<PAGE>

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 IN ACCORDANCE WITH RULE 201 OF REGULATION S-T, THIS FORM 10-K IS BEING FILED
             IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION.

                                 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, 1999

                                      or

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

  For the transition period from _____ to ______

                        Commission File Number 0-24363

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

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

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

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

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

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

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

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

                        Common Stock, $0.001 par value

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

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

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

   As of March 21, 2000, 30,022,538 shares of Common Stock of the Registrant
were issued and outstanding and the aggregate market value of voting common
stock held by non-affiliates was $34,683,920.

                      Documents Incorporated by Reference

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

THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 17, 2000 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION.

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<PAGE>

                         INTERPLAY ENTERTAINMENT CORP.

            INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>
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                                                                          Page
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 <C>      <S>                                                             <C>
                                      PART I

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

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

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

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

                                      PART II

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

 Item 6.  Selected Financial Data.......................................   14

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

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

 Item 8.  Consolidated Financial Statements and Supplementary Data......   37

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

                                     PART III

 Item 10. Directors and Executive Officers of the Registrant............   38

 Item 11. Executive Compensation........................................   38

 Item 12. Security Ownership of Certain Beneficial Owners and
          Management....................................................   38

 Item 13. Certain Relationships and Related Transactions................   38

                                      PART IV

 Item 14. Exhibits, Financial Statement Schedules, and Reports on
          Form 8-K......................................................   39

 Signatures..............................................................  40

 Exhibit Index...........................................................  42
</TABLE>

                                       2
<PAGE>

   This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934 and such forward-looking statements are
subject to the safe harbors created thereby. For this purpose, any statements
contained in this Form 10-K except for historical information may be deemed to
be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate" or "continue" or the negative or other
variations thereof or comparable terminology are intended to identify forward-
looking statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements.

   The forward-looking statements included in this Form 10-K are based on
current expectations that involve a number of risks and uncertainties, as well
as certain assumptions. For example, any statements regarding future cash
flow, financing activities, cost reduction measures, compliance with the
Company's line of credit and an extension or replacement of such line are
forward-looking statements involving the aforementioned risks and
uncertainties. There can be no assurance that the Company will generate
positive cash flow in the future or that the Company will be able to obtain
additional or replacement financing on satisfactory terms, if at all; or that
any cost reductions effected by the Company will be sufficient to offset any
negative cash flow from operations; or that the Company will remain in
compliance with its line of credit or be able to renew or replace such line.
Additional risks and uncertainties include possible delays in the completion
of products, the possible lack of consumer appeal and acceptance of products
released by the Company, fluctuations in demand, lost sales because of the
rescheduling of product launches or order deliveries, failure of the Company's
markets to continue to grow, failure of the Company's products to be and
remain accepted within their respective markets, material adverse changes in
competitive conditions within the Company's markets, failure of the Company to
retain key development and management personnel, failure of the Company to
accurately anticipate market demand, and material adverse changes in the
Company's operations or business. Additional factors that may affect future
operating results are discussed in more detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance". Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, the Company's business and
operations are subject to substantial risks that increase the uncertainty
inherent in the forward-looking statements, and the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved. In
addition, risks, uncertainties and assumptions change as events or
circumstances change. The Company disclaims any obligation to publicly release
the results of any revisions to these forward-looking statements which may be
made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-K with the SEC or otherwise to revise or update any oral or
written forward-looking statement that may be made from time to time by the
Company or on the Company's behalf.

   Interplay(R), Interplay Productions(R) and certain of the Company's product
names and publishing labels referred to in this Form 10-K are the Company's
trademarks. This Annual Report on Form 10-K also contains trademarks belonging
to others.

                                       3
<PAGE>

                                    PART I

ITEM 1. BUSINESS

Overview

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

   The Company seeks to publish interactive entertainment software titles that
are, or have the potential to become, franchise software titles that can be
leveraged across several releases and/or platforms, and has published many
such successful franchise titles to date. In addition, the Company holds
licenses to use popular brands, such as Star Trek and Caesars Palace, for
incorporation into certain of its products. Of the more than 40 titles
currently in development by the Company, more than half are sequels to
successful titles or incorporate licensed intellectual properties.

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

   The Company completed equity transactions in 1999 and early in 2000 with
Titus Interactive S.A. ("Titus"), which provided for the issuance of
10,795,455 shares of the Company's Common Stock and 719,424 shares of the
Company's Preferred Stock for $55 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Control by Titus".

Products

   The Company develops, publishes and distributes interactive entertainment
software titles that provide immersive game experiences by combining advanced
technology with engaging content, vivid graphics and rich sound. The Company
utilizes the experience and judgment of the avid gamers in its product
development group to select and produce the products it publishes. This has
resulted in the publication of a wide variety of games that have received
numerous awards, including the Academy of Interactive Arts & Sciences' Best
Title, Computer Game Review's Gold and Platinum Triads, PC Entertainment's
Editor's Choice Awards, and Computer Gaming World's Game of the Year.

   The Company's strategy is to invest in products for those platforms,
whether PC or video game console, that have or will have sufficient installed
bases for the investment to be economically viable. The Company currently
develops and publishes products compatible with multiple variations of the PC
platform, including Windows 98 and 2000, and for currently-available video
game consoles, including the Sony PlayStation and Sega Dreamcast. The Company
anticipates the introduction of the Sony PlayStation 2 in the third quarter of
2000, and new platforms from Nintendo and Microsoft in 2001. In addition, the
Company anticipates substantial growth in installed base for high-speed
Internet access, with the possibility of significantly expanded technical
capabilities for the PC platform.

                                       4
<PAGE>

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

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

Product Development

   The Company develops or acquires its products from a variety of sources,
including its three internal development divisions, Shiny and publishing
relationships with leading independent developers.

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

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

                                       5
<PAGE>

   During the years ended December 31, 1999 and 1998, the eight months ended
December 31, 1997 and the year ended April 30, 1997, the Company spent $20.6
million, $24.5 million, $14.3 million and $21.4 million, respectively, on
product research and development activities. Those amounts represented 20.2%,
19.3%, 16.6% and 25.7%, respectively, of revenue in each of those periods.

 Internal Product Development

   U.S. Product Development. The Company's U.S. internal product development
group (excluding Shiny's development group) consisted of approximately 210
people at December 31, 1999. Once a design is selected by the Company, a
production team, development schedule and budget are established. The
Company's internal development process includes initial design and concept
layout, computer graphic design, 2D and 3D artwork, programming, prototype
testing, sound engineering and quality control. The development process for an
original, internally developed product typically takes from 12 to 24 months,
and six to 12 months for the porting of a product to a different technology
platform. The Company utilizes a variety of advanced hardware and software
development tools, including animation, sound compression utilities, clay
modeling and video compression for the production and development of its
interactive entertainment software titles. The Company's internal development
organization is divided into three divisions, each dedicated to the production
and development of products for a particular product category. The Company
also undertakes development activities through its subsidiary, Shiny. Within
each division, development teams are assigned to a particular project. These
teams are generally led by a producer or associate producer and include game
designers, software programmers, artists, product managers and sound
technicians. The Company believes that this divisional approach promotes the
creative and entrepreneurial environment necessary to develop innovative and
successful titles. In addition, the Company believes that breaking down the
development function into divisions enables it to improve its software design
capabilities, to better manage its internal and external development processes
and to create and enhance its software development tools and techniques,
thereby enabling the Company to obtain greater efficiency and improved
predictability in the software development process.

   Shiny. David Perry, Shiny's President and founder, has produced a number of
highly successful interactive entertainment software titles, including
CoolSpot, Aladdin, Earthworm Jim, Earthworm Jim II and MDK. Shiny currently
has one original title under development. The Company will distribute this
title worldwide under the Shiny label. Shiny's development group presently
consists of approximately 25 people.

   International Development. The Company has international development
resources through Interplay Productions Limited ("Interplay Europe"), whose
software producers manage the efforts of local third party developers in
European countries. The Company currently has several original products, under
development through Interplay Europe. Interplay Europe's development group
presently consists of approximately 5 people.

 External Product Development

   In order to expand its product offerings to include hit titles created by
third party developers, and to leverage its sales and distribution
capabilities, the Company enters into publishing arrangements with third party
developers, including foreign developers and publishers who wish to utilize
the Company's sales and distribution network in North America. In February
1999, the Company entered into a Product Publishing Agreement with Virgin
Interactive Entertainment Limited pursuant to which the Company will publish
substantially all of Virgin's titles in North and South America and Japan. In
the years ended December 31, 1999, December 31, 1998, the eight months ended
December 31, 1997, and the year ended April 30, 1997, approximately 75%, 70%,
50% and 33%, respectively, of new products released by the Company which the
Company believes are or will become franchise titles were developed by third
party developers. The Company expects that the proportion of its new products
which are developed externally may vary significantly from period to period as
different products are released. The Company's focus in obtaining publishing
products is to select titles that combine advanced technologies with creative
game design. The publishing agreements usually provide the Company with the
exclusive right to distribute a product on a worldwide basis (however, in
certain instances the agreement provides for a specified territory). The
Company typically funds external development through the payment of

                                       6
<PAGE>

advances upon the completion of milestones, which advances are credited
against royalties based on sales of the products. Further, the Company's
publishing arrangements typically provide the Company with ownership of the
trademarks relating to the product as well as exclusive rights to sequels to
the product. The Company manages the production of external development
projects by appointing a producer from one of its internal product development
divisions to oversee the product's development and work with the third party
developer to design, develop and test the game.

   The Company believes this strategy of cultivating relationships with
talented third party developers, such as the developers of Baldur's Gate,
Descent and TombRaider, provides an excellent source of quality products, and
a number of the Company's commercially successful products have been developed
under this strategy. However, the Company's reliance on third party software
developers for the development of a significant number of its interactive
software entertainment products involves a number of risks. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Dependence on Third Party Software
Developers."

Sales And Distribution

   The Company's sales and distribution efforts are designed to broaden
product distribution and to increase the penetration of the Company's products
in domestic and international markets. The Company supplements its direct
distribution efforts in North America with third party distributors and
"affiliate label" relationships in which the Company serves as distributor for
others. Over the past several years, the Company has increased its sales and
distribution efforts in international markets through the formation of
Interplay Europe, and most recently through the Virgin Distribution Agreement,
and through licensing and third party distribution strategies elsewhere. The
Company also distributes its software products through Interplay OEM in
bundling transactions with computer, peripheral and various other companies
and through on-line services.

   North America. In North America, the Company sells its products primarily
to mass merchants, warehouse club stores, large computer and software
specialty retail chains and through catalogs. In addition, the company sells
its products to Internet commerce sites. A majority of the Company's North
American retail sales are to direct accounts, and a lesser percentage are to
third party distributors. The Company's principal direct retail accounts
include CompUSA, Best Buy, Electronics Boutique, Wal-Mart and Software
Acquisitions. The Company's principal distributors in North America include GT
Interactive, Navarre, and Merisel. The Company also distributes product
catalogs and related promotional material to end-users who can order products
by direct mail, by using a toll-free number, or by accessing the Company's web
site. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Future Performance--Dependence on
Distribution Channels; Risk of Customer Business Failures; Product Returns."

   The Company sells to retailers and distributors through its North American
sales organization. The Company's North American sales force is largely
responsible for generating retail demand for the Company's products by
presenting new products to the Company's retail customers in advance of the
products' scheduled release dates, by providing technical advice with respect
to the Company's products and by working closely with retailers and
distributors to sell the Company's products. The Company typically ships its
products within a short period of time after acceptance of purchase orders
from distributors and other customers. Accordingly, the Company typically does
not have a material backlog of unfilled orders, and net sales in any quarter
are substantially dependent on orders recorded in that quarter. Any
significant weakening in customer demand would therefore have a material
adverse impact on the Company's operating results and on the Company's ability
to maintain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Performance--Fluctuations in Operating Results; Uncertainty of Future Results;
Seasonality."

   The Company seeks to extend the life cycle and financial return of many of
its products by marketing those products differently along the product's sales
life. Although the product life cycle for each title varies

                                       7
<PAGE>

based on a number of factors, including the quality of the title, the number
and quality of competing titles, and in certain instances seasonality, the
Company typically considers a title to be "back catalog" once it incurs its
first price drop after its initial release. The Company utilizes marketing
programs appropriate for each particular title, which generally include
progressive price reductions over time to increase the product's longevity in
the retail channel as the Company shifts its advertising support to newer
releases.

   The Company has acquired the right to distribute certain products on an
affiliate label basis whereby it distributes products that are produced and
published by a third party and are marketed under the third party's name with
the package bearing a notation that the product is being distributed by the
Company. The Company's focus in obtaining affiliate label products is to
select titles that complement the Company's product families. Products that
are distributed through the Company's affiliate label program are generally
purchased directly from the third party and sold based on a distribution mark-
up.

   The Company provides terms of sale comparable to competitors in its
industry. In addition, the Company provides technical support in North America
for its products through its customer support department and a 90-day limited
warranty to end-users that its products will be free from manufacturing
defects. While to date the Company has not experienced any material warranty
claims, there can be no assurance that the Company will not experience
material warranty claims in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Dependence on Distribution Channels; Risk of Customer
Business Failures; Product Returns."

   International. Prior to February 1999, the Company distributed its titles
in Europe through Interplay Europe, and employed approximately 21 persons
dedicated to sales and marketing in the European market. Interplay Europe had
an agreement with Infogrames U.K. and Virgin to pool resources in order to
distribute PC and video game console software to independent software
retailers in the United Kingdom, and had distribution agreements with Acclaim
Entertainment pursuant to which Acclaim Entertainment distributes certain of
the Company's titles in selected European countries. Net revenues from such
distribution agreements with Acclaim Entertainment represented 3.4% 9.6%, 7.4%
and 14.9% of the Company's net revenues in the years ended December 31, 1999,
December 31, 1998, the eight months ended December 31, 1997 and the year ended
April 30, 1997, respectively. In February 1999, the Company completed an
agreement to acquire a 43.9% membership interest in VIE Acquisition Group LLC,
the parent entity of Virgin. In connection with such acquisition, the Company
entered into the Virgin Distribution Agreement, pursuant to which Virgin hired
Interplay Europe's sales and marketing personnel and is distributing
substantially all of the Company's titles in Europe, CIS, Africa and the
Middle East for a seven year period. Under such agreement, the Company will
pay Virgin a distribution fee for its marketing and distribution of the
Company's products, as well as certain direct costs and expenses, and a fixed
overhead fee that is subject to reduction in certain events. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Distribution Agreement."

   The Company has built a distribution capability in certain of the developed
markets in Asia and the Americas utilizing third party distribution
arrangements for specified products and platforms. In 1995 the Company
established operations in Japan in order to expand its Japanese sales. In July
1997, the Company initiated a licensing strategy in Japan and terminated its
operations there. The Company has also licensed a number of its titles to Sony
Computer Entertainment to publish in Japan on the PlayStation. In Australia
and New Zealand, the Company has entered into an agreement with Roadshow
Entertainment Pty. Ltd., pursuant to which Roadshow Entertainment Pty. Ltd.
has the exclusive right to market and distribute the Company's ongoing PC and
video game console products.

   OEM. Interplay OEM employs approximately 22 people, including 7 in Europe,
focused on the distribution of interactive entertainment software in bundling
transactions to the computer hardware industry. Under these arrangements, one
or more software titles, which are either limited-feature versions or the
retail version of a game, are bundled with computer or peripheral devices and
are sold by an original equipment manufacturer so that the purchaser of the
hardware device obtains the software as part of the hardware purchase. In
addition,

                                       8
<PAGE>

Interplay OEM has established a development capability to create modified
versions of titles which support its customers' technologies. Although it is
customary for OEM customers to pay a lower per unit price on sales through OEM
bundling contracts, such arrangements involve a high unit volume commitment.
Interplay OEM net revenues generally are incremental net revenues and do not
have significant additional product development or sales and marketing costs.
There can be no assurance that OEM sales will continue to generate consistent
profits for the Company, and a decrease in OEM sales or margins could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition to distributing the Company's titles,
Interplay OEM serves as an exclusive OEM distributor for a number of
interactive entertainment software publishers, including LucasArts
Entertainment Company, Take Two Interactive, Fox Interactive, Westwood
Studios, Virgin, Gathering of Developers, EMME Interactive and Titus.
Interplay OEM's hardware customers include many of the industry's largest
computer and peripheral manufacturers including IBM, Compaq, 3Dfx, Diamond
Multimedia, Packard Bell/NEC, Creative Labs, Pioneer Electronic, Canon, Dell
and Logitech. OEM devotes five employees to modifying existing products into
suitable OEM products. Interplay OEM has expanded its business model to
include licensing of the represented software as a premium to the non-
Information Technology marketplace, as well as continuing its licensing and
merchandising activities on behalf of Interplay and Shiny including television
animation, novelizations, strategy guides and other merchandise tied to
Interplay's entertainment properties.

   The Company's North American and international distribution channels are
characterized by continuous change, including consolidation, financial
difficulties of certain distributors and retailers, and the emergence of new
distributors and new retail channels such as warehouse chains, mass merchants,
computer superstores and Internet commerce sites. The Company is exposed to
the risk of product returns and markdown allowances with respect to its
distributors and retailers. The Company allows distributors and retailers to
return defective, shelf-worn and damaged products in accordance with
negotiated terms. The Company considers return requests on a case-by-case
basis, taking into consideration factors such as the products involved, the
customer's historical sales volume and the customer's credit status. The
Company also offers a 90-day limited warranty to its end users that its
products will be free from manufacturing defects. In addition, the Company
provides markdown allowances, which consist of credits given to customers to
induce them to lower the retail sales price of certain products in an effort
to increase sales to consumers and to help manage its customers' inventory
levels in the distribution channel. Although the Company maintains a reserve
for returns and markdown allowances, and although the Company manages its
returns and markdown allowances through its authorization procedure, the
Company could be forced to accept substantial product returns and provide
markdown allowances to maintain its relationships with retailers and its
access to distribution channels. The Company's reserve for estimated returns,
exchanges, markdowns, price concessions, and warranty costs was $9.2 and $18.4
million at December 31, 1999 and 1998, respectively. Product returns and
markdown allowances that exceed the Company's reserves could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Future Performance--Dependence on
Distribution Channels; Risk of Customer Business Failures; Product Returns."

Marketing

   The Company's marketing department is organized into product groups aligned
with its three internal development divisions and Shiny to promote a focused
marketing strategy and brand image for each division. Integrated into these
product groups are public relations for each division. In addition, the
marketing department has four functional groups (web department, event
coordination, creative services and advertising) that support these four
product groups.

   The Company's marketing department develops and implements marketing
programs and campaigns for each of the Company's titles and product groups.
The Company's marketing activities in preparation for a product launch include
print advertising, game reviews in consumer and trade publications, retail in-
store promotions, attendance at trade shows and public relations. The Company
sends direct and electronic mail promotional materials to its large database
of gamers. The Company has also selectively used radio and

                                       9
<PAGE>

   television advertisements in connection with the introduction of certain of
its products. The Company budgets a portion of each product's sales for
cooperative advertising and market development funds with retailers. Every
title and brand is launched with a multi-tiered marketing campaign that is
developed on an individual basis to promote product awareness and customer
pre-orders. The Company anticipates that over time, as the market for its
products matures and competition becomes more intense, it will become
necessary to devote more overall resources to marketing its products but
marketing costs for its products should remain proportional to revenues.

   The Company maximizes on-line marketing through web advertising and the
maintenance of several web sites. These sites provide news and information of
interest to its customers through free demonstration versions, contests,
games, tournaments and promotions. Also, to generate interest in new product
introductions, the Company provides free demonstration versions of upcoming
titles both through magazines and through game samples that consumers can
download from the Company's web site. In addition, marketing hosts on-line
events and maintains a vast collection of message boards to keep customers
informed on shipped and upcoming titles.

Competition

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

   The Company competes primarily with other publishers of PC and video game
console interactive entertainment software. Significant competitors include
Electronic Arts Inc., GT Interactive Software Corp., Take Two Interactive
Software Inc, THQ Inc., The 3DO Compay, Eidos PLC, Infogrames Entertainment,
Mattel, Inc., Activision, Inc., Microsoft Corporation, LucasArts Entertainment
Company, Midway Games Inc., Acclaim Entertainment, Inc., Havas Interactive and
Hasbro, Inc. In addition, integrated video game console hardware/software
companies such as Sony Computer Entertainment, Nintendo and Sega compete
directly with the Company in the development of software titles for their
respective platforms. Large diversified entertainment companies, such as The
Walt Disney Company, many of which own substantial libraries of available
content and have substantially greater financial resources than the Company,
may decide to compete directly with the Company or to enter into exclusive
relationships with competitors of the Company. The Company also believes that
the overall growth in the use of the Internet and on-line services by
consumers may pose a competitive threat if customers and potential customers
spend less of their available time using interactive entertainment software
and more time on the Internet and on-line services.

   Retailers of the Company's products typically have a limited amount of
shelf space and promotional resources, and there is intense competition among
consumer software producers, and in particular interactive entertainment
software products, for high quality retail shelf space and promotional support
from retailers. To the extent that the number of consumer software products
and computer platforms increases, competition for shelf space may intensify
and may require the Company to increase its marketing expenditures. Due to
increased competition for limited shelf space, retailers and distributors are
in an increasingly better position to negotiate favorable terms of sale,
including price discounts, price protection, marketing and display fees and
product return policies. The Company's products constitute a relatively small
percentage of any retailer's sales volume, and there can be no assurance that
retailers will continue to purchase the Company's products or to provide the
Company's products with adequate levels of shelf space and promotional
support, and a prolonged failure in this regard may have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors Affecting Future Performance--Industry Competition;
Competition for Shelf Space."

                                      10
<PAGE>

Manufacturing

   The Company's PC-based products consist primarily of CD-ROMs and DVDs, user
manuals and packaging. Substantially all of the Company's CD-ROM and DVDs
duplication is performed by unaffiliated third parties. Printing of the user
manual and packaging, manufacturing of related materials and assembly of
completed packages are performed to the Company's specifications by
unaffiliated third parties. To date, the Company has not experienced any
material difficulties or delays in the manufacture and assembly of its CD-ROM
or DVD based products, and has not experienced significant returns due to
manufacturing defects.

   Sony Computer Entertainment, Sega and Nintendo manufacture the Company's
products that are compatible with their respective video game consoles, as
well as the manuals and packaging for such products, and ship finished
products to the Company for distribution. PlayStation and Dreamcast products
consist of CD-ROMs and are typically delivered by Sony Computer Entertainment
and Sega, respectively within a relatively short lead-time. Manufacturers of
Nintendo and other video game cartridges typically deliver software to the
Company within 45 to 60 days after receipt of a purchase order. If the Company
experiences unanticipated delays in the delivery of manufactured software
products, its net sales and operating results could be materially adversely
affected. Furthermore, the long manufacturing cycle associated with video game
cartridges requires that the Company forecast retailer and consumer demands
for its manufactured titles further in advance of shipment than for PC-based
products, PlayStation or Dreamcast CD-ROMs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Dependence on Licenses from and Manufacturing by Hardware
Companies."

Intellectual Property And Proprietary Rights

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

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

   The Company relies on existing copyright laws to prevent unauthorized
distribution of its software. Existing copyright laws afford only limited
protection. Policing unauthorized use of the Company's products is difficult,
and software piracy can be expected to be a persistent problem, especially in
certain international markets. Further, the laws of certain countries in which
the Company's products are or may be distributed either do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the U.S. or are weakly enforced. Legal protection of the Company's
rights may be ineffective in such countries, and as the Company leverages its
software products using emerging technologies, such as the Internet and on-
line services, the ability of the Company to protect its intellectual property
rights, and to avoid infringing the intellectual property rights of others,
becomes more difficult. In addition, the intellectual property laws are less
clear with

                                      11
<PAGE>

respect to such emerging technologies. There can be no assurance that existing
intellectual property laws will provide adequate protection to the Company's
products in connection with such emerging technologies.

   As the number of software products in the interactive entertainment
software industry increases and the features and content of these products
further overlap, interactive entertainment software developers may
increasingly become subject to infringement claims. Although the Company makes
reasonable efforts to ensure that its products do not violate the intellectual
property rights of others, there can be no assurance that claims of
infringement will not be made. Any such claims, with or without merit, can be
time consuming and expensive to defend. From time to time, the Company has
received communication from third parties asserting that features or content
of certain of its products may infringe upon the intellectual property rights
of such parties. There can be no assurance that existing or future
infringement claims against the Company will not result in costly litigation
or require the Company to license the intellectual property rights of third
parties, either of which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Protection of Proprietary Rights."

Employees

   As of December 31, 1999, the Company had 417 full time employees, including
210 in product development, 85 in sales and marketing and 65 in finance,
general and administrative. This includes 28 full time employees of Shiny, 22
full time employees of Interplay OEM and 7 full time employees of Interplay
Europe. The Company also retains independent contractors to provide certain
services, primarily in connection with its product development activities. The
Company and its full time employees are not subject to any collective
bargaining agreements and the Company believes that its relations with its
employees are good.

   From time to time the Company has retained actors and/or "voice over"
talent to perform in certain of the Company's products, and the Company
expects to continue this practice in the future. These performers are
typically members of the Screen Actors Guild ("SAG") or other performers'
guilds, which guilds have established collective bargaining agreements
governing their members' participation in interactive media projects. The
Company or an affiliated entity may be required to become subject to the
jurisdiction of SAG's collective bargaining agreement, or some other
applicable performers' guild, with respect to the Company's development
projects in the future in order to engage the services of performers in the
development of the Company's products.

ITEM 2. PROPERTIES

   The Company's headquarters are located in Irvine, California, where the
Company leases approximately 81,000 square feet of office space. This lease
expires in June 2006 and provides the Company with one five year option to
extend the term of the lease and expansion rights, on an "as available basis,"
to approximately double the size of the office space. Interplay Europe leases
approximately 10,000 square feet of space in Buckinghamshire, England. This
lease expires in October 2014 and, Interplay Europe has the option for early
termination of the lease in November 2000 or in November 2005. In addition,
Interplay Europe subleases approximately 1,700 square feet of office space in
Central London, England from Virgin. This lease expires in July 2000. Shiny
leases approximately 4,100 square feet of space in Laguna Beach, California,
which lease expires in October 2000 and which provides Shiny with an option to
extend the term for an additional five years. The Company believes that its
facilities are adequate for its current needs and that suitable additional or
substitute space will be available in the future to accommodate expansion of
the Company's operations.

ITEM 3. LEGAL PROCEEDINGS

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

                                      12
<PAGE>

   The Company and the former owner of Shiny have a dispute over additional
cash payments upon the delivery and acceptance of interactive entertainment
software titles that Shiny was committed to deliver over time. The Company
believes that no amounts are due as of December 31, 1999 under the applicable
agreements.

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

   None.

                                      13
<PAGE>

                                    PART II

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

   The Common Stock is traded on The NASDAQ Stock Market National Market
System under the symbol "IPLY". As of December 31, 1999, there were
approximately 2,000 holders of the Common Stock.

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

<TABLE>
<CAPTION>
   For the Year ended December 31, 1998                             High   Low
   ------------------------------------                             ----- -----
   <S>                                                              <C>   <C>
   Second Quarter.................................................. $6.19 $5.75
   Third Quarter...................................................  7.50  3.19
   Fourth Quarter..................................................  3.00  1.50

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

Dividend Policy

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

   The following is a summary of transactions by the Company during the year
ended December 31, 1999 involving sales of the Company's securities that were
not registered under the Securities Act:

   During the year ended December 31, 1999, the Company issued an aggregate of
2,208,028 nonqualified stock options to purchase Common Stock pursuant to the
Company's 1997 Stock Incentive Plan (the "1997 Plan") to officers, directors
and employees of the Company at a weighted average exercise price of $2.14.
Such options were issued but not sold, in the view of the Company, and,
therefore, registration thereof was not required. During the period referred
to above, options to issue 287,958 shares or the Company's Common Stock
pursuant to the 1997 Plan were exercised.

   As a result of the two equity transactions with Titus in 1999, the Company
issued and sold 10,795,455 shares of the Company's Common Stock for $35
million. Subsequent to December 31, 1999, the Company also issued 719,424
shares of Preferred Stock to Titus for $20 million in a transaction that
included warrants to Titus for up to 500,000 shares of Common Stock at $3.79
per share. The Company issued 484,848 shares of the Company's Common Stock to
RuneCraft Limited. An employee of the Company was issued 56,208 shares of the
Company's Common Stock. Such shares were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

   The selected consolidated statements of operations data for the years ended
December 31, 1999 and 1998, the eight months ended December 31, 1997 and the
year ended April 30, 1997, and the selected consolidated balance sheets data
as of December 31, 1999 and 1998 are derived from the Company's audited
consolidated financial statements included elsewhere in this Form 10-K. The
selected consolidated statements of operations

                                      14
<PAGE>

data for the years ended April 30, 1996 and 1995, and the selected
consolidated balance sheets data as of December 31, 1997, April 30, 1997, 1996
and 1995 are derived from the Company's audited consolidated financial
statements not included in this Form 10-K. The Company's historical results
are not necessarily indicative of the results that may be achieved for any
other period. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in
this Form 10-K.

<TABLE>
<CAPTION>
                                              Eight Months
                             Years Ended         Ended
                            December 31,      December 31,  Years Ended April 30,
                          ------------------  ------------ --------------------------
                            1999      1998        1997       1997     1996     1995
                          --------  --------  ------------ --------  -------  -------
                             (Dollars in thousands, except per share amounts)
<S>                       <C>       <C>       <C>          <C>       <C>      <C>
Statements of Operations
 Data(1):
Net revenues............  $101,930  $126,862    $85,961    $ 83,262  $96,952  $79,546
Cost of goods sold......    61,103    71,928     44,864      62,480   49,939   45,491
                          --------  --------    -------    --------  -------  -------
Gross profit............    40,827    54,934     41,097      20,782   47,013   34,055
Operating expenses:
 Marketing and sales....    32,432    39,471     20,603      24,627   23,285   14,280
 General and
  administrative........    15,247    12,841      8,989       9,408    9,025    5,528
 Product development....    20,629    24,472     14,291      21,431   15,120    8,200
 Other..................     5,323       --         --          --       --       --
                          --------  --------    -------    --------  -------  -------
 Total operating
  expenses..............    73,631    76,784     43,883      55,466   47,430   28,008
                          --------  --------    -------    --------  -------  -------
Operating income
 (loss).................   (32,804)  (21,850)    (2,786)    (34,684)    (417)   6,047
Other income (expense)..    (3,471)   (4,933)    (2,273)     (1,600)    (807)   1,046
                          --------  --------    -------    --------  -------  -------
Income (loss) before
 income taxes...........   (36,275)  (26,783)    (5,059)    (36,284)  (1,224)   7,093
Provision (benefit) for
 income taxes...........     5,410     1,437        --       (9,065)    (480)   2,844
Net income (loss).......  $(41,685) $(28,220)   $(5,059)   $(27,219) $  (744) $ 4,249
                          ========  ========    =======    ========  =======  =======
Net income (loss) per
 share (2):
 Basic..................  $  (1.86) $  (1.91)   $ (0.45)   $  (2.46) $ (0.07) $  0.40
 Diluted................  $  (1.86) $  (1.91)   $ (0.45)   $  (2.46) $ (0.07) $  0.35
                          ========  ========    =======    ========  =======  =======
Selected Operating Data:
Net revenues by
 geographic region:
 North America..........  $ 49,443  $ 73,865    $51,833    $ 38,606  $54,702  $51,892
 International..........    30,310    35,793     24,642      32,006   24,579   13,829
 OEM, royalty and
  licensing.............    22,177    17,204      9,486      12,650   17,671   13,825
Net revenues by
 platform:
 Personal computer......  $ 65,397  $ 67,406    $42,520    $ 45,192  $60,254  $36,804
 Video game console.....    14,356    42,252     33,955      25,420   19,027   28,917
 OEM, royalty and
  licensing.............    22,177    17,204      9,486      12,650   17,671   13,825

<CAPTION>
                                   December 31,                   April 30,
                          -------------------------------- --------------------------
                            1999      1998        1997       1997     1996     1995
                          --------  --------  ------------ --------  -------  -------
                                           (Dollars in thousands)
<S>                       <C>       <C>       <C>          <C>       <C>      <C>
 Balance Sheets Data:
 Working capital........  $ (7,622) $ (3,135)   $13,616    $  7,890  $18,485  $25,227
 Total assets...........    56,936    74,944     77,821      69,005   68,511   44,226
 Total debt.............    19,630    24,651     38,154      14,970      108      262
 Stockholders' equity
  (deficit).............    (2,071)    4,193     (1,267)      3,401   30,195   30,069
</TABLE>
--------
(1) Effective May 1, 1997, the Company changed its year end from April 30 to
    December 31.
(2) See Note 9 of Notes to Consolidated Financial Statements for an
    explanation of the number of shares used in computing net income (loss)
    per share.

                                      15
<PAGE>

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

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

General

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

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

   In order to expand the Company's distribution channels and engage in
software development in overseas markets, in 1995 the Company established
operations in the United Kingdom and in Japan. In July 1997, the Company
initiated a licensing strategy in Japan and terminated its operations there.
In February 1999, the Company undertook a restructuring of its operations in
the United Kingdom that included its investment in VIE Acquisition Group LLC
("VIE"). In connection with the Company's investment in VIE, the Company
entered into an exclusive distribution agreement with Virgin Entertainment
Interactive Limited ("Virgin") which is controlled by VIE and integrated its
distribution operations with Virgin which substantially reduced its sale and
marketing personnel in Europe. The Company still maintains its European OEM
and product development operations. International net revenues accounted for
approximately 29.7%, 28.2%, 28.7% and 38.4% of the Company's net revenues
during the years ended December 31, 1999 and 1998, the eight months ended
December 31, 1997 and the year ended April 30, 1997, respectively.

   In January 1997, the Company formed a wholly owned subsidiary, Interplay
OEM, Inc. ("Interplay OEM"), which had previously operated as a division of
the Company. Interplay OEM distributes the Company's interactive entertainment
software titles, as well as those of other software publishers, to computer
and peripheral device manufacturers for use in bundling arrangements. The
Company also derives net revenues from the licensing of certain of its
intellectual properties and certain of its products to third parties for
distribution in markets and through channels that are outside the Company's
primary focus. OEM, royalty and licensing net revenues accounted for 21.8%,
13.6%, 11.0% and 15.2% of the Company's total net revenues for the years ended
December 31, 1999 and 1998, the eight months ended December 31, 1997 and the
fiscal year ended April 30, 1997, respectively. OEM, royalty and licensing net
revenues generally are incremental net revenues and do not have significant
additional product development or sales and marketing costs, Cost of goods
sold related to PC and video game console net revenues represents the
manufacturing and related costs of interactive entertainment

                                      16
<PAGE>

software products, including costs of media, manuals, duplication, packaging
materials, assembly, freight and royalties paid to developers, licensors and
hardware manufacturers. Cost of goods sold related to royalty-based net
revenues primarily represents third party licensing fees and royalties paid by
the Company. Typically, cost of goods sold as a percentage of net revenues for
video game console products and affiliate label products are higher than cost
of goods sold as a percentage of net revenues for PC based products due to the
relatively higher manufacturing and royalty costs associated with these
products. Also included in the cost of goods sold is the amortization of
prepaid royalty and license fees paid to third party software developers.
Prepaid royalties are expensed over a period of six months commencing with the
initial shipment of the title at a rate based upon the numbers of units
shipped. The Company evaluates the likelihood of future realization of prepaid
royalties quarterly, on a product-by-product basis, and charges cost of goods
sold for any amounts that it deems unlikely to be realized through future
product sales.

   For the year ended December 31, 1999, the Company's net loss was $41.7
million. The Company's results from operations were adversely affected by
several factors. The Company was unable to ship two major titles and a third
major title was shipped later than expected which adversely affected sales
volume. The Company experienced higher product returns and markdown allowances
than expected during the year ended December 31, 1999 due to certain title
releases that did not gain broad market acceptance. In addition, the Company
expensed a $6.9 million provision for bad debt and $5.3 million for asset
valuation, severance charges and provision to cover certain minimum operating
charges payable to Virgin associated with the restructured operations of the
Company. The Company has taken certain actions with the objective of improving
its operating results in the future, including the reduction of its sell-in
unit quantities to limit potential price protection and product return
exposure.

   Effective May 1, 1997, the Company changed its fiscal year end from April
30 to December 31. Accordingly, the discussion of financial results set forth
below compares the year ended December 31, 1999 to the comparable 1998 period,
the year ended December 31, 1998 to the previous year ended April 30, 1997 and
compares the eight months ending December 31, 1997 to the comparable 1996
period.

   The Company's operating results have fluctuated significantly in the past
and will likely fluctuate significantly in the future, both on a quarterly and
an annual basis. A number of factors may cause or contribute to such
fluctuations, and many of such factors are beyond the Company's control. There
can be no assurance that the Company will be profitable in any particular
period. It is likely that the Company's operating results in one or more
future periods will fail to meet or exceed the expectations of securities
analysts or investors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality.

                                      17
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                             Year Ended        Eight Months Ended
                            December 31,          December 31,         Year Ended
                          ---------------   ------------------------   April 30,
                           1999     1998     1997           1996          1997
                          ------   ------   ---------   ------------   ----------
                                                        (unaudited)
<S>                       <C>      <C>      <C>         <C>            <C>
Statements of Operations
 Data:
Net revenues............   100.0%   100.0%      100.0%         100.0%    100.0%
Cost of goods sold......    59.9     56.7        52.2           70.9      75.0
                          ------   ------   ---------      ---------     -----
Gross margin............    40.1     43.3        47.8           29.1      25.0
Operating expenses:
  Marketing and sales...    31.8     31.1        24.0           31.3      29.6
  General and
   administrative.......    15.0     10.1        10.5           17.3      11.3
  Product development...    20.2     19.3        16.6           24.8      25.7
  Other.................     5.2      --          --             --        --
                          ------   ------   ---------      ---------     -----
    Total operating
     expenses...........    72.2     60.5        51.1           73.4      66.6
                          ------   ------   ---------      ---------     -----
Operating income
 (loss).................   (32.1)   (17.2)       (3.3)         (44.3)    (41.6)
Other income (expense)..    (3.4)    (3.9)       (2.6)          (2.2)     (1.9)
                          ------   ------   ---------      ---------     -----
Loss before income
 taxes..................   (35.5)   (21.1)       (5.9)         (46.5)    (43.5)
Provision (benefit) for
 income taxes...........     5.3      1.1         --           (11.8)    (10.9)
                          ------   ------   ---------      ---------     -----
Net loss................   (40.8)%  (22.2)%      (5.9)%        (34.7)%   (32.6)%
                          ======   ======   =========      =========     =====
Selected Operating Data:
Net revenues by segment:
  North America.........    48.5%    58.2%       60.3%          55.1%     46.4%
  International.........    29.7     28.2        28.7           27.7      38.4
  OEM, royalty and
   licensing............    21.8     13.6        11.0           17.2      15.2
                          ------   ------   ---------      ---------     -----
                           100.0%   100.0%      100.0%         100.0%    100.0%
                          ======   ======   =========      =========     =====
Net revenues by
 platform:
  Personal computer.....    64.1%    53.1%       49.5%          50.9%     54.3%
  Video game console....    14.1     33.3        39.5           31.9      30.5
  OEM, royalty and
   licensing............    21.8     13.6        11.0           17.2      15.2
                          ------   ------   ---------      ---------     -----
                           100.0%   100.0%      100.0%         100.0%    100.0%
                          ======   ======   =========      =========     =====
</TABLE>

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

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

   Net revenues for the year ended December 31, 1999 decreased compared to the
same period in 1998. The decrease in North American net revenues for the year
ended December 31, 1999 was primarily due to less major title releases across
multiple platforms and resulting decreases in unit sales volume in the 1999
period, in addition the Company experienced a high level of product returns
and markdowns due to certain titles that did not gain broad market acceptance.
The decrease in international net revenues was due primarily to decreased net
revenues in Europe due to less major title releases across multiple platforms
and resulting decreases in unit sales volume in the 1999 period. OEM, royalty
and licensing net revenues increased in the year ended December 31, 1999
compared to the same period in 1998 due to increased net revenues in the OEM
business and increased net revenues in licensing. The Company expects that
OEM, royalty and licensing net revenues in 2000 will be generally consistent
with 1999.

                                      18
<PAGE>

 Platform Net Revenues

   PC net revenues remained relatively even in the year ended December 31,
1999 compared to the same period in 1998 due to the continued sales of
Baldur's Gate and new major title releases such as Baldur's Gate: Tales of the
Sword Coast, Descent 3, Freespace 2, Kingpin, Starfleet Command and Torment
offset by a lower number of titles released overall. The Company expects its
PC net revenues to increase in 2000. Video game console net revenues decreased
in the year ended December 31, 1999 compared to the same period in 1998 due to
fewer major title releases. Major console title releases in the 1999 period
included Baseball 2000 (PlayStation), Caesar's Palace II (Game Boy Color) and
Incoming (Dreamcast). Even though video game console sales are not expected to
grow in 2000 for this segment of the industry, the Company expects its video
game console net revenues to increase in 2000 as a result of the added
penetration into this segment and the expected release of more titles.

 Cost of Goods Sold; Gross Margin

   Cost of goods sold decreased in the year ended December 31, 1999 compared
to the same period in 1998 due to lower net revenues and a higher percentage
of PC titles as compared to video game console titles, offset by write-offs of
prepaid royalties relating to titles which had been canceled due to the
Company discontinuing its licensed sports product line. The Company expects
its cost of goods sold to increase in 2000 due to its expected higher net
revenues base. The decrease in gross margin was primarily due to a high level
of product returns and markdowns due to certain titles that did not gain broad
market acceptance. The Company expects its gross margin to increase in 2000
due to a significantly improved inventory in channel position and continued
concentration on a sell-through product distribution strategy to improve
inventory management and reduce returns and allowances.

 Marketing and Sales

   Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services, monthly overhead and distribution fees payable to Virgin and
other related operating expenses. Marketing and sales expenses decreased in
the year ended December 31, 1999 compared to the same period in 1998. The
decrease is primarily attributable to decreased advertising, specifically
television advertising, and other marketing costs associated with fewer major
titles released during the 1999 period. In addition, the Company reduced
personnel and commission expense in connection with the restructuring of
European operations, including the distribution agreement entered into in
February 1999 between the Company and Virgin. The Company expects its
marketing and sales expenses to continue to decrease in 2000.

 General and Administrative

   General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses
increased in the year ended December 31, 1999 compared to the same period in
1998. The increase is primarily attributable to a provision for bad debt
expense of $6.9 million in 1999 in response to, among other things, the
deteriorating financial condition of certain customers, which placed serious
doubts on their ability and intent to pay. General and administrative expenses
other than bad debt expense decreased in the 1999 period. This decrease is
primarily due to the reorganization of the Company's European operations and
successful efforts to reduce North American operating expenses. The Company
expects its general and administrative expenses to decrease in 2000.

 Product Development

   Product development expenses, which primarily consist of personnel and
support costs, are charged to operations in the period incurred. Product
development expenses decreased in the year ended December 31,

                                      19
<PAGE>

1999 compared to the same period in 1998. The decrease is primarily due to
cost efficiencies achieved as a result of the reorganization of the
development process. Because of product development efforts in anticipation of
new video game console platforms, the Company expects its product development
expenses to increase in 2000.

 Other Operating Expense

   Other operating expenses are primarily non-recurring or unusual expenses
associated with the operations of the Company in 1999. Other operating
expenses of $5.3 million for the year ended December 31,1999 included $2.4
million for restructuring, asset valuations and severance charges. These
charges were incurred primarily in connection with restructuring the European
operations, including establishing the new distribution arrangements in Europe
whereby Virgin replaced the third party distribution arrangements and the
Company recorded provisions for the costs of reductions in work force and
facilities move, including asset valuation, severance expenses and estimated
facility lease termination charges. In addition, the Company recorded a
$2.9 million provision to cover certain minimum operating charges payable to
Virgin. The Company does not expect to incur any further restructuring or
asset valuation charges in connection with its distribution arrangement in
Europe.

 Other Income (Expense)

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

 Provision (Benefit) for Income Taxes

   The Company recorded a tax provision of $5.4 million in the year ended
December 31, 1999, as compared with a tax provision of $1.4 million in the
comparable 1998 period. The tax provision recorded during both periods
represents an increase of the valuation allowance on the deferred tax asset
due to the uncertainty of realization of the deferred tax asset in future
periods. The Company has a deferred tax asset of approximately $35 million
that has been fully reserved at December 31, 1999. This tax asset would reduce
future provisions for income taxes and related tax liabilities when realized.

Year Ended December 31, 1998 Compared to the Year Ended April 30, 1997

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

   Net revenues for the twelve months ended December 31, 1998 increased
compared to the twelve months ended April 30, 1997. The increase in North
American net revenues for the twelve months ended December 31, 1998 was
primarily due to increased title releases across multiple platforms and
resulting increases in unit sales volume in the 1998 period. A high level of
product returns and markdowns due to certain title releases that did not gain
broad market acceptance adversely affected both periods. The increase in
international net revenues was primarily attributable to increased net
revenues in Europe due to an increase in the number of titles that achieved
broad market acceptance. OEM, royalty and licensing net revenues increased in
the twelve months ended December 31, 1998 compared to the twelve months ended
April 30, 1997.

 Platform Net Revenues

   PC net revenues increased in the twelve months ended December 31, 1998
compared to the twelve months ended April 30, 1997 due to new major title
releases such as Baldur's Gate, Die By The Sword, Descent: Freespace The Great
War, Fallout 2, VR Sports Powerboat Racing, Redneck Deer Huntin' and Redneck
Rides

                                      20
<PAGE>

Again. Video game console net revenues also increased in the twelve months
ended December 31, 1998 compared to the twelve months ended April 30, 1997 due
to new major PlayStation title releases in the 1998 period such as Caesars
Palace II, Crime Killer, Heart of Darkness, VR Sports Powerboat Racing, VR
Baseball '99 and Wild 9.

 Cost of Goods Sold; Gross Margin

   Cost of goods sold increased in the twelve months ended December 31, 1998
compared to the twelve months ended April 30, 1997 mainly due to a higher net
revenues base. Both periods were adversely impacted by the effect of write-
offs of prepaid royalties relating to titles or platform versions of titles
that had been canceled or that were expected to achieve lower unit sales than
were originally anticipated. The increase in gross margin in the 1998 period
over the 1997 period was primarily due to lower write-offs of prepaid
royalties related to titles or platform versions of titles that had been
canceled or that were expected to achieve lower unit sales than were
originally anticipated. A high level of product returns and markdowns due to
certain title releases that did not gain broad market acceptance adversely
affected both periods.

 Marketing and Sales

   Marketing and sales expenses increased in the twelve months ended December
31, 1998 compared to the twelve months ended April 30, 1997. The increase was
primarily due to increases in advertising and other marketing costs associated
with the increase in major titles launched and products sold, including
increased cooperative advertising and marketing development funds, increased
advertising and commissions on product releases in the U.S. and the European
markets during the 1998 period as well as television advertising for Wild 9
and Heart of Darkness, two titles launched during the 1998 period.

 General and Administrative

   General and administrative expenses increased in the twelve months ended
December 31, 1998 compared to the twelve months ended April 30, 1997. The
increase in the twelve months ended December 31, 1998 was primarily
attributable to higher overhead costs including a $0.8 million provision for
uncollectable amounts owed to the Company by Engage Games Online, which is
majority-owned by the company's Chairman and Chief Executive Officer.

 Product Development

   Product development expenses increased in the twelve months ended December
31, 1998 compared to the twelve months ended April 30, 1997. The increase was
primarily due to an increase in the number of products under development,
offset in part by cost efficiencies achieved as a result of the reorganization
of the development process late in 1998.

 Other Income (Expense)

   Other expense increased in the twelve months ended December 31, 1998
compared to the twelve months ended April 30, 1997. The increase in the twelve
months ended December 31, 1998 was primarily due to increased borrowings under
the Company's line of credit to support increased working capital requirements
prior to the completion of the IPO in June 1998 and interest on the
Subordinated Secured Promissory Notes. The Company used the proceeds of the
IPO to repay those Subordinated Secured Promissory Notes that were not
converted into Common Stock and to pay down the bank line of credit, both of
which resulted in lower interest expense in the second half of 1998.

 Provision (Benefit) for Income Taxes

   The Company recorded a tax provision of $1.4 million in the twelve months
ended December 31, 1998, as compared with a tax benefit of $9.1 million in the
twelve months ended April 30, 1997. The $1.4 million tax

                                      21
<PAGE>

provision for 1998 consists primarily of an increase in the deferred tax
valuation of $2.0 million, offset by a foreign tax benefit of $0.6 million.

Eight Months Ended December 31, 1997 Compared to the Eight Months Ended
December 31, 1996

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

   Net revenues for the eight months ended December 31, 1997 increased
compared to the same period in 1996 period. The increase in North American and
international net revenues for the eight months ended December 31, 1997 was
primarily due to increased title releases across multiple platforms in 1997.
In addition, the Company experienced a higher than expected level of product
returns and markdowns due to certain titles that did not gain broad market
acceptance. OEM, royalty and licensing net revenues decreased in the 1997
period compared to the 1996 period.

 Platform Net Revenues

   PC net revenues increased in the eight months ended December 31, 1997
compared to the same period in 1996 due to new major title releases such as
Fallout and Star Trek: Starfleet Academy. Video game console net revenues
increased in the eight months ended December 31, 1997 compared to the same
period in 1996 due to new major title releases such as Clay Fighter 63 1/3
(Nintendo 64).

 Cost of Goods Sold; Gross Margin

   Cost of goods sold increased in the eight months ended December 31, 1997
compared to the same period in 1996. Gross margin as a percentage of net
revenue increased in the 1997 period compared to the 1996 period. The increase
in gross margin was primarily due to reductions in sales by the Company on
affiliate label titles published by third parties, reductions in OEM royalty
expenses as a percentage of net revenues, and changes in the product mix of
externally developed products released during the periods, offset in part by
greater manufacturing costs attributable to an increased number of video game
console products released during the 1997 period. The 1996 period also
included the effects of additional write-offs of prepaid royalties relating to
titles or platform versions of titles which had been canceled or which were
expected to achieve lower unit sales than were originally forecast.

 Marketing and Sales

   Marketing and sales expenses increased in the eight months ended December
31, 1997 compared to the same period in 1996. The increase in absolute dollars
was primarily due to advertising and other marketing costs associated with the
increase in products launched during the period. The decrease as a percentage
of net revenues was primarily attributable to operating efficiencies gained as
a result of an increased net revenues base.

 General and Administrative

   General and administrative expenses increased in the eight months ended
December 31, 1997 compared to the same period in 1996. The increase in
absolute dollars was primarily attributable to increased personnel and
operations and facilities costs both in North America and Europe in support of
increased net revenues. The decrease as a percentage of net revenues was
primarily attributable to operating efficiencies gained as a result of an
increased net revenues base.

 Product Development

   Product development expenses increased in the eight months ended December
31, 1997 compared to the same period in 1996. The increase in absolute dollars
was primarily due to the addition of personnel in the Company's product
development group, an increase in the number of products under development and
the initiation of European and OEM product development in the 1997 period. The
decrease as a percentage of net revenues primarily reflected operating
efficiencies gained as a result of increased net revenues.

                                      22
<PAGE>

 Other Income (Expense)

   Other expense increased in the eight months ended December 31, 1997
compared to the same period in 1996. This increase was primarily due to
increased borrowings under the Company's line of credit to support increased
working capital requirements in the 1997 period and interest on the
Subordinated Secured Promissory Notes, which were issued from October 1996
through February 1997 and were outstanding throughout the 1997 period.

 Provision (Benefit) for Income Taxes

   The Company recorded no tax provision in the eight months ended December
31, 1997, compared to a tax benefit of $5.9 million in the comparable 1996
period. No tax benefit was recorded in the 1997 period due to the uncertainty
of realization in future periods.

Liquidity and Capital Resources

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

   As of December 31, 1999 the Company's principal sources of liquidity
included cash of $399,000 and the Company's line of credit bearing interest at
the London Interbank Offered Rate plus 4.87 percent (11.35 percent as of
December 31, 1999). Under the terms of the line of credit, the Company has
maximum availability for borrowings and letters of credit up to $25 million
based in part upon qualifying receivables and inventory. Within the overall
credit limit, the line of credit also provides that the Company may borrow up
to $7 million in excess of its borrowing base. Under the line of credit the
Company is required to maintain a cash collateral deposit of $2.5 million and
a $5 million personal guarantee by the Company's Chairman and Chief Executive
Officer ("Chairman"). As of December 31, 1999, the Company's balance on the
line of credit was $19.2 million with no stand by letters of credit
outstanding. The amount available for borrowing under the line of credit was
$1.9 million as of December 31, 1999. Subsequent to December 31, 1999, The
Company extended its line of credit through April 2001 generally under the
same terms, except that Titus provided a $20 million corporate guarantee and
the financial institution agreed to release to the Company the $2.5 million of
cash held as collateral. In connection with the $20 million corporate
guarantee provided by Titus on the extension of the Company's line of credit,
if the Company defaults in accordance with the line of credit agreement, and
Titus is forced to pay on its corporate guarantee, Titus may have the right to
receive additional shares of the Company's Common Stock upon conversion of
their Preferred Stock. In addition, the Company secured a $5 million
supplemental line of credit with Titus through April 2001.

   Based upon certain assumptions, including without limitation, the Company's
ability to achieve anticipated operating results, the Company believes that it
will be able to renew its line of credit or obtain alternate financing on
reasonable terms. However, there can be no assurance that the assumptions
relied on by the Company will prove correct or that the Company will be able
to renew or replace its line of credit or obtain alternate financing on
reasonable terms, if at all.

   The Company's primary capital needs have historically been to fund working
capital requirements necessitated by its net losses, its sales growth, the
development and introduction of products and related technologies and the
acquisition or lease of equipment and other assets used in the product
development process. The Company's operating activities used cash of $26.4
million during the year ended December 31, 1999, primarily attributable to a
decrease in accounts payable and accrued liabilities and the net loss for the
year, offset in part by a decrease in trade receivables, the write off of the
deferred tax asset and depreciation and amortization. Cash provided by
financing activities of $27.8 million for the year ended December 31, 1999
consisted primarily of the proceeds from the equity investments by Titus,
offset partially by the paydown of borrowings on the Company's line of credit.
Cash used in investing activities of $1.6 million for the year ended December
31, 1999 consisted of capital expenditures, primarily for office and computer
equipment used in Company operations. The Company does not currently have any
material commitments with respect to any capital expenditures.


                                      23
<PAGE>

   In February 1999, the Company acquired a 43.9% membership interest in VIE,
the parent entity of Virgin. Under the terms of an International Distribution
Agreement entered into between the Company and Virgin in connection with the
acquisition of that interest, the Company must pay overhead fees and expenses,
subject to reduction in certain events, and distribution fees for the
marketing and distribution of the Company's products based on net sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance--Distribution Agreement".

   To reduce the Company's working capital needs, the Company has implemented
various measures including a reduction of personnel, a reduction of fixed
overhead commitments and has scaled back certain product development and
marketing programs. In addition, the Company believes that its International
Distribution Agreement with Virgin will reduce its international costs and
expenses in future periods. The Company is pursuing various alternatives,
including further expense reductions, in an effort to continue to reduce
operating expenses as much as possible without an adverse impact on its
ability to generate successful future business activities. There can be no
assurance that the Company will be able to undertake such measures, or that
such measures would not materially and adversely affect the Company's ability
to publish commercially viable titles, or that such measures would be
sufficient to generate operating profits. In addition, the Company's long term
liquidity will be materially dependent on its ability to develop and market
successful titles for the hardware platforms that dominate the interactive
entertainment market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Future Performance--
Liquidity; Future Capital Requirements".

   To provide working capital to support the Company's future operations, the
Company took several actions during 1999, and in early 2000, the Company
extended the expiration of its line of credit to April 2001, as discussed
above. In addition, the Company completed a transaction with Titus under a
Stock Purchase Agreement dated April 14, 2000 and issued 719,424 shares of
newly designated Series A Preferred Stock ("Preferred Stock") which has
preferences under certain events, as defined. The Preferred Stock is
convertible by Titus, redeemable by the Company, and accrues a 6 percent
dividend per annum. The Company may redeem the Preferred Stock at any time at
the original issue price. Titus may convert the Preferred Stock shares into
shares of Common Stock at any time after May 2001. The conversion rate is the
lesser of $2.78 or 85 percent of the market price per share at the time of
conversion, as defined. The Preferred Stock is entitled to the same voting
rights as if it had been converted to Common Stock. Conversion rights are
limited to 5,504,507 shares of Common Stock unless the Company's stockholders
have approved the issuance of the Preferred Stock at which time the Preferred
Stock shares would be convertible to 7,194,240 shares of Common Stock at
closing. In the event that the Company defaults on its line of credit and
Titus is forced to pay on its corporate guarantee of such line, the Series A
Preferred Stock conversion rights will be adjusted so as to make such shares
convertible into up to approximately 42.8 million shares of Common Stock. In
the event that the Company is able to repay to Titus the amounts paid under
the guarantee within six months, the conversion rate shall be returned to the
level at which it existed prior to such adjustment. In the event that the
Company is unable to repay such amounts within six months, the conversion rate
shall be readjusted at the end of such six month period based on the average
closing price of the Company's Common Stock for the last 20 trading days
during such period. If such average price is $10.00 per share, the shares
would be convertible into 7,194,240 shares of Common Stock, and, if less than
$10.00, the shares would be convertible into approximately an additional
5,000,000 shares for each dollar the average price is below $10.00, up to a
maximum of approximately 42.8 million shares. In connection with this
transaction, Titus received a warrant for 350,000 shares of Common Stock at
$3.79 per share exercisable at any time, and a warrant for 50,000 shares of
the Company's Common Stock at $3.79 per share which would only be exercisable
by Titus if the Company does not meet certain financial operating performance
targets for the year ending December 31, 2000, as defined. Both warrants
expire in April 2010. The Common Stock shares issuable upon conversion of the
Preferred Stock or the exercise of the warrants are subject to certain
registration rights. The Company also obtained a $5 million supplemental
secured line of credit with Titus through April 2001. Amounts drawn on this
line will be subject to interest of up to 12 percent per annum payable

                                      24
<PAGE>

quarterly. In connection with this line of credit, Titus received a warrant
for up to 100,000 shares of the Company's Common Stock at $3.79 per share that
will expire in April 2010. The warrant will become exercisable if and to the
extent that the Company draws on the line of credit, as defined.

   The Company believes that funds available under its line of credit, amounts
to be received from equity financing, amounts to be received under various
product license and distribution agreements and anticipated funds from
operations will be sufficient to satisfy the Company's projected working
capital and capital expenditure needs in the normal course of business at
least through the expiration of its line of credit in April 2001. Based upon
certain assumptions, including without limitation, the Company's ability to
achieve anticipated operating results, the Company believes that it will be
able to renew its line of credit or obtain alternate financing on reasonable
terms. However, there can be no assurance that the assumptions relied on by
the Company will prove correct or that the Company will be able to renew or
replace its line of credit on satisfactory terms, if at all. Further, there
can be no assurance that the Company will not be required to raise additional
working capital through debt or equity financing during such period. If the
Company is required to raise additional working capital, there can be no
assurance that the Company will be able to raise such additional working
capital on acceptable terms, if at all. In the event the Company is unable to
raise additional working capital, further measures would be necessary
including, without limitation, the sale or consolidation of certain
operations, the delay, cancellation or scale back of product development and
marketing programs and other actions. No assurance can be given that such
measures would not materially adversely affect the Company's ability to
develop and publish commercially viable titles, or that such measures would be
sufficient to generate operating profits in 2000 and beyond. Certain of such
measures may require third party consents or approvals, including the
Company's financial institution, and there can be no such assurance that such
consents or approvals can be obtained. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting
Future Performance--Liquidity; Future Capital Requirements".

Year 2000 Issue

   To date, no significant problems related to the Year 2000 issue have been
identified in the Company's internal systems or with its vendors, suppliers,
service providers or customers that would materially impact the Company's
business. Also, no significant Year 2000 issues have been identified with the
internally developed or third party products that the Company distributes.

   Although the Company does not expect any significant future Year 2000
related failures or malfunctions, the Company will continue to monitor its
internal systems and work closely with its suppliers, service providers and
customers to seek to avoid any material interruptions in its business.

   The Company has spent approximately $300,000 for the cost of upgrading,
replacing, testing and implementing its Year 2000 compliance plan. No further
significant expenditures are currently expected.

FACTORS AFFECTING FUTURE PERFORMANCE

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

Liquidity; Future Capital Requirements

   We used net cash in operations of $26.4 and 18.8 million during the years
ended December 31, 1999 and 1998, respectively. We cannot assure you that we
will ever generate positive cash flow from operations. Our ability to fund our
capital requirements out of our available cash, line of credit and cash
generated from our operations depends on a number of factors. Some of these
factors include the progress of our product development programs, the rate of
growth of our business, and our products' commercial success. We may have to
seek additional funds through debt or equity financings, product licensing or
distribution transactions or other

                                      25
<PAGE>

sources of financing in order to provide ourselves with enough working
capital. If we issue additional equity securities, our existing stockholders
could suffer a large amount of dilution in their ownership. In the event we
have to raise additional working capital from other sources, we cannot assure
you that we will be able to raise additional working capital on acceptable
terms, if at all. In the event we cannot raise additional working capital, we
would have to take additional actions to continue to reduce our costs,
including selling or consolidating certain operations, delaying, canceling or
scaling back product development and marketing programs and other actions.
These measures could materially and adversely affect our ability to publish
successful titles, and these measures may not be enough to generate operating
profits. We might have to get the approval of other parties, including our
financial lender, for some of these measures, and we cannot assure you that we
would be able to obtain those approvals.

Fluctuations in Operating Results; Uncertainty of Future Results; Seasonality

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

  . delays in shipping our products

  . demand for our products

  . demand for our competitors' products

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

  . changes in computing platforms

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

  . changes in our product mix

  . the number of our products which are returned

  . the timing of orders placed by our distributors and dealers

  . delays in shipping our products

  . the timing of our development and marketing expenditures

  .  price competition

  . the level of our international and OEM, royalty and licensing net
    revenues.

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

  . the uncertainties associated with the interactive entertainment software
    development process

  . long manufacturing lead times for Nintendo-compatible products

  . possible production delays

  . the approval process for products compatible with the Sony Computer
    Entertainment, Nintendo and Sega video game consoles

  . approvals required from other licensors.

   Because of the limited number of products we introduce in any particular
quarter, a delay in the introduction of a product may materially and adversely
affect our operating results for that quarter, and may not be recaptured in
later quarters. A significant portion of our operating expenses is relatively
fixed, and planned expenditures are based largely on sales forecasts. If net
revenues do not meet our expectations in any given quarter, operating results
may be materially adversely affected. The interactive entertainment software
industry is highly seasonal,

                                      26
<PAGE>

with the highest levels of consumer demand occurring during the year-end
holiday buying season, followed by demand during the first calendar quarter.
As a result, our net revenues, gross profits and operating income have
historically been highest during the fourth and the following first calendar
quarters, and have declined from those levels in the following second and
third calendar quarters.

   Our failure or inability to introduce products on a timely basis to meet
these seasonal increases in demand may have a material adverse effect on our
business, operating results and financial condition.

   We may over time become increasingly affected by the industry's seasonal
patterns. Although we seek to reduce the effect of such seasonal patterns on
our business by distributing our product release dates more evenly throughout
the year, we cannot assure you that these efforts will be successful. We
cannot assure you that we will be profitable in any particular period given
the uncertainties associated with software development, manufacturing,
distribution and the impact of the industry's seasonal patterns on our net
revenues.

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

Significant Recent Losses

   We have experienced significant net losses in recent periods, including
losses of $41.7 million and $28.2 million for the years ended December 31,
1999 and 1998, respectively. These losses resulted largely from delays in the
completion of certain products, a higher than expected level of product
returns and markdowns on products released during the year, and the cost of
restructuring our operations, including international distribution
arrangements. These losses also resulted from lower than expected worldwide
sales of certain releases, as well as from operating expense levels that were
high relative to our revenue level. We may experience similar problems in
current or future periods and we may not be able to generate sufficient net
revenues or adequate working capital, or bring our costs into line with
revenues, so as to attain or sustain profitability in the future.

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

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

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<PAGE>

resulting in loss of or delay in market acceptance. This loss or delay could
have a material adverse effect on our business, operating results and
financial condition.

Uncertainty of Market Acceptance; Dependence on Hit Titles

   Consumer preferences for interactive entertainment software are always
changing and are extremely difficult to predict. Historically, few interactive
entertainment software products have achieved continued market acceptance.
Instead, a limited number of releases have become "hits" and have accounted
for a substantial portion of revenues in our industry. Further, publishers
with a history of producing hit titles have enjoyed a significant marketing
advantage because of their heightened brand recognition and consumer loyalty.
We expect the importance of introducing hit titles to increase in the future.
We cannot assure you that our new products will achieve significant market
acceptance, or that we will be able to sustain this acceptance for a
significant length of time if we achieve it. We also cannot assure you that
product life cycles will be sufficient to permit us to recover product
development and other associated costs. Most of our products have a relatively
short life cycle and sell for a limited period of time after their initial
release, usually less than one year. We believe that these trends will
continue in our industry and that our future revenue will continue to be
dependent on the successful production of hit titles on a continuous basis.
Because we introduce a relatively limited number of new products in a given
period, the failure of one or more of these products to achieve market
acceptance could have a material adverse effect on our business, operating
results and financial condition. Further, if we do not achieve market
acceptance, we could be forced to accept substantial product returns or grant
significant markdown allowances to maintain our relationship with retailers
and our access to distribution channels. For example, we had significantly
higher than expected product returns and markdowns during the year ended
December 31, 1999 and we cannot assure you that higher than expected product
returns and markdowns will not continue in the future. In the event that we
are forced to accept significant product returns or grant significant markdown
allowances, our business, operating results and financial condition could be
materially adversely affected.

Control by Titus

   Titus currently owns 12,817,255 shares, or approximately 43 percent, of our
outstanding Common Stock, 718,424 shares of our Series A Preferred Stock which
have certain voting rights and are convertible into at least 7,184,240 shares
of Common Stock at any time after May 2001 if not previously redeemed by the
Company, and warrants for up to 500,000 shares of our Common Stock. In
addition, if we default on our line of credit and Titus is obligated to pay on
the $20 corporate guarantee that they provided on the extension of our line of
credit through April 2001, the Series A Preferred Stock may become convertible
into up to 42.8 million shares of our Common Stock, which would constitute
over 75 percent of our Common Stock as of the date hereof. In connection with
Titus' investment, Herve Caen, Titus' president and chief executive officer,
serves as our president and as a member of our Board of Directors, and Herve's
brother Eric Caen, also serves on our Board of Directors. As a consequence,
Titus holds significant voting power with respect to the election of our Board
of Directors and the approval of significant corporate actions, and Herve and
Eric Caen have substantial authority over our operations. As the Company's
capital structure currently stands, in the event that the Stockholder
Agreement pursuant to which our Board of Directors is currently nominated
terminates, Titus would be able to elect 3 of 7 members of the Board of
Directors. In the event Titus acquires enough additional shares of our common
stock so that it owns more than 50% of our total outstanding common stock,
Titus would be able to elect a majority of our Board of Directors, set our
dividend policy and otherwise exercise substantial control over our
management. This control could prevent or hinder a sale of the Company on
terms that are not acceptable to Titus.

Continued Listing on the NASDAQ National Market

   Our Common Stock is currently quoted on the NASDAQ National Market under
the symbol "IPLY." For continued inclusion on the NASDAQ National Market, a
company must meet certain tests, including a minimum bid price of $1.00 and
net tangible assets of at least $4 million. In the event that we fail to
satisfy the listing standards on a continuous basis, our Common Stock may be
removed from listing on the NASDAQ National

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<PAGE>

Market. If our Common Stock were delisted from the NASDAQ National Market,
trading of our Common Stock, if any, would be conducted on the NASDAQ Small
Cap Market, in the over-the-counter market on the so-called "pink sheets" or,
if available, the NASD's "Electronic Bulletin Board." In any of those cases,
investors could find it more difficult to dispose of, or to obtain accurate
quotations as to the value of, our Common Stock. The trading price per share
of our Common Stock would most likely be reduced as a result.

Distribution Agreement

   In connection with our acquisition of a 43.9 percent membership interest in
Virgin's parent entity in February 1999, we signed an International
Distribution Agreement with Virgin. Under this Agreement, we appointed Virgin
as our exclusive distributor for substantially all of our products in Europe,
the CIS, Africa and the Middle East, subject to certain reserved rights, for a
seven-year period. Because of the exclusive nature of the Agreement, if Virgin
were to experience problems with its business, or were to fail to perform as
expected, our business, operating results and financial condition could be
materially and adversely affected. In connection with this Agreement, Virgin
hired our European sales and marketing personnel, and we pay Virgin a
distribution fee for marketing and distributing our products, as well as
certain direct costs and expenses, and a fixed overhead fee that is subject to
reduction in certain events. In the year ended December 31, 1999, we recorded
a $2.9 million provision to cover certain minimum operating charges in 1999.
In addition, due to the fixed nature of the overhead fee, we will not be able
to reduce our European sales and marketing expenses in response to downturns
in our sales in Europe, which could have a material adverse effect on our
business, operating results and financial condition.

Dependence on Third Party Software Developers

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

Rapidly Changing Technology; Platform Risks

   The interactive entertainment software industry is subject to rapid
technological change. New technologies, including operating systems such as
Microsoft Windows 98 and 2000, technologies that support multi-player games,
new media formats such as on-line delivery and digital video disks ("DVDs")
and as yet unreleased video game platforms could render our current products
or products in development obsolete or unmarketable. We must continually
anticipate and assess the emergence of, and market acceptance of, new
interactive entertainment software platforms well in advance of the time the
platform is introduced to consumers. Because product development cycles are
difficult to predict, we must make substantial product development and other
investments in a particular platform well in advance of introduction of the
platform. If the platforms for which we develop software are not released on a
timely basis or do not attain significant market penetration, our business,
operating results and financial condition could be materially adversely
affected. Alternatively, if we fail to develop products for a platform that
does achieve significant market penetration, then our business, operating
results and financial condition could also be materially adversely affected.

                                      29
<PAGE>

   The emergence of new interactive entertainment software platforms and
technologies and the increased popularity of new products and technologies may
materially and adversely affect the demand for products based on older
technologies. The broad range of competing and incompatible emerging
technologies may lead consumers to postpone buying decisions with respect to
products until one or more emerging technologies gain widespread acceptance.
This postponement could have a material adverse effect on our business,
operating results and financial condition. We are currently actively
developing products for the Microsoft Windows 98 and 2000, Sony PlayStation
and PlayStation 2, and Sega Dreamcast platforms. We are also planning to
develop product for new platforms expected to be introducted in 2001 by
Microsoft and Nintendo. Our success will depend in part on our ability to
anticipate technological changes and to adapt our products to emerging game
platforms. We cannot assure you that we will be able to anticipate future
technological changes, to obtain licenses to develop products for those
platforms on favorable terms or to create software for those new platforms.
Any failure to do so could have a material adverse effect on our business,
operating results and financial condition.

Industry Competition; Competition for Shelf Space

   The interactive entertainment software industry is intensely competitive
and new interactive entertainment software programs and software platforms are
regularly introduced. Our competitors vary in size from small companies to
very large corporations with significantly greater financial, marketing and
product development resources than ours do. Due to these greater resources,
certain of our competitors can undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to licensors of
desirable motion picture, television, sports and character properties and pay
more to third party software developers than we can. We believe that the main
competitive factors in the interactive entertainment software industry
include:

  . product features

  . brand name recognition

  . access to distribution channels

  . quality

  . ease of use, price, marketing support and quality of customer service.

   We compete primarily with other publishers of PC and video game console
interactive entertainment software. Significant competitors include:


  . Electronic Arts Inc.

  . GT Interactive Software Corp.

  . Mattel, Inc.

  . Activision, Inc.

  . Infogrames Entertainment

  . Microsoft Corporation

  . LucasArts Entertainment Company

  . Midway Games Inc.

  . Acclaim Entertainment, Inc.

  . Havas Interactive

  . Hasbro, Inc.

  . The 3DO Company

  . Take Two Interactive Software, Inc.

  . Eidos PLC

  . THQ Inc.

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<PAGE>

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

   Retailers of our products typically have a limited amount of shelf space
and promotional resources, and there is intense competition among consumer
software producers, and in particular interactive entertainment software
products, for high quality retail shelf space and promotional support from
retailers. To the extent that the number of consumer software products and
computer platforms increases, competition for shelf space may intensify and
may require us to increase our marketing expenditures. Due to increased
competition for limited shelf space, retailers and distributors are in an
increasingly better position to negotiate favorable terms of sale, including
price discounts, price protection, marketing and display fees and product
return policies. Our products constitute a relatively small percentage of any
retailer's sale volume, and we cannot assure you that retailers will continue
to purchase our products or to provide our products with adequate levels of
shelf space and promotional support. A prolonged failure in this regard may
have a material adverse effect on our business, operating results and
financial condition.

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

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

   The distribution channels through which publishers sell consumer software
products evolve continuously through a variety of means, including
consolidation, financial difficulties of certain distributors and retailers,
and the emergence of new distributors and new retailers such as warehouse
chains, mass merchants and computer superstores. As more consumers own PCs,
the distribution channels for interactive entertainment software will likely
continue to change. Mass merchants have become the most important distribution
channels for retail sales of interactive entertainment software. A number of
these mass merchants, including Wal-Mart, have entered into exclusive buying
arrangements with other software developers or distributors, which
arrangements prevent us from selling certain of our products directly to that
mass merchant. If the number of mass merchants entering into exclusive buying
arrangements with our competitors were to increase, our ability to sell to
such merchants would be restricted to selling through the exclusive
distributor. Because sales to distributors typically have a lower gross profit
than sales to retailers, this would have the effect of lowering our gross
profit. This trend could increase the material adverse impact on our business,
operating results and financial condition. In addition, emerging methods of
distribution, such as the Internet and on-line services, may become more
important in the future, and it will be important for us to maintain access to
these channels of distribution. We cannot assure you that we will maintain
access or that our access will allow us to maintain our historical sales
volume levels.

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

                                      31
<PAGE>

while we maintain a reserve for uncollectible receivables, the actual reserve
may not be sufficient in every circumstance. As a result, a payment default by
a significant customer could have a material adverse effect on our business,
operating results and financial condition.

   We are exposed to the risk of product returns and markdown allowances with
respect to our distributors and retailers. We allow distributors and retailers
to return defective, shelf-worn and damaged products in accordance with
negotiated terms, and also offer a 90-day limited warranty to our end users
that our products will be free from manufacturing defects. In addition, we
provide markdown allowances to our customers to manage our customers'
inventory levels in the distribution channel. Although we maintain a reserve
for returns and markdown allowances, and although our agreements with certain
of our customers place certain limits on product returns and markdown
allowances, we could be forced to accept substantial product returns and
provide markdown allowances to maintain our relationships with retailers and
our access to distribution channels. Product return and markdown allowances
that exceed our reserves could have a material adverse effect on our business,
operating results and financial condition. In this regard, our results of
operations for the year ended December 31, 1999 were adversely affected by a
higher than expected level of product returns and markdown allowances, which
reduced our net revenues. We may continue to experience such high levels of
product returns and markdown allowances in future periods, which could have a
material adverse effect on our business, operating results and financial
condition.

Shares Eligible for Future Sale

   In 1999, we entered into two Stock Purchase Agreements with Titus, pursuant
to which Titus purchased 10,795,455 shares of our Common Stock from us for an
aggregate purchase price of $35 million. As part of the agreements, Titus'
chairman and chief executive officer became our president, and our chairman
and chief executive officer exchanged 2 million personal shares of our Common
Stock for an agreed upon number of Titus shares. As a result of these
transactions, Titus currently owns approximately 43 percent of our outstanding
common stock.

   In addition, Titus purchased 719,424 shares of Preferred Stock from us in
April 2000. The Preferred Stock is convertible by Titus, redeemable by us, and
accrues a 6 percent dividend per year. Titus may convert the Preferred Stock
at any time after May 2001 and has conversion rights limited to 5,504,507
shares of Common Stock unless our stockholders approve the issuance of the
Preferred Stock at which time the Preferred Stock shares would become
convertible into at least 7,194,240 shares of our Common Stock. Titus also
received warrants to purchase up to 500,000 shares of our Common Stock. If we
default in accordance with the line of credit agreement, and Titus is forced
to pay on their corporate guarantee, the Series A Preferred Stock may become
convertible into up to 42.8 million shares of our Common Stock.

   We have agreed to register all of the unregistered shares held by Titus for
resale under the Securities Act of 1933, as amended. This registration could
temporarily impair our ability to raise capital through the sale of our equity
securities, and, if such registered shares are sold, could have a material
adverse effect on the market price of our Common Stock.

Dependence upon Third Party Licenses

   Many of our products, such as our Star Trek, Advanced Dungeons and Dragons
and the Caesar's Palace titles, are based on original ideas or intellectual
properties licensed from other parties. We cannot assure you that we will be
able to obtain new licenses, or renew existing licenses, on commercially
reasonable terms, if at all. For example, Paramount has granted the Star Trek
license to another party upon the expiration of our rights. If we are unable
to obtain licenses for the underlying content that we believe offers the
greatest consumer appeal, we would either have to seek alternative,
potentially less appealing licenses, or release the products without the
desired underlying content, either of which could have a material adverse
effect on our business, operating results and financial condition. We cannot
assure you that acquired properties will enhance the market acceptance of

                                      32
<PAGE>

our products based on those properties. We also cannot assure you that our new
product offerings will generate net revenues in excess of their costs of
development and marketing or minimum royalty obligations, or that net revenues
from new product sales will meet or exceed net revenues from existing product
sales.

Dependence on Licenses from and Manufacturing by Hardware Companies

   We are required to obtain a license to develop and distribute software for
each of the video game console platforms for which we develop products,
including a separate license for each of North America, Japan and Europe. We
have obtained licenses to develop software for the PlayStation and are working
towards obtaining similar rights for the upcoming PlayStation 2. We have also
obtained agreements to develop software for the Sega Dreamcast platform, which
was introduced in the United States and Europe in Fall 1999. We cannot assure
you that we will be able to obtain licenses from hardware companies on
acceptable terms or that any existing or future licenses will be renewed by
the licensors. In addition, Sony Computer Entertainment, Nintendo and Sega
each have the right to approve the technical functionality and content of the
Company's products for such platform prior to distribution. Due to the nature
of the approval process, we must make significant product development
expenditures on a particular product prior to the time it seeks those
approvals. Our inability to obtain these approvals could have a material
adverse effect on our business, operating results and financial condition.

   Hardware companies such as Sony Computer Entertainment, Nintendo and Sega
may impose upon their licensees a restrictive selection and product approval
process, such that those licensees are restricted in the number of titles that
will be approved for distribution on the particular platform. While we have
prepared our future product release plans taking this competitive approval
process into consideration, if we incorrectly predict its impact and fail to
obtain approvals for all products in our development plans, this failure could
have a material adverse effect on our business, operating results and
financial condition. We depend upon Sony Computer Entertainment, Nintendo and
Sega for the manufacture of our products that are compatible with their
respective video game consoles. As a result, Sony, Nintendo and Sega have the
ability to raise prices for supplying these products at any time and
effectively control the timing of our release of new titles for those
platforms. PlayStation and Dreamcast products consist of CD-ROMs and are
typically delivered by Sony Computer Entertainment and Sega, respectively,
within a relatively short lead time. Manufacturers of Nintendo and other video
game cartridges typically deliver software to us within 45 to 60 days after
receipt of a purchase order. If we experience unanticipated delays in the
delivery of video game console products from Sony Computer Entertainment, Sega
or Nintendo, or if actual retailer and consumer demand for our interactive
entertainment software differs from our forecast, our business, operating
results and financial condition could be materially adversely affected.

Dependence on Key Personnel

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

Risks Associated with International Operations; Currency Fluctuations

   Our international net revenues accounted for 29.7, 28.2, 28.7 and 38.4
percent of our total net revenues for the years ended December 31, 1999 and
1998, the eight months ended December 31, 1997 and the year ended April 30,
1997, respectively. In February 1999, we entered into an International
Distribution Agreement with

                                      33
<PAGE>

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

  . the impact of recessions in foreign economies

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

  . longer accounts receivable collection periods

  . greater difficulty in accounts receivable collection

  . unexpected changes in regulatory requirements

  . difficulties and costs of staffing and managing foreign operations

  . political and economic instability.

   These factors may have a material adverse effect on our future
international net revenues and, consequently, on our business, operating
results and financial condition. We currently do not engage in currency
hedging activities. Although exposure to currency fluctuations to date has
been insignificant, we cannot assure you that fluctuations in currency
exchange rates in the future will not have a material adverse effect on net
revenues from international sales and licensing, and thus on our business,
operating results and financial condition.

Risks Associated with New European Currency

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

Protection of Proprietary Rights

   We regard our software as proprietary and rely on a combination of patent,
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights.
We own or license various copyrights and trademarks, and hold the rights to
one patent application related to the software engine for our Messiah title.
While we provide "shrinkwrap" license agreements or limitations on use with
our software, it is uncertain to what extent these agreements and limitations
are enforceable. We are aware that some unauthorized copying occurs within the
computer software industry, and if a significantly greater amount of
unauthorized copying of our interactive entertainment software products were
to occur, our operating results could be materially adversely affected. While
we use copy protection on some of our products, we do not provide source code
to third parties unless they have signed nondisclosure agreements with respect
to that source code.

   We rely on existing copyright laws to prevent unauthorized distribution of
our software. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy can be a
persistent problem, especially in certain international markets. Further, the
laws of certain countries where our products are or may be distributed either
do not protect our products and intellectual property rights to the same
extent as the laws of the U.S. or are weakly enforced. Legal protection of our
rights may be

                                      34
<PAGE>

ineffective in such countries, and as we leverage our software products using
emerging technologies, such as the Internet and on-line services, our ability
to protect our intellectual property rights and to avoid infringing others'
intellectual property rights becomes more difficult. We cannot assure you that
existing intellectual property laws will provide adequate protection for our
products in connection with these emerging technologies.

   As the number of interactive entertainment software products in the
industry increases and the features and content of these products continues to
overlap, software developers may increasingly become subject to infringement
claims. Although we make reasonable efforts to ensure that our products do not
violate the intellectual property rights of others, we cannot assure you that
claims of infringement will not be made. Any such claims, with or without
merit, can be time consuming and expensive to defend. From time to time, we
receive communications from third parties regarding such claims. We cannot
assure you that existing or future infringement claims against us will not
result in costly litigation or require us to license the intellectual property
rights of third parties, either of which could have a material adverse effect
on our business, operating results and financial condition.

Entertainment Software Rating System; Governmental Restrictions

   Legislation is periodically introduced at the state and federal levels in
the U.S. and in foreign countries to establish a system for providing
consumers with information about graphic violence and sexually explicit
material contained in interactive entertainment software products. Such a
system would include procedures for interactive entertainment software
publishers to identify particular products within defined rating categories
and communicate these ratings to consumers through appropriate package
labeling and through advertising and marketing presentations. In addition,
many foreign countries have laws that permit governmental entities to censor
the content of certain works, including interactive entertainment software. In
certain instances, we may be required to modify our products to comply with
the requirements of these governmental entities, which could delay the release
of those products in those countries. Those delays could have a material
adverse effect on our business, operating results and financial condition.
While we currently voluntarily submit our products to industry-created review
boards and publish their ratings on our game packaging, we believe that
mandatory government-run interactive entertainment software products rating
systems eventually will be adopted in many countries which represent
significant markets or potential markets for our products. Due to the
uncertainties inherent in the implementation of such rating systems, confusion
in the marketplace may occur, and we are unable to predict what effect, if
any, such rating systems would have on our business. In addition to such
regulations, certain retailers have in the past declined to stock certain of
our products because they believed that the content of the packaging artwork
or the products would be offensive to the retailer's customer base. While to
date these actions have not had a material adverse effect on our business,
operating results or financial condition, we cannot assure you that similar
actions by our distributors or retailers in the future would not have a
material adverse effect on our business, operating results and financial
condition.

Control by Directors and Officers

   Including Titus, our directors and executive officers beneficially own an
aggregate of about 51 percent of our outstanding Common Stock, and could,
under certain circumstances, gain substantial additional ownership. See
"Factors Affecting Future Performance--Control by Titus". These stockholders,
if acting together with Universal Studios, Inc. ("Universal"), would be able
to control substantially all matters requiring our stockholders' approval,
including the election of directors (subject to our stockholders' cumulative
voting rights) and the approval of mergers or other business combination
transactions. This concentration of ownership could discourage or prevent a
change in control.

Development of Internet/On-Line Services or Products

   We seek to establish an on-line presence by creating and supporting sites
on the Internet. Our future plans envision conducting and supporting on-line
product offerings through these sites or others. Our ability to successfully
establish an on-line presence and to offer online products will depend on
several factors outside our control. These factors include the emergence of a
robust online industry and infrastructure and the development and
implementation of technological advancements to the Internet to increase
bandwidth and speed to the point

                                      35
<PAGE>

that will allow us to conduct and support online product offerings. Because
global commerce and the exchange of information on the Internet and other
similar open, wide area networks are relatively new and evolving, we cannot
assure you that a viable commercial marketplace on the Internet will emerge
from the developing industry infrastructure or that the appropriate
complementary products for providing and carrying Internet traffic and
commerce will be developed. We also cannot assure you that we will be able to
create or develop a sustainable or profitable on-line presence or that we will
be able to generate any significant revenue from on-line product offerings in
the near future, it at all. If the Internet does not become a viable
commercial marketplace, or if this development occurs but is insufficient to
meet our needs or if such development is delayed beyond the point where we
plan to have established an on-line service, our business, operating results
and financial condition could be materially adversely affected.

Risks Associated with Acquisitions

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

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

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

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

Stock Price Volatility

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

  . quarter to quarter variations in results of operations

  . our announcements of new products

  . our competitors' announcements of new products

  . our product development or release schedule

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

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

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

  . other events or factors

                                      36
<PAGE>

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   We do not have any derivative financial instruments as of December 31,
1999. However, we are exposed to certain market risks arising from
transactions in the normal course of business, principally the risk associated
with interest rate fluctuations on our revolving line of credit agreement, and
the risk associated with foreign currency fluctuations. We do not hedge our
interest rate risk, or our risk associated with foreign currency fluctuations.

 Interest Rate Risk

   Our interest rate risk is immaterial due to the short maturity of the line
of credit agreement. We have no fixed rate debt.

 Foreign Currency Risk

   Our earnings are affected by fluctuations in the value of our foreign
subsidiary's functional currency, and by fluctuations in the value of the
functional currency of our investment in a foreign company that is accounted
for under the equity method. Our risk associated with foreign exchange
fluctuations has been immaterial to date.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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


   None.

                                      37
<PAGE>

                                   PART III

   Certain information required by Part III is omitted from this report, as
the Company will file a definitive proxy statement (the "Proxy Statement")
within 120 days after the end of its fiscal year pursuant to Regulation 14A of
the Securities Exchange Act of 1934 for its Annual Meeting of Shareholders to
be held in June 2000 and the information included therein is incorporated
herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                      38
<PAGE>

                                    PART IV

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

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

      (1) Financial Statements

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

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

      (3) Exhibits

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

    (b) Reports on Form 8-K.

      (1) The Company filed a Report on Form 8-K on January 2, 1999, which
  reported that the Company announced its acceptance of the resignation of
  David Dukes as a Director of the Company. The Report also stated that Mr.
  Dukes' resignation was not due to any disagreement with the Company on any
  matter relating to the Company's operations, policies or practices.

      (2) The Company filed a Report on Form 8-K on June 3, 1999, which
  reported that the Company had signed a letter of intent with Titus
  Interactive S.A. ("Titus") relating to the purchase and sale of 6.25
  million shares of the Company's Common Stock for $25 million.

      (3) The Company filed a Report on Form 8-K on July 29, 1999, which
  reported that the Company had entered into an agreement with Titus relating
  to the previously reported transaction.

                                      39
<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized, at Irvine,
California this 14th day of April 2000.

                                          Interplay Entertainment Corp.

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

                               POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
         /s/ Brian Fargo               Chairman of the Board of     April 14, 2000
______________________________________  Directors and Chief
             Brian Fargo                Executive Officer
                                        (Principal Executive
                                        Officer)

          /s/ Herve Caen               President and Director       April 14, 2000
______________________________________
              Herve Caen

        /s/ Manuel Marrero             Chief Financial and Chief    April 14, 2000
______________________________________  Operating Officer
            Manuel Marrero              (Principal Financial and
                                        Accounting Officer)

          /s/ Eric Caen                Director                     April 14, 2000
______________________________________
              Eric Caen
</TABLE>

                                      40
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
<S>                                    <C>                        <C>
        /s/ James Barnett              Director                     April 14, 2000
______________________________________
            James Barnett

       /s/ Charles S. Paul             Director                     April 14, 2000
______________________________________
           Charles S. Paul
</TABLE>

                                       41
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
   2.1   Agreement and Plan of Reorganization and Merger, dated May 29, 1998,
         between the Company and Interplay Productions. (incorporated herein by
         reference to Exhibit 2.1 to the Company's Registration Statement on
         Form S-1, No. 333-48473 (the "Form S-1"))
   3.1   Amended and Restated Certificate of Incorporation of the Company.
         (incorporated herein by reference to Exhibit 3.1 to the Form S-1)
   3.2   Amended and Restated Bylaws of the Company. (incorporated herein by
         reference to Exhibit 3.2 to the Form S-1)
   4.1   Specimen form of stock certificate for Common Stock. (incorporated
         herein by reference to Exhibit 4.1 to the Form S-1)
   4.2   Shareholders' Agreement among MCA Inc., the Company, and Brian Fargo,
         dated March 30, 1994, as amended. (incorporated herein by reference to
         Exhibit 4.2 to the Form S-1)
   4.3   Investors' Rights Agreement dated October 10, 1996, as amended, among
         the Company and holders of its Subordinated Secured Promissory Notes
         and Warrants to purchase Common Stock. (incorporated herein by
         reference to Exhibit 4.3 to the Form S-1)
  10.1   Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan").
         (incorporated herein by reference to Exhibit 10.1 to the Form S-1)
  10.2   Form of Stock Option Agreement pertaining to the 1997 Plan.
         (incorporated herein by reference to Exhibit 10.2 to the Form S-1)
  10.3   Form of Restricted Stock Purchase Agreement pertaining to the 1997
         Plan. (incorporated herein by reference to Exhibit 10.3 to the Form S-
         1)
  10.4   Incentive Stock Option and Nonqualified Stock Option Plan--1994, as
         amended (the "1994 Plan"). (incorporated herein by reference to
         Exhibit 10.4 to the Form S-1)
  10.5   Form of Nonqualified Stock Option Agreement pertaining to the 1994
         Plan. (incorporated herein by reference to Exhibit 10.5 to the Form S-
         1)
  10.6   Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
         Purchase Plan--1991, as amended (the "1991 Plan"). (incorporated
         herein by reference to Exhibit 10.6 to the Form S-1)
  10.7   Form of Incentive Stock Option Agreement pertaining to the 1991 Plan.
         (incorporated herein by reference to Exhibit 10.7 to the Form S-1)
  10.8   Form of Nonqualified Stock Option Agreement pertaining to the 1991
         Plan. (incorporated herein by reference to Exhibit 10.8 to the Form S-
         1)
  10.9   Employee Stock Purchase Plan. (incorporated herein by reference to
         Exhibit 10.10 to the Form S-1)
  10.10  Form of Indemnification Agreement for Officers and Directors of the
         Company. (incorporated herein by reference to Exhibit 10.11 to the
         Form S-1)
  10.11  Von Karman Corporate Center Office Building Lease between the Company
         and Aetna Life Insurance Company of Illinois, dated September 8, 1995,
         together with amendments thereto. (incorporated herein by reference to
         Exhibit 10.14 to the Form S-1)
  10.12  Loan and Security Agreement among Greyrock Business Credit, a Division
         of NationsCredit Commercial Corporation ("Greyrock"), the Company, and
         Interplay OEM, Inc. ("Interplay OEM"), dated June 16, 1997, as
         amended, with Schedules. (incorporated herein by reference to Exhibit
         10.15 to the Form S-1)
</TABLE>

                                       42
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  10.13  Letter of Credit Agreement among Greyrock, the Company and Interplay
         OEM, dated September 10, 1997. (incorporated herein by reference to
         Exhibit 10.18 to the Form S-1)
  10.14  Letter of Credit Agreement among Greyrock, the Company and Interplay
         OEM, dated September 24, 1997. (incorporated herein by reference to
         Exhibit 10.19 to the Form S-1)
  10.15  Master Equipment Lease between Brentwood Credit Corporation and the
         Company, dated March 28, 1996, with Schedules. (incorporated herein by
         reference to Exhibit 10.20 to the Form S-1)
  10.16  Master Equipment Lease Agreement between General Electric Capital
         Computer Leasing Corporation and the Company, dated December 14, 1994,
         as amended, with Schedules. (incorporated herein by reference to
         Exhibit 10.22 to the Form S-1)
  10.17  Confidential License Agreement for Nintendo 64 Video Game System,
         between the Company and Nintendo of America, Inc., dated October 7,
         1997. (Portions omitted pursuant to a request for confidential
         treatment.) (incorporated herein by reference to Exhibit 10.23 to the
         Form S-1)
  10.18  PlayStation License Agreement, between Sony Computer Entertainment of
         America and the Company, dated February 16, 1995. (Portions omitted
         pursuant to a request for confidential treatment.) (incorporated
         herein by reference to Exhibit 10.24 to the Form S-1)
  10.19  Master Merchandising License Agreement between Paramount Pictures
         Corporation and the Company, dated as of June 16, 1992. (Portions
         omitted pursuant to a request for confidential treatment.)
         (incorporated herein by reference to Exhibit 10.25 to the Form S-1)
  10.20  Heads of Agreement concerning Sales and Distribution between the
         Company and Activision, Inc., dated November 19, 1998, as amended
         (incorporated herein by reference to Exhibit 10.23 to Registrant's
         Annual Report on Form 10-K for the year ended December 31, 1998.)
         (Portions omitted pursuant to a request for confidential treatment.)
  10.21  Stock Purchase Agreement between the Company and Titus Interactive SA,
         dated March 18, 1999 (incorporated herein by reference to Exhibit
         10.24 to Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1998.)
  10.22  International Distribution Agreement between the Company and Virgin
         Interactive Entertainment Limited, dated February 10, 1999
         (incorporated herein by reference to Exhibit 10.26 to Registrant's
         Annual Report on Form 10-K for the year ended December 31, 1998.)
         (Portions omitted pursuant to a request for confidential treatment.)
  10.23  Termination Agreement among the Company, Virgin Interactive
         Entertainment Limited, VIE Acquisition Group, LLC and VIE Acquisition
         Holdings, LLC, dated February 10, 1999 (incorporated herein by
         reference to Exhibit 10.27 to Registrant's Annual Report on Form 10-K
         for the year ended December 31, 1998.) (Portions omitted pursuant to a
         request for confidential treatment.)
  10.24  Amendment to Loan Documents among the Company, Interplay OEM, Inc. and
         Greyrock, dated March 18, 1999 (incorporated herein by reference to
         Exhibit 10.28 to Registrant's Annual Report on Form 10-K for the year
         ended December 31, 1998.)
  10.25  Fifth Amendment to Lease for Von Karman Corporate Center Office
         Building between the Company and Arden Realty Finance IV, L.L.C.,
         dated December 4, 1998 (incorporated herein by reference to Exhibit
         10.29 to Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1998.)
 10.26   Stock Purchase Agreement dated July 20, 1999, by and among the
         Company, Titus Interactive S.A., and Brian Fargo (incorporated herein
         by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1999.)
 10.27   Exchange Agreement dated July 20, 1999, by and among Titus Interactive
         S.A., Brian Fargo, Herve Caen and Eric Caen (incorporated herein by
         reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-
         Q for the quarter ended June 30, 1999.)
</TABLE>

                                       43
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  10.28  Employment Agreement between the Company and Herve Caen dated November
         9, 1999 (incorporated herein by reference to Exhibit 10.3 to
         Registrant's Quarterly Report on Form 10-Q for the quarter ended
         September 30, 1999.)
  10.29  Employment Agreement between the Company and Brian Fargo dated
         November 9, 1999 (incorporated herein by reference to Exhibit 10.2 to
         Registrant's Quarterly Report on Form 10-Q for the quarter ended
         September 30, 1999.)
  10.30  Stockholder Agreement among the Company, Titus Interactive S.A. and
         Brian Fargo dated November 9, 1999 (incorporated herein by reference
         to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
         quarter ended September 30, 1999.)
  10.31  Stock Purchase Agreement between the Company and Titus Interactive
         S.A, dated April 14, 2000.
  10.32  Certificate of Designation, dated April 14, 2000.
  10.33  Warrant (350,000 shares) for Common Stock between the Company and
         Titus Interactive S.A, dated April 14, 2000.
  10.34  Warrant (50,000 shares) for Common Stock between the Company and Titus
         Interactive S.A, dated April 14, 2000.
  10.35  Warrant (100,000 shares) for Common Stock between the Company and
         Titus Interactive S.A, dated April 14, 2000.
  10.36  Amendment to Loan Documents among the Company, Interplay OEM, Inc. and
         Greyrock, dated April 14, 2000.
  10.37  Revolving Note between the Company and Titus Interactive S.A., dated
         April 14, 2000.
  10.38  Reimbursement and Security Agreement between the Company and Titus
         Interactive S.A., dated April 14, 2000.
  10.39  Amendment Number 1 to International Distribution Agreement between the
         Company and Virgin Interactive Entertainment Limited, dated July 1,
         1999.
  21.1   Subsidiaries of the Company. (incorporated herein by reference to
         Exhibit 21.1. to the Form S-1)
  23.1   Consent of Arthur Andersen LLP.
  24.1   Power of Attorney (included as page 37 to this Form 10-K).
  27.1   Financial Data Schedule.
</TABLE>

                                       44
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS
                  AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets at December 31, 1999 and 1998................ F-3

Consolidated Statements of Operations for the years ended December 31,
 1999 and 1998, the eight months ended December 31, 1997 and the year
 ended April 30, 1997.................................................... F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years
 ended December 31, 1999 and 1998, the eight months ended December 31,
 1997 and the year ended April 30, 1997.................................. F-5

Consolidated Statements of Cash Flows for the years ended December 31,
 1999 and 1998, the eight months ended December 31, 1997 and the year
 ended April 30, 1997.................................................... F-6

Notes to Consolidated Financial Statements............................... F-7
</TABLE>

                                      F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Interplay Entertainment Corp.:

   We have audited the accompanying consolidated balance sheets of INTERPLAY
ENTERTAINMENT CORP. (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
1999 and 1998, the eight months ended December 31, 1997, and the year ended
April 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interplay Entertainment
Corp. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years ended December 31, 1999
and 1998, the eight months ended December 31, 1997, and the year ended April
30, 1997, in conformity with accounting principles generally accepted in the
United States.

Arthur Andersen LLP

Orange County, California
April 14, 2000

                                      F-2
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               1999     1998
                                                             --------  -------
<S>                                                          <C>       <C>
                           ASSETS
                           ------
Current Assets:
  Cash...................................................... $    399  $   614
  Restricted Cash...........................................    2,597      --
  Trade receivables, net
   of allowances of $9,161 and $18,431, respectively........   22,209   36,407
  Inventories...............................................    6,057    6,303
  Prepaid licenses and royalties............................   19,249   18,128
  Deferred income taxes.....................................      --     5,336
  Other.....................................................      874      685
                                                             --------  -------
    Total current assets....................................   51,385   67,473
Property and Equipment, net.................................    4,225    5,679
Other Assets................................................    1,326    1,792
                                                             --------  -------
                                                             $ 56,936  $74,944
                                                             ========  =======
       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
       ----------------------------------------------
Current Liabilities:
  Current debt.............................................. $ 19,630  $24,651
  Accounts payable..........................................   21,462   23,403
  Accrued liabilities.......................................   17,915   22,554
                                                             --------  -------
    Total current liabilities...............................   59,007   70,608
Minority Interest in Subsidiary.............................      --       143
Commitments and Contingencies
Stockholders' Equity (Deficit):
  Series A Preferred stock, $.001 par value, authorized
   5,000,000 shares;
  issued and outstanding, none..............................      --       --
  Common stock, $.001 par value, authorized 50,000,000
   shares;
  issued and outstanding 29,989,125 shares in 1999 and
   18,292,431 shares in 1998................................       30       18
  Paid-in capital...........................................   87,390   51,918
  Accumulated deficit.......................................  (89,782) (48,097)
  Accumulated other comprehensive income....................      291      354
                                                             --------  -------
    Total stockholders' equity (deficit)....................   (2,071)   4,193
                                                             --------  -------
                                                             $ 56,936  $74,944
                                                             ========  =======
</TABLE>

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

                                      F-3
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                     Eight Months
                          Years Ended December 31,      Ended      Year Ended
                         --------------------------  December 31,   April 30,
                             1999          1998          1997         1997
                         ------------  ------------  ------------  -----------
<S>                      <C>           <C>           <C>           <C>
Net revenues............ $    101,930  $    126,862  $    85,961   $    83,262
Cost of goods sold......       61,103        71,928       44,864        62,480
                         ------------  ------------  -----------   -----------
Gross profit............       40,827        54,934       41,097        20,782
                         ------------  ------------  -----------   -----------
Operating expenses:
  Marketing and sales...       32,432        39,471       20,603        24,627
  General and
   administrative.......       15,247        12,841        8,989         9,408
  Product development...       20,629        24,472       14,291        21,431
  Other.................        5,323           --           --            --
                         ------------  ------------  -----------   -----------
    Total operating
     expenses...........       73,631        76,784       43,883        55,466
                         ------------  ------------  -----------   -----------
Operating loss..........      (32,804)      (21,850)      (2,786)      (34,684)
Other income (expense):
  Interest expense......       (3,640)       (4,620)      (3,009)       (1,907)
  Other.................          169          (313)         736           307
                         ------------  ------------  -----------   -----------
    Total other
     expense............       (3,471)       (4,933)      (2,273)       (1,600)
Loss before provision
 (benefit) for income
 taxes..................      (36,275)      (26,783)      (5,059)      (36,284)
Provision (benefit) for
 income taxes...........        5,410         1,437          --         (9,065)
Net loss................ $    (41,685) $    (28,220) $    (5,059)  $   (27,219)
                         ============  ============  ===========   ===========
Net loss per share:
  Basic/Diluted......... $      (1.86) $      (1.91) $     (0.45)  $     (2.46)
                         ============  ============  ===========   ===========
Weighted average number
 of common shares
 outstanding:
  Basic/Diluted.........   22,418,463    14,762,644   11,123,327    11,085,632
                         ============  ============  ===========   ===========
</TABLE>


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

                                      F-4
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                  Accumulated
                            Common Stock              Retained       Other
                          ------------------ Paid-in  Earnings   Comprehensive Comprehensive
                            Shares    Amount Capital  (Deficit)  Income (Loss)     Loss
                          ----------  ------ -------  ---------  ------------- -------------
<S>                       <C>         <C>    <C>      <C>        <C>           <C>
Balance, April 30,
 1996...................  10,829,781   $ 11  $17,783  $ 12,401        --
 Exercise of stock
  options...............     313,403    --        58        --        --
 Repurchase of common
  stock.................     (29,124)   --      (275)      --         --
 Proceeds from
  warrants..............         --     --       148       --         --
 Compensation for stock
  options granted.......         --     --       306       --         --
 Net loss...............         --     --       --    (27,219)       --         $(27,219)
 Other comprehensive
  income, net of income
  taxes:
 Foreign currency
  translation
  adjustment............         --     --       --        --         --              188
                                                                                 --------
 Other comprehensive
  income................         --     --       --        --        $188             188
                                                                                 --------
 Comprehensive loss.....         --     --       --        --         --         $(27,031)
                          ----------   ----  -------  --------       ----        ========
Balance, April 30,
 1997...................  11,114,060     11   18,020   (14,818)       188
 Issuance of common
  stock.................      16,362    --       184       --         --
 Repurchase of common
  stock.................    (178,594)   --       --        --         --
 Compensation for stock
  options granted.......         --     --       204       --         --
 Net loss...............         --     --       --     (5,059)       --         $ (5,059)
 Other comprehensive
  income, net of income
  taxes:
 Foreign currency
  translation
  adjustment............         --     --       --        --         --                3
 Other comprehensive
  income................         --     --       --        --           3               3
                                                                                 --------
 Comprehensive loss.....         --     --       --        --         --         $ (5,056)
                          ----------   ----  -------  --------       ----        ========
Balance, December 31,
 1997...................  10,951,828     11   18,408   (19,877)       191
 Issuance of common
  stock, net of issuance
  costs.................   5,056,102      5   24,390       --         --
 Issuance of warrants...         --     --       316       --         --
 Exercise of warrants...   2,272,417      2    8,599       --         --
 Exercise of stock
  options...............      12,084    --        15       --         --
 Compensation for stock
  options granted.......         --     --       190       --         --
 Net loss...............         --     --       --    (28,220)       --         $(28,220)
 Other comprehensive
  income, net of income
  taxes:
 Foreign currency
  translation
  adjustment............         --     --       --        --         --              163
                                                                                 --------
 Other comprehensive
  income................         --     --       --        --         163             163
                                                                                 --------
 Comprehensive loss.....         --     --       --        --         --         $(28,057)
                          ----------   ----  -------  --------       ----        ========
Balance, December 31,
 1998...................  18,292,431     18   51,918   (48,097)       354
 Issuance of common
  stock, net of issuance
  costs.................  11,408,736     12   34,838       --         --
 Exercise of stock
  options...............     287,958    --       608       --         --
 Compensation for stock
  options granted.......         --     --        26       --         --
 Net loss...............         --     --       --    (41,685)       --         $(41,685)
 Other comprehensive
  income, net of income
  taxes:
 Foreign currency
  translation
  adjustment............         --     --       --        --         --              (63)
                                                                                 --------
 Other comprehensive
  loss..................         --     --       --        --         (63)            (63)
                                                                                 --------
 Comprehensive loss.....         --     --       --        --         --         $(41,748)
                          ----------   ----  -------  --------       ----        ========
Balance, December 31,
 1999...................  29,989,125   $ 30  $87,390  $(89,782)      $291
                          ==========   ====  =======  ========       ====
</TABLE>

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

                                      F-5
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                        Years Ended      Eight Months
                                       December 31,         Ended     Year Ended
                                     ------------------  December 31, April 30,
                                       1999      1998        1997        1997
                                     --------  --------  ------------ ----------
<S>                                  <C>       <C>       <C>          <C>
Cash flows from operating
 activities:
 Net loss..........................  $(41,685) $(28,220)   $(5,059)    $(27,219)
 Adjustments to reconcile net loss
  to the cash used in operating
  activities--
  Depreciation and amortization....     3,023     3,415      2,138        3,172
  Noncash expense for stock
   options.........................        26       190        204          306
  Noncash interest expense.........       300        68        184          --
  Write-off of other assets........        82       --         --           250
  Loss on asset valuation,
   restructuring...................       410
  Deferred income taxes............     5,336     2,022        128       (6,649)
  Minority interest in earnings
   (loss) of subsidiary............      (143)     (117)       (66)          28
 Changes in assets and liabilities:
  Trade receivables, net...........    14,198       693    (12,338)       3,926
  Inventories......................       246        35      1,066       (1,508)
  Income taxes receivable..........       --      1,427        174         (176)
  Other current assets.............      (489)    1,657     (1,864)       5,732
  Other assets.....................       --         (3)       543        5,610
  Prepaid licenses and royalties...    (1,121)   (5,501)    (1,714)      (4,102)
  Accounts payable.................    (1,941)    6,282        146       (1,999)
  Accrued liabilities..............    (4,653)     (166)     1,449        5,618
  Income taxes payable.............        14      (607)      (310)         --
                                     --------  --------    -------     --------
   Net cash used in operating
    activities.....................   (26,397)  (18,825)   (15,319)     (17,011)
Cash flows used in investing
 activities:
 Purchase of property and
  equipment........................    (1,595)   (1,684)      (792)      (3,451)
                                     --------  --------    -------     --------
   Net cash used in investing
    activities.....................    (1,595)   (1,684)      (792)      (3,451)
Cash flows provided by financing
 activities:
 Net borrowings (payments) on line
  of credit........................    (5,257)    1,229     12,296        5,900
 Issuances (payments) of
  subordinated secured promissory
  notes and warrants...............       --     (6,054)       --        14,803
 Repayments on notes payable.......       --        (76)       (62)         (75)
 Net proceeds from issuance of
  common stock.....................    35,450    24,310        --           --
 Proceeds from exercise of stock
  options..........................         8        15        --            58
 Additions to restricted cash......    (2,597)      --         --           --
 Other financing activities........       236       --         --           --
                                     --------  --------    -------     --------
   Net cash provided by financing
    activities.....................    27,840    19,424     12,234       20,686
                                     --------  --------    -------     --------
Effect of exchange rate changes on
 cash..............................       (63)      163          3          263
                                     --------  --------    -------     --------
Net increase (decrease) in cash....      (215)     (922)    (3,874)         487
Cash, beginning of year............       614     1,536      5,410        4,923
                                     --------  --------    -------     --------
Cash, end of year..................  $    399  $    614    $ 1,536     $  5,410
                                     ========  ========    =======     ========
Supplemental cash flow information:
 Cash paid during the year for
  Interest.........................  $  3,608  $  4,671    $ 2,936     $  1,638
Supplemental disclosure of non-cash
 financing activity:
 Common Stock issued under Multi-
  Product Agreement................  $  1,000  $    --     $   --      $    --
</TABLE>

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

                                      F-6
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Line of Business; Risk Factors

   Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(collectively with Interplay Productions, a California corporation, the
"Company"), develop, publish, and distribute interactive entertainment
software. In addition, the Company distributes certain titles to computer or
peripheral device manufacturers for use in bundling arrangements. The
Company's software is developed for use on various interactive entertainment
software platforms, including personal computers and current generation video
game consoles, such as the Sony PlayStation and Sega Dreamcast.

   For the year ended December 31, 1999 the Company incurred a net loss of
$41.7 million and used cash in operating activities of $26.4 million.
Partially because of these losses, the Company's liquidity deteriorated during
1999. At December 31, 1999, the Company had negative working capital of $7.6
million, although the Company did have borrowing availability under its line
of credit (See Note 5).

   To provide working capital to support the Company's operations, in 1999 the
Company took several actions during the year, including extending the
expiration of its line of credit, in connection with which the Company's
Chairman and Chief Executive Officer ("Chairman") personally guaranteed $5
million of the Company's obligations under such line of credit. Further, the
Company completed two equity transactions with Titus Interactive S.A.
("Titus") which provided for the issuance of 10,795,455 shares of the
Company's Common Stock for $35 million (See Notes 5 and 8).

   Subsequent to December 31, 1999, the Company extended its line of credit
through April 2001, in connection with which Titus provided a $20 million
corporate guarantee, and the Company also completed a transaction with Titus,
which provided for the issuance of convertible, redeemable Preferred Stock for
$20 million. In addition, Titus may be entitled to receive additional shares
of Common Stock upon conversion of their Preferred Stock if we default on our
line of credit and Titus is obligated to pay on the $20 corporate guarantee
that they provided on the extension of our line of credit through April 2001.
In addition, the Company secured a $5 million supplemental line of credit with
Titus through April 2001 (See Note 14).

   The Company believes that funds available under its line of credit, funds
to be received from the sale of equity securities and anticipated funds from
operations, if any, should be sufficient to satisfy the Company's projected
working capital and capital expenditure needs in the normal course of business
at least through the end of 2000 (See Notes 5 and 14). However, there can be
no assurance that the Company will be able to raise sufficient funds to
satisfy its projected working capital and capital expenditure needs beyond
2000.

   In addition to the continuing risks related to the Company's future
liquidity, the Company also faces numerous other risks associated with its
industry. These risks include dependence on new product introductions, product
delays, rapidly changing technology, intense competition, dependence on
distribution channels and risk of customer returns. Certain additional risks
are discussed on pages 25-36 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.

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

   A valuation allowance is provided for the deferred tax asset when it is
estimated to be more likely than not that a portion of the deferred tax asset
will not be realized in the short-term. Primarily as a result of the factors
discussed above, during the year ended December 31, 1999, the Company took a
charge of $5.4 million to fully reserve its deferred tax asset (See Note 6).


                                      F-7
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2. Summary of Significant Accounting Policies

 Consolidation

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

 Change of Fiscal Year End

   Effective May 1, 1997, the Company changed its fiscal year end from April
30 to December 31.

 Reincorporation

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

 Use of Estimates

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

 Reclassifications

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

 Restricted Cash

   Restricted cash represents cash collateral deposits made in accordance with
the Company's amended Loan and Security Agreement (see Note 5). Restricted
cash earns interest at the bank's prime rate (8.5 percent at December 31,
1999) less three percent, or 5.5 percent at December 31, 1999.

 Inventories

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

 Prepaid Licenses and Royalties

   Prepaid licenses and royalties consist of payments for intellectual
property rights and advanced royalty payments to outside developers. In
addition such costs include certain other outside production costs generally
consisting of film cost and amounts paid for digitized motion data with
alternative future uses. Payments to developers represent contractual advanced
payments made for future royalties. These payments are contingent upon the
successful completion of milestones, which generally represent specific
deliverables. Royalty advances are recoupable against future sales based upon
the contractual royalty rate. The Company amortizes the cost of licenses,
prepaid royalties and other outside production costs to cost of sales over six
months commencing with

                                      F-8
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the initial shipment of the related title at a rate based upon the number of
units shipped. Management evaluates the future realization of such costs
quarterly and charges to cost of goods sold any amounts that management deems
unlikely to be fully realized through future sales. Such costs are classified
as current and noncurrent assets based upon estimated net product sales.

 Property and Equipment

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

 Other Non-current Assets

   Other non-current assets consist primarily of goodwill which the Company is
amortizing on a straight-line basis over seven years (see Note 3). Accumulated
amortization as of December 31, 1999 and 1998 was $1.7 and $1.3 million
respectively.

 Long-lived Assets

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

 Fair Value of Financial Instruments

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

 Revenue Recognition

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

                                      F-9
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Product Development

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

 Advertising Costs

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

 Income Taxes

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

 Foreign Currency

   The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated at
the weighted average exchange rate prevailing during the period. Gains or
losses arising from the translation of the foreign subsidiaries' financial
statements are included in the accompanying consolidated balance sheets as a
separate component of stockholders' equity (deficit). (Losses) gains resulting
from foreign currency transactions amounted to ($125,000), ($288,000),
$246,000, and $364,000 during the years ended December 31, 1999 and 1998, the
eight months ended December 31, 1997 and the year ended April 30, 1997,
respectively, and are included in other income (expense) in the consolidated
statements of operations.

 Net Loss Per Share

   The Company accounts for net loss per share in accordance with SFAS No. 128
"Earnings Per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure." Basic net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted net loss per share is computed by dividing loss
attributable to common stockholders by the weighted average number of common
shares outstanding plus the effect of any dilutive stock options and common
stock warrants.

   For years ended December 31, 1999 and 1998, the eight months ended December
31, 1997 and the year ended April 30, 1997, all options and warrants to
purchase common stock were excluded from the diluted loss per share
calculation as the effect of such inclusion would be antidilutive.

 Comprehensive Income (Loss)

   The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". 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. The disclosures required by SFAS
No. 130 have been included in the Statements of Stockholders' Equity
(Deficit).

                                     F-10
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Stock-Based Compensation

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

 Recent Accounting Pronouncements

   In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 became effective for fiscal
years beginning after December 15, 1998. The adoption of this standard did not
have a material impact on the Company's results of operations.

   The AICPA issued SOP 98-4, "Deferral of the Effective Date of SOP 97-2,
Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition", which effectively modified and delayed the
application of certain provisions of SOP 97-2 until fiscal years beginning
after March 15, 1999. The Company does not believe that adoption of these
standards will have a material impact on the Company's results of operations.

   In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued and, as amended by SFAS No. 137, will become
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The adoption of this standard did not have a material impact on the
Company's results of operations.

   In December 1999, the Securities Exchange Commission ("SEC") staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," as amended
by SAB No. 101A, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 explains the SEC
staff's general framework for revenue recognition, stating that certain
criteria be met in order to recognize revenue. SAB No. 101 also addresses the
question of gross vs. net revenue presentation and financial statement and
Management's Discussion and Analysis disclosures related to revenue
recognition. The Company will adopt SAB No. 101 in the first quarter of 2000.

3. Acquisition

   In 1995, the Company acquired a 91 percent interest in Shiny Entertainment,
Inc. ("Shiny") for $3.6 million in cash and stock. The acquisition was
accounted for using the purchase method. The allocation of purchase price
included $3 million of goodwill. The purchase agreement requires the Company
to pay the former owner of Shiny additional cash payments of up to $5.6
million upon the delivery and acceptance of five future Shiny interactive
entertainment software titles, as defined. As of December 31, 1999, the
Company had not been required to make any additional payments in accordance
with the purchase agreement. (See Note 7)

4. Detail of Selected Balance Sheet Accounts

 Inventories

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

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 -------------
                                                                  1999   1998
                                                                 ------ ------
                                                                  (Dollars in
                                                                  thousands)
      <S>                                                        <C>    <C>
      Packaged software......................................... $4,394 $4,070
      CD-ROMs, DVDs, cartridges, manuals, packaging and
       supplies.................................................  1,663  2,233
                                                                 ------ ------
                                                                 $6,057 $6,303
                                                                 ====== ======
</TABLE>


                                     F-11
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Other Current Assets

   Other current assets consist of the following:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   -------------
                                                                    1999   1998
                                                                   ------ ------
                                                                    (Dollars in
                                                                    thousands)
      <S>                                                          <C>    <C>
      Prepaid expenses............................................ $  764 $  639
      Deposits....................................................    110     46
                                                                   ------ ------
                                                                   $  874 $  685
                                                                   ====== ======
</TABLE>

 Property and Equipment

   Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                1999     1998
                                                              --------  -------
                                                                (Dollars in
                                                                 thousands)
      <S>                                                     <C>       <C>
      Computers and equipment...............................  $ 14,651  $13,944
      Furniture and fixtures................................       849      588
      Leasehold improvements................................     1,348    1,135
                                                              --------  -------
                                                                16,848   15,667
      Less: accumulated depreciation and amortization.......   (12,623)  (9,988)
                                                              --------  -------
                                                              $  4,225  $ 5,679
                                                              ========  =======
</TABLE>

 Accrued Liabilities

   Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    1998
                                                                ------- -------
                                                                  (Dollars in
                                                                  thousands)
      <S>                                                       <C>     <C>
      Royalties payable........................................ $ 7,950 $ 6,758
      Accrued payroll..........................................   2,337   2,552
      Payable to distributor...................................   2,908     216
      Accrued bundle and affiliate.............................   1,563   1,409
      Deferred income..........................................   2,039   9,786
      Other....................................................   1,118   1,833
                                                                ------- -------
                                                                $17,915 $22,554
                                                                ======= =======
</TABLE>

   Included in deferred income for the year ended December 31, 1998 is $9.0
million related to distribution and other advances on future products.

                                      F-12
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. Current Debt

   Current debt consists of the following:
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1999    1998
                                                                 ------- -------
                                                                   (Dollars in
                                                                   thousands)
      <S>                                                        <C>     <C>
      Loan Agreement............................................ $19,218 $24,475
      Other.....................................................     412     176
                                                                 ------- -------
                                                                 $19,630 $24,651
                                                                 ======= =======
</TABLE>

 Loan Agreement

   Borrowings under the Loan and Security Agreement ("Loan Agreement") bear
interest at LIBOR (6.48 percent at December 31, 1999 and 5.62 percent at
December 31, 1998) plus 4.87 percent (11.35 percent at December 31, 1999 and
10.49 percent at December 31, 1998). At various times during 1999, the Company
amended its line of credit under the Loan Agreement with a financial
institution to extend its current line of credit through April 2000 and
thereafter, based on qualifying receivables and inventory. Under the terms of
the Amendment the maximum credit line is $25 million. Within the total credit
limit, the Company may borrow up to $7 million in excess of its borrowing
base. At December 31, 1999, the Company had availability of $1.9 million on
its line of credit. Under the amended line of credit the Company has been
required to place a cash collateral deposit from time to time, which was $2.5
million at December 31, 1999. In addition, the Company is required to maintain
the $5 million personal guarantee by the Company's Chairman. Subsequent to
year end, the Company further amended its line of credit which, among other
things, extended the expiration through April 2001 (See Note 14). The Company
is currently in compliance with the terms of the Loan Agreement.

6. Income Taxes

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

<TABLE>
<CAPTION>
                                        Years Ended      Eight Months
                                       December 31,          Ended    Year Ended
                                     ------------------  December 31, April 30,
                                       1999      1998        1997        1997
                                     --------  --------  ------------ ----------
                                              (Dollars in thousands)
     <S>                             <C>       <C>       <C>          <C>
     Domestic....................... $(32,294) $(25,038)   $(2,784)    $(32,888)
     Foreign........................   (3,981)   (1,745)    (2,275)      (3,396)
                                     --------  --------    -------     --------
     Total.......................... $(36,275) $(26,783)   $(5,059)    $(36,284)
                                     ========  ========    =======     ========
</TABLE>

                                     F-13
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                         Year
                                             Years Ended      Eight      Ended
                                            December 31,   Months Ended  April
                                            -------------  December 31,   30,
                                             1999   1998       1997      1997
                                            ------ ------  ------------ -------
                                                  (Dollars in thousands)
     <S>                                    <C>    <C>     <C>          <C>
     Current:
       Federal............................. $  --  $  --      $(179)    $(1,689)
       State...............................      8      8       --          --
       Foreign.............................     66   (571)       51         153
                                            ------ ------     -----     -------
                                                74   (563)     (128)     (1,536)
     Deferred:
       Federal.............................  4,536  2,000       128      (7,303)
       State...............................    800    --        --         (226)
                                            ------ ------     -----     -------
                                             5,336  2,000       128      (7,529)
                                            ------ ------     -----     -------
                                            $5,410 $1,437     $ --      $(9,065)
                                            ====== ======     =====     =======
</TABLE>

   The Company files a consolidated U.S. Federal income tax return which
includes substantially all of its domestic operations. The Company files
separate tax returns for each of its foreign subsidiaries in the countries in
which they reside. The Company's available net operating loss (NOL)
carryforward for federal tax reporting purposes approximates $97.1 million and
may be subject to certain limitations as defined under Section 382 of the
Internal Revenue Code. The federal NOL carryforwards expire through the year
2019. The Company's NOL's for state tax reporting purposes approximate $48.7
million and expire through the year 2004.

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

<TABLE>
<CAPTION>
                                       Years Ended         Eight       Year
                                      December 31,      Months Ended   Ended
                                      ---------------   December 31, April 30,
                                       1999     1998        1997       1997
                                      ------   ------   ------------ ---------
   <S>                                <C>      <C>      <C>          <C>
   Statutory income tax rate.........  (34.0)%  (34.0)%    (34.0)%     (34.0)%
   State and local income taxes, net
    of federal income tax benefit....   (3.0)    (3.0)      (3.0)       (3.0)
   Valuation allowance...............   51.9     39.8       39.7         8.0
   Other.............................    --       2.6       (2.7)        4.0
                                      ------   ------      -----       -----
                                        14.9 %    5.4 %      --  %     (25.0)%
                                      ======   ======      =====       =====
</TABLE>

                                     F-14
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1999      1998
                                                            --------  --------
                                                               (Dollars in
                                                               thousands)
   <S>                                                      <C>       <C>
   Current deferred tax asset (liability):
     Prepaid royalties..................................... $ (7,652) $ (5,621)
     Nondeductible reserves................................    4,184     5,013
     Accrued expenses......................................    1,007       853
     Foreign loss and credit carryforward..................      454     1,962
     Federal and state net operating losses................   35,952    17,796
     Research and development credit carryforward..........      831       831
     Other.................................................      314       461
                                                            --------  --------
                                                            $ 35,090  $ 21,295
                                                            ========  ========
   Non-current deferred tax asset (liability):
     Depreciation expense.................................. $   (126) $   (342)
     Nondeductible reserves................................      318       223
     Other.................................................       (5)      (22)
                                                            --------  --------
                                                            $    187  $   (141)
                                                            ========  ========
   Total deferred tax asset before valuation allowance..... $ 35,277  $ 21,154
   Valuation allowance.....................................  (35,277)  (15,818)
                                                            --------  --------
   Net deferred tax asset.................................. $    --   $  5,336
                                                            ========  ========
</TABLE>

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

7. Commitments and Contingencies

 Leases

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

<TABLE>
   <S>                                                                  <C>
   Year ending December 31 (Dollars in thousands):
     2000.............................................................. $ 2,131
     2001..............................................................   1,731
     2002..............................................................   1,755
     2003..............................................................   1,770
     2004..............................................................   1,907
     Thereafter........................................................   4,708
                                                                        -------
                                                                        $14,002
                                                                        =======
</TABLE>

   Total rent expense was $3.2 million, $2.4 million, $1.3 million and $2.1
million for the years ended December 31, 1999 and 1998, the eight months ended
December 31, 1997, and the year ended April 30, 1997, respectively.

                                     F-15
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Pending Internal Revenue Service Examination

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

 Litigation

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

   The Company and the former owner of Shiny have a dispute over additional
cash payments upon the delivery and acceptance of interactive entertainment
software titles that Shiny was committed to deliver over time (See Note 3).
The Company believes that no amounts are due as of December 31, 1999 under the
applicable agreements.

 Employment Agreements

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

 New European Currency

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

8. Stockholders' Equity (Deficit)

 Common Stock

   In connection with the amendment of the Company's line of credit agreement
in November 1998 (see Note 5), the Company issued its Chairman warrants to
purchase 400,000 shares of the Company's Common Stock (the "Warrants") at an
exercise price of $3.00 per share exercisable after May 20, 1999. The Warrants
have a three year term and have no registration rights. The shares issuable
upon exercise of the warrants are

                                     F-16
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   subject to the twelve month lockup agreement the employee entered into in
connection with the Company's IPO. In connection with the issuance of the
Warrants, the Company recorded an expense equal to the fair market value of
the Warrants, which is approximately $316,000, with such expense being
amortized as additional debt cost in 1999, which was the term of the
guarantee.

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

   In April 1999, the Company entered into a multi-product development
agreement with a developer which provides for the delivery of ten titles to
the Company during 1999 and 2000 in exchange for $0.5 million paid in cash
installments and the issuance of 484,848 shares of the Company's Common Stock.
The shares of Common Stock will be restricted as to transfer rights until such
products are delivered and accepted by the Company. The arrangement also
includes certain penalties to the developer in the event of noncompliance and
the terms and conditions are subject to the approval by the Company's
underwriters and lenders, if necessary.

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

   During 1999, the Company completed two equity transactions with Titus which
provided for the issuance of 10,795,455 shares of the Company's Common Stock
for $35 million. Subsequent to December 31, 1999, the Company completed a
transaction with Titus which provided for the issuance of convertible,
redeemable Preferred Stock for $20 million, including warrants to purchase
shares of the Company's Common Stock (See Note 14).

 Employee Stock Purchase Plan.

   Under this plan, eligible employees may purchase shares of the Company's
Common Stock at 85% of fair market value at specific, predetermined dates. Of
the 200,000 shares authorized to be issued under the plan, 72,000 shares
remained available for issuance at December 31, 1999. Employees purchased
72,225 and 56,102 shares in 1999 and 1998 for $127,000 and $85,000,
respectively.

 Initial Public Offering

   In June 1998, the Company effected a registration with the Securities and
Exchange Commission, whereby the Company registered up to 5,750,000 shares of
its Common Stock. In June 1998, the Company completed its initial public
offering of 5,000,000 shares of Common Stock, at $5.50 per share, which raised
approximately

                                     F-17
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$24.3 million, net of expenses of $3.2 million. In addition, in connection
with the offering, 750,000 shares of Common Stock of the Company were sold by
a selling stockholder at $5.50 per share, for which the Company received no
proceeds.

9. Loss Per Share

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

   There were options and warrants outstanding to purchase 3,740,780 shares of
common stock and there were 484,848 shares of restricted common stock at
December 31, 1999, which were excluded from the loss per share computation. At
December 31, 1998 and 1997 and April 30, 1997 there were options to purchase
2,132,738, 1,838,972 and 1,630,022 shares of common stock, respectively, which
were not included in the loss per share computation. The weighted average
exercise price at December 31, 1999, 1998 and 1997 and April 30, 1997 was
$3.30, $4.73, $5.29 and $4.59, respectively, for the options outstanding.

10. Employee Benefit Plans

 Stock Option Plans

   The Company has three stock option plans. Under the Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan--1991 (1991
Plan), the Company was authorized to grant options to its employees to
purchase up to 2,250,000 shares of common stock. Under the Incentive Stock
Option and Nonqualified Stock Option Plan--1994 (1994 Plan), the Company was
authorized to grant options to its employees to purchase up to 808,300 shares
of common stock. Under the 1997 Stock Incentive Plan the Company may grant
options to its employees, consultants and directors to purchase up to 700,000
shares of common stock.

   Options under all three plans generally vest over five years. Holders of
options under the 1991 Plan and the 1994 Plan shall be deemed 100 percent
vested in the event of a merger in which the Company is not the surviving
entity, a sale of substantially all of the assets of the Company, or a sale of
all shares of common stock of the Company. The Company has treated the
difference, if any, between the exercise price and the estimated fair market
value, as determined by the board of directors on the date of grant, as
compensation expense for financial reporting purposes. Compensation expense
for the vested portion aggregated $26,000, $190,000, $204,000 and $306,000 for
the years ended December 31, 1999 and 1998, the eight months ended December
31, 1997, and the year ended April 30, 1997, respectively.

   Effective February 9, 1998, the Company repriced substantially all
outstanding options with exercise prices greater than $8 per share and
subsequently reissued these options with exercise prices equal to $8 per
share, management's estimate of the fair value of the Company's common stock
as of the date of reissuance. These options were accounted for as new grants.
Effective March 2, 1998, the 1991 Plan and the 1994 Plan were terminated for
purposes of future grants. On February 23, 1998, the Company granted 240,100
stock options with an exercise price equal to the estimated fair market value
of $8 per share.

                                     F-18
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                Years Ended December 31,
                          --------------------------------------- Eight Months Ended      Year Ended
                                 1999                1998         December 31, 1997     April 30, 1997
                          ------------------- ------------------- ------------------- -------------------
                                     Weighted            Weighted            Weighted            Weighted
                                     Average             Average             Average             Average
                                     Exercise            Exercise            Exercise            Exercise
                           Shares     Price    Shares     Price    Shares     Price    Shares     Price
                          ---------  -------- ---------  -------- ---------  -------- ---------  --------
<S>                       <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
Options outstanding at
 beginning of period....  2,132,738   $4.73   1,838,972   $5.29   1,630,022   $ 4.59  1,824,025   $ 3.16
 Granted................  2,208,028    2.14     451,100    6.91     263,750    11.25    136,800    14.08
 Exercised..............   (287,958)   0.04     (12,084)   1.27         --       --    (313,403)    0.18
 Canceled...............   (712,028)   5.29    (139,750)   8.44     (54,800)   12.50    (17,400)    8.50
 Rescinded..............                         (5,500)   8.00         --       --         --       --
                          ---------   -----   ---------   -----   ---------   ------  ---------   ------
Options outstanding at
 end of period..........  3,340,780   $3.30   2,132,738   $4.73   1,838,972   $ 5.29  1,630,022   $ 4.59
                          =========   =====   =========   =====   =========   ======  =========   ======
Options exercisable.....  1,209,734           1,448,143           1,324,132           1,218,102
                          =========           =========           =========           =========
</TABLE>

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

<TABLE>
<CAPTION>
                                   Years Ended           Eight
                                  December 31,        Months Ended Year Ended
                              ----------------------  December 31, April 30,
                                 1999        1998         1997        1997
                              ----------  ----------  ------------ ----------
<S>                           <C>         <C>         <C>          <C>
Risk free rate...............        6.3%        5.1%         6.1%        6.1%
Expected life................ 7.12 years  7.74 years   8.02 years  7.13 years
Expected volatility..........        0.9         0.7          --          --
Expected dividends...........        --          --           --          --
Weighted--average grant-date
 fair value of options
 granted..................... $     1.91  $     2.95   $     3.61  $     3.68
</TABLE>

   A detail of the options outstanding and exercisable as of December 31, 1999
is as follows:

<TABLE>
<CAPTION>
                       Options Outstanding               Options Exercisable
               ---------------------------------------  -----------------------
                               Weighted                               Weighted
  Range of                      Average      Weighted                 Average
  Exercise       Number        Remaining     Average      Number      Exercise
   Prices      Outstanding   Contract Life    Price     Outstanding    Price
  --------     -----------   -------------   --------   -----------   --------
<S>            <C>           <C>             <C>        <C>           <C>
$0.15-$ 0.47      572,874        2.24         $0.15        572,874     $0.15
$1.94-$ 4.44    1,929,356        9.19          2.44        175,356      2.64
$4.50-$ 6.66      212,400        7.29          5.02        113,600      5.09
$7.00-$10.00      626,150        6.51          8.25        347,904      8.36
                ---------        ----         -----      ---------     -----
$0.15-$10.00    3,340,780        7.38         $3.30      1,209,734     $3.34
                =========        ====         =====      =========     =====
</TABLE>

                                      F-19
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                        Years Ended         Eight       Year
                                       December 31,      Months Ended   Ended
                                     ------------------  December 31, April 30,
                                       1999      1998        1997       1997
                                     --------  --------  ------------ ---------
                                     (Dollars in thousands, except per share
                                                     amounts)
   <S>                               <C>       <C>       <C>          <C>
   Net loss as reported............  $(41,685) $(28,220)   $(5,059)   $(27,219)
   Pro forma compensation expense..    (1,242)   (1,011)      (276)       (348)
                                     --------  --------    -------    --------
   Pro forma net loss..............  $(42,927) $(29,231)   $(5,335)   $(27,567)
                                     ========  ========    =======    ========
   Basic and diluted net loss as
    reported.......................  $  (1.86) $  (1.91)   $ (0.45)   $  (2.46)
   Basic and diluted pro forma net
    loss...........................  $  (1.91) $  (1.98)   $ (0.48)   $  (2.49)
                                     ========  ========    =======    ========
</TABLE>

 Profit Sharing 401(k) Plan

   The Company sponsors a 401(k) plan ("the Plan") for most full-time
employees. The Company matches 50 percent of the participant's contributions
up to six percent of the participant's base compensation. The profit sharing
contribution amount is at the sole discretion of the Company's board of
directors. Participants vest at a rate of 20 percent per year after the first
year of service for profit sharing contributions and 20 percent per year after
the first two years of service for matching contributions. Participants become
100 percent vested upon death, permanent disability or termination of the
Plan. Benefit expense for the years ended December 31, 1999 and 1998, for the
eight months ended December 31, 1997 and for the year ended April 30, 1997 was
$257,000, $256,000, $178,000, and $229,000, respectively.

11. Related Parties

   The Company has amounts due from a business controlled by the Chairman of
the Company. Net amounts due, prior to reserves, at December 31, 1999 and 1998
were $2.5 and $2 million, respectively. Such amounts at December 31, 1999 and
1998 are fully reserved. Through December 1997, the Company rented office
space from the Chairman of the Company. Rent expense paid to the Chairman was
$160,000 and $191,000 for the eight months ended December 31, 1997 and for the
year ended April 30, 1997, respectively.

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



   The Company subleases office space from Virgin. Rent expense paid to Virgin
was $50,000 for the year ended December 31, 1999.

 Distribution and Publishing Agreements

   In February 1999, the Company signed an International Distribution
Agreement with Virgin which provides for the exclusive distribution of
substantially all of the Company's products in Europe, CIS, Africa and the

                                     F-20
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Middle East for a seven-year period, cancelable under certain conditions,
subject to termination penalties and costs. Under the Agreement, the Company
pays Virgin a monthly overhead fee, certain minimum operating charges, a
distribution fee based on net sales, and Virgin provides certain market
preparation, warehousing, sales and fulfillment services on behalf of the
Company. In connection with this arrangement the Company incurred expenses of
$3.4 million in distribution fees, $3.9 million in overhead fees and $2.9
million to cover certain minimum operating charges to Virgin for the year
ended December 31, 1999.

   The Company has also executed a Product Publishing Agreement with Virgin
which provides the Company with an exclusive license to publish and distribute
substantially all of Virgin's products within North America, Latin America and
South America for a royalty based on net sales. During the year ended
December 31, 1999, the Company recognized revenue of $276,000 and gross profit
of $41,000 for performing distribution services on behalf of Virgin.

   In April 1999, the Company entered into an exclusive North American
distribution agreement with Titus which provides for the distribution of eight
titles on multiple platforms for a two-year period. Under the terms of the
arrangement, the Company will receive a distribution fee for all orders
shipped and will provide certain services including marketing, order
processing, billings and collections. During the year ended December 31, 1999,
the Company recognized revenue of $1.2 million and gross profit of $0.2
million for performing distribution services on behalf of Titus.

   During 1999, the Company executed publishing agreements with Titus. As a
result of these agreements, the Company has delivered titles to Titus and
recognized $2.6 million in licensing revenue.

 Investment in Affiliate

   In connection with the International Distribution Agreement and Product
Publishing Agreement, the Company has also executed an Operating Agreement
with Virgin Acquisition Holdings, LLC, which, among other terms and
conditions, provides the Company with a 43.9 percent equity interest in VIE
Acquisition Group LLC ("VIE"), the parent entity of Virgin. Under the
Operating Agreement the Company was obligated to make a cash payment of
$9,000. However, the Company is not obligated to make any future contributions
to the working capital of Virgin other than the monthly overhead fee discussed
above. In addition, two former members of the management of Interplay
Productions Limited, the Company's United Kingdom subsidiary, have acquired a
6 percent interest in VIE. During 1999, Titus acquired 50.1 percent equity
interest in VIE. The Company and Titus together hold a 94 percent equity
interest in VIE.

   The Company accounts for its investment in VIE in accordance with the
equity method of accounting. The Company did not recognize any material income
or loss in connection with its investment in VIE for the year ended December
31, 1999. In addition, the Company does not recognize sales to Virgin until
Virgin reports its sales of the Company's products to unaffiliated third
parties.

12. Concentration of Credit Risk

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

   For the year ended December 31, 1999, Virgin accounted for approximately 22
percent of net revenues in connection with the International Distribution
Agreement (See Note 11). One customer accounted for

                                     F-21
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

approximately 15 percent of net revenues for the fiscal year ended April 30,
1997. No single customer accounted for ten percent or more of net revenues in
the year ended December 31, 1998 or the eight months ended December 31, 1997.

13. Segment and Geographical Information

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

<TABLE>
<CAPTION>
                         Year Ended December 31,      Eight Months    Year Ended
                         -----------------------   Ended December 31, April 30,
                            1999         1998             1997           1997
                         -----------  -----------  ------------------ ----------
                                        (Dollars in thousands)
<S>                      <C>          <C>          <C>                <C>
Net revenues:
  United States......... $    92,244  $    94,727       $65,199         $ 54,469
  United Kingdom........       9,686       32,135        20,689           27,867
  Other.................         --           --             73              926
                         -----------  -----------       -------        --------
    Consolidated net
     revenues........... $   101,930  $   126,862       $85,961         $ 83,262
                         ===========  ===========       =======        ========
Income (loss) from
 operations:
  United States......... $   (28,824) $   (20,315)      $   298         $(30,764)
  United Kingdom........      (3,980)      (1,535)       (2,666)          (3,871)
  Other.................         --           --           (418)             (49)
                         -----------  -----------       -------        --------
    Consolidated loss
     from operations.... $   (32,804) $   (21,850)      $(2,786)        $(34,684)
                         ===========  ===========       =======        ========
Expenditures made for
 the acquisition of
 long-lived assets:
  United States......... $     1,595  $     1,067       $   459         $  2,741
  United Kingdom........         --           422           175              382
  Other.................         --           195           158              328
                         -----------  -----------       -------        --------
    Total expenditures
     for long-lived
     assets............. $     1,595  $     1,684       $   792         $  3,451
                         ===========  ===========       =======        ========
</TABLE>

   Net revenues were made to geographic regions as follows:

<TABLE>
<CAPTION>
                             Years Ended December 31,
                         ----------------------------------  Eight Months Ended       Year Ended
                               1999              1998         December 31, 1997     April 30, 1997
                         ----------------  ----------------  --------------------   ---------------
                          Amount  Percent   Amount  Percent   Amount     Percent    Amount  Percent
                         -------- -------  -------- -------  ---------- ---------   ------- -------
                                                (Dollars in thousands)
<S>                      <C>      <C>      <C>      <C>      <C>        <C>         <C>     <C>
North America........... $ 49,443    48.5% $ 73,865    58.2% $   51,833       60.3% $38,606    46.4%
Europe..................   23,901    23.4    28,777    22.7      19,941       23.2   26,752    32.1
Rest of World...........    6,409     6.3     7,016     5.5       4,701        5.5    5,254     6.3
OEM, royalty and
 licensing..............   22,177    21.8    17,204    13.6       9,486       11.0   12,650    15.2
                         --------   -----  --------   -----  ----------   --------  -------   -----
                         $101,930   100.0% $126,862   100.0% $   85,961      100.0% $83,262   100.0%
                         ========   =====  ========   =====  ==========   ========  =======   =====
</TABLE>

                                     F-22
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Long-lived assets by geographic regions, net:

<TABLE>
<CAPTION>
                                                 December 31,     December 31,
                                                     1999             1998
                                                ---------------  --------------
                                                Amount  Percent  Amount Percent
                                                ------- -------  ------ -------
                                                    (Dollars in thousands)
<S>                                             <C>     <C>      <C>    <C>
North America.................................. $ 5,435    97.9% $6,621    89.6%
Europe.........................................      47     0.9     723     9.8
Rest of World..................................     --      --      --      --
OEM, royalty and licensing.....................      69     1.2      44     0.6
                                                -------   -----  ------   -----
                                                $ 5,551   100.0% $7,388   100.0%
                                                =======   =====  ======   =====
</TABLE>

14. Subsequent Events

 Amendment to Credit Facility

   Subsequent to December 31, 1999, the Company extended its line of credit
through April 2001 generally under the same terms (See Note 5), except that
Titus provided a $20 million corporate guarantee and the financial institution
agreed to release to the Company the $2.5 million of cash held as collateral.

 Sale of Preferred Stock

   Subsequent to December 31, 1999, the Company completed a transaction with
Titus under a Stock Purchase Agreement dated April 13, 2000 and issued 719,424
shares of newly designated Series A Preferred Stock ("Preferred Stock") which
has preferences under certain events, as defined. The Preferred Stock is
convertible by Titus, redeemable by the Company, and pays a 6 percent dividend
per annum. The Company may redeem the Preferred Stock shares at anytime at the
original issue price. Titus may convert the Preferred Stock shares into shares
of Common Stock at any time after May 2001. The conversion rate is the lesser
of $2.78 or 85 percent of the market price per share at the time of
conversion, as defined. The Preferred Stock is entitled to the same voting
rights as if it had been converted to Common Stock shares. Conversion rights
are limited to 6,004,507 shares of Common Stock unless the Company's
stockholders have approved the issuance of the Preferred Stock at which time
the Preferred Stock shares would be convertible to 7,194,240 shares of Common
Stock at closing. In connection with this transaction, Titus received a
warrant for 350,000 shares of the Company's Common Stock at $3.79 per share
exercisable at anytime, and a warrant for 50,000 shares of the Company's
Common Stock at $3.79 per share which would only be exercisable by Titus if
the Company does not meet certain financial operating performance targets for
the year ending December 31, 2000, as defined. Both warrants expire in April
2010. In connection with the $20 million corporate guarantee provided by Titus
on the extension of the Company's line of credit, if the Company defaults in
accordance with the line of credit agreement, and Titus is forced to pay on
its corporate guarantee, Titus may have the right to receive additional shares
of the Company's Common Stock upon conversion of their Preferred Stock. The
Common Stock shares issuable upon conversion of the Preferred Stock or the
exercise of the warrants are subject to certain registration rights.

   The Company also secured a $5 million supplemental line of credit with
Titus through April 2001. Amounts drawn on this line will be subject to
interest of up to 12 percent per annum payable quarterly. In connection with
this line of credit, Titus received a warrant for up to 100,000 shares of the
Company's Common Stock at $3.79 per share that will expire in April 2010. The
warrant will vest if and to the extent that the Company draws on the line of
credit, as defined.


                                     F- 23
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Unaudited Pro-forma Condensed Balance Sheet

   The following unaudited pro-forma condensed balance sheet reflects the
estimated impact of the sale of the Series A Preferred stock for $20 million
and the amendment to the credit facility and the related release of
$2.5 million of cash collateral described above as if the transactions would
have taken place at December 31, 1999.

                              UNAUDITED PRO-FORMA
                     CONDENSED CONSOLIDATED BALANCE SHEET
                               December 31, 1999

<TABLE>
<CAPTION>
                                                                        Pro-
                                                             Actual    forma
                                                            --------  --------
                                                               (Dollars in
                                                                thousands)
<S>                                                         <C>       <C>
                          ASSETS
                          ------
Current Assets:
  Cash..................................................... $    399  $ 22,996
  Restricted cash..........................................    2,597       --
  Trade receivables, net of allowances of $9,161...........   22,209    22,209
  Inventories..............................................    6,057     6,057
  Prepaid licenses and royalties...........................   19,249    19,249
  Other....................................................      874       874
                                                            --------  --------
    Total current assets...................................   51,385    71,385
Property and Equipment, net................................    4,225     4,225
Other Assets...............................................    1,326     1,326
                                                            --------  --------
                                                            $ 56,936  $ 76,936
                                                            ========  ========
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
      ----------------------------------------------
Current Liabilities:
  Current debt............................................. $ 19,630  $ 19,630
  Accounts payable.........................................   21,462    21,462
  Accrued liabilities......................................   17,915    17,915
                                                            --------  --------
    Total current liabilities..............................   59,007    59,007
Commitments and Contingencies
Stockholders' Equity (Deficit):
  Series A Preferred stock, $.001 par value, authorized
   5,000,000 shares; issued and outstanding, none and pro
   forma 719,424 shares....................................      --     20,000
  Common stock, $.001 par value, authorized 50,000,000
   shares; issued and outstanding 29,989,125 shares........       30        30
  Paid-in capital..........................................   87,390    87,390
  Accumulated deficit......................................  (89,782)  (89,782)
  Accumulated other comprehensive income...................      291       291
                                                            --------  --------
    Total stockholders' equity (deficit)...................   (2,071)   17,929
                                                            --------  --------
                                                            $ 56,936  $ 76,936
                                                            ========  ========
</TABLE>

                                     F-24
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                      Trade Receivables Allowance
                         ------------------------------------------------------
                          Balance at  Provisions for
                         Beginning of  Returns and   Returns and Balance at End
         Period             Period      Discounts     Discounts    of Period
         ------          ------------ -------------- ----------- --------------
<S>                      <C>          <C>            <C>         <C>
Year ended April 30,
 1997...................   $ 9,100       $34,424      $(28,630)     $14,894
                           =======       =======      ========      =======
Eight months ended
 December 31, 1997......   $14,894       $21,915      $(22,348)     $14,461
                           =======       =======      ========      =======
Year ended December 31,
 1998...................   $14,461       $43,596      $(39,626)     $18,431
                           =======       =======      ========      =======
Year ended December 31,
 1999...................   $18,431       $25,187      $(34,457)     $ 9,161
                           =======       =======      ========      =======
</TABLE>


                                      F-25