<PAGE>

                      Securities and Exchange Commission
                             Washington, DC  20549

                                  FORM 10-K/A

                                  (Mark One)
 [X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
            Act of 1934 for the Fiscal Year ended December 31, 2000

                                      OR

   [_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
                             Exchange Act of 1934

                        Commission file number 0-24363

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

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

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

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

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

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.001 par value
                               (Title of Class)
                          ___________________________

     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. [_]
<PAGE>

     As of August 13, 2001, 44,980,708 shares of Common Stock of the Registrant
were issued and outstanding and the aggregate market value of voting common
stock held by non-affiliates was $21,752,670.

                      DOCUMENTS INCORPORATED BY REFERENCE

     None.

                                AMENDMENT NO. 2
                  TO THE ANNUAL REPORT ON FORM 10-K FILED BY
     INTERPLAY ENTERTAINMENT CORP. ON APRIL 17, 2001, AS AMENDED ON APRIL
                                   30, 2001.

     The following Items amend the Annual Report on Form 10-K filed by Interplay
Entertainment Corp. (the "Company") on April 17, 2001, as amended by Form 10-K/A
on April 30, 2001 (the "Form 10-K"), as permitted by rules and regulations
promulgated by the Securities Exchange Commission. That Form 10-K is hereby
amended and restated to insert those Items as set forth herein. All capitalized
terms used herein but not defined shall have the meanings ascribed to them in
the Form 10-K.

                                    PART I

ITEM 1. BUSINESS

Overview

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

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

     In February 1999, in connection with the Company's acquisition of a
minority membership interest in the parent entity of Virgin Interactive
Entertainment Limited ("Virgin"), the Company entered into an International
Distribution Agreement with Virgin (the "Virgin Distribution Agreement").
Pursuant to the Virgin Distribution Agreement, Virgin hired the Company's
European

                                       2
<PAGE>

sales and marketing personnel and is distributing substantially all of the
Company's titles in Europe, CIS, Africa and the Middle East. As part of the
terms of the April 2001 settlement between Virgin and the Company, VIE
Acquisition Group LLC ("VIE") redeemed the Company's membership interest in VIE.
See "Business--Sales and Distribution--International" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors Affecting Future Performance--Distribution Agreement".

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

Products

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

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

     The Company has entered into license agreements with Sega, Sony Computer
Entertainment, Microsoft and Nintendo pursuant to which the Company has the
right to develop, sublicense, publish, and distribute products for the
licensor's respective platforms in specified territories. In certain cases,

                                       3
<PAGE>

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

Product Development

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

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

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

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

Internal Product Development

     U.S. Product Development. The Company's U.S. internal product development
group (excluding Shiny's development group) consisted of approximately 210
people at December 31, 2000. Once a design is selected by the Company, a
production team, development schedule and

                                       4
<PAGE>

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

     Shiny. David Perry, Shiny's President and founder, has produced a number of
highly successful interactive entertainment software titles, including CoolSpot,
Aladdin, Earthworm Jim, Earthworm Jim II and MDK. Shiny currently has one
original title in development under the Matrix license. The Company plans to
publish and distribute this title worldwide under the Shiny label. Shiny's
development group consisted of approximately 24 people at December 31, 2000.

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

External Product Development

     In order to expand its product offerings to include hit titles created by
third party developers, and to leverage its publishing and distribution
capabilities, the Company enters into publishing arrangements with third party
developers, including foreign developers and publishers who wish to utilize the
Company's sales and distribution network in North America. In February 1999, the
Company entered into a Product Publishing Agreement with Virgin Interactive
Entertainment Limited pursuant to which the Company will publish substantially
all of Virgin's titles in North and South America and Japan. As part of the
April 2001 settlement between Virgin and the Company, the Product Publishing
Agreement was amended to provide for the Company to publish only one future
title developed by Virgin. In the years ended December 31, 2000, 1999 and 1998,
approximately 70%, 75% and 70%, respectively, of new products released by the
Company which the Company believes are or will become franchise titles were
developed by third party developers. The Company expects that the proportion of
its new products which are developed externally may vary significantly from
period to period as different products are released. The Company's focus in
obtaining publishing products is to select titles that combine advanced
technologies with creative game design. The publishing agreements usually
provide the Company with the exclusive right to distribute a product on a
worldwide basis (however, in certain instances the agreement provides for a
specified

                                       5
<PAGE>

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

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

Sales And Distribution

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

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

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

                                       6
<PAGE>

significant weakening in customer demand would therefore have a material adverse
impact on the Company's operating results and on the Company's ability to
achieve or maintain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Future
Performance--Fluctuations in Operating Results; Uncertainty of Future Results;
Seasonality."

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

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

     International. Prior to February 1999, the Company distributed its titles
in Europe through Interplay Europe, and employed approximately 21 people
dedicated to sales and marketing in the European market. Interplay Europe had an
agreement with Infogrames U.K. and Virgin to pool resources in order to
distribute PC and video game console software to independent software retailers
in the United Kingdom, and had distribution agreements with Acclaim
Entertainment pursuant to which Acclaim Entertainment distributes certain of the
Company's titles in selected European countries. Net revenues from such
distribution agreements with Acclaim Entertainment represented 3.4% and 9.6% of
the Company's net revenues in the years ended December 31, 1999 and 1998,
respectively. In February 1999, the Company completed an agreement to acquire a
43.9% membership interest in VIE Acquisition Group LLC, the parent entity of
Virgin. In connection with such acquisition, the Company entered into the Virgin
Distribution Agreement, pursuant to which Virgin hired Interplay Europe's sales
and marketing personnel and is distributing substantially all of the Company's
titles in Europe, CIS, Africa and the Middle East for a seven year period. Under
such agreement as amended, the Company pays Virgin a distribution fee for its
marketing and distribution of the Company's products, as well as certain direct
costs and expenses. The Company also grants Virgin the near exclusive right to
distribute our products in Europe, the Commonwealth of Independent States,
Africa and the Middle East. The Company believes that the prices charged to
Virgin are comparable to the prices that the Company could charge an
unaffiliated third party distributor in the territories in which Virgin has
distribution rights. As part of the April 2001 settlement between Virgin and the
Company, VIE redeemed the Company's membership interest in VIE. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance--Distribution Agreement."

     The Company has built a distribution capability in certain of the developed
markets in Asia and the Americas utilizing third party distribution arrangements
for specified products and platforms.

                                       7
<PAGE>

In July 1997, the Company initiated a licensing strategy in Japan in order to
expand its Japanese sales. The Company has also licensed a number of its titles
to Sony Computer Entertainment to publish in Japan on the PlayStation console.
The Company has entered into an agreement with Tech Pacific Australia Pty Ltd
("Tech Pacific") in 2000 and terminated its agreement with Roadshow
Entertainment Pty. Ltd.("Roadshow"), pursuant to which Tech Pacific has the
exclusive right to sell and distribute the Company's ongoing PC and video game
console products in Australia. The Company has an agreement with Roadshow to
market and distribute its PC and video game console products in New Zealand.

     OEM. Interplay OEM employs approximately 22 people, including 6 in Europe
and one in Singapore, focused on the distribution of interactive entertainment
software in bundling transactions to the computer hardware industry. Under these
arrangements, one or more software titles, which are either limited- feature
versions or the retail version of a game, are bundled with computer or
peripheral devices and are sold by an original equipment manufacturer so that
the purchaser of the hardware device obtains the software as part of the
hardware purchase. In addition, Interplay OEM has established a development
capability to create modified versions of titles which support its customers'
technologies. Although it is customary for OEM customers to pay a lower per unit
price on sales through OEM bundling contracts, such arrangements involve a high
unit volume commitment. Interplay OEM net revenues generally are incremental net
revenues and do not have significant additional product development or sales and
marketing costs. There can be no assurance that OEM sales will continue to
generate consistent profits for the Company, and a decrease in OEM sales or
margins could have a material adverse effect on the Company's business,
operating results and financial condition. In addition to distributing the
Company's titles, Interplay OEM serves as an exclusive OEM distributor for a
number of interactive entertainment software publishers, including LucasArts
Entertainment Company, Fox Interactive, Virgin, Gathering of Developers, Rage
Software, MacPlay and Titus. Interplay OEM's hardware customers include many of
the industry's largest computer and peripheral manufacturers including IBM,
Compaq, Packard Bell/NEC, Creative Labs, Pioneer Electronics, Canon, Dell and
Logitech. OEM devotes four employees to modifying existing products into
suitable OEM products. In 2000, Interplay OEM launched a new division,
bundledirect.com, which sells fixed bundle packs to Value-Added Resellers and
System Builders. Interplay OEM expanded its business model to include licensing
of the represented software as a premium to the non-Information Technology
marketplace, as well as continuing its licensing and merchandising activities on
behalf of Interplay and Shiny including television animation, novelizations,
strategy guides and other merchandise tied to Interplay's entertainment
properties.

     The Company's North American and International distribution channels are
characterized by continuous change, including consolidation, financial
difficulties of certain distributors and retailers, and the emergence of new
distributors and new retail channels such as warehouse chains, mass merchants,
computer superstores and Internet commerce sites. The Company is exposed to the
risk of product returns and markdown allowances with respect to its distributors
and retailers. The Company allows distributors and retailers to return
defective, shelf-worn and damaged products in accordance with negotiated terms.
The Company considers return requests on a case-by-case basis, taking into
consideration factors such as the products involved, the customer's historical
sales volume and the customer's credit status. The Company also offers a 90-day
limited warranty to its end users that its products will be free from
manufacturing defects. In addition, the Company provides markdown allowances,
which consist of credits given to customers to induce them to lower the retail
sales price of certain products in an effort to increase sales to consumers and
to help manage its customers' inventory levels in the distribution channel.
Although the Company maintains a reserve for returns and markdown allowances,
and although the Company manages its returns and markdown

                                       8
<PAGE>

allowances through its authorization procedure, the Company could be forced to
accept substantial product returns and provide markdown allowances to maintain
its relationships with retailers and its access to certain distribution
channels. The Company's reserve for estimated returns, exchanges, markdowns,
price concessions, and warranty costs was $6.5 million and $9.2 million at
December 31, 2000 and 1999, respectively. Product returns and markdown
allowances that exceed the Company's reserves could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting Future Performance-- Dependence on Distribution
Channels; Risk of Customer Business Failures; Product Returns."

Marketing

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

     The Company's marketing department develops and implements marketing
programs and campaigns for each of the Company's titles and product groups. The
Company's marketing activities in preparation for a product launch include print
advertising, game reviews in consumer and trade publications, retail in- store
promotions, attendance at trade shows and public relations. The Company also
sends direct and electronic mail promotional materials to its database of
gamers, and has selectively used radio and television advertisements in
connection with the introduction of certain of its products. The Company budgets
a portion of each product's sales for cooperative advertising and market
development funds with retailers. Every title and brand is launched with a
multi-tiered marketing campaign that is developed on an individual basis to
promote product awareness and customer pre-orders. The Company anticipates that
over time, as the market for its products matures and competition becomes more
intense, it will become necessary to devote more overall resources to marketing
its products but marketing costs for its products should remain proportional to
revenues.

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

Competition

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

                                       9
<PAGE>

in the interactive entertainment software industry include product features,
brand name recognition, access to distribution channels, quality, ease of use,
price, marketing support and quality of customer service.

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

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

Manufacturing

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

     Sony Computer Entertainment manufactures and ships finished products that
are compatible with its video game consoles to the Company for distribution.
PlayStation 2 products consist of DVDs and PlayStation products consist of CD-
ROMs. Both products include manuals and

                                       10
<PAGE>

packaging and are typically delivered by Sony Computer Entertainment within a
relatively short lead-time.

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

Intellectual Property And Proprietary Rights

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

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

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

                                       11
<PAGE>

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

Employees

     As of December 31, 2000, the Company had 413 employees, including 241 in
product development, 102 in sales and marketing and 70 in finance, general and
administrative. Included in these counts are 27 employees of Shiny, 22 employees
of Interplay OEM and 7 employees of Interplay Europe. The Company also retains
independent contractors to provide certain services, primarily in connection
with its product development activities. The Company and its full time employees
are not subject to any collective bargaining agreements and the Company believes
that its relations with its employees are good.

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

                                    PART II

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

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

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

     For the Year ended December 31, 1999               High     Low
     ------------------------------------               ----     ---

     First Quarter.................................     $3.00   $1.69
     Second Quarter................................      2.63    1.88

                                       12
<PAGE>

     Third Quarter.................................      2.94   2.00
     Fourth Quarter................................      4.44   1.56

     For the Year ended December 31, 2000                High     Low
     ------------------------------------                ----     ---

     First Quarter................................      $4.50    $2.91
     Second Quarter...............................       3.31     1.75
     Third Quarter................................       3.81     2.25
     Fourth Quarter...............................       4.00     2.56

Dividend Policy

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

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

     In April 2000, the Company issued 719,424 shares of Series A Preferred
Stock to Titus Interactive S.A., an accredited investor, for $20 million in a
transaction that included the issuance of warrants to Titus to purchase up to
500,000 shares of Common Stock at $3.79 per share.  These shares and warrants
were issued in reliance upon the exemption provided by Section 4(2) and/or Rule
506 of the Securities Act.

     In April 2001, the Company sold 8,126,770 shares of its Common Stock to 26
accredited investors for $12.7 million, and received net proceeds of
approximately $11.5 million.  The shares were issued at $1.5625 per share, and
included warrants to purchase one share of Common Stock for each share
purchased.  The warrants are exercisable at $1.75 per share, and one-half of
the warrants can be exercised immediately with the other half exercisable after
June 27, 2001, if (and only if) the closing price of the Company's Common Stock
as reported on Nasdaq does not equal or exceed $2.75 for 20 consecutive trading
days prior to June 27, 2001.  The Company may also require the holder to
exercise the warrants if the closing price of the Company's common stock as
reported on Nasdaq equals or exceeds $3.00 for 20 consecutive trading days prior
to June 27, 2001.  The warrants expire in March 2006.  The transaction provides
for a registration statement covering the shares sold or issuable upon exercise
of such warrants to be filed by April 16, 2001 and become effective by May 31,
2001.  In addition, because we have not yet registered the shares issued in the
private placement, the Company has, as of August 1, 2001, an accrued obligation
to pay the private placement investors an aggregate amount of $517,120 in cash,
payable on demand.  This obligation will continue to accrue at approximately
$250,000 each month that the Company does not register the shares.  There is no
cap on the penalty due to the Company's failure to register such shares.  In the
event that the filing and effective dates of the registration statement are not
met, the Company is subject to a two percent penalty per month, payable in cash
or stock, until the filing and effective

                                       13
<PAGE>

dates are met. These shares were sold in reliance on Rule 506 and/or Section
4(2) of the Securities Act.

     On August 13, 2001, Titus, converted 336,070 shares of Series A Preferred
Stock of the Company into 6,679,306 shares of Common Stock.  After the
conversion, Titus owns approximately 19,496,561 shares of Common Stock, which
constitutes approximately 43 percent of the total outstanding common stock of
the Company.  In addition, Titus holds a remaining 383,354 shares of Series A
Preferred Stock, which, depending upon the conversion ratio, upon conversion
most likely would result in Titus owning a majority of the Company's issued and
outstanding shares of Common Stock.  Titus did not pay any additional
consideration for the Common Stock issued upon conversion of the Series A
preferred stock.  The issuance of the Common Stock upon conversion of the Series
A Preferred Stock was made in reliance upon the exemption provided by Section
4(2) and/or Rule 506 of the Securities Act.

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

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

General

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

     We record revenues when we deliver products to customers in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition."  For those
agreements that provide the customers the right to create and sell multiple
copies of a product in exchange for guaranteed amounts, we recognize revenue at
the delivery of the product master or the first copy.  We recognize per copy
royalties on sales that exceed the guarantee as copies are duplicated.  We
generally are not contractually obligated to accept returns, except for
defective, shelf-worn and damaged products.  However, on a case-by-case
negotiated basis, we permit customers to return or exchange product and may
provide price concessions to our retail distribution customers on unsold or slow
moving products.  In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," we record
revenue net of a provision for estimated returns, exchanges, markdowns, price
concessions, and warranty costs.  We record such reserves based upon
management's evaluation of historical experience, current industry trends and
estimated costs.  The amount of reserves ultimately required could differ
materially in the near term from the amounts provided in the accompanying
consolidated financial statements.  We provide customer support only via
telephone and the Internet.  Customer support costs are not material and we
charge such costs to expenses as we incur them.

     In order to expand our distribution channels and engage in software
development in overseas markets, in 1995 we established operations in the United
Kingdom and in 1997, we initiated a

                                       14
<PAGE>

licensing strategy in Japan. In February 1999, we undertook a restructuring of
our operations in the United Kingdom that included our investment in VIE
Acquisition Group LLC, or VIE. In connection with our investment in VIE, we
entered into an exclusive distribution agreement with Virgin Entertainment
Interactive Limited, or Virgin, an entity controlled by VIE, and integrated our
distribution operations with Virgin, which substantially reduced our sales and
marketing personnel in Europe. As part of an April 2001 settlement between us
and Virgin, VIE redeemed our LLC membership interest in VIE. Pursuant to such
settlement, we agreed to assume responsibility for marketing functions in
Europe. We also maintain European OEM and product development operations.
International net revenues accounted for approximately 33.5% of our net revenues
for the year ended December 31, 2000, 29.7% of our net revenues for the year
ended December 31, 1999, and 28.2% of our net revenues for the year ended
December 31, 1998.

     In January 1997, we formed a wholly-owned subsidiary, Interplay OEM, which
had previously operated as a division of ours.  Interplay OEM distributes our
interactive entertainment software titles, as well as those of other software
publishers, to computer and peripheral device manufacturers for use in bundling
arrangements.  During 2000, Interplay OEM expanded its bundling arrangements
into the non-Information Technology marketplace and created a division named
bundledirect.com, which transacts with value-added resellers and system
builders.  We also derive net revenues from the licensing of intellectual
property and products to third parties for distribution in markets and through
channels that are outside of our primary focus.  OEM, royalty and licensing net
revenues collectively accounted for net revenues of 12.5% for the year ended
December 31, 2000, 21.8% for the year ended December 31, 1999, and 13.6% for the
year ended December 31, 1998.  OEM, royalty and licensing net revenues generally
are incremental net revenues and do not have significant additional product
development or sales and marketing costs, and accordingly do not have a
significant impact on our operating losses.  Cost of goods sold related to PC
and video game console net revenues represents the manufacturing and related
costs of interactive entertainment software products, including costs of media,
manuals, duplication, packaging materials, assembly, freight and royalties paid
to developers, licensors and hardware manufacturers.  Cost of goods sold related
to royalty-based net revenues primarily represents third party licensing fees
and royalties paid by us.  Typically, cost of goods sold as a percentage of net
revenues for video game console products and affiliate label products are higher
than cost of goods sold as a percentage of net revenues for PC based products
due to the relatively higher manufacturing and royalty costs associated with
video game console and affiliate label products.  We also include in the cost of
goods sold amortization of prepaid royalty and license fees we pay to third
party software developers.  We expense prepaid royalties over a period of six
months commencing with the initial shipment of the title at a rate based upon
the numbers of units shipped.  We evaluate the likelihood of future realization
of prepaid royalties quarterly, on a product-by-product basis, and charge the
cost of goods sold for any amounts that we deem unlikely to realize through
future product sales.

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

                                       15
<PAGE>

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

Results of Operations

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

                                                Year Ended December 31
                                               ------------------------
                                                2000     1999     1998
                                               ------   ------   ------
STATEMENTS OF OPERATIONS DATA:
Net revenues                                   100.0%   100.0%   100.0%
Cost of goods sold                              51.7     59.9     56.7
                                               ------   ------   ------
Gross margin                                    48.3     40.1     43.3
Operating expenses:
 Marketing and sales                            25.3     31.8     31.1
 General and administrative                      9.8     15.0     10.1
 Product development                            21.2     20.2     19.3
 Other                                            --      5.2       --
                                               ------   ------   ------
 Total operating expenses                       56.3     72.2     60.5
                                               ------   ------   ------
Operating loss                                  (8.0)   (32.1)   (17.2)
Other expense                                   (3.5)    (3.4)    (3.9)
                                               ------   ------   ------
Loss before income taxes                       (11.5)   (35.5)   (21.1)
Provision for income taxes                        --      5.3      1.1
                                               ------   ------   ------
Net loss                                      (11.5)%  (40.8)%  (22.2)%
                                               ======   ======   ======
SELECTED OPERATING DATA:
Net revenues by segment:
 North America                                  54.0%    48.5%    58.2%
 International                                  33.5     29.7     28.2
 OEM, royalty and licensing                     12.5     21.8     13.6
                                               ------   ------   ------
                                               100.0%   100.0%   100.0%
                                               ======   ======   ======
Net revenues by platform:
 Personal computer                              73.5%    64.1%    53.1%
 Video game console                             14.0     14.1     33.3
 OEM, royalty and licensing                     12.5     21.8     13.6
                                               ------   ------   ------
                                               100.0%   100.0%   100.0%
                                               ======   ======   ======

                                       16
<PAGE>

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

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

     Overall net revenues for the year ended December 31, 2000 increased 3
percent compared to the same period in 1999.  This increase resulted from a 14
percent increase in North American net revenues and a 16 percent increase in
International net revenues, offset by a 41 percent decrease in OEM, royalties
and licensing, as described below.

     The increase in North American and International net revenues for the year
ended December 31, 2000 was mainly because the titles released this year
generated $5.7 million more sales volume and because of a decrease by $6.1
million in product returns and price concessions compared to 1999.  Our efforts
to focus on product planning and release fewer, but higher quality titles
resulted in five fewer title releases across multiple platforms this year as
compared to last year.  We expect that North American and International
publishing net revenues in 2001 will increase compared to 2000.

     The decrease in OEM, royalty and licensing net revenues in the year ended
December 31, 2000 compared to the same period in 1999 was due to decreased net
revenues in the OEM business and in licensing transactions.  The $5.1 million
decrease in the OEM business was primarily due to a decrease in the volume of
transactions which relates to the general market decrease in personal computer
sales, and the decrease in licensing transactions is primarily due to the
recognition of $2.3 million of deferred revenue for the shipment of a major
title to a customer in 1999 without a comparable transaction in 2000.  We expect
that OEM, royalty and licensing net revenues in 2001 will increase compared to
2000.

Platform Net Revenues

     PC net revenues increased 18 percent during the year ended December 31,
2000 compared to the same period in 1999 primarily due to the release of seven
major hit titles such as Star Trek Klingon Academy, Icewind Dale, Sacrifice,
Baldur's Gate II, Giants, Star Trek StarFleet Command II and Star Trek New
Worlds, compared to six major hit titles released in 1999.  In addition, we
continue to experience strong sales from Baldur's Gate and Baldur's Gate:  Tales
of the Sword Coast, both of which were released prior to 2000.  The increase in
PC net revenues was partially offset by our release of 18 titles in 2000
compared to 28 titles in 1999.  We expect our PC net revenues to decrease in
2001 due to our increased focus on next generation console titles.  Video game
console net revenues increased 2 percent in the year ended December 31, 2000
compared to the same period in 1999, due to higher unit sales of our major
console title releases, partially offset by approximately 10 percent lower price
points for current generation console titles.  We released four major video game
console titles in 2000, including MDK 2 (Dreamcast), Gekido (PlayStation),
Caesar's Palace 2000 (PlayStation) and Wild Wild Racing (PlayStation 2),
compared to three major video game console titles released in 1999.  We expect
our video game console net revenues to increase in 2001 as a result of a
substantial increase in planned major title releases for new generation game
consoles in 2001 compared to 2000.

                                       17
<PAGE>

Cost of Goods Sold; Gross Margin

     Cost of goods sold decreased 12 percent in the year ended December 31, 2000
compared to the same period in 1999, due to releasing a higher percentage of
internally developed titles and the discontinuation of the affiliate label
distribution business that typically has a higher cost of goods component
relative to net sales.  The 1999 period also reflects $1.7 million of non-
recurring write-offs of prepaid royalties relating to titles that had been
canceled mainly due to our discontinuation of our licensed sports product line
during 1999.  We expect our cost of goods sold to increase in 2001 as compared
to 2000 due to an expected higher net revenues base from the planned release of
more major next generation game console titles in the 2001 period.  The 24
percent increase in gross profit margin was primarily due to a 33 percent
increase in internally developed titles sold without a royalty component in cost
of goods sold, and a 25 percent decrease in product returns and price
concessions compared to the 1999 period.  We expect our future gross profit
margin to decrease in 2001 as compared to 2000 due to an increase in next
generation video game console title releases, which typically have a higher cost
of goods relative to net revenues.  However, we expect a higher dollar gross
profit on an increased net revenue base in 2001 compared to 2000.

Marketing and Sales

     Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services and other related operating expenses.  The 10 percent decrease
in marketing and sales expenses for the year ended December 31, 2000 compared to
the 1999 period is attributable primarily to a $1.3 million decrease in
personnel costs and a $0.5 million decrease in advertising and retail marketing
support expenditures.  In addition, we amended our International Distribution
Agreement with Virgin Interactive Entertainment Limited, or Virgin, effective
January 1, 2000, which eliminated the fixed monthly overhead fees of
approximately $2.3 million we incurred in the 1999 period.  We expect our
marketing and sales expenses to remain about the same in 2001 compared to 2000,
due to continued planned decreases in advertising and retail marketing support
expenditures and lower personnel costs, offset by the $1.3 million in overhead
fees payable to Virgin in 2001 to be incurred in connection with the terms of
our April 2001 settlement with Virgin.

General and Administrative

     General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses.  The 44 percent decrease in general and
administrative expenses for the year ended December 31, 2000 compared to the
same period in 1999 is primarily attributable to a $6.6 million decrease in bad
debt expense and a $1.1 million decrease in personnel costs.  We are continuing
our efforts to reduce North American operating expenses and expect our general
and administrative expenses to decrease in 2001 compared to 2000.

Product Development

     We charge product development expenses, which consist primarily of
personnel and support costs, to operations in the period incurred.  The 8
percent increase in product development expenses for the year ended December 31,
2000 compared to the same period in 1999 is due to a $1.5 million increase in
expenditures devoted to our focus on developing next generation video game
console

                                       18
<PAGE>

platforms. We expect our product development expenses to remain approximately
constant in absolute dollars in 2001 compared to 2000.

Other Operating Expense

     Other operating expenses are one-time and non-recurring expenses associated
with our operations in 1999.  During the year ended December 31, 2000, we did
not incur any other operating expenses.  Other operating expenses of $5.3
million for the year ended December 31, 1999 were due to a provision of $1.6
million for estimated asset valuation and restructuring charges in connection
with the reductions in our European operations, $2.9 million for minimum
operating charges payable to Virgin which did not repeat in 2000, and $0.8
million charge for severance expense due to the departure of two of our former
executives during the year ended December 31, 1999.

Other Expense, Net

     Other expense consists primarily of interest expense on our lines of credit
and foreign currency exchange transaction losses.  The 6 percent decrease for
the year ended December 31, 2000 compared to the same period in 1999 was due to
a $0.6 million decrease in interest expense on lower average borrowings under
our line of credit, partially by $0.7 million in foreign currency exchange
transaction losses incurred in connection with European distribution activities.

Provision (Benefit) for Income Taxes

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

YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998

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

     Overall net revenues for the year ended December 31, 1999 decreased 20
percent compared to the same period in 1998.  This decrease resulted from a 33
percent decrease in North American net revenues and a 15 percent decrease in
International net revenues, offset by a 29 percent increase in OEM, royalties
and licensing, as described below.

     The decrease in North American and International net revenues for the year
ended December 31, 1999 was due primarily to the release of four fewer major
titles across multiple platforms and the resulting $46.9 million decrease in
sales volume in the 1999 period.

     OEM, royalty and licensing net revenues increased $5.0 million in the year
ended December 31, 1999 compared to the same period in 1998 due to a $1.8
million increase in net revenues in the OEM business and a $3.2 million increase
in net revenues in licensing.

                                       19
<PAGE>

Platform Net Revenues

     PC net revenues decreased 3 percent in the year ended December 31, 1999
compared to the same period in 1998 due to the release of four fewer titles
overall, including one less major title, offset by continued sales of Baldur's
Gate.  We released six new major titles in 1999, such as Baldur's Gate:  Tales
of the Sword Coast, Descent 3, Freespace 2, Kingpin, Starfleet Command and
Torment, compared to seven new major titles in 1998.  Video game console net
revenues decreased 66 percent in the year ended December 31, 1999 compared to
the same period in 1998 due to our release of three fewer major titles.  Major
console title releases in the 1999 period included Baseball 2000 (PlayStation),
Caesar's Palace II (Game Boy Color) and Incoming (Dreamcast).

Cost of Goods Sold; Gross Margin

     Cost of goods sold decreased 15 percent in the year ended December 31, 1999
compared to the same period in 1998 due to a 20 percent decrease in net
revenues, which may have a higher cost of goods sold, and a shift in product
mix.  Video game console revenues, comprised 14 percent of total net revenues in
1999 compared to 33 percent in 1998.  The decrease in cost of goods sold was
offset by $1.7 million write-offs of prepaid royalties relating to titles that
we canceled due to our discontinuation of our licensed sports product line.  The
26 percent decrease in gross margin was due primarily to a high level of product
returns and price concessions attributable to the inability of some of our
titles to gain broad, market acceptance from customers, which reduced net sales
substantially.

Marketing and Sales

     Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services, monthly overhead and distribution fees payable to Virgin, and
other related operating expenses.  Marketing and sales expenses decreased 25
percent in the year ended December 31, 1999 compared to the same period in 1998.
The decrease is attributable primarily to a $7.4 million decrease in
advertising, specifically television advertising, and other marketing costs
associated with fewer major titles released during the 1999 period.  In
addition, we reduced personnel and commission expense by $2.5 million in
connection with the restructuring of European operations, including the new
distribution arrangements we made with Virgin starting in February 1999.

General and Administrative

     General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses.  General and administrative expenses increased
41 percent in the year ended December 31, 1999 compared to the same period in
1998.  The increase is attributable primarily to a provision for bad debt
expense of $6.9 million in 1999 in response to, among other things, the
deteriorating financial condition of some of our customers, which placed serious
doubts on their ability and intent to pay.  General and administrative expenses
other than bad debt expense decreased $1.6 million in the 1999 period.  This
decrease is due primarily to the reorganization of our European operations and
successful efforts to reduce North American general and administrative expenses.

                                       20
<PAGE>

Product Development

     We charge product development expenses, which consist primarily of
personnel and support costs, to operations in the period incurred. Product
development expenses decreased 16 percent in the year ended December 31, 1999
compared to the same period in 1998. The decrease is due to a $3.8 million
reduction in expense achieved as a result of the reorganization of the
development process.

Other Operating Expense

     Other operating expenses are one-time and non-recurring expenses associated
with our operations in 1999. Other operating expenses of $5.3 million for the
year ended December 31, 1999 included $2.4 million for restructuring, asset
valuations and severance charges. We incurred charges primarily in connection
with restructuring the European operations, including establishing the new
distribution arrangements in Europe whereby Virgin replaced our third party
distribution arrangements and we recorded provisions for the costs of reductions
in work force and facilities move, including asset valuation, severance expenses
and estimated facility lease termination charges. In addition, we recorded a
$2.9 million provision for minimum operating charges payable to Virgin.

Other Income (Expense)

     Other income (expense) primarily consists of interest expense on our line
of credit. Other expense decreased in the year ended December 31, 1999 compared
to the same period in 1998. This decrease was due primarily to decreased
interest expense of $1 million on lower borrowings under our line of credit and
the repayment of the Subordinated Secured Promissory Notes in June 1998. We
repaid these borrowings with the proceeds of our initial public offering in June
1998 and the equity investments by Titus Interactive, S.A. in 1999.

Provision (Benefit) for Income Taxes

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

Liquidity and Capital Resources

     We have funded our operations to date primarily through the use of lines of
credit and equipment leases, through cash generated by the private sale of
securities, from the proceeds from our initial public offering, from the
proceeds from licensing agreements, and from operations.

     As of December 31, 2000 our principal sources of liquidity included cash of
$2.8 million and our line of credit that expired on April 30, 2001. In addition,
$4 million was available under on our supplemental line of credit with Titus. In
April 2001, we repaid all amounts outstanding on the Titus line of credit and
terminated the line of credit.

                                       21
<PAGE>

     In April 2001, we secured a new working capital line of credit from a bank
and repaid all amounts outstanding on our former line of credit and supplemental
line of credit. These lines of credit were terminated upon full payment. Our new
working capital line of credit line bears interest at the bank's prime rate, or,
at our option, a portion of the outstanding balance bears interest at LIBOR plus
2.5%, for a fixed short-term. At June 30, 2001, borrowings under the new working
capital line of credit bore interest at various interest rates between 6.39
percent and 7 percent. Our new line of credit provides for borrowings and
letters of credit of up to $15 million based in part upon qualifying receivables
and inventory. Under the new line of credit the Company is required to maintain
a $2 million personal guarantee by the Company's Chairman and Chief Executive
Officer ("Chairman"). The new line of credit has a term of three years, subject
to review and renewal by the bank on April 30 of each subsequent year. As of
June 30, 2001, we are not in compliance with the financial covenants under the
new line of credit pertaining to net worth and minimum earnings before interest,
taxes, depreciation and amortization. If the bank does not waive compliance with
the required covenants under the credit agreement, the bank could terminate the
credit agreement and accelerate payment of all outstanding amounts. Because we
depend on this credit agreement to fund our operations, the bank's termination
of the credit agreement could cause material harm to our business, including our
ability to continue as a going concern.

     In addition, in April 2001, we completed a private placement of 8,126,770
shares of Common Stock for $12.7 million, and received net proceeds of
approximately $11.9 million. The shares were issued at $1.5625 per share, and
included warrants to purchase one share of Common Stock for each share sold. The
warrants are exercisable at $1.75 per share, and the warrants can be exercised
immediately. The warrants expire in March 2006. The transaction provides for a
registration statement covering the shares sold or issuable upon exercise of
such warrants to be filed by April 16, 2001 and become effective by May 31,
2001. In the event that the agreed effective date of the registration statement
is not met, we are subject to a two percent penalty per month, payable in cash,
until the registration statement is effective. We did not meet the effective
date of the registration statement and we are incurring a monthly penalty of
$254,000, payable in cash, until the effectiveness of the registration. This
obligation will continue to accrue each month that the registration statement is
not declared effective and does not have a limit on the amount payable to these
investors. Because this payment is cumulative, this obligation could have a
material adverse effect on our financial condition. Moreover, we may be unable
to pay the total penalty due to the investors.

     In April 2001, our Chairman provided us with a $3 million loan, payable in
May 2002, with interest at 10 percent. In connection with this loan to us and
the $2 million guarantee he provided under the new line of credit from a bank,
the Chairman received warrants to purchase 500,000 shares of our Common Stock at
$1.75 per share, vesting upon issuance and expiring in April 2004.

     Our primary capital needs historically have been to fund working capital
requirements necessary to fund our net losses, our sales growth, the development
and introduction of products and related technologies, and the acquisition or
lease of equipment and other assets used in the product development process.

                                       22
<PAGE>

     Our operating activities used cash of $23.2 million during the year ended
December 31, 2000, primarily attributable to the $12.1 million net loss for the
year, a $5.9 million increase in trade receivables, and a $12.1 million decrease
in accounts payable and accrued liabilities, partially offset by a $2.7 million
decrease in inventory. The increase in trade receivables at December 31, 2000
compared to December 31, 1999 was due to a $3.5 million increase in sales during
the fourth quarter of 2000 compared to the same quarter in 1999 and a $2.6
million decrease in allowances for doubtful trade accounts receivable. We
believe that our allowances for doubtful accounts receivable are adequate based
on historical experience, and our current estimate of potential sales allowances
and doubtful accounts. The decrease in accounts payable and accrued liabilities
is due to increased borrowings under our line of credit and collections of
increased trade receivables, along with reductions to these liabilities, which
resulted from overall decreases in the related operating expenditures. The
decrease in inventory is due to successful efforts to manage inventory, which
reduced purchasing lead times and improved inventory turns.

     Cash provided by financing activities of $28.9 million for the year ended
December 31, 2000 consisted primarily of the proceeds from the equity
investments by Titus, borrowings on our line of credit and the release of
restricted cash by the our senior creditor. Cash used in investing activities of
$3.2 million for the year ended December 31, 2000 consisted of normal capital
expenditures, primarily for office and computer equipment used in our
operations. We do not currently have any material commitments with respect to
any future capital expenditures.

     We have incurred significant net losses in recent periods, including losses
of $12.1 million during fiscal 2000 and $41.7 million during fiscal 1999. These
losses are due in part to the high fixed costs to developing our products, to
the relatively short life cycle and limited period for sales of our products,
and to failure of game console manufactures to timely introduce their products
which use our software. To reduce our working capital needs, we have implemented
various measures including a reduction of personnel, a reduction of fixed
overhead commitments, and a scaling back of marketing programs. We will continue
to pursue various alternatives to improve future operating results, including
further expense reductions as long as they do not have an adverse impact on our
ability to develop, market and sell successful new interactive entertainment
software.

     We believe that funds available under our new line of credit, amounts
received from the equity financings transactions discussed above, amounts to be
received under various product license and distribution agreements and
anticipated funds from operations will be sufficient to satisfy our short-term
capital and commitments in the normal course of business at least through
December 31, 2001. Our long-term capital commitments consist of lease
commitments and potential loss contingencies. Historically, we have funded these
requirements from normal operating cash flows and available balances from the
existing line of credit. Should these funds be insufficient, additional funding
may not be available or may only be available on unfavorable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors Affecting Future Performance - Liquidity, Future Capital
Requirements."

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     We do not have any derivative financial instruments as of December 31,
2000. However, we are exposed to certain market risks arising from transactions
in the normal course of business, principally the risk associated with interest
rate fluctuations on our revolving line of credit

                                       23
<PAGE>

agreement, and the risk associated with foreign currency fluctuations. We do not
hedge our interest rate risk, or our risk associated with foreign currency
fluctuations.

Interest Rate Risk

     The table below provides information as of December 31, 2000 about our
other financial instruments that are sensitive to changes in interest rates.

Working Capital Line of Credit (Variable Rate)

Amount borrowed at December 31, 2000                 $24.4 million
Maximum amount of Line                                 $25 million  (1)
Variable interest rate                                      11.65%  (2)
Expiration                                          April 30, 2001  (3)

(1)  Within the total credit limit, we may borrow up to $7 million in excess of
     our borrowing base, which is based on qualifying receivables and inventory.

(2)  Borrowings bear interest at LIBOR plus 4.87 percent.

(3)  In April 2001 we replaced our existing line of credit with a new three year
     loan and security agreement with a bank providing for a $15 million working
     capital line of credit. Advances under the line are limited to an advance
     formula of qualified accounts receivable and inventory and bear interest at
     the banks prime rate, or at LIBOR plus 2.5 percent at our option.

Foreign Currency Risk

     Our earnings are affected by fluctuations in the value of our foreign
subsidiary's functional currency, and by fluctuations in the value of the
functional currency of our foreign receivables, primarily from Virgin. We
recognized losses of $935,000, $125,000 and $288,000 during the years ended
December 31, 2000, 1999 and 1998, respectively, primarily in connection with
foreign exchange fluctuations in the timing of payments received on accounts
receivable from Virgin. Based upon the average foreign currency rates for the
year ended December 31, 2000, a hypothetical 10 percent change in the applicable
foreign exchange rates would have increased our loss by approximately $94,000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions With Fargo

     In March 2000, the Company entered into a Film Production Joint Venture
Agreement with Mr. Fargo under which Mr. Fargo will provide up to $1.0 million
to fund the marketing of certain of the Company's game concepts, characters and
trademarks as motion picture projects. Under the terms of the Film Production
Joint Venture Agreement, net profits that the venture generates from the
Company's properties would be allocated first to reimburse Mr. Fargo for the
amount of his contributions, and then to the Company. In addition, certain
intellectual properties owned by Mr. Fargo may be marketed by the venture. Any
net profits that the venture generates from Fargo properties will be allocated
to Mr. Fargo.

                                       24
<PAGE>

     In April 2000, the Company entered into a joint venture agreement with Mr.
Fargo pursuant to which each of Interplay and Mr. Fargo will contribute up to $1
million each, as well as licenses for intellectual property suitable for
development as film projects. During fiscal 2000, Mr. Fargo contributed
$$360,000 to the joint venture. The contributions of up to $1 million value each
will be at each party's discretion. Proceeds from the joint venture, if any,
will be allocated to each party in accordance with its capital contributions and
then to the party contributing the intellectual property that generated the
proceeds.

     In April 2001, the Company borrowed $3 million from Mr. Fargo for the
purpose of repaying the outstanding balance on its line of credit from Titus.
The Fargo loan is for a term of one year, bears interest at an annual rate of
10%, and is otherwise subject to the terms of a Secured Promissory Note and a
Security Agreement with Mr. Fargo, both dated April 12, 2001. Also in April
2001, Mr. Fargo gave a $2 million personal guaranty of the Company's line of
credit from LaSalle Business Credit, Inc. In consideration for the loan and
guaranty, the Company issued to Mr. Fargo a three-year Warrant for 500,000
shares of the Company's Common Stock, exercisable at $1.75 per share.

     In connection with an acquisition of the Company's stock by Universal
Studios, Inc. in 1994, the Company's Board of Directors awarded Mr. Fargo a
bonus of $1 million. Mr. Fargo deferred payment of the bonus, and there is
currently a remaining unpaid balance of $282,000.

Transactions with Titus and Fargo

     In March 1999, the Company entered into a Stock Purchase Agreement with
Titus Interactive SA and Brian Fargo (the "Titus I Agreement"). Under the terms
of the Titus I Agreement, the Company issued Two Million Five Hundred Thousand
(2,500,000) shares of its common stock to Titus in exchange for consideration of
Ten Million Dollars ($10,000,000). Pursuant to the terms of the Stock Purchase
Agreement, the purchase price was recalculated based on the average closing
price per share of the Company's common stock as reported by Nasdaq during the
ten trading days ended June 30, 2000 and the purchase price was recalculated
again based on the average closing price per share of the Company's common stock
as reported by Nasdaq during the ten trading days ending August 20, 2000.
Pursuant to the June 30, 2000, adjustment, the Company issued to Titus 1,161,771
additional shares of common stock without additional consideration, for a total
of 3,661,771 shares, and issued to Titus a promissory note in the principal
amount of $1,120,202.90, bearing interest at the rate of 10% per annum and due
January 1, 2000. As a result of the August 1999 recalculation, and following
stockholder approval of the transaction, the purchase price was adjusted to
$2.20, and the number of shares of common stock to be issued under the Titus I
Agreement was adjusted to 4,545,455. In August 2000, the Company issued to Titus
the remaining 883,684 shares of common stock, and Titus cancelled the June 1999
promissory note.

     In May 1999 the Company signed a letter of intent with Titus pursuant to
which Titus loaned the Company $5,000,000 and the Company and Titus agreed to
negotiate certain additional transactions. Pursuant thereto, on July 19, 1999,
the Company and Titus entered into a Stock Purchase Agreement (the "Titus II
Agreement") providing for the sale and issuance of Six Million Two Hundred Fifty
Thousand (6,250,000) shares of Company's common stock to Titus in exchange for
total consideration of $25,000,000, including the $5,000,000 previously loaned
to the Company. Upon the closing of the Titus II Agreement (the "Closing"),
Interplay, Titus and Fargo entered into a stockholder agreement pursuant to
which: (a) Titus and Fargo each had the right to designate two directors and
together had the right to designate the remaining three directors to our Board
of

                                       25
<PAGE>

Directors; (b) Titus and Fargo granted to each other a right of first refusal
with respect to either party's sale our stock; (c) we granted Titus and Fargo
preemptive rights with respect to our future issuances of stock; (d) Titus and
Fargo granted each other co-sale rights with respect to either party's sale of
our stock; and (e) we were restricted from amending our Certificate of
Incorporation or Bylaws. The Stockholder Agreement has since terminated but is
on file with Securities and Exchange Commission as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the Quarter Ended September 30, 1999. In addition, at
the Closing the Company entered into Employment Agreements with each of Brian
Fargo and Herve Caen, pursuant to which Messrs. Fargo and Caen are employed as
Chief Executive Officer and President, respectively, of the Company, which
agreements shall each have an initial term of three years. Titus and Fargo have
also entered into an Exchange Agreement, which was consummated concurrent with
the Titus II Agreement, pursuant to which Fargo exchanged 2,000,000 shares of
the Company's common stock for 96,666 shares of Titus common stock.

     In April 2000, the Company entered into a Stock Purchase Agreement with
Titus (the "Titus III Agreement") providing for the issuance to Titus of 719,424
shares of the Company's newly-designated Series A Preferred Stock (the
"Preferred Stock") with certain voting and conversion rights, and Warrants to
purchase up to 500,000 shares of the Company's common stock, in return for
consideration from Titus in the form of $20 million cash and Titus's agreement
to certain obligations. Among the obligations that the Titus III Agreement
imposed upon Titus were: (i) that Titus provide a $20 million guaranty (the
"Titus Guaranty") of the Company's line of credit from Greyrock Capital; (ii)
that Titus extend to the Company a $5 million supplemental line of credit; and
(iii) that Titus provide the Company with financial reports required by Greyrock
Capital as a condition to the release of $2.5 million in cash collateral held by
Greyrock Capital. The Preferred Stock bears a six percent per annum cumulative
dividend. The Company was obligated to repay to Titus any amounts that Titus may
pay under the Titus Guaranty, and such repayment was secured by a second-
priority security interest in the Company's assets. Moreover, as a condition of
the Titus Guaranty, the Company granted Titus a right of first refusal on the
Company's sale of assets for $100,000 or more. In December 2000 through March
2001, the Company drew approximately $3 million on the Titus line of credit. The
Titus line of credit was repaid in full and terminated, and the Titus Guaranty
was released, in April 2001.

     Titus can convert the Preferred Stock into the Company's common stock at
any time following May 31, 2001. The number of shares of the Company's common
stock to be issued upon such conversion is determined by multiplying the number
of shares of Preferred Stock to be converted by the conversion ratio applicable
at the time. The conversion ratio is defined as a fraction, the numerator of
which is the initial purchase price per share of the Preferred Stock, $27.80,
and the denominator of which (the "Denominator") is adjustable. The initial
Denominator is the lower of $2.78 or 85% of the average market price of the
Company's common stock for the 20 trading days preceding the date of conversion.
The ratio shall be adjusted to account for stock splits or similar other changes
in the Company's capital structure.

     The Company may redeem any unconverted shares of Preferred Stock at the
original purchase price, plus accrued but unpaid dividends, at any time prior to
its conversion. In addition, the Preferred Stock is entitled to voting power
equivalent to the voting power of the shares of the Company's common stock into
which the Preferred Stock can be converted, subject to a maximum of 7,619,047
votes.

                                       26
<PAGE>

     There were three Warrants issued in connection with the Titus III Agreement
for the purchase of the Company's common stock in the amounts of 350,000 shares,
100,000 shares, and 50,000 shares. All three Warrants are exercisable at $3.79
per share, and are for a term of 10 years. The 350,000 share Warrant and the
50,000 share Warrant are fully exercisable. The 100,000 share warrant is
exercisable as to 60,000 shares pursuant to a pre-determined calculation, as
provided in that Warrant.

     The Company is obligated to register all of the Company's common stock
issued pursuant to the Titus I Agreement and the Titus II Agreement, and all of
the common stock issuable upon conversion of the Series A Preferred Stock and
the Warrants issued pursuant to the Titus III Agreement.

     In June 2000, the Company and Titus entered into a Technology and Content
License Agreement by which Titus licensed the content for the game "Messiah",
the trademarks "Mummy" and "Kingpin", and the game engine for Messiah. In
connection with such license, Titus paid the Company an advance payment of
royalties of $3 million.

     In May 2001, the Company entered into an agreement with Titus, Fargo and
Herve Caen by which the Company agreed: (i) not to assert that any facts
contained in Titus's May 15, 2001 Schedule 13D/A filing was untrue; (ii) to call
an annual meeting of the Company's stockholders by August 15, 2001 with no less
than 40 days' notice, and with a record date of the day before any redemption of
Series A Preferred Stock but in no case later than June 19, 2001; and (iii) not
to amend its Bylaws or Certificate of Incorporation prior to the annual meeting.
Herve Caen agreed not to deliver any notice of a meeting of Interplay's
stockholders prior to June 1, 2001.

Transactions with Titus and Virgin

     In February 1999, the Company acquired a 43.9% interest in VIE Acquisition
Group, LLC ("VIE"), the parent entity of Virgin Interactive Entertainment
Limited ("Virgin"). Management of VIE was governed by an Operating Agreement, to
which the Company became a party. In connection with the acquisition, the
Company entered into an International Distribution Agreement with Virgin.
Pursuant to the International Distribution Agreement, Virgin hired the Company's
European sales and marketing personnel and is distributing substantially all of
the Company's titles in Europe, CIS, Africa and the Middle East. The
International Distribution Agreement required the Company to pay certain
overhead fees and minimum commissions. Also in connection with the acquisition
of equity in Virgin's parent, the Company entered into a Product Publishing
Agreement with Virgin pursuant to which the Company published substantially all
lain of Virgin's titles in North and South America and Japan. The Company, VIE
and Virgin also entered into a Termination Agreement which provided terms for
the Company's withdrawal as a member of VIE and termination of the International
Distribution Agreement.

     In late 1999, Titus acquired the holder of a 50.1% equity interest in VIE.
In early 2000, Titus acquired the remaining 6% of VIE.

     In May 2000, the Company and Virgin amended the International Distribution
Agreement to, among other things, eliminate the overhead fees and minimum
commissions payable by the Company.

                                       27
<PAGE>

     In April 2001, the Company settled certain disputes with Virgin and amended
the International Distribution Agreement, the Termination Agreement and the
Product Publishing Agreement. As a result of the settlement, VIE redeemed the
Company's interest in VIE and Virgin paid the Company $3.1 million in net past
due balances owed under the International Distribution Agreement. In addition,
the Company will pay Virgin a one-time marketing fee of $333,000 for the period
ended June 30, 2001, and monthly overhead fees of $111,000 per month for a nine
month period beginning April 2001 and $83,000 per month for a six month period
beginning January 2002, with no further commitment for overhead fees for the
remainder of the term of the International Distribution Agreement. The Product
Publishing Agreement was amended such that it would only cover the publishing
rights for a product currently known as "Lotus".

Other Transactions

     Beginning in March 1998, the Company has entered into Indemnification
Agreements with all of its directors and executive officers providing for
indemnification of such persons by the Company in certain circumstances.

                     FACTORS AFFECTING FUTURE PERFORMANCE

     Our future operating results depend upon many factors and are subject to
various risks and uncertainties. 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:

We currently have a number of obligations that we are unable to meet without
generating additional revenues or raising additional capital. If we cannot
generate additional revenues or raise additional capital in the near future, we
may become insolvent and our stock would become illiquid or worthless.

     As of June 30, 2001, our cash balance was approximately $677,000 and our
outstanding accounts payable totaled approximately $14.8 million. If we do not
receive sufficient financing we may (i) liquidate assets, (ii) seek or be forced
into bankruptcy and/or (iii) continue operations, but incur material harm to our
business, operations or financial condition. In addition, because we have not
yet registered the shares issued in our April 2001 private placement of common
stock, we have, as of August 1, 2001, an accrued obligation to pay the private
placement investors an aggregate amount of $508,000 in cash payable on demand.
This obligation will continue to accrue at approximately $250,000 each month
that we do not register the shares. There is no cap on the penalty due to our
failure to register such shares. Because of our financial condition, our Board
of Directors has a duty to our creditors that may conflict with the interests of
our stockholders. If we cannot obtain additional capital, the Board may make
decisions that favor the interests of creditors at the expense of our
stockholders.

We depend, in part, on external financing to fund our capital needs. If we are
unable to obtain sufficient financing on favorable terms, we may not be able to
continue to operate our business.

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

                                       28
<PAGE>

     .  the progress and timely completion of our product development programs;

     .  our products' commercial success;

     .  our ability to license intellectual property on favorable terms;

     .  the introduction and acceptance of new hardware platforms by third
        parties; and

     .  our compliance with the financial covenants of our existing line of
        credit.

     If we cannot raise additional capital on favorable terms, we will have to
reduce our costs by selling or consolidating our operations, and by delaying,
canceling, suspending or scaling back product development and marketing
programs. These measures could materially limit our ability to publish
successful titles and may not decrease our costs enough to restore our
operations to profitability.

Our failure to comply with the covenants in our existing credit agreement could
result in the termination of the agreement and a substantial reduction in the
cash available to finance our operations.

     Pursuant to our credit agreement with LaSalle Business Credit Inc., or
"LaSalle," entered into in April 2001, we agreed:

     .  to safeguard, maintain and insure substantially all of our property,
        which property is collateral for any loans made under the credit
        agreement;

     .  not to incur additional debt, except for trade payables and similar
        transactions, or to make loans;

     .  not to enter into any significant corporate transaction, such as a
        merger or sale of substantially all of our assets without the knowledge
        and consent o LaSalle;

     .  to maintain an agreed-upon tangible consolidated net worth, to be set by
        the parties for periods subsequent to April 2001;

     .  to maintain a ratio of earnings before interest, taxes, depreciation and
        amortization, or EBITDA, to interest expense of at least 1.25 to 1.00;

     .  not to make capital expenditures in an aggregate amount of more than
        $2.5 million in any fiscal year without the consent of LaSalle; and

     .  to maintain EBITDA of at least the following amounts for the following
        periods:

        - negative $7.2 million for the six month period from January 1, 2001
            through June 30, 2001;
        - negative $3.5 million for the nine month period from January 1, 2001
            through September 30, 2001; and

                                       29
<PAGE>

        - $7.7 million during any consecutive twelve-month period from and after
            January 1, 2001.

     We are not in compliance with the financial covenants pertaining to net
worth and minimum EBITDA. If LaSalle does not waive compliance with these
covenants, or if we breach other covenants or if there are other events of
default in effect under the credit agreement and LaSalle does not waive
compliance with them, LaSalle would be able to terminate the credit agreement
and all outstanding amounts owed to LaSalle would immediately become due and
payable. Because we depend on our credit agreement to fund our operations,
LaSalle's termination of the credit agreement could cause material harm to our
business.

A change of control may cause the termination of several of our material
contracts with our licensors and distributors.

     If there were a change of control of our Board of Directors, some of our
third-party developers and licensors may assert that this event constitutes a
change of control and they may attempt to terminate existing development and
distribution agreements with us. In particular, our license for "the Matrix"
allows for the licensor to terminate the license if there is a change of control
without their approval. The loss of the Matrix license would materially harm our
projected operating results and financial condition.

The unpredictability of our quarterly results may cause our stock price to
decline.

     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;

                                       30
<PAGE>

     .  approvals required from content and technology licensors; and

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

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

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

     We have incurred significant net losses in recent periods, including a net
loss of $20.8 million in the six months ended June 30, 2001, $12.1 million
during 2000 and $41.7 million during 1999.  Our losses stem partly from the
significant costs we incur to develop our entertainment software products.
Moreover, a significant portion of our operating expenses are relatively fixed,
with planned expenditures based largely on sales forecasts.  At the same time,
most of our products have a relatively short life cycle and sell for a limited
period of time after their initial release, usually less than one year.

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

     In the past, revenues have been reduced by:

     .  delays in the introduction of new software products;

     .  delays in the introduction, manufacture or distribution of the platform
        for which a software product was developed;

     .  a higher than expected level of product returns and markdowns on
        products released during the year;

     .  the cost of restructuring our operations, including international
        distribution arrangements; and

     .  lower than expected worldwide sales of entertainment software releases.

     Similar problems may occur in the future.  Any reductions in our net
revenues could harm our business and financial results.

Our growing dependence on revenues from game console software products increases
our exposure to seasonal fluctuations in the purchases of game consoles.

                                       31
<PAGE>

     The interactive entertainment software industry is highly seasonal, with
the highest levels of consumer demand occurring during the year-end holiday
buying season.  As a result, our net revenues, gross profits and operating
income have historically been highest during the second half of the year.  The
impact of this seasonality will increase as we rely more heavily on game console
net revenues in the future.  Moreover, delays in game console software products
largely depend on the timeliness of introduction of game console platforms by
the manufacturers of those platforms, such as Sega and Nintendo. The
introduction by a manufacturer of a new game platform too late in the holiday
buying season could result in a substantial loss of revenues by us.  Seasonal
fluctuations in revenues from game console products may cause material harm to
our business and financial results.

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

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

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

Our largest stockholder, Titus Interactive SA, may implement or block corporate
actions in ways that are not in the best interests of our stockholders as a
whole.

     Titus currently owns approximately 43.3% of our common stock, and, in
connection with their ownership of our Series A Preferred Stock, controls
approximately 48% of the total voting power of our stock.  Upon conversion of
the Series A Preferred Stock held by Titus as of August 14, 2001, Titus could
own up to approximately 7.7 million additional shares of our common stock,
bringing its total ownership to approximately 51.6%, of our common stock.  Titus
may continue to convert each share of their Series A Preferred Stock, to the
extent not previously redeemed by us, into a number of shares of our Common
Stock determined by dividing $27.80 by the lesser of (i) $2.78 or (ii) 85
percent of the average closing price per share as reported by Nasdaq for the
twenty trading days preceding the date of conversion.  Pursuant to the terms of
our Series A Preferred Stock, Titus also has the ability to block approval of a
merger or change in control that the holders of a majority of our common stock
may deem beneficial.

                                       32
<PAGE>

     In connection with its investment, Titus has elected its Chief Executive
Officer and its President to serve as members of our Board of Directors and
Titus' Chief Executive Officer serves as our President.  Titus may elect
additional members that would constitute a majority of directors.

     As a consequence of its stock ownership and Board and management
representation, Titus exerts significant influence over corporate policy and
potentially may implement or block corporate actions that are not in the
interests of Interplay and its stockholders as a whole.  For example, Titus
could compel us to enter into agreements with Titus  or its subsidiaries on
terms more favorable than those we would agree to with a third party or to
forego enforcement of our rights against Titus or its subsidiaries. Titus could
also use its veto over mergers to prevent a merger than may be in the best
interests of our stockholders as a whole or to try to negotiate more favorable
merger consideration for itself.

Our stock price may decline significantly if we are delisted from the Nasdaq
National Market.

     Our common stock currently is quoted on the Nasdaq National Market System.
For continued inclusion on the Nasdaq National Market, we must meet certain
tests, including a minimum bid price of $1.00 and net tangible assets of at
least $4 million.  We currently are not in compliance with the minimum net
tangible assets requirement.  In addition, during the second quarter of fiscal
2000 we were subject to a hearing before a Nasdaq Listing Qualifications Panel,
which determined to continue the listing of our common stock on the Nasdaq
National Market subject to certain conditions, all of which were fulfilled.
However, if we continue to fail to satisfy the listing standards on a continuous
basis, Nasdaq may delist our common stock from its National Market System.

     The variable conversion price of our Series A Preferred Stock increases our
risk of being delisted in several ways:

     Bid Price.  The substantial number of shares that are potentially issuable
upon conversion of the Series A Preferred Stock and the short selling that may
occur as a result of the future priced nature of those shares increases the risk
that our stock price will fall below Nasdaq's minimum bid price requirement and
could, as noted above, result in our being delisted.  See our risk factors
"Substantial sales of our common stock by our existing stockholders may reduce
the price of our stock and dilute existing stockholders" and "The holder of our
Series A Preferred Stock could engage in short selling..."

     Public Interest Concerns.  If the returns on our Series A Preferred Stock
are deemed "excessive" compared with those of public investors in our common
stock, Nasdaq may deny inclusion or apply more stringent criteria to the
continued listing of our common stock.  In making this analysis, Nasdaq
considers:

     .  the amount raised in the transaction relative to our capital structure
        at the time of issuance;

     .  the dilutive effect of the transaction on our existing holders of common
        stock;

     .  the risk undertaken by Titus in purchasing our Series A Preferred Stock;

     .  the relationship between the Titus and us;

                                       33
<PAGE>

     .  whether the transaction was preceded by other similar transactions; and

     .  whether the transaction is consistent with the just and equitable
        principles of trade.

     Nasdaq also considers, as mitigating factors in its analysis, incentives
that encourage Titus to hold the Series A Preferred Stock for a longer time
period and limit the number of shares into which the Series A Preferred Stock
may be converted.  Such features may limit the dilutive effect of the
transaction and increase the risk undertaken by Titus in relationship to the
reward available.

     Change of Control and Change of Financial Structure. As of August 14,
2001, the Series A Preferred Stock was convertible into 7.7 million shares of
our common stock.  The exercise of these conversion rights could increase Titus'
percentage ownership of our capital stock significantly and may cause Nasdaq to
determine that (i) a merger or consolidation that results in a change of control
or (ii) a change in financial structure has occurred.  If Nasdaq determines that
the conversion of our Series A Preferred Stock constitutes a change in control
and a change in financial structure, we would need to re-apply for listing on
Nasdaq and satisfy all initial listing requirements as of that time.  We
currently do not satisfy those initial listing requirements.

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

A significant percentage of our international sales depend on our distribution
agreement with Virgin and Virgin's diligent sales efforts and timely payments
pursuant to that agreement.

     In connection with our acquisition in February 1999 of a 43.9% limited
liability company membership interest in VIE Acquisition Group, LLC, or VIE, the
parent entity of Virgin Interactive Entertainment Limited, or Virgin, we signed
an international distribution agreement with Virgin.  Under this agreement, we
appointed Virgin as exclusive distributor for most of our products in Europe,
the Commonwealth of Independent States, Africa and the Middle  East, for a
seven-year period.  During the course of the last two years, due to a dispute
regarding the amount of overhead fees and commissions we owed Virgin, Virgin
withheld material amounts of proceeds from us from their distribution of our
products from time to time.

     In April 2001, we entered into a settlement agreement with Virgin in which:

     .  each party entered into a general release from claims against the other
        party;

     .  Virgin paid us $3.1 million in settlement of amounts due us under the
        distribution agreement;

     .  we paid Virgin $330,000 for marketing overhead related to sales of our
        products;

     .  VIE redeemed our membership interest in VIE in full in exchange for the
        performance of our obligations under the settlement agreement;

                                       34
<PAGE>

     .  pursuant to the concurrent third amendment to our distribution agreement
        with Virgin, the overhead fees owed to Virgin going forward were
        immediately reduced and will be eliminated by July 2002; and

     .  we no longer have an equity interest in Virgin. Virgin is a wholly-owned
        subsidiary of, and is controlled by, Titus.

     Virgin remains our exclusive distributor throughout much of the world,
therefore our revenues could fall significantly and our business and financial
results could suffer material harm if:

     .  further disputes arise over amounts payable by us to Virgin;

     .  Virgin fails to deliver to the full proceeds owed us from distribution
        of our products;

     .  fails to effectively distribute our products abroad; or

     .  otherwise fails to perform under the distribution agreement.

Two of our directors have substantial, conflicting interests in our most
significant distributor, Virgin Interactive Entertainment, Limited.

     All of the equity interests of VIE are owned by Titus, a significant
stockholder of Interplay, which is controlled by two of our directors, Messrs.
Herve Caen and Eric Caen.  Herve Caen is the Chief Executive Officer of Titus
and Eric Caen is the President of Titus.  Herve Caen also serves as our
President.  Due to their positions with both of us and Titus, either of the
Caens could influence or induce us to enter into agreements or business
arrangements with VIE, or its subsidiary Virgin, on terms less favorable to us
than we would negotiate with an unaffiliated third party in an arm's length
transaction.

Our long-term exclusive distribution agreement with Virgin may discourage
potential acquirors from acquiring us.

     Pursuant to the settlement agreement we entered into with Titus, Virgin and
VIE on April 11, 2001, during the seven-year term of our February 1999
distribution agreement with Virgin, we agreed not to sell, license our
publishing rights, or enter into any agreement to either sell or license our
publishing rights with respect to any products covered by the distribution
agreement in the territory covered by the distribution agreement, with the
exception of two qualified sales each year.

     The restrictions on sales and licensing of publishing rights until 2006 may
discourage potential acquirors from entering into an acquisition transaction
with us, or may cause potential acquirors to demand terms that are less
favorable to our stockholders.  In addition, the settlement agreement contains
termination penalties of a minimum of $10 million, subject to substantial
increases pursuant to the terms of the settlement agreement, which also may
discourage potential acquirors that already have their own distribution
capabilities in these territories.

Our reliance on third party software developers subjects us to the risks that
these developers will not supply us in a timely manner with high quality
products or on acceptable terms.

                                       35
<PAGE>

     Third party interactive entertainment software developers, such as Bioware
Corp. and Planet Moon Studios develop many of our software products.  Since we
depend on these developers in the aggregate, we remain subject to the following
risks:

     .  continuing strong demand for the developers' products may cause
        developers who developed products for us in the past to instead work for
        our competitors in the future;

     .  the inability for us to control whether developers complete products on
        a timely basis or within acceptable quality standards, or at all;

     .  limited financial resources may force developers out of business prior
        to their completion of projects for us or require us to fund additional
        costs; and

     .  the possibility that developers could demand that we renegotiate our
        arrangements with them to include new terms less favorable to us.

     Increased competition for skilled third party software developers also has
compelled us to agree to make advance payments on royalties and to guarantee
minimum royalty payments to intellectual property licensors and game developers.
If the products subject to these arrangements do not generate sufficient sales
volumes to recover these royalty advances and guaranteed payments, we would have
to write-off unrecovered portions of these payments, which could cause material
harm to our business and financial results.

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

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

     .  operating systems such as Microsoft Windows 2000;

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

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

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

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

                                       36
<PAGE>

     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 which 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.

We compete with a number of companies that have substantially greater financial,
marketing and product development resources than we do.

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

     .  product features;

     .  brand name recognition;

     .  access to distribution channels;

     .  quality;

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

     .  ability to obtain licenses to popular motion picture, television, sports
        and character properties and to third party software developers.

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

     .  Electronic Arts Inc.
     .  Activision, Inc.
     .  Infogrames Entertainment
     .  Microsoft Corporation
     .  LucasArts Entertainment Company
     .  Midway Games Inc.
     .  Acclaim Entertainment, Inc.
     .  Vivendi Universal Interactive Publishing
     .  Ubi Soft Entertainment Publishing
     .  The 3DO Company

                                       37
<PAGE>

     .  Take Two Interactive Software, Inc.
     .  Eidos PLC
     .  THQ Inc.

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

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

We may face difficulty obtaining access to retailers necessary to market and
sell our products effectively.

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

Because we sell a substantial portion of our products on a purchase order basis,
our sales may decline substantially without warning and in a brief period of
time.

     We currently sell our products through our sales force to mass merchants,
warehouse club stores, large computer and software specialty chains and through
catalogs in the United States and Canada, as well as to certain distributors.
Outside North America, we generally sell products to third party distributors.
We make our sales primarily on a purchase order basis, without long-term
agreements.  The loss of, or significant reduction in sales to, any of our
principal retail customers or distributors could cause material harm to our
business.

If we are compelled to sell a larger proportion of our products to distributors,
our gross profit may decline.

                                       38
<PAGE>

     Mass merchants are the most important distribution channel for retail sales
of interactive entertainment software.  A number of these mass merchants have
entered into exclusive buying arrangements with software developers or other
distributors, which arrangements could prevent us from selling some or all of
our products directly to that mass merchant. If the number of mass merchants
entering into exclusive buying arrangements with our competitors were to
increase, our ability to sell to such merchants would be restricted to selling
through the exclusive distributor.  Because sales to distributors typically have
a lower gross profit than sales to retailers, this would lower our gross profit.
This trend could cause material harm to our business.

If our distributors or retailers cannot honor their credit arrangements with us,
we may be burdened with payment defaults and uncollectible accounts.

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

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

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

Substantial sales of our common stock by our existing stockholders may reduce
the price of our stock and dilute existing stockholders.

     We have filed registration statements covering a total of approximately
49.5 million shares of our common stock for the benefit of the holders we
describe below.  Assuming the effectiveness of these registration statements,
these shares would be eligible for immediate resale in the public market.

     .  Universal Studios, Inc. holds approximately 10.4%, of our outstanding
        common stock, all of which are being registered.

     .  Titus currently holds approximately 43.3% of our outstanding common
        stock and upon conversion of all its shares of Series A Preferred Stock,
        may own up to approximately 51.6% of our common stock. All of the shares
        of common stock issuable to Titus upon the conversion of the preferred
        stock or the exercise of the warrants are being registered in our
        pending registration statements.

                                       39
<PAGE>

     .  Pursuant to registration statement 333-59088, filed on April 4, 2001, we
        intend to register shares equal to approximately 18% of our outstanding
        common stock, held by a number of our investors as set forth in that
        registration statement.

     .  Employees and directors hold options and warrants to purchase 10.8% of
        our common stock, most of which are eligible for immediate resale. We
        may issue options to purchase up to an additional 2.0% of our common
        stock to employees and directors, which we anticipate will be freely
        tradable when issued.

     Although the holders described above are subject to restrictions on the
transfer of our common stock, future sales by such holders could decrease the
trading price of our common stock and, therefore, the price at which you could
resell your shares.  A lower market price for our shares also might impair our
ability to raise additional capital through the sale of our equity securities.
Any future sales of our stock would also dilute existing stockholders.

We depend upon third party licenses of content for many of our products.

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

We may fail to obtain new licenses from hardware companies on acceptable terms
or to obtain renewals of existing or future licenses from licensors.

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

Our sales volume and the success of our products depends in part upon the number
of product titles distributed by hardware companies for use with their video
game platforms.

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

                                       40
<PAGE>

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

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

     As a result, Sony, Nintendo and Microsoft can shift onto us the risk that
if actual retailer and consumer demand for our interactive entertainment
software differs from our forecasts, we must either the bear the loss from
overproduction or the lesser revenues associated with producing additional
discs. Either situation could lead to material reductions in our net revenues.

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

     Our interactive entertainment software requires extensive time and creative
effort to produce and market. The production of this software is closely tied to
the continued service of our key product design, development, sales, marketing
and management personnel, and in particular on the leadership, strategic vision
and industry reputation of our founder and Chief Executive Officer, Brian Fargo.
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 failure to
retain the services of Brian Fargo or other key personnel, including competent
executive management, or to attract and retain additional qualified employees
could cause material harm to our business.

Titus intends to gain control of our board of directors, which could result in a
significant change in management and operations.

     Titus has stated that they intend to gain control of our Board of
Directors. It is possible that this change in control could result in a change
in our management and operations. Significant changes in the composition of our
executive management team may hinder our ability to address the other challenges
we face, and may cause material harm to our business or financial condition.

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 17
percent of our total net revenues for the six months ended June 30, 2001 and
approximately 28 percent for the six months ended June 30, 2000. Most of these
revenues come from our distribution relationship with Virgin, pursuant to which
Virgin became the exclusive distributor for most of our products in Europe, the
Commonwealth of Independent States, Africa and the Middle East. To the extent
our resources allow, we intend to continue to expand our direct and indirect
sales, marketing and product localization activities worldwide.

                                       41
<PAGE>

     Our international sales and operations 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;

     .  we depend on Virgin as our exclusive distributor in Europe, the
        Commonwealth of Independent States, Africa and the Middle East; 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.

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

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

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

     Policing unauthorized use of our products is difficult, and software piracy
can be a persistent problem, especially in some international markets. Further,
the laws of some countries where our

                                       42
<PAGE>

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 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 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.

                                       43
<PAGE>

Our directors and officers control a large percentage of our voting stock and
may use this control to compel corporate actions that are not in the best
interests of our stockholders as a whole.

     Including Titus, our directors and executive officers beneficially own
approximately 69% of our aggregate common stock. In the event Titus converts all
of its shares of Series A Preferred Stock into common stock, the additional
shares could increase Titus' ownership to approximately 51.6%. These
stockholders can control substantially all matters requiring stockholder
approval, including the election of directors, subject to our stockholders'
cumulative voting rights, and the approval of mergers or other business
combination transactions. This concentration of voting power could discourage or
prevent a change in control that otherwise could result in a premium in the
price of our common stock.

     Moreover, since Titus owns 100% of VIE and only up to approximately 51.6%
of Interplay, Titus will recognize more revenue on a consolidated basis to the
extent it is able to divert revenues to the Virgin entities at the expense of
Interplay. Therefore, Titus has an incentive to compel Interplay to enter into
transactions with the Virgin entities on terms less favorable than might prevail
in a transaction with an unaffiliated third party.

We may fail to implement Internet-based product offerings successfully.

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

     .  increases in the Internet's data transmission capability;

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

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

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

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

     Our Board of Directors has the authority, without any action by the
stockholders, to issue up to 4,616,646 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:

                                       44
<PAGE>

     .  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.

The holder of our Series A Preferred Stock could engage in short selling to
increase the number of shares of common stock issuable upon conversion of our
Series A Preferred Stock. If this occurs, the market price of our common stock
and the value of your investment may decline.

     Titus, the sole holder of shares of our Series A Preferred Stock, may
convert those shares into shares of our common stock. The shares of our Series A
Preferred Stock generally are convertible into a number of shares of common
stock determined by dividing $27.80 by the lesser of (a) $2.78 and (b) 85
percent of the average of the closing prices per share as reported by the Nasdaq
National Market for the twenty trading days preceding the date of conversion.

     Based on the above formula, the number of shares of our common stock that
are issuable upon conversion of the Series A Preferred Stock increases as the
price of our common stock decreases. Increases in the number of shares of our
common stock which are publicly traded could put downward pressure on the market
price of our common stock. Depending on the trading volume of our stock, the
sale of a relatively limited number of shares could cause a significant decrease
in price. Therefore, Titus could sell short our common stock prior to conversion
of the Series A Preferred Stock, potentially causing the market price to decline
and a greater number of shares to become issuable upon conversion of the Series
A Preferred Stock. Titus could then convert its Series A Preferred Stock and use
the shares of common stock received upon conversion to cover its short
positions. Titus could thereby profit by the decline in the market price of our
common stock caused by its short selling.

     See also the risk factor entitled "Substantial sales of our common stock by
our existing stockholders may reduce the price of our stock and dilute existing
stockholders."

Our stock price is volatile.

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

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

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

                                       45
<PAGE>

     .  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.

                                       46
<PAGE>

We do not pay dividends on our common stock.

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

Increases in interest rates will increase the cost of our debt.

     Our working capital line of credit bears interest at either the bank's
prime rate or LIBOR, at our option both of which are variable rates. As such, if
interest rates increase, we will have to use more cash to service our debt,
which could impede our ability to meet other expenses as they become due and
could cause material harm to our business and financial condition.

                                       47
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Irvine,
State of California, on the 31st day of August, 2001.

                                            INTERPLAY ENTERTAINMENT CORP.

                                            By:   /s/ Brian Fargo
                                              -------------------------
                                            Brian Fargo, Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.


/s/ Brian Fargo                Chief Executive Officer         August 31, 2001
----------------------         and Chairman of the Board
Brian Fargo                    (Principal Executive Officer)

                               President and Director                 --
----------------------
Herve Caen


/s/ Manuel Marrero             Chief Financial Officer and     August 31, 2001
----------------------         Chief Operating Officer
Manuel Marrero                 (Principal Financial and
                               Accounting Officer)


----------------------         Director                               --
Eric Caen


         *                     Director                        August 31, 2001
----------------------
Richard S.F. Lehrberg


----------------------         Director                        August 31, 2001
Keven F. Baxter


----------------------         Director                        August 31, 2001
R. Stanley Roach

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


*By: /s/ Brian Fargo
     ------------------------
     Brian Fargo, Attorney-in-Fact

                                       48
<PAGE>

                                 EXHIBIT INDEX


EXHIBIT NO.                     DESCRIPTION

10.40         Joint Venture Agreement dated April 3, 2000, by and between the
              Company and Brian Fargo.
10.41         Agreement dated May 15, 2001, by and among the Company, Brian
              Fargo, Titus Interactive S.A. and Herve Caen.
10.42         Amendment to International Distribution Agreement, dated April 12,
              2001, by and between the Company and Virgin Interactive
              Entertainment Limited. *
10.43         Retail License Agreement dated December 18, 2000, by and between
              the Company and Warner Bros. Consumer Products, a division of Time
              Warner Entertainment Company, L.P.*
10.44         Playstation(R) CD-ROM/DVD-ROM Licensed Publisher Agreement dated
              April 1, 2001, by and between the Company and Sony Computer
              Entertainment America, Inc.*
10.45         Computer Game License Agreement, dated August 8, 1994, by and
              between the Company and TSR, Inc.*
10.46         First Amendment to Computer Game License Agreement dated August 8,
              1994, by and between the Company and TSR, Inc.*
10.47         Second Amendment to License Agreement Between TSR, Inc. and
              Interplay Productions, dated March 8, 1998, by and between the
              Company and TSR, Inc.*
23.1          Consent of Arthur Andersen LLP, independent public accountants.

*  Registrant has sought confidential treatment pursuant to Rule 24b-2 of the
   Securities Exchange Act of 1934, as amended, for a portion of the referenced
   exhibit.

                                       49
<PAGE>

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS
                 AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




                                                                    Page
                                                                    ----
Report of Independent Public Accountants                            F-2
Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2000 and 1999           F-3
Consolidated Statements of Operations for the years
ended December 31, 2000, 1999 and 1998                              F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2000, 1999 and 1998                F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998                                    F-6
Notes to Consolidated Financial Statements                          F-7
Schedule II -- Valuation and Qualifying Accounts                    S-1

                                      F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Interplay Entertainment Corp.:

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

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

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

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

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




/s/  Arthur Andersen LLP

ARTHUR ANDERSEN LLP
Orange County, California
April 16, 2001, except for the matters discussed in Note 15 as to which the date
is August 23, 2001

                                      F-2
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                  -----------------------------------
                                   ASSETS                                             2000                       1999
                                   ------                                         -----------------------------------
<S>                                                                               <C>                    <C>
Current Assets:
     Cash                                                                         $   2,835              $     399
     Restricted Cash                                                                      -                  2,597
     Trade receivables, net of allowances
         of $6,543 and $9,161, respectively                                          28,136                 22,209
     Inventories                                                                      3,359                  6,057
     Prepaid licenses and royalties                                                  17,704                 19,249
     Other                                                                              772                    874
                                                                                  ---------              ---------
        Total current assets                                                         52,806                 51,385

Property and Equipment, net                                                           5,331                  4,225
Other Assets                                                                            944                  1,326
                                                                                  ---------              ---------
                                                                                  $  59,081              $  56,936
                                                                                  =========              =========

               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               ----------------------------------------------

Current Liabilities:
     Current debt                                                                 $ 25,433               $ 19,630
     Accounts payable                                                               12,270                 21,462
     Accrued liabilities                                                            14,980                 17,915
                                                                                  --------               --------
          Total current liabilities                                                 52,683                 59,007
                                                                                  --------               --------

Commitments and Contingencies (see Note 7)

Stockholders' Equity (Deficit):
     Series A Preferred Stock, $.001 par value, authorized 5,000,000 shares;
        issued and outstanding 719,424 and zero shares, respectively                20,604                      -
     Common Stock, $.001 par value, authorized 100,000,000 and
       50,000,000 shares, respectively; issued and outstanding
       30,143,636 and 29,989,125 shares, respectively                                   30                     30
     Paid-in capital                                                                88,759                 87,390
     Accumulated deficit                                                          (103,259)               (89,782)
     Accumulated other comprehensive income                                            264                    291
                                                                                  --------               --------
          Total stockholders' equity (deficit)                                       6,398                 (2,071)
                                                                                  --------               --------
                                                                                  $ 59,081               $ 56,936
                                                                                  ========               ========
</TABLE>

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

                                      F-3
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                         ----------------------------------------------
                                                             2000            1999              1998
                                                         --------------     -----------     -----------
<S>                                                      <C>                <C>             <C>
Net revenues                                             $     104,582      $   101,930     $   126,862
Cost of goods sold                                              54,061           61,103          71,928
                                                         -------------      -----------     -----------
   Gross profit                                                 50,521           40,827          54,934
                                                         -------------      -----------     -----------

Operating expenses:
   Marketing and sales                                          26,482           29,524          39,471
   General and administrative                                   10,249           18,155          12,841
   Product development                                          22,176           20,629          24,472
   Other                                                           -              5,323             -
                                                         -------------      -----------     -----------
      Total operating expenses                                  58,907           73,631          76,784
                                                         -------------      -----------     -----------
      Operating loss                                            (8,386)         (32,804)        (21,850)
                                                         -------------      -----------     -----------

Other income (expense):
   Interest expense                                             (2,992)          (3,640)         (4,620)
   Other                                                          (697)             169            (313)
                                                         -------------      -----------     -----------
       Total other income (expense)                             (3,689)          (3,471)         (4,933)
                                                         -------------      -----------     -----------

Loss before provision
     for income taxes                                          (12,075)         (36,275)        (26,783)
Provision for income taxes                                         -              5,410           1,437
                                                         -------------      -----------     -----------
Net loss                                                 $     (12,075)     $   (41,685)    $   (28,220)
                                                         =============      ===========     ===========

Cumulative dividend on participating preferred stock     $         870      $       -       $       -
Accretion of warrant on preferred stock                            532              -               -
                                                         -------------      -----------     -----------
Net loss attributable to common stockholders             $     (13,477)     $   (41,685)    $   (28,220)
                                                         =============      ===========     ===========

Net loss per share:
Basic/diluted                                            $       (0.45)     $     (1.86)    $     (1.91)
                                                         =============      ===========     ===========
Weighted average number of
 common shares outstanding:
Basic/diluted                                               30,046,701       22,418,463      14,762,644
                                                         =============      ===========     ===========


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

                                      F-4
</TABLE>
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                  Preferred Stock            Common Stock          Paid-in      Accumulated
                                               -----------------------  -----------------------
                                                 Shares      Amount        Shares       Amount      Capital        Deficit
                                               ---------  -----------   ------------  ---------  -----------  ----------------
<S>                                            <C>        <C>           <C>           <C>        <C>          <C>

Balance, December 31, 1997                             -     $      -     10,951,828       $ 11     $ 18,408        $ (19,877)
   Issuance of common stock,
     net of issuance costs                             -            -      5,056,102          5       24,390                -
   Issuance of warrants                                -            -              -          -          316                -
   Exercise of warrants                                -            -      2,272,417          2        8,599                -
   Exercise of stock options                           -            -         12,084          -           15                -
   Proceeds from warrants
   Compensation for stock options granted              -            -              -          -          190                -
   Net loss                                            -            -              -          -            -          (28,220)
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation adjustment       -            -              -          -            -                -

           Other comprehensive income                  -            -              -          -            -                -

              Comprehensive loss                       -            -              -          -            -                -
                                               ---------  -----------  -------------  ---------  -----------  ---------------
Balance, December 31, 1998                             -            -     18,292,431         18       51,918          (48,097)
   Issuance of common stock                            -            -     11,408,736         12       34,838                -
   Exercise of stock options                           -            -        287,958          -          608                -
   Compensation for stock options granted              -            -              -          -           26                -
   Net loss                                            -            -              -          -            -          (41,685)
   Other comprehensive income,
       net of income taxes:
         Foreign currency translation adjustment       -            -              -          -            -                -

           Other comprehensive income                  -            -              -          -            -                -

              Comprehensive loss                       -            -              -          -            -                -
                                               ---------  -----------  -------------  ---------  -----------  ---------------
Balance, December 31, 1999                             -            -     29,989,125         30       87,390          (89,782)
   Issuance of common stock,
       net of issuance costs                           -            -         40,661          -          439                -
   Issuance of Series A preferred stock          719,424       19,202              -          -            -                -
   Issuance of warrants                                -            -              -          -          798                -
   Exercise of stock options                           -            -        113,850          -           42                -
   Accretion of warrant                                -          532              -          -            -             (532)
   Accumulated accrued dividend on
      Series A Preferred Stock                         -          870              -          -            -             (870)
   Compensation for stock options granted              -            -              -          -           90                -
   Net loss                                            -            -              -          -            -          (12,075)
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation adjustment       -            -              -          -            -                -

           Other comprehensive income                  -            -              -          -            -                -

              Comprehensive loss                       -            -              -          -            -                -
                                               ---------  -----------  -------------  ---------  -----------  ---------------
Balance, December 31, 2000                       719,424     $ 20,604     30,143,636       $ 30     $ 88,759       $ (103,259)
                                               =========  ===========  =============  =========  ===========  ===============


<CAPTION>
                                                     Accumulated
                                                        Other
                                                    Comprehensive      Comprehensive

                                                    Income (Loss)      Income (Loss)        Total
                                                  -----------------  -----------------   -------------
<S>                                               <C>                <C>                 <C>

Balance, December 31, 1997                                    $ 191          $       -       $ (1,267)
   Issuance of common stock,
     net of issuance costs                                        -                  -         24,395
   Issuance of warrants                                           -                  -            316
   Exercise of warrants                                           -                  -          8,601
   Exercise of stock options                                      -                  -             15
   Proceeds from warrants                                         -                  -              -
   Compensation for stock options granted                         -                  -            190
   Net loss                                                       -            (28,220)       (28,220)
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation adjustment                  -                163              -
                                                                     -----------------
           Other comprehensive income                           163                163            163
                                                                     -----------------
              Comprehensive loss                                  -          $ (28,057)             -
                                                  -----------------  =================   ------------
Balance, December 31, 1998                                      354                  -          4,193
   Issuance of common stock                                       -                  -         34,850
   Exercise of stock options                                      -                  -            608
   Compensation for stock options granted                         -                  -             26
   Net loss                                                       -          $ (41,685)       (41,685)
   Other comprehensive income,
       net of income taxes:
         Foreign currency translation adjustment                  -                (63)             -
                                                                     -----------------
           Other comprehensive income                           (63)               (63)           (63)
                                                                     -----------------
              Comprehensive loss                                  -          $ (41,748)             -
                                                  -----------------  =================   ------------
Balance, December 31, 1999                                      291                  -         (2,071)
   Issuance of common stock,
       net of issuance costs                                      -                  -            439
   Issuance of Series A preferred stock                           -                  -         19,202
   Issuance of warrants                                           -                  -            798
   Exercise of stock options                                      -                  -             42
   Accretion of warrant                                           -                  -              -
   Accumulated accrued dividend on
      Series A Preferred Stock                                    -                  -              -
   Compensation for stock options granted                         -                  -             90
   Net loss                                                       -          $ (12,075)       (12,075)
   Other comprehensive income,
      net of income taxes:
         Foreign currency translation adjustment                  -                (27)             -
                                                                     -----------------
           Other comprehensive income                           (27)               (27)           (27)
                                                                     -----------------
              Comprehensive loss                                  -          $ (12,102)             -
                                                  -----------------  =================   ------------
Balance, December 31, 2000                                    $ 264                           $ 6,398
                                                  =================                      ============
</TABLE>

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



                                      F-5
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF OF CASH FLOWS
                            (Dollars in thousands)


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

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

                                      F-6
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Line of Business; Risk Factors

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

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

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

     The Company believes that funds available under its new line of credit,
funds received from the sale of equity securities and anticipated funds from
operations including licensing and distribution transactions, if any, will be
sufficient to satisfy the Company's projected working capital and capital
expenditure needs in the normal course of business at least through the end of
2001 (See Notes 5, 14 and 15). However, there can be no assurance that the
Company will have or be able to raise sufficient funds to satisfy its projected
working capital and capital expenditure needs beyond 2001.

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

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


2.  Summary of Significant Accounting Policies

Consolidation

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

Reincorporation

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

Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and

                                      F-7
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Reclassifications

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

Restricted Cash

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

Inventories

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

Prepaid Licenses and Royalties

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

Property and Equipment

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

Other Non-current Assets

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

Long-lived Assets

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

                                      F-8
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


     Fair Value of Financial Instruments

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

Revenue Recognition

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

Product Development

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

Advertising Costs

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

Income Taxes

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

Foreign Currency

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

                                      F-9
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Net Loss Per Share

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

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

Comprehensive Income (Loss)

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

Stock-Based Compensation

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

Recent Accounting Pronouncements

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

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

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

                                      F-10
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


3.  Acquisition

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

4.  Detail of Selected Balance Sheet Accounts

Inventories

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

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


Other Current Assets

  Other current assets consist of the following:


                                                            December 31,
                                                     ------------------------
                                                        2000          1999
                                                     ----------    ----------
                                                      (Dollars in thousands)
Prepaid expenses                                     $      689    $      764
Deposits                                                     83           110
                                                     ----------    ----------
                                                     $      772    $      874
                                                     ==========    ==========

Property and Equipment

  Property and equipment consists of the following:

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

                                      F-11
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

Accrued Liabilities

     Accrued liabilities consist of the following:

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

5. Current Debt

     Current debt consists of the following:

                                                   December 31,
                                            --------------------------
                                                  2000         1999
                                            ------------- ------------
                                              (Dollars in thousands)
Loan Agreement                               $    24,433  $    19,218
Supplemental line of credit from Titus             1,000            -
Other                                                  -          412
                                            ------------- ------------
                                             $    25,433  $    19,630
                                            ============= ============

Loan Agreement

     Borrowings under the Loan and Security Agreement ("Loan Agreement") bear
interest at LIBOR (6.78 percent at December 31, 2000 and 6.48 percent at
December 31, 1999) plus 4.87 percent (11.65 percent at December 31, 2000 and
11.35 percent at December 31, 1999). In April 2000, the Company amended its line
of credit under the Loan Agreement with a financial institution to extend its
current line of credit through April 2001. Under the terms of the Amendment the
maximum credit line is $25 million. Within the total credit limit, the Company
may borrow up to $7 million in excess of its borrowing base, which is based on
qualifying receivables and inventory. At December 31, 2000, the Company had
availability of $600,000 on its line of credit. In addition, the Company is
required to maintain the $5 million personal guarantee by the Company's Chairman
and Chief Executive Officer ("Chairman") and Titus is required to provide a $20
million corporate guarantee. The Company is currently in compliance with the
terms of the Loan Agreement. In April 2001, the Company replaced its line of
credit under a loan and security agreement with a new bank (see Note 14).

Supplemental line of credit from Titus

     In April 2000, the Company secured a $5 million supplemental line of credit
with Titus expiring in May 2001. Amounts borrowed under this line are subject to
interest at the maximum legal rate for parties other than financial
institutions, currently 10 percent per annum, payable quarterly. In connection
with this line of credit, Titus received a warrant for up to 100,000 shares of
the Company's Common Stock at $3.79 per share that will expire in April 2010 and
is exercisable if and to the extent that the Company borrows under the line of
credit, as defined. At

                                      F-12
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

December 31, 2000, the Company had availability of $4 million on its
supplemental line of credit. Subsequent to December 31, 2000, the Company
borrowed an additional $2 million under the supplemental line, and during April
2001, the total outstanding balance plus accrued interest in the aggregate
amount of approximately $3.1 million was paid in full.

6. Income Taxes

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

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

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

                                           Years Ended December 31,
                                        -----------------------------
                                          2000      1999       1998
                                        -------   --------   --------
                                            (Dollars in thousands)
Current:
 Federal                                $     -   $      -   $      -
 State                                        -          8          8
 Foreign                                      -         66       (571)
                                        -------   --------   --------
                                              -         74       (563)
Deferred:
 Federal                                      -      4,536      2,000
 State                                        -        800          -
                                        -------   --------   --------
                                              -      5,336      2,000
                                        -------   --------   --------
                                        $     -   $  5,410   $  1,437
                                        =======   ========   ========

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

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

                                           Years Ended December 31,
                                        -----------------------------
                                          2000      1999       1998
                                        -------   --------   --------
                                            (Dollars in thousands)
Statutory income tax rate
State and local income taxes, net of      (34.0)%    (34.0)%    (34.0)%
  Federal income tax benefit               (3.0)      (3.0)      (3.0)
Valuation allowance                        37.0       51.9       39.8
Other                                         -          -        2.6
                                        -------   --------   --------
                                              - %     14.9 %      5.4 %
                                        =======   ========   ========

                                      F-13
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     The components of the Company's net deferred income tax asset (liability)
are as follows:
                                                             December 31,
                                                      ------------------------
                                                           2000       1999
                                                      ------------------------
                                                       (Dollars in thousands)
Current deferred tax asset (liability):
  Prepaid royalties                                   $   (7,081)  $   (7,652)
  Nondeductible reserves                                   3,135        4,184
  Accrued expenses                                           763        1,007
  Foreign loss and credit carryforward                       965          454
  Federal and state net operating losses                  39,672       35,952
  Research and development credit carryforward               831          831
  Other                                                      294          314
                                                      ----------   ----------
                                                      $   38,579   $   35,090
                                                      ----------   ----------

Non-current deferred tax asset (liability):
  Depreciation expense                                $       50   $     (126)
  Nondeductible reserves                                     389          318
  Other                                                       (6)          (5)
                                                      ----------   ----------
                                                      $      433   $      187
                                                      ----------   ----------

Total deferred tax asset before
  valuation allowance                                 $   39,012   $   35,277
Valuation allowance                                      (39,012)     (35,277)
                                                      ----------   ----------
Net deferred tax asset                                $        -   $        -
                                                      ==========   ==========

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

7. Commitments and Contingencies

Leases

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

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

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

                                      F-14
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Pending Internal Revenue Service Examination

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

Litigation

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

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

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

Employment Agreements

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

New European Currency

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

                                      F-15
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. Stockholders' Equity

Preferred Stock and Common Stock

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

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

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

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

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

                                      F-16
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUDSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

following weighted average assumptions: dividend yield of zero percent; expected
volatility of 92 percent; risk-free interest rate of 5.85 percent; and an
expected life of one-year. This resulted in the Company allocating $19,202,000
to the Preferred Stock and $798,000 to the warrant which is included in paid in
capital. The discount on the Preferred Stock is being accreted over a one-year
period as a dividend to the Preferred Stock. As of December 31, 2000, the
Company had accreted $532,000. In addition, Titus received a warrant for 50,000
shares of the Company's Common Stock exercisable at $3.79 per share which became
exercisable by Titus since the Company did not meet certain financial operating
performance targets for the year ending December 31, 2000, as defined. Both
warrants expire in April 2010. In April 2001, Titus' guarantee of the Company's
principal line of credit was released and the Company may redeem the Preferred
Stock at anytime thereafter (see Note 14).

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

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

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

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

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

Employee Stock Purchase Plan

     Under this plan, eligible employees may purchase shares of the Company's
Common Stock at 85% of fair market value at specific, predetermined dates.
During the year, the Board of Directors increased the number of

                                      F-17
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


shares authorized to 300,000. Of the 300,000 shares authorized to be issued
under the plan, approximately 131,000 shares remained available for issuance at
December 31, 2000. Employees purchased 40,661 and 72,225 shares in 2000 and 1999
for $89,000 and $127,000, respectively.

9.  Loss Per Share

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

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

10. Employee Benefit Plans

Stock Option Plans

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

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

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

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

                                      F-18
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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

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

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

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

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

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


Profit Sharing 401(k) Plan

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

                                      F-19
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


11.  Related Parties

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

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

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

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

Distribution and Publishing Agreements

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

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

                                      F-20
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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

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

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

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

Investment in Affiliate

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

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


12.  Concentration of Credit Risk

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

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

                                      F-21
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

13. Segment and Geographical Information

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

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

     Net revenues were attributable to geographic regions as follows:

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

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

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

                                      F-22
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

14. Subsequent Events

Replacement of Credit Facility

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

Sale of Common Stock

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

                                      F-23
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Unaudited Pro-forma Condensed Balance Sheet

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

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

<TABLE>
<CAPTION>
                                        ASSETS                                 Actual       Pro-forma
                                        ------                              -----------    -----------
<S>                                                                         <C>            <C>
Current Assets:                                                               (Dollars in thousands)
  Cash                                                                      $     2,835    $     2,835
  Trade receivables, net                                                         28,136         28,136
  Inventories                                                                     3,359          3,359
  Prepaid licenses and royalties                                                 17,704         17,704
  Other                                                                             772            772
                                                                            -----------    -----------
  Total current assets                                                           52,806         52,806
                                                                            -----------    -----------

Property and Equipment, net                                                       5,331          5,331
Other Assets                                                                        944            944
                                                                            -----------    -----------
                                                                            $    59,081    $    59,081
                                                                            ===========    ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY
                         ------------------------------------

Current Liabilities:
  Current debt                                                              $    25,433    $    13,887
  Accounts payable                                                               12,270         12,270
  Accrued liabilities                                                            14,980         14,980
                                                                            -----------    -----------
     Total current liabilities                                                   52,683         41,137
                                                                            -----------    -----------

Commitments and Contingencies

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

Loan from Chairman and Chief Executive Officer

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

                                      F-24
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Amendment to Shiny Purchase Agreement

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

Settlement of Dispute with Virgin Interactive Entertainment Limited

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

15. Subsequent Event - Factors Affecting Future Performance and Going Concern

     As of June 30, 2001, the Company's current liabilities exceeded its current
assets by $9.2 million. For the six months ended June 30, 2001, the Company
incurred a net loss of $20.8 million based on its unaudited financial
statements. However, net cash used in operating activities was $1.7 million as
the Company's negative operating results were largely offset by strong trade
receivable collections and conservative management of inventories and
disbursements. During the same period last year, the net cash used in operating
activities was $19.7 million.

     In June 2001, the Company experienced significant delays in the production
and release of certain titles. These delays resulted in significant declines in
the operating revenues of the Company as compared to budget for the quarter
ended June 30, 2001. The Company has not released sufficient product during the
three month period ended June 30, 2001 to generate a profitable level of
revenues, or sufficient accounts receivable to maximize the use of its line of
credit. The Company also anticipates that delays in product releases could
continue in the short-term, and funds available under its new line of credit and
from ongoing operations are not sufficient to satisfy the projected working
capital and capital expenditure needs in the normal course of business. In
addition, the Company is not in compliance with certain financial covenants set
forth in the new line of credit agreement as of June 30, 2001 and these
violations have not been cured as of August 23, 2001. If the bank does not waive
compliance with the required covenants, terminates the credit agreement and
demands acceleration of payment of the outstanding amounts, the Company would
not have the funds to repay the bank and would be unable to continue to draw on
the credit facility to fund future operations.

     The Company continues to implement cost reduction programs including a
reduction of personnel, a reduction of fixed overhead commitments, cancelled or
suspended development on future titles and have scaled back certain marketing
programs. During the six months ended June 30, 2001, the Company incurred $2.2
million in write-offs of prepaid royalties for titles in development that have
been canceled. The Company may continue to incur write-offs if additional
projects are canceled in order to reduce future operating expenditures. The
Company has, and expects to continue to, incur costs related to penalties
arising from the April 2001 private placement registration statement not being
declared effective (see Note 14). This obligation will continue to accrue each
month that the registration statement is not declared effective and does not
have a limit on the amount payable to these investors. As of August 23, 2001,
this registration statement is not declared effective and the Company has
accrued penalties of $508,000.

     The Company is seeking external sources of funding, including but not
limited to, a sale or merger of the Company, a private placement of Company
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
carry out management's long-term strategic objectives. However, there can be no
assurance that the Company can complete the transactions necessary to provide
the required funding on a timely basis in order to continue ongoing operations
in the normal course of business.

                                      F-25
<PAGE>

                INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     If the Company is unable to secure the required funding on a timely basis,
it will continue to reduce its costs by selling or consolidating its operations,
and by continuing to delay or cancel product development and marketing programs.

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

     Conversion of Series A Preferred Stock

     On August 13, 2001, Titus converted 336,070 shares of Series A Preferred
Stock into 6,679,306 shares of Common Stock (See Note 8). Subsequent to this
partial conversion, Titus owns 19,496,561 shares of Common Stock and 383,354
shares of Series A Preferred Stock with voting rights equivalent to 4,059,903
shares of Common Stock. Collectively, Titus has 48 percent of the total voting
power of the Company capital stock as of August 13, 2001.

     Distribution Agreement

     In August 2001, the Company received an advance of $4 million for the North
American distribution rights of a future title. The advance will be recouped
against future distribution commissions payable, based on the future sales of
the title.

                                      F-26
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
            NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



     Quarterly Financial Data (Unaudited)

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

<TABLE>
<CAPTION>
                                      March 31       June 30        September 30 December 31
                                     ----------     ----------      ------------ -----------
                                       (Dollars in thousands, except per share amounts)
<S>                                  <C>            <C>             <C>          <C>
Year ended December 31, 2000:
Net revenues                         $  18,143       $  24,921        $ 31,631      $ 30,773
                                     =========       =========       =========   ===========
Gross profit                         $   8,571       $  13,465        $ 15,436      $ 13,061
                                     =========       =========       =========   ===========
Net loss                             $  (5,498)      $  (1,903)       $    113      $ (4,772)
                                     =========       =========       =========   ===========

Net loss per share basic/diluted     $   (0.18)      $   (0.08)       $  (0.01)     $  (0.18)
                                     =========       =========       =========   ===========

Year ended December 31, 1999:
Net revenues                         $  21,620       $  29,430        $ 23,636      $ 27,323
                                     =========       =========       =========   ===========
Gross profit                         $   9,054       $  11,814        $  8,303      $ 11,609
                                     =========       =========       =========   ===========
Net loss                             $  (8,278)      $  (6,921)        (16,976)     $ (9,563)
                                     =========       =========       =========   ===========

Net loss per share basic/diluted     $   (0.44)      $   (0.33)       $  (0.75)     $  (0.35)
                                     =========       =========       =========   ===========
</TABLE>

                                    F-27
<PAGE>

                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                           Trade Receivables Allowance
                              -----------------------------------------------------------
                              Balance at     Provisions for
                              Beginning of     Returns      Returns and   Balance at End
      Period                   Period       and Discounts    Discounts      of Period
      ------                   ------       -------------    ---------      ---------
<S>                           <C>          <C>             <C>          <C>

Year ended December 31, 1998   $  14,461       $  43,596    $ (39,626)      $     18,431
                              ==========   =============   ==========       ============

Year ended December 31, 1999   $  18,431       $  25,187    $ (34,457)      $      9,161
                              ==========   =============   ==========       ============

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