and on-
line services, the ability of the Company to protect its 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 adequate protection to
the Company's products 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 the Company makes
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, the Company has
received communication from third parties asserting that features

                                      11
<PAGE>

or content of certain of its products may infringe upon the intellectual
property rights of such parties. There can be no assurance that existing or
future infringement claims against the Company will not result in costly
litigation or require the Company to license the intellectual property rights
of third parties, either of which could have a material adverse effect on the
Company's 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, 2000, the Company had 413 employees, including 241 in
product development, 102 in sales and marketing and 70 in finance, general and
administrative. Included in these counts are 27 employees of Shiny, 22
employees of Interplay OEM and 7 employees of Interplay Europe. The Company
also retains independent contractors to provide certain services, primarily in
connection with its product development activities. The Company and its full
time employees are not subject to any collective bargaining agreements and the
Company believes that its relations with its employees are good.

   From time to time the Company has retained actors and/or "voice over"
talent to perform in certain of the Company's products, and the Company
expects 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. The
Company or an affiliated entity may be required to become subject to the
jurisdiction of SAG's collective bargaining agreement, or some other
applicable performers' guild, with respect to the Company's development
projects in the future in order to engage the services of performers in the
development of the Company's products.

ITEM 2. PROPERTIES

   The Company's headquarters are located in Irvine, California, where the
Company leases approximately 81,000 square feet of office space. This lease
expires in June 2006 and provides the Company 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. Interplay Europe leases
approximately 10,000 square feet of space in Buckinghamshire, England. This
lease expires in October 2014 and, Interplay Europe has the option for early
termination of the lease in November 2005. In addition, Interplay Europe
subleases approximately 1,700 square feet of office space in Central London,
England from Virgin. This lease expires in July 2001. Shiny leases
approximately 4,100 square feet of space in Laguna Beach, California, which
lease expires in October 2001. The Company believes that its facilities are
adequate for its current needs and that suitable additional or substitute
space will be available in the future to accommodate potential expansion of
the Company's operations.

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.

   The Company and the former owner of Shiny have a dispute over additional
cash payments upon the delivery and acceptance of interactive entertainment
software titles that Shiny was committed to deliver over time. The Company
believes that no amounts are due as of December 31, 2000 under the applicable
agreements. In March 2001, the Company entered into an amendment to the Shiny
purchase agreement which, among other things, provides for the settlement of a
dispute with the former owner of Shiny, and for the Company to acquire the
remaining nine percent equity interest in Shiny for $600,000. The amendment
also provides for additional cash payments to the former owner of Shiny for
two interactive entertainment software titles to be delivered in the future.
The former owner of Shiny will earn royalties after the future delivery of the
two titles to the Company.

                                      12
<PAGE>

   Virgin Interactive Entertainment Limited ("Virgin") disputed an amendment
to the International Distribution Agreement with the Company, and claimed that
the Company was obligated, among other things, to pay a contribution to their
overhead of up to approximately $9.3 million annually, subject to decrease by
the amount of commissions earned by Virgin on its distribution of our
products. In April 2001, the Company settled its dispute with Virgin and
amended the International Distribution Agreement, the Termination Agreement
and the Product Publishing Agreement entered into on February 10, 1999. As a
result of the settlement, Virgin dismissed its claim for overhead fees, VIE
redeemed the Company's membership interest in VIE and Virgin paid the Company
$3.1 million in net past due balances owed under the International
Distribution Agreement. In addition, the Company will pay Virgin a one-time
marketing fee of $333,000 for the period ended June 30, 2001, and the monthly
overhead fee was revised for the Company to pay $111,000 per month for a nine
month period beginning April 2001 and $83,000 per month for a six month period
beginning January 2002, with no further overhead commitment for the remainder
of the term of the International Distribution Agreement.

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

   On October 25, 2000, the Company held its annual stockholders' meeting.
There were 30,016,147 shares of Common Stock outstanding entitled to vote and
a total of 24,061,598 shares (80%) were represented at the meeting in person
or by proxy. In addition, the 719,424 shares of Series A Preferred Stock owned
by Titus were represented and were entitled to 7,194,240 votes. The following
summarizes vote results of proposals submitted to the Company's stockholders.

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

<TABLE>
<CAPTION>
                                                             For       Withheld
                                                         -----------  ----------
     <S>                                                 <C>          <C>
     Brian Fargo........................................  29,466,562      99,543
     Richard S.F. Lehrberg..............................  29,466,562      99,543
     James Barnett......................................  11,166,600  18,399,505
     R. Stanley Roach...................................  11,166,600  18,399,505
     Herve Caen.........................................  29,466,562      99,543
     Eric Caen..........................................  29,466,562      99,543
</TABLE>

2. Proposal for the issuance of Convertible Preferred Stock and Warrants to
   Titus Interactive S.A., pursuant to the terms of the Stock Purchase
   Agreement dated April 13, 2000.

<TABLE>
<CAPTION>
        For               Against                   Withheld                   Broker Non-vote
        ---               -------                   --------                   ---------------
     <S>                  <C>                       <C>                        <C>
     23,721,262           114,445                    3,219                        5,727,179
</TABLE>

3. Proposal for the amendment to limit the voting rights of the Series A
   Preferred Stock in compliance with the Nasdaq National Market requirements.

<TABLE>
<CAPTION>
        For               Against                   Withheld                   Broker Non-vote
        ---               -------                   --------                   ---------------
     <S>                  <C>                       <C>                        <C>
     23,811,347           22,885                     4,694                        5,727,179
</TABLE>

4. Proposal for the amendment to Certificate of Incorporation to increase the
   number of authorized Common Stock to 100,000,000.

<TABLE>
<CAPTION>
        For               Against                   Withheld                   Broker Non-vote
        ---               -------                   --------                   ---------------
     <S>                  <C>                       <C>                        <C>
     29,512,841           49,245                     4,019                           --
</TABLE>

5. Proposal to ratify the appointment of Arthur Andersen LLP as independent
   auditors for the fiscal year ending December 31, 2000.

<TABLE>
<CAPTION>
        For               Against                   Withheld                   Broker Non-vote
        ---               -------                   --------                   ---------------
     <S>                  <C>                       <C>                        <C>
     29,558,462            5,705                     1,938                           --
</TABLE>

                                      13
<PAGE>

                                    PART II

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

   The Common Stock is traded on The NASDAQ Stock Market National Market
System under the symbol "IPLY". As of December 31, 2000, there were
approximately 2,000 holders of the Common Stock.

   The following table sets forth the range of high and low sales prices for
the Common Stock for the periods indicated.

<TABLE>
<CAPTION>
     For the Year ended December 31, 1999                           High   Low
     ------------------------------------                           ----- -----
     <S>                                                            <C>   <C>
     First Quarter................................................. $3.00 $1.69
     Second Quarter................................................  2.63  1.88
     Third Quarter.................................................  2.94  2.00
     Fourth Quarter................................................  4.44  1.56

<CAPTION>
     For the Year ended December 31, 2000                           High   Low
     ------------------------------------                           ----- -----
     <S>                                                            <C>   <C>
     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

   The Company anticipates that all future earnings will be retained to
finance future operations, and the Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future. The Company's credit
agreement with a bank restricts the Company from paying cash dividends without
the prior written consent of the lender. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Liquidity; Future Capital Requirements".

   The following is a summary of transactions by the Company during the year
ended December 31, 2000 involving sales of the Company's securities that were
not registered under the Securities Act:

   During the year ended December 31, 2000, the Company issued an aggregate of
968,498 nonqualified stock options to purchase Common Stock pursuant to the
Company's 1997 Stock Incentive Plan (the "1997 Plan") to officers, directors
and employees of the Company at a weighted average exercise price of $2.64.
Such options were issued but not sold, in the view of the Company, and,
therefore, registration thereof was not required. During the period referred
to above, options to issue 94,298 shares of the Company's Common Stock
pursuant to the 1997 Plan were exercised. In addition, under the Incentive
Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan--
1991, options to issue 29,413 shares of the Company's Common Stock were
exercised.

   In April 2000, the Company issued 719,424 shares of Preferred Stock to
Titus for $20 million in a transaction that included warrants to Titus for up
to 500,000 shares of Common Stock at $3.79 per share. An employee of the
Company was issued 56,208 shares of the Company's Common Stock. Such shares
were issued in reliance upon the exemption provided by Section 4(2) of the
Securities Act.

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

                                      14
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The selected consolidated statements of operations data for the years ended
December 31, 2000, 1999 and 1998 and the selected consolidated balance sheets
data as of December 31, 2000 and 1999 are derived from the Company's audited
consolidated financial statements included elsewhere in this Form 10-K. The
selected consolidated statements of operations data for the eight months ended
December 31, 1997 and for the years ended April 30, 1997 and 1996, and the
selected consolidated balance sheets data as of December 31, 1998, 1997, April
30, 1997 and 1996 are derived from the Company's audited consolidated
financial statements not included in this Form 10-K. The Company's historical
results are not necessarily indicative of the results that may be achieved for
any other period. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in
this Form 10-K.

<TABLE>
<CAPTION>
                                                        Eight Months
                                                           Ended       Years Ended
                           Years Ended December 31,     December 31,    April 30,
                          ----------------------------  ------------ -----------------
                            2000      1999      1998        1997       1997     1996
                          --------  --------  --------  ------------ --------  -------
                              (Dollars in thousands, except per share amounts)
<S>                       <C>       <C>       <C>       <C>          <C>       <C>
Statements of Operations
 Data(1):
Net revenues............  $104,582  $101,930  $126,862    $85,961    $ 83,262  $96,952
Cost of goods sold......    54,061    61,103    71,928     44,864      62,480   49,939
                          --------  --------  --------    -------    --------  -------
Gross profit............    50,521    40,827    54,934     41,097      20,782   47,013
Operating expenses:
 Marketing and sales....    26,482    29,524    39,471     20,603      24,627   23,285
 General and
  administrative........    10,249    18,155    12,841      8,989       9,408    9,025
 Product development....    22,176    20,629    24,472     14,291      21,431   15,120
 Other..................       --      5,323       --         --          --       --
                          --------  --------  --------    -------    --------  -------
 Total operating
  expenses..............    58,907    73,631    76,784     43,883      55,466   47,430
                          --------  --------  --------    -------    --------  -------
Operating loss..........    (8,386)  (32,804)  (21,850)    (2,786)    (34,684)    (417)
Other expense...........    (3,689)   (3,471)   (4,933)    (2,273)     (1,600)    (807)
                          --------  --------  --------    -------    --------  -------
Loss before income
 taxes..................   (12,075)  (36,275)  (26,783)    (5,059)    (36,284)  (1,224)
Provision (benefit) for
 income taxes...........       --      5,410     1,437        --       (9,065)    (480)
                          --------  --------  --------    -------    --------  -------
Net loss................  $(12,075) $(41,685) $(28,220)   $(5,059)   $(27,219) $  (744)
                          ========  ========  ========    =======    ========  =======
Cumulative dividend on
 participating preferred
 stock..................  $    870  $    --   $    --     $   --     $    --   $   --
Accretion of warrant on
 preferred stock........       532       --        --         --          --       --
                          --------  --------  --------    -------    --------  -------
Net loss attributable to
 common stockholders....  $(13,477) $(41,685) $(28,220)   $(5,059)   $(27,219) $  (744)
                          ========  ========  ========    =======    ========  =======
Net loss per share (2):
 Basic..................  $  (0.45) $  (1.86) $  (1.91)   $ (0.45)   $  (2.46) $ (0.07)
 Diluted................  $  (0.45) $  (1.86) $  (1.91)   $ (0.45)   $  (2.46) $ (0.07)
                          ========  ========  ========    =======    ========  =======
Selected Operating Data:
Net revenues by
 geographic region:
 North America..........  $ 56,454  $ 49,443  $ 73,865    $51,833    $ 38,606  $54,702
 International..........    35,077    30,310    35,793     24,642      32,006   24,579
 OEM, royalty and
  licensing.............    13,051    22,177    17,204      9,486      12,650   17,671
Net revenues by
 platform:
 Personal computer......  $ 76,886  $ 65,397  $ 67,406    $42,520    $ 45,192  $60,254
 Video game console.....    14,645    14,356    42,252     33,955      25,420   19,027
 OEM, royalty and
  licensing.............    13,051    22,177    17,204      9,486      12,650   17,671
</TABLE>

<TABLE>
<CAPTION>
                                     December 31,                 April 30,
                            ---------------------------------  ---------------
                             2000    1999     1998     1997     1997    1996
                            ------- -------  -------  -------  ------- -------
                                         (Dollars in thousands)
<S>                         <C>     <C>      <C>      <C>      <C>     <C>
Balance Sheets Data:
Working capital............ $   123 $(7,622) $(3,135) $13,616  $ 7,890 $18,485
Total assets...............  59,081  56,936   74,944   77,821   69,005  68,511
Total debt.................  25,433  19,630   24,651   38,154   14,970     108
Stockholders' equity
 (deficit).................   6,398  (2,071)   4,193   (1,267)   3,401  30,195
</TABLE>
--------
(1) Effective May 1, 1997, the Company changed its year end from April 30 to
    December 31.
(2) See Note 9 of Notes to Consolidated Financial Statements for an
    explanation of the number of shares used in computing net income (loss)
    per share.

                                      15
<PAGE>

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

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

General

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

   Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition". For those agreements that provide the customers the right to
create and sell 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 copies are duplicated. The Company is generally not
contractually obligated to accept returns, except for defective, shelf-worn
and damaged products in accordance with negotiated terms. However, the Company
permits customers to return or exchange product and may provide markdown
allowances on products unsold by a customer. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when
Right of Return Exists", revenue is recorded net of a provision for estimated
returns, exchanges, markdowns, price concessions, and warranty costs. Such
reserves are based upon management's evaluation of historical experience,
current industry trends and estimated costs. The amount of reserves ultimately
required could differ materially in the near term from the amounts provided 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.

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

   In January 1997, the Company formed a wholly owned subsidiary, Interplay
OEM, Inc. ("Interplay OEM"), which had previously operated as a division of
the Company. Interplay OEM distributes the Company's interactive entertainment
software titles, as well as those of other software publishers, to computer
and peripheral device manufacturers for use in bundling arrangements. During
2000, Interplay OEM expanded its bundling arrangements into the non-
Information Technology marketplace and has created a division named
bundledirect.com which transacts with Value-Added Resellers and System
Builders. The Company also derives net revenues from the licensing of certain
of its intellectual properties and certain of its products to third parties
for distribution in markets and through channels that are outside the
Company's primary focus. OEM, royalty and licensing net revenues accounted for
12.5%, 21.8% and 13.6% of the Company's total net revenues for the years ended
December 31, 2000, 1999 and 1998, respectively. OEM, royalty and licensing net
revenues generally are incremental net revenues and do not have significant
additional product development or sales and marketing

                                      16
<PAGE>

costs, and accordingly do not have a significant impact on the Company's
operating results. 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 the Company. 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 these products. Also included in the cost of goods sold
is the amortization of prepaid royalty and license fees paid to third party
software developers. Prepaid royalties are expensed over a period of six
months commencing with the initial shipment of the title at a rate based upon
the numbers of units shipped. The Company evaluates the likelihood of future
realization of prepaid royalties quarterly, on a product-by-product basis, and
charges cost of goods sold for any amounts that it deems unlikely to be
realized through future product sales.

   For the year ended December 31, 2000, the Company's net loss was $12.1
million. The Company's results from operations were adversely affected by
several factors. The interactive entertainment software industry experienced
lower prices for titles, especially with current generation video console
platforms, such as Sony PlayStation and Nintendo N64. Sony introduced the
PlayStation 2 in October 2000 but did not ship the number of units it
originally forecasted. In addition, the sales of personal computers decreased
for the year ended December 31, 2000 as compared to the same period in 1999.
As a result of these factors, the Company experienced lower unit sales volume
than it expected. The Company expects its unit sales volumes on next
generation video console platforms to increase and its unit sales volume on
personal computer platforms to remain relatively constant in the 12 months
ended December 31, 2001 as compared to the same period in 2000.

   The Company's operating results have fluctuated significantly in the past
and will likely 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 the Company's control. There
can be no assurance that the Company will be profitable in any particular
period. It is likely that the Company's 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.

                                      17
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                            Years Ended
                                                           December 31,
                                                         ---------------------
                                                         2000    1999    1998
                                                         -----   -----   -----
<S>                                                      <C>     <C>     <C>
Statements of Operations Data:
Net revenues............................................ 100.0%  100.0%  100.0%
Cost of goods sold......................................  51.7    59.9    56.7
                                                         -----   -----   -----
Gross margin............................................  48.3    40.1    43.3
Operating expenses:
  Marketing and sales...................................  25.3    31.8    31.1
  General and administrative............................   9.8    15.0    10.1
  Product development...................................  21.2    20.2    19.3
  Other.................................................   --      5.2     --
                                                         -----   -----   -----
    Total operating expenses............................  56.3    72.2    60.5
                                                         -----   -----   -----
Operating loss..........................................  (8.0)  (32.1)  (17.2)
Other expense...........................................  (3.5)   (3.4)   (3.9)
                                                         -----   -----   -----
Loss before income taxes................................ (11.5)  (35.5)  (21.1)
Provision for income taxes..............................   --      5.3     1.1
                                                         -----   -----   -----
Net loss................................................ (11.5)% (40.8)% (22.2)%
                                                         =====   =====   =====

Selected Operating Data:
Net revenues by segment:
  North America.........................................  54.0%   48.5%   58.2%
  International.........................................  33.5    29.7    28.2
  OEM, royalty and licensing............................  12.5    21.8    13.6
                                                         -----   -----   -----
                                                         100.0%  100.0%  100.0%
                                                         =====   =====   =====
Net revenues by platform:
  Personal computer.....................................  73.5%   64.1%   53.1%
  Video game console....................................  14.0    14.1    33.3
  OEM, royalty and licensing............................  12.5    21.8    13.6
                                                         -----   -----   -----
                                                         100.0%  100.0%  100.0%
                                                         =====   =====   =====
</TABLE>

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

 North American, International and OEM, Royalty and Licensing Net Revenues

   Net revenues for the year ended December 31, 2000 increased compared to the
same period in 1999. The increase in North American and International net
revenues for the year ended December 31, 2000 was primarily due to the titles
released this year having higher sales volume and a lower level of product
returns and allowances as compared to the same period in 1999. The Company's
efforts of a more focused product planning and release schedule of less, but
higher quality titles resulted in fewer title releases across multiple
platforms this year as compared to last year. The Company expects that North
American and International net revenues in 2001 will increase compared to
2000. OEM, royalty and licensing net revenues decreased in the year ended
December 31, 2000 compared to the same period in 1999 due to decreased net
revenues in the OEM business and decreased net revenues in licensing
transactions. The decrease in the OEM business is primarily due to a decrease
in the volume of transactions which relates to the general market decrease in
personal computer sales, and the decrease

                                      18
<PAGE>

in licensing transactions is primarily due to the recognition of deferred
revenue for the shipment of a major title to a customer in 1999 without a
comparable transaction in 2000. The Company expects that OEM, royalty and
licensing net revenues in 2001 will increase compared to 2000.

 Platform Net Revenues

   PC net revenues increased during the year ended December 31, 2000 compared
to the same period in 1999 primarily due to the release of major hit titles
such as Star Trek Klingon Academy, Icewind Dale, Sacrifice, Baldur's Gate II,
Giants and Star Trek StarFleet Command II. In addition, the Company continued
to experience strong sales from Baldur's Gate and Baldur's Gate: Tales of the
Sword Coast, both of which were released in 1999. The increase was partially
offset by a lower number of titles released overall. The Company expects its
PC net revenues to decrease in 2001 due to its increased focus on next
generation console titles. Video game console net revenues increased slightly
in the year ended December 31, 2000 compared to the same period in 1999 due to
higher unit sales, partially offset by lower price points for current
generation console titles. Major video game console title releases included
MDK 2 (Dreamcast), Gekido (PlayStation), Caesar's Palace 2000 (PlayStation)
and Wild Wild Racing (PlayStation 2). The Company expects its video game
console net revenues to increase in 2001 as a result of a substantial increase
in planned major title releases for new generation game consoles in 2001 as
compared to 2000.

 Cost of Goods Sold; Gross Margin

   Cost of goods sold decreased 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 write-offs of prepaid royalties in 1999
relating to titles that had been canceled mainly due to the Company
discontinuing its licensed sports product line during 1999. The Company
expects its cost of goods sold to increase in 2001 as compared to 2000 due to
an expected higher net revenues base from the planned release of more major
next generation game console titles in the 2001 period. The increase in gross
profit margin was primarily due to a higher percentage of internally developed
titles sold without a royalty component in cost of goods sold, and a lower
level of product returns and markdowns compared to the 1999 period. The
Company expects its future gross profit margin to decrease in 2001 as compared
to 2000 due to an increase in next generation video game console releases
which typically have a higher cost of goods relative to net revenues. However,
the Company expects a higher dollar gross profit on an increased net revenue
base in 2001 compared to 2000.

 Marketing and Sales

   Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services and other related operating expenses. The decreases in
marketing and sales expenses for the year ended December 31, 2000 compared to
the 1999 period is attributable primarily to lower personnel costs and
decreased advertising and retail marketing support expenditures. In addition,
the Company amended its International Distribution Agreement with Virgin
Interactive Entertainment Limited ("Virgin") effective January 1, 2000, which
eliminated the fixed monthly overhead fees the Company incurred in the 1999
period. The Company expects its marketing and sales expenses to remain about
the same in 2001 as compared to 2000, due to continued decreased advertising
and retail marketing support expenditures and lower personnel costs, offset by
the overhead fees payable to Virgin in 2001, in connection with the terms of
the April 2001 settlement between Virgin and the Company.

 General and Administrative

   General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. The decrease in general and administrative
expenses for the year ended December 31, 2000 as compared to the same period
in 1999 is

                                      19
<PAGE>

primarily attributable to a decrease in bad debt expense and personnel costs.
The Company is continuing its efforts to reduce North American operating
expenses and expects its general and administrative expenses to decrease in
2001 as compared to 2000.

 Product Development

   Product development expenses, which consist primarily of personnel and
support costs, are charged to operations in the period incurred. The increase
in product development expenses for the year ended December 31, 2000 as
compared to the same period in 1999 is primarily due to increased expenditures
devoted to the Company's focus on next generation video game console
platforms. The Company expects its product development expenses to remain
approximately constant in absolute dollars in 2001 as compared to 2000.

 Other Operating Expense

   Other operating expenses are primarily one-time expenses associated with
the operations of the Company in 1999. During the year ended December 31, 2000
the Company did not incur any other operating expenses. Other operating
expenses of $5.3 million for the year ended December 31, 1999, were due
primarily to the anticipated asset valuation and restructuring charge in
connection with the Company's reductions in its European operations. Included
in these amounts was a $2.9 million provision to cover certain minimum
operating charges payable to Virgin which did not repeat in 2000. In addition,
the Company recorded severance expense for the departure of the Company's
former president during the year ended December 31, 1999.

 Other Expense, net

   Other expense consists primarily of interest expense on the Company's lines
of credit and foreign currency exchange transaction losses. The decrease for
the year ended December 31, 2000 compared to the same period in 1999 was due
to decreased interest expense on lower average borrowings under the Company's
line of credit which was offset partially by foreign currency exchange
transaction losses incurred in connection with European distribution.

 Provision (Benefit) for Income Taxes

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

Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998

 North American, International and OEM, Royalty and Licensing Net Revenues

   Net revenues for the year ended December 31, 1999 decreased compared to the
same period in 1998. The decrease in North American net revenues for the year
ended December 31, 1999 was primarily due to fewer major title releases across
multiple platforms and resulting decreases in unit sales volume in the 1999
period. In addition the Company experienced a high level of product returns
and markdowns due to certain titles that did not gain broad market acceptance.
The decrease in international net revenues was due primarily to decreased net
revenues in Europe due to less major title releases across multiple platforms
and resulting decreases in unit sales volume in the 1999 period. OEM, royalty
and licensing net revenues increased in the year ended December 31, 1999
compared to the same period in 1998 due to increased net revenues in the OEM
business and increased net revenues in licensing in connection with certain
major transactions with specific hardware manufacturers and for certain
selected titles.

                                      20
<PAGE>

 Platform Net Revenues

   PC net revenues remained relatively even in the year ended December 31,
1999 compared to the same period in 1998 due to the continued sales of
Baldur's Gate and new major title releases such as Baldur's Gate: Tales of the
Sword Coast, Descent 3, Freespace 2, Kingpin, Starfleet Command and Torment
offset by a lower number of titles released overall. Video game console net
revenues decreased in the year ended December 31, 1999 compared to the same
period in 1998 due to fewer major title releases. Major console title releases
in the 1999 period included Baseball 2000 (PlayStation), Caesar's Palace II
(Game Boy Color) and Incoming (Dreamcast).

 Cost of Goods Sold; Gross Margin

   Cost of goods sold decreased in the year ended December 31, 1999 compared
to the same period in 1998 due to lower net revenues and a higher percentage
of PC titles as compared to video game console titles, offset by write-offs of
prepaid royalties relating to titles which had been canceled due to the
Company discontinuing its licensed sports product line. The decrease in gross
margin was primarily due to a high level of product returns and markdowns
which reduced net sales substantially due to certain titles that did not gain
broad market acceptance.

 Marketing and Sales

   Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services, monthly overhead and distribution fees payable to Virgin and
other related operating expenses. Marketing and sales expenses decreased in
the year ended December 31, 1999 compared to the same period in 1998. The
decrease is primarily attributable to decreased advertising, specifically
television advertising, and other marketing costs associated with fewer major
titles released during the 1999 period. In addition, the Company reduced
personnel and commission expense in connection with the restructuring of
European operations, including the new distribution arrangements made with
Virgin starting in February 1999.

 General and Administrative

   General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses
increased in the year ended December 31, 1999 compared to the same period in
1998. The increase is primarily attributable to a provision for bad debt
expense of $6.9 million in 1999 in response to, among other things, the
deteriorating financial condition of certain customers, which placed serious
doubts on their ability and intent to pay. General and administrative expenses
other than bad debt expense decreased in the 1999 period. This decrease is
primarily due to the reorganization of the Company's European operations and
successful efforts to reduce North American general and administrative
expenses.

 Product Development

   Product development expenses, which primarily consist of personnel and
support costs, are charged to operations in the period incurred. Product
development expenses decreased in the year ended December 31, 1999 compared to
the same period in 1998. The decrease is primarily due to cost efficiencies
achieved as a result of the reorganization of the development process.

 Other Operating Expense

   Other operating expenses are primarily non-recurring or unusual expenses
associated with the operations of the Company in 1999. Other operating
expenses of $5.3 million for the year ended December 31,1999 included $2.4
million for restructuring, asset valuations and severance charges. These
charges were incurred primarily in

                                      21
<PAGE>

connection with restructuring the European operations, including establishing
the new distribution arrangements in Europe whereby Virgin replaced the third
party distribution arrangements and the Company recorded provisions for the
costs of reductions in work force and facilities move, including asset
valuation, severance expenses and estimated facility lease termination
charges. In addition, the Company recorded a $2.9 million provision to cover
certain minimum operating charges payable to Virgin.

 Other Income (Expense)

   Other income (expense) primarily consists of interest expense on the
Company's line of credit. Such other expense decreased in the year ended
December 31, 1999 compared to the same period in 1998. This decrease was
primarily due to decreased interest expense on lower borrowings under the
Company's line of credit and the repayment of the Subordinated Secured
Promissory Notes in June 1998. These borrowings were repaid with the proceeds
of the Company's IPO in June 1998 and the equity investments by Titus
Interactive, S.A. ("Titus") in 1999.

 Provision (Benefit) for Income Taxes

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

Liquidity and Capital Resources

   The Company has funded its operations to date primarily through the use of
lines of credit and equipment leases, through cash generated by the private
sale of securities, from the proceeds from the initial public offering and
from operations.

   As of December 31, 2000 the Company's principal sources of liquidity
included cash of $2.8 million and the Company's line of credit which expires
on April 30, 2001. In addition, the Company had availability of $4 million on
its supplemental line of credit with Titus. In April 2001, the Company repaid
all amounts outstanding on the Titus line of credit and such line of credit
was terminated. In April 2001, the Company obtained a new line of credit from
an unaffiliated third party lender bearing interest at the lender's prime
rate, or at LIBOR plus 2.5 percent, at the Company's option. Such line of
credit provides for borrowings and letters of credit of up to $15 million
based in part upon qualifying receivables and inventory. Under the line of
credit the Company is required to maintain a $2 million personal guarantee by
the Company's Chairman and Chief Executive Officer. Such line of credit has a
term of three years, subject to review and renewal by the leader on April 30
of each year.

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

                                      22
<PAGE>

   The Company's primary capital needs have historically been to fund working
capital requirements necessary to fund its net losses, its 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. The Company's operating activities used cash of $23.2
million during the year ended December 31, 2000, primarily attributable to the
net loss for the year, an increase in trade receivables, and a decrease in
accounts payable and accrued liabilities, partially offset by a decrease in
inventory and normal depreciation and amortization provisions. Cash provided
by financing activities of $28.9 million for the year ended December 31, 2000
consisted primarily of the proceeds from the equity investments by Titus,
borrowings on the Company's line of credit and the release of restricted cash
by the Company's senior creditor. Cash used in investing activities of $3.2
million for the year ended December 31, 2000 consisted of normal capital
expenditures, primarily for office and computer equipment used in Company
operations. The Company does not currently have any material commitments with
respect to any future capital expenditures.

   To reduce the Company's working capital needs, the Company has implemented
various measures including a reduction of personnel, a reduction of fixed
overhead commitments, and has scaled back certain marketing programs. The
Company will continue to pursue various alternatives to improve future
operating results, including further expense reductions as long as they do not
have an adverse impact on its ability to generate successful future business
activities.

   The Company believes that funds available under its new line of credit,
amounts received from the equity financings transactions discussed above,
amounts to be received under various product license and distribution
agreements and anticipated funds from operations will be sufficient to satisfy
the Company's projected working capital and capital expenditure needs in the
normal course of business at least through December 31, 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance--Liquidity; Future Capital
Requirements".

FACTORS AFFECTING FUTURE PERFORMANCE

   Future operating results of the Company depend upon many factors and are
subject to various risks and uncertainties. Some of the risks and
uncertainties which may cause the Company's operating results to vary from
anticipated results or which may materially and adversely affect its operating
results are as follows:

Liquidity; Future Capital Requirements

   We used net cash in operations of $23.2 million and $26.4 million during
the years ended December 31, 2000 and 1999, respectively. At December 31,
2000, our working capital was $123,000. 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, bank line of credit 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 issue additional
equity securities, our existing stockholders could suffer a large amount of
dilution in their ownership. In the event we have to raise additional working
capital from other sources, we cannot assure you that we will be able to raise
additional working capital on acceptable terms, if at all. In the event we
cannot raise additional working capital, we would have to take additional
actions to continue to reduce our costs, including selling or consolidating
certain operations, delaying, canceling or scaling back product development
and marketing programs and other actions. These measures could materially and
adversely affect our ability to publish successful titles, and these measures
may not be enough to generate operating profits. We might have to get the
approval of other parties, including our new senior lender and/or Titus, for
some of these measures, and we cannot assure you that we would be able to
obtain those approvals. In addition, there is a risk that our Common Stock may
be delisted from the Nasdaq National Market (see "Continued Listing on the
Nasdaq National Market," below). If such delisting were to occur, our ability
to raise equity capital could be significantly impaired.

                                      23
<PAGE>

Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality

   Our operating results have fluctuated a great deal in the past and will
probably continue to fluctuate significantly in the future, both on a
quarterly and an annual basis. Many factors may cause or contribute to these
fluctuations, and many of these factors are beyond our control. Some of these
factors include the following:

  . delays in shipping our products

  . demand for our products

  . demand for our competitors' products

  . the size and rate of growth of the market for interactive entertainment
    software

  . changes in PC and video game console platforms

  . the number of new products and product enhancements released by us and
    our competitors

  . changes in our product mix

  . the number of our products that are returned

  . the timing of orders placed by our distributors and dealers

  . the timing of our development and marketing expenditures

  . price competition

  . the level of our international and OEM, 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:

  . the uncertainties associated with the interactive entertainment software
    development process

  . long manufacturing lead times for Nintendo-compatible products

  . possible production delays

  . the approval process for products compatible with video game consoles
    such as those from Sony Computer Entertainment, Nintendo, Sega and
    Microsoft

  . approvals required from content and technology licensors

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

   Because of the limited number of products we introduce in any particular
quarter, a delay in the introduction of a product may materially and adversely
affect our operating results for that quarter, and may not be recaptured in
later quarters. Such delays have had a significant adverse effect on our
operating results in certain past quarters. A significant portion of our
operating expenses is relatively fixed, and planned expenditures are based
largely on sales forecasts. If net revenues do not meet our expectations in
any given quarter, operating results may be materially adversely affected. 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. Revenues are also materially affected by new product
releases. Our failure or inability to introduce products on a timely basis to
meet these seasonal increases in demand may have a material adverse effect on
our business, operating results and financial condition.

   We may over time become increasingly affected by the industry's seasonal
patterns. Although we seek to reduce the effect of such seasonal patterns on
our business by distributing our product release dates more evenly throughout
the year, we cannot assure you that these efforts will be successful. We
cannot assure you that we

                                      24
<PAGE>

will be profitable in any particular period given the uncertainties associated
with software development, manufacturing, distribution and the impact of the
industry's seasonal patterns on our net revenues.

   As a result of the foregoing factors it is possible that our operating
results in one or more future periods will fail to meet or exceed the
expectations of securities analysts or investors. In that event, the trading
price of our Common Stock would likely be materially adversely affected.

Significant Recent Losses

   We have experienced significant net losses in recent periods, including
losses of $12.1 million and $41.7 million for the years ended December 31,
2000 and 1999, respectively. The 1999 losses resulted largely from delays in
the completion of certain products, a higher than expected level of product
returns and markdowns on products released during the year, and the cost of
restructuring our operations, including international distribution
arrangements. The 2000 losses resulted from lower than expected worldwide
sales of certain releases, as well as from operating expense levels that were
high relative to our revenue level. We may experience similar problems in
current or future periods and we may not be able to generate sufficient net
revenues or adequate working capital, or bring our costs into line with
revenues, so as to attain or sustain profitability in the future.

Dependence on New Product Introductions; Risk of Product Delays and Product
Defects

   Our products typically have short life cycles, and we depend on the timely
introduction of successful new products to generate net revenues, to fund
operations and to replace declining net revenues from older products. These
new products include enhancements of or sequels to our existing products and
conversions of previously released products to additional platforms. If in the
future, for any reason, net revenues from new products fail to replace
declining net revenues from existing products, our business, operating results
and financial condition could be materially adversely affected. The timing and
success of new interactive entertainment software product releases remains
unpredictable due to the complexity of product development, including the
uncertainty associated with new technology. The development cycle of new
products is difficult to predict but typically ranges from 12 to 24 months
with six to 12 months for adapting a product to a different technology
platform. The success of any particular software product can also be
negatively impacted by delays in the introduction, manufacture or distribution
of the platform for which the product was developed (see "Rapidly Changing
Technology; Platform Risks"). In the past, we have frequently experienced
significant delays in the introduction of new products, including certain
products currently under development. Because net revenues associated with the
initial shipments of a new product generally constitute a high percentage of
the total net revenues associated with a product, any delay in the
introduction of, or the presence of a defect in, one or more new products
expected in a period could have a material adverse effect on the ultimate
success of these products and on our business, operating results and financial
condition. The cost of developing and marketing new interactive entertainment
software has increased in recent years due to such factors as the increasing
complexity and content of interactive entertainment software, the increasing
sophistication of hardware technology and consumer tastes and the increasing
costs of obtaining licenses for intellectual properties. We expect this trend
to continue. We cannot assure you that our new products will be introduced on
schedule, if at all, or that, if introduced, these products will achieve
significant market acceptance or generate significant net revenues for us. In
addition, software products as complex as the ones we offer may contain
undetected errors when first introduced or when new versions are released. We
cannot assure you that, despite testing prior to release, errors will not be
found in new products or releases after shipment, resulting in loss of or
delay in market acceptance. This loss or delay could have a material adverse
effect on our business, operating results and financial condition.

Uncertainty of Market Acceptance; Dependence on Hit Titles

   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

                                      25
<PAGE>

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 also cannot
assure you that product life cycles will be sufficient to permit us to recover
product development and other associated costs. 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. We believe that these trends will
continue in our industry and that our future revenue will continue to be
dependent 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 have a material adverse effect on our business, operating
results and financial condition. Further, if we do not achieve market
acceptance, we could be forced to accept substantial product returns or grant
significant markdown allowances to maintain our relationship with retailers
and our access to distribution channels. For example, we had significantly
higher than expected product returns and markdowns during the year ended
December 31, 1999 and we cannot assure you that higher than expected product
returns and markdowns will not continue in the future. In the event that we
are forced to accept significant product returns or grant significant markdown
allowances, our business, operating results and financial condition could be
materially adversely affected.

Control by Titus

   Titus currently owns 12,817,255 shares, or approximately 33.5 percent, of
our outstanding Common Stock, and 719,424 shares of our Series A Preferred
Stock that currently have voting power equivalent to up to 7,619,047 shares of
Common Stock. As such, Titus currently holds approximately 44.5% of the total
voting power of our stock. Commencing June 1, 2001, Titus may convert each
such shares, to the extent not previously redeemed by us, into a number of
shares of our Common Stock determined by dividing $27.80 by the lesser of (a)
$2.78 and (b) eighty-five percent (85%) of the average closing price per share
as reported by Nasdaq for the twenty (20) trading days preceding the date of
conversion. Based on the closing price of our Common Stock on April 11, 2001,
the Series A Preferred Stock would be convertible into an aggregate of
approximately 17.7 million shares of our Common Stock. Titus also holds
warrants for up to 460,000 shares of our Common Stock, exercisable at $3.79
per share, expiring in April 2010. In connection with Titus' investment, Herve
Caen, Titus' chairman and chief executive officer, serves as our president and
as a member of our Board of Directors, and Herve Caen's brother Eric Caen, who
is president and a director of Titus, also serves on our Board of Directors.
As a consequence, Titus holds significant voting power with respect to the
election of our Board of Directors and the right of approval of certain
significant corporate actions, and Herve Caen and Eric Caen have substantial
authority over our operations. Titus may, under certain circumstances, be able
to elect as many as four of the seven members of the Board of Directors. As
such, Titus may be able to exercise a higher degree of control over our
management. This control could prevent or hinder a sale of the Company on
terms that are not acceptable to Titus. Moreover, Titus holds interests that
may vary from those of the Company and its other stockholders, and Titus may
exercise its control of the Company in the furtherance of such outside
interests.

Continued Listing on the Nasdaq National Market

   Our Common Stock is currently quoted on the Nasdaq National Market under
the symbol "IPLY." For continued inclusion on the Nasdaq National Market, a
company must meet certain tests, including a minimum bid price of $1.00 and
net tangible assets of at least $4 million. As of December 31, 1999, we were
not in compliance with the minimum net tangible assets requirement, and did
not return to compliance with that requirement until April 14, 2000. We were
subject to a hearing before a Nasdaq Listing Qualifications Panel, which
determined to continue the listing of our Common Stock on the Nasdaq National
Market subject to certain conditions, all of which we have fulfilled. If we
fail to satisfy the listing standards on a continuous basis, our Common Stock
may be removed from listing on the Nasdaq National Market. If our Common Stock
were delisted from the Nasdaq National Market, trading of our Common Stock, if
any, would be conducted on the Nasdaq Small Cap Market, in the over-the-
counter market on the so-called "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
would most likely be reduced as a result.

                                      26
<PAGE>

   In addition, Nasdaq requires two independent directors on a company's Board
of Directors, and beginning June 14, 2001 will require three. We currently do
not comply with this requirement. As such, we will have to identify and secure
the services of additional suitable independent candidates in order to
maintain compliance with this listing requirement. Any failure to do so could
lead to our Common Stock being delisted from the Nasdaq National Market.

Distribution Agreement

   In connection with our acquisition of a 43.9 percent membership interest in
Virgin Interactive Entertainment Limited's ("Virgin") parent entity in
February 1999, we signed an International Distribution Agreement with Virgin.
Under this Agreement, we appointed Virgin as our exclusive distributor for
substantially all of our products in Europe, the CIS, Africa and the Middle
East, subject to certain reserved rights, for a seven-year period. We pay
Virgin a distribution fee for marketing and distributing our products, as well
as certain direct costs and expenses. Virgin has been inconsistent in meeting
its obligations to deliver to us the proceeds obtained from their distribution
of our products. Because of the exclusive nature of the Agreement, if Virgin
were to continue to be inconsistent in meeting its obligations to deliver to
us proceeds from distribution, or were to experience problems with its
business, or otherwise to fail to perform under the Agreement, our business,
operating results and financial condition could be materially and adversely
affected.

   In May 2000, we amended the International Distribution Agreement with
Virgin to, among other things, eliminate the overhead fees and minimum
commissions payable by us. Virgin disputed the validity of this amendment, and
claimed that we were obligated, among other things, to pay a contribution to
their overhead of up to approximately $9.3 million annually, subject to
decrease by the amount of commissions earned by Virgin on its distribution of
our products. As part of the April 2001 settlement between Virgin and the
Company, VIE Acquisition Group LLC ("VIE"), the parent entity of Virgin,
redeemed the Company's membership interest in VIE. In addition, Virgin paid
the Company $3.1 million, dismissed its claim for past overhead fees, reduced
the minimum monthly overhead fee payable to Virgin to $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, and eliminate the minimum overhead
commitment commencing July 2002 and for the remaining term of the
International Distribution Agreement.

Dependence on Third Party Software Developers

   We rely on third party interactive entertainment software developers for
the development of a significant number of our interactive entertainment
software products. As there continues to be high demand for reputable and
competent third party developers, we cannot assure you that third party
software developers that have developed products for us in the past will
continue to be available to develop products for us in the future. Many third
party software developers have limited financial resources, which could expose
us to the risk that such developers may go out of business prior to completing
a project. In addition, due to our limited control over third party software
developers, we cannot assure you that such developers will complete products
for us on a timely basis or within acceptable quality standards, if at all.
Due to increased competition for skilled third party software developers, we
have had to agree to make advance payments on royalties and guaranteed minimum
royalty payments to intellectual property licensors and game developers, and
we expect to continue to enter into these kinds of arrangements. If the
products subject to these arrangements do not have sufficient sales volumes to
recover these royalty advances and guaranteed payments, we would have to
write-off unrecovered portions of these payments, which could have a material
adverse effect on our business, operating results and financial condition.
Further, we cannot assure you that third party developers will not demand
renegotiation of their arrangements with us.

Rapidly Changing Technology; Platform Risks

   The interactive entertainment software industry is subject to rapid
technological change. New technologies, including operating systems such as
Microsoft Windows 2000, technologies that support multi-player games, new
media formats such as on-line delivery and digital video disks ("DVDs") and
recent releases or planned releases

                                      27
<PAGE>

in the near future of new video game platforms such as the Sony Playstation 2,
the Nintendo Gamecube and the Microsoft Xbox could render our current products
or products in development obsolete or unmarketable. 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 software are not released on a
timely basis or do 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.

   The emergence of new interactive entertainment software platforms and
technologies and the increased popularity of new products and technologies may
materially and adversely affect the demand for products based on older
technologies. The broad range of competing and incompatible emerging
technologies may lead consumers to postpone buying decisions with respect to
products until one or more emerging technologies gain widespread acceptance.
This postponement could have a material adverse effect on our business,
operating results and financial condition. We are currently developing
products for Microsoft Windows, Sony PlayStation 2 and new platforms expected
to be introduced in 2001 by Microsoft and Nintendo. Our success will depend in
part on our ability to anticipate technological changes and to adapt our
products to emerging game platforms. We cannot assure you that we will be able
to anticipate future technological changes, to obtain licenses to develop
products for those platforms on favorable terms or to create software for
those new platforms. Any failure to do so could have a material adverse effect
on our business, operating results and financial condition.

Industry Competition; Competition for Shelf Space

   The interactive entertainment software industry is intensely competitive
and new interactive entertainment software programs and software platforms are
regularly introduced. Our competitors vary in size from small companies to
very large corporations with significantly greater financial, marketing and
product development resources than we have. Due to these greater resources,
certain of our competitors can 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 we can. We believe that the main
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.

  . Activision, Inc.

  . Infogrames Entertainment

  . Microsoft Corporation

  . LucasArts Entertainment Company

  . Midway Games Inc.

  . Acclaim Entertainment, Inc.

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<PAGE>

  . Vivendi Universal Interactive Publishing

  . Ubi Soft Entertainment

  . The 3DO Company

  . Take Two Interactive Software, Inc.

  . Eidos PLC

  . THQ Inc.

   In addition, integrated video game console hardware/software companies such
as Sony Computer Entertainment, Nintendo, Microsoft Corporation 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 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 on-line services by consumers may pose a competitive threat if
customers and potential customers spend less of their available home PC time
using interactive entertainment software and more using the Internet and on-
line services.

   Retailers of our products typically have a limited amount of shelf space
and promotional resources, and there is intense competition among consumer
software producers, and in particular 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
may require us to increase our marketing expenditures. Due to increased
competition for limited shelf space, retailers and distributors are in an
increasingly better 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 sale 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
have a material adverse effect on our business, operating results and
financial condition.

Dependence on Distribution Channels; Risk of Customer Business Failures;
Product Returns

   We currently sell our products directly through our own sales force to mass
merchants, warehouse club stores, large computer and software specialty chains
and through catalogs in the U.S. and Canada, as well as to certain
distributors. Outside North America, we generally sell products to third party
distributors. Our sales are made primarily on a purchase order basis, without
long-term agreements. The loss of, or significant reduction in sales to, any
of our principal retail customers or distributors could materially adversely
affect our business, operating results and financial condition.

   The distribution channels through which publishers sell consumer software
products evolve continuously through a variety of means, including
consolidation, financial difficulties of certain distributors and retailers,
and the emergence of new distributors and new retailers such as warehouse
chains, mass merchants and computer superstores. As more consumers own PCs,
the distribution channels for interactive entertainment software will likely
continue to change. Mass merchants have become the most important distribution
channels for retail sales of interactive entertainment software. A number of
these mass merchants have entered into exclusive buying arrangements with
other software developers or distributors, which arrangements could prevent us
from selling certain of our products directly to that mass merchant. If the
number of mass merchants entering into exclusive buying arrangements with our
competitors were to increase, our ability to sell to such merchants would be
restricted to selling through the exclusive distributor. Because sales to
distributors typically have a lower gross profit than sales to retailers, this
would have the effect of lowering our gross profit. This trend could have a
material adverse impact on our business, operating results and financial
condition. In addition, emerging methods

                                      29
<PAGE>

of distribution, such as the Internet and on-line services, may become more
important in the future, and it will be important for us to maintain access to
these channels of distribution. We cannot assure you that we will maintain
access or that our access will allow us to maintain our historical sales
volume levels.

   Distributors and retailers in the computer industry have from time to time
experienced significant fluctuations in their businesses, and a number have
failed. The insolvency or business failure of any significant distributor or
retailer of our products could have a material adverse effect on our business,
operating results and financial condition. We typically make sales to
distributors and retailers on unsecured credit, with terms that vary depending
upon the customer and the nature of the product. Although we have insolvency
risk insurance to protect against our customers' bankruptcy, insolvency or
liquidation, this insurance contains a significant deductible and a co-payment
obligation, and the policy does not cover all instances of non-payment. 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 have a material adverse effect on our
business, operating results and financial condition.

   We are exposed to the risk of product returns and markdown allowances 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 markdown allowances to our customers to manage our customers'
inventory levels in the distribution channel. Although we maintain a reserve
for returns and markdown allowances, and although our agreements with certain
of our customers place certain limits on product returns and markdown
allowances, we could be forced to accept substantial product returns and
provide markdown allowances to maintain our relationships with retailers and
our access to distribution channels. Product return and markdown allowances
that exceed our reserves could have a material adverse effect on our business,
operating results and financial condition. In this regard, our results of
operations for the year ended December 31, 1999 were adversely affected by a
higher than expected level of product returns and markdown allowances, which
reduced our net revenues. We could continue to experience such high levels of
product returns and markdown allowances in future periods, which could have a
material adverse effect on our business, operating results and financial
condition.

Shares Eligible for Future Sale

   Universal Studios, Inc. currently holds 4,658,216 shares, or 12.2%, of our
outstanding Common Stock. We have agreed to file a registration statement
covering the resale of such shares by Universal Studios, Inc., and expect that
such registration statement will be filed in April 2001.

   In 1999, we entered into two Stock Purchase Agreements with Titus, pursuant
to which Titus purchased 10,795,455 shares of our Common Stock from us for an
aggregate purchase price of $35 million. As part of the agreements, Titus'
chairman and chief executive officer became our president, and our chairman
and chief executive officer exchanged 2 million of his personal shares of our
Common Stock for an agreed upon number of Titus shares. As a result of these
transactions, Titus currently owns approximately 33.5% of our outstanding
Common Stock. We have filed a registration statement under the Securities Act
of 1933, as amended, covering the resale of all of the shares of our Common
Stock that we have sold and issued to Titus.

   In addition, Titus purchased 719,424 shares of Series A Preferred Stock
from us in April 2000. The Preferred Stock is convertible by Titus, redeemable
by us at the purchase price under certain circumstances, and accrues a six
percent dividend per year. Commencing June 1, 2001, Titus may convert each
such shares, to the extent not previously redeemed by us, into a number of
shares of our Common Stock determined by dividing $27.80 by the lesser of
(a) $2.78 and (b) eighty-five percent (85%) of the average closing price per
share as reported by Nasdaq for the twenty (20) trading days preceding the
date of conversion. Based on the closing price of our Common Stock on April
11, 2001, the Series A Preferred Stock would be convertible into an aggregate
of approximately 17.7 million shares of our Common Stock. Titus may convert
the Preferred Stock at any time

                                      30
<PAGE>

after May 2001, at which time the Preferred Stock shares would be convertible
into at least 7,194,240 shares of our Common Stock. Titus also holds warrants
to purchase up to 460,000 shares of our Common Stock. We have also agreed to
register the shares of Common Stock issuable upon conversion of the Preferred
Stock.

   In addition, in April 2001, we completed a private placement of 8,126,770
shares of our Common Stock for an aggregate purchase price of $12.7 million.
In connection with such transaction, we issued to each investor a warrant to
purchase up to one share of our Common Stock at a price of $1.75 per share for
each share purchased in the private placement. Pursuant to such transactions,
we have agreed to file a registration statement covering the resale of the
shares purchased and the shares issuable upon exercise of such warrants (an
aggregate of up to 16,253,540 shares of Common Stock) by April 16, 2001, and
to cause such registration statement to be declared effective by May 31, 2001.
We also have other outstanding warrants to buy up to 1,360,000 shares of
Common Stock.

   In addition, employees and directors (who are not deemed affiliates) hold
options to buy 2,579,967 shares of Common Stock. Any shares registered will be
eligible for resale. If these shares are not sold or not included in the
Registration Statement, they may be included in certain registration
statements to be filed by us in the future.

   We may issue options to purchase up to an additional 1,280,027 shares of
Common Stock under our stock option plans, which we anticipate will be fully
saleable when issued.

   Sales of substantial amounts of Common Stock into the public market could
lower the market price of the Common Stock. Titus, our largest stockholder and
the holder of Series A Preferred Stock, and Company officers and directors may
under certain circumstances hold more than 50% of our outstanding Common
Stock. Although such persons are subject to certain restrictions on the
transfer of their Interplay stock, future sales by them could depress the
market price of the Common Stock.

Risks Associated with the Potential Introduction of a Majority of Titus'
Common Stock into the Market

   We have filed a registration statement covering the resale of 10,795,445
shares of Common Stock held by Titus, which will give Titus the ability to
sell such shares on the public market. This number of shares represents
approximately 36% of the outstanding shares of our Common Stock. In addition,
we have agreed to register for resale all of the shares of Common Stock
issuable to Titus upon conversion of the Series A Preferred Stock. In the
event Titus sells these shares in the public market, such sales could lead to
a significant decrease in the public trading price of shares of our Common
Stock. Such a decrease in value would affect the price at which you could
resell your shares. Such an offering by Titus could also negatively affect our
ability to raise capital through the sale of our equity securities, and could
increase the dilution to our stockholders resulting from any such sale.
Further, because any such sale would be made by our largest single
stockholder, such sale might create a negative perception of us and our
securities. This perception may heighten any negative effect on the trading
price of our Common Stock and our ability to raise capital through the sale of
our equity securities.

   We also intend to register shares of our Common Stock underlying the
conversion right of our Series A Preferred Stock, 4,658,216 shares of Common
Stock held by Universal Studios, Inc. and shares of Common Stock issued in our
April 2001 private placement, as well as shares of Common Stock issuable under
the warrants granted in that private placement.

Dependence upon Third Party Licenses

   Many of our products, such as our Star Trek, Advanced Dungeons and Dragons,
Matrix and Caesars Palace titles, are based on original ideas or intellectual
properties licensed from other parties. We cannot assure you that we will be
able to obtain new licenses, 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 obtain licenses for the underlying content
that we believe offers the greatest consumer appeal, we would either have to
seek alternative, potentially less appealing licenses,

                                      31
<PAGE>

or release the products without the desired underlying content, either of
which could have a material adverse effect on our business, operating results
and financial condition. We cannot assure you that acquired properties will
enhance the market acceptance of our products based on those properties. We
also cannot assure you that our new product offerings will generate net
revenues in excess of their costs of development and marketing or minimum
royalty obligations, or that net revenues from new product sales will meet or
exceed net revenues from existing product sales.

Dependence on Licenses from and Manufacturing by Hardware Companies

   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, Microsoft and
Sega. We cannot assure you that we will be able to obtain new licenses from
hardware companies on acceptable terms or that any existing or future licenses
will be renewed by the licensors. In addition, Sony Computer Entertainment,
Nintendo, Microsoft and Sega each have the right to approve the technical
functionality and content of our products for their respective platforms prior
to distribution. Due to the 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 have a material adverse effect on our business, operating results and
financial condition.

   Hardware companies such as Sony Computer Entertainment, Nintendo, Sega and
Microsoft may impose upon their licensees a restrictive selection and product
approval process, such that those licensees are restricted in the number of
titles that will be approved for distribution on the particular platform.
While we have prepared our future product release plans taking this
competitive approval process into consideration, if we incorrectly predict its
impact or otherwise fail to obtain approvals for all products in our
development plans, this failure could have a material adverse effect on our
business, operating results and financial condition. We depend upon Sony
Computer Entertainment, Nintendo, Microsoft and Sega for the manufacture of
our products that are compatible with their respective video game consoles. As
a result, Sony Computer Entertainment, Nintendo, Sega and Microsoft have the
ability to raise prices for supplying these products at any time and
effectively control the timing of our release of new titles for those
platforms. Playstation and Dreamcast products consist of CD-ROMs and are
typically delivered by Sony Computer Entertainment and Sega, respectively,
within a relatively short lead time. Other media may entail longer lead times
depending on the manufacturer. If we experience unanticipated delays in the
delivery of video game console products from Sony Computer Entertainment,
Sega, Nintendo or Microsoft, or if actual retailer and consumer demand for our
interactive entertainment software differs from our forecast, our business,
operating results and financial condition could be materially adversely
affected.

Dependence on Key Personnel

   Our success depends to a significant extent on the continued service of our
key product design, development, sales, marketing and management personnel,
and in particular on the leadership, strategic vision and industry reputation
of our founder and Chief Executive Officer, Brian Fargo. Our future success
will also depend upon our ability to continue to attract, motivate and retain
highly qualified employees and contractors, particularly key software design
and development personnel. Competition for highly skilled employees is
intense, and we cannot assure you that we will be successful in attracting and
retaining such personnel. Specifically, we may experience increased costs in
order to attract and retain skilled employees. Our failure to retain the
services of Brian Fargo or other key personnel or to attract and retain
additional qualified employees could have a material adverse effect on our
business, operating results and financial condition.

Risks Associated with International Operations; Currency Fluctuations

   Our international net revenues accounted for 34, 30 and 28 percent of our
total net revenues for the years ended December 31, 2000, 1999 and 1998,
respectively. In February 1999, we entered into an International

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<PAGE>

Distribution Agreement with Virgin for the exclusive distribution of our
products in selected international territories. We intend to continue to
expand our direct and indirect sales, marketing and product localization
activities worldwide. This expansion will require a great deal of management
time and attention and financial resources in order to develop improved
international sales and support channels. We cannot assure you, however, that
we will be able to maintain or increase international market demand for our
products. Our international sales and operations are subject to a number of
inherent risks, including the following:

  . the impact of recessions in foreign economies

  . the time and financial costs associated with translating and localizing
    products for international markets

  . longer accounts receivable collection periods

  . greater difficulty in accounts receivable collection

  . unexpected changes in regulatory requirements

  . difficulties and costs of staffing and managing foreign operations

  . foreign currency exchange rate fluctuations

  . political and economic instability

  . dependence on Virgin as an exclusive distributor for Europe.

   These factors may have a material adverse effect on our future
international net revenues and, consequently, on our business, operating
results and financial condition. We currently do not engage in currency
hedging activities and for the year ended December 31, 2000, our results were
negatively impacted by $935,000 due to fluctuations in currency exchange
rates. We cannot assure you that fluctuations in currency exchange rates in
the future will not have a material adverse effect on net revenues from
international sales and licensing, and thus on our business, operating results
and financial condition.

Risks Associated with New European Currency

   On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and a new European currency, the euro. These eleven countries
adopted the euro as the common legal currency on that date. We make a
significant portion of our sales to these countries. Consequently, we
anticipate that the euro conversion will, among other things, create technical
challenges to adapt information technology and other systems to accommodate
euro-denominated transactions. The euro conversion may also limit our ability
to charge different prices for our products in different markets. While we
anticipate that the conversion will not cause major disruption of our
business, the conversion may have a material effect on our business or
financial condition.

Protection of Proprietary Rights

   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 the software engine for 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, our operating results could be materially adversely affected. While
we use copy protection on some of our products, we do not provide source code
to third parties unless they have signed nondisclosure agreements with respect
to that source code.


                                      33
<PAGE>

   We rely on existing copyright laws to prevent unauthorized distribution of
our software. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy can be a
persistent problem, especially in certain international markets. Further, the
laws of certain 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 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 others' intellectual property rights may be diminished. We cannot
assure you that existing intellectual property laws will provide adequate
protection for our products in connection with these emerging technologies.

   As the number of interactive entertainment software products in the
industry increases and the features and content of these products continues to
overlap, software developers may increasingly become subject to infringement
claims. Although we make reasonable efforts to ensure that our products do not
violate the intellectual property rights of others, we cannot assure you 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
receive communications from third parties regarding such claims. We cannot
assure you that existing or future infringement claims against us will not
result in costly litigation or require us to 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.

Entertainment Software Rating System; Governmental Restrictions

   Legislation is periodically introduced at the state and federal levels in
the U.S. 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. Such a
system would include procedures for interactive entertainment software
publishers to identify particular products within defined rating categories
and communicate these ratings to consumers through appropriate package
labeling and through advertising and marketing presentations. In addition,
many foreign countries have laws that permit governmental entities to censor
the content of certain works, including interactive entertainment software. In
certain instances, we may be required to modify our products to comply with
the requirements of these governmental entities, which could delay the release
of those products in those countries. Those delays could have a material
adverse effect on our business, operating results and financial condition.
While we currently voluntarily submit our products to industry-created review
boards and publish their ratings on our game packaging, we believe that
mandatory government-run interactive entertainment software products rating
systems eventually will be adopted in many countries that represent
significant markets or potential markets for our products. Due to the
uncertainties inherent in the implementation of 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 certain 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 had a material adverse effect on our business,
operating results or financial condition, we cannot assure you that similar
actions by our distributors or retailers in the future would not have a
material adverse effect on our business, operating results and financial
condition.

Control by Directors and Officers

   Including Titus, our directors and executive officers beneficially own
voting stock with a total of approximately 45  percent of the aggregate Common
Stock voting power in the Company. In addition, Titus holds Preferred Stock
currently entitled to 7,619,047 votes, or approximately 20 percent of overall
voting power, and in the event Titus converts such shares into Common Stock,
the resulting shares could substantially increase Titus' voting power. These
stockholders can control substantially all matters requiring our stockholders'
approval, including the election of directors (subject to our stockholders'
cumulative voting rights) and the approval of mergers or other business
combination transactions. This concentration of voting power could discourage
or prevent a change in control.


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<PAGE>

Development of Internet/On-Line Services or Products

   We seek to establish an on-line presence by creating and supporting sites
on the Internet. Our future plans envision conducting and supporting on-line
product offerings through these sites or others. Our ability to successfully
establish an on-line presence and to offer online products will depend on
several factors outside our control. These factors include the emergence of a
robust online industry and infrastructure and the development and
implementation of technological advancements to the Internet to increase
bandwidth to the point that will allow us to conduct and support on-line
product offerings. Because global commerce and the exchange of information on
the Internet and other similar open, wide area networks are relatively new and
evolving, we cannot assure you that a viable commercial marketplace on the
Internet will emerge from the developing industry infrastructure or that the
appropriate complementary products for providing and carrying Internet traffic
and commerce will be developed. We also cannot assure you that we will be able
to create or develop a sustainable or profitable on-line presence or that we
will be able to generate any significant revenue from on-line product
offerings in the near future, if 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 on-line service, our business,
operating results and financial condition could be materially adversely
affected.

Risks Associated with Acquisitions

   As part of our strategy to enhance distribution and product development
capabilities, we intend to review potential acquisitions of complementary
businesses, products and technologies. Some of these acquisitions could be
material in size and scope. While we will continue to search for appropriate
acquisition opportunities, we cannot assure you that the Company will be
successful in identifying suitable acquisition opportunities. If we do
identify any potential acquisition opportunity, we cannot assure you that we
will consummate the acquisition, and if the acquisition does occur, we cannot
assure you that it will be successful in enhancing our business or will
increase our earnings. As the interactive entertainment software industry
continues to consolidate, we may face increased competition for acquisition
opportunities, which may inhibit our ability to complete suitable transactions
or may increase their cost. Future acquisitions could also divert substantial
management time, result in short term reductions in earnings or special
transactions or other charges and may be difficult to integrate with existing
operations or assets.

   We may, in the future, issue additional shares of Common Stock in
connection with one or more acquisitions, which may dilute our stockholders.
Additionally, with respect to future acquisitions, our stockholders may not
have an opportunity to review the financial statements of the entity being
acquired or to vote on these acquisitions.

Anti-Takeover Effects; Delaware Law and Certain Charter and Bylaw Provisions

   Our Certificate of Incorporation and Bylaws, as well as Delaware corporate
law, contain certain provisions that could delay, defer or prevent a change in
control and could materially adversely affect the prevailing market price of
our Common Stock. Certain of these provisions impose various procedural and
other requirements that could make it more difficult for stockholders to take
certain corporate actions.

Stock Price Volatility

   The trading price of our Common Stock has been and could continue to be
subject to wide fluctuations in response to certain factors, including:

  . quarter to quarter variations in results of operations

  . our announcements of new products

  . our competitors' announcements of new products


                                      35
<PAGE>

  . our product development or release schedule

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

  . changes in earnings estimates or buy/sell recommendations by analysts

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

  . other events or factors

   In addition, the public stock markets experience extreme price and trading
volume volatility, particularly in high technology sectors of the market. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons often unrelated to the operating performance
of the specific companies. These broad market fluctuations may adversely
affect the market price of our Common Stock.

Lack of Dividends on Common Stock

   We have not paid any cash dividends on our Common Stock and do not
anticipate paying dividends in the near future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   We do not have any derivative financial instruments as of December 31,
2000. 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 our revolving line of credit agreement, 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 working capital line of credit bears interest at either the bank's
prime rate or LIBOR, at our option. We have no fixed rate debt. As such, if
interest rates increase in the future, our operating results and cashflows
could be materially and adversely affected.

 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 $935,000, $125,000 and $288,000 during the years ended
December 31, 2000, 1999 and 1998, respectively, primarily in connection with
foreign exchange fluctuations in the timing of payments received on accounts
receivable from Virgin.

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.

                                      36
<PAGE>

                                   PART III

   Certain information required by Part III is omitted from this report, as
the Company will file a definitive proxy statement (the "Proxy Statement")
within 120 days after the end of its fiscal year pursuant to Regulation 14A of
the Securities Exchange Act of 1934 for its Annual Meeting of Shareholders,
currently anticipated to be held in June 2001 and the information included
therein is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

   Information regarding executive compensation appears under the caption
"Compensation of Executive Officers" in the Proxy Statement and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Management
Directors and Nominees" in the Proxy Statement and is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   Information regarding certain relationships and related transactions
appears under the caption "Certain Transactions Between Management and the
Company or its Subsidiaries" in the Proxy Statement and is incorporated herein
by reference.

                                      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 Report of
    Independent Public Accountants 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
    Report of Independent Public Accountants 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.

     None.

                                      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 13th day of April 2001.

                                          Interplay Entertainment Corp.

                                                     /s/ Brian Fargo
                                          By:
                                             __________________________________
                                                       Brian Fargo
                                          Its:Chairman of the Board and Chief
                                                         Executive
                                               Officer (Principal Executive
                                                         Officer)

                               POWER OF ATTORNEY

   The undersigned directors and officers of Interplay Entertainment Corp. do
hereby constitute and appoint Brian Fargo and Manuel Marrero, 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/ Brian Fargo               Chairman of the Board of     April 13, 2001
______________________________________  Directors and Chief
             Brian Fargo                Executive Officer
                                        (Principal
                                        Executive Officer)

                                       President and Director       April 13, 2001
______________________________________
              Herve Caen

        /s/ Manuel Marrero             Chief Financial and Chief    April 13, 2001
______________________________________  Operating Officer
            Manuel Marrero              (Principal Financial and
                                        Accounting Officer)

                                       Director                     April 13, 2001
______________________________________
              Eric Caen
</TABLE>

                                      39
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
<S>                                    <C>                        <C>
    /s/ Richard S. F. Lehrberg         Director                     April 13, 2001
______________________________________
        Richard S. F. Lehrberg

       /s/ R. Stanley Roach            Director                     April 13, 2001
______________________________________
           R. Stanley Roach
</TABLE>

                                       40
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
   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)
</TABLE>

                                       41
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  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)
  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.)
</TABLE>

                                       42
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  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.)
  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.)
  21.1   Subsidiaries of the Company. (incorporated herein by reference to
         Exhibit 21.1. to the Form S-1)
  23.1   Consent of Arthur Andersen LLP.
  24.1   Power of Attorney (included as page 40 to this Form 10-K).
</TABLE>

                                       43
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS
                  AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................. F-2

CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

Notes to Consolidated Financial Statements............................... F-7

Schedule II--Valuation and Qualifying Accounts........................... S-1
</TABLE>

                                      F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Interplay Entertainment Corp.:

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

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

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

   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

                                      F-2
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

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

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


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

                                      F-3
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                        -------------------------------------
                                           2000         1999         1998
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
Net revenues........................... $   104,582  $   101,930  $   126,862
Cost of goods sold.....................      54,061       61,103       71,928
                                        -----------  -----------  -----------
Gross profit...........................      50,521       40,827       54,934
                                        -----------  -----------  -----------
Operating expenses:
  Marketing and sales..................      26,482       29,524       39,471
  General and administrative...........      10,249       18,155       12,841
  Product development..................      22,176       20,629       24,472
  Other................................         --         5,323          --
                                        -----------  -----------  -----------
    Total operating expenses...........      58,907       73,631       76,784
                                        -----------  -----------  -----------
    Operating loss.....................      (8,386)     (32,804)     (21,850)
                                        -----------  -----------  -----------
Other income (expense):
  Interest expense.....................      (2,992)      (3,640)      (4,620)
  Other................................        (697)         169         (313)
                                        -----------  -----------  -----------
    Total other income (expense).......      (3,689)      (3,471)      (4,933)
                                        -----------  -----------  -----------
Loss before provision for income
 taxes.................................     (12,075)     (36,275)     (26,783)
Provision for income taxes.............         --         5,410        1,437
                                        -----------  -----------  -----------
Net loss............................... $   (12,075) $   (41,685) $   (28,220)
                                        ===========  ===========  ===========
Cumulative dividend on participating
 preferred stock....................... $       870  $       --   $       --
Accretion of warrant on preferred
 stock.................................         532          --           --
                                        -----------  -----------  -----------
Net loss attributable to common
 stockholders.......................... $   (13,477) $   (41,685) $   (28,220)
                                        ===========  ===========  ===========
Net loss per share:
  Basic/diluted........................ $     (0.45) $     (1.86) $     (1.91)
                                        ===========  ===========  ===========
Weighted average number of common
 shares outstanding:
  Basic/diluted........................  30,046,701   22,418,463   14,762,644
                                        ===========  ===========  ===========
</TABLE>

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

                                      F-4
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                            (Dollars in thousands)

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

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

                                      F-5
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

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

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

                                      F-6
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Line of Business; Risk Factors

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

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

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

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

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

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

2. Summary of Significant Accounting Policies

 Consolidation

   The accompanying consolidated financial statements include the accounts of
Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay
Productions Limited (U.K.), Interplay OEM, Inc., Interplay Productions Pty Ltd
(Australia), Interplay Co., Ltd., (Japan) and its 91 percent-owned subsidiary
Shiny Entertainment, Inc. All significant intercompany accounts and
transactions have been eliminated.

 Reincorporation

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

                                      F-7
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Use of Estimates

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

 Reclassifications

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

 Restricted Cash

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

 Inventories

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

 Prepaid Licenses and Royalties

   Prepaid licenses and royalties consist of payments for intellectual
property rights and advanced royalty payments to outside developers. In
addition, such costs include certain other outside production costs generally
consisting of film cost and amounts paid for digitized motion data with
alternative future uses. Payments to developers represent contractual advanced
payments made for future royalties. These payments are contingent upon the
successful completion of milestones, which generally represent specific
deliverables. Royalty advances are recoupable against future sales based upon
the contractual royalty rate. The Company amortizes the cost of licenses,
prepaid royalties and other outside production costs to cost of goods sold
over six months commencing with the initial shipment of the related title at a
rate based upon the number of units shipped. Management evaluates the future
realization of such costs quarterly and charges to cost of goods sold any
amounts that management deems unlikely to be fully realized through future
sales. Such costs are classified as current and noncurrent assets based upon
estimated product release date.

 Property and Equipment

   Property and equipment are stated at cost. Depreciation of computers,
equipment and furniture and fixtures is provided using the straight-line
method over a five year period. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful life or the
remaining lease term.

 Other Non-current Assets

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

                                      F-8
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Long-lived Assets

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

 Fair Value of Financial Instruments

   The carrying value of cash, accounts receivable, accounts payable and notes
payable approximates the fair value. In addition, the carrying value of all
borrowings approximates fair value based on interest rates currently available
to the Company.

 Revenue Recognition

   Revenues are recorded when products are delivered to customers in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition". For those agreements that provide the customers the right to
multiple copies in exchange for guaranteed amounts, revenue is recognized at
the delivery of the product master or the first copy. Per copy royalties on
sales that exceed the guarantee are recognized as earned. Guaranteed minimum
royalties on sales that do not meet the guarantee are recognized as the
minimum payments come due. The Company is generally not contractually
obligated to accept returns, except for defective, shelf-worn and damaged
products in accordance with negotiated terms. However, the Company permits
customers to return or exchange product and may provide markdown allowances on
products unsold by a customer. In accordance with SFAS No. 48, "Revenue
Recognition when Right of Return Exists", revenue is recorded net of an
allowance for estimated returns, exchanges, markdowns, price concessions and
warranty costs. Such reserves are based upon management's evaluation of
historical experience, current industry trends and estimated costs. The amount
of reserves ultimately required could differ materially in the near term from
the amounts included in the accompanying consolidated financial statements.
Customer support provided by the Company is limited to telephone and Internet
support. These costs are not material and are charged to expenses as incurred.

 Product Development

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

 Advertising Costs

   The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and
charged to expense at the first run of the ad. Cooperative advertising with
distributors and retailers is accrued when revenue is recognized. Cooperative
advertising credits are reimbursed when qualifying claims are submitted.

 Income Taxes

   The Company accounts for income taxes using the asset 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.

                                      F-9
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Foreign Currency

   The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated at
the weighted average exchange rate prevailing during the period. Gains or
losses arising from the translation of the foreign subsidiaries' financial
statements are included in the accompanying consolidated financial statements
as other comprehensive income (loss). Losses resulting from foreign currency
transactions amounted to $935,000, $125,000 and $288,000 during the years
ended December 31, 2000, 1999 and 1998, respectively, and are included in
other income (expense) in the consolidated statements of operations.

 Net Loss Per Share

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

   For years ended December 31, 2000, 1999 and 1998, all options and warrants
to purchase common stock were excluded from the diluted loss per share
calculation, as the effect of such inclusion would be antidilutive.

 Comprehensive Income (Loss)

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

 Stock-Based Compensation

   The Company accounts for employee stock options in accordance with the
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and makes the necessary pro forma disclosures mandated by SFAS No.
123 "Accounting for Stock-based Compensation" (see Note 10).

 Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities", which
is effective for fiscal years beginning after June 15, 2000 as amended by SFAS
No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments. The statement requires that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value, and that changes in the derivative's
fair value be recognized currently in the earnings unless specific hedge
accounting criteria are met. The adoption of this standard on January 1, 2001,
did not have a material impact on the Company's results of operations.

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

                                     F-10
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, ("FIN 44"), Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB 25. This Interpretation
clarifies (a) the definition of employee for purposes of applying Opinion 25,
(b) the criteria for determining whether a plan qualifies as a non-
compensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occur after either December 15, 1998, or January 12,
2000. The adoption of FIN 44 did not have a material effect on the Company's
financial position or results of operations.

3. Acquisition

   In 1995, the Company acquired a 91 percent interest in Shiny Entertainment,
Inc. ("Shiny") for $3.6 million in cash and stock. The acquisition was
accounted for using the purchase method. The allocation of purchase price
included $3 million of goodwill. The purchase agreement requires the Company
to pay the former owner of Shiny additional cash payments of up to $5.6
million upon the delivery and acceptance of five future Shiny interactive
entertainment software titles, as defined. As of December 31, 2000, the
Company had not been required to make any additional payments in accordance
with the purchase agreement (see Note 7). In March 2001, the Company acquired
the remaining nine percent equity interest in Shiny for $600,000 (see Note
14).

4. Detail of Selected Balance Sheet Accounts

 Inventories

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

<TABLE>
<CAPTION>
                                                             December 31,
                                                        -----------------------
                                                           2000        1999
                                                        ----------- -----------
                                                        (Dollars in thousands)
      <S>                                               <C>         <C>
      Packaged software finished goods................. $     2,628 $     4,394
      CD-ROMs, DVDs, manuals, packaging and supplies...         731       1,663
                                                        ----------- -----------
                                                        $     3,359 $     6,057
                                                        =========== ===========

 Other Current Assets

   Other current assets consist of the following:

<CAPTION>
                                                             December 31,
                                                        -----------------------
                                                           2000        1999
                                                        ----------- -----------
                                                        (Dollars in thousands)
      <S>                                               <C>         <C>
      Prepaid expenses................................. $       689 $       764
      Deposits.........................................          83         110
                                                        ----------- -----------
                                                        $       772 $       874
                                                        =========== ===========
</TABLE>

                                     F-11
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Property and Equipment

   Property and equipment consists of the following:

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

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

 Accrued Liabilities

   Accrued liabilities consist of the following:

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

5. Current Debt

   Current debt consists of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2000    1999
                                                                ------- -------
                                                                  (Dollars in
                                                                  thousands)
     <S>                                                        <C>     <C>
     Loan Agreement............................................ $24,433 $19,218
     Supplemental line of credit from Titus....................   1,000     --
     Other.....................................................     --      412
                                                                ------- -------
                                                                $25,433 $19,630
                                                                ======= =======
</TABLE>

 Loan Agreement

   Borrowings under the Loan and Security Agreement ("Loan Agreement") bear
interest at LIBOR (6.78 percent at December 31, 2000 and 6.48 percent at
December 31, 1999) plus 4.87 percent (11.65 percent at December 31, 2000 and
11.35 percent at December 31, 1999). In April 2000, the Company amended its
line of

                                     F-12
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

 Supplemental line of credit from Titus

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

6. Income Taxes

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

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                   ----------------------------
                                                     2000      1999      1998
                                                   --------  --------  --------
                                                     (Dollars in thousands)
     <S>                                           <C>       <C>       <C>
     Domestic..................................... $(10,801) $(32,294) $(25,038)
     Foreign......................................   (1,274)   (3,981)   (1,745)
                                                   --------  --------  --------
     Total........................................ $(12,075) $(36,275) $(26,783)
                                                   ========  ========  ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                Years Ended
                                                                December 31,
                                                             ------------------
                                                             2000  1999   1998
                                                             ---- ------ ------
                                                                (Dollars in
                                                                 thousands)
     <S>                                                     <C>  <C>    <C>
     Current:
       Federal.............................................  $--  $  --  $  --
       State...............................................   --       8      8
       Foreign.............................................   --      66   (571)
                                                             ---- ------ ------
                                                              --      74   (563)
                                                             ==== ====== ======

     Deferred:
       Federal.............................................   --   4,536  2,000
       State...............................................   --     800    --
                                                             ---- ------ ------
                                                              --   5,336  2,000
                                                             ---- ------ ------
                                                             $--  $5,410 $1,437
                                                             ==== ====== ======
</TABLE>

                                     F-13
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company files a consolidated U.S. Federal income tax return which
includes substantially all of its domestic operations. The Company files
separate tax returns for each of its foreign subsidiaries in the countries in
which they reside. The Company's available net operating loss ("NOL")
carryforward for Federal tax reporting purposes approximates $107.8 million
and may be subject to certain limitations as defined under Section 382 of the
Internal Revenue Code. The Federal NOL carryforwards expire through the year
2020. The Company's NOL's for State tax reporting purposes approximate $50.2
million and expire through the year 2005.

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

<TABLE>
<CAPTION>
                                                          Years Ended
                                                         December 31,
                                                       ---------------------
                                                       2000    1999    1998
                                                       -----   -----   -----
     <S>                                               <C>     <C>     <C>
     Statutory income tax rate........................ (34.0)% (34.0)% (34.0)%
     State and local income taxes, net of Federal
      income tax benefit..............................  (3.0)   (3.0)   (3.0)
     Valuation allowance..............................  37.0    51.9    39.8
     Other............................................   --      --      2.6
                                                       -----   -----   -----
                                                         --  %  14.9 %   5.4 %
                                                       =====   =====   =====
</TABLE>
   The components of the Company's net deferred income tax asset (liability)
are as follows:

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

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

                                     F-14
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. Commitments and Contingencies

 Leases

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

<TABLE>
      <S>                                                               <C>
      Year ending December 31 (Dollars in thousands):
        2001........................................................... $ 1,864
        2002...........................................................   1,755
        2003...........................................................   1,758
        2004...........................................................   1,907
        2005...........................................................   1,789
        Thereafter.....................................................   3,648
                                                                        -------
                                                                        $12,721
                                                                        =======
</TABLE>

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

 Pending Internal Revenue Service Examination

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

 Litigation

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

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

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

                                     F-15
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Employment Agreements

   The Company has entered into employment agreements with certain key
employees providing for, among other things, salary, bonuses and the right to
participate in certain incentive compensation and other employee benefit plans
established by the Company. Under these agreements, upon termination without
cause or resignation for good reason, as defined, the employees may be
entitled to certain severance benefits, as defined. These agreements expire
between 2002 and 2004.

 New European Currency

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

8. Stockholders' Equity

 Preferred Stock and Common Stock

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

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

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

                                     F-16
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock will be restricted as to transfer rights until such products are
delivered and accepted by the Company. The arrangement also includes certain
penalties to the developer in the event of noncompliance and the terms and
conditions are subject to the approval by the Company's underwriters and
lenders, if necessary.

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

   During 1999, the Company completed two equity transactions with Titus which
provided for the issuance of 10,795,455 shares of the Company's Common Stock
for $35 million. In April 2000, the Company completed a $20 million
transaction with Titus under a Stock Purchase Agreement and issued 719,424
shares of newly designated Series A Preferred Stock ("Preferred Stock") and a
warrant for 350,000 shares of the Company's Common Stock, which has
preferences under certain events, as defined. The Preferred Stock is
convertible by Titus, redeemable by the Company, and accrues a 6 percent
cumulative dividend per annum payable in cash or, at the option of Titus, in
shares of the Company's Common Stock as declared by the Company's Board of
Directors. The Company may redeem the Preferred Stock shares at the original
issue price plus all accrued but unpaid dividends at any time after
termination of Titus's guarantee of the Company's principal line of credit.
Titus may convert the Preferred Stock shares into shares of Common Stock at
any time after May 2001 or earlier under certain events as defined. The
conversion rate is the lesser of $2.78 (7,194,240 shares of Common Stock) or
85 percent of the market price per share at the time of conversion, as
defined. The Preferred Stock is entitled to the same voting rights as if it
had been converted to Common Stock shares subject to a maximum of
7,619,047 votes. In October 2000, the Company's stockholders approved the
issuance of the Preferred Stock to Titus. In connection with this transaction,
Titus received a warrant for 350,000 shares of the Company's Common Stock
exercisable at $3.79 per share at anytime. The fair value of the warrant was
estimated on the date of the grant using the Black-Scholes pricing model with
the following weighted average assumptions: dividend yield of zero percent;
expected volatility of 92 percent; risk-free interest rate of 5.85 percent;
and an expected life of one-year. This resulted in the Company allocating
$19,202,000 to the Preferred Stock and $798,000 to the warrant which is
included in paid in capital. The discount on the Preferred Stock is being
accreted over a one-year period as a dividend to the Preferred Stock. As of
December 31, 2000, the Company had accreted $532,000. In addition, Titus
received a warrant for 50,000 shares of the Company's Common Stock exercisable
at $3.79 per share which became exercisable by Titus since the Company did not
meet certain financial operating performance targets for the year ending
December 31, 2000, as defined. Both warrants expire in April 2010. In April
2001, Titus' guarantee of the Company's principal line of credit was released
and the Company may redeem the Preferred Stock at anytime thereafter (see Note
14).

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

                                     F-17
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

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

   In March 2001, the Company completed a private placement of 8,126,770
shares of Common Stock for $12.7 million, and received net proceeds of
approximately $11.5 million. The shares were issued at $1.5625 per share, and
included warrants to purchase one share of Common Stock for each share sold.
The warrants are exercisable at $1.75, and one half of the warrants can be
exercised immediately with the other half exercisable after June 27, 2001,
only if prior to this date, the Company's Common Stock trading price does not
exceed $2.75 for a period of 20 consecutive trading days, as defined. The
warrants also have a call provision by the Company if the Company's Common
Stock trades at or above $3.00, as defined. If the Company issues additional
shares of Common Stock at a per share price below the exercise price of the
warrants, then the warrants are to be repriced, as defined, subject to
stockholder approval. The warrants expire in March 2006. The transaction
provides for registration rights with a registration statement to be filed by
April 16, 2001 and become effective by May 31, 2001. In the event that the
filing and effective dates of the registration statement are not met, the
Company is subject to a two percent penalty per month, payable in cash or
stock, until the filing and effective dates are met. (see Note 14).

 Employee Stock Purchase Plan

   Under this plan, eligible employees may purchase shares of the Company's
Common Stock at 85% of fair market value at specific, predetermined dates.
During the year, the Board of Directors increased the number of shares
authorized to 300,000. Of the 300,000 shares authorized to be issued under the
plan, approximately 131,000 shares remained available for issuance at December
31, 2000. Employees purchased 40,661 and 72,225 shares in 2000 and 1999 for
$89,000 and $127,000, respectively.

9. Loss Per Share

   Basic loss per share is calculated by dividing net loss attributable 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-dilutive.

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

                                     F-18
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. Employee Benefit Plans

 Stock Option Plans

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

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

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

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

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

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

                                     F-19
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                        Options Outstanding         Options Exercisable
                 ---------------------------------- --------------------
                               Weighted    Weighted             Weighted
     Range of                   Average    Average              Average
     Exercise      Number      Remaining   Exercise   Number    Exercise
      Prices     Outstanding Contract Life  Price   Outstanding  Price
     --------    ----------- ------------- -------- ----------- --------
   <S>           <C>         <C>           <C>      <C>         <C>
   $0.15-$ 0.47     572,874      1.24       $0.15      572,874   $0.15
   $1.94-$ 4.44   2,469,143      8.72        2.58      594,943    2.47
   $4.50-$ 6.66      96,500      6.99        5.18       53,100    5.38
   $7.00-$10.00     391,450      6.04        8.40      275,090    8.57
                  ---------      ----       -----    ---------   -----
   $0.15-$10.00   3,529,967      7.16       $2.90    1,496,007   $2.81
                  =========      ====       =====    =========   =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                                ----------------------------
                                                  2000      1999      1998
                                                --------  --------  --------
                                                  (Dollars in thousands,
                                                except per share amounts)
   <S>                                          <C>       <C>       <C>
   Net loss attributable to common
    stockholders, as reported.................. $(13,477) $(41,685) $(28,220)
   Pro forma compensation expense..............   (1,370)   (1,242)   (1,011)
                                                --------  --------  --------
   Pro forma net loss attributable to common
    stockholders............................... $(14,847) $(42,927) $(29,231)
                                                ========  ========  ========
   Basic and diluted net loss as reported...... $  (0.45) $  (1.86) $  (1.91)
   Basic and diluted pro forma net loss........ $  (0.49) $  (1.91) $  (1.98)
                                                ========  ========  ========
</TABLE>

 Profit Sharing 401(k) Plan

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

11. Related Parties

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

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

                                     F-20
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In connection with the Company's new working capital line of credit
obtained subsequent to year end and the retirement of the current debt
existing under the Company's previous working capital line of credit
arrangements (see Notes 5 and 14), the secured personal guarantee of $5
million previously provided by the Chairman was released, and a new personal
guarantee for $2 million, secured by $1 million in cash, was provided to the
new bank by the Chairman. In addition, the Chairman provided the Company with
a $3 million loan, payable in May 2002, with interest at 10 percent. In
connection with the new guarantee and loan, the Chairman received warrants to
purchase 500,000 shares of the Company's Common Stock at $1.75 per share,
expiring in April 2011.

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

 Distribution and Publishing Agreements

   In February 1999, the Company entered into an International Distribution
Agreement with Virgin which provides for the exclusive distribution of
substantially all of the Company's products in Europe, CIS, Africa and the
Middle East for a seven-year period, cancelable under certain conditions,
subject to termination penalties and costs. Under the Agreement, the Company
pays Virgin a monthly overhead fee, certain minimum operating charges, a
distribution fee based on net sales, and Virgin provides certain market
preparation, warehousing, sales and fulfillment services on behalf of the
Company. The Company amended its International Distribution Agreement with
Virgin effective January 1, 2000. Under the amended Agreement, the Company no
longer pays Virgin an overhead fee or minimum commissions. In addition, the
Company extended the term of the agreement through February 2007 and
implemented an incentive plan that will allow Virgin to earn a higher
commission rate, as defined. Virgin disputed the amendment to the
International Distribution Agreement with the Company, and claimed that the
Company was obligated, among other things, to pay a contribution to their
overhead of up to approximately $9.3 million annually, subject to decrease by
the amount of commissions earned by Virgin on its distribution of our
products. The Company settled this dispute with Virgin in April 2001 (see Note
14). In connection with the International Distribution Agreement, the Company
incurred distribution commission expense of $4.6 million and $3.4 million for
the years ended December 31, 2000 and 1999, respectively. In addition, the
Company recognized overhead fees of $3.9 million and certain minimum operating
charges to Virgin of $2.9 million for the year ended December 31, 1999.

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

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

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

                                     F-21
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

 Investment in Affiliate

   In connection with the International Distribution Agreement and Product
Publishing Agreement, the Company has also entered into an Operating Agreement
with Virgin Acquisition Holdings, LLC, which, among other terms and
conditions, provides the Company with a 43.9 percent equity interest in VIE
Acquisition Group LLC ("VIE"), the parent entity of Virgin. Under the
Operating Agreement, the Company was obligated to make a cash payment of
$9,000. However, the Company is not obligated to make any future contributions
to the working capital of Virgin other than the monthly overhead fee discussed
above. During 1999, Titus acquired a 50.1 percent equity interest in VIE and
in 2000, Titus acquired the 6 percent originally owned by the two former
members of the management of Interplay Productions Limited, the Company's
United Kingdom subsidiary. The Company and Titus together held a 100 percent
equity interest in VIE as of December 31, 2000. As part of the terms of the
April 2001 settlement, VIE redeemed the Company's membership interest in VIE
(see Note 14).

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

12. Concentration of Credit Risk

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

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

                                     F-22
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. Segment and Geographical Information

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

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

   Net revenues were attributable to geographic regions as follows:

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

   Long-lived assets, net, by geographic regions are as follows:

<TABLE>
<CAPTION>
                                                    December 31,   December 31,
                                                        2000           1999
                                                   -------------- --------------
                                                   Amount Percent Amount Percent
                                                   ------ ------- ------ -------
                                                      (Dollars in thousands)
<S>                                                <C>    <C>     <C>    <C>
North America..................................... $6,139   97.8% $5,435   97.9%
Europe............................................     76    1.2      47    0.9
Rest of World.....................................    --     --      --     --
OEM, royalty and licensing........................     60    1.0      69    1.2
                                                   ------  -----  ------  -----
                                                   $6,275  100.0% $5,551  100.0%
                                                   ======  =====  ======  =====
</TABLE>

                                      F-23
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14. Subsequent Events

 Replacement of Credit Facility

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

 Sale of Common Stock

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

                                     F-24
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Unaudited Pro-forma Condensed Balance Sheet

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

                         UNAUDITED PRO-FORMA CONDENSED
                           CONSOLIDATED BALANCE SHEET
                               December 31, 2000

<TABLE>
<CAPTION>
                                                                        Pro-
                                                             Actual    forma
                                                            --------  --------
                                                               (Dollars in
                                                                thousands)
   <S>                                                      <C>       <C>
                           ASSETS
                           ------
   Current Assets:
     Cash.................................................  $  2,835  $  2,835
     Trade receivables, net...............................    28,136    28,136
     Inventories..........................................     3,359     3,359
     Prepaid licenses and royalties.......................    17,704    17,704
     Other................................................       772       772
                                                            --------  --------
       Total current assets...............................    52,806    52,806
                                                            --------  --------
   Property and Equipment, net............................     5,331     5,331
   Other Assets...........................................       944       944
                                                            --------  --------
                                                             $59,081  $ 59,081
                                                            ========  ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
            ------------------------------------
   Current Liabilities:
     Current debt.........................................  $ 25,433  $ 13,887
     Accounts payable.....................................    12,270    12,270
     Accrued liabilities..................................    14,980    14,980
                                                            --------  --------
       Total current liabilities..........................    52,683    41,137
                                                            --------  --------
   Commitments and Contingencies

   Stockholders' Equity:
     Series A Preferred stock, $.001 par value, authorized
      5,000,000 shares; issued and outstanding 719,424
      shares..............................................    19,735    19,735
     Common stock, $.001 par value, authorized 50,000,000
      shares; issued and outstanding 30,143,636 and
      38,270,406 proforma shares..........................        30        38
     Paid-in capital......................................    88,759   100,297
     Accumulated deficit..................................  (102,390) (102,390)
     Accumulated other comprehensive income...............       264       264
                                                            --------  --------
       Total stockholders' equity.........................     6,398    17,944
                                                            --------  --------
                                                             $59,081  $ 59,081
                                                            ========  ========
</TABLE>

                                      F-25
<PAGE>

 Loan from Chairman and Chief Executive Officer

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

 Amendment to Shiny Purchase Agreement

   In March 2001, the Company entered into an amendment to the Shiny purchase
agreement (see Notes 3 and 7) which, among other things, settles a dispute
with the former owner of Shiny, and provide for the Company to acquire the
remaining nine percent equity interest in Shiny for $600,000. The amendment
also provides for additional cash payments to the former owner of Shiny for
two interactive entertainment software titles to be delivered in the future.
The former owner of Shiny will earn royalties after the future delivery of the
two titles to the Company.

 Settlement of Dispute with Virgin Interactive Entertainment Limited

   In April 2001, the Company settled its dispute with Virgin (see Note 7) and
amended the International Distribution Agreement, the Termination Agreement
and the Product Publishing Agreement entered into in February 10, 1999 (see
Note 11). As a result of the settlement, Virgin dismissed its claim for
overhead fees, VIE Acquisition Group LLC ("VIE") redeemed the Company's
membership interest in VIE and Virgin paid the Company $3.1 million in net
past due balances owed under the International Distribution Agreement. In
addition, the Company will pay Virgin a one-time marketing of $333,000 for the
period ending June 30, 2001 and the monthly overhead fee was revised for the
Company to pay $111,000 per month for a nine month period beginning April
2001, and $83,000 per month for a six month period beginning January 2002,
with no further overhead commitment for the remainder of the term of the
International Distribution Agreement.

  Quarterly Financial Data (Unaudited)

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

<TABLE>
<CAPTION>
                              March 31     June 30   September 30  December 31
                             ----------- ----------- ------------- ------------

                              (Dollars in thousands, except per share amounts)
<S>                          <C>         <C>         <C>           <C>
Year ended December 31,
 2000:
  Net revenues..............   $18,143     $24,921     $ 31,631      $30,773
                               =======     =======     ========      =======
  Gross profit..............   $ 8,571     $13,465     $ 15,436      $13,061
                               =======     =======     ========      =======
  Net loss..................   $(5,498)    $(1,903)    $    113      $(4,772)
                               =======     =======     ========      =======
  Net loss per share
   basic/diluted............   $ (0.18)    $ (0.08)    $  (0.01)     $ (0.18)
                               =======     =======     ========      =======
Year ended December 31,
 1999:
  Net revenues..............   $21,620     $29,430     $ 23,636      $27,323
                               =======     =======     ========      =======
  Gross profit..............   $ 9,054     $11,814     $  8,303      $11,609
                               =======     =======     ========      =======
  Net loss..................   $(8,278)    $(6,921)    $(16,976)     $(9,563)
                               =======     =======     ========      =======
  Net loss per share
   basic/diluted............   $ (0.44)    $ (0.33)    $  (0.75)     $ (0.35)
                               =======     =======     ========      =======
</TABLE>


                                     F-26
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                      Trade Receivables Allowance
                         ------------------------------------------------------
                          Balance at  Provisions for
                         Beginning of  Returns and   Returns and Balance at End
         Period             Period      Discounts     Discounts    of Period
         ------          ------------ -------------- ----------- --------------
<S>                      <C>          <C>            <C>         <C>
Year ended December 31,
 1998...................   $14,461       $43,596      $(39,626)     $18,431
                           =======       =======      ========      =======
Year ended December 31,
 1999...................   $18,431       $25,187      $(34,457)     $ 9,161
                           =======       =======      ========      =======
Year ended December 31,
 2000...................   $ 9,161       $19,016      $(21,634)     $ 6,543
                           =======       =======      ========      =======
</TABLE>

                                      S-1