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, 2006

                                       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.)

             100 N. CRESCENT DRIVE, BEVERLY HILLS, CALIFORNIA 90210
                    (Address of principal executive offices)

                                 (310) 432-1958
              (Registrant's telephone number, including area code)

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

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

                         COMMON STOCK, $0.001 PAR VALUE

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act Yes [ ] No [X].

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [x] No [ ].

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

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

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non- accelerated filer [x]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [x].

As of December 29, 2006, the aggregate  market value of voting common stock held
by non-affiliates  was approximately  $6,000,000 based upon the closing price of
the Common Stock on that date.


<PAGE>


Documents incorporated by reference

Portions of the  registrant's  definitive  proxy statement  relating to its 2007
annual  meeting of  stockholders,  which will be filed with the  Securities  and
Exchange  Commission  pursuant to regulation 14A within 120 days of the close of
the  registrant's  last fiscal year, are incorporated by reference into Part III
of this report.


As of December 29, 2006,  103,855,634  shares of Common Stock of the  Registrant
were issued and outstanding. This includes 4,658,216 shares of Treasury Stock.


                                       2
<PAGE>


             INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006


                                                                            PAGE
                                                                            ----
PART I

     Item 1.   Business                                                        4

     Item 1A   Risk Factors                                                    8

     Item 2.   Properties                                                     13

     Item 3.   Legal Proceedings                                              13

     Item 4.   Submission of Matters to a Vote of Security Holders            15

PART II

     Item 5.   Market for Registrant's Common Equity and Related
               Stockholder Matters                                            15

     Item 6.   Selected Financial Data                                        19

     Item 7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations                            20

     Item 7A.  Quantitative and Qualitative Disclosure about
               Market Risk                                                    29

     Item 8.   Consolidated Financial Statements and Supplementary
               Data                                                           29

     Item 9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure                            29

     Item 9A   Controls and Procedures

PART III

     Item 10.  Directors and Executive Officers of the Registrant             30

     Item 11.  Executive Compensation                                         30

     Item 12.  Security Ownership of Certain Beneficial Owners
               and Management and Related Stockholder Matters                 30

     Item 13.  Certain Relationships and Related Transactions                 30

     Item 14.  Principal Accounting Fees and Services                         30

PART IV

     Item 15.  Exhibits, Financial Statement Schedules.                       31

Signatures                                                                    32

Exhibit Index                                                                 33


                                       3
<PAGE>


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

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

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

     INTERPLAY (R), INTERPLAY  PRODUCTIONS(R),  GAMES ON LINE (R) AND CERTAIN OF
OUR OTHER PRODUCT NAMES AND PUBLISHING LABELS REFERRED TO IN THIS REPORT ARE THE
COMPANY'S TRADEMARKS. THIS REPORT ALSO CONTAINS TRADEMARKS BELONGING TO OTHERS.


                                     PART I

ITEM 1.    BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS

     Interplay  Entertainment  Corp.,  which we refer to in this Report as "we,"
"us," or  "our,"  is a  publisher  and  licensor  of  interactive  entertainment
software for both core gamers and the mass market.  We were  incorporated in the
State of California in 1982 and were  reincorporated in the State of Delaware in
May  1998.  We are  most  widely  known  for our  titles  in the  action/arcade,
adventure/role  playing  game (RPG),  and  strategy/puzzle  categories.  We have
produced  and  licensed  titles  for  many  of  the  most  popular   interactive
entertainment software platforms.

     We seek to publish or license out interactive entertainment software titles
that are, or have the potential to become, franchise software titles that can be
leveraged  across  several  releases  and/or  platforms,  and have  published or
licensed many such successful franchise titles to date.

     The Company is planning to exploit its Intellectual  Property  "Fallout" on
Massively  Multiplayer  Online  Gaming  (MMOG) and is  reviewing  the  financial
avenues for funding MMOG.

     Our business and industry has certain risks and uncertainties.  During 2006
we continued to operate  under limited cash flow from  operations.  We expect to
operate under improved cash  constraints  during 2007.  During 2006,  because of
limited resources, we have been primarily engaged in exploiting existing titles.
We have  had no new  internal  development  of  software  titles.  For a  fuller
discussion of the risk and uncertainties  relating to our financial results, our
business and our industry, please see the section titled "Risk Factors" in "Item
7.  Management's  Discussion and Analysis of Financial  Condition and Results of
Operations."

     Our  principal  activities  involve  publishing  of  video  game  products,
licensing of our  intellectual  properties,  online  distribution,  back catalog
licensing and OEM/ merchandising.


                                       4
<PAGE>


PRODUCTS

     We publish and distribute  interactive  entertainment  software titles that
provide  immersive  game  experiences  by  combining  advanced  technology  with
engaging content, vivid graphics and rich sound.

     Our  strategy is to invest in products for those  platforms,  whether PC or
video game console, that have or will have sufficient installed bases or a large
enough number of potential  subscribers  for the  investment to be  economically
viable. We do not currently internally develop new products.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

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

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

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

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

PRODUCT DEVELOPMENT

     We currently do not have any new products under development.

     During the years  ended  December  31,  2006,  2005 and 2004,  we spent $0,
$300,000 and $2.6 million,  respectively,  on product  research and  development
activities.  Those  amounts  represented  0%, 3% and 20%,  respectively,  of net
revenues in each of those periods.


                                       5
<PAGE>


SEGMENT INFORMATION

     We operate primarily in one industry segment,  the development,  publishing
and  distribution  of  interactive   entertainment   software.  For  information
regarding the revenues and assets associated with our geographic  segments,  see
Note 13 of the Notes to our Consolidated Financial Statements included elsewhere
in this Report.

SALES AND DISTRIBUTION

     NORTH  AMERICA.  We  distribute  and  license  rights to our  products  and
Intellectual Properties in North America and other selected territories from our
corporate offices in Beverly Hills, California.

     INTERNATIONAL.  We  distribute  and  license  rights  to our  products  and
Intellectual Properties in Europe and other selected territories thru our wholly
owned subsidiary, Interplay Productions Ltd,located in London, England..

LICENSING

     We entered into  various  licensing  agreements  during 2006 under which we
licensed others to exploit games that we have intellectual property rights to.

MARKETING

     We  assist  our  distributors  in the  development  and  implementation  of
marketing programs and campaigns for each of our titles and product groups.

COMPETITION

     The interactive  entertainment  software industry is intensely  competitive
and is  characterized  by the frequent  introduction of new hardware systems and
software  products.  Our  competitors  vary in size from small companies to very
large corporations with significantly  greater financial,  marketing and product
development resources than ours. Due to these greater resources,  certain of our
competitors are able to undertake more extensive marketing campaigns, adopt more
aggressive  pricing  policies,  pay higher fees to licensors of desirable motion
picture, television, sports and character properties and pay more to third party
software  developers than us. We believe that the principal  competitive factors
in the interactive  entertainment  software  industry include product  features,
brand name recognition,  access to distribution channels,  quality, ease of use,
price, marketing support and quality of customer service.

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

SEASONALITY

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

MANUFACTURING

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


                                       6
<PAGE>


     Sony Computer Entertainment, Microsoft Corporation and Nintendo manufacture
and ship finished products that are compatible with their video game consoles to
our  licensees  for  distribution.  PlayStation  2, Xbox and  GameCube  products
consist of the game disks and include  manuals and  packaging  and are typically
delivered within a relatively short lead-time.

     If we  experience  unanticipated  delays in the  delivery  of  manufactured
software products by our third party manufacturers,  our net sales and operating
results could be materially adversely affected.

BACKLOG

     We do not carry  inventories  because  all of our  sales  and  distribution
efforts  are  handled  by our  licensees  under  the  terms  of  our  respective
distribution agreements with them. We do not have any backlog orders

EMPLOYEES

     As of  December  31,  2006,  we had 6  employees,  including  1 in software
engineering,   2  in  sales  and  marketing  and  3  in  finance,   general  and
administrative.

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

ADDITIONAL INFORMATION

     We file annual,  quarterly and current reports,  proxy statements and other
information  with the U.S.  Securities  and Exchange  Commission or SEC. You may
obtain copies of these reports via the Internet at the SEC's homepage located at
www.sec.gov.   You   may   also  go  to  our   Internet   address   located   at
www.interplay.com  and go to  "Investor  Relations"  which  will link you to the
SEC's homepage for our filed reports. In addition, copies of the reports we file
with the SEC may also be  obtained  at the SEC's  Public  Reference  Room at 450
Fifth  Street,  NW,  Washington,  DC 20549.  You may obtain  information  on the
operation of the Public Reference Room by Calling the SEC at 1-800-SEC-0330.


                                       7
<PAGE>


ITEM 1A.   RISK  FACTORS


RISK FACTORS

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

RISKS RELATED TO OUR FINANCIAL RESULTS

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

     As of December 31, 2006, our cash balance was approximately $50,000 and our
working capital deficit totaled  approximately $8.1 million.  In particular,  we
have some  significant  creditors  that  comprise a  substantial  proportion  of
outstanding obligations, including many that have obtained judgments against us,
that we might not be able to satisfy. If we do not receive sufficient  financing
or sufficient funds from our operations we may (i) liquidate  assets,  (ii) seek
or be  forced  into  bankruptcy  and/or  (iii)  continue  operations,  but incur
material harm to our business, operations or financial condition. These measures
could have a material  adverse  effect on our  ability  to  continue  as a going
concern.  Additionally,  because  of  our  financial  condition,  our  Board  of
Directors  has a duty to our  creditors  that may conflict with the interests of
our  stockholders.  When a Delaware  corporation is operating in the vicinity of
insolvency,  the Delaware courts have imposed upon the corporation's directors a
fiduciary  duty to the  corporation's  creditors.  Our Board of Directors may be
required to make  decisions that favor the interests of creditors at the expense
of our  stockholders  to fulfill its fiduciary  duty.  For  instance,  we may be
required  to preserve  our assets to  maximize  the  repayment  of debts  versus
employing  the assets to further  grow our  business  and  increase  shareholder
value.  If we cannot generate enough income from our operations or are unable to
locate additional funds through financing, we will not have sufficient resources
to continue operations.

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

         For the year ended  December 31, 2006, our net income was $3.1 million,
$4.5  million  of our  revenue  was  recognized  from the  reversals  of certain
settlements,  reversal of  reserves,  prior year  payables.  The $4.5 million of
reversals and settlements did not generate cash flow. However,  since inception,
we have incurred  significant  losses and negative cash flow. As of December 31,
2006 we had an  accumulated  deficit of $130  million.  Our  ability to fund our
capital  requirements  out of our  available  cash and cash  generated  from our
operations  depends on a number of factors.  Some of these  factors  include the
progress of our product  distributions and licensing,  the rate of growth of our
business,  and our products'  commercial success. If we cannot generate positive
cash flow from  operations,  we will have to  continue  to reduce  our costs and
raise working  capital from other sources.  These measures could include selling
or  consolidating  certain  operations  or assets,  and  delaying,  canceling or
scaling back  operations.  These measures could  materially and adversely affect
our ability to publish  successful titles, and may not be enough to permit us to
operate profitability, or at all.

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

     If we are not  acquired  by or merge with  another  entity or if we are not
able to raise additional capital by sale or license of certain of our assets, we
may need to consummate a financing  transaction to receive additional liquidity.
This  additional  financing  may  take the form of  raising  additional  capital
through public or private equity  offerings or debt financing.  To the extent we
raise additional capital by issuing equity securities, we cannot be certain that
additional  capital  will  be  available  to  us  on  favorable  terms  and  our
stockholders will likely  experience  substantial  dilution.  Our certificate of
incorporation  provides for the issuance of preferred stock however we currently
do not  have  any  preferred  stock  issued  and  outstanding.  Any  new  equity
securities  issued may have greater  rights,  preferences or privileges than our
existing  common  stock.  Material  shortage of capital  will require us to take
drastic  steps such as reducing our level of  operations,  disposing of selected
assets,  effecting financings on less than favorable terms or seeking protection
under federal bankruptcy laws.


                                       8
<PAGE>


RISKS RELATED TO OUR BUSINESS

TITUS  INTERACTIVE  SA (PLACED  IN  INVOLUNTARY  BANKRUPTCY  IN  JANUARY,  2005)
CONTROLS A MAJORITY OF OUR VOTING STOCK AND CAN ELECT A MAJORITY OF OUR BOARD OF
DIRECTORS  AND  PREVENT  AN  ACQUISITION  OF US THAT IS  FAVORABLE  TO OUR OTHER
STOCKHOLDERS.  ALTERNATIVELY,  TITUS  CAN ALSO  CAUSE A SALE OF  CONTROL  OF OUR
COMPANY THAT MAY NOT BE FAVORABLE TO OUR OTHER STOCKHOLDERS.

     Titus  owns   approximately  58  million  shares  of  common  stock.  As  a
consequence,  Titus can control  substantially all matters requiring stockholder
approval,  including  the election of  directors,  subject to our  stockholders'
cumulative  voting  rights,  and the  approval  of  mergers  or  other  business
combination  transactions.  At our 2003 and 2002 annual  stockholders  meetings,
Titus  exercised its voting power to elect a majority of our Board of Directors.
Currently, our Chief Executive Officer and interim Chief Financial Officer Herve
Caen was a director of various Titus  affiliates.  This  concentration of voting
power  could  discourage  or prevent a change in control  that  otherwise  could
result in a premium in the price of our common stock. Further, Titus' bankruptcy
could lead to a sale by its liquidator or other representative in bankruptcy, of
shares Titus holds in us,  and/or a sale of Titus itself which would result in a
sale of control of our Company and such a sale may not be favorable to our other
stockholders.  Such a sale,  including if it involves a dispersion  of shares to
multiple  stockholders,  further  could have the  effect of making any  business
combination, or a sale of all of our shares as a whole, more difficult.

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

     We are currently  operating  without a credit agreement or credit facility.
There  can be no  assurance  that we will be  able to  enter  into a new  credit
agreement  or that if we do enter  into a new  credit  agreement,  it will be on
terms favorable to us.

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

IF WE FAIL TO DELIVER OUR PRODUCTS AT THE RIGHT TIMES, OUR SALES WILL SUFFER.

     We are  presently  without a CFO,  and Mr. Caen has assumed the position of
interim-CFO and continues as CFO to date until a replacement can be found. o OUR
BUSINESS AND INDUSTRY IS BOTH SEASONAL AND  CYCLICAL.

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

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

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

     o    demand for our products and our competitors' products;

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

     o    changes in personal computer and video game console platforms;

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

     o    changes in our product mix;

     o    the number of our products that are returned; and

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

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

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

     o    approvals required from content and technology licensors; and


                                       9
<PAGE>


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

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

     Although  for the year ended  December  31,  2006,  our net income was $3.1
million,  $4.5  million  was from one time  non  recurring  events,  and we have
incurred  significant  net losses in  previous  years and $4.5  million  did not
generate cash flow. Our losses in the past stemmed  partly from the  significant
costs we  incurred  to develop  our  entertainment  software  products,  product
returns and price concessions.  Moreover, a significant portion of our operating
expenses is relatively fixed, with planned  expenditures  based largely on sales
forecasts.  At the same time, most of our products have a relatively  short life
cycle and sell for a limited period of time after their initial release, usually
less than one year.

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

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

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

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

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

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

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

     Our net revenues from  international  sales accounted for approximately 66%
and 57% of our total net  revenues  for years ended  December 31, 2006 and 2005,
respectively. To the extent our resources allow, we intend to continue to expand
our direct and indirect  sales,  marketing and product  localization  activities
worldwide.

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

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

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

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

     o    regulatory requirements may change unexpectedly;


                                       10
<PAGE>


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

     o    fluctuations in foreign currency exchange rates;

     o    political and economic instability; and

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

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

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

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

     We are exposed to the risk of product returns and pricing  concessions with
respect  to  our  distributors.  Our  distributors  allow  retailers  to  return
defective,  shelf-worn and damaged products in accordance with negotiated terms,
and also offer a 90-day limited warranty to our end users that our products will
be free from  manufacturing  defects.  In  addition,  our  distributors  provide
pricing  concessions to our customers to manage our customers'  inventory levels
in the  distribution  channel.  Our  distributors  could  be  forced  to  accept
substantial  product  returns and provide  pricing  concessions  to maintain our
relationships with retailers and their access to distribution channels.

RISKS RELATED TO OUR INDUSTRY

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

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

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

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

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

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


                                       11
<PAGE>


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

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

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

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

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

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

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

     o    operating systems;

     o    new media formats

     o    releases of new video game consoles;

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

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

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

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

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

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

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

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

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


                                       12
<PAGE>


RISKS RELATED TO OUR STOCK

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

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

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

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

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

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

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

OUR STOCK IS VOLATILE

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

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

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

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

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

ITEM 2.    PROPERTIES

     The Company's headquarters are located in Beverly Hills, California,  where
we leased  approximately  3,100  square feet of office  space.  The  facility is
leased  through  April 2008.  We are currently  subleasing  approximately  1,100
square  feet of our  facility  to an  independent  third  party.  We also have a
representation office in France.

ITEM 3.    LEGAL PROCEEDINGS

     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.


                                       13
<PAGE>


     On  October  24,  2002,  Synnex  Information  Technologies  Inc  ("Synnex")
initiated legal proceedings  against the Company for various claims related to a
breach of a  distributorship  agreement.  Synnex  obtained a  $172,000  judgment
against the Company.

     On or about October 9, 2003, Warner Brothers Entertainment, Inc. ("Warner")
filed suit against us in the Superior Court for the State of California,  County
of Orange,  alleging  default on an Amended  and  Restated  Secured  Convertible
Promissory Note held by Warner dated April 30, 2002, with an original  principal
sum of $2.0  million.  At the time the suit was  filed,  the  current  remaining
principal  sum due  under  the note  was $1.4  million  in  principal  including
interest.  We owe a remaining  balance of approximately  $383,000 payable in one
remaining  installment.  The Company is currently  in default of the  settlement
agreement.

     In April 2004,  Arden  Realty  Finance IV LLC  ("Arden")  filed an unlawful
detainer  action  against  the  Company in the  Superior  Court for the State of
California, County of Orange, alleging the Company's default under its corporate
lease agreement.  At the time the suit was filed,  the alleged  outstanding rent
totaled $432,000. The Company was unable to pay the rent, and vacated the office
space during the month of June 2004. On June 3, 2004,  Arden obtained a judgment
of approximately  $588,000 exclusive of interest.  In addition the Company is in
the  process of  resolving a prior  claim with the  landlord in the  approximate
amount of  $148,000,  exclusive  of  interest.  The  Company  has  negotiated  a
forbearance  agreement  whereby  Arden agreed to accept  payments  commencing in
January  2005 in the amount of $60,000  per month until the full amount is paid.
The  Company  has been in  default  of the  forbearance  agreement.  On or about
November 1, 2006,  Arden filed an involuntary  bankruptcy  petition  against the
Company.  The petition is pending before the bankruptcy court and the Company is
opposing it.

     Monte Cristo Multimedia, a French video game developer and publisher, filed
a breach of contract complaint against the Company in the Superior Court for the
State of California,  County of Orange,  on August 6, 2002,  alleging damages in
the  amount  of  $886,000  plus  interest,   in  connection  with  an  exclusive
distribution agreement.  This claim was settled for $100,000,  payable in twelve
installments, however, the Company was unable to satisfy its payment obligations
and  consequently,  Monte  Cristo has filed a  stipulated  judgment  against the
Company in the amount of $100,000  additional interest has accrued in the amount
of $26,548,  the total outstanding balance at December 31, 2006 is $126,548.  If
Monte Cristo executes the judgment, it will negatively affect the Company's cash
flow, which could further  restrict the Company's  operations and cause material
harm to our business.

     In August 2003, Reflexive  Entertainment,  Inc. filed an action against the
Company for failure to pay development  fees in the Orange County Superior Court
that was settled in July 2004.  The Company was unable to make the  payments and
Reflexive  sought and obtained  judgment  against the company for  approximately
$110,000.  On or about November 1, 2006, Reflexive joined Arden in the filing of
an involuntary  bankruptcy petition against the Company. The petition is pending
before the bankruptcy court and the Company is opposing it.

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

     The Company  received notice from the Internal Revenue Service ("IRS") that
it owes  approximately  $110,000  pursuant to section 166 and section 186 of the
Internal Revenue Code in payroll tax penalties, and interest for late filing and
late  payment of payroll  taxes.  Approximately  $110,000 has been accrued as of
December  31, 2006 but remains  unpaid.  The  Company  received  notice from the
Employment  Development  Department (EDD) that it owes approximately $103,000 in
payroll taxes, interest and penalties for the periods ending 2003, 2004 and 2005
which has been accrued for  December 31, 2006.  The Company is in the process of
establishing a payment plan with the Employment Development Department.

     The Company was unable to meet  certain  2004  payroll  obligations  to its
employees,  as a  result  several  employees  filed  claims  with  the  State of
California  Labor Board ("Labor  Board").  The Labor Board has fined the Company
approximately  $10,000 for failure to meet its payroll  obligations and obtained
in August 2005 judgments  totaling  $118,000 in favor of former employees of the
Company , since this time  $44,000 of the claims have been  settled  leaving,  a
balance of $74,000. On or about November 1, 2006, two employees joined Arden and
Reflexive  in the  filing of an  involuntary  bankruptcy  petition  against  the
Company.  The petition is pending before the bankruptcy court and the Company is
opposing it.

     The Company's  property,  general  liability,  auto,  fiduciary  liability,
workers compensation and employment practices liability,  have been cancelled in
2004. The company subsequently  entered into new workers compensation  insurance
plan.


                                       14
<PAGE>


The Labor Board fined the Company  approximately $79,000 for having lost workers
compensation  insurance for a period of time. The Company is appealing the Labor
Board fines.

     The Company received notice from the California State Board of Equalization
of a balance due in the amount of $73,000  for a prior year  audit.  The Company
has engaged an independent  specialized accounting firm to appeal the prior year
audit  calculations  and submit a settlement  proposal to the  California  State
Board of Equalization.

     On September 14, 2005,  Network Commercial  Service,  Inc. ("NCS") filed an
action against the Company alleging breach of contract relating to the provision
of copying equipment.  NCS subsequently  obtained a judgment against the company
for approximately $140,000.

     On April 22, 2005,  Mark Strecker  filed an action  against the Company for
various claims alleging unpaid services in the amount of $35,000. The Company is
evaluating the merit of the lawsuit.

     On May 19, 2005 DZN,  The Design  Corporation  filed an action  against the
Company for various advertising  services in the amount of $38,000.  The Company
is evaluating the merit of the lawsuit.

     On February 2, 2006 Michael  Sigel filed an action  against the Company for
unauthorized use of image. The Company is evaluating the merit of the lawsuit.

     On March 7, 2006,  Parallax  Software Corp.  entered a judgment against the
Company for a material  breach of a  settlement  agreement  related to royalties
owed in the amount of $219,000.

o On November 25, 2002,  Special  Situations Fund III, Special Situations Cayman
Fund, L.P., Special Situations Private Equity Fund, L.P., and Special Situations
Technology  Fund,  L.P.  (collectively,  "Special  Situations")  initiated legal
proceedings  against the Company seeking damages of approximately  $1.3 million,
alleging,  among other things,  that we failed to secure a timely effective date
for a  Registration  Statement  for its shares  purchased by Special  Situations
under a common stock  subscription  agreement  dated March 29, 2001 and that the
Company  therefore,  liable to pay  Special  Situations  $1.3  million.  Special
Situations  entered  into a settlement  agreement  with the Company in December,
2003  contemplating  payments over time, which the Company later  defaulted.  In
August,  2004 the Company  entered into a stipulation  of settlement on which it
later defaulted.  On January 12, 2005 a judgment of  approximately  $776,000 was
entered in the State of New York and on February  4, 2005 a judgment  reflecting
the January 12, 2005 judgment was entered in the State of California.  On May 3,
2006  the  Company  entered  into  a  Stipulation  of  Settlement.   Under  this
Stipulation  of Settlement,  the Company issued a total of 10,000,000  shares of
its unregistered  common stock and made a payment in the amount of approximately
$239,000.  Following the issuance of such shares,  and in  consideration of such
issuance  and  such  payment,   satisfaction  of  judgments  in  the  amount  of
approximately  $776,000  were  filed.  Such  shares  were  issued  in a  private
placement pursuant to section 4(2) of the Securities Act of 1933 and were issued
at a price of $.0296 per share,  using a value based on the then current  market
price of shares of common stock discounted by such newly issued shares.

     The Company has  recorded an estimate  for the  liabilities  related to the
aforementioned  litigation.  If any of the  creditors  execute  their  judgments
against the Company, the results will negatively affect the Company's cash flow,
which could restrict the Company's  operations and cause material  restraints to
its business.

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

     None


                                     PART II

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

     The Company trades on the  NASD-operated  Over-the-Counter  Bulletin Board.
Our  common  stock is  currently  traded on the  NASD-operated  Over-the-Counter
Bulletin Board under the symbol "IPLY" or while non-compliant  "IPLYE". At March
19, 2007, there were 100 holders of record of our common stock.


                                       15
<PAGE>


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

FOR THE YEAR ENDED DECEMBER 31, 2006                     HIGH              LOW
------------------------------------                   -------           -------

First Quarter ..............................           $   .04           $   .01
Second Quarter .............................               .04               .02
Third Quarter ..............................               .03               .01
Fourth Quarter .............................               .29               .01

FOR THE YEAR ENDED DECEMBER 31, 2005                     HIGH              LOW
------------------------------------                   -------           -------

First Quarter ..............................           $   .02           $   .01
Second Quarter .............................               .01               .01
Third Quarter ..............................               .01               .01
Fourth Quarter .............................               .01               .01

DIVIDEND POLICY

     It is not currently our policy to pay dividends.

SECURITIES ISSUANCES

     10,000,000  new shares were issued  during the period  ending  December 31,
2006. (See Special Situation in Item 3 Legal Proceedings)

     On October 2, 2006 the Company  issued  6,370,000  warrants to purchase the
Company's  common stock at $.0279 per share (average closing price over ten days
subsequent to the  resolution  authorizing  the issuance of the warrants) to the
officer and directors.

     The   6,100,000   warrants  were  issued  to  the  officer  to  reduce  his
compensation  and to  convert  a  portion  of  his  unpaid  compensation  into a
conditional  demand note.  The  conditions  includes that such note will be paid
only if the tangible net worth of the Company exceeds $1 million or in a case of
change  in  control.  The  demand  note  will  accrue  interest  at a rate of 5%
annually. These warrants were valued using the Black-Scholes Model.

     In addition  270,000 warrants were issued to the directors to convert their
earned but unpaid  director's fees to conditional  demand notes.  The conditions
include  that  such  notes  will be paid only if the  tangible  net worth of the
Company  exceeds $1 million or in a case of change in control.  The demand notes
will accrue interest at a rate of 5% annually.  These warrants were valued using
the Black-Scholes Model.

     On October 2, 2006 the Company  issued  2,570,000  options to directors and
senior employees to purchase the Company's common stock at $.045 per share.

     Such  warrants and options were issued in a private  placement  pursuant to
section 4 (2) of the Securities Act of 1933.


                                       16
<PAGE>


STOCK COMPENSATION PLANS

     The  following  table sets forth certain  information  regarding our equity
compensation plans as of December 31, 2006:

<TABLE>
<CAPTION>
                                                                                Number of securities
                                                                               remaining available for
                           Number of securities to   01Weighted-average     future issuance under equity
                           be issued upon exercise     exercise price of         compensation plans
                           of outstanding options,   outstanding options,       (excluding securities
                             warrants and rights      warrants and rights     reflected in column (a))
-------------------------- ------------------------- ---------------------- -----------------------------
                                     (a)                      (b)                        (c)
<S>                               <C>                       <C>                       <C>
Equity compensation
  plans approved by
  security holders
Equity compensation
  plans not approved
  by security holders             9,970,298                 0.029                     7,360,000
                           ------------------------- ---------------------- -----------------------------
Total                             9,970,298                 0.029                     7,360,000
                           ========================= ====================== =============================
</TABLE>


     We have one stock option plan currently  outstanding.  Under the 1997 Stock
Incentive  Plan,  as amended  (the "1997  Plan"),  we may grant up to 10 million
options to our employees,  consultants and directors,  which generally vest from
three to five years.

     There were  differences  between the exercise  price and the estimated fair
market  value as  compensation  expense  in the  amount of  $40,000,  $0 and $0,
respectively,  for  financial  reporting  purposes.  There  was no  compensation
expense for any vested portion for the years 2005 and 2004 respectively and 2006
the Company recorded a charge to income of $40,000 under FASB 123R.


                                       17
<PAGE>


PERFORMANCE GRAPH

     The following  graph sets forth the percentage  change in cumulative  total
stockholder  return of our common stock during the period from December 31, 2001
to December 31, 2006,  compared with the cumulative  returns of the NASDAQ Stock
Market (U.S.  Companies)  Index and the Media General Index 820*. The comparison
assumes  $100 was  invested on December 31, 2001 in our common stock and in each
of the foregoing  indices.  Information  presented below is as of the end of the
fiscal year ended December 31, 2006.

                          [PERFORMANCE GRAPH OMITTED]

<TABLE>
<CAPTION>
----------------------------- ----------- ----------- ---------- ----------- ----------- -----------
                                   12/01       12/02      12/03       12/04       12/05       12/06
----------------------------- ----------- ----------- ---------- ----------- ----------- -----------
<S>                               <C>          <C>       <C>         <C>         <C>         <C>
INTERPLAY ENTERTAINMENT CORP.     100.00       13.04      16.30        3.04        1.74       29.35
NASDAQ COMPOSITE                  100.00       71.97     107.18      117.07      120.50      137.02
NEW PEER GROUP                    100.00       77.53     141.43      184.44      164.44      169.50
OLD PEER GROUP                    100.00       70.27     127.35      166.00      153.05      156.65
</TABLE>


     In any of our fillings  under the Securities Act of 1933, as amended or the
Securities  Exchange Act of 1934, as amended that  incorporate  this performance
graph and the data related thereto by reference, this performance graph and data
related thereto will be considered  excluded from the incorporation by reference
and will not be deemed a part of any such other filing unless we expressly state
that the performance graph and the data related thereto is so incorporated.


                                       18
<PAGE>


ITEM 6.    SELECTED FINANCIAL DATA

     The selected consolidated statements of operations data for the years ended
December 31, 2006,  2005 and 2004 and the selected  consolidated  balance sheets
data as of December 31, 2006 and 2005 are derived from our audited  consolidated
financial  statements  included elsewhere in this Report. Our historical results
are not necessarily indicative of the results that may be achieved for any other
period.  The  following  data  should  be  read in  conjunction  with  "Item  7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
Report.

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                       ------------------------------------------------------------
                                                          2006         2005        2004         2003         2002
                                                       ---------    ---------   ---------    ---------    ---------
                                                                   (Dollars in thousands, except share
                                                                           and per share amounts)
<S>                                                    <C>          <C>         <C>          <C>          <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues .......................................   $     967    $   7,158   $  13,197    $  36,301    $  43,999
Cost of goods sold .................................         167          478       6,826       13,120       26,706
                                                       ---------    ---------   ---------    ---------    ---------
Gross profit .......................................         800        6,680       6,371       23,181       17,293
Operating expenses .................................       2,069        3,197       8,853       21,787       29,653
                                                       ---------    ---------   ---------    ---------    ---------
Operating (income) loss ............................      (1,269)       3,483      (2,482)       1,394      (12,360)
Sale of subsidiary .................................        --           --          --           --         28,813
Other income (expense) .............................       4,348        2,445      (2,094)         (82)      (1,531)
                                                       ---------    ---------   ---------    ---------    ---------
Income (loss) before income taxes ..................       3,079        5,928      (4,576)       1,312       14,922
Provision (benefit) for income taxes ...............        --           --           154         --           (225)
                                                       ---------    ---------   ---------    ---------    ---------
Net income (loss) ..................................   $   3,079    $   5,928   $  (4,730)   $   1,312    $  15,147
                                                       =========    =========   =========    =========    =========

Cumulative dividend on participating preferred stock   $    --      $    --     $    --      $    --      $     133
Accretion of warrant ...............................        --           --          --           --           --
                                                       ---------    ---------   ---------    ---------    ---------
Net income (loss) available to common stockholders .   $   3,079    $   5,928   $  (4,730)   $   1,312    $  15,014
                                                       =========    =========   =========    =========    =========
Net income (loss) per common share:
     Basic .........................................   $   0.030    $   0.063   $   (0.05)   $    0.01    $    0.18
     Diluted .......................................   $   0.028    $   0.063   $   (0.05)   $    0.01    $    0.16
Shares used in calculating net income (loss) per
   common share - basic ............................     100,513       93,856      93,856       93,852       83,585
Shares used in calculating net income (loss) per
   common share - diluted ..........................     102,603       93,856      93,856      104,314       96,070

SELECTED OPERATING DATA:
Net revenues by geographic region:
     North America .................................   $     203    $   2,885   $   1,544    $  13,541    $  26,184
     International .................................         632        4,056       9,934        6,484        5,674
     OEM, royalty and licensing ....................         132          217       1,720       16,276       12,141

Net revenues by platform:
     Personal computer .............................   $     456    $     631   $   1,817    $   7,671    $  15,802
     Video game console ............................         379          971       9,660       12,354       16,056
     OEM, royalty and licensing ....................         132          217       1,720       16,276       12,141
     Recognition of Revenue from expired contracts .        --          4,571        --           --           --
                              Online licensing .....        --            768        --           --           --
</TABLE>

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                       ------------------------------------------------------------
                                                          2006         2005        2004         2003         2002
                                                       ---------    ---------   ---------    ---------    ---------
BALANCE SHEETS DATA:                                                      (Dollars in thousands)
<S>                                                    <C>          <C>          <C>          <C>          <C>
Working capital (deficiency) .......................   $  (8,098)   $ (11,497)   $ (17,852)   $ (14,750)   $ (17,060)
Total assets .......................................         323          673          834        5,486       14,298
Total debt .........................................       1,572        1,549        1,575          837        2,082
Stockholders' equity  (deficit) ....................      (8,087)     (11,490)     (17,362)     (12,636)     (13,930)
</TABLE>


                                       19
<PAGE>


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

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

EXECUTIVE OVERVIEW AND SUMMARY

     Interplay  Entertainment  Corp. is a publisher and licensor of  interactive
entertainment  software  for both core gamers and the mass  market.  We are most
widely known for our titles in the  action/arcade,  adventure/role  playing game
(RPG), and strategy/puzzle  categories. We have produced and licensed titles for
many of the most popular interactive entertainment software platforms.

     During  2006  we  continued  to  operate   under  limited  cash  flow  from
operations. We expect to operate under improved cash constraints during 2007.

     Although we are now able to pay our current  obligations  as they come due,
we  continue  to face  difficulties  in paying off older  liabilities,  incurred
judgments and have pending  litigation as a result of our  continuing  cash flow
difficulties.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming  that we will  continue  as a going  concern,  which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  The carrying  amounts of assets and  liabilities  presented in the
financial  statements  do not  purport to  represent  realizable  or  settlement
values.  The  Report of our  Independent  Auditors  for the  December  31,  2006
consolidated  financial statements includes an explanatory  paragraph expressing
substantial doubt about our ability to continue as a going concern.

     We entered into  various  licensing  agreements  during 2006 under which we
licensed others to exploit games that we have  intellectual  property rights to.
We expect in 2007 to enter into similar  license  arrangements  to generate cash
for the Company's operations.

     Our  products  were  either  designed  and created by our  employees  or by
external software  developers.  When we used external  developers,  we typically
advanced  development funds to the developers in installment payments based upon
the completion of certain milestones.  These advances were typically  considered
advances against future  royalties.  We currently have no product in development
with  external  developers.  We plan on  creating  additional  products  through
external developers but no assurance can be made that it will be successful.

     Our operating  results will  continue to be impacted by economic,  industry
and business  trends  affecting  the  interactive  entertainment  industry.  Our
industry  is  highly  seasonal,  with the  highest  levels  of  consumer  demand
occurring  during the year-end  holiday buying  season.  With the release of new
console systems by Sony, Nintendo and Microsoft, our industry has entered into a
new cycle that could affect marketability of new products if any.

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

MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES

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


                                       20
<PAGE>


REVENUE RECOGNITION

     We record revenues when we deliver products to customers in accordance with
Statement of Position  ("SOP") 97-2,  "Software  Revenue  Recognition."  and SEC
Staff Accounting Bulletin No. 104, Revenue Recognition.

     Sales were  formerly  made by two  distributors,  Vivendi  and  Avalon,  an
affiliate of our majority  shareholder Titus Interactive  S.A.until we ended our
relationship  with  them  during  2005.  We  recognize  revenue  from  sales  by
distributors, net of sales commissions, only as the distributor recognizes sales
of our products to unaffiliated third parties. For those agreements that provide
the  customers  the  right to  multiple  copies  of a product  in  exchange  for
guaranteed  amounts,  we recognize revenue at the delivery and acceptance of the
product gold master.  We recognize  per copy  royalties on sales that exceed the
guarantee as copies are duplicated.

     The Company  recognizes  revenue from sales by  distributors,  net of sales
commissions,  only as the distributor recognizes sales of the Company's products
to unaffiliated  third parties.  For those agreements that provide the customers
the right to multiple  copies of a product in exchange for  guaranteed  amounts,
revenue is recognized as earned.  guaranteed  minimum royalties on sales,  where
the guarantee is not  recognized  upon  delivery,  are recognized as the minimum
payments come due. The Company  recognizes revenue on expired contracts when the
termination date of the contract is reached because guaranteed minimum royalties
are not reimbursable and are recorded as revenue.

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

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

PREPAID LICENSES AND ROYALTIES

     Prepaid licenses and royalties consist of license fees paid to intellectual
property rights holders for use of their trademarks or copyrights. Also included
in prepaid  royalties are prepayments  made to independent  software  developers
under developer  arrangements that have alternative  future uses. These payments
are contingent  upon the successful  completion of milestones,  which  generally
represent specific deliverables.  Royalty advances are recoupable against future
sales based upon the contractual royalty rate. We amortize the cost of licenses,
prepaid royalties and other outside  production costs to cost of goods sold over
six months  commencing  with the initial  shipment in each region of the related
title.  We  amortized  these  amounts at a rate based upon the actual  number of
units shipped with a minimum  amortization  of 75% in the first month of release
and a minimum of 5% for each of the next five months after release. This minimum
amortization rate reflects our typical product life cycle. Our management relies
on forecasted  revenue to evaluate the future  realization of prepaid  royalties
and  charges to cost of goods sold any  amounts  they deem  unlikely to be fully
realized  through  future  sales.  Such costs are  classified as current and non
current assets based upon estimated product release date. If actual revenue,  or
revised sales forecasts, fall below the initial forecasted sales, the charge may
be larger than anticipated in any given quarter. Once the charge has been taken,
that  amount  will not be  expensed  in future  quarters  when the  product  has
shipped.

SOFTWARE DEVELOPMENT COSTS

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


                                       21
<PAGE>


OTHER SIGNIFICANT ACCOUNTING POLICIES

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

RESULTS OF OPERATIONS

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

                                                   YEARS ENDED DECEMBER 31,
                                               -------------------------------
                                                 2006        2005       2004
                                               --------    --------   --------
STATEMENTS OF OPERATIONS DATA:
Net revenues ................................       100 %       100 %      100 %
Cost of goods sold ..........................        17           7         52
                                               --------    --------   --------
Gross margin ................................        83          93         48
Operating expenses:
     Marketing and sales ....................        52           4         13
     General and administrative .............       161          37         34
     Product development ....................      --             4         20
     Other ..................................                             --
                                               --------    --------   --------
     Total operating expenses ...............       213          45         67
                                               --------    --------   --------
Operating income (loss) .....................      (130)         48        (19)
Other income (expense) ......................       449          34        (16)
                                               --------    --------   --------
Income (loss) before provision
  for income taxes ..........................       319          82        (35)
Provision for income taxes ..................                                1
                                               --------    --------   --------
Net income (loss) ...........................       319 %        82 %      (36)%
                                               ========    ========   ========
SELECTED OPERATING DATA:
Net revenues by segment:
     North America ..........................        21          41 %       12 %
     International ..........................        66          56         75
     OEM, royalty and licensing .............        13           3         13
                                               --------    --------   --------
                                                    100         100 %      100 %
                                               ========    ========   ========
Net revenues by platform:
     Personal computer ......................        47           9 %       14 %
     Video game console .....................        39          14         73
     OEM, royalty and licensing .............        14           3         13
    Recognition of revenue on
      expired contracts .....................       N/A          63        N/A
    Online licensing ........................       N/A          11        N/A
                                               --------    --------   --------
                                                    100 %       100 %      100 %
                                               ========    ========   ========

     Geographically,  our net revenues for the years ended December 31, 2006 and
2005 breakdown as follows: (in thousands)

                                             2006     2005    Change    % Change
-----------------------------------------   ------   ------   ------    --------
North America ...........................      203    2,885   (2,682)    (92.9)%
-----------------------------------------   ------   ------   ------    --------
International ...........................      632    4,056   (3,424)    (84.4)%
-----------------------------------------   ------   ------   ------    --------
OEM, Royalty & Licensing ................      132      217      (85)      (.4)%
-----------------------------------------   ------   ------   ------    --------
Net Revenues ............................      967    7,158   (6,191)    (86.5)%
-----------------------------------------   ------   ------   ------    --------


                                       22
<PAGE>


     Geographically,  our net revenues for the years ended December 31, 2005 and
2004 breakdown as follows: (in thousands)

                                           2005     2004    Change    % Change
---------------------------------------   ------   ------   ------    --------
North America .........................    2,885    1,544    1,341        86.9%
---------------------------------------   ------   ------   ------    --------
International .........................    4,056    9,934   (5,878)      (59.2)%
---------------------------------------   ------   ------   ------    --------
OEM, Royalty & Licensing ..............      217    1,720   (1,503)      (87.3)%
---------------------------------------   ------   ------   ------    --------
Net Revenues ..........................    7,158   13,197   (6,039)      (45.7)%
---------------------------------------   ------   ------   ------    --------

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

     Net  revenues  for the year  ended  December  31,  2006 were $  967,000,  a
decrease of 86.5%  compared to the same period in 2005.  This decrease  resulted
from a 92.9%  decrease in North  American net revenue,  and a 84.4%  decrease in
International net revenue,  royalty and licensing revenues and a .4% decrease in
OEM net revenue.

     Net revenues  for the year ended  December  31, 2005 were $7.1  million,  a
decrease of 45.7%  compared to the same period in 2004.  This decrease  resulted
from a 59.2% decrease in International net revenues and a 87.3% decrease in OEM,
royalties and licensing  revenues,  offset by a 86.9% increase in North American
net revenues.

     North  American  net  revenues  for the year ended  December  31, 2006 were
$203,000 as compared to $2.9 million for the year ended  December 31, 2005.  The
decrease  in North  American  net  revenues  in 2006 was mainly due to no longer
recognizing as income advanced royalties on expired contracts and no new product
releases during the twelve months ended December 31, 2006.

     North  American net revenues for the year ended December 31, 2005 were $2.9
million as compared to $1.5 million for the year ended  December  31, 2004.  The
increase  in  North  American  net  revenues  in  2005  was  mainly  due  to the
recognition  of  deferred  revenue  in the amount of $2.1  million on  contracts
expiring and the balance attributable to licensing, royalties and catalog sales.

     We expect that our North American  publishing net revenues will increase in
2007 compared to 2006, mainly due to increased catalog sales.

     International  net  revenues  for the year  ended  December  31,  2006 were
$632,000,  a decrease of $3.4 million as compared to International  net revenues
for the year ended December 31, 2005. The decrease in International net revenues
compared to the year ended  December 31, 2005 was mainly due to  recognizing  as
income  advanced  royalties  on expired  contracts  and no new product  releases
during the twelve months ended December 31, 2006

     International  net revenues for the year ended  December 31, 2005 were $4.0
million,  a decrease of $5.8 million as compared to  International  net revenues
for the year ended  December  31,  2004.  Included in the $4.0  million are $2.5
million of recognition of deferred revenues on contracts expiring.  The decrease
in International  net revenues  compared to the year ended December 31, 2004 was
mainly due to releasing no new product  during the twelve months ended  December
31, 2005  compared to  releasing  BALDUR'S  GATE DARK  ALLIANCE II and  FALLOUT:
BROTHERHOOD OF STEEL during 2004.

     We expect that our  International  publishing net revenues will increase in
2007 as compared to 2006, mainly due to increased catalog sales.

     OEM,  royalty and  licensing  net revenues for the year ended  December 31,
2006 were  $132,000,  a decrease  of $85,000 as  compared  to the same period in
2005.   The   decrease  in  OEM  business   was  mainly   attributable   to  our
reorganization.
     OEM,  royalty and  licensing  net revenues for the year ended  December 31,
2005 were $.2 million, a decrease of $1.5 million as compared to the same period
in 2004.  The OEM  business  decreased  $1.5  million  as a  consequence  of our
reorganization.

PLATFORM, EXPIRED CONTRACTS AND LICENSING DEALS NET REVENUES

     Our platform,  expired  contracts and licensing  deals net revenues for the
years ended December 31, 2006 and 2005 breakdown as follows: (in thousands)


                                       23
<PAGE>


                                    2006     2005    Change    % Change
--------------------------------   ------   ------   ------    --------
Personal Computer ..............      456      631     (175)      (27.7)%
--------------------------------   ------   ------   ------    --------
Video Game Console .............      379      971     (592)      (60.9)%
--------------------------------   ------   ------   ------    --------
OEM, Royalty & Licensing .......      132      217      (85)      (39.2)%
--------------------------------   ------   ------   ------    --------
Recognition of revenue on
  expired contracts ............     --      4,571   (4,571)     (100.0)%
--------------------------------   ------   ------   ------    --------
Online Licensing ...............     --        768     (768)     (100.0)%
--------------------------------   ------   ------   ------    --------
Net Revenues ...................      967    7,158   (6,191)      (86.5)%
--------------------------------   ------   ------   ------    --------

     PC net  revenues  for the year ended  December  31, 2006 were  $456,000,  a
decrease of 27.7%  compared to the same period in 2005.  The  decrease in PC net
revenues in 2006 was primarily due to no new releases and the  expiration of our
distribution  agreement  with  Vivendi  ending  in 2005.  We  expect  our PC net
revenues  to  increase in 2007 as compared to 2006 as we continue to exploit our
back catalog.

     Our video game console net  revenues  for the year ended  December 31, 2006
were $379,000 a decrease of 60.9% compared to the same period in 2005. There was
no revenue  recognition from deferred revenue of expired  contracts for the year
ended December 31, 2006. Licensing for the year ended December 31, 2006 were $0.
The  decrease in video game console net  revenues  was  primarily  due to no new
releases. Our catalog sales also decreased in 2006 as compared to 2005. Since we
anticipate  releasing  new  console  titles in 2007,  we expect  our video  game
console net revenues to increase in 2007.

     Our platform,  expired  contracts and licensing  deals net revenues for the
years ended December 31, 2005 and 2004 breakdown as follows: (in thousands)

                                    2005     2004    Change    % Change
--------------------------------   ------   ------   ------    --------
Personal Computer ..............      631    1,817   (1,186)      (65.3)%
--------------------------------   ------   ------   ------    --------
Video Game Console .............      971    9,660   (8,689)      (89.9)%
--------------------------------   ------   ------   ------    --------
OEM, Royalty & Licensing .......      217    1,720   (1,503)      (87.4)%
--------------------------------   ------   ------   ------    --------
Recognition of revenue on
  expired contracts ............    4,571        0    4,571         N/A
--------------------------------   ------   ------   ------    --------
Online Licensing ...............      768        0      768         N/A
--------------------------------   ------   ------   ------    --------
Net Revenues ...................    7,158   13,197   (6,039)      (45.8)%
--------------------------------   ------   ------   ------    --------

     PC net  revenues  for the year ended  December  31, 2005 were  $631,000,  a
decrease of 65.3 % compared to the same period in 2004.  The  decrease in PC net
revenues in 2005 was primarily due to no new releases.

     Our video game console net  revenues  for the year ended  December 31, 2005
were $1 million a decrease of 89.9% compared to the same period in 2004. Revenue
recognition  from  deferred  revenue  of  expired  contracts  for the year ended
December 31, 2005 were $4.6 million.  Licensing for the year ended  December 31,
2005 were $1 million.  The  decrease  in video game  console  net  revenues  was
primarily  due to no new releases.  Our catalog sales also  decreased in 2005 as
compared to 2004.

COST OF GOODS SOLD; GROSS MARGIN

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


                                       24
<PAGE>


     Our net  revenues,  cost of goods sold and gross margin for the years ended
December 31, 2006 and 2005 breakdown as follows: (in thousands)

                                           2006     2005    Change    % Change
---------------------------------------   ------   ------   ------    --------
Net Revenues ..........................      967    7,158   (6,191)      (86.5)%
---------------------------------------   ------   ------   ------    --------
Cost of Goods Sold ....................      167      478     (311)      (65.1)%
---------------------------------------   ------   ------   ------    --------
Gross Margin ..........................      800    6,680   (5,880)      (88.0)%
---------------------------------------   ------   ------   ------    --------

     Our cost of goods sold decreased to $167,000 in the year ended December 31,
2006  compared to  $478,000  in the same  period in 2005.  We expect our cost of
goods sold to increase in 2007 as compared  to 2006  because we  anticipate  new
product releases.

     Our gross margin decreased to $800,000 for the twelve months ended December
31, 2006 from $6.7  million in the  comparable  period in 2005.  The decrease in
gross margin was mainly attributable to our decrease in revenue.

     Our net  revenues,  cost of goods sold and gross margin for the years ended
December 31, 2005 and 2004 breakdown as follows: (in thousands)

                                           2005     2004    Change    % Change
---------------------------------------   ------   ------   ------    --------
Net Revenues ..........................    7,158   13,197   (6,039)      (45.8)%
---------------------------------------   ------   ------   ------    --------
Cost of Goods Sold ....................      478    6,826   (6,348)        (93)%
---------------------------------------   ------   ------   ------    --------
Gross Margin ..........................    6,680    6,371      309         4.8%
---------------------------------------   ------   ------   ------    --------

     Our cost of goods sold decreased 93% to $478,000  million in the year ended
December 31, 2005 compared to $6.8 million in the same period in 2004.

     Our gross margin  increased to 93.3% for the twelve  months ended  December
31, 2005 from 48.2% in the comparable period in 2004.

MARKETING AND SALES

     Our marketing and sales  expenses for the years ended December 31, 2006 and
2005 breakdown as follows: (in thousands)

                                              2006     2005    Change   % Change
------------------------------------------   ------   ------   ------   -------
Marketing and Sales ......................      509      312      197     63.1%
------------------------------------------   ------   ------   ------   -------

     Marketing and sales expenses  primarily  consist of advertising  and retail
marketing support,  sales commissions,  marketing and sales personnel,  customer
support  services and other  related  operating  expenses.  Marketing  and sales
expenses for the twelve months ended  December 31, 2006 were  $509,000,  a 63.1%
increase as compared to the 2005 period.  The  increase in  marketing  and sales
expenses is due to certain  expenses being  classified as marketing and sales in
2006 compared to the prior year  classification  into general and administration
and a continued  effort to sell back catalog  products.  We expect our marketing
and sales  expenses to increase in 2007  compared to 2006,  as we expect to ship
new products.

     Our marketing and sales  expenses for the years ended December 31, 2005 and
2004 breakdown as follows: (in thousands)

                                           2005     2004    Change    % Change
---------------------------------------   ------   ------   ------    --------
Marketing and Sales ...................      312    1,703   (1,391)      (81.7)%
---------------------------------------   ------   ------   ------    --------

     Marketing and sales expenses  primarily  consist of advertising  and retail
marketing support,  sales commissions,  marketing and sales personnel,  customer
support  services and other  related  operating  expenses.  Marketing  and sales
expenses for the twelve months ended December 31, 2005 were $312,000 million,  a
81.7%  decrease as compared to the 2004 period.  The  decrease in marketing  and
sales expenses is due primarily to no new releases.

GENERAL AND ADMINISTRATIVE

     Our general and  administrative  expenses for the years ended  December 31,
2006 and 2005 breakdown as follows: (in thousands)


                                       25
<PAGE>


                                            2006     2005    Change   % Change
----------------------------------------   ------   ------   ------   --------
General and Administrative .............    1,560    2,617    1,057      (40.4)%
----------------------------------------   ------   ------   ------   --------

     General and  administrative  expenses  primarily  consist of administrative
personnel expenses,  facilities costs,  professional fees, bad debt expenses and
other related operating  expenses.  General and administrative  expenses for the
year ended December 31, 2006 were $1.6 million,  a 40.4% decrease as compared to
the same period in 2005.  The  decrease is mainly due to  decreases in personnel
costs  and  general   expenses   during  2006.   The  decrease  in  General  and
administrative expenses is due to certain expenses being classified as marketing
and sales in 2006  compared to the prior year  classification  into  general and
administration .

     Our general and  administrative  expenses for the years ended  December 31,
2005 and 2004 breakdown as follows: (in thousands)

                                           2005     2004    Change    % Change
---------------------------------------   ------   ------   ------    --------
General and Administrative ............    2,617    4,514   (1,897)        (42)%
---------------------------------------   ------   ------   ------    --------

     General and  administrative  expenses  primarily  consist of administrative
personnel expenses,  facilities costs,  professional fees, bad debt expenses and
other related operating  expenses.  General and administrative  expenses for the
year ended  December 31, 2005 were $2.6  million,  a 42% decrease as compared to
the same period in 2004.  The  decrease is mainly due to  decreases in personnel
costs  and  general  expenses  as a  result  of a  reduction  in  administrative
personnel during 2005.

PRODUCT DEVELOPMENT

     Our product development  expenses for the years ended December 31, 2006 and
2005 breakdown as follows: (in thousands)

                                           2006     2005    Change    % Change
---------------------------------------   ------   ------   ------    --------
Product Development ...................        0      268     (268)       (100)%
---------------------------------------   ------   ------   ------    --------

     We charge internal product development expenses, which consist primarily of
personnel  and support  costs,  to operations  in the period  incurred.  Product
development  expenses  for the year  ended  December  31,  2006 were $ 0, a 100%
decrease as compared to the same period in 2005. This decrease was due to us not
having any new product in development.

     Our product development  expenses for the years ended December 31, 2005 and
2004 breakdown as follows: (in thousands)

                                           2005     2004    Change    % Change
---------------------------------------   ------   ------   ------    --------
Product Development ...................      268    2,636   (2,368)      (89.8)%
---------------------------------------   ------   ------   ------    --------

     We charge internal product development expenses, which consist primarily of
personnel  and support  costs,  to operations  in the period  incurred.  Product
development expenses for the year ended December 31, 2005 were $268,000, a 89.8%
decrease as compared to the same period in 2004. This decrease was mainly due to
a $2.4 million decrease in personnel costs and general expenses as a result of a
reduction in headcount and the closure of our internal development studio during
the year.

OTHER EXPENSE (INCOME), NET

     Our other expense for the years ended  December 31, 2006 and 2005 breakdown
as follows: (in thousands)

                                           2006      2005     Change   % Change
---------------------------------------   ------    ------    ------   --------
Other Expense (Income) ................   (4,348)   (2,445)    1,903         78%
---------------------------------------   ------    ------    ------   --------

     Other  income   consists   primarily  of   settlement   in  the  amount  of
approximately $310,000, reversal of reserves in the amount of approximately $2.2
million, reduction of accrued royalties in the amount of $810,000,  reversals of
accounts  payable in the amount of $1.2 million,  interest expense in the amount
of $135,000.and additional miscellaneous income.


                                       26
<PAGE>


     Our other expense for the years ended  December 31, 2005 and 2004 breakdown
as follows: (in thousands)

                                           2005      2004    Change    % Change
---------------------------------------   ------    ------   ------    --------
Other Expense (Income) ................   (2,445)    2,248   (4,693)        208%
---------------------------------------   ------    ------   ------    --------

     Other income  consists  primarily of a settlement  which was a reduction of
accrued  royalties,  accrued  expenses and accounts  payable in the amount of $1
million,  an additional  adjustment  to accrued  royalties in the amount of $1.6
million, an immaterial impairment of assets of $.3 million, recovery of bad debt
in the amount of $.06 million, an additional write down of Titus Software in the
amount of $.2 million,  and immaterial  foreign currency  exchange  transactions
gains and losses.

PROVISION (BENEFIT) FOR INCOME TAXES

     We recorded no tax  provision for the years ended  December 31, 2006,  2005
and 2004.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2006, we had a working capital deficit of  approximately
$8.1 million, and our cash balance was approximately  $50,000. We currently have
no cash  reserves  and are  only  able to pay  current  liabilities.  We  cannot
continue in our current form without obtaining additional financing or income.

     We have substantially  reduced our operating expenses and have licensed two
of our Intellectual  Properties,  Earthworm Jim and Fallout to third parties. If
we do not receive  sufficient  financing or income we may (i) liquidate  assets,
(ii) sell the company (iii) seek  protection  from our  creditors  including the
filing of voluntary  bankruptcy or being the subject of involuntary  bankruptcy,
and/or  (iv)  continue  operations,  but incur  material  harm to our  business,
operations  or  financial  conditions.  These  conditions,   combined  with  our
historical operating losses and our deficits in stockholders' equity and working
capital,  raise  substantial  doubt  about our  ability to  continue  as a going
concern.

     Additionally, we have reduced our fixed overhead commitments, and cancelled
or suspended  development  on future  titles and scaled back  certain  marketing
programs  associated  with the cancelled  projects.  Management will continue to
pursue various alternatives to improve future operating results.

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

     We have been operating  without a credit facility since October 2001, which
has adversely  affected  cash flow.  Although we are now able to pay our current
liabilities,  we continue to face difficulties in paying our historical vendors,
and employees, and have pending lawsuits as a result of our continuing cash flow
difficulties. We expect these difficulties to improve during 2007.

     Historically,  we have funded our  operations  primarily  through cash flow
from operations, including royalty and distribution fee advances.

     Our  primary   capital  needs  have   historically   been  working  capital
requirements  necessary to fund our  operations.  Our operating  activities used
cash of $72,000  during the twelve  months ended  December  31, 2006,  primarily
attributable to licensing and distribution net of expenditures.

     The Company had $4.5  million in income  from  recognition  of one time non
recurring  events;  however the  Company  does not expect  material  further non
recurring income in 2007.

     We entered into  various  licensing  agreements  during 2006 under which we
licensed others to exploit games that we have  intellectual  property rights to.
We expect in 2007 to enter into similar  license  arrangements  to generate cash
for the Company's operations.

     Currently the Company has no internal development of new titles.

     The Company is planning to exploit its Intellectual  Property  "Fallout" on
Massively  Multiplayer  Online  Gaming  (MMOG) and is  reviewing  the  financial
avenues for funding MMOG.


                                       27
<PAGE>


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

OFF-BALANCE SHEET ARRANGEMENTS

     We do not have  any  off-balance  sheet  arrangements  under  which we have
obligations  under a  guaranteed  contract  that has any of the  characteristics
identified in paragraph 3 of FASB Interpretation 3 of FASB Interpretation No. 45
Guarantors  Accounting and Disclosure  Requirements  for  Guarantees,  Including
Indirect  Guarantees of Indebtedness  of Others.  We do not have any retained or
contingent interest in assets transferred to an unconsolidated entity or similar
arrangement  that serves as credit,  liquidity  or market  risk  support to such
entity  for  such  assets.  We also do not  have  any  obligation,  including  a
contingent  obligation,  under a  contract  that  would  be  accounted  for as a
derivative instrument. We have no obligations, including a contingent obligation
arising out of a variable interest (as referenced in FASB Interpretation No. 46,
Consolidation of Variable  Interest  Entities (January 2003), as may be modified
or supplemented) in an  unconsolidated  entity that is held by, and material to,
the registrant, where such entity provides financing,  liquidity, market risk or
credit  risk  support  to, or  engages  in  leasing,  hedging  or  research  and
development services with the registrant.

CONTRACTUAL OBLIGATIONS

     The following table summarizes certain of our contractual obligations under
non-cancelable  contracts and other  commitments  at December 31, 2006,  and the
effect such  obligations  are expected to have on our liquidity and cash flow in
future periods (in thousands).
                                                LESS                      MORE
                                                THAN    1 - 3    3 - 5    THAN
CONTRACTUAL OBLIGATIONS               TOTAL    1 YEAR   YEARS    YEARS   5 YEARS
-----------------------------------   ------   ------   ------   ------  -------
Lease Commitments (1) .............      162      121       41        0        0
-----------------------------------   ------   ------   ------   ------  -------

(1)   We have  a lease  commitment  at  the Beverly  Hills office  through April
2008.  We also  have a lease  commitment  at the  French  representation  office
through February 28, 2008 with an option for an additional 6 years.

     Our current cash reserves  plus our expected cash from existing  operations
will only be sufficient to fund our anticipated  expenditures to March 31, 2008.
We will need to continue to  consummate  certain  sales of assets  and/or  raise
additional financing to meet our contractual obligations.

ACTIVITIES WITH RELATED PARTIES

     Our operations in prior years involved  significant  transactions  with our
majority  stockholder  Titus  and its  affiliates.  We had a major  distribution
agreement with Avalon, an affiliate of Titus which is now cancelled.

TRANSACTIONS WITH TITUS AND AFFILIATES

     Titus (placed in involuntary  liquidation  in January 2005)  presently owns
approximately 58 million shares of our common stock.

     As of December 31, 2006 and December  31,  2005,  Titus and its  affiliates
owed us $0 and $105,000,  respectively.  We owed Titus and its affiliates $0 and
$0 as of December 31, 2006 and December 31, 2005 respectively.

     In June 2003, we began  operating  under a  representation  agreement  with
Titus Japan K.K. ("Titus  Japan"),  a  majority-controlled  subsidiary of Titus,
pursuant to which Titus  Japan  represents  us as an agent in regards to certain
sales  transactions  in Japan. As of December 31, 2006 the Company had a balance
owed from Titus Japan of $ 226,000. During the twelve months ending December 31,
2006 our  Japanese  subsidiary  incurred to Titus  Japan costs of  approximately
$106,000 in commissions,  publishing and staff services.  We closed our Japanese
subsidiary during the 4th quarter of 2006.


                                       28
<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2006,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Interpretation  No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES (FIN 48). FIN
48 clarifies the  accounting for  uncertainty  in income taxes  recognized in an
enterprise's  financial  statements in accordance with SFAS 109,  ACCOUNTING FOR
INCOME  TAXES.  FIN  48  prescribes  a  recognition  threshold  and  measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on derecognition, classification, interest and penalties, accounting in
interim  periods,  disclosure  and  transition.  FIN 48 is  effective  for years
beginning after December 15, 2006. We will adopt FIN 48 as of December 30, 2006,
as required.  Currently, we are not able to estimate the impact FIN 48 will have
on our financial statements.

     In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS, which
defines fair value,  creates a framework for  measuring  fair value in generally
accepted accounting  principles (GAAP), and expands disclosures about fair value
measurements.  SFAS 157 is effective for financial  statements issued for fiscal
years beginning after November 15, 2007. We will adopt SFAS 157 on its effective
date.  The  Company  has  not yet  determined  the  effect,  if  any,  that  the
application of SFAS No. 157 will have on its consolidated financial statements.

      In September 2006, the Securities and Exchange  Commission  ("SEC") issued
SAB No. 108,  Topic 1-N,  "Considering  the Effects of Prior Year  Misstatements
when Quantifying  Misstatements  in Current Year Financial  Statements." SAB No.
108 requires companies to evaluate the materiality of current year misstatements
using both the rollover approach and the iron curtain  approach.  SAB No. 108 is
effective for  statements  covering the first fiscal year ending after  November
15,  2006.  The  adoption  of SAB No. 108 did not have a material  impact on the
Company's consolidated financial position and results of operations.

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

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not have any  derivative  financial  instruments  as of December  31,
2006.  However, we are exposed to certain market risks arising from transactions
in the normal course of business,  principally  the risk associated with foreign
currency fluctuations. We do not hedge our risk associated with foreign currency
fluctuations.

FOREIGN CURRENCY RISK

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

     We recognized a $3,000 loss, $10,000 loss and $33,000 loss during the years
ended December 31, 2006,  2005 and 2004,  respectively,  primarily in connection
with  foreign  exchange  fluctuations  in the  timing of  payments  received  on
accounts receivable from Avalon and other foreign distributors or licensees.

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

The  information  required by this Item 9 has been  previously  furnished and is
incorporated  herein by reference to our forms 8-K filed on ( i) March  15,2005,
and  amendment to such form 8-K filed on March 16, 2005,  (ii) February 16, 2006
and amendment to such form 8-K filed on March 20, 2006

ITEM 9A.   CONTROLS AND PROCEDURES

     As of the end of the period  covered  by this  report,  we  carried  out an
evaluation,  under  the  supervision  and with the  participation  of our  Chief
Executive  Officer and interim Chief Financial  Officer of the  effectiveness of
the design and operation of our disclosure  controls and procedures.  Based upon
this evaluation, our Chief Executive Officer and interim


                                       29
<PAGE>


Chief Financial  Officer  concluded that our disclosure  controls and procedures
were effective,  at the reasonable assurance level, in ensuring that information
required to be disclosed is recorded, processed,  summarized and reported within
the time periods specified by the SEC rules and forms and in timely alerting him
to material information required to be included in this report.

     There  were  no  changes  made  in our  internal  controls  over  financial
reporting  that occurred  during the quarter  ended  December 31, 2006 that have
materially affected or reasonably likely to materially affect these controls.

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

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


                                    PART III


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  in Item10 is  incorporated  herein  by  reference  to the
section  entitled  "Proposal One ----  Election of  Directors"  contained in the
Proxy  Statement ( the "Proxy  Statement")  for the 2007  annual  meeting of the
stockholders to be filed with the Securities and Exchange  Commission within 120
days of the close of the fiscal year ended December 29, 2006.

ITEM 11.   EXECUTIVE COMPENSATION

     The  information  in Item 11 is  incorporated  herein by  reference  to the
section  entitled  "Proposal One ----  Election of  Directors"  contained in the
Proxy Statement.


ITEM 12.   SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND  MANAGEMENT AND
           RELATED STOCKHOLDER MATTERS

     The  information  in Item12 is  incorporated  herein  by  reference  to the
section  entitled  "General  Information"  ----  Security  Ownership  of Certain
Beneficial  Owners and Management" and "Proposal One ---- Election of Directors"
contained in the Proxy Statement.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  in Item 13 is  incorporated  herein by  reference  to the
section entitled "Proposal One --- Election of Directors" contained in the Proxy
Statement.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

     The  information  in Item 14 is  incorporated  herein by  reference  to the
section  entitled  by  reference  to the  section  entitled  "Proposal  Two  ---
Ratification  of the  Appointment of Independent  Registered  Public  Accountant
Firm" contained in the Proxy Statement.


                                       30
<PAGE>


                                     PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

     (1) Financial Statements

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

     (2) Financial Statement Schedules

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

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

     (3) Exhibits

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


                                       31
<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  Beverly  Hills,
California this 9th day of April 2007.

                                     INTERPLAY ENTERTAINMENT CORP.



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


                                                                    Exhibit 24.1
                                POWER OF ATTORNEY

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

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

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


/s/ Herve Caen
____________________      Chief Executive Officer, Interim       April 9, 2007
Herve Caen                Chief Financial Officer and
                          Director (Principal Executive
                          and Financial and Accounting
                          Officer)



/s/ Eric Caen
____________________      Director                               April 9, 2007
Eric Caen




/s/ Michel Welter
____________________      Director                               April 9, 2007
Michel Welter


                                       32
<PAGE>


                                  EXHIBIT INDEX


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

3.1      Amended and  Restated  Certificate  of  Incorporation  of the  Company;
         (incorporated  herein by  reference  to  Exhibit  3.1 to the  Company's
         Annual Report on Form 10-K for the year ended December 31, 2003).

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

3.3      Certificate  of  Amendment of  Certificate  of  Designation  of Rights,
         Preferences,  Privileges and  Restrictions of Series A Preferred Stock,
         as filed with the  Delaware  Secretary  of State on October  30,  2000;
         (incorporated  herein by  reference  to  Exhibit  3.3 to the  Company's
         Annual Report on Form 10-K for the year ended December 31, 2003).

3.4      Certificate  of  Amendment  of  Amended  and  Restated  Certificate  of
         Incorporation of the Company,  as filed with the Delaware  Secretary of
         State on November 2, 2000; (incorporated herein by reference to Exhibit
         3.4 to the  Company's  Annual  Report on Form  10-K for the year  ended
         December 31, 2003).

3.5      Certificate  of  Amendment  of  Amended  and  Restated  Certificate  of
         Incorporation of the Company,  as filed with the Delaware  Secretary of
         State on January 21, 2004; (incorporated herein by reference to Exhibit
         3.5 to the  Company's  Annual  Report on Form  10-K for the year  ended
         December 31, 2003).

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

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

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

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

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

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

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

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

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

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


                                       33
<PAGE>


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

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

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

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

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

10.47    Mutual  Release  Settlement  Agreement  by  and  between  Warner  Bros.
         Entertainment,  Inc.  and  the  Company,  dated  October  13,  2003.  ;
         (incorporated  herein by  reference to exhibit  10.47 to the  Company's
         Annual  Report on form 10-K for the year ended  December 31, 2003 filed
         on April 27, 2004).

10.48    Letter  Agreement  by and between  Majorem Ltd and the  Company,  dated
         December 21, 2004. ; (Incorporated herein by reference to exhibit 10.48
         to the Company's Annual Report on form 10-K for the year ended December
         31, 2004 filed on June 3, 2005).

14.1     Code of Ethics of the  Company;  (incorporated  herein by  reference to
         Exhibit 14.1 to Amendment No. 1 to the Company's  Annual Report on Form
         10-K for the year ended December 31, 2003 filed on April 27, 2004).

21.1     Subsidiaries of the Company.

23.1     Consent of Jeffrey S. Gilbert, Independent Registered Public Accounting
         firm

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

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

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

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

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


                                       34
<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                       AND REPORTS OF INDEPENDENT AUDITORS



                                                                          PAGE
                                                                         ------

Reports of Independent Registered Public Accounting Firms                 F-2
Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2006 and 2005                 F-4
Consolidated Statements of Operations for the years ended
     December 31, 2006, 2005 and 2004                                     F-5
Consolidated Statements of Stockholder's Equity (Deficit)
     for the years ended December 31, 2006, 2005, 2004                    F-6
Consolidated Statements of Cash Flows for the years ended
     December 31, 2006, 2005 and 2004                                     F-7
Notes to Consolidated Financial Statements                                F-9
Schedule II - Valuation and Qualifying Accounts                           S-1


                                       35
<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Interplay Entertainment Corp.

            I  have  audited  the  consolidated   balance  sheets  of  Interplay
Entertainment Corp. (a majority-owned  subsidiary of Titus Interactive,S.A.) and
Subsidiaries  (the  "Company")  as of December 31, 2006 and 2005 and the related
consolidated  statements  of  operations,  stockholders'  equity  (deficit)  and
comprehensive  income(loss)and  cash  flows for the years then  ended.  My audit
included the schedule of valuation and  qualifying  accounts for the years ended
December 31, 2006 and 2005.  These  consolidated  financial  statements  are the
responsibility of the Company's  management.  My responsibility is to express an
opinion on these consolidated  financial statements and the schedule based on my
audit.

            I conducted  my audit in  accordance  with  standards  Of the Public
Company Accounting Oversight Board (United States). Those standards require that
I plan and perform the audit to obtain  reasonable  assurance  about whether the
consolidated  financial statements are free of material  misstatement.  An audit
includes  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly,  I express no
such  opinion.  An audit also  includes  examining,  on a test  basis,  evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting  principles used and significant
estimates  made by  management  as  well as  evaluating  the  overall  financial
statement  presentation.  I believe my audit provides a reasonable  basis for my
opinion.

            In my opinion,  the consolidated  financial  statements  referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of Interplay  Entertainment  Corp. and  Subsidiaries as of December 31,
2006 and 2005 and the results of their  operations  and their cash flows for the
two years  then  ended,  in  conformity  with  accounting  principles  generally
accepted  in the United  States of  America.  Also,  in my opinion  the  related
financial  statement  schedule  for the years ended  December 31, 2006 and 2005,
when considered in relation to the basic financial  statements taken as a whole,
presents fairly in all material respects the information set forth therein.

         The accompanying  consolidated  financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has limited liquid resources,
a history of losses,  negative working capital of $8,098,000,  and stockholders'
deficit of $8,087,000. These matters raise substantial doubt about the Company's
ability to continue as a going  concern.  Management's  plans in regard to these
matters  are also  discussed  in Note 1. In  addition,  on  November  1, 2006 an
involuntary petition under Chapter 7 of the Bankruptcy Code was filed in Federal
Court by several of the  Company's  creditors  (See Note 15).  The  consolidated
financial  statements do not include any  adjustment  that might result from the
outcomes of these uncertainties.

                              /S/ JEFFREY S. GILBERT

Los Angeles, California
April 6, 2007


                                       36
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders
Interplay Entertainment Corp.

     We have audited the  consolidated  statement of  operations,  shareholders'
equity  (deficit) and other  comprehensive  income (loss) and cash flows for the
year ended December 31, 2004 of Interplay  Entertainment Corp. (a majority-owned
subsidiary of Titus  Interactive  S.A.) and subsidiaries  (the  "Company").  Our
audit also  included the schedule of valuation and  qualifying  accounts for the
year ended  December 31,  2004.  These  consolidated  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audit.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the results of operations and cash
flows of Interplay  Entertainment  Corp. for the year ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.  Also, in our opinion, the related financial statement schedule for the
year ended December 31, 2004, when considered in relation to the basic financial
statements,  taken as a whole,  presents  fairly in all  material  respects  the
information set forth therein.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company has negative working capital of $17.8 million and a stockholders'
deficit of $17.3  million at December 31, 2004.  These  factors,  among  others,
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  Management's plans in regard to these matters are described in Note 1.
The consolidated  financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



/s/ Rose, Snyder & Jacobs
-----------------------------------
Rose, Snyder & Jacobs
A Corporation of Public Accountants

Encino, California
May 31, 2005


                                       37
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                                   DECEMBER 31,
                                                                         ------------------------------
                                  ASSETS                                      2006             2005
                                                                         -------------    -------------

<S>                                                                      <C>              <C>
Current Assets:
     Cash ............................................................   $      50,000    $     122,000
     Trade receivables from related parties, net of allowances
         of $0 and $2,114,000, respectively ..........................               0           17,000
     Trade receivables, net of allowances
         of $17,000 and $76,000, respectively ........................         227,000          428,000
     Inventories .....................................................           8,000            8,000
     Deposits ........................................................           4,000            8,000
     Prepaid expenses ................................................           6,000           60,000
    Other receivables ................................................          17,000            8,000
                                                                         -------------    -------------
        Total current assets .........................................         312,000          651,000

Property and equipment, net ..........................................           3,000            7,000
Other assets .........................................................           8,000           15,000
                                                                         -------------    -------------
                          Total assets ...............................   $     323,000    $     673,000
                                                                         =============    =============

              LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
     Notes payable ...................................................   $   1,427,000    $   1,406,000
     Accounts payable subject to judgments ...........................       1,653,000        1,653,000
     Accounts payable - other ........................................       4,006,000        8,050,000
     Accrued royalties ...............................................         170,000          949,000
     Deferred income .................................................         460,000          105,000
     Notes payable officer and directors .............................         694,000                0
                                                                         -------------    -------------
          Total current liabilities ..................................       8,410,000       12,163,000
                                                                         -------------    -------------

Commitments and contingencies
Stockholders' Equity (Deficit):
     Preferred stock, $0.001 par value 5,000,000 shares authorized;
        no shares issued or outstanding, respectively,
     Common stock, $0.001 par value 150,000,000 shares authorized;
        issued and outstanding 103,855,634 shares in 2006 and
        93,855,634 shares in 2005 ....................................         104,000           94,000
     Paid-in capital .................................................     121,964,000      121,640,000
     Accumulated deficit .............................................    (130,205,000)    (133,284,000)
     Accumulated other comprehensive income ..........................          50,000           60,000
     Treasury stock of 4,658,216 shares at December 31,2006 and 2005 .               0                0
                                                                         -------------    -------------
          Total stockholders'  (deficit) .............................      (8,087,000)     (11,490,000)
                                                                         -------------    -------------
                          Total liabilities and stockholders'(deficit)   $     323,000    $     673,000
                                                                         =============    =============
</TABLE>

                             See accompanying notes.


                                       38
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                               -----------------------------------------------
                                                                   2006             2005             2004
                                                               -------------    -------------    -------------

<S>                                                            <C>              <C>              <C>
Net revenue from recognition on expired contracts ..........   $        --      $   4,571,000    $        --
Net revenues from licensing ................................            --            768,000        1,932,000
Net revenues from related and non related party distributors         967,000        1,819,000       11,265,000
                                                               -------------    -------------    -------------
   Total net revenues ......................................         967,000        7,158,000       13,197,000
Cost of goods sold .........................................         167,000          478,000        6,826,000
                                                               -------------    -------------    -------------
   Gross profit ............................................         800,000        6,680,000        6,371,000
                                                               -------------    -------------    -------------

Operating expenses:
   Marketing and sales .....................................         509,000          312,000        1,703,000
   General and administrative ..............................       1,560,000        2,617,000        4,514,000
   Product development .....................................               0          268,000        2,636,000
                                                               -------------    -------------    -------------
      Total operating expenses .............................       2,069,000        3,197,000        8,853,000
                                                               -------------    -------------    -------------

      Operating income (loss) ..............................      (1,269,000)       3,483,000       (2,482,000)
                                                               -------------    -------------    -------------

Other income (expense):
   Interest expense ........................................        (139,000)        (146,000)        (249,000)
   Other (primarily reversal of prior year recorded
      liabilities and settlements in 2006 and 2005) ........       4,487,000        2,591,000       (1,999,000)
                                                               -------------    -------------    -------------
       Total other income (expense) ........................       4,348,000        2,445,000       (2,248,000)
                                                               -------------    -------------    -------------

Income (loss) before provision (benefit) for
   income taxes ............................................       3,079,000        5,928,000       (4,730,000)
Provision (benefit) for income taxes .......................            --               --               --
                                                               -------------    -------------    -------------

Net income (loss) ..........................................   $   3,079,000    $   5,928,000    $  (4,730,000)
                                                               =============    =============    =============

Net income (loss) per common share:
Basic ......................................................   $       0.030    $        0.06    $       (0.05)
                                                               =============    =============    =============
Diluted ....................................................   $       0.028    $        0.06    $       (0.05)
                                                               =============    =============    =============

Weighted average number of shares used in
   calculating net income (loss) per
   common share:
Basic ......................................................     100,513,000       93,856,000       93,856,000
                                                               =============    =============    =============
Diluted ....................................................     102,603,000       93,856,000       93,856,000
                                                               =============    =============    =============
</TABLE>


                                       39
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                         AND COMPRESENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                             (DOLLARS IN THOUSANDS)

<CAPTION>
                                      PREFERRED STOCK               COMMON STOCK
                                 -------------------------   -------------------------     PAID-IN
                                    SHARES        AMOUNT        SHARES        AMOUNT       CAPITAL
                                 -----------   -----------   -----------   -----------   -----------
<S>                                     <C>           <C>     <C>          <C>           <C>
Balance, December 31, 2003 ...          --            --      93,855,634   $        94   $   121,640

   Issuance of common stock,
       net of issuance costs .          --            --            --            --            --
   Net Income ................          --            --            --            --            --
   Other comprehensive income,
       net of income taxes:
   Foreign currency
       translation adjustment           --            --            --            --            --
                                 -----------   -----------   -----------   -----------   -----------
Balance, December 31, 2004 ...          --            --      93,855,634            94       121,640
                                 -----------   -----------   -----------   -----------   -----------
   Issuance of common stock,
       net of issuance costs .          --            --            --            --            --
   Net Income ................          --            --            --            --            --
   Other comprehensive income,
       net of income taxes:
   Foreign currency
       translation adjustment           --            --            --            --            --
                                 -----------   -----------   -----------   -----------   -----------
Balance, December 31, 2005 ...          --            --      93,855,634            94       121,640
                                 -----------   -----------   -----------   -----------   -----------
   Issuance of common stock,
       net of issuance costs .          --            --            --            --            --
   Additional Paid in Capital
       - Options .............          --            --            --            --              38
   Shares for Debt - Special
       Situation .............          --            --      10,000,000            10           286
   Treasury stock
   Net Income ................          --            --            --            --            --
   Other comprehensive income,
       net of income taxes:
   Foreign currency
       translation adjustment           --            --            --            --            --
                                 -----------   -----------   -----------   -----------   -----------
Balance, December 31,2006 ....          --            --     103,855,634   $       104   $   121,964
                                 ===========   ===========   ===========   ===========   ===========


<CAPTION>
                                                ACCUMULATED
                                                   OTHER
                                 ACCUMULATED   COMPREHENSIVE
                                   DEFICIT     INCOME (LOSS)      TOTAL
                                 -----------    -----------    -----------
<S>                              <C>            <C>            <C>
Balance, December 31, 2003 ...   $  (134,481)   $       111    $   (12,636)

   Issuance of common stock,
       net of issuance costs .          --             --             --
   Net Income ................        (4,730)          --           (4,730)
   Other comprehensive income,
       net of income taxes:
   Foreign currency
       translation adjustment           --                4              4
                                 -----------    -----------    -----------
Balance, December 31, 2004 ...      (139,211)           115        (17,362)
                                 -----------    -----------    -----------
   Issuance of common stock,
       net of issuance costs .          --             --             --
   Net Income ................         5,928           --            5,928
   Other comprehensive income,
       net of income taxes:
   Foreign currency
       translation adjustment           --              (56)           (56)
                                 -----------    -----------    -----------
Balance, December 31, 2005 ...      (133,283)           (59)       (11,490)
                                 -----------    -----------    -----------
   Issuance of common stock,
       net of issuance costs .          --             --             --
   Additional Paid in Capital
       - Options .............          --             --               38
   Shares for Debt - Special
       Situation .............          --             --              296
   Treasury stock
   Net Income ................         3,079           --            3,079
   Other comprehensive income,
       net of income taxes:
   Foreign currency
       translation adjustment             (1)            (9)           (10)
                                 -----------    -----------    -----------
Balance, December 31,2006 ....   $  (130,205)   $        50    $    (8,087)
                                 ===========    ===========    ===========
</TABLE>

                             See accompanying notes.


                                       40
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OF CASH FLOWS

<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                          ------------------------------------------
                                                              2006           2005           2004
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
Cash flows from operating activities:
   Net income (loss) ..................................   $ 3,079,000    $ 5,928,000    $(4,730,000)
   Adjustments to reconcile net income (loss) to
      cash provided by (used in) operating activities--
      Depreciation and amortization ...................         4,000        142,000        734,000
      Deposit .........................................         4,000         (8,000)       600,000
      Additional Paid in Capital - Options expenses ...        38,000           --             --
      Shares issued for settlement of  liability ......       296,000           --             --
      Reversal of prior year recorded liabilities .....    (4,441,000)    (2,345,000)          --
      Writeoff of prepaid licenses and royalties ......          --             --          209,000
      Abandonement of fixed assets ....................          --          323,000           --
      Changes in assets and liabilities:
         Restricted cash ..............................          --            2,000           --
         Trade receivables, net .......................       201,000       (297,000)      (133,000)
         Trade receivables from related parties .......        17,000         (6,000)       554,000
         Inventories ..................................          --           18,000        120,000
         Prepaid licenses and royalties ...............          --             --             --
         Prepaid expenses .............................        54,000        (60,000)       673,000
         Loss on sale of assets .......................          --             --           28,000
         Loss on abandonment of assets ................          --             --          862,000
         Other current assets/receivables .............        (9,000)       129,000       (134,000)
         Accounts payable .............................      (367,000)       885,000      1,704,000
         Accrued royalties ............................        (7,000)      (329,000)    (1,566,000)
         Note Payable Officers ........................       694,000           --             --
         Payables to related parties ..................          --       (3,870,000)          --
         Advances - Vivendi ...........................          --             --          996,000
         Deferred revenue - ( Non related Party) ......       355,000       (475,000)     1,385,000
         Deferred Income ..............................          --             --       (1,923,000)
         Accumulated other comprehensive income .......        10,000         56,000          4,000
                                                          -----------    -----------    -----------
             Net cash provided by (used in) operating
                activities ............................       (72,000)        93,000       (617,000)
                                                          -----------    -----------    -----------
Cash flows from investing activities:
   Purchases of property and equipment ................          --             --             --
                                                          -----------    -----------    -----------
            Net cash (used in) investing activities ...          --             --             --
                                                          -----------    -----------    -----------
Cash flows from financing activities:
   Repayment of debt ..................................          --             --           61,000
   Proceeds from debt .................................          --             --         (586,000)
                                                          -----------    -----------    -----------
         Net cash used in  financing activities
                                                                 --             --         (525,000)
                                                          -----------    -----------    -----------
Effect of exchange rate changes on cash
                                                          -----------    -----------    -----------
Cash, beginning of year ...............................       122,000         29,000      1,171,000
                                                          -----------    -----------    -----------
Cash, end of year .....................................   $    50,000    $   122,000    $    29,000
                                                          ===========    ===========    ===========

Supplemental cash flow information:
    Cash paid during the year for interest ............          --             --             --
                                                          ===========    ===========    ===========
</TABLE>

                             See accompanying notes.


                                       41
<PAGE>


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004


1.   DESCRIPTION OF BUSINESS AND OPERATIONS

     Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(the "Company"), publish and license out interactive entertainment software. The
Company's  software is developed  for use on various  interactive  entertainment
software platforms,  including personal computers and video game consoles,  such
as the Sony  PlayStation 3,  Microsoft  Xbox360 and Nintendo Wii. As of December
31, 2006, Titus  Interactive,  S.A.  ("Titus") which is in bankruptcy in France,
and was a  France-based  developer,  publisher and  distributor  of  interactive
entertainment  software,  owns  approximately 56% of the Company's common stock.
The Company's  common stock is quoted on the NASDAQ OTC Bulletin Board under the
symbol "IPLY", or while non-compliant "IPLYE".

GOING CONCERN

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming the Company will continue as a going concern, which contemplates, among
other things,  the realization of assets and  satisfaction of liabilities in the
normal  course of business.  The Company had net income of $4.5 million in 2006,
primarily  derived from one time non recurring non cash events which occurred in
2006.  At December 31,  2006,  the Company had a  stockholders'  deficit of $8.1
million  and a  working  capital  deficit  of  $8.1  million.  The  Company  has
historically funded its operations from licensing fees, royalty and distribution
fee advances, and will continue to exploit its existing intellectual  properties
to provide future funding.

     To reduce  working  capital  needs,  the  Company has  implemented  various
measures  including a reduction  of  personnel,  a reduction  of fixed  overhead
commitments  and  cancellation  or suspension of  development  on future titles.
Management  will  continue  to pursue  various  alternatives  to improve  future
operating  results  and  further  expense  reductions,  some of which may have a
long-term adverse impact on the Company's ability to generate  successful future
business activities.

     In addition,  the Company  continues to seek,  external  sources of funding
including,  but not  limited  to, a sale or  merger  of the  Company,  a private
placement  or  public  offering  of the  Company's  capital  stock,  the sale of
selected   assets,   the  licensing  of  certain   product  rights  in  selected
territories,   selected   distribution   agreements,   and/or  other   strategic
transactions  sufficient to provide short-term funding,  and potentially achieve
the Company's long-term strategic objectives.  Although the Company has had some
success in licensing  certain of its products in the past,  no assurance  can be
given that the Company will do so in the future.

     The  Company  anticipates  its current  cash  reserves,  plus its  expected
generation of cash from existing operations, will only be sufficient to fund its
anticipated  expenditures  through  the end of first  quarter  of  fiscal  2008.
Consequently,  the  Company  expects  that it will  need  to  obtain  additional
financing or income. However, no assurance can be given that alternative sources
of funding can be obtained on acceptable  terms,  or at all.  These  conditions,
combined  with the  Company's  historical  operating  losses and its deficits in
stockholders'  equity and working  capital,  raise  substantial  doubt about the
Company's ability to continue as a going concern. The accompanying  consolidated
financial  statements  do not include any  adjustments  to reflect the  possible
future  effects  on  the   recoverability   and  classification  of  assets  and
liabilities that might result from the outcome of this uncertainty.

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 Co., Ltd., (Japan)
which was closed during the 4th quarter 2006 and Games On-line.  All significant
inter-company accounts and transactions have been eliminated.


                                       42
<PAGE>


USE OF ESTIMATES

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

RISKS AND UNCERTAINTIES

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

INVENTORIES

     Inventories  consist of packaged  software  ready for  shipment,  including
video  game  console  software.  Inventories  are  valued  at the  lower of cost
(first-in,  first-out) or market.  The Company regularly  monitors inventory for
excess  or  obsolete  items  and  makes  any  valuation  corrections  when  such
adjustments  are known.  Based on management's  evaluation,  the Company has not
established any valuation allowance at December 31, 2006 .

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

PREPAID LICENSES AND ROYALTIES

     The Company has in the past had prepaid  licenses and royalties  consisting
of fees paid to intellectual property rights holders for use of their trademarks
or  copyrights.  Also included in prepaid  royalties  were  prepayments  made to
independent  software  developers  under  development   arrangements  that  have
alternative  future uses.  These  payments were  contingent  upon the successful
completion of  milestones,  which  generally  represent  specific  deliverables.
Royalty advances were recoupable against future sales based upon the contractual
royalty rate. The Company  amortized these costs of licenses,  prepaid royalties
and  other  outside  production  costs to cost of  goods  sold  over six  months
commencing  with the initial  shipment in each region of the related title.  The
Company  amortized these amounts at a rate based upon the actual number of units
shipped with a minimum  amortization  of 75% in the first month of release and a
minimum  of 5% for each of the next five  months  after  release.  This  minimum
amortization rate reflected the Company's typical product life cycle. Management
evaluates the future  realization of such costs quarterly and charges to cost of
goods sold any amounts  that  management  deems  unlikely  to be fully  realized
through  future  sales.  Such costs were  classified  as current and  noncurrent
assets  based  upon  estimated  product  release  dates.  There  were no prepaid
licenses and royalties at December 31, 2006.

SOFTWARE DEVELOPMENT COSTS

     Research  and  development  costs,  which  consisted  primarily of software
development  costs,  are expensed as incurred.  Financial  accounting  Standards
Board  ("FASB")  Statement of Financial  Accounting  Standards  ("SFAS") No. 86,
"Accounting for the Cost of Computer  Software to be Sold,  Leased, or Otherwise
Marketed", provides for the capitalization of certain software development costs
incurred after  technological  feasibility of the software is established or for
development costs that have alternative future uses. Under the Company's current
practice of  developing  new  products,  the  technological  feasibility  of the
underlying   software  is  not  established  until   substantially  all  product
development is complete,  which generally  includes the development of a working
model. The Company has not capitalized any software development costs since 2003
on internal  development  projects,  as the eligible costs were determined to be
insignificant.


                                       43
<PAGE>


ACCRUED ROYALTIES

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

PROPERTY AND EQUIPMENT

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

LONG-LIVED ASSETS

     The Company  reviews  long-lived  assets for impairment  whenever events or
changes  in  circumstances  indicate  that  their  carrying  amounts  may not be
recoverable.  If the  cost  basis of a  long-lived  asset  is  greater  than the
estimated  fair  value,  based on various  models,  including  projected  future
undiscounted net cash flows from such asset (excluding interest) and replacement
value, an impairment loss is recognized. Impairment losses are calculated as the
difference  between  the cost basis of an asset and its  estimated  fair  value.
Management  determined in 2005 that impairment existed related to specific items
of property and  equipment and adjusted  these assets to zero..  There can be no
assurance,  however,  that market  conditions  will not change or demand for the
Company's  products or services will  continue  which could result in additional
impairment of other long-lived assets in the future.

GOODWILL AND INTANGIBLE ASSETS

     Goodwill and  identifiable  intangible  assets that have indefinite  useful
lives  are  not be  amortized  but  rather  be  tested  at  least  annually  for
impairment,  and identifiable intangible assets that have finite useful lives be
amortized  over their useful lives.  At December 31, 2006 and 2005,  the Company
had no goodwill or intangible assets subject to amortization.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

REVENUE RECOGNITION

     Revenues  are  recorded   when  products  are  delivered  to  customers  in
accordance  with  Statement  of  Position   ("SOP")  97-2,   "Software   Revenue
Recognition"  and SEC Staff Accounting  Bulletin No. 104,  Revenue  Recognition.
With the signing of the new Vivendi Universal Games, Inc. distribution agreement
in  August  2002,  substantially  all of the  Company's  sales  were made by two
related  party  distributors  (Notes 5 and 11 ),  Vivendi  Universal  Games,Inc.
(Vivendi),  which owned less than 5% of the outstanding  shares of the Company's
common  stock at that  time,  and  Avalon  Interactive  Group  Ltd.  ("Avalon"),
formerly Virgin Interactive  Entertainment Limited, a wholly owned subsidiary of
Titus  until  the  Company  ended its  relationship  with them  during  2005,  a
significant part of the Vivendi  distribution  agreement ended in August,  2005,
and Avalon,  because of  bankruptcy,  ceased to be the  distributor  in February
2005.

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


                                       44
<PAGE>


The Company recognizes revenue on expired contracts when the termination date of
the  contract  is  reached  because   guaranteed   minimum   royalties  are  not
reimbursable and is therefore, recorded as revenue.

     The Company is generally  not  contractually  obligated to accept  returns,
except for  defective,  shelf-worn  and  damaged  products  in  accordance  with
negotiated  terms.  However,  on a case by case  basis,  the  Company may permit
customers to return or exchange product and may provide  markdown  allowances on
products  unsold by a customer.  Revenue is  recorded  net of an  allowance  for
estimated returns,  exchanges,  markdowns, price concessions and warranty costs.
Such allowances are based upon management's evaluation of historical experience,
current industry trends and estimated costs. Management of the Company estimated
that no allowances  were  necessary at December 31, 2006 and 2005. The amount of
allowances 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 internet  support.
These costs are not significant and are charged to expenses as incurred.

     The  Company  also  engages  in the sale of  licensing  rights  on  certain
products.  The terms of the licensing  rights differ,  but normally  include the
right to develop and distribute a product on a specific video game platform. For
these  activities,  revenue is recognized when the rights have been  transferred
and no other  obligations  exist. The Company has entered into various licensing
agreements  during 2006 under which it licensed others to exploit games to which
the Company had intellectual property rights.

REVERSAL OF CERTAIN PRIOR YEAR ACCRUALS AND ACCOUNTS PAYABLE

     During the year ended  December  31, 2006 and 2005 the Company has reversed
certain accruals and accounts  payables of  approximately  $4.5 million and $2.6
million respectively. It is the Company's policy to reverse outstanding accruals
and accounts  payables that have been outstanding for over 3 years and no effort
has been made by the vendor or  claimant  for that period of time to collect the
outstanding balances.

ADVANCES FROM DISTRIBUTORS

     Deferred  income is recognized when contracts with  distributors  expire or
are terminated.

ADVERTISING COSTS

     The Company generally  expenses  advertising costs as incurred,  except for
production  costs  associated with media campaigns that are deferred and charged
to expense at the first run of the ad. Cooperative advertising with distributors
and  retailers is accrued when revenue is  recognized.  Cooperative  advertising
credits are reimbursed when qualifying  claims are submitted.  Advertising costs
approximated  $509,000,  $312,000 and $1.2 million for the years ended  December
31, 2006, 2005 and 2004, respectively.

INCOME TAXES

     The  Company  accounts  for  income  taxes  using the  liability  method as
prescribed  by the SFAS No. 109,  "Accounting  for Income  Taxes." The statement
requires an asset and liability approach for financial  accounting and reporting
of income taxes. Deferred income taxes are provided for temporary differences in
the recognition of certain income and expense items for financial  reporting and
tax purposes given the provisions of the enacted tax laws. A valuation allowance
has been  provided  for all  deferred  tax assets  equal to the amounts of these
assets.

FOREIGN CURRENCY

     The  Company  follows  the  principles  of SFAS No. 52,  "Foreign  Currency
Translation,"  using the local  currency of its  operating  subsidiaries  as the
functional currency.  Accordingly, all assets and liabilities outside the United
States are translated into U.S. dollars at the rate of exchange in effect at the
balance  sheet date.  Income and expense  items are  translated  at the weighted
average exchange rate prevailing during the period. Gains or losses arising from
the translation of the foreign  subsidiaries'  financial statements are included
in the accompanying  consolidated  financial  statements as a component of other


                                       45
<PAGE>


comprehensive   loss.   Gains  and  Losses   resulting  from  foreign   currency
transactions amounted to a $3,000 loss, $10,000 loss and $33,000 loss during the
years ended December 31, 2006, 2005 and 2004,  respectively,  and is included in
other income (expense) in the consolidated statements of operations.

NET INCOME (LOSS) PER SHARE

     Basic net income  (loss) per common  share is computed  by dividing  income
(loss)  attributable to common  stockholders  by the weighted  average number of
common  shares  outstanding.  Diluted  net income  (loss)  per  common  share is
computed by dividing income (loss)  attributable  to common  stockholders by the
weighted  average  number of common  shares  outstanding  plus the effect of any
convertible  debt,  dilutive stock options and common stock warrants if any. For
the years ended December 31, 2005 and 2004, all options and warrants outstanding
to purchase  common stock were excluded from the earnings per share  computation
as the exercise  price was greater  than the average  market price of the common
shares.  For the year ended December 31, 2006 certain  warrants and options were
dilutive and were included in diluted net income per share.

     The Company  discloses  information  regarding  segments in accordance with
SFAS No. 131 DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 establishes  standards for reporting of financial information about
operating  segments  in  annual  financial  statements  and  requires  reporting
selected  information about operating segments in interim financial reports. The
Company is managed,  and financial  information is developed,  on a geographical
basis,  rather than a product line basis. Thus, the Company has provided segment
information on a geographical basis (see Note 13).

Allowance for Doubtful Accounts

     Management   establishes  an  allowance  for  doubtful  accounts  based  on
qualitative  and  quantitative  review  of  credit  profiles  of  the  Company's
customers,  contractual  terms  and  conditions,  current  economic  trends  and
historical payment,  return and discount experience.  Management  reassesses the
allowance  for doubtful  accounts  each period.  If  management  made  different
judgments or utilized different estimates for any period,  material  differences
in the amount and timing of revenue recognized could result. Accounts receivable
are written off when all collection attempts have failed.

Cost of Software Revenue

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

COMPREHENSIVE INCOME (LOSS)

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

STOCK-BASED COMPENSATION

      Effective   January  1,  2006  the  Company   adopted  SFAS  No.   123(R),
"SHARE-BASED   PAYMENT"  ("SFAS  123R"),  which  requires  the  measurement  and
recognition of  compensation  cost at fair value for all  share-based  payments,
including  stock options and restricted  stock awards.  The Company adopted SFAS
123R using the modified prospective  transition method and, as a result, did not
retroactively  adjust results from prior periods.  Under this transition method,
stock-based compensation is recognized for: (1) expense related to the remaining
non-vested portion of all stock awards granted prior to January 1, 2006 based on
the grant date fair value estimated in accordance  with the original  provisions
of SFAS No. 123,  ACCOUNTING FOR STOCK-BASED  COMPENSATION  ("SFAS 123") and the
same   straight-line   attribution  method  used  to  determine  the  pro  forma
disclosures  under SFAS 123; and (2) expense related to all stock awards granted
on or  subsequent  to  January  1,  2006,  based on the grant  date  fair  value
estimated in accordance with the provisions of SFAS 123R.


                                       46
<PAGE>


     At December 31, 2006, the Company has one stock-based employee compensation
plan,  which  is  described  more  fully  in  Note  10.   Stock-based   employee
compensation cost approximated  $40,000,  $0; $0 was reflected in net income for
the years ended  December 31,  2006,  2005 and 2004,  respectively.  Stock-based
employee compensation:

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                                  -----------------------------------
                                                                     2006         2005        2004
                                                                  ----------   ----------  ----------
                                                                        (Dollars in thousands,
                                                                      except per share amounts)
<S>                                                               <C>          <C>         <C>
Net income (loss) available to common stockholders, as reported   $    3,079   $    5,928  $   (4,730)
Pro forma estimated fair value compensation expense ...........         --           --          --
                                                                  ----------   ----------  ----------
Pro forma net income (loss) available to common stockholders ..   $    3,079   $    5,928  $   (4,730)
                                                                  ==========   ==========  ==========
Basic net income (loss) per common share as reported ..........   $     .030   $     0.06  $    (0.05)
Diluted net income (loss) per common share as reported ........   $     .028   $     0.06  $    (0.05)
Basic pro forma net income (loss) per common share ............   $     .030   $     0.06  $    (0.05)
Diluted pro forma net income (loss) per common share ..........   $     .028   $     0.06  $    (0.05)
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2006,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Interpretation  No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES (FIN 48). FIN
48 clarifies the  accounting for  uncertainty  in income taxes  recognized in an
enterprise's  financial  statements in accordance with SFAS 109,  ACCOUNTING FOR
INCOME  TAXES.  FIN  48  prescribes  a  recognition  threshold  and  measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on derecognition, classification, interest and penalties, accounting in
interim  periods,  disclosure  and  transition.  FIN 48 is  effective  for years
beginning after December 15, 2006. We will adopt FIN 48 as of December 30, 2006,
as required.  Currently, we are not able to estimate the impact FIN 48 will have
on our financial statements.

     In September  2006,  the FASB issued SFAS 157,  FAIR VALUE  MEASUREMENTS  ,
which  defines  fair value,  creates a  framework  for  measuring  fair value in
generally accepted  accounting  principles (GAAP), and expands disclosures about
fair value measurements.  SFAS 157 is effective for financial  statements issued
for fiscal years  beginning  after  November 15, 2007. We will adopt SFAS 157 on
its effective date. The Company has not yet determined the effect,  if any, that
the  application  of  SFAS  No.  157  will  have on its  consolidated  financial
statements.

     In September  2006, the Securities and Exchange  Commission  ("SEC") issued
SAB No. 108,  Topic 1-N,  "Considering  the Effects of Prior Year  Misstatements
when Quantifying  Misstatements  in Current Year Financial  Statements." SAB No.
108 requires companies to evaluate the materiality of current year misstatements
using both the rollover approach and the iron curtain approach.. The adoption of
SAB  No.  108 did not  have a  material  impact  on the  Company's  consolidated
financial position and results of operations.

3.   DETAIL OF SELECTED BALANCE SHEET ACCOUNTS

PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

                                                                DECEMBER 31,
                                                             ------------------
                                                              2006        2005
                                                             ------      ------
                                                                 (Dollars in
                                                                  thousands)
Computers and equipment ................................     $   14      $   14
Furniture and fixtures .................................          8           8
Leasehold improvements .................................       --          --
                                                             ------      ------
                                                                 22          22
Less: Accumulated depreciation
   and amortization ....................................        (19)        (15)
                                                             ------      ------
               Net Equipment ...........................     $    3      $    7
                                                             ======      ======


                                       47
<PAGE>


     For the years ended December 31, 2006, 2005 and 2004, the Company  incurred
depreciation  and  amortization  expense  of  $4,000,   $100,000  and  $800,000,
respectively.  During the years ended  December  31,  2006,  2005 and 2004,  the
Company disposed of fully  depreciated  equipment having an original cost of $0,
$1.4 and $4.7 million, respectively.

4.   PROMISSORY NOTES

     The Company  issued to Warner  Brothers  Entertainment,  Inc.  ("Warner") a
Secured Convertible  Promissory Note bearing interest at 6% per annum, due April
30, 2003, in the principal amount of $2.0 million in connection with the sale of
a  subsidiary  in 2002.  The note was issued in partial  payment of amounts  due
Warner  under the  parties'  license  agreement  for the video game based on the
motion picture,  THE MATRIX. The note is secured by all of the Company's assets,
and may be converted by the holder  thereof into shares of the Company's  common
stock on the maturity  date or, to the extent there is any proposed  prepayment,
within the 30- day period  prior to such  prepayment.  The  conversion  price is
equal to the lower of (a) $0.304 or (b) an amount  equal to the average  closing
price of a share of the Company's common stock for the five business days ending
on the day prior to the conversion date,  provided that in no event can the note
be  converted  into more than  18,600,000  shares.  If any  amount  remains  due
following  conversion of the note into 18,600,000  shares,  the remaining amount
will be payable in cash.  The Company agrees to register with the Securities and
Exchange  Commission the shares of common stock to be issued in the event Warner
exercises  its  conversion  option.  At December 31,  2005,  the balance owed to
Warner,  including accrued interest,  is $360,000.  On or about October 9, 2003,
Warner  filed suit  against the Company in the  Superior  Court for the State of
California,  County of  Orange,  alleging  default on an  Amended  and  Restated
Secured Convertible Promissory Note held by Warner dated April 30, 2002, with an
original  principal  sum of $2.0  million.  At the time the suit was filed,  the
current remaining principal sum due under the note was $1.4 million in principal
and interest. The Company entered into a settlement agreement on this litigation
and entered  into a payment  plan with Warner to satisfy the balance of the note
by January 30,  2004.  The  Company is  currently  in default of the  settlement
agreement  with  Warner and has  entered  into a payment  plan,  under which the
Company is in default,  for the remaining balance of $383,000 as of December 31,
2006 .

     The Company issued to Atari  Interactive,  Inc. ("Atari") a Promissory Note
bearing no interest,  due December 31,  2006,  in the  principal  amount of $2.0
million in connection  with Atari  entering into tri-party  agreements  with the
Company and its then main  distributors,  Vivendi and Avalon.  On March 28, 2007
both parties  agreed to extend the option  period of the  promissory  note until
March 31,  2008.  The note was  issued in  payment  of all  outstanding  accrued
royalties due Atari under the Dungeons & Dragons license agreement which license
was  terminated  by Atari on April 23, 2004.  At December 31, 2006,  the balance
owed to Atari,  is $1.0  million as a result of  payments  made by  Vivendi  and
Avalon on the Company's behalf to Atari.

     Included in accounts payable not subject to judgments is a $140,000 advance
from the former President of Interplay Japan which has been closed.

5.   ADVANCES FROM DISTRIBUTORS, RELATED PARTIES AND OTHERS

     Advances from distributors consist of the following:

                                                               DECEMBER 31,
                                                         -----------------------
                                                           2006           2005
                                                         --------       --------
                                                         (Dollars in thousands)

Advances for other distribution rights ...........       $460,000       $      0
                                                         ========       ========


                                       48
<PAGE>


6.   INCOME TAXES

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

                                            YEARS ENDED DECEMBER 31,
                              -------------------------------------------------
                                  2006               2005               2004
                              -----------        -----------        -----------

Domestic ..............       $ 3,624,000        $ 6,554,000        $(4,574,000)
Foreign ...............          (550,000)          (626,000)            (3,000)
                              -----------        -----------        -----------
Total .................       $ 3,079,000        $ 5,928,000        $(4,577,000)
                              ===========        ===========        ===========

     The provision for income taxes is comprised of the following:

                                                 YEARS ENDED DECEMBER 31,
                                         --------------------------------------
                                           2006           2005           2004
                                         --------       --------       --------
                                                (Dollars in thousands)
Current:
   Federal ....................          $   --         $   --         $   --
   State ......................              --             --             --
   Foreign ....................              --             --             --
                                         --------       --------       --------
Deferred:
   Federal ....................              --             --             --
   State ......................              --             --             --
                                         --------       --------       --------
                                         $   --         $   --         $   --
                                         ========       ========       =========

     The Company files a  consolidated  U.S.  Federal  income tax return,  which
includes all of its domestic operations.  The Company files separate tax returns
for each of its foreign  subsidiaries in the countries in which they reside. The
Company's  available net  operating  loss ("NOL")  carryforward  for Federal tax
reporting purposes  approximates $125 million and expires through the year 2023.
The Company's NOL for California  State tax reporting  purposes  approximate $64
million and expires  through the year 2013.  The  utilization of the federal and
state net operating losses may be limited by Internal Revenue Code.

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

                                           2006          2005           2004
                                        ---------     ---------     ----------
Statutory Federal  income tax rate ...      34.0%         34.0%        34.0%
State income tax effect, net of
   federal benefits ..................       5.8           5.8          --
   Valuation allowance ...............     (39.8)        (39.5)       (39.5)
   Tax rate differentiation of
       foreign earnings ..............       --            --           --
Other ................................       --            --           --
                                        ---------     ---------     ----------
                                             -- %          -- %         -- %
                                        =========     =========     ==========


                                       49
<PAGE>


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

                                                              DECEMBER 31,
                                                         ----------------------
                                                           2006          2005
                                                         --------      --------
                                                         (Dollars in thousands)
Current deferred tax asset (liability):
     Prepaid royalties .............................     $    183      $   --
     Nondeductible reserves ........................         --             872
     Accrued expenses ..............................           31          --
     Foreign loss and credit carryforward ..........        2,954         2,766
     Federal and state net operating losses ........       50,609        49,766
     Other .........................................         --            --
                                                         --------      --------
                                                           53,777        53,404
                                                         --------      --------
Non-current deferred tax asset (liability):
     Depreciation expense ..........................         --            --
     Nondeductible reserves ........................         --            --
                                                         --------      --------
                                                             --            --
                                                         --------      --------
Net deferred tax asset before
     valuation allowance ...........................       53,777        53,404
Valuation allowance ................................      (53,777)      (53,404)
                                                         --------      --------
Net deferred tax asset .............................     $   --        $   --
                                                         ========      ========

     The Company maintains a valuation allowance against its deferred tax assets
due  to  the  uncertainty   regarding  future  realization.   In  assessing  the
realizability  of its deferred tax assets,  management  considers  the scheduled
reversal of deferred tax liabilities,  projected future taxable income,  and tax
planning  strategies.  The valuation  allowance on deferred tax assets increased
$373,000  during the year ending  December 31, 2006 and  increased  $2.1 million
during the year ending December 31, 2005.

7.   COMMITMENTS AND CONTINGENCIES

LEASES

     The Company's  headquarters are located in Beverly Hills,  California.  The
facility is leased through April 2008. The Company is currently  subleasing on a
short-term  basis a portion of the office space to an  independent  third party.
The Company closed the satellite  office in Irvine,  California in May 2006. The
Company also has a lease commitment at the French  representation office through
February 28, 2008 with an option for an additional 6 years.

     The minimum  annual net rentals for 2007 and 2008 are $121,000 and $41,000,
respectively.

     Total net rent expense was $ 77,000 net, $40,000 and $400,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.

LITIGATION

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


                                       50
<PAGE>


     On  October  24,  2002,  Synnex  Information  Technologies  Inc  ("Synnex")
initiated legal proceedings  against the Company for various claims related to a
breach of a  distributorship  agreement.  Synnex  obtained a  $172,000  judgment
against the Company.

     On or about October 9, 2003, Warner Brothers Entertainment, Inc. ("Warner")
filed suit against us in the Superior Court for the State of California,  County
of Orange,  alleging  default on an Amended  and  Restated  Secured  Convertible
Promissory Note held by Warner dated April 30, 2002, with an original  principal
sum of $2.0  million.  At the time the suit was  filed,  the  current  remaining
principal  sum due  under  the note  was $1.4  million  in  principal  including
interest.  We owe a remaining  balance of approximately  $383,000 payable in one
remaining  installment.  The Company is currently  in default of the  settlement
agreement.

     In April 2004,  Arden  Realty  Finance IV LLC  ("Arden")  filed an unlawful
detainer  action  against  the  Company in the  Superior  Court for the State of
California, County of Orange, alleging the Company's default under its corporate
lease agreement.  At the time the suit was filed,  the alleged  outstanding rent
totaled $432,000. The Company was unable to pay the rent, and vacated the office
space during the month of June 2004. On June 3, 2004,  Arden obtained a judgment
of approximately  $588,000 exclusive of interest.  In addition the Company is in
the  process of  resolving a prior  claim with the  landlord in the  approximate
amount of  $148,000,  exclusive  of  interest.  The  Company  has  negotiated  a
forbearance  agreement  whereby  Arden agreed to accept  payments  commencing in
January  2005 in the amount of $60,000  per month until the full amount is paid.
The  Company  has been in  default  of the  forbearance  agreement.  On or about
November 1, 2006,  Arden filed an involuntary  bankruptcy  petition  against the
Company.  The petition is pending before the bankruptcy court and the Company is
opposing it. (See Note 15)

     Monte Cristo Multimedia, a French video game developer and publisher, filed
a breach of contract complaint against the Company in the Superior Court for the
State of California,  County of Orange,  on August 6, 2002,  alleging damages in
the  amount  of  $886,000  plus  interest,   in  connection  with  an  exclusive
distribution agreement.  This claim was settled for $100,000,  payable in twelve
installments, however, the Company was unable to satisfy its payment obligations
and  consequently,  Monte  Cristo has filed a  stipulated  judgment  against the
Company in the amount of $100,000  additional interest has accrued in the amount
of $26,548;  the total outstanding balance at December 31, 2006 is $126,548.  If
Monte Cristo executes the judgment, it will negatively affect the Company's cash
flow, which could further  restrict the Company's  operations and cause material
harm to our business.

     In August 2003, Reflexive  Entertainment,  Inc. filed an action against the
Company for failure to pay development  fees in the Orange County Superior Court
that was settled in July 2004.  The Company was unable to make the  payments and
Reflexive  sought and obtained  judgment  against the company for  approximately
$110,000.  On or about November 1, 2006, Reflexive joined Arden in the filing of
an involuntary  bankruptcy petition against the Company. The petition is pending
before the bankruptcy court and the Company is opposing it. (See Note 15)


                                       51
<PAGE>


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

     The Company  received notice from the Internal Revenue Service ("IRS") that
it owes  approximately  $110,000  pursuant to section 166 and section 186 of the
Internal Revenue Code in payroll tax penalties, and interest for late filing and
late  payment of payroll  taxes.  Approximately  $110,000 has been accrued as of
December  31, 2005 but remains  unpaid.  The  Company  received  notice from the
Employment  Development  Department (EDD) that it owes approximately $103,000 in
payroll taxes, interest and penalties owed for the periods ending 2003, 2004 and
2005 which has been accrued for December 31, 2006. The Company is in the process
of establishing a payment plan with the Employment Development Department.

     The Company was unable to meet  certain  2004  payroll  obligations  to its
employees,  as a  result  several  employees  filed  claims  with  the  State of
California  Labor Board ("Labor  Board") . The Labor Board has fined the Company
approximately  $10,000 for failure to meet its payroll  obligations and obtained
in August 2005 judgments  totaling  $118,000 in favor of former employees of the
Company , since  this time  $44,000  of the claims  have been  settled  and paid
leaving,  a balance of  $74,000.  On or about  November 1, 2006,  two  employees
joined Arden and Reflexive in the filing of an involuntary  bankruptcy  petition
against the Company. The petition is pending before the bankruptcy court and the
Company is opposing it. (See Note 15)

     The Company's  property,  general  liability,  auto,  fiduciary  liability,
workers compensation and employment practices liability,  have been cancelled in
2004. The company subsequently  entered into new workers compensation  insurance
plan.  The Labor Board fined the Company  approximately  $79,000 for having lost
workers  compensation  insurance for a period of time.  The Company is appealing
the Labor Board fines.

     The Company received notice from the California State Board of Equalization
of a balance due in the amount of $73,000  for a prior year  audit.  The Company
has engaged an independent  specialized accounting firm to appeal the prior year
audit  calculations  and submit a settlement  proposal to the  California  State
Board of Equalization.

     On September 14, 2005,  Network Commercial  Service,  Inc. ("NCS") filed an
action against the Company alleging breach of contract relating to the provision
of copying equipment.  NCS subsequently  obtained a judgment against the company
for approximately $140,000.

     On April 22, 2005,  Mark Strecker  filed an action  against the Company for
various claims alleging unpaid services in the amount of $35,000. The Company is
evaluating the merit of the lawsuit.

     On May 19, 2005 DZN,  The Design  Corporation  filed an action  against the
Company for various advertising  services in the amount of $38,000.  The Company
is evaluating the merit of the lawsuit.

     On February 2, 2006 Michael  Sigel filed an action  against the Company for
unauthorized use of image. The Company is evaluating the merit of the lawsuit.

     On March 7, 2006,  Parallax  Software Corp.  entered a judgment against the
Company for a material  breach of a  settlement  agreement  related to royalties
owed in the amount of $219,000.

     On November 25,  2002,  Special  Situations  Fund III,  Special  Situations
Cayman Fund,  L.P.,  Special  Situations  Private Equity Fund, L.P., and Special
Situations Technology Fund, L.P. (collectively,  "Special Situations") initiated
legal  proceedings  against the Company  seeking damages of  approximately  $1.3
million,  alleging,  among  other  things,  that we  failed  to  secure a timely
effective date for a Registration  Statement for its shares purchased by Special
Situations under a common stock subscription  agreement dated March 29, 2001 and
that the Company  therefore,  liable to pay  Special  Situations  $1.3  million.
Special  Situations  entered  into a  settlement  agreement  with the Company in
December,  2003  contemplating  payments  over  time,  which the  Company  later
defaulted.  In August, 2004 the Company entered into a stipulation of settlement
on which it later  defaulted.  On January 12,  2005 a judgment of  approximately
$776,000 was entered in the State of New York and on February 4, 2005 a judgment
reflecting the January 12, 2005 judgment was entered in the State of California.
On May 3, 2006 the Company entered into a Stipulation of Settlement.  Under this
Stipulation  of Settlement,  the Company issued a total of 10,000,000  shares of
its unregistered  common stock and made a payment in the amount of approximately
$239,000.  Following  the issuance of such shares and in  consideration  of such
issuance  and  such  payment,   satisfaction  of  judgments  in  the  amount  of
approximately  $776,000  were  filed.  Such  shares  were  issued  in a  private
placement pursuant to section 4(2) of the Securities Act of 1933 and were issued
at a price of $.0296 per share,  using a value based on the then current  market
price of shares of common stock discounted by such newly issued shares.

     The Company has  recorded an estimate  for the  liabilities  related to the
aforementioned  litigation.  If any of the  creditors  execute  their  judgments
against the Company, the results will negatively affect the Company's cash flow,
which could restrict the Company's  operations and cause material  restraints to
its business.

8.   STOCKHOLDERS' EQUITY

PREFERRED STOCK AND COMMON STOCK

     The Company's articles of incorporation authorize up to 5,000,000 shares of
$0.001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time as the Board of Directors  determine.  As
of December 31, 2006, there were no shares of preferred stock outstanding.


                                       52
<PAGE>


     In connection with a private  placement in April,  2001, the Company issued
warrants to purchase 8,126,770 shares of the Company's common stock at $1.75 per
shares.  These  warrants  expired on March 31, 2006. In addition to the warrants
issued in the private  placement,  the Company  granted  the  investment  banker
associated  with the  transaction a warrant for 500,000  shares of the Company's
common stock.  The warrant has an exercise  price of $1.5625 per share and vests
one year after the registration statement became effective.  The warrant expires
four years  after it vests.  The  Company  incurred  a penalty of  approximately
$254,000  per  month,  payable  in cash,  until  June  2002,  when the  required
registration statement was declared effective.  During 2003, the Company settled
with  certain of these  investors  with  respect to  payment.  The total  amount
accrued  at  December  31,  2005 and 2004 was  $2.2  million  and $3.1  million,
respectively.  During 2006 the Company reversed the outstanding  accrual of $2.2
million,  as management of the Company  determined that based on the time period
the debt was outstanding, it was no longer collectible by the creditors.

     In August 2001, Titus converted  336,070 shares of Series A Preferred Stock
it  purchased  in April  2000  into  6,679,306  shares  of  Common  Stock.  This
conversion  did not include  accumulated  dividends of $740,000 on the Preferred
Stock,  these were  reclassified as an accrued liability since Titus had elected
to receive the dividends in cash. In March 2002,  Titus  converted its remaining
383,354  shares of Series A  Preferred  Stock into  47,492,162  shares of Common
Stock.  In connection  with sale of Preferred Stock with Titus in April 2000 the
Company  issued a warrant to purchase  350,000  shares of the  Company's  common
stock at $3.79 per share and another  warrant to Titus to purchase 50,000 shares
of the Company's common stock at $3.79 per share.  Both warrants expire in April
2010.

WARRANTS ISSUED

     During 2006 the Company issued 6,370,000 warrants to purchase the Company's
common stock at $.0279 per share (average closing price over ten days subsequent
to the resolution  authorizing  the issuance of the warrants) to the officer and
directors.

     The   6,100,000   warrants  were  issued  to  the  officer  to  reduce  his
compensation  and to  convert  a  portion  of  his  unpaid  compensation  into a
conditional  demand note.  The  conditions  includes that such note will be paid
only if the tangible net worth of the Company exceeds $1 million or in a case of
change  in  control.  The  demand  note  will  accrue  interest  at a rate of 5%
annually. These warrants were valued using the Black-Scholes Model.

     In addition  270,000 warrants were issued to the directors to convert their
earned but unpaid  director's fees to conditional  demand notes.  The conditions
include  that  such  notes  will be paid only if the  tangible  net worth of the
Company  exceeds $1 million or in a case of change in control.  The demand notes
will accrue interest at a rate of 5% annually,  These warrants were valued using
the Black-Scholes Model.

     The aggregate amount charged against income was approximately $40,000.

SHARES RESERVED FOR FUTURE ISSUANCE

     Common  stock  reserved  for future  issuance  at  December  31, 2006 is as
follows:

Stock option plans:
       Outstanding ........................................            2,640,000
       Available for future grants ........................            7,360,000
                                                                      ----------
                                                                      10,000,000
                                                                      ----------
Warrants ..................................................            7,330,298
                                                                      ----------
Total .....................................................           17,330,298
                                                                      ==========

TREASURY STOCK

     In December 2005,  NBC Universal  returned  their  4,658,216  shares of the
Company's  common stock at no cost to the Company.  The Company  included  these
shares as treasury stock in 2006 and 2005.


                                       53
<PAGE>


9.   NET EARNINGS (LOSS) PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                                 ------------------------------
                                                                   2006       2005       2004
                                                                 --------   --------   --------
                                                                     (Amounts in thousands,
                                                                    except per share amounts)
<S>                                                              <C>        <C>        <C>
Net income (loss) available to common stockholders ...........   $  3,079   $  5,928   $ (4,730)

   Interest related to conversion of secured convertible
      promissory note ........................................       --         --         --
                                                                 --------   --------   --------
   Dilutive net income (loss) available to common stockholders   $  3,079   $  5,928   $ (4,730)
                                                                 --------   --------   --------
Shares used to compute net income (loss) per common share:

   Weighted-average common shares ............................    100,513     93,856     93,856

   Dilutive stock equivalents ................................      2,090       --         --
                                                                 --------   --------   --------
   Dilutive potential common shares ..........................    102,603     93,856     93,856
                                                                 ========   ========   ========
Net income (loss) per common share:

   Basic .....................................................   $  0.030   $   0.06   $  (0.05)

   Diluted ...................................................   $  0.028   $   0.06   $  (0.05)
</TABLE>

     There were options and warrants outstanding to purchase 9,970,298 shares of
common  stock at December 31, 2006,  which were  excluded  from the earnings per
common  share  computation  as the  exercise  price was greater than the average
market price of the common shares.

     Due to the net loss attributable for the year ended December 31, 2004, on a
diluted  basis to common  stockholders,  stock  options and  warrants  have been
excluded  from the diluted  earnings per share  calculation  as their  inclusion
would have been  antidilutive.  The weighted  average exercise price at December
31, 2006, 2005 and 2004 was $.38, $1.84 and $1.84, respectively, for the options
and warrants  outstanding.  No dilution effect for options and warrants has been
made for 2005 as the  market  price  of the  common  stock  did not  exceed  the
exercise  price of the options or  warrants.  The  dilution  effect for the year
ended December 31,2006 was 2,090,000 common shares related to warrants issued to
officer and directors.

<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                          ----------------------------------------------------------------------------
                                   2006                       2005                      2004
                          ------------------------   -----------------------   -----------------------
                                         WEIGHTED                  WEIGHTED                  WEIGHTED
                                         AVERAGE                   AVERAGE                   AVERAGE
                                         EXERCISE                  EXERCISE                  EXERCISE
                            SHARES        PRICE        SHARES       PRICE        SHARES       PRICE
                          ----------    ----------   ----------   ----------   ----------   ----------
<S>                        <C>          <C>           <C>         <C>           <C>         <C>

Warrants outstanding at
  beginning of year ...    9,587,068    $     1.84    9,587,068   $     1.84    9,587,068   $     1.84
   Granted ............    6,370,000         .0279         --           --           --           --
   Exercised ..........         --            --           --           --           --           --
   Canceled ...........   (8,626,770)         --           --           --           --           --
                          ----------                 ----------                ----------
Warrants outstanding
  and exercisable at
  end of year .........    7,330,298    $      .38    9,587,068         1.84    9,587,068   $     1.84
                          ==========                 ==========                ==========
</TABLE>


                                       54
<PAGE>


     A detail of the warrants  outstanding  and  exercisable  as of December 31,
2006 is as follows:

                                    WARRANTS OUTSTANDING AND EXERCISABLE
                            ---------------------------------------------------
                                                   WEIGHTED           WEIGHTED
    RANGE OF                                       AVERAGE            AVERAGE
    EXERCISE                   NUMBER             REMAINING          EXERCISE
     PRICES                 OUTSTANDING         CONTRACT LIFE          PRICE
---------------             -----------         -------------       -----------
 $1.75 - $1.75                  500,000              .47            $   1.75
 $3.79 - $3.79                  460,298             4.29                3.79
$.0279 - $.0279               6,370,000             9.75            $  .0279


10.  EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

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

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


<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                          ----------------------------------------------------------------------------
                                   2006                       2005                      2004
                          ------------------------   -----------------------   -----------------------
                                        WEIGHTED                   WEIGHTED                  WEIGHTED
                                        AVERAGE                    AVERAGE                   AVERAGE
                                        EXERCISE                   EXERCISE                  EXERCISE
                            SHARES       PRICE        SHARES        PRICE        SHARES       PRICE
                          ----------   ----------   ----------    ----------   ----------    ----------
<S>                        <C>          <C>            <C>        <C>             <C>        <C>
Options outstanding at
  beginning of year ...       70,000   $      .30      211,150    $     2.02      425,985    $     1.95
   Granted ............    2,570,000         .045         --            --          5,000          0.08
   Exercised ..........         --           --           --            --           --            --
   Canceled ...........         --           --       (141,150)         2.02     (219,835)         1.85
                          ----------                ----------                 ----------    ----------
Options outstanding
  at end of year ......    2,640,000   $      .05       70,000    $      .30      211,150    $     2.02
                          ==========                ==========                 ==========
   Options exercisable     2,620,002                    50,002                    171,686
                          ==========                ==========                 ==========
</TABLE>


     Black Scholes  Single  Option  approach was used to estimate the fair value
information  presented utilizing ratable amortization.  There were 2,570,000,  0
and 5,000 options granted in 2006, 2005 and 2004, respectively.


                                       55
<PAGE>


     A detail of the options outstanding and exercisable as of December 31, 2006
is as follows:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                            ---------------------------------------------   -----------------------------
  RANGE OF EXERCISE                           WEIGHTED        WEIGHTED                        WEIGHTED
                                              AVERAGE          AVERAGE                         AVERAGE
   RANGE OF EXERCISE            NUMBER        REMAINING       EXERCISE          NUMBER        EXERCISE
        PRICES               OUTSTANDING    CONTRACT LIFE       PRICE        OUTSTANDING        PRICE
-------------------------   -------------   -------------   -------------   -------------   -------------
<S>                             <C>                  <C>    <C>                 <C>         <C>
    $0.045 - $.68               2,640,000            8.75   $         .05       2,620,002   $         .05
                            -------------   -------------   -------------   -------------   -------------
    $0.045 - $.68               2,640,000            8.75   $         .05       2,620,002   $         .05
                            =============   =============   =============   =============   =============
</TABLE>

PROFIT SHARING 401(K) PLAN

     In 2003,  the  employee  stock  purchase  plan was  terminated,  the Profit
Sharing 401(k) plan during 2007 had  distributed all assets in the plan and will
file their final pension plan returns during 2007.

11.  RELATED PARTY TRANSACTIONS

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

                                                            DECEMBER 31,
                                                     --------------------------
                                                         2006           2005
                                                     -----------    -----------
                                                      (Dollars in thousands)
Receivables from related parties:
  Titus TSC ......................................   $         0    $        70
  Titus SARL .....................................             0             18
  VIE Acquisition Group (Titus owned) ............             0             17
  Avalon .........................................             0              0
                                                               0          2,026
  Less Reserves ..................................            (0)        (2,114)
                                                     -----------    -----------
  Total ..........................................   $         0    $        17
                                                     ===========    ===========


ACTIVITIES WITH RELATED PARTIES

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

     The Company's operations involve significant transactions with its majority
stockholder  Titus and its  affiliates.  The  Company  had a major  distribution
agreement with Avalon.

TRANSACTIONS WITH TITUS AND AFFILIATES

     Titus (placed in French  involuntary  bankruptcy in January 2005) presently
owns approximately 58 million shares of Company common stock.

     As of December 31, 2006 and December  31, 2005,  Titus and its  affiliates,
excluding   Avalon  owed  the  Company  $0  and  $105,000,   respectively   (See
transactions with Titus Software below

     In June 2003, we began  operating  under a  representation  agreement  with
Titus Japan K.K. ("Titus  Japan"),  a  majority-controlled  subsidiary of Titus,
pursuant to which Titus  Japan  represents  us as an agent in regards to certain
sales transactions


                                       56
<PAGE>


in Japan.  As of December  31,  2006 the  Company had a balance  owed from Titus
Japan of $ 226,000.  During the  twelve  months  ending  December  31,  2006 the
Company's  Japanese  subsidiary  incurred to Titus Japan costs of  approximately
$106,000 in commissions,  publishing and staff services.  The Company closed our
Japanese subsidiary during the 4th quarter of 2006.

     The  amounts  due from  Avalon as of  December  31,  2006  have been  fully
reversed.

12.  CONCENTRATION OF CREDIT RISK

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

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

     o    The Company's  revenues and cash flows could fall  significantly,  and
          its business and  financial  results  could  suffer  material  harm if
          Interplay   Productions  Ltd  fails  to  effectively   distribute  the
          Company's products.

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

     For the years  ended  December  31,  2005 and 2004 , Avalon  accounted  for
approximately  2% and 70%  respectively,  of net revenues in connection with the
International  Distribution  Agreement (Note 11). Vivendi  accounted for 7 % and
21%  of  net  revenues  in  the  years  ended   December  31,  2005,  and  2004,
respectively.

13.  SEGMENT AND GEOGRAPHICAL INFORMATION

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

     Net revenues by geographic regions were as follows:

<TABLE>
<CAPTION>
                                        YEARS ENDED DECEMBER 31,
                   ----------------------------------------------------------------
                          2006                   2005                   2004
                   ------------------    --------------------    ------------------
                    AMOUNT    PERCENT     AMOUNT      PERCENT     AMOUNT    PERCENT
                   -------    -------    -------      -------    -------    -------
                                        (Dollars in thousands)
<S>                <C>            <C>    <C>              <C>    <C>            <C>
North America ..   $   203         21%   $ 2,885 (1)       40%   $ 1,544         12%
Europe .........       471         49      1,779 (1)       25      8,706         66
Rest of World ..       161         17      2,277 (1)       32      1,228          9
OEM, royalty and
   licensing ...       132         13        217            3      1,720         13
                   -------    -------    -------      -------    -------    -------
                   $   967        100%   $ 7,158          100%   $13,197        100%
                   =======    =======    =======      =======    =======    =======
</TABLE>

(1)  Included  in net  revenue by  geographic  regions  are the  recognition  of
     deferred revenue on contracts expiring as follows:
     North  America - $2,071  million  Europe  $363,000 Rest of the World $2,138
     million.


                                       57
<PAGE>


14.  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, 2006:
Net revenues .............................   $        106    $        239   $        335   $        287
                                             ============    ============   ============   ============
Gross profit .............................   $        100    $         93   $        330   $        277
                                             ============    ============   ============   ============
Net income (loss) ........................   $       (529)   $      2,060   $      1,633   $        (85)
                                             ============    ============   ============   ============

Net income (loss) per common share basic .   $     (0.006)   $       0.02   $       0.02   $     (0.001)
                                             ============    ============   ============   ============
Net income (loss) per common share diluted   $     (0.006)   $       0.02   $       0.02   $     (0.001)
                                             ============    ============   ============   ============

Year ended December 31, 2005:
Net revenues .............................   $        793    $        468   $      4,268   $      1,629
                                             ============    ============   ============   ============
Gross profit .............................   $        622    $        372   $      4,255   $      1,431
                                             ============    ============   ============   ============
Net income (loss) ........................   $       (216)   $        631   $      4,700   $        812
                                             ============    ============   ============   ============

Net income (loss) per common share basic .   $      (0.00)   $       0.01   $       0.05   $       0.01
                                             ============    ============   ============   ============
Net income (loss) per common share diluted   $      (0.00)   $       0.01   $       0.05   $       0.01
                                             ============    ============   ============   ============
</TABLE>

15. INVOLUNTARY BANKRUPTCY

     On  November  1,  2006  an  involuntary  petition  under  Chapter  7 of the
Bankruptcy  Code  was  filed  in  Federal  Court  by  several  of the  Company's
creditors.  Involuntary  bankruptcy is a process where a court appointed trustee
is empowered to liquidate the non exempt  property,  if any, of the debtor.  The
Company is opposing the petition.


                                       58
<PAGE>


<TABLE>
                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<CAPTION>
                                                          TRADE RECEIVABLES ALLOWANCE
                                      ------------------------------------------------------------------
                                        BALANCE AT     PROVISIONS FOR
                                       BEGINNING OF        RETURNS      RETURNS AND       BALANCE AT END
              PERIOD                      PERIOD        AND DISCOUNTS     DISCOUNTS         OF PERIOD
-----------------------------------   --------------   --------------    ----------       --------------
<S>                                   <C>              <C>               <C>              <C>
Year ended December 31, 2004 ......   $          725   $        1,681    $         --     $        2,406
                                      ==============   ==============    ==============   ==============

Year ended December 31, 2005 ......   $        2,406   $         (216)   $         --     $        2,190
                                      ==============   ==============    ==============   ==============

Year ended December 31, 2006 ......   $        2,190   $       (2,173)   $         --     $           17
                                      ==============   ==============    ==============   ==============
</TABLE>


                                       59