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, 2009





or





[_]       TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ND
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 incorporation or organization)
            (I.R.S.
      Employer Identification No.)





12301
Wilshire Blvd., Suite 502, Los Angeles, California 90025


(Address
of principal executive offices)





(310)
979-7070


(Registrant's telephone number,
including area code)





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





Securities
registered pursuant to Section 12 (g) of the Act:  Common Stock, $0.001 par
value





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





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





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. [_]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer [_]
            Accelerated
      filer [_]
            Non-
      accelerated filer [X]
            Smaller
      reporting company  [_]





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





As of
December 31, 2009, the aggregate market value of voting common stock held by
non-affiliates was approximately $6,500,000 based upon the closing price of the
Common Stock on that date.





Portions
of the Registrant’s definitive proxy statement relating to its 2009 annual
meeting of stockholders, which will be filed with the Securities and Exchange
Commission pursuant to regulation 14A within 120 days of the close of the
Registrant’s last fiscal year, are incorporated by reference into Part III of
this report.





As of
March 31, 2010,122,662,052 shares of Common Stock of the Registrant were issued
and outstanding.











INDEX TO
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009











PAGEPART
      IItem
      1.
            Business
            3Item
      1A.
            Risk
      Factors
            6Item
      2.
            Properties
            11Item
      3.
            Legal
      Proceedings
            11Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            11PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity and Related Stockholder
    Matters
            12Item
      6.
            Selected
      Financial Data
            14Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            15Item
      7A.
            Quantitative
      and Qualitative Disclosure about Market Risk
            24Item
      8.
            Consolidated
      Financial Statements and Supplementary Data
            24Item
      9A.(T)
            Controls
      and Procedures
            24PART
      IIIItem
      10.
            Directors
      and Executive Officers of the Registrant
            25Item
      11.
            Executive
      Compensation
            25Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            25Item
      13.
            Certain
      Relationships and Related Transactions
            25Item
      14.
            Principal
      Accounting Fees and Services
            26Item
      15
            Exhibits,
      Financial Statement Schedules
            26Signatures
            
            27Exhibit
      Index
            
            28





2


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





The forward-looking statements included
in this Report are based on current expectations that involve a number of risks
and uncertainties, as well as certain assumptions.  For example, any
statements regarding future cash flow, cash constraints, financing activities,
cost reduction measures, and mergers, sales or acquisitions are forward-looking
statements and there can be no assurance that we will affect any or all of these
objectives in the future.  Additional risks and uncertainties that may
affect our future results are discussed in more detail in the section titled
“Risk Factors” in “Item 7.  “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”





Assumptions relating to our
forward-looking statements involve judgments with respect to, among other
things, future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control.  Although we believe that the
assumptions underlying the forward-looking statements are reasonable, our
industry, business and operations are subject to substantial risks, and the
inclusion of such information should not be regarded as a representation by
management that any particular objective or plans will be
achieved.  In addition, risks, uncertainties and assumptions change as
events or circumstances change.  We disclaim any obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances occurring
subsequent to the filing of this Report with the SEC or otherwise to revise or
update any oral or written forward-looking statement that may be made from time
to time by us or on our behalf.





Interplayâ,Interplay Productionsâ,Games On Line ®
and certain of our other product names and publishing labels referred to in this
Report are the Company’s trademarks.  This Report also contains
trademarks belonging to others.








PART
I





Item
1.         
 BUSINESS





Overview
and Recent Developments





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





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





We own the intellectual property rights
in several recognized video games and intend, to develop
sequels to some of our most successful games, for the current generation of
video game consoles, personal computers and mobile platforms.





In 2007
we sold “Fallout” to a third party and entered into, subject to satisfaction of
various conditions, a license back which could allow us to create, develop and
exploit a “Fallout” Massively Multiplayer Online Game. We are planning to
exploit the license back of “Fallout” MMOG.





We have
entered into various agreements with several experienced Video Game
studios for the development of games based on intellectual properties we
either own or have licensed.  As a result of such agreements we
currently have under production or pre-production games based on Battlechess,
Clayfighter, Dark Alliance, Descent, Earthworm Jim, MDK2 and Stonekeep. These
games when completed will be available for various platforms including Mobile
devices, Apple iPod and iPad, Nintendo Wiiware and DSiware, Xbox Live
Arcade, Sony Playstation Network and Personal Computers. We also continue full
scale development of a Massively Multiplayer Online Game (MMOG), code named
"Project: V13" for personal computers. This MMOG has been in design and
development at Interplay since November 2007.





Our
development partners are working under the direction and control of Interplay’s
creative team to complete development of each project to very high quality
standards.








3


Our
business and industry has certain risks and uncertainties. For a fuller
discussion of the risk and uncertainties relating to our financial results, our
business and our industry, please see the section titled “Risk Factors” in Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”





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





Products





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





Our strategy is to invest in products
for those platforms, whether PC or video game console, that have or will have
sufficient installed bases or a large enough number of potential subscribers for
the investment to be economically viable. We are currently internally developing
one new product and have five new products in production and three in pre
production externally.





Intellectual
Property and Proprietary Rights





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





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


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





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





Product
Development





We currently have a total of nine new
products in various stages of development.We have reinitiated our
in-house game development studio, and have hired game developers for this
purpose.




During the years ended December 31,
2009, 2008 and 2007, we spent $279,000, $328,000 and $18,000 respectively, on
product research and development activities.  Those amounts
represented 21%, 24% and 0% respectively, of net revenues in each of those
periods.





4


Segment
Information





We operate primarily in one industry
segment, the development, publishing and distribution of interactive
entertainment software.  For information regarding the revenues
associated with our geographic segments, see Note 12 of the Notes to our
Consolidated Financial Statements included elsewhere in this
Report.





Sales
and Distribution




North America. We distribute
our products and intellectual property rights in our video games in North
America and other selected territories from our corporate offices in Los
Angeles, California.





International.We distribute
our products and intellectual property rights in our video games in Europe and
other selected territories thru our wholly owned subsidiary, Interplay
Productions Ltd, located in London, England.





Licensing





We entered into various licensing
agreements during 2009 under which we licensed others to exploit games that we
have intellectual property rights to.





Marketing





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





Competition




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




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




Seasonality





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





Manufacturing




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





Sony Computer Entertainment, Microsoft Corporation and Nintendo
manufacture and ship finished products that are compatible with their video game
consoles to our licensees for distribution.





5


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





Backlog





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





Employees





As of December 31, 2009, we had 9 employees, including 5 in games
development  and 4 in finance, general and
administrative.




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





Additional
Information





We file annual, quarterly and current
reports, proxy statements and other information with the U.S. Securities and
Exchange Commission or SEC. You may obtain copies of these reports via the
Internet at the SEC’s homepage located at www.sec.gov.  You may also
go to our Internet address located at www.interplay.com/investors/ and go to
“SEC filings” which will link you to the SEC’s homepage for our filed
reports.  In addition, copies of the reports we file with the SEC may
also be obtained at the SEC’s Public Reference Room at 100 F Street NE,
Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by Calling the SEC at 1-800-SEC-0330.





Item
1A.        RISK FACTORS





RISK
FACTORS





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




RISKS
RELATED TO OUR FINANCIAL RESULTS





We
currently have some obligations that we are unable to meet without generating
additional income or raising additional capital.  If we cannot
generate additional income or raise additional capital in the near future, we
may become insolvent and/or be made bankrupt and/or may become illiquid or
worthless.





As of
December 31, 2009, our cash balance was approximately $1,000 and our working
capital deficit totaled approximately $2.841 million. If we do not receive
sufficient financing or sufficient funds from our operations we may (i)
liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii) continue
operations, but incur material harm to our business, operations or financial
condition.  These measures could have a material adverse effect on our
ability to continue as a going concern.  Additionally, because of our
financial condition, our Board of Directors has a duty to our creditors that may
conflict with the interests of our stockholders.  When a Delaware
corporation is operating in the vicinity of insolvency, the Delaware courts have
imposed upon the corporation's directors a fiduciary duty to the corporation's
creditors.  Our Board of Directors may be required to make decisions
that favor the interests of creditors at the expense of our stockholders to
fulfill its fiduciary duty.  For instance, we may be required to
preserve our assets to maximize the repayment of debts versus employing the
assets to further grow our business and increase shareholder
value.  If we cannot generate enough income from our operations or are
unable to locate additional funds through financing, we will not have sufficient
resources to continue operations.





We
have a history of losses, and may have to further reduce our costs by curtailing
future operations to continue as a business.





For the
year ended December 31, 2009, our net loss was approximately $1,500,000. As of
December 31, 2009 we had an accumulated deficit of $2.8 million.  Our
ability to fund our capital requirements out of our available cash and cash
generated from our operations depends on a number of factors.  Some of
these factors include the progress of our product distributions and licensing,
the rate of growth of our business, and our products’ commercial
success.  If we cannot generate positive cash flow from operations, we
will have to continue to reduce our costs and raise working capital from other
sources.  These measures could include selling or consolidating
certain operations or assets, and delaying, canceling or further scaling back
operations.  These measures could materially and adversely affect our
ability to publish successful titles, and may not be enough to permit us to
operate profitability, or at all.


6


Our ability to effect a financing
transaction to fund our operations could adversely affect the value of your
stock.





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





RISKS
RELATED TO OUR BUSINESS





We
may not be able to successfully develop a “Fallout” MMOG.





We plan
to exploit the license that we hold to create a “Fallout” MMOG. We needed to
satisfy various conditions to maintain our license.  Although we
believe that all such conditions have been met, our licensor Bethesda Softworks
LLC filed a legal action attempting to terminate our license.





If we
lose the pending litigation, our license to create a "Fallout"-branded MMOG may
be terminated and we might not be able to successfully launch the
game.





The
lack of any credit agreement has resulted in a substantial reduction in the cash
available to finance our operations.





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




We
continue to operate without a Chief Financial Officer, which may affect our
ability to manage our financial operations.





We are presently without a CFO, and Mr. Caen has assumed the position of
interim-CFO and continues as CFO to date until a replacement can be
found.





Our business and industry is both
seasonal and cyclical. If we fail to deliver our products at the right times,
our sales will suffer.





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





The
unpredictability of future results may cause our stock price to remain depressed
or to decline further.





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





·
            demand
      for our products and our competitors'
products;


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


·
            changes
      in personal computer and video game console
  platforms;


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


·
            changes
      in our product mix;


·
            the
      number of our products that are returned;
and


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





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





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


·
            approvals
      required from content and technology licensors;
  and


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





7


There
are high fixed costs to developing our products.  If our revenues
decline because of delays in the distribution of our products, or if there are
significant defects or dissatisfaction with our products, our business could be
harmed.





Our losses in the past have stemmed
partly from the significant costs we incurred to develop our entertainment
software products, product returns and price concessions.  Moreover, a
significant portion of our operating expenses is relatively fixed, with planned
expenditures based largely on sales forecasts.  At the same time, most
of our products have a relatively short life cycle and sell for a limited period
of time after their initial release, usually less than one year.





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





If
our products do not achieve broad market acceptance, our business could be
harmed significantly.





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





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





We
have a limited number of key management and other personnel.  The loss
of any single member of management or key person or the failure to hire and
integrate capable new key personnel could harm our business.





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





Our
international sales expose us to risks of unstable foreign economies,
difficulties in collection of revenues, increased costs of administering
international business transactions and fluctuations in exchange
rates.





Our net
revenues from international sales accounted for approximately 23% and 17% of our
total net revenues for years ended December 31, 2009 and 2008, respectively. To
the extent our resources allow, we intend to continue to expand our direct and
indirect sales, marketing and product localization activities
worldwide.





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





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


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


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


·
            regulatory
      requirements may change
unexpectedly;


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


·
            fluctuations
      in foreign currency exchange rates;


·
            political
      and economic instability; and


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





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





8


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





Some
of our customers have the ability to return our products or to receive pricing
concessions and such returns and concessions could reduce our net revenues and
results of operations.





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





RISKS
RELATED TO OUR INDUSTRY





Inadequate
intellectual property protections could prevent us from enforcing or defending
our proprietary technology.





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





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





We
may unintentionally infringe on the intellectual property rights of others,
which could expose us to substantial damages or restrict our
operations.





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







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




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




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





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





Our business is
intensely competitive and profitability is increasingly driven by a few key
title releases.  If we are unable to deliver key titles, our business
may be harmed.





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





9


If we fail to anticipate changes in
video game platforms and technology, our business may be
harmed.





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





·
            operating
      systems;


·
            new
      media formats


·
            releases
      of new video game consoles;


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





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





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




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




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




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





Our
software may be subject to governmental restrictions or rating
systems.





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





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





RISKS
RELATED TO OUR STOCK





Some
provisions of our charter documents may make takeover attempts difficult, which
could depress the price of our stock and inhibit our ability to receive a
premium price for your shares.





Our
Certificate of Incorporation, as amended, provides for 5,000,000 authorized
shares of Preferred Stock.  Our Board of Directors has the authority,
without any action by the stockholders, to issue up to 4,280,576 shares of
preferred stock and to fix the rights and preferences of such
shares.  In addition, our certificate of incorporation and bylaws
contain provisions that:





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




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





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




10


Our
common stock may be subject to the “Penny Stock” rules which could adversely
affect the market price of our common stock.




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




Our
stock is volatile





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





·
            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;
  and


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





Item
2.            PROPERTIES





The
Company’s headquarters are located in Los Angeles, California, where we lease
approximately 2,700 square feet of office space. The facility is leased through
October 2012.  The Company’s development studio is located in Irvine,
California, where we lease approximately 1,700 square feet of office space. The
facility is leased until March 2011. We also have a representation office in
France.





Item
3.            LEGAL
PROCEEDINGS





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





On
September 8, 2009 Bethesda Softworks LLC filed a Complaint for Declaratory
Judgment, Preliminary Injunction and Other Relief against the Company in
the United  States  District  Court for the
District of Maryland.  Bethesda seeks to terminate the rights
Interplay holds to sell and develop certain FALLOUT(r)-branded video games,
including an MMOG.  Interplay  disputes all claims raised by
Bethesda and has answered the lawsuit and asserted
Counter-Claims,  including claims for Breach of
Contract,  Tortious  Interference with Prospective Economic
Advantage, Rescission,  Accounting
and  Declaratory  Relief seeking an award of damages and
other relief.  Interplay also seeks a declaration from the Court that
it has not infringed upon
the  FALLOUT(R)  mark  and  that it
has  satisfied  the  terms  of  the
Trademark Licensing Agreement related to Interplay's production of a FALLOUT(R)
massively-multiplayer online  game.  The Court denied
Bethesda's  Motion for Preliminary Injunction on
December 10, 2009, a decision that Bethesda has
appealed.  Interplay will continue to defend its rights and
pursue its Counter-Claims against Bethesda.





The
Company received notices from the Internal Revenue Service (“IRS”) that it owes
approximately $200,000 in payroll taxes, payroll tax penalties, and interest for
unpaid and late payment of payroll taxes for the years 2008 and 2009, which has
been accrued as of December 31, 2009.  The Company is in the process of
negotiating a payment plan with the Internal Revenue Service.





The
Company received notice from the Franchise Tax Board that it owes approximately
$25,000 in franchise tax , interest and penalties for the tax year ending 2008
which has been accrued as of December 31, 2009. The Company has
established a payment plan with the Franchise Tax Board.





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





None





11


PART
II





Item
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
    MATTERS





The Company trades on the NASD-operated Over-the-Counter Bulletin
Board.  Our common stock is currently traded on the NASD-operated
Over-the-Counter Bulletin Board under the symbol “IPLY.”  At March 30,
2010, there were 96 holders of record of our common stock.





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





For the Year ended December 31,
      2009
            
            High
            
            
            LowFirst
      Quarter
            
            $
            .10
            
            
            $
            .05Second
      Quarter
            
            
            .09
            
            
            
            .06Third
      Quarter
            
            
            .07
            
            
            
            .05Fourth
      Quarter
            
            
            .07
            
            
            
            .05For the Year ended December 31,
      2008
            
            High
            
            
            LowFirst
      Quarter
            
            $
            .08
            
            
            $
            .07Second
      Quarter
            
            
            .20
            
            
            
            .07Third
      Quarter
            
            
            .17
            
            
            
            .12Fourth
      Quarter
            
            
            .13
            
            
            
            .07





Dividend
Policy





It is not
currently our policy to pay dividends.





Stock
Compensation Plans





The
following table sets forth certain information regarding our equity compensation
plans as of December 31, 2009:





Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders
            
            
            4,960,000
            
            
            
            0.097
            
            
            
            5,040,000Issuance
      of Warrants for services and other  compensation not approved by
      security holders
            
            
            18,156,181
            
            
            
            0.24
            
            
            
            -Total
            
            
            23,116,181
            
            
            
            
            
            
            
            5,040,000





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




The
estimated fair market value of the warrants and options were charged to
compensation expense in the amount of $667,000, $199,000 and $12,000 for the
years ended 2009, 2008 and 2007, respectively.





12


Performance
Graph





The
following graph compares the cumulative 5-year total return to shareholders on
Interplay Entertainment Corp.'s common stock relative to the cumulative total
returns of the NASDAQ Composite index, and a customized peer group of eleven
companies listed in footnote 1 below. An investment of $100 (with reinvestment
of all dividends) is assumed to have been made in our common stock, in the peer
group, and the index on 12/31/2004 and its relative performance is tracked
through 12/31/2009.










(1.) The
company's customized peer group includes eleven companies which are: Activision
Blizzard Inc, Electronic Arts Inc, Futuremedia PLC, Giant Interactive Group Inc,
GLU Mobile Inc, Majesco Entertainment Company, Southpeak Interactive Corp., Take
Two Interactive Software Inc, THQ Inc, Webzen Inc and Shanda Interactive
Entertainment Limited.




12/04
            
            
            
            12/05
            
            
            
            12/06
            
            
            
            12/07
            
            
            
            12/08
            
            
            
            12/09Interplay
      Entertainment Corp.
            
            
            100.00
            
            
            
            57.14
            
            
            
            964.29
            
            
            
            571.43
            
            
            
            571.43
            
            
            
            464.29NASDAQ
      Composite
            
            
            100.00
            
            
            
            108.50
            
            
            
            130.22
            
            
            
            132.50
            
            
            
            80.00
            
            
            
            129.93Peer
      Group
            
            
            100.00
            
            
            
            84.96
            
            
            
            89.09
            
            
            
            112.03
            
            
            
            45.40
            
            
            
            57.77





The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.


13


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





Item
6.            SELECTED
FINANCIAL DATA





The
selected consolidated statements of operations data for the years ended December
31, 2009, 2008 and 2007 and the selected consolidated balance sheets data as of
December 31, 2009 and 2008 are derived from our audited consolidated financial
statements included elsewhere in this Report. Our historical results are not
necessarily indicative of the results that may be achieved for any other
period.  The following data should be read in conjunction with “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the Consolidated Financial Statements included elsewhere in this
Report.





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(Dollars
      in thousands, except share and per share amounts)Statements
      of Operations Data:Net
      revenues
            
            $
            1,360
            
            
            $
            1,378
            
            
            $
            6,001
            
            
            $
            967
            
            
            $
            7,158Cost
      of goods sold
            
            
            147
            
            
            
            12
            
            
            
            8
            
            
            
            167
            
            
            
            478Gross
      profit
            
            
            1,213
            
            
            
            1,366
            
            
            
            5,993
            
            
            
            800
            
            
            
            6,680Operating
      expenses
            
            
            2,630
            
            
            
            1,820
            
            
            
            1,538
            
            
            
            2,069
            
            
            
            3,197Operating
      (income) loss
            
            
            (1,417
            )
            
            
            (454
            )
            
            
            4,455
            
            
            
            (1,269
            )
            
            
            3,483Other
      income (expense)
            
            
            (97
            )
            
            
            (39
            )
            
            
            1,401
            
            
            
            4,348
            
            
            
            2,445Income
      (loss) before income taxes
            
            
            (1,514
            )
            
            
            (493
            )
            
            
            5,856
            
            
            
            3,079
            
            
            
            5,928Provision
      (benefit) for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income (loss)
            
            $
            (1,514
            )
            
            $
            (493
            )
            
            $
            5,856
            
            
            $
            3,079
            
            
            $
            5,928Cumulative
      dividend on participating preferred stock
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Accretion
      of warrant
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income (loss) available to common stockholders
            
            $
            (1,514
            )
            
            $
            (493
            )
            
            $
            5,856
            
            
            $
            3,079
            
            
            $
            5,928Net
      income (loss) per common share:Basic
            
            $
            (0.014
            )
            
            $
            (0.004
            )
            
            $
            0.059
            
            
            $
            0.030
            
            
            $
            0.063Diluted
            
            $
            (0.014
            )
            
            $
            (0.004
            )
            
            $
            0.057
            
            
            $
            0.030
            
            
            $
            0.063Shares
      used in calculating net income (loss) per common share -
    basic
            
            
            108,770
            
            
            
            103,482
            
            
            
            99,197
            
            
            
            100,513
            
            
            
            93,856Shares
      used in calculating net income (loss) per common share -
      diluted
            
            
            108,770
            
            
            
            103,482
            
            
            
            102,028
            
            
            
            102,603
            
            
            
            93,856Selected
      Operating Data:Net
      revenues by geographic region:North America
            
            $
            1,048
            
            
            $
            89
            
            
            $
            5
            
            
            $
            203
            
            
            $
            2,885International
            
            
            312
            
            
            
            239
            
            
            
            246
            
            
            
            632
            
            
            
            4,056OEM, royalty and
      licensing
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            132
            
            
            
            217Other
            
            
            -
            
            
            
            1,050
            
            
            
            5,750
            
            
            
            -
            
            
            
            -Net
      revenues by platform:Personal
      computer
            
            $
            1,042
            
            
            $
            261
            
            
            $
            222
            
            
            $
            456
            
            
            $
            631Video
      game console
            
            
            100
            
            
            
            67
            
            
            
            29
            
            
            
            379
            
            
            
            971OEM,
      royalty and licensing
            
            
            218
            
            
            
            -
            
            
            
            -
            
            
            
            132
            
            
            
            217Recognition
      of Revenue from expired contracts
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,574Other
            
            
            -
            
            
            
            1,050
            
            
            
            5,750
            
            
            
            -
            
            
            
            -Online
      licensing
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            768December
      31,2009
            
            
            
            2008
            
            
            
            2007
            
            
            
            2006
            
            
            
            2005Balance
      Sheets Data:
            
            
            
            
            
            
            
            
            
            (Dollars
      in thousands)Working
      capital (deficiency)
            
            $
            (2,841
            )
            
            $
            (2,415
            )
            
            $
            (2,279
            )
            
            $
            (8,098
            )
            
            $
            (11,497
            )Total
      assets
            
            
            197
            
            
            
            163
            
            
            
            1,201
            
            
            
            323
            
            
            
            673Total
      debt
            
            
            2,997
            
            
            
            2,520
            
            
            
            3,480
            
            
            
            8,410
            
            
            
            12,163Stockholders'
      equity (deficit)
            
            
            (2,800
            )
            
            
            (2,357
            )
            
            
            (2,279
            )
            
            
            (8,087
            )
            
            
            (11,490
            )








14


Item
7.            MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





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





Executive
Overview and Summary





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





The accompanying consolidated financial
statements have been prepared assuming that we will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  The carrying amounts of assets and
liabilities presented in the financial statements do not purport to represent
realizable or settlement values.  The Report of our Independent
Auditors for the December 31, 2009 consolidated financial statements includes an
explanatory paragraph expressing substantial doubt about our ability to continue
as a going concern.





We entered into various distribution
and  licensing agreements during 2009 under which we utilized others
to exploit games that we have intellectual property rights to. We expect in 2010
to enter into similar distribution and license arrangements to generate cash for
the Company’s operations.





During
2007 we sold “Fallout” to a third party and entered into, subject to
satisfaction of various conditions, a license back which could allow us to
create, develop and exploit a “Fallout” Massively Multiplayer Online Game. We
are planning to exploit the license back of “Fallout” MMOG.





We have
entered into various agreements  with several experienced Video Game
studios  for the development of games based on our Intellectual
properties.  As a result of such agreements we currently have under
production or pre production games based on Battlechess, Clayfighter, Dark
Alliance, Descent, Earthworm Jim, MDK2 and Stonekeep. These games when completed
will be available for various platforms including Mobile devices, Apple iPod,
Nintendo Wiiware and DSiware, Xbox Live Arcade, Sony Playstation Network and
Personal Computers. We also have under production a Massively Multiplayer Online
Game (MMOG), code named "Project: V13" for personal computers. This MMO game has
been in design and development at Interplay since November 2007.





We also
continue full scale development of a Massively Multiplayer Online Game (MMOG),
code named "Project: V13" for personal computers. This MMOG has been in design
and development at Interplay since November 2007.


Our
development partners are working under the direction and control of Interplay’s
creative team to complete development of each project to very high quality
standards.





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





Our
products were either designed and created by our employees or by external
software developers.  When we used external developers, we typically
advanced development funds to the developers in installment payments based upon
the completion of certain milestones.  These advances were typically
considered advances against future royalties. We currently have several products
in development with external developers under a net-revenue-sharing model rather
than traditional development funds advances.





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





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








15


Management's
Discussion of Critical Accounting Policies





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





Revenue
Recognition





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





We
generally are not contractually obligated to accept returns, except for
defective, shelf-worn and damaged products.  However, on a
case-by-case negotiated basis, we permit customers to return or exchange
products and may provide price concessions to our retail distribution customers
on unsold or slow moving products.  We record revenue net of a
provision for estimated returns, exchanges, markdowns, price concessions, and
warranty costs.  We record such reserves based upon management's
evaluation of historical experience, current industry trends and estimated
costs.  The amount of reserves ultimately required could differ
materially in the near term from the amounts provided in the accompanying
consolidated financial statements.





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





Prepaid
Licenses and Royalties





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





Software
Development Costs





Software
development costs include payments made to independent software developers under
development agreements, as well as direct costs incurred for internally
developed products. Software development costs are capitalized once the
technological feasibility of a product is established and such costs are
determined to be recoverable. Technological feasibility of a product encompasses
both technical design documentation and game design documentation. For products
where proven technology exists, this may occur early in the development cycle.
Technological feasibility is evaluated on a product-by-product basis. Prior to a
product’s release, we expense, as part of “cost of sales — software royalties
and amortization,” capitalized costs when we believe such amounts are not
recoverable. Capitalized costs for those products that are cancelled
or


16


abandoned
are charged to product development expense in the period of cancellation.
Amounts related to software development which are not capitalized are charged
immediately to product development expense. We evaluate the future
recoverability of capitalized amounts on a quarterly basis. The recoverability
of capitalized software development costs is evaluated based on the expected
performance of the specific products for which the costs relate. Criteria used
to evaluate expected product performance include:  historical performance
of comparable products using comparable technology; orders for the product prior
to its release; and estimated performance of a sequel product based on the
performance of the product on which the sequel is based.





Commencing
upon product release, capitalized software development costs are amortized to
“cost of sales — software royalties and amortization” based on the ratio of
current revenues to total projected revenues, generally resulting in an
amortization period of six months or less. For products that have been released
in prior periods, we evaluate the future recoverability of capitalized amounts
on a quarterly basis. The primary evaluation criterion is actual title
performance.





Significant
management judgments and estimates are utilized in the assessment of when
technological feasibility is established, as well as in the ongoing assessment
of the recoverability of capitalized costs. In evaluating the recoverability of
capitalized costs, the assessment of expected product performance utilizes
forecasted sales amounts and estimates of additional costs to be incurred. If
revised forecasted or actual product sales are less than and/or revised
forecasted or actual costs are greater than the original forecasted amounts
utilized in the initial recoverability analysis, the net realizable value may be
lower than originally estimated in any given quarter, which could result in an
impairment charge.





Other
Significant Accounting Policies





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





17


Results
of Operations





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





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Statements
      of Operations Data:Net
      revenues
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %Cost
      of goods sold
            
            
            10
            
            
            
            -Gross
      margin
            
            
            90
            
            
            
            100
            
            
            
            100Operating
      expenses:Marketing and
    sales
            
            
            26
            
            
            
            
            
            
            
            4General and
      administrative
            
            
            146
            
            
            
            108
            
            
            
            21Product
    development
            
            
            21
            
            
            
            24
            
            
            
            -Total operating
      expenses
            
            
            193
            
            
            
            132
            
            
            
            25Operating
      income (loss)
            
            
            (103
            )
            
            
            (32
            )
            
            
            75Other
      income (expense)
            
            
            (7
            )
            
            
            (3
            )
            
            
            25Income
      (loss) before provision for  income taxes
            
            
            (110
            )
            
            
            (35
            )
            
            
            100Provision
      for income taxes
            
            
            
            
            
            
            
            
            
            
            -Net
      income (loss)
            
            
            (110
            )
      %
            
            
            (35
            )
      %
            
            
            100
            %Selected
      Operating Data:Net
      revenues by segment:North America
            
            
            77
            %
            
            
            6
            %
            
            
            96
            %International
            
            
            23
            
            
            
            17
            
            
            
            4OEM, royalty and
      licensing
            
            
            0
            
            
            
            -Other
            
            
            0
            
            
            
            76
            
            
            
            -100
            %
            
            
            100
            %
            
            
            100
            %Net
      revenues by platform:Personal
    computer
            
            
            77
            %
            
            
            19
            %
            
            
            4
            %Video game
    console
            
            
            7
            
            
            
            5OEM, royalty and
      licensing
            
            
            16
            
            
            
            -Other
            
            
            
            
            
            
            76
            
            
            
            96100
            %
            
            
            100
            %
            
            
            100
            %








Geographically,
our net revenues for the years ended December 31, 2009 and 2008 breakdown as
follows: (in thousands)





2009
            
            
            2008
            
            
            Change
            
            
            %
      ChangeNorth
      America
            
            $
            1,048
            
            
            
            1,139
            
            
            
            (91
            )
            
            
            (8.0
            )%International
            
            
            312
            
            
            
            239
            
            
            
            73
            
            
            
            31
            %Net
      Revenues
            
            
            1,360
            
            
            
            1,378
            
            
            
            (18
            )
            
            
            (1
            )%





Geographically,
our net revenues for the years ended December 31, 2008 and 2007 breakdown as
follows: (in thousands)





2008
            
            
            2007
            
            
            Change
            
            
            %
      ChangeNorth
      America
            
            
            1,139
            
            
            
            5,755
            
            
            
            (4,616
            )
            
            
            (80.2
            )%International
            
            
            239
            
            
            
            246
            
            
            
            (7
            )
            
            
            (3.0
            )%Net
      Revenues
            
            
            1,378
            
            
            
            6,001
            
            
            
            (4,623
            )
            
            
            (77
            )%





18


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





Net
revenues for the year ended December 31, 2009 were $1,360,000, a decrease of 1%
compared to the same period in 2008.  The net revenues for the year
ended December 31,2009 were driven by retail distribution and electronic
distribution of back catalog games.  Net revenues of retail
and electronic distribution of back catalog games increased to $1,360,000 for
the year ended December 31, 2009 as compared to $328,000 compared to the same
period in 2008. This was an increase in net revenues in the amount of
$1,032,000.





Net
revenues for the year ended December 31, 2008 were $1,378,000, a decrease of 77%
compared to the same period in 2007. The Company had $1,050,000 in revenue from
Atari Interactive exercising an existing option to purchase, from the Company
intellectual property rights developed by the Company with the Dungeon &
Dragons games, with the balance due from the Company to Atari Interactive under
a Note of $1,050,000 being cancelled. This decrease resulted from a 80.2%
decrease significantly effected by the non recurring Fallout transaction in 2007
in North American net revenue, and a 3% decrease in International net revenue,
royalty and licensing revenues and a 0% decrease in OEM net
revenue.





North
American net revenues for the year ended December 31, 2009 were $1,048,000 as
compared to $1,139,000 for the year ended December 31, 2008.  The net
revenues for the year ended December 31, 2009 were driven by retail distribution
and electronic distribution of back catalog games. The Company recognized
$1,050,000 in revenues from Atari Interactive exercising an existing option and
$89,000 in North American royalties earned in 2008.





North
American net revenues for the year ended December 31, 2008 were $1,139,000 as
compared to $5,755,000 for the year ended December 31, 2007.  The
Company recognized $1,050,000 in revenues from Atari Interactive exercising an
existing option and $89,000 in North American royalties earned in 2008. The
Company had $5,750,000 in income from recognition of the sale of “Fallout” and
$5,000 in North American royalties earned in 2007.





International
net revenues for the year ended December 31, 2009 were $312,000,
an  increase of $73,000 as compared to International net revenues for
the year ended December 31, 2008. The increase in International net revenues
compared to the year ended December 31, 2008 was mainly due to a 31% increase in
net revenues for
the year ended December 31, 2009 driven by retail distribution and electronic
distribution of back catalog games..





International
net revenues for the year ended December 31, 2008 were $239,000, a decrease of
$7,000 as compared to International net revenues for the year ended December 31,
2007. The decrease in International net revenues compared to the year ended
December 31, 2007 was mainly due to a 3.0% decrease in back catalog
sales.





Publishing
Net Revenues by Platform, Atari option exercise agreement”, Contracts and
Licensing Deals Net Revenues





Our
publishing net revenues by platform, contracts and licensing deals net revenues
for the years ended December 31, 2009 and 2008 breakdown are as follows: (in
thousands)





2009
            
            
            2008
            
            
            Change
            
            
            %
      ChangePersonal
      Computer
            
            
            1042
            
            
            
            261
            
            
            
            781
            
            
            
            299
            %Video
      Game Console
            
            
            100
            
            
            
            67
            
            
            
            33
            
            
            
            49
            %OEM,
      Royalty & Licensing
            
            
            218
            
            
            
            0
            
            
            
            218
            
            
            
            100
            %Other
            
            
            0
            
            
            
            1,050
            (1)
            
            
            (1,050
            )
            
            
            (100
            )%Net
      Revenues
            
            
            1,360
            
            
            
            1,378
            
            
            
            (18
            )
            
            
            (1
            )%





(1)  Recognition
of Revenue of Atari Option Exercise Agreement.





PC net
revenues for PC net revenues the year ended December 31, 2009 were $1,042,000,
an increase of 299% compared to the same period in 2008.  The increase
in PC net revenues in 2009 was primarily from retail distribution and electronic
distribution of back catalog games.





Our video
game console net revenues for the year ended December 31, 2009 were $100,000 an
increase of 49% compared to the same period in 2008, mainly due to electronic
distribution of back catalog games..





Our OEM,
royalty and licensing revenues for the year ended December 31, 2009 were
218,000, an increase of 100% compared to the same period in 2008, due to new
back catalog games licensing.


The
Company had $1,050,000 in income from Atari Interactive exercising an existing
option to purchase certain intellectual properties from the company in exchange
for debt as a onetime non-recurring event during 2008.


19


Our
publishing net revenues by platform, contracts and licensing deals net revenues
for the years ended December 31, 2008 and 2007 breakdown is as follows: (in
thousands)





2008
            
            
            2007
            
            
            Change
            
            
            %
      ChangePersonal
      Computer
            
            
            261
            
            
            
            222
            
            
            
            39
            
            
            
            17.5
            %Video
      Game Console
            
            
            67
            
            
            
            29
            
            
            
            38
            
            
            
            131
            %OEM,
      Royalty & Licensing
            
            
            0
            
            
            
            0
            
            
            
            
            
            
            
            0Other
            
            
            1,050
            (1)
            
            
            5,750
            (2)
            
            
            4,700
            
            
            
            (82
            )%Net
      Revenues
            
            
            1,360
            
            
            
            6,001
            
            
            
            (4,641
            )
            
            
            (77
            )%




(1)                 Recognition
of Revenue of Atari Option Exercise Agreement.


(2)                 Recognition
of Revenue of the sale of  “Fallout”





PC net
revenues for the year ended December 31, 2008 were $261,000, an increase of
17.5% compared to the same period in 2007.  The increase in PC net
revenues in 2008 was primarily due to an increase in  back catalog
sales.





Our video
game console net revenues for the year ended December 31, 2008 were $67,000 an
increase of 131% compared to the same period in 2007, mainly due to an increase
in back catalog sales.





In 2007
the Company had $5,750,000 in income from recognition of the sale of “Fallout”
as a onetime non- recurring event.





Cost
of Goods Sold; Gross Margin





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





Our net
revenues, cost of goods sold and gross margin for the years ended December 31,
2009 and 2008 breakdown as follows: (in thousands)





2009
            
            
            2008
            
            
            Change
            
            
            %
      ChangeNet
      Revenues
            
            
            1,360
            
            
            
            1,378
            
            
            
            (18
            )
            
            
            (1.3
            )%Cost
      of Goods Sold
            
            
            147
            
            
            
            12
            
            
            
            (135
            )
            
            
            (113.5
            )%Gross
      Margin
            
            
            1,213
            
            
            
            1,366
            
            
            
            (153
            )
            
            
            (11.2
            )%





Our cost
of goods sold increased to $147,000 in the year ended December 31, 2009 compared
to $12,000 in the same period in 2008. Our gross margin decreased to $1,213,000
for the twelve months ended December 31, 2009 from $1,366,000 in the comparable
period in 2008. The increase in cost of goods sold during 2009 is attributable
to the retail distribution of ‘Fallout.”  The decrease in gross margin
was primarily due to the recognition of the Atari non recurring transaction in
2008.





20


Our net
revenues, cost of goods sold and gross margin for the years ended December 31,
2008 and 2007 breakdown as follows: (in thousands)





2008
            
            
            2007
            
            
            Change
            
            
            %
      ChangeNet
      Revenues
            
            
            1,378
            
            
            
            6,001
            
            
            
            (4,623
            )
            
            
            520.5
            %Cost
      of Goods Sold
            
            
            12
            
            
            
            8
            
            
            
            (4
            )
            
            
            (95.2
            )%Gross
      Margin
            
            
            1,366
            
            
            
            5,993
            
            
            
            (4,627
            )
            
            
            649.1
            )%





Our cost
of goods sold increased to $12,000 in the year ended December 31, 2008 compared
to $8,000 in the same period in 2007. Our gross margin decreased to $1,366,000
for the twelve months ended December 31, 2008 from $5,993,000 in the comparable
period in 2007. The decrease  in gross margin was primarily due to the
sale of “ Fallout” in 2007.





Marketing
and Sales





Our
marketing and sales expenses for the years ended December 31, 2009 and 2008
breakdown as follows: (in thousands)





2009
            
            
            2008
            
            
            Change
            
            
            %
      ChangeMarketing
      and Sales
            
            
            359
            
            
            
            0
            
            
            
            (359
            )
            
            
            100
            %





Marketing
and sales expenses primarily consist of  sales
commissions,  and other related operating expenses. Marketing and
sales expenses for the twelve months ended December 31, 2009 were $359,000, a
100.00% increase as compared to the same period in 2008.  The increase
in marketing and sales expenses was primarily due to  sales
commissions incurred under various distribution agreements paid in connection
with retail and electronic distribution of back catalog games.





Our
marketing and sales expenses for the years ended December 31, 2008 and 2007
breakdown as follows: (in thousands)





2008
            
            
            2007
            
            
            Change
            
            
            %
      ChangeMarketing
      and Sales
            
            
            0
            
            
            
            245
            
            
            
            (245
            )
            
            
            100
            %





Marketing
and sales expenses for the twelve months ended December 31, 2008 was $0, a 100%
decrease as compared to the 2007.





General
and Administrative





Our
general and administrative expenses for the years ended December 31, 2009 and
2008 breakdown as follows: (in thousands)





2009
            
            
            2008
            
            
            Change
            
            
            %
      ChangeGeneral
      and Administrative
            
            
            1,992
            
            
            
            1,492
            
            
            
            500
            
            
            
            33.5
            %





General
and administrative expenses primarily consist of administrative personnel
expenses, facilities costs, compensation expense for options, legal
expenses and other related operating expenses.  General and
administrative expenses for the year ended December 31, 2009 were $1.992
million, a 33.5% increase as compared to the same period in 2008.





Our
general and administrative expenses for the years ended December 31, 2008 and
2007 breakdown as follows: (in thousands)





2008
            
            
            2007
            
            
            Change
            
            
            %
      ChangeGeneral
      and Administrative
            
            
            1,492
            
            
            
            1,274
            
            
            
            218
            
            
            
            17.12
            %





General
and administrative expenses primarily consist of administrative personnel
expenses, facilities costs, professional fees, and other related operating
expenses.  General and administrative expenses for the year ended
December 31, 2008 were $1.492 million, a 17% increase as compared to the same
period in 2007.





21


Product
Development





Our
product development expenses for the years ended December 31, 2009 and 2008
breakdown as follows: (in thousands)





2009
            
            
            2008
            
            
            Change
            
            
            %
      ChangeProduct
      Development
            
            
            279
            
            
            
            328
            
            
            
            (49
            )
            
            
            (14.94
            )%





Product
development expenses for the year ended December 31, 2009 were $ 279,000, a
14.94% decrease as compared to the same period in 2008.  This
decrease was mainly due to a decrease in staffing in the amount of ($63,000) and
an increase in overhead of $14,000 .





Our
product development expenses for the years ended December 31, 2008 and 2007
breakdown as follows: (in thousands)





2008
            
            
            2007
            
            
            Change
            
            
            %
      ChangeProduct
      Development
            
            
            328
            
            
            
            18
            
            
            
            310
            
            
            
            (172.2
            )%





Product
development expenses for the year ended December 31, 2008 were $ 328,000, a
172.2%  increase  as compared to the same period in
2007.





Other
Expense (Income), Net





Our other
expense for the years ended December 31, 2009 and 2008 breakdown as follows: (in
thousands)





2009
            
            
            2008
            
            
            Change
            
            
            %
      ChangeOther
      Expense (Income)
            
            
            97
            
            
            
            39
            
            
            
            58
            
            
            
            148.7
            %





Other
income consists primarily of interest expense on debt in the amount of
$39,000, bad debt expenses in the amount of $13,000,  foreign
currency exchange transactions gains of$14,000,write off of intellectual
properties of $126,000,  nonrecurring income licensing settlements of
($35,000), prior period reversals of accruals of ($35,000), rental income in the
amount of ($4,000) and  additional miscellaneous adjustments of
$(21,000).





Our other
expense for the years ended December 31, 2008 and 2007 breakdown as follows: (in
thousands)





2008
            
            
            2007
            
            
            Change
            
            
            %
      ChangeOther
      Expense (Income)
            
            
            39
            
            
            
            (1,401
            )
            
            
            1,440
            
            
            
            102
            %





Other
income consists primarily of interest expense on debt in the amount of $35,000,
California Franchise Tax  (Alternative Minimum Tax) for the year ended
2007 in the amount of $39,000, bad debt expenses in the amount of $6,000,
litigation reserve in the amount of $31,000, foreign currency exchange
transactions gains of($9,000), reversal of bad debts ($34,000), rental income in
the amount of ($24,000) and interest income in the amount of ($7,000) and
additional miscellaneous adjustments of $2,000.





Provision
(Benefit) for Income Taxes





We
recorded no tax provision for the years ended December 31, 2009, 2008 and
2007.





Liquidity
and Capital Resources





As of
December 31, 2009, we had a working capital deficit of approximately $2,841,000,
and our cash balance was approximately $1,000.  We cannot continue to
fund our current operations without obtaining additional financing or
income.





During
2007 we sold “Fallout” to a third party and entered into subject to satisfaction
of various condition the license back which could allow us to create, develop
and exploit a “Fallout” MMOG. We are planning to exploit the license back of
“Fallout” MMOG.





22


We have
contracted with Masthead Studios to fund the development of a Massively
Multiplayer Online Game (MMOG), code named "Project: V13." As a part of the
agreement, the game utilizes Masthead's proprietary tools and MMOG technology
developed for Masthead's "Earthrise" project.


We are
leveraging our portfolio of gaming properties through sequels and various
development and publishing arrangements. We are developing sequels to some of
our most successful games, including Battlechess, Clayfighter, Earthworm Jim,
Dark Alliance, Descent, MDK2 and Stonekeep. We have reinitiated our in-house
game development studio, and have hired game developers. We have obtained
distribution rights to Prehistorik Man and Legendary Wars: T-Rex Rumble for
Nintendo DSi.





We have
entered into a Game Production Agreement with Interactive Game Group which
provides for the financing of game development under certain
conditions.





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





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





Our
primary capital needs have historically been working capital requirements
necessary to fund our operations. Our operating activities  provided cash
of $25,000 during the twelve months ended December 31, 2009.




We
entered into various licensing agreements during 2009 under which we licensed
others to exploit games that we have intellectual property rights to. We expect
in 2010 to enter into similar license arrangements to generate cash for the
Company’s operations.





No
assurance can be given that funding can be obtained by us on acceptable terms,
or at all. These conditions, combined with our deficits in stockholders' equity
and working capital, raise substantial doubt about our ability to continue as a
going concern.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements under which we have obligations under a
guaranteed contract including indirect guarantees of indebtedness of
others.  We do not have any retained or contingent interest in assets
transferred to an unconsolidated entity or similar arrangement that serves as
credit, liquidity or market risk support to such entity for such
assets.  We also do not have any obligation, including a contingent
obligation, under a contract that would be accounted for as a derivative
instrument.  We have no obligations, including a contingent obligation
arising out of a variable interest  in an unconsolidated entity that
is held by, and material to, the registrant, where such entity provides
financing, liquidity, market risk or credit risk support to, or engages in
leasing, hedging or research and development services with the
registrant.





Contractual
Obligations





The following table summarizes certain
of our contractual obligations under non-cancelable contracts and other
commitments at December 31, 2009, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods (in
thousands).





Contractual
      Obligations
            Total
            Less
      than

                1
      year
            1
      - 3

                years
            3
      - 5

                years
            More
      than

                5
      yearsLease
      Commitments (1)
            322
            115
            207
            0
            0







23


(1) The
Company as of November 1, 2009 has relocated to new offices in Los Angeles and
has a lease commitment through October 2012. The Company also has a lease
commitment in Irvine for our new development offices through March 31, 2011. The
Company also has a lease commitment at the French representation office through
February 28, 2011 with an option for an additional 3 years.




Recent
Accounting Pronouncements





Only July
1, 2009, the Financial Accounting Standards Board (FASB) launched the FASB
Accounting Standards Codification as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification is effective for interim and annual periods ending after September
15, 2009. All existing accounting standards documents are superseded as
described in FASB Statement No. 168, The FASB Accounting Standards
Codification  and the Hierarchy of Generally Accepted Accounting
Principles. All other accounting literature not included in the
Codification is nonauthoritative.





Other
recent accounting updates issued by FASB and the SEC did not or are not believed
by management to have a material impact on the Company’s present or future
consolidated financial statements.





Item
7A.         QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We do not
have any derivative financial instruments as of December 31, 2009. However, we
are exposed to certain market risks arising from transactions in the normal
course of business, principally the risk associated with foreign currency
fluctuations.  We do not hedge our risk associated with foreign
currency fluctuations.





Foreign
Currency Risk





Our
earnings are affected by fluctuations in the value of our foreign subsidiary's
functional currency, and by fluctuations in the value of the functional currency
of our foreign receivables.





We
recognized a $14,000 loss, $9,000 gain and $60,000 loss during the years ended
December 31, 2009, 2008 and 2007, respectively, primarily in connection with
foreign exchange fluctuations in the timing of payments received on accounts
receivable from foreign distributors or licensees.





Item
8.            CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





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





Item
9A.(T)    CONTROLS AND PROCEDURES





As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
interim Chief Financial Officer of the effectiveness of the design and operation
of our disclosure controls and procedures. Based upon this evaluation, our Chief
Executive Officer and interim Chief Financial Officer concluded that our
disclosure controls and procedures were effective, at the reasonable assurance
level, in ensuring that information required to be disclosed is recorded,
processed, summarized and reported within the time periods specified by the SEC
rules and forms and in timely alerting him to material information required to
be included in this report.





There
were no changes made in our internal controls over financial reporting that
occurred during the quarter ended December 31, 2009  that have
materially affected or reasonably likely to materially affect these
controls.





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





24


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





Management
Report on Internal Control over Financial Reporting





The
Company’s management, including our Chief Executive Officer and interim Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting (as such term is defined in Exchange
Act Rule 13a-15(f) and 15d-15(f)) for Interplay Entertainment Corp. and its
subsidiaries (the “Company”). The Company’s internal control system was designed
to provide reasonable assurance to the Company’s management and Board of
Directors regarding the preparation and fair presentation of published
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America.





Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changing conditions, effectiveness of
internal control over financial reporting may vary over time. The Company’s
processes contain self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.





Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria for effective internal
control described in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its
assessment, management concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2009.








PART
III








Item
10.          DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT





The
information in Item10 is incorporated herein by reference to the section
entitled “Proposal One ---- Election of Directors” contained in the Proxy
Statement ( the “Proxy Statement”) for the 2010 annual meeting of the
stockholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended December 31, 2009.





Item
11.          EXECUTIVE
COMPENSATION





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







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





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





Item
13.          CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS





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





25


Item
14.          PRINCIPAL ACCOUNTING
FEES AND SERVICES





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





PART IV








Item 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES


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





(1)         Financial
Statements





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





(2)         Financial
Statement Schedules




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.





26


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 Los Angeles , California this 15th day of April,
2010.





INTERPLAY
ENTERTAINMENT CORP.








/s/ Hervé
Caen


By:___________________________________


Hervé
Caen


Its:  Chief
Executive Officer and


Interim
Chief Financial Officer


(Principal
Executive and















Exhibit
24.1


POWER
OF ATTORNEY





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





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





Signature
            
            Title
            Date/s/
      Hervé Caen
            
            Chief
      Executive Officer, Interim Chief
            April
      15, 2010Hervé
      Caen
            
            Financial
      Officer and Director(Principal
      Executive and Financial andAccounting
      Officer)/s/
      Eric Caen
            
            Director
            April
      15, 2010Eric
      Caen/s/
      Michel Welter
            
            Director
            April
      15, 2010Michel
      Welter/s/
      Alberto Haddad
            
            Director
            April
      15, 2010Alberto
      Haddads/
      Xavier de Portal
            
            Director
            April
      15, 2010Xavier
      de Portal





27


EXHIBIT
INDEX





EXHIBIT
              NO.
            
            DESCRIPTION3.1
            
            Amended
      and Restated Certificate of Incorporation of the Company; (incorporated
      herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form
      10-K for the year ended December 31, 2003).3.2
            
            Certificate
      of Designation of Preferences of Series A Preferred Stock, as filed with
      the Delaware Secretary of State on April 14, 2000; (incorporated herein by
      reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1999).3.3
            
            Certificate
      of Amendment of Certificate of Designation of Rights, Preferences,
      Privileges and Restrictions of Series A Preferred Stock, as filed with the
      Delaware Secretary of State on October 30, 2000; (incorporated herein by
      reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2003).3.4
            
            Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of the
      Company, as filed with the Delaware Secretary of State on November 2,
      2000; (incorporated herein by reference to Exhibit 3.4 to the Company’s
      Annual Report on Form 10-K for the year ended December 31,
      2003).3.5
            
            Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of the
      Company, as filed with the Delaware Secretary of State on January 21,
      2004; (incorporated herein by reference to Exhibit 3.5 to the
      Company’s  Quarterly Report on Form 10-Q for the Quarter ended
      March 31, 2008).3.6
            
            Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of the
      Company, as filed with the Delaware Secretary of State on July 1, 2008;
      (incorporated herein by reference to Exhibit 3.6 to the
      Company’s  Quarterly Report on Form 10-Q for the Quarter ended
      September 30, 2008).3.7
            
            Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of the
      Company, as filed with the Delaware Secretary of State on July 1, 2008;
      (incorporated herein by reference to Exhibit 3.7 to the
      Company’s  Quarterly Report on Form 10-Q for the Quarter ended
      September 30, 2008).3.8
            
            Amended
      and Restated Bylaws of the Company; (incorporated herein by reference to
      Exhibit 3.8 to the Company’s Quarterly Report on Form 10-Q for the Quarter
      ended September 30, 2008).4.1
            
            Specimen
      form of stock certificate for Common Stock; (incorporated herein by
      reference to Exhibit 4.1 to the Form S-1)10.01
            
            Third
      Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan");
      (incorporated herein by reference to Appendix A of the Definitive Proxy
      Statement filed on August 20, 2002).10.02
            
            Form
      of Stock Option Agreement pertaining to the 1997 Plan; (incorporated
      herein by reference to exhibit 10.2 to the form S-1).10.03
            
            Form
      of Restricted Stock Purchase Agreement pertaining to the 1997 Plan;
      (incorporated herein by reference to Exhibit 10.3 to the Form
      S-1).10.04
            
            Form
      of Indemnification Agreement for Officers and Directors of the Company;
      (incorporated herein by reference to Exhibit 10.11 to the Form
      S-1).10.05
            
            Employment
      Agreement between the Company and Herve Caen dated November 9, 1999;
      (incorporated herein by reference to Exhibit 10.3 to the Company's
      Quarterly Report on Form 10-Q for the quarter ended September 30,
      1999).   28
   10.06
            
            Trademark
      License Agreement by and between Bethesda Softworks LLC and the Company
      dated as of April 4, 2007; (incorporated herein by reference to exhibit
      10.49 to the Company’s   8-K filed on April 12,
      2007).10.07
            
            Form
      of Option exercise agreement dated July 24,2008 between Atari Interactive
      Inc. and the Company.; (incorporated herein by reference to exhibit 10.08
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September  30, 2008.14.1
            
            Code
      of Ethics of the Company; (incorporated herein by reference to Exhibit
      14.1 to Amendment No. 1 tothe

                Company’s
      Annual Report on Form 10-K for the year ended December 31, 2003 filed on
      April 27, 2004).21.1
            
            Subsidiaries
      of the Company.23.1
            
            Consent
      of Jeffrey S. Gilbert, Independent Registered Public Accounting
      firm24.1
            
            Power
      of Attorney (included on signature page to this Form
  10-K)31.1
            
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
      under the Securities Exchange Act of 1934, as amended.31.2
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
      under the Securities Exchange Act of 1934, as amended.32.1
            
            Certification
      of Chief Executive Officer and interim Chief Financial Officer pursuant to
      18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 by Hervé
Caen.







29


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS







INTERPLAY
ENTERTAINMENT CORP. AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS


AND
REPORT OF INDEPENDENT AUDITOR











PageReports
      of Independent Registered Public Accounting Firm
            
            F-2Consolidated
      Balance Sheets at December 31, 2009 and 2008
            
            F-3Consolidated
      Statements of Operations for the years ended
              December 31, 2009, 2008 and
      2007
            
            F-4Consolidated
      Statements of Stockholder's Equity (Deficit) and Comprehensive Income
      (loss) for the
              years ended December 31, 2009,
      2008, 2007
            
            F-5Consolidated
      Statements of Cash Flows for the years ended
              December 31, 2009, 2008 and
      2007
            
            F-6Notes
      to Consolidated Financial Statements
            
            F-7














F-1


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Interplay
Entertainment Corp.





I have
audited the consolidated balance sheets of Interplay Entertainment Corp and
Subsidiaries (the "Company") as of December 31, 2009 and 2008 and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss)and cash flows each of the years in the three year
period ending December 31, 2009. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my
audit.





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





In my
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Interplay
Entertainment Corp. and Subsidiaries as of December 31, 2009 and 2008 and the
results of their operations and their cash flows for each of the years in the
three year period ending December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has limited liquid resources, a
history of losses, negative working capital of $2,841,000 and stockholders'
deficit of $2,800,000. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 1.  The consolidated financial
statements do not include any adjustment that might result from the outcomes of
these uncertainties.





JEFFREY
S. GILBERT





Los
Angeles, California


April 15,
2010








F-2


INTERPLAY
ENTERTAINMENT CORP. AND SUBSIDIARIES




CONSOLIDATED
BALANCE SHEETS





December
      31,ASSETS
            
            2009
            
            
            2008Current
      Assets:Cash
            
            $
            1,000
            
            
            $
            0Trade receivables, net of
      allowances of $0 and $6,000, respectively
            
            
            88,000
            
            
            
            87,000Inventories
            
            
            28,000
            
            
            
            1,000Deposits
            
            
            14,000
            
            
            
            7,000Prepaid
    expenses
            
            
            13,000
            
            
            
            11,000Other
    receivables
            
            
            12,000
            
            
            
            9,000Total current
      assets
            
            
            156,000
            
            
            
            115,000Property
      and equipment, net
            
            
            41,000
            
            
            
            48,000Total  assets
            
            $
            197,000
            
            
            $
            163,000LIABILITIES AND STOCKHOLDERS' EQUITY
      (DEFICIT)Current
      Liabilities:Drawings in excess of cash
      balances
            
            $
            0
            
            
            $
            24,000Convertible note
      payable
            
            
            
            
            
            
            53,000Notes payable officer and
      directors
            
            
            487,000
            
            
            
            469,000Accounts
      payable  and accrued expenses
            
            
            1,745,000
            
            
            
            1,209,000Deferred
income
            
            
            765,000
            
            
            
            710,000Total current
      liabilities
            
            
            2,997,000
            
            
            
            2,465,000Commitments
      and contingenciesStockholders'
      Equity (Deficit):Preferred
      stock, $0.001 par value 5,000,000 shares authorized; no shares issued or
      outstanding, respectivelyCommon
      stock, $0.001 par value 300,000,000 shares authorized; issued and
      outstanding  115,695,268 shares in 2009  and
      108,140,301  shares in 2008116,000
            
            
            
            108,000Paid-in capital
            
            
            123,357,000
            
            
            
            122,309,000Accumulated
      deficit
            
            
            (126,356,000
            )
            
            
            (124,842,000
            )Accumulated other
      comprehensive income
            
            
            83,000
            
            
            
            123,000Treasury stock of 4,658,216
      shares at December 31,2009 and 2008Total
      stockholders'  (deficit)
            
            
            (2,800,000
            )
            
            
            (2,302,000
            )Total liabilities and
      stockholders’(deficit)
            
            $
            197,000
            
            
            $
            163,000





See
accompanying notes.





F-3


INTERPLAY
ENTERTAINMENT CORP. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Revenue
            
            $
            1,360,000
            
            
            $
            1,378,000
            
            
            $
            6,001,000Cost
      of goods sold
            
            
            147,000
            
            
            
            12,000
            
            
            
            8,000Gross
      profit
            
            
            1,213,000
            
            
            
            1,366,000
            
            
            
            5,993,000Operating
      expenses:Marketing
      and sales
            
            
            359,000
            
            
            
            0
            
            
            
            245,000General
      and administrative
            
            
            1,992,000
            
            
            
            1,492,000
            
            
            
            1,275,000Product
      development
            
            
            279,000
            
            
            
            328,000
            
            
            
            18,000Total
      operating expenses
            
            
            2,630,000
            
            
            
            1,820,000
            
            
            
            1,538,000Operating
      income  (loss)
            
            
            (1,417,000
            )
            
            
            (454,000
            )
            
            
            4,455,000Other
      income (expense):Interest
      expense
            
            
            (39,000
            )
            
            
            (35,000
            )
            
            
            (59,000
            )Other
      (primarily reversal of accounts payable in 2007)
            
            
            (58,000
            )
            
            
            (4,000
            )
            
            
            1,460,000Total
      other income (expense)
            
            
            (97,000
            )
            
            
            (39,000
            )
            
            
            1,401,000Income
      (loss) before provision (benefit) forincome
      taxes
            
            
            (1,514,000
            ))
            
            
            (493,000
            )
            
            
            5,856,000Provision
      (benefit) for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income (loss)
            
            $
            (1,514,000
            ))
            
            $
            (493,000
            )
            
            $
            5,856,000Net
      income (loss) per common share:Basic
            
            $
            (0.014
            )
            
            $
            (0.004
            )
            
            $
            0.059Diluted
            
            $
            (0.014
            )
            
            $
            (0.004
            )
            
            $
            0.057Weighted
      average number of shares used in calculatingnet
      income (loss) per common shareBasic
            
            
            108,770,183
            
            
            
            103,482,000
            
            
            
            99,197,000Diluted
            
            
            108,770,183
            
            
            
            103,482,000
            
            
            
            102,027,000










F-4


INTERPLAY
ENTERTAINMENT CORP. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


AND
COMPREHENSIVE INCOME (LOSS)


YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007


(Dollars
in thousands)


Accumulated
                OtherPreferred
      Stock
              
              
              Common
      Stock
              
              
              Paid-in
              
              
              Accumulated
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              Income
      (Loss)
              
              
              TotalBalance,
      December 31, 2006
              
              
              -
              
              
              $
              -
              
              
              
              103,855,634
              
              
              $
              104
              
              
              $
              121,966
              
              
              $
              (130,205
              )
              
              $
              50
              
              
              $
              (8,087
              )Issuance
      of Stock Options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12
              
              
              
              -
              
              
              
              -
              
              
              
              12Shares
      for Debt – SpecialSituationsTreasury
      stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,856
              
              
              
              -
              
              
              
              5,856Other
      comprehensive income, net of income taxes:
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Foreign
      currency translationadjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (600
              )
              
              
              -Balance,
      December 31, 2007
              
              
              -
              
              
              
              -
              
              
              
              103,855,634
              
              
              
              104
              
              
              
              121,976
              
              
              
              (124,349
              )
              
              $
              (10
              )
              
              $
              (2,279
              )Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (493
              )
              
              
              -
              
              
              
              (493
              )Exercise
      of Warrants for common stock by CEO
              
              
              
              
              
              
              
              
              
              
              4,000,000
              
              
              
              4
              
              
              
              107
              
              
              
              
              
              
              
              
              
              
              
              111Sale
      of common stock
              
              
              -
              
              
              
              -
              
              
              
              284,667
              
              
              
              -
              
              
              
              27
              
              
              
              -
              
              
              
              -
              
              
              
              27Issuance
      of warrants for services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              174
              
              
              
              -
              
              
              
              -
              
              
              
              174Issuance
      of stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25
              
              
              
              -
              
              
              
              -
              
              
              
              25Other
      comprehensive income, net of income taxes:
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              133
              
              
              
              (133
              )Balance,
      December 31, 2008
              
              
              
              
              
              
              
              
              
              
              108,140,301
              
              
              $
              108
              
              
              $
              122,309
              
              
              $
              (124,842
              )
              
              $
              123
              
              
              $
              (2,302
              )Exercise
      of Warrants for common stock
      by CEO
              
              
              -
              
              
              
              -
              
              
              
              2,100,000
              
              
              
              2
              
              
              
              58
              
              
              
              -
              
              
              
              -
              
              
              
              60Issuance
      of common stock  for debt, intellectual property and
      cash
              
              
              -
              
              
              
              -
              
              
              
              5,454,967
              
              
              
              6
              
              
              
              322
              
              
              
              -
              
              
              
              -
              
              
              
              328Issuance
      of Warrants for services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              573
              
              
              
              -
              
              
              
              
              
              
              
              573Issuance
      of warrants for sale of stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              23
              
              
              
              -
              
              
              
              -
              
              
              
              23Issuance
      of  Stock OptionTreasury stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              72
              
              
              
              -
              
              
              
              
              
              
              
              72Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,514
              )
              
              
              -
              
              
              
              (1,514
              )Other
      comprehensive income, net of income taxes:
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (40
              )
              
              
              (40
              )Balance,
      December 31, 2009
              
              
              -
              
              
              $
              -
              
              
              
              115,695,268
              
              
              $
              116
              
              
              $
              123,357
              
              
              $
              (126,356
              )
              
              $
              83
              
              
              $
              (2,800
              )





See
accompanying notes.


F-5


INTERPLAY
ENTERTAINMENT CORP. AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS




Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (1,514,000
            )
            
            $
            (493,000
            )
            
            $
            5,856,000Adjustments
      to reconcile net income (loss) tocash
      provided by (used in) operating activities--Depreciation
      and amortization
            
            
            14,000
            
            
            
            9,000
            
            
            
            2,000Issuance
      of stock options to employees
            
            
            72,000
            
            
            
            25,000
            
            
            
            12,000Issuance
      of warrants for services to CEO and directors
            
            
            573,000
            
            
            
            174,000Issuance
      of warrants in conjunction for conversion of debt
            
            
            23,000Write
      off of intellectual property acquired by issuance of common
      stock
            
            
            126,000Reversal
      of prior year recorded liabilities
            
            
            
            
            
            
            -
            
            
            
            (1,425,000
            )Changes
      in assets and liabilities:
            
            
            
            
            
            
            -Trade
      receivables, net
            
            
            (1,000
            )
            
            
            (61,000
            )
            
            
            201,000Trade
      receivables from related parties
            
            
            -
            
            
            
            
            
            
            
            -Inventories
            
            
            (27,000
            )
            
            
            -
            
            
            
            7,000Deposits
            
            
            (7,000
            )
            
            
            (3,000
            )
            
            
            -Prepaid
      expenses
            
            
            (2,000
            )
            
            
            (1,000
            )
            
            
            (4,000
            )Settlement
      of Atari Note
            
            
            
            
            
            
            (1,050,000
            )
            
            
            -Other
      current assets/receivables
            
            
            (3,000
            )
            
            
            4,000
            
            
            
            4,000Drawings
      in excess of cash balance
            
            
            
            
            
            
            24,000Note
      payable officer and directors
            
            
            48,000Accounts
      payable and accrued expenses
            
            
            538,000
            
            
            
            92,000
            
            
            
            (3,285,000
            )Deferred
      Income
            
            
            55,000
            
            
            
            115,000
            
            
            
            135,000Accumulated
      other comprehensive income
            
            
            (40,000
            )
            
            
            133,000
            
            
            
            (60,000
            )Net
      cash provided by (used in) operating activities
            
            
            (145,000
            )
            
            
            (1,032,000
            )
            
            
            1,443,000Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (8,000
            )
            
            
            (52,000
            )
            
            
            (8,000
            )Net
      cash (used in) investing activities
            
            
            (8,000
            )
            
            
            (52,000
            )
            
            
            (8,000
            )Cash
      flows from financing activities:Payment
      of debt
            
            
            
            
            
            
            -
            
            
            
            (382,000
            )Demand
      notes to CEO and directors
            
            
            
            
            
            
            (269,000
            )
            
            
            35,000Exercise
      of warrants for common stock by CEO
            
            
            -
            
            
            
            111,000
            
            
            
            -Sale
      of common stock-net
            
            
            148,000
            
            
            
            27,000
            
            
            
            -Note
      Payable - CEO
            
            
            30,000Proceeds
      from debt
            
            
            -
            
            
            
            53,000
            
            
            
            -Net
      cash used in  financing activities
            
            
            178,000
            
            
            
            (78,000
            )
            
            
            (347,000
            )Net
      increase (decrease) in cash
            
            
            25,000
            
            
            
            (1,162,000
            )
            
            
            1,088,000Cash,
      beginning of year
            
            
            (24,000
            )
            
            
            1,138,000
            
            
            
            50,000Cash,
      end of year
            
            $
            1,000
            
            
            $
            (24,000
            )
            
            $
            1,138,000Supplemental
      cash flow information:Cash
      paid during the year for interest
            
            $
            39,000
            
            
            $
            33,000
            
            
            $
            371,000Issuance
      of common shares for intellectual properties subsequently written
      off
            
            $
            126,000
            
            
            $
            -
            
            
            $
            -Issuance
      of common stock for liquidation of convertible debt
            
            $
            53,000
            
            
            $
            -
            
            
            $
            -Exercise
      of warrants for common stock - CEO
            
            $
            60,000
            
            
            
            -
            
            
            
            -





See
accompanying notes.


F-6


INTERPLAY
ENTERTAINMENT CORP. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended DECEMBER 31, 2009, 2008 and 2007








1.
            Description
      of Business and Operations





Interplay
Entertainment Corp., a Delaware corporation, and its subsidiaries (the
"Company"), publish, distribute and license to others interactive
entertainment software.  The Company's software is developed for use
on various interactive entertainment software platforms, including personal
computers and video game consoles.The
Company’s common stock is quoted on the NASDAQ OTC Bulletin Board under the
symbol “IPLY”.





Going
Concern





The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the normal
course of business.  The Company had net loss of $1,514,000 in 2009.
At December 31, 2009, the Company had a stockholders’ deficit of $2,800,000 and
a working capital deficit of $2,841,000. The Company has historically funded its
operations from licensing fees, royalty and distribution fee advances, and will
continue to exploit its existing intellectual property rights in our videogames
to provide future funding.





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





The
Company expects that it will need to obtain additional financing or income to
fund its current operations.  However, no assurance can be given that
funding can be obtained on acceptable terms, or at all.  These
conditions, combined with the Company’s historical operating losses and its
deficits in stockholders’ equity and working capital, raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
liabilities that might result from the outcome of this uncertainty.





2.
            Summary
      of Significant Accounting Policies





Consolidation





The
accompanying consolidated financial statements include the accounts of Interplay
Entertainment Corp. and its wholly-owned subsidiaries, Interplay Productions
Limited (U.K.), Interplay OEM, Inc., Games On-line and Interplay Japan which is
inactive.  All significant inter-company accounts and transactions
have been eliminated.





Cash
and Cash Equivalents





The
Company considers all highly liquid investments with insignificant interest rate
risks and original maturities of three months or less from the date of purchase
to be cash equivalents. The carry amounts of cash and cash equivalents
approximate their fair values.





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates made in preparing
the consolidated financial statements include, among others, sales returns and
allowances, allowances for uncollectible receivables, cash flows used to evaluate
the recoverability of prepaid licenses and royalties and long-lived assets,
stock- based transaction, and certain accrued liabilities related to
litigation.  Actual results could differ from those
estimates. F-7
  Risks
and Uncertainties





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





Inventories





Inventories
consist of packaged software ready for shipment or at sales locations, including
video game console software.  Inventories are valued at the lower of
cost (first-in, first-out) or market.  The Company regularly monitors
inventory for excess or obsolete items and makes any valuation corrections when
such adjustments are known.  Based on management’s evaluation, the
Company had not established any valuation allowance at December 31,
2009.





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





Prepaid
Licenses and Royalties





The
Company has in the past had prepaid licenses and royalties consisting of fees
paid to intellectual property rights holders for use of their trademarks or
copyrights. Also included in prepaid royalties were prepayments made to
independent software developers under development arrangements that have
alternative future uses.  These payments were contingent upon the
successful completion of milestones, which generally represent specific
deliverables.  Royalty advances were recoupable against future sales
based upon the contractual royalty rate.  The Company amortized these
costs of licenses, prepaid royalties and other outside production costs to cost
of goods sold over six months commencing with the initial shipment in each
region of the related title.  The Company amortized these amounts at a
rate based upon the actual number of units shipped with a minimum amortization
of 75% in the first month of release and a minimum of 5% for each of the next
five months after release.  This minimum amortization rate reflected
the Company's typical product life cycle.  Management evaluates the
future realization of such costs quarterly and charges to cost of goods sold any
amounts that management deems unlikely to be fully realized through future
sales.  Such costs were classified as current and noncurrent assets
based upon estimated product release dates. There were no prepaid licenses and
royalties at December 31, 2009.





Product Development
Costs





Product development
costs would include payments made to independent software developers under
development agreements, as well as direct costs incurred for internally
developed products. For the year ended December 31, 2009 the Company incurred
$279,000 of product development costs.





Software
development costs are capitalized once the technological feasibility of a
product is established and such costs are determined to be recoverable.
Technological feasibility of a product encompasses both technical design
documentation and game design documentation. For products where proven
technology exists, this may occur early in the development cycle. Technological
feasibility is evaluated on a product-by-product basis. Prior to a product’s
release, we expense, as part of “cost of sales — software royalties and
amortization,” capitalized costs when we believe such amounts are not
recoverable. Capitalized costs for those products that are cancelled or
abandoned are charged to product development expense in the period of
cancellation. Amounts related to software development which are not capitalized
are charged immediately to product development expense. We evaluate the future
recoverability of capitalized amounts on a quarterly basis. The recoverability
of capitalized software development costs is evaluated based on the expected
performance of the specific products for which the costs relate. Criteria used
to evaluate expected product performance include:  historical performance
of comparable products using comparable technology; orders for the product prior
to its release; and estimated performance of a sequel product based on the
performance of the product on which the sequel is based.




F-8




Commencing
upon product release, capitalized software development costs are amortized to
“cost of sales — software royalties and amortization” based on the ratio of
current revenues to total projected revenues, generally resulting in an
amortization period of six months or less. For products that have been released
in prior periods, we evaluate the future recoverability of capitalized amounts
on a quarterly basis. The primary evaluation criterion is actual title
performance.





Significant
management judgments and estimates are utilized in the assessment of when
technological feasibility is established, as well as in the ongoing assessment
of the recoverability of capitalized costs. In evaluating the recoverability of
capitalized costs, the assessment of expected product performance utilizes
forecasted sales amounts and estimates of additional costs to be incurred. If
revised forecasted or actual product sales are less than and/or revised
forecasted or actual costs are greater than the original forecasted amounts
utilized in the initial recoverability analysis, the net realizable value may be
lower than originally estimated in any given quarter, which could result in an
impairment charge.





Research
and development costs, which consisted primarily of product development
costs, are expensed as incurred.





Accrued
Royalties





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





Property
and Equipment





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





Long-lived
Assets





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





Goodwill
and Intangible Assets





Goodwill
and identifiable intangible assets that have indefinite useful lives are not be
amortized but rather be tested at least annually for impairment, and
identifiable intangible assets that have finite useful lives be amortized over
their useful lives. At December 31, 2009 and 2008, the Company had no goodwill
or intangible assets subject to amortization.





Fair
Value of Financial Instruments





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





Revenue
Recognition





Revenues
are recorded when products are delivered to customers based on contract
terms  and completion of the sales process.


F-9


The
Company recognizes revenue from sales by distributors, only as the
distributor recognizes sales of the Company’s products to unaffiliated third
parties.  Sales commission are recorded as marketing and sales
expense. For those agreements that provide the customers the right to multiple
copies of a product in exchange for guaranteed amounts, revenue is recognized at
the delivery and acceptance of the product gold master.  Per copy
royalties on sales that exceed the guarantee are recognized as
earned.  Guaranteed minimum royalties on sales, where the guarantee is
not recognizable upon delivery, are recognized as the minimum payments come
due.  The Company recognizes revenue on expired contracts when the
termination date of the contract is reached because guaranteed minimum royalties
are not reimbursable and is therefore, recorded as revenue.





The
Company is generally not contractually obligated to accept returns, except for
defective, shelf-worn and damaged products in accordance with negotiated
terms.  However, on a case by case basis, the Company may permit
customers to return or exchange product and may provide markdown allowances on
products unsold by a customer.  Revenue is recorded net of an
allowance for estimated returns, exchanges, markdowns, price concessions and
warranty costs.  Such allowances are based upon management's
evaluation of historical experience, current industry trends and estimated
costs. Management of the Company estimated that no allowances were necessary at
December 31, 2009, 2008 and 2007. The amount of allowances ultimately required
could differ materially in the near term from the amounts included in the
accompanying consolidated financial statements.





Customer
support provided by the Company is limited to internet support.  These
costs are not significant and are charged to expenses as incurred.





The
Company also engages in the sale of licensing rights on certain
products.  The terms of the licensing rights differ, but normally
include the right to develop and distribute a product on a specific video game
platform.  For these activities, revenue is recognized when the rights
have been transferred and no other obligations exist. The Company has entered
into various licensing agreements during 2008 under which it licensed others to
exploit games to which the Company had intellectual property
rights.





Reversal
of Certain Prior Year Accruals and Accounts Payable





During
the year ended December 31, 2007 the Company has reversed certain accruals and
accounts payables of approximately $1.4 million. It is the Company’s policy to
reverse outstanding accruals and accounts payables that have been outstanding
for over 4 years and no effort has been made by the vendor or claimant for that
period of time to collect the outstanding balances.





Advances
from Distributors





Non
refundable but recoupable advances received by the Company for the future
distribution and license rights are recorded as deferred income
and  are recognized as income  as such advances are recouped
from actual sales or when contracts with the distributors expire or are
terminated.





Sales
and Marketing





The Company generally expenses
advertising and commission  costs as incurred, except for production
costs associated with media campaigns that are deferred and charged to expense
at the first run of the advertising.  Cooperative advertising with
distributors and retailers is accrued when revenue is
recognized.  Cooperative advertising credits are reimbursed when
qualifying claims are submitted.  Sales and marketing costs
approximated $359,000, $0 and $245,000 for the years ended December 31, 2009,
2008 and 2007, respectively.





Income
Taxes





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




F-10





Foreign Currency





The
Company uses the local currency of its operating subsidiaries as the functional
currency.  Accordingly, all assets and liabilities outside the United
States are translated into U.S. dollars at the rate of exchange in effect at the
balance sheet date.  Income and expense items are translated at the
weighted average exchange rate prevailing during the period.  Gains or
losses arising from the translation of the foreign subsidiaries' financial
statements are included in the accompanying consolidated financial statements as
a component of other comprehensive loss. Gains and Losses resulting from foreign
currency transactions amounted to a $14,000 loss, $9,000 gain and $60,000 loss
during the years ended December 31, 2009, 2008 and 2007, respectively, and is
included in other income (expense) in the consolidated statements of
operations.





Net
Income (Loss) Per Share





Basic net
income (loss) per common share is computed by dividing income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding.  Diluted net income (loss) per common share is
computed by dividing income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding plus the effect of any
convertible debt, dilutive stock options and common stock warrants if
any.  For the years ended December 31, 2009 and 2008, all options and
warrants outstanding to purchase common stock were excluded from the loss per
share computation as these were antidilutive. For the year ended December 31,
2007 certain warrants and options were dilutive and were included in diluted net
income per share.





Segment
Information





The
Company discloses information regarding operating segments   The
Company is managed, and financial information is developed, on a geographical
basis, rather than a product line basis.  Thus, the Company has
provided segment information on a geographical basis (see Note 12).





Allowance
for Doubtful Accounts





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





Cost of
Software Revenue





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





Comprehensive
Income (Loss)





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





Stock-Based
Compensation





The
Company measures and recognizes compensation cost at fair value for all
share-based payments, including warrants, stock options and restricted stock
awards.





F-11


Recent
Accounting Pronouncements





Only July
1, 2009, the Financial Accounting Standards Board (FASB) launched the FASB
Accounting Standards Codification as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification is effective for interim and annual periods ending after September
15, 2009. All existing accounting standards documents are superseded as
described in FASB Statement No. 168, The FASB Accounting Standards
Codification  and the Hierarchy of Generally Accepted Accounting
Principles. All other accounting literature not included in the
Codification is nonauthoritative.





Other
recent accounting updates issued by FASB and the SEC did not or are not believed
by management to have a material impact on the Company’s present or future
consolidated financial statements.





3.
            Detail of Selected Balance
      Sheet Accounts





Property
and Equipment





Property
and equipment consists of the following:





December
      31,2009
            
            
            2008(Dollars
      in thousands)Computers
      and equipment
            
            $
            46
            
            
            $
            38Furniture
      and fixtures
            
            
            10
            
            
            
            10Web
      Page
            
            
            17
            
            
            
            1773
            
            
            
            65Less:  Accumulated
      depreciation and amortization
            
            
            (32
            )
            
            
            (17
            )Net Equipment
            
            $
            41
            
            
            $
            48





For the years ended December 31, 2009,
2008 and 2007, the Company incurred depreciation and amortization expense of
$15,000, $10,000 and $2,000, respectively.  During the years ended
December 31, 2008, 2007 and 2006, the Company disposed of fully depreciated
equipment having an original cost of $0, $14,000 and $0,
respectively.





4.
            Notes
      Payable





The
Company issued on October 2, 2006 to the following officer and directors Herve
Caen, Eric Caen and Michel Welter conditional demand notes which have since
become demand notes (due to the change in control resulting from Financial
Planning and Development SA’s acquisition of approximately 56% of the Company’s
outstanding stock) bearing a 5% annual interest rate. The demand notes were
issued for the earned but unpaid directors’ fees to Herve Caen for $50,000, to
Eric Caen for $50,000, to Michel Welter for $85,000, and for earned but unpaid
salary to Herve Caen in the amount of $500,000. A total of $431,000 in principal
and interest remains outstanding under the demand notes as of December 31,
2009.  Interest accrued on the demand notes as of December 31, 2009
was $23,000.





The
Company issued on June 15, 2009 a $30,000 Note to Herve Caen bearing a 5% annual
interest rate for a loan made  to the Company. The Note was repaid
with interest on March 19, 2010.





The
Company issued on June 27, 2008 to Interactive Game Group a convertible
promissory note in the amount of $52,000 for consideration received in cash. The
unpaid principal balance of this Convertible Note shall bear interest at a per
annum rate equal to the three (3) months Libor interest rate plus one percent
adjusted quarterly and due with a six month term. (Current interest rate of
2.26%). The note is convertible into 400,000 shares of the  Company’s
common stock price as of June 30, 2008 ($0.13 per share) which was the market
price at the date of the agreement. On March 24, 2009 the Company issued to
Microprose, LLC, an affiliate of Interactive Game Group, 5,454,967 shares of
Common Stock of the Company and issued a warrant to purchase 1,677,483 shares of
Common Stock of the Company for a total consideration of $327,298. Such shares
and warrant were issued, and any underlying shares of Common Stock would be
issued, in a private placement exempt from registration pursuant to section 4(2)
of the Securities Act of 1933. Such warrant has a term of 3 years, an exercise
price




F-12




of $0.06,
and is immediately exercisable. Out of the consideration of $327,298, $148,000
was received in cash, $126,000 was satisfied by the acquisition of certain
intellectual property rights by the Company subsequently written off, and
$53,298wassatisfied by
the cancellation of the convertible promissory note in the amount of $52,000 and
accrued interest thereon from Interactive Game Group. These warrants were valued
using the Black-Scholes calculation and charged to
operations.


The
Company entered on July 24, 2008, into an Option Exercise Agreement (the
"Agreement") with Atari Interactive, Inc. ("Atari Interactive"). Under the
Agreement, Atari Interactive and the Company settled outstanding disputes among
them, including in connection with an existing Promissory Note dated August 19,
2004 of the Company in favor of Atari Interactive (the "Note"). Pursuant to the
Agreement, Atari Interactive exercised an existing option to purchase, and
purchased, from the Company intellectual property rights developed by the
Company in connection with the Dungeons & Dragons games. The balance of all
amounts due from the Company to Atari Interactive under the Note of
approximately $1,050,000.00 was cancelled and terminated and was recognized as
revenue.




5.
            Advances
      from Distributors which are considered Deferred
  Income





December
      31,2009
            
            
            2008(Dollars
      in thousands)Non
      refundable advances for future  distribution
    rights
            
            $
            765,000
            
            
            $
            710,000





6.
            Income
      Taxes


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


Years
      Ended December 31,2009
            
            
            2008
            
            
            2007(Dollars in
      thousands)Domestic
            
            $
            (577,000
            )
            
            $
            (469,000
            )
            
            $
            5,640,000Foreign
            
            
            (27,000
            )
            
            
            (24,000
            )
            
            
            216,000Total
            
            $
            (604,000
            )
            
            $
            (493,000
            )
            
            $
            5,856,000





The provision for income taxes is
comprised of the following:





Years
      Ended December 31,2009
            2008
            
            
            2007(Dollars
      in thousands)Current:Federal
            
            $
            -
            
            
            $
            -
            
            
            $
            -State
            
            
            
            
            
            
            
            
            
            
            -Foreign
            
            
            -
            
            
            
            -
            
            
            
            -Deferred:Federal
            
            
            -
            
            
            
            -
            
            
            
            -State
            
            
            -
            
            
            
            -
            
            
            
            -$
            -
            
            
            $
            -
            
            
            $
            -





F-13


The
Company files a consolidated U.S. Federal income tax return, which includes all
of its domestic operations. The Company files separate tax returns for each of
its foreign subsidiaries in the countries in which they reside.  The
Company's available net operating loss (“NOL”) carry forward for Federal tax
reporting purposes approximates $114 million and expires through the year
2029.  The Company's NOL for California State tax reporting purposes
approximate $39 million and expires through the year 2019.  The
utilization of the federal and state net operating losses may be limited by
Internal Revenue Code.





Due to
changes in control the utilization of net operating loss carryforwards maybe
subject to annual limitations under provisions of the internal revenue code,
such limitations could result in the permanent loss of a portion of the net
operating loss carryforwards.





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





2009
            
            
            2008
            
            
            2007Statutory
      Federal  income tax rate
            
            
            34.0
            %
            
            
            34.0
            %
            
            
            34.0
            %State
      income tax effect, net of federal benefits
            
            
            5.8
            
            
            
            5.8
            
            
            
            5.8Valuation
      allowance
              Tax rate differentiation of foreign earnings
            
            
            (39.8
            )
            
            
            (39.8
            )
            
            
            (39.5
            )Other-
            %
            
            
            -
            %
            
            
            -
            %





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





December
      31,2009
            
            
            2008(Dollars
      in Thousands)Current
      deferred tax asset (liability):Deferred
      Income
            
            $
            (
      99
            )
            
            $
            113Accrued
      expenses
            
            
            -Foreign
      loss and credit carryforward
            
            
            974
            
            
            
            974Federal
      and state net operating losses
            
            
            45,397
            
            
            
            51,597Other
            
            
            -
            
            
            
            -46,272
            
            
            
            52,684Non-current
      deferred tax asset (liability):Depreciation
      expense
            
            
            -
            
            
            
            -Nondeductible
      reserves
            
            
            -
            
            
            
            --
            
            
            
            -Net
      deferred tax asset before valuation allowance
            
            
            46,272
            
            
            
            52,684Valuation
      allowance
            
            
            46,272
            
            
            
            52,684Net
      deferred tax asset
            
            $
            -
            
            
            $
            -





The Company maintains a valuation
allowance against its deferred tax assets due to the uncertainty regarding
future realization.  In assessing the realizability of its deferred
tax assets, management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies.  The valuation allowance on deferred tax assets decreased
$6.8 million during the year ending December 31, 2009 and increased $1.8 million
during the year ending December 31, 2008.





F-14


7.
            Commitments
      and Contingencies





Leases





The
Company as of November 1, 2009 has relocated to new offices in Los Angeles and
has a lease commitment through October 2012. We also have a lease commitment in
Irvine for our new development offices through March 31, 2011. We also have a
lease commitment at the French representation office through February 28, 2011
with an option for an additional 3 years.




Total net
rent expense was $ 149,000, $155,000 and $83,000 for the years ended December
31, 2009, 2008 and 2007, respectively.





Litigation





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





On
September 8, 2009  Bethesda Softworks LLC filed a Complaint for
Declaratory Judgment, Preliminary Injunction and Other Relief against the
Company in the
United  States  District  Court for the District
of Maryland.  Bethesda seeks to terminate the rights Interplay holds
to sell and develop certain FALLOUT(r)-branded video games, including an
MMOG.  Interplay  disputes all claims raised by Bethesda and
has answered the lawsuit and asserted Counter-Claims,  including
claims for Breach of Contract, Tortious  Interference with
Prospective Economic Advantage, Rescission,  Accounting
and  Declaratory  Relief seeking an award of damages and
other relief.  Interplay also seeks a declaration from the Court that
it has not infringed upon
the  FALLOUT(R)  mark  and  that it has
satisfied  the terms of theTrademark Licensing Agreement related to
Interplay's production of a FALLOUT(R) massively-multiplayer
online  game.  The Court denied Bethesda's Motion
for Preliminary Injunction on December 10, 2009, a decision
Bethesda has appealed.  Interplay  will continue to defend
its rights and pursue its Counter-Claims against Bethesda.





The
Company received notices from the Internal Revenue Service (“IRS”) that it owes
approximately $200,000 in payroll taxes, payroll tax penalties, and interest for
unpaid and late payment of payroll taxes for the years 2008 and 2009, which has
been accrued for December 31, 2009. The Company is in the process of negotiating
a payment plan with the Internal Revenue Service.





The
Company received notice from the California Franchise Tax Board that it owes
approximately $25,000 in franchise tax , interest and penalties for the tax year
ending 2008 which has been accrued for December 31, 2009. The Company has
established a payment plan with the Franchise Tax Board.





8.
            Stockholders’
      Equity





Preferred
Stock and Common Stock





The
Company's articles of incorporation authorize up to 5,000,000 shares of $0.001
par value preferred stock.  Shares of preferred stock may be issued in
one or more classes or series at such time as the Board of Directors
determine.  As of December 31, 2009, there were no shares of preferred
stock outstanding.





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


F-15


The
Company on June 30, 2008 amended and restated its Certificate of Incorporation
to increase the number of authorized shares of the Company’s Common Stock, par
value $0.001 per share, a total of 300,000,000 shares of Common
Stock.





Warrants
Issued





The
Company issued a total of 11,105,883 warrants during 2009:





On June
18, 2009 the Board of Directors extended the suspension of cash
compensation  for Directors fees through September 2009 and issued
3,428,400 warrants  to  Eric Caen, Alberto Haddad, Xavier de Portal
and Michel Welter respectively as Directors. Michel Welter and Xavier De Portal
each were granted 999,950 , Alberto Haddad was granted 857,100 and Eric Caen was
granted 571,400. Such warrants have a term of 10 years an exercise price of
$0.065, and are immediately exercisable.  6,000,000 10 year warrants were
issued on June 18, 2009 at an exercise price of $0.065 to Herve Caen, the Chief
Executive Officer and Interim Chief Financial Officer, to extend his
reduced  compensation to $250,000 through June 30, 2010.





These
warrants were valued using the Black-Scholes calculation.  The amount
of $572,047 was charged to 2009 operations.





On March
24, 2009 the Company issued to Microprose, LLC, an affiliate of Interactive Game
Group, 5,454,967 shares of Common Stock of the Company and issued a warrant to
purchase 1,677,483 shares of Common Stock of the Company for a total
consideration of $327,298. Such shares and warrant were issued, and any
underlying shares of Common Stock would be issued, in a private placement exempt
from registration pursuant to section 4(2) of the Securities Act of 1933. Such
warrant has a term of 3 years, an exercise price of $0.06, and is immediately
exercisable. Out of the consideration of $327,298, $148,000 was received in
cash, $126,000 was satisfied by the acquisition of certain intellectual property
rights by the Company subsequently written off, and $53,298 was satisfied by the
cancellation of the convertible promissory note (see Note 2) in the amount of
$52,000 and accrued interest thereon from Interactive Game Group. These warrants
were valued using the Black-Scholes calculation.





The
amount of $ 23,000 was charged to 2009 operations.





Exercise
of Warrants





On July
6, 2009, Herve Caen, Chief Executive Officer and Interim Chief Financial
Officer, exercised  2,100,000 warrants issued in 2006 at an exercise
price of 0.0279.  These shares were paid for by reducing the balance
due from the Company to Herve Caen including accrued interest of $21,000 and
principal of $40,000.





Outstanding
Warrants





Years Ended December 31,2009
            
            
            2008
            
            
            2007Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Shares
            
            
            Weighted
      Average Exercise PriceWarrants
      outstanding at beginning of year
            
            
            9,150,298
            
            
            $
            .41
            
            
            
            7,330,000
            
            
            $
            .38
            
            
            
            7,330,000
            
            
            $
            .38Granted
            
            
            11,105,883
            
            
            
            .0645
            
            
            
            5,820,000
            
            
            
            .175Exercised
            
            
            (2,100,000
            )
            
            
            .028
            
            
            
            (4,000,000
            )
            
            
            .028
            
            
            
            -
            
            
            
            -CanceledWarrants
      outstanding and exercisable
              at
      end of year
            
            
            18,156,181
            
            
            $
            .24
            
            
            
            9,150,298
            
            
            $
            .41
            
            
            
            7,330,298
            
            
            $
            .38





F-16


A detail
of the warrants outstanding and exercisable as of December 31, 2009 is as
follows:





Warrants
      Outstanding and ExercisableRange
      of Exercise Prices
            
            
            Number
      Outstanding
            
            
            Weighted
      Average Remaining Contract Life
            
            
            Weighted
      Average Exercise Price$
            1.75-$1.75
            
            
            
            500,000
            
            
            
            1.33
            
            
            $
            1.75$
            3.79-$3.79
            
            
            
            460,298
            
            
            
            .29
            
            
            $
            3.79$
            0.175-$0.175
            
            
            
            5,000,000
            
            
            
            8.40
            
            
            $
            .175$
            .13-$.13
            
            
            
            820,000
            
            
            
            8.50
            
            
            $
            013$
            .06-$.065
            
            
            
            11,105,883
            
            
            
            9
            
            
            $
            .064$
            .0279-$.0279
            
            
            
            270,000
            
            
            
            .75
            
            
            $
            .0279Total
            
            
            
            18,156,181





Sale
of Common Stock





On March
24, 2009 the Company issued to Microprose, LLC, an affiliate of Interactive Game
Group, 5,454,967 shares of Common Stock of the Company and issued a warrant to
purchase 1,677,483 shares of Common Stock of the Company for a total
consideration of $327,298. Such shares and warrant were issued, and any
underlying shares of Common Stock would be issued, in a private placement exempt
from registration pursuant to section 4(2) of the Securities Act of 1933. Such
warrant has a term of 3 years, an exercise price of $0.06, and is immediately
exercisable. Out of the consideration of $327,298, $148,000 was received in
cash, $126,000 was satisfied by the acquisition of certain intellectual property
rights by the Company, and $53,298 was satisfied by the cancelation of the
convertible promissory note (see Note 4) in the amount of
$52,000   and accrued interest thereon from Interactive Game
Group.





On
October 22, 2008 and on December 5, 2008 the Company sold to two private
investors a total of 284,667 shares of Common Stock of the Company, (84,667
shares at $0.09 and 200,000 shares  at $0.10 per share)  for
a total consideration of $27,620.00. Such shares were issued, in a private
placement exempt from registration pursuant to section 4(2) of the Securities
Act of 1933.





Shares
reserved for future issuance





Common
stock reserved for future issuance at December 31, 2009 is as
follows:





Stock
      option plan:Outstanding
            
            4,960,000Available
      for future grants
            
            5,040,00010,000,000
              -Warrants
            
            18,156,181Total
            
            28,156,181





F-17


Treasury
Stock





In
December 2005, NBC Universal returned their 4,658,216 shares of the Company’s
common stock at no cost to the Company. The Company included these shares as
treasury stock in 2009 and 2008.





9.
            Net
      Earnings (Loss) Per Common Share





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





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007(Amounts
      in thousands, except per share amounts)Net
      income (loss) available to common stockholders
            
            $
            (1,514
            )
            
            $
            (493
            )
            
            $
            5,856Interest
      related to conversion of secured convertible promissory
    note
            
            
            -
            
            
            
            -
            
            
            
            -Dilutive
      net income (loss) available to common stockholders
            
            $
            (1,514
            )
            
            $
            (493
            )
            
            $
            5,856Shares
      used to compute net income (loss) per common share:Weighted-average
      common shares
            
            
            108,770
            
            
            
            103,482
            
            
            
            99,197Dilutive
      stock equivalents
            
            
            0
            
            
            
            0
            
            
            
            2,831Dilutive
      potential common shares
            
            
            108,770
            
            
            
            103,482
            
            
            
            102,028Net
      income (loss) per common share:Basic
            
            $
            (0.014
            )
            
            $
            (0.004
            )
            
            $
            0.059Diluted
            
            $
            (0.014
            )
            
            $
            (
      0.004
            )
            
            $
            0.057





In 2009
and 2008 the warrants and options were anti-dilutive.





For the
year ended December 31, 2007 certain warrants and options were dilutive and were
included in diluted net income per share.





10.
            Employee
      Benefit Plans





Stock
Option Plans





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


F-18


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





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Shares
            
            
            Weighted
      Average Exercise PriceOptions
      outstanding at beginning of year
            
            
            3,160,000
            
            
            $
            .074
            
            
            
            1,410,000
            
            
            $
            .045
            
            
            
            2,660,000
            
            
            $
            .05Granted
            
            
            2,050,000
            
            
            $
            .065
            
            
            
            1,750,000
            
            
            $
            .175
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Canceled
            
            
            (250,000
            )
            
            
            .15
            
            
            
            -
            
            
            
            
            
            
            
            (1,250,000
            )
            
            
            .045Options
      outstanding at end of year
            
            
            4,960,000
            
            
            $
            .097
            
            
            
            3,160,000
            
            
            $
            .074
            
            
            
            1,410,000
            
            
            $
            .045








Black
Scholes Single Option approach was used to estimate the fair value information
presented utilizing ratable amortization.  There were 2,050,000,
1,750,000 and 0 options granted in 2009, 2008 and 2007,
respectively.





A detail
of the options outstanding and exercisable as of December 31, 2009 is as
follows:





Options
      Outstanding and ExercisableRange
      of Exercise Prices
            
            
            Number
              Outstanding
            
            
            Weighted
      Average Remaining Contract Life
            
            Weighted
      Average Exercise Price$
            0.0279-$0.680
            
            
            
            4,960,000
            
            
            
            6.50
            
            
            $
            0.097








11.
            Concentration
      of Credit Risk





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





12.
            Segment
      and Geographical Information





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





F-19


Net
revenues by geographic regions were as follows:





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)
            
            (Dollars
      in thousands)
            
            (Dollars
      in thousands)North
      America
            
            $
            1,048
            
            
            
            83
            %
            
            $
            1,139
            (1)
            
            
            83
            %
            
            $
            5,755
            (2)
            
            
            96
            %Europe
            
            
            312
            
            
            
            17
            
            
            
            239
            
            
            
            17
            
            
            
            246
            
            
            
            4Rest
      of World
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -OEM,
      royalty and licensing
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -$
            1,360
            
            
            
            100
            %
            
            $
            1,378
            
            
            
            100
            %
            
            $
            6,001
            
            
            
            100
            %





(1)
            Included
      in the net revenues by geographic regions is the exercising of the option
      by Atari Interactive  to purchase certain intellectual
      properties from the company in exchange for a note due them in the amount
      of $1,050,000.


(2)
            Included
      in the net revenues by geographic regions is the sale of “Fallout”
      transaction in the amount of
$5,750,000.





13.
            Quarterly
      Financial Data (Unaudited)





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





March
      31
            
            
            June
      30
            
            
            September
      30
            
            
            December
      31(Dollars
      in thousands, except per share amounts)Year
      ended December 31, 2009:Net
      revenues
            
            $
            93
            
            
            $
            251
            
            
            $
            510
            
            
            $
            506Gross
      profit
            
            $
            67
            
            
            $
            142
            
            
            $
            391
            
            
            $
            613Net
      income (loss)
            
            $
            (264
            )
            
            $
            (771
            )
            
            $
            (15
            )
            
            $
            (464
            )Net
      income (loss) per common share basic
            
            $
            (0.002
            )
            
            $
            (0.007
            )
            
            $
            (0.00
            )
            
            $
            (0.004
            )Net
      income (loss) per common share diluted
            
            $
            (0.002
            )
            
            $
            (0.007
            )
            
            $
            (0.00
            )
            
            $
            (0.004
            )Year
      ended December 31, 2008:Net
      revenues
            
            $
            57
            
            
            $
            40
            
            
            $
            1,083
            
            
            
            199Gross
      profit
            
            $
            57
            
            
            $
            2
            
            
            $
            1,083
            
            
            
            190Net
      income (loss)
            
            $
            (344
            )
            
            $
            (492
            )
            
            $
            624
            
            
            
            (281
            )Net
      income (loss) per common share basic
            
            $
            (0.004
            )
            
            $
            (0.005
            )
            
            $
            0.01
            
            
            
            (0.00
            )Net
      income (loss) per common share diluted
            
            $
            (0.004
            )
            
            $
            (0.005
            )
            
            $
            0.01
            
            
            
            (0.00
            )








F-20


14.
            Subsequent
      Events





On March
17, 2010 the Company sold to Dotcorp Asset Management eleven million six hundred
twenty five thousand (11,625,000) shares of Common Stock of the Company
(including four million six hundred thousand (4,658,216)  existing
shares previously held by the Company as treasury stock and issued a warrant to
purchase 7,500,000 shares of Common Stock of the Company for a total
consideration of $982,650.  The warrant has a term of four years, an
exercise price of $0.10 and is immediately exercisable.




Proceeds
of the sale will be used to fund operations, including game
development.








F-21