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

FORM 10-K

(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, 2001

OR

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

For the transition period from _____ to _____

Commission file number 0-18813

THQ INC.(Exact Name of Registrant as Specified in Its Charter)
_______________

|                                                                               |  |                                                
|------------------------------------------------------------------------------ |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction of
Incorporation or Organization)        |  | 13-3541686
(I.R.S. Employer
Identification No.)
|                                                                              
|27001 Agoura Road
Calabasas Hills, CA
(Address of principal executive offices) |  | 91301
(Zip Code)                               

Registrants telephone number, including area code: (818) 871-5000

_______________

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

None.

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

Common Stock, $.01 par value
Preferred Stock Purchase Rights

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 (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [x]

As of March 15, 2002, approximately 26,213,000 shares of Common Stock of
the Registrant were outstanding and the aggregate market value of voting
Common Stock held by non-affiliates was approximately $1,226,883,000.

DOCUMENTS INCORPORATED BY REFERENCE

The 2002 Notice of Annual Meeting of Stockholders and Proxy Statement is
incorporated by reference to Part III herein.





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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. BUSINESS                                                                             
|              | Item 2. PROPERTIES                                                                           
|              | Item 3. LEGAL PROCEEDINGS                                                                    
|              | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | Item 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|              | Item 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|              | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES   
|Exhibit 10.8 
|Exhibit 10.18
|Exhibit 21   
|Exhibit 23.1 



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THQ INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 2001

ITEMS IN FORM 10-K

|            |  |                                                                                        |  |     
|----------- |  | -------------------------------------------------------------------------------------- |  | ----
|            |  |                                                                                        |  | PAGE
|            |  |                                                                                        |  |     
|Facing page |  |                                                                                        |  |     
|Part I      |  |                                                                                        |  |     
|Item 1.     |  | Business                                                                               |  | 1   
|Item 2.     |  | Properties                                                                             |  | 13  
|Item 3.     |  | Legal Proceedings                                                                      |  | 14  
|Item 4.     |  | Submission of Matters to a Vote of Security Holders                                    |  | 14  
|Part II     |  |                                                                                        |  |     
|Item 5.     |  | Market for the Registrants Common Equity and Related Stockholder Matters              |  | 15  
|Item 6.     |  | Selected Financial Data                                                                |  | 17  
|Item 7.     |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations. |  | 18  
|Item 7A.    |  | Quantitative and Qualitative Disclosures About Market Risk                             |  | 32  
|Item 8.     |  | Financial Statements and Supplementary Data                                            |  | 32  
|Item 9.     |  | Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.  |  | 32  
|Part III    |  |                                                                                        |  |     
|Item 10.    |  | Directors and Executive Officers of the Registrant                                     |  | 33  
|Item 11.    |  | Executive Compensation                                                                 |  | 33  
|Item 12.    |  | Security Ownership of Certain Beneficial Owners and Management                         |  | 33  
|Item 13.    |  | Certain Relationships and Related Transactions                                         |  | 33  
|Part IV     |  |                                                                                        |  |     
|Item 14.    |  | Exhibits, Financial Statement Schedule and Reports on Form 8-K                         |  | 34  
|Signatures  |  |                                                                                        |  | 37  





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This Annual Report contains, or incorporates by reference, certain statements
that may be deemed forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements appear in a
number of places in this Report, including, without limitation, Business and
Management Discussion and Analysis of Financial Condition and Results of
Operations. These statements are based on current expectations, estimates and
projections about the Companys business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements due to numerous
factors, including those described above and the following: changes in demand
for the Companys products, product mix, the timing of customer orders and
deliveries, the impact of competitive products and pricing and difficulties
encountered in the integration of acquired businesses. In addition, such
statements could be affected by growth rates and market conditions relating to
the interactive software industry and general domestic and international
economic conditions. Specific information concerning these and other such
factors is contained in our Registration Statement on Form S-3 filed with the
Securities Exchange Commission on January 22, 2002, as amended. A copy of this
filing may be obtained by contacting us or the SEC. The forward-looking
statements contained herein speak only as of the date on which they are made,
and we do not undertake any obligation to update any forward-looking statement
to reflect events or circumstances after the date of this Annual Report.




PART I




Item 1. BUSINESS

Introduction

We are a leading global developer and publisher of interactive entertainment
software for the major hardware platforms in the home video game market. We
currently develop and publish titles for Sony PlayStation 2, Microsoft Xbox,
Nintendo GameCube, Nintendo Game Boy Advance, PCs, wireless devices and online.
Our titles span most major interactive entertainment software genres,
including action, adventure, childrens, driving, fighting, puzzle, role
playing, simulation, sports and strategy.

Our software is based on intellectual property licensed or assigned from third
parties or created internally. We continually seek to identify and develop
titles based on content from other entertainment media (such as movies and
television programs), sports and entertainment personalities, popular sports
and trends or concepts that have high public visibility or recognition or that
reflect the trends of popular culture. We license intellectual property from
World Wrestling Federation Entertainment, Nickelodeon, Disney, Sega, Time
Warner, Tetris Company, Mattel, LucasArts and others. Our portfolio of
licensed brands includes the World Wrestling Federation, Britney Spears,
Rugrats, SpongeBob SquarePants, Scooby-Doo, Star Wars, Hot Wheels, Power
Rangers, Disney/Pixars Monsters, Inc.and others.

We also develop software based on brands created by our eight internal
development studios and by external developers under contract with us. Our
original brands include Red Faction, MX 2002 featuring Ricky Carmichael,
Summoner, New Legendsand Dark Summit. Other than games that we release on
PCs, all of our products are manufactured for us by
Sony, Nintendo and Microsoft or their
authorized vendors.

We recently entered into a master interactive license agreement with
Nickelodeon that grants us the exclusive right to develop and publish games
based on all existing and future individual Nickelodeon animated TV and movie
properties targeting children ages 6-11 on every game system through 2005. In
addition, we also entered into an agreement with Nickelodeon to jointly create,
develop and publish original video game content with multi-media franchise
potential through Nickelodeons television, movie, on-line, magazine and
consumer product network. The first title we are working on under this
agreement is the character-based action-adventure Tak and The Power of JuJu
(working title), which is scheduled for release on PlayStation 2 and GameCube
in 2003.

In North America, we market and distribute our software to customers including
Wal-Mart, Toys R Us, Target, Electronics Boutique, Best Buy, GameStop, Kay
Bee Toys and other regional and national general merchandisers, discount store
chains, and specialty retailers. Outside North America, we market and
distribute our software to retailers in 70 countries and territories through
offices in the United Kingdom, France, Germany and Australia.

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In the year ended December 31, 2001, our net sales increased to $379.0 million
from $347.0 million in 2000, $303.5 million in 1999, $216.7 million in 1998 and
$90.2 million in 1997, representing a compound annual growth rate since 1997 of 43%.
During the year ended December 31, 2001, our net income was $36.0 million, as
compared to $18.2 million for the year ended December 31, 2000.

We are a Delaware corporation that was incorporated in 1997. We were formerly
incorporated in New York in 1989 under the name Trinity Acquisition
Corporation, which changed its name in 1990 to T.HQ, Inc. through a merger with
T.HQ, Inc., a California corporation. Our principal executive offices are
located at 27001 Agoura Road, Calabasas Hills, California 91301, and our
telephone number is (818) 871-5000. Our web site is at www.thq.com.

THQ and the THQ logo are trademarks and/or registered of THQ Inc. Nintendo®,
Nintendo Entertainment System® (NES), Super Nintendo Entertainment System®
(SNES), Game Boy®, Game Boy Color®, Game Boy Advance, GameCube and Nintendo
64® are trademarks and/or registered trademarks of Nintendo of America Inc.
(Nintendo). Sega®, Genesis®, Game Gear®, Saturn® and Dreamcast® are
registered trademarks of Sega of America, Inc. (Sega). Sony PlayStation® and
Sony PlayStation® 2 are trademarks and/or registered trademarks of Sony
Computer Entertainment Inc. (Sony). Microsoft Xbox is a trademark of
Microsoft Corporation (Microsoft). Red Faction, Summoner, Dark Summit, Cedar
Ridge Construction, Heavy Iron Studios®, Helixe, Pacific Coast Power & Light
Company, Genetic Anomalies, Volition, THQ Wireless, Rainbow Studios and Rainbow
Multimedia, Cranky Pants Studios and their respective
logos are trademarks and/or registered trademarks of THQ Inc. All other
trademarks are property of their respective owners. Microsoft, Nintendo and
Sony are referred to herein collectively as the manufacturers.

Recent Developments

On March 8, 2002, we announced that our Board of Directors declared a three-for-two stock
split of our shares of common stock to be effected in the form of a 50% stock dividend, which will be distributed
on or about April 9, 2002, to stockholders of record as of the
close of business on March 26, 2002. The effect of the stock dividend is not reflected in the
consolidated financial statements.

The Interactive Entertainment Industry And Technology

The home interactive game market consists of software distributed on disc and
cartridge media for use solely on dedicated hardware systems, and software
distributed on CD-ROMS for use on PCs. Disc media includes DVD-ROM discs for
use on the Sony PlayStation 2 and Microsoft Xbox, proprietary discs for use on
the Nintendo GameCube and CD-ROM discs for use on the Sony PlayStation. The
Nintendo Game Boy Advance is the only current platform that uses cartridges.
Until 1996, most software for dedicated platforms was sold in cartridge form.
Since then, disc-based products have become increasingly popular because they
have substantially greater data storage capacity and lower costs than
cartridges.

The first modern platform was introduced by Nintendo in 1985 using 8-bit
technology. 8-bit means that the central processing unit, or chip, on which
the software operates is capable of processing data in 8-bit units. Subsequent
advances in technology have resulted in continuous increases in the processing
power of the chips that power both the consoles and PCs. As the technology of
the hardware has advanced, the software has similarly advanced, with faster and
more complex images, more lifelike animation and sound effects and more
intricate scenarios. The larger data storage capacity of disc-based media for
systems such as the Sony PlayStation 2, Microsoft Xbox and the Nintendo
GameCube enables them to provide richer content and longer play. This new
generation of systems is based primarily on 128-bit technology. The latest
hand-held platform, Game Boy Advance, uses 32-bit technology.

The following table sets forth the year in which each of the manufacturers
platforms, for which we have published titles and technology, were released in
the United States:

|                            |  |                                |  |              |                     |              |  |                                         |  |                                               
|--------------------------- |  | ------------------------------ |  | ------------ | ------------------- | ------------ |  | --------------------------------------- |  | ----------------------------------------------
|                            |  |                                |  | Date of U.S. |                     |              |  |                                        
|Manufacturer                |  | Product Name                   |  | Introduction |                     | Media Format |  | Technology                             
|                            |  |                                |  |             
|Nintendo
Nintendo
Sega
Sega |  | NES
Game Boy
Game Gear
Genesis |  |              | 1985
1989
1991
1989 |              |  | Cartridge
Cartridge
Cartridge
Cartridge |  | 8-bit
8-bit (portable)
8-bit (portable)
16-bit

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|                                                                           |  |                                                                                                           |  |              |                                                   |              |  |                                                                                                                                                                            |  |                                                                                                
|-------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | ------------ | ------------------------------------------------- | ------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------
|                                                                           |  |                                                                                                           |  | Date of U.S. |                                                   |              |  |                                                                                                                                                                           
|Manufacturer                                                               |  | Product Name                                                                                              |  | Introduction |                                                   | Media Format |  | Technology                                                                                                                                                                
|                                                                           |  |                                                                                                           |  |             
|Nintendo
Sega
Sony
Nintendo
Nintendo
Sega
Sony
Nintendo
Nintendo
Microsoft |  | SNES
Saturn
PlayStation
Nintendo 64
Game Boy Color
Dreamcast
PlayStation 2
Game Boy Advance
GameCube
Xbox |  |              | 1991
1995
1995
1996
1998
1999
2000
2001
2001
2001 |              |  | Cartridge
      Cartridge
      CD-ROM Disc
      Cartridge
      Cartridge
      CD-ROM Disc
      DVD-ROM Disc
      Cartridge
      Proprietary Disc
      DVD-ROM Disc |  | 16-bit
32-bit
32-bit
64-bit
16-bit (portable)
128-bit
128-bit
32-bit (portable)
128-bit
128-bit

Sony launched PlayStation 2, the successor to PlayStation, in the North
American market in October 2000. Nintendo launched the handheld Game Boy
Advance platform in June 2001 and the GameCube platform in November 2001.
Microsoft also launched a new platform, Xbox, in November 2001. Software for
the new platforms requires different standards of design and technology to
fully exploit their capabilities. The introduction of new platforms also
requires that game developers devote substantial additional resources to
product design and development.

Business Strategy

Our corporate goal is to expand market share while increasing profitability.
We believe that our success in the following strategic imperatives will
position us well to exploit the new console cycle and other growth
opportunities:



| |  | Build a well-diversified product portfolio across brand, genre and
platform.Due to constantly changing consumer demand and hardware
platforms, we believe it is important to offer a diversified portfolio of
titles. We have worked to grow and diversify our product portfolio by
securing additional content licenses, creating our own brands and
content, seeking out unique co-development relationships (i.e.
Nickelodeon and Sega) and supporting multiple platforms. Through
licensing agreements with World Wrestling Federation Entertainment,
Nickelodeon, Disney, Sega, Time Warner, Tetris Company, Mattel, LucasArts
and others, we have diversified our portfolio of popular licensed brands
to include World Wrestling Federation, Britney Spears, Rugrats, SpongeBob
SquarePants, Scooby-Doo, Star Wars, Hot Wheels, Power Rangers and
Disney/Pixars Monsters, Inc.and other titles. We also have eight
internal development studios that focus on developing our original
brands. Our titles span a wide spectrum of genres. We currently develop
and publish for all existing major interactive entertainment hardware
platforms. We will continue to work towards building a well-diversified
product portfolio by obtaining additional licenses, increasing our
internal brands and publishing titles across multiple platforms.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Establish strong technology and internal development capabilities.We
believe it is important for our business to expand our internal
development capabilities. We have increased our internal development
capabilities through the acquisition and formation of development
studios, consisting of Outrage Games (Outrage), Cranky Pants
Games, Genetic Anomalies, Inc. (GA), Heavy Iron Studios® (Heavy
Iron), Helixe, Pacific Coast Power & Light Company (PCP&L), Rainbow
Multimedia Group, Inc., also known as Rainbow Studios, (Rainbow) and
Volition, Inc. (Volition). Since 2000, we have launched internally
developed games, including Red Faction, MX2002 featuring Ricky
Carmichael, Summoner, Rocket Power: Dream Schemeand Evil Dead: Hail to
the King. We will continue to improve our internal development
capabilities by selectively acquiring or establishing development
studios.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| 
| |  | Expand internationally.International markets represent a significant
growth opportunity for us. We operate offices in the United Kingdom,
Germany, France and Australia and distribute our products in 66 other
countries and territories. We have a dedicated group that adapts our
titles for international markets by localizing language and other
cultural features. We will continue to expand internationally by
establishing offices in new territories, developing and acquiring content
that has international appeal, possibly acquiring foreign development
studios and targeting wireless devices and online gaming applications to
appropriate foreign markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| 
| |  | Prudently invest in emerging applications such as wireless and online
gaming.We are selectively pursuing opportunities within wireless gaming
that we believe will allow us to benefit from the rapid growth projected
for this emerging market while remaining consistent with our focus on
profitability. In wireless gaming, we are                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|  |  | working with key wireless platform and service providers to leverage our
existing technologies and content rather than spending heavily on new
technologies and content. Our initial wireless titles, based on World
Wrestling Federation Entertainment and various Intellivision licensed content,
were released in December 2001. Our first online gaming title, WWF: With
Authority!, was developed by one of our internal studios and was released in
February 2001. We released our second online game, Sky Sports Football
Manager, a soccer management game, in the United Kingdom market in November
2001 through NI Sports using a content and distribution agreement with Sky
Sports. In addition, Sony and Microsoft have both announced plans to offer
online capabilities for their respective hardware platforms and we intend to
take advantage of these online capabilities.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Increase profit margins through effective execution and
disciplined management.Profitability continues to be a
leading corporate focus. We continue to (i) utilize
strict ordering and inventory controls to reduce
inventory risk; (ii) proactively work with key customers
to manage inventories, reduce the need for allowances or
price protection, accelerate cash collection and reduce
accounts receivable; (iii) scrutinize costs and minimize
corporate overhead and (iv) build an experienced
management team and a financial and operating system
infrastructure based on sophisticated technology. We
believe that our continued emphasis on all of these
practices will help us increase profitability and
stockholder value in the future.                                                                                                                                    

We intend to continue pursuing potential acquisition transactions consistent
with these strategies. In addition, in order to create a closer relationship
with independent developers, we may from time to time make investments or
acquire interests in independent developers.

Titles

We have released an aggregate of 320 titles as of December 31, 2001 which
includes 6 Sony PlayStation 2 titles, 2 online titles, 15 Nintendo Game Boy
Advance titles, 2 Microsoft Xbox titles, 2 wireless titles and 37 PC titles.
We continually seek to acquire licenses and create original content (brands) to
publish and distribute additional titles.

The following tables set forth, for each platform, the published titles (i)
released by us in 2001 and anticipated to be released in 2002, and (ii) the
date of release (or anticipated release) of each title. We cannot assure you
that each of the titles anticipated for release in 2002 will be released when
scheduled, if ever.

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TITLES RELEASED IN 2001

|                                                       |  |                   |  |                                      |  |        
|------------------------------------------------------ |  | ----------------- |  | ------------------------------------ |  | -------
|                                                       |  |                   |  |                                      |  | Release
|Title                                                  |  | Category          |  | Platform                             |  | Date   
|                                                       |  |                   |  |                                      |  |        
|CROC 2                                                 |  | Adventure         |  | Game Boy Color                       |  | 1/01   
|Action Man: Search for Base X                          |  | Action            |  | Game Boy Color                       |  | 1/01   
|Championship Motocross 2001 Featuring
Ricky Carmichael |  | Racing            |  | PlayStation                          |  | 1/01   
|WWF: With Authority!                                   |  | Card Game         |  | Online                               |  | 2/01   
|Scooby-Doo! Classic Creep Capers                       |  | Adventure         |  | Game Boy Color                       |  | 2/01   
|SpongeBob SquarePants: Legend of The
Lost Spatula      |  | Childrens Games  |  | Game Boy Color                       |  | 2/01   
|The Simpsons: Night of the Living
Treehouse of Horror |  | Action            |  | Game Boy Color                       |  | 3/01   
|Aidyn Chronicles: The First Mage                       |  | Role Playing      |  | Nintendo 64                          |  | 3/01   
|Summoner                                               |  | Role Playing      |  | PC CD-ROM                            |  | 3/01   
|Rocket Power: Gettin Air                              |  | Childrens Games  |  | Game Boy Color                       |  | 3/01   
|MTV Sports: T.J. Lavins Ultimate BMX                  |  | Extreme Sports    |  | PlayStation                          |  | 3/01   
|Aliens: Thanatos Encounter                             |  | Action            |  | Game Boy Color                       |  | 3/01   
|Evil Dead: Hail to the King                            |  | Adventure         |  | PC CD-ROM                            |  | 3/01   
|Blues Clues: Big Band Musical                         |  | Childrens Games  |  | PlayStation                          |  | 3/01   
|Star Wars Episode One: Battle for Naboo                |  | Adventure         |  | Nintendo 64                          |  | 3/01   
|Indiana Jones and the Infernal Machine                 |  | Action/Adventure  |  | Game Boy Color                       |  | 3/01   
|Rugrats: Totally Angelica                              |  | Childrens Games  |  | PlayStation                          |  | 4/01   
|Power Rangers Time Force                               |  | Action            |  | Game Boy Color                       |  | 5/01   
|Red Faction                                            |  | Shooter           |  | PlayStation 2                        |  | 5/01   
|Matchbox: Emergency Patrol                             |  | Adventure         |  | Game Boy Color                       |  | 5/01   
|Disneys Atlantis: The Lost Empire                     |  | Action            |  | Game Boy Color                       |  | 5/01   
|EA Soccer Stars 2001                                   |  | Sports            |  | Game Boy Color                       |  | 5/01   
|GT Advance Championship Racing                         |  | Racing            |  | Game Boy Advance                     |  | 6/01   
|MX 2002 Featuring Ricky Carmichael                     |  | Racing            |  | PlayStation 2                        |  | 6/01   
|Prince Naseem Boxing                                   |  | Boxing            |  | Game Boy Color                       |  | 7/01   
|WWF Betrayal                                           |  | Fighting          |  | Game Boy Color                       |  | 8/01   
|Matchbox Emergency Patrol                              |  | Adventure         |  | PC CD-ROM                            |  | 8/01   
|Bob The Builder: Can We Fix It?                        |  | Childrens Games  |  | PC CD-ROM                            |  | 8/01   
|Bob The Builder: Fix It Fun!                           |  | Childrens Games  |  | Game Boy Color                       |  | 8/01   
|Bob The Builder: Can We Fix It?                        |  | Childrens Games  |  | PlayStation                          |  | 9/01   
|Disneys Atlantis: The Lost Empire                     |  | Action            |  | Game Boy Advance                     |  | 9/01   
|Hot Wheels: Extreme Racing                             |  | Racing            |  | PlayStation                          |  | 9/01   
|Hot Wheels: Jetz                                       |  | Flying            |  | PC CD-ROM                            |  | 9/01   
|Hot Wheels: Mechanix                                   |  | Racing            |  | PC CD-ROM                            |  | 9/01   
|MX 2002 Featuring Ricky Carmichael                     |  | Racing            |  | Game Boy Advance                     |  | 9/01   
|Power Rangers Time Force                               |  | Action            |  | PC CD-ROMGame Boy Advance            |  | 9/01   
|Red Faction                                            |  | Shooter           |  | PC CD-ROM                            |  | 9/01   
|Rocket Power: Dream Scheme                             |  | Childrens Games  |  | Game Boy Advance                     |  | 9/01   
|Rocket Power: Team Rocket Rescue                       |  | Extreme Sports    |  | PlayStation                          |  | 9/01   
|Rugrats: Castle Capers                                 |  | Childrens Games  |  | Game Boy Advance                     |  | 9/01   
|SpongeBob SquarePants: Operation
Krabby Patty          |  | Childrens Games  |  | PC CD-ROM                            |  | 9/01   
|SpongeBob SquarePants: SuperSponge                     |  | Childrens Games  |  | PlayStation                          |  | 9/01   
|Tetris Worlds                                          |  | Puzzle            |  | Game Boy Advance                     |  | 9/01   
|B.A.S.S. Strike                                        |  | Sports Simulation |  | PlayStation 2                        |  | 10/01  
|Disney/Pixars Monsters, Inc.                          |  | Action/Adventure  |  | Game
Boy ColorGame Boy Advance       |  | 10/01  
|Power Rangers Time Force                               |  | Action            |  | PlayStation                          |  | 10/01  
|Rocket Power: Extreme Arcade Games                     |  | Childrens Games  |  | PC CD-ROM                            |  | 10/01  
|Rugrats: All Growed Up                                 |  | Childrens Games  |  | PC CD-ROM                            |  | 10/01  
|The Wild Thornberrys: Chimp Chase                      |  | Childrens Games  |  | Game Boy Advance                     |  | 10/01  
|Scooby-Doo! and the Cyber Chase                        |  | Adventure         |  | PlayStation
        Game Boy Advance |  | 10/01  

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|                                   |  |                  |  |                                    |  |        
|---------------------------------- |  | ---------------- |  | ---------------------------------- |  | -------
|                                   |  |                  |  |                                    |  | Release
|Title                              |  | Category         |  | Platform                           |  | Date   
|                                   |  |                  |  |                                    |  |        
|Jimmy Neutron: Boy Genius          |  | Childrens Games |  | PC CD-ROM
        Game Boy Advance |  | 11/01  
|SpongeBob SquarePants: SuperSponge |  | Childrens Games |  | Game Boy Advance                   |  | 11/01  
|Tetris Worlds                      |  | Puzzle           |  | PC CD-ROM                          |  | 11/01  
|WWF Road To Wrestlemania           |  | Fighting         |  | Game Boy Advance                   |  | 11/01  
|Dark Summit                        |  | Extreme Sports   |  | PlayStation 2
        Xbox         |  | 11/01  
|WWF SmackDown! Just Bring It     |  | Fighting         |  | PlayStation 2                      |  | 11/01  
|Hot Wheels: Burnin Rubber         |  | Racing           |  | Game Boy Advance                   |  | 11/01  
|Sky Sports Football Manager        |  | Sports           |  | Online                             |  | 11/01  
|Star Wars Jedi Power Battles       |  | Action/Adventure |  | Game Boy Advance                   |  | 11/01  
|MX 2002 Featuring Ricky Carmichael |  | Racing           |  | Xbox                               |  | 12/01  
|WWF: Mobile Madness                |  | Fighting         |  | Wireless                           |  | 12/01  
|Astrosmash!                        |  | Action           |  | Wireless                           |  | 12/01  

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TITLES RELEASED AND ANTICIPATED TO BE RELEASED IN 2002 (1)

|                                                     |  |                  |  |                                          |         |           
|---------------------------------------------------- |  | ---------------- |  | ---------------------------------------- | ------- | ----------
|                                                     |  |                  |  |                                          | Release
|Title                                                |  | Category         |  | Platform                                 | Date   
|                                                     |  |                  |  |                                          |        
|Snood*                                               |  | Puzzle           |  | Wireless                                 |         | 2/02      
|Snood 21*                                            |  | Puzzle           |  | Wireless                                 |         | 2/02      
|MotoGP*                                              |  | Racing           |  | Wireless                                 |         | 2/02      
|Dark Summit*                                         |  | Extreme Sports   |  | GameCube                                 |         | 2/02      
|WWF Raw*                                             |  | Fighting         |  | Xbox                                     |         | 2/02      
|Columns Crown*                                       |  | Action/Adventure |  | Game Boy Advance                         |         | 2/02      
|Sonic Advance*                                       |  | Action/Adventure |  | Game Boy Advance                         |         | 2/02      
|Puyo Pop*                                            |  | Action/Adventure |  | Game Boy Advance                         |         | 2/02      
|New Legends*                                         |  | Action/Adventure |  | Xbox                                     |         | 2/02      
|Matchbox: Rescue Rigs*                               |  | Childrens Games |  | PC CD-ROM                                |         | 2/02      
|MotoGP*                                              |  | Racing           |  | Game Boy Advance                         |         | 3/02      
|Tetris Worlds*                                       |  | Puzzle           |  | PlayStation 2                            |         | 3/02      
|Baseball Advance*                                    |  | Sports           |  | Game Boy Advance                         |         | 3/02      
|Tetris                                               |  | Puzzle           |  | Wireless                                 |         | Spring 02
|Star Wars: Episode II Attack of the Clones           |  | Action/Adventure |  | Game Boy Advance                         |         | Spring 02
|Britneys Dance Beat                                 |  | Dance            |  | PlayStation 2
Game Boy Advance
PC CD-ROM |         | Spring 02
|Jimmy Neutron: Boy Genius                            |  | Childrens Games |  | PlayStation 2
GameCube                   |         | Spring 02
|The Ripping Friends                                  |  | Action           |  | Game Boy Advance                         |         | Spring 02
|The Pinball of the Dead                              |  | Action/Adventure |  | Game Boy Advance                         |         | Spring 02
|MotoGP                                               |  | Racing           |  | Xbox                                     |         | Spring 02
|Scooby-Doo Night of 100 Frights                      |  | Adventure        |  | PlayStation 2                            |         | Spring 02
|Scooby-Doo The Motion Picture                        |  | Adventure        |  | Game Boy Advance                         |         | Spring 02
|Hey Arnold! The Movie                                |  | Childrens Games |  | Game Boy Advance                         |         | Spring 02
|WWF Wrestlemania X8                                  |  | Fighting         |  | GameCube                                 |         | Spring 02
|MX Superfly                                          |  | Racing           |  | PlayStation 2
GameCube                   |         | Spring 02
|Tetris Worlds                                        |  | Puzzle           |  | GameCubeXbox                             |         | Summer 02
|Smash Pack                                           |  | Action/Adventure |  | Game Boy Advance                         |         | Summer 02
|Toxic Grind                                         |  | Extreme Sports   |  | XboxGameCube                             |         | Summer 02
|Power Rangers Wild Force                             |  | Action           |  | Game Boy Advance                         |         | Summer 02
|Rocket Power: Beach Bandits                          |  | Childrens Games |  | GameCubePlayStation 2                    |         | Summer 02
|Summoner 2                                           |  | Role Playing     |  | PlayStation 2                            |         | Summer 02
|Scooby-Doo Night of 100 Frights                      |  | Adventure        |  | GameCube                                 |         | Summer 02
|Pride FC                                             |  | Fighting         |  | PlayStation 2                            |         | Summer 02
|Jimmy Neutron (working title)                        |  | Childrens Games |  | PC CD-ROM
Game Boy Advance               |         | Fall 02  
|Rugrats (working title)                              |  | Childrens Games |  | GameCube
PlayStation 2Game Boy Advance   |         | Fall 02  
|Rocket Power: Beach Bandits                          |  | Childrens Games |  | Game Boy Advance                         |         | Fall 02  
|Hot Wheels (working title)                           |  | Racing           |  | PlayStation 2                            |         | Fall 02  
|MX Superfly                                          |  | Racing           |  | Xbox                                     |         | Fall 02  
|SpongeBob
SquarePants: Revenge of theFlying Dutchman |  | Childrens Games |  | GameCube
PlayStation 2Game Boy Advance   |         | Fall 02  
|SpongeBob SquarePants (working title)                |  | Childrens Games |  | PC CD-ROM                                |         | Fall 02  
|The Wild Thornberrys: The Movie                      |  | Childrens Games |  | PC CD-ROM
Game Boy Advance               |         | Fall 02  

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##### Table of Contents



|                                              |  |                  |  |                        |         |         
|--------------------------------------------- |  | ---------------- |  | ---------------------- | ------- | --------
|                                              |  |                  |  |                        | Release
|Title                                         |  | Category         |  | Platform               | Date   
|                                              |  |                  |  |                        |        
|Disney/Pixars Monsters, Inc. (working
title) |  | Action/Adventure |  | GameCube               |         | Fall 02
|Battle Bots                                   |  | Fighting         |  | GameCube
PlayStation 2 |         | Fall 02
|Red Faction 2                                 |  | Shooter          |  | PlayStation 2          |         | Fall 02



---

|(1) |  | Excludes titles we expect to release in 2002 but which we have not
yet publicly announced as well as titles we only distribute.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|*   |  | Titles released as of March 20, 2002.                                                                                          

Intellectual Property Licenses

Our strategy includes the creation of exciting games based on licensed
properties that have attained a high level of consumer recognition or
acceptance. We have relationships with a number of licensors, including World
Wrestling Federation Entertainment, Disney, Nickelodeon, Saban, Sega, Tetris
Company, Mattel, LucasArts and Warner Brothers.

We pay royalties to our property licensors that generally range from 3% to 25%
of our net sales of the corresponding title. We typically advance payments
against minimum guaranteed royalties over the license term. License fees tend
to be higher for properties with proven popularity and less perceived risk of
commercial failure. To the extent competition intensifies for licenses of
highly desirable properties, we may encounter difficulty in obtaining or
renewing these licenses. See  Competition. Licenses are of variable
duration, may be exclusive for a specific title or line of titles, and may in
some instances be renewable upon payment of certain minimum royalties or the
attainment of specified sales levels. Other licenses are not renewable upon
expiration, and it cannot be assured that we and the licensor will reach
agreement to extend the term of any particular license.

Our property licenses usually grant us exclusive use of the property for the
specified titles, on specified platforms, within a defined territory and during
the license term. Licensors typically however, retain the right to exploit the
property for all other purposes, including the right to license the property
for use with other platforms and have general approval rights. Our games based
on a particular property for use with one or more particular platforms may
compete with games published by other companies that are based on the same
property but for a different platform.

Agreement With JAKKS Pacific, Inc.

We entered into an agreement with JAKKS Pacific,
Inc. (JAKKS), as recently amended, to govern our
relationship with respect to the World Wrestling Federation license we jointly
obtained from World Wrestling Federation Entertainment in June 1999. Our
relationship with JAKKS was established to develop, manufacture, distribute,
market and sell video games, as well as sublicense products pursuant to the
license from World Wrestling Federation Entertainment. The principal terms of
this operating agreement are as follows:



| |  |  | We are responsible for funding all operations of the venture,
including all payments owed to World Wrestling Federation
Entertainment.                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | For the period commencing
November 16, 1999 and ending June 30, 2006, JAKKS is entitled to receive a preferred payment equal to the
greater of a fixed guarantee, payable quarterly, or specified
percentages of the net sales from World Wrestling Federation
Entertainment-licensed games (as defined) in amounts that vary based on
the platform. The payment of these amounts is guaranteed by us. We
are entitled to the profits and cash distributions remaining after the
payment of these amounts.
|
| |  |  | For periods after June 30, 2006, the amount of the preferred
payment will be subject to renegotiation between the parties. An
arbitration procedure is specified in the event the parties do not
reach agreement.                                                                                                                                                                                                                                                                                         
|
| |  |  | We are responsible for the day-to-day operations of the venture.
We are responsible for development, sales and distribution of the World
Wrestling Federation Entertainment-licensed games, and JAKKS is
responsible for the approval process and other relationship matters
with World Wrestling Federation Entertainment. We and JAKKS co-market
the games.                                                                                                                                             

For financial reporting purposes, we are deemed to control the venture;
therefore, all joint venture operating results are consolidated with our
results.

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In November 2001, through our relationship with JAKKS, we entered into a letter
of intent to expand the World Wrestling Federation license to include exclusive
rights to other wrestling content produced by World Wrestling Federation
Entertainment. In exchange for these rights we have agreed to increase the
minimum guarantee payable to World Wrestling Federation Entertainment through
December 31, 2009.

Platform Licenses

Our business is dependent on our license agreements with the manufacturers.
All of these licenses are for fixed terms and are not exclusive. Each license
grants us the right to develop, publish and distribute titles for use on such
manufacturers platform(s), and requires that each such title be approved by
the manufacturer prior to development of the software and embodied in products
that are manufactured solely by such manufacturer or (in the case of Microsoft)
its authorized vendor.

The following table sets forth information with respect to our platform
licenses. In some instances, we have more than one platform license for a
particular platform.

|             |  |                      |  |                                   |                    |              
|------------ |  | -------------------- |  | --------------------------------- | ------------------ | -------------
|Manufacturer |  | Platform             |  | Territory                         | Expiration Date(s)
|             |  |                      |  |                                   |                   
|Nintendo     |  | Nintendo 64          |  | North America and Latin
America   |                    | May 2003     
|Nintendo     |  | Nintendo 64          |  | Europe, Australia and
New Zealand |                    | January 2004 
|Nintendo     |  | Game Boy Color       |  | North America and Latin
America   |                    | March 2004   
|Nintendo     |  | Game Boy Color       |  | Europe, Australia and
New Zealand |                    | October 2002 
|Nintendo     |  | Game Boy Advance     |  | Western Hemisphere                |                    | July 2004    
|Nintendo     |  | Game Boy Advance (1) |  | Europe, Australia and
New Zealand |                    | (1)          
|Nintendo     |  | GameCube (1)         |  | (1)                               |                    | (1)          
|Sony         |  | PlayStation          |  | United States, Canada
and Mexico  |                    | August 2002  
|Sony         |  | PlayStation          |  | Europe, Australia and
New Zealand |                    | December 2005
|Sony         |  | PlayStation 2        |  | United States and Canada          |                    | March 2003   
|Sony         |  | PlayStation 2 (1)    |  | Europe                            |                    | (1)          
|Microsoft    |  | Xbox                 |  | (2)                               |                    | November 2004



---

|(1) |  | In negotiation; terms to be determined.               
|--- |  | ------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The territory is determined on a title-by-title basis.

Nintendo charges us an amount for each Nintendo Game Boy Advance and Game Boy
Color cartridge. This amount varies based, in part, on the memory capacity of
the cartridges. Nintendo GameCube, Sony and Microsoft contracts include a
charge for every disc manufactured. The amounts charged by the manufacturers
include a manufacturing, printing and packaging fee as well as a royalty for
the use of the manufacturers name, proprietary information and technology, and
are subject to adjustment by the manufacturers at their discretion. The
manufacturers have the right to review, evaluate and approve a prototype of
each title and the titles packaging.

In addition, we must indemnify the manufacturers with respect to all loss,
liability and expense resulting from any claim against the manufacturer
involving the development, marketing, sale or use of our games, including any
claims for copyright or trademark infringement brought against the
manufacturer. As a result, we bear a risk that the properties upon which the
titles are based, or that the information and technology licensed from the
manufacturer and incorporated in the products, may infringe the rights of third
parties. Our agreements with our independent software developers and property
licensors typically provide for us to be indemnified with respect to certain
matters. If any claim is brought by a manufacturer against us for
indemnification, however, our developers or licensors may not

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have sufficient resources to in turn, indemnify us. Furthermore, these
parties indemnification of us may not cover the matter that gives rise to the
manufacturers claim.

Each platform license may be terminated by the manufacturer if a breach or
default by us is not cured after we receive written notice from the
manufacturer, or if we become insolvent. Upon termination of a platform
license for any reason other than our breach or default, the manufacturer has
the right to purchase from us, at the price paid by us, any product inventory
manufactured by such manufacturer that remains unsold for a specified period
after termination. We must destroy any such inventory not purchased by the
manufacturer. Upon termination as a result of our breach or default, we must
destroy any remaining inventory, subject to the right of any of our
institutional lenders to sell such inventory for a specified period.

Software Design And Development

After we acquire a property from a licensor or develop a concept internally, we
design and develop a game with features intended to utilize the characteristics
of the property and to appeal to the games target consumers. Our software
development process generally takes one of two forms.

Internal Development.The in-house development of product is currently
conducted by our studios: Outrage, Cranky Pants Games, GA, Heavy Iron, Helixe,
PCP&L, Rainbow and Volition. The head of each studio reports to our Executive
Vice President  Worldwide Studios. Our studios are staffed by producers, game
designers, software engineers, artists, animators and game testers. In May,
2001 we started a new development studio in Grass Valley, California named
Cedar Ridge Construction. We have since made this studio a second location of
PCP&L and no longer refer to it as Cedar Ridge Construction. We acquired
Rainbow in December 2001. In February, 2002 we formed a new studio in Seattle,
Washington named Cranky Pants Games. In March 2002, we formed a new
studio in Ann Arbor, Michigan named Outrage Games.

External Development.Our external development is supervised by our Vice
President  Product Development. We contract with independent software
developers to conceptualize and develop games under our supervision. Our
agreements with software developers are usually entered into on a game-by-game
basis and generally provide for the payment of the greater of a fixed amount or
compensation based on actual sales. The compensation is based on a percentage
of net sales ranging from 4% to 20% for some developers, while others are based
on a fixed amount per unit sold and range from $.50 to $5.00 per unit. We
generally pay our developers installments of the fixed fee based on specific
development milestones. We generally obtain ownership of the software code and
related documentation. We may make strategic investments in third party
developers for the purpose of securing access to proprietary software and
talented developers.

Upon completion of development, each game is extensively play-tested by us and
sent to the manufacturer for its review and approval. Related artwork, user
instructions, warranty information, brochures and packaging designs are also
developed under our supervision. The development cycle for a new game,
including the development of the necessary software, approval by the
manufacturer and production of the initial products, typically has ranged from
12 to 30 months for home console games and 7 to 12 months for handheld games.
This relatively long development cycle requires that we assess whether there
will be adequate retailer and consumer demand for a game well in advance of its
release.

Manufacturing

Other than games that we release on PCs, all of our products are manufactured
for us by the manufacturers or their authorized vendors.

The manufacturing process begins with our placing a purchase order with a
manufacturer and opening either a letter of credit in favor of the manufacturer
or utilizing our line of credit with the manufacturer. We then send the
software code and a prototype of the game to the manufacturer, together with
related artwork, user instructions, warranty information, brochures and
packaging designs, for approval, defect testing and manufacture. Nintendo
typically delivers products to us within 15 to 60 days of its receipt of an
order and a corresponding letter of credit and Sony typically delivers products
to us within 10 to 24 days. Microsofts authorized vendors typically deliver
products to us within 10-15 days.

We are required by the platform licenses to provide a standard defective
product warranty on all of the products sold. Generally, we are responsible
for resolving, at our own expense, any warranty or repair claims. We have not
experienced any material warranty claims.

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Marketing, Sales and Distribution

We are dependent on the popularity of our games based on licensed properties
and positive awareness of our original game concepts to attract customers and
to obtain shelf space in stores. Our domestic sales activities are directed by
our Executive Vice President  North American Publishing, who maintains contact
with major retail accounts and manages the activities of our internal sales
staff.

North American Sales.Our games are promoted to retailers by display at trade
shows such as the annual Electronic Entertainment Expo (E3). We also conduct
print and cooperative retail advertising campaigns for most titles and prepare
promotional materials, including product videos, to increase awareness among
retailers and consumers.

Our marketing efforts for products released in 2001 included national
television, print, radio and Internet advertising and promotional campaigns.
Products shipped in 2001 that received television support included WWF
SmackDown! Just Bring It, MX 2002 Featuring Ricky Carmichael, Bob The
Builder, Jimmy Neutron: Boy Genius, Rocket Power, Scooby-Doo,and SpongeBob
SquarePants. Our games were supported by promotions such as trailers, demo
discs, over-sized boxes, standees, posters, and pre-sell giveaways at retail,
game kiosks at sporting and outdoor events, rebates and contests with national
packaged goods companies and fast food restaurants and co-marketing efforts
with the hardware manufacturers. Product public relations for 2001 included
cover, feature, preview, review and round-up coverage in broadcast, print and
online media targeting enthusiast, lifestyle and major mainstream outlets.
Additionally, we continue to increase our corporate public relation efforts,
establishing relationships with leading technology and business reporters.

We utilize electronic data interchange with most of our major domestic
customers in order to (i) efficiently receive, process and ship customer
product orders, and (ii) accurately track and forecast sell-through of products
to consumers in order to determine whether to order additional products from
the manufacturers. The electronic data interchange system is integrated with
our enterprise resource planning system which allows for further efficiencies
in the items mentioned above. We ship most of our products to our domestic
customers from a public bonded warehouse located in Ohio.

In the past, we supplemented the efforts of our sales employees with
independent sales representatives. Starting in January 2002, all sales efforts
will be handled by our own sales employees.

The domestic retail price for our titles currently ranges between $20 and $30
for Game Boy Color, between $30 and $40 for Game Boy Advance, between $10 and
$40 for PlayStation, between $30 and $50 for PlayStation 2, $50 for Xbox, $50
for GameCube and between $10 and $50 for PC games.

International Sales.Our international sales activities are directed by our
Senior Vice President  International Publishing via our international offices
in the United Kingdom, France, Germany and Australia. International offices
market and distribute direct-to-retail in their home territories as well as
market and distribute finished goods to 66 additional territories via a
sub-distribution network. In 2001, international net sales grew 51% as
compared to the same period in 2000 due to our offices in France and Australia
conducting business for a full year in 2001 and an expanded product offering.

Concentration of Sales.Some of our individual titles make up a substantial
portion of our gross sales. The following includes games that generated more
than 10% of our gross sales over the last three years. WWF SmackDown! Just
Bring Iton the Sony PlayStation 2 was the only title to makeup more than 10%
of our gross sales in 2001 at 14.6%. In 2000, sales for WWF SmackDown!on the
Sony PlayStation, WWF SmackDown! 2 (Know Your Role)also on the Sony
PlayStation and WWF No Mercyfor the Nintendo 64 were 16.9%, 16.0% and 15.5% of
gross sales, respectively. In 1999, sales for WCW/NWO Thunderfor the Sony
PlayStation, WWF Wrestlemaniafor the Nintendo 64 and Rugrats: Search for
Reptarfor the Sony PlayStation were 12.7%, 12.9% and 11.5%, of gross sales,
respectively.

Our sales are made directly to retailers and independent distributors. We
distribute our games primarily to mass merchandisers and national retail chain
stores, including Wal-Mart, Toys R Us, Target, Electronics Boutique, Best
Buy, GameStop and Kay Bee Toys. We do not have any written agreements or other
understandings with any of our customers that relate to their future purchases,
so our customers may terminate their purchases from us at any time.

Revenue Fluctuations and Seasonality.We have experienced, and will likely
continue to experience, significant quarterly fluctuations in net sales and
operating results due to a variety of factors. The software market is highly
seasonal with sales typically significantly higher during the fourth quarter
(due primarily to the increased demand for

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##### Table of Contents



interactive games during the year-end holiday buying season). Other factors
that cause fluctuations include the timing of our release of new titles, the
popularity of both new titles and titles released in prior periods, changes in
the mix of titles with varying gross margins, the timing of customer orders,
the timing of shipments by the manufacturers, fluctuations in the size and rate
of growth of consumer demand for software for various platforms, the timing of
the introduction of new platforms and the accuracy of retailers forecasts of
consumer demand. Our expenses are partially based on our expectations of
future sales and, as a result, operating results would be disproportionately
and adversely affected by a decrease in sales or a failure by us to meet our
sales expectations. There can be no assurance that we can maintain consistent
profitability on a quarterly or annual basis.

Profit margins may vary over time as a result of a variety of factors. Profit
margins for cartridge products for the Game Boy platforms can vary based on the
cost of the memory chip used for a particular title. Disc-based products have
significantly lower per unit manufacturing costs than cartridge-based products,
however, they have higher development costs than cartridge-based products.

Geographic Information

We operate in one reportable segment in which we are a developer and publisher
of interactive entertainment software for the leading hardware platforms in the
home video game market. Wireless and online gaming may become new reportable
segments as our activity in these markets increase. The following information
sets forth geographic information on our sales generated by our regional
offices for the years ended December 31, 2001, 2000 and 1999
(also See Note 15
to the consolidated financial statements for additional geographic information
on our sales and long-lived assets):

SALES TO UNAFFILLIATED CUSTOMERS
($ in Thousands)

|               |  |                |         |      |  |      |         |  |  |   |         | 
|-------------- |  | -------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|               |  | For Year Ended
|               |  |               
|               |  | 2001           |         | 2000 |  | 1999
|               |  |                |         |      |  |     
|North America  |  | $              | 262,676 |      |  | $    | 270,116 |  |  | $ | 228,827 | 
|United Kingdom |  |                | 60,240  |      |  |      | 44,638  |  |  |   | 41,404  | 
|Germany        |  |                | 25,517  |      |  |      | 20,442  |  |  |   | 33,252  | 
|France         |  |                | 18,185  |      |  |      | 7,979   |  |  |   |        | 
|Australia      |  |                | 12,374  |      |  |      | 3,828   |  |  |   |        | 
|               |  |                |         |      |  |      |         |  |  |   |         | 
|Consolidated   |  | $              | 378,992 |      |  | $    | 347,003 |  |  | $ | 303,483 | 
|               |  |                |         |      |  |      |         |  |  |   |         | 

Intellectual Property Rights

Each game we release embodies a number of separately protected intellectual
property rights of the manufacturer, the property licensor and, to a lesser
extent, the external developer and us. The licensor of the property owns the
trademarks, trade names, copyrights and other intellectual property rights
relating to the property on which the game is based. The manufacturer owns the
patents and substantially all of the other intellectual property embodied in
the product and the developer, whether internal or external, often owns
proprietary tools and technology embedded in the game software. While we own
the game software embodied in the product, we believe that such software has
little independent economic value. Accordingly, we must rely on the
manufacturer and the property licensor with respect to protection from
infringement of the property rights by third parties.

Each of the manufacturers incorporates security devices in its platforms and
products to prevent unlicensed use. In addition, Nintendo requires its
licensees to display the trademarked Nintendo Seal of Approval to notify the
public that the game has been approved by Nintendo for use with a Nintendo
platform.

Competition

The interactive entertainment software industry is intensely competitive. We
compete with hardware manufacturers for both property licenses and software
sales. Each of these manufacturers is typically the largest developer and
marketer for its platforms. These companies may increase their own software
development efforts. As a result of their commanding positions in the industry
as the manufacturers of platforms and publishers of software for their
platforms, the manufacturers generally have better bargaining positions with
respect to retail pricing, shelf space and purchases than any of their
licensees, including us.

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##### Table of Contents



In addition to the manufacturers, our competitors include Activision, Inc.,
Acclaim Entertainment, Inc., Electronic Arts Inc., Midway Games Inc., Take-Two
Interactive Software, Inc. and Infogrames, Inc. Each of the manufacturers has a
broader software line and greater financial, marketing and other resources than
us, as do some of our other competitors. Accordingly, some of our competitors
may be able to market their software more aggressively or make higher offers or
guarantees in connection with the acquisition of licensed properties.

At various times, toy companies, large software companies, movie studios and
others have focused on the video game market resulting in greater competition
for us. Additionally, many of our competitors are developing on-line
interactive games and interactive networks that will be competitive with our
interactive products.

As competition for retail shelf space becomes more intense, we may need to
increase our marketing expenditures to maintain sales of our titles. As
competition for popular properties increases, our cost of acquiring licenses
for such properties may increase resulting in reduced margins.
Prolonged price competition, increased licensing costs or reduced profit
margins would have a material adverse effect on us.

In addition, the market for our products is characterized by significant price
competition, and we may face increasing pricing pressures from our current and
future competitors. Further, as the industry continues to transition from the
old platforms (Sony PlayStation, Nintendo 64 and Nintendo Game Boy Color) to
the next generation platforms (Sony PlayStation 2, Nintendo GameCube, Nintendo
Game Boy Advance and Microsoft Xbox), there may be price erosion on the old
consoles. Accordingly, there can be no assurance that competitive pressures
will not require us to reduce our prices. Any material reduction in the price
of our products would adversely affect operating income as a percentage of net
revenue and would require us to increase unit sales in order to maintain net
revenue.

Available Information

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (SEC). Our SEC
filings are available to the public over the Internet at the SECs web site at
http://www.sec.gov. You may also read and copy any document we file at the
SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.

Employees

As of December 31, 2001, we had 595 full-time employees, of whom 35 are located
in the United Kingdom; 54 are located in Germany; 9 are located in France and 8
are located in Australia. None of our employees are represented by a labor
union or covered by a collective bargaining agreement, and we believe that
relations with our employees are good.




Item 2.     PROPERTIES

Our executive offices occupy approximately 45,057 square feet of office space
in Calabasas Hills, California, pursuant to leases expiring in June 2002 and
August 2005, respectively. We lease additional office space as follows:

|                                      |  |                                                     
|------------------------------------- |  | ----------------------------------------------------
|Company                               |  | Location of Offices                                 
|                                      |  |                                                     
|Pacific Coast Power and Light Company |  | Santa Clara, California and Grass
Valley, California
|Heavy Iron Studios                    |  | Culver City, California                             
|Cranky Pants Games                    |  | Seattle, Washington                                 
|Rainbow Multimedia Group, Inc.        |  | Phoenix, Arizona                                    
|Volition, Inc.                        |  | Champaign, Illinois                                 
|Outrage Games                         |  | Ann Arbor, Michigan                                 
|Genetic Anomalies, Inc.               |  | Lexington, Massachusetts                            
|Helixe                                |  | Lexington, Massachusetts                            
|T.HQ International, Ltd.              |  | Woking, England                                     
|THQ Entertainment GmbH                |  | Kaarst, Germany                                     
|THQ France SARL                       |  | Paris, France                                       
|THQ Asia Pacific Pty. Ltd.            |  | Melbourne, Australia                                

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We also own 10,820 square feet of additional office space located in Phoenix, Arizona.




Item 3.     LEGAL PROCEEDINGS

We are a party to lawsuits in the normal course of our business. Litigation in
general, and securities and intellectual property litigation in particular, can
be expensive and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict. Other than as
described below, we are not a party to any material legal proceedings.

We and certain of our officers and directors are defendants in a class action
lawsuit filed in the United States District Court for the Central District of
California entitled In re THQ Inc.Securities Litigation, Master File No.
CV-00-1783-AHM. On December 20, 2000, the court dismissed this action with
prejudice as to all of the defendants. On April 23, 2001, the United States
District Court for the Central District of California modified its December 20,
2000 order and permitted plaintiffs to file a third amended complaint on that
date. Defendants have filed an answer denying all of the material allegations
of the third amended complaint and asserting legal and factual defenses. The
third amended complaint alleges that defendants violated Rule 10b-5 and Section
20(a) of the Securities Exchange Act of 1934, including allegations that
defendants manipulated the companys stock price; distributed false and
misleading information concerning revenue recognition, forecasts and earnings
estimates; selectively disclosed material information; and engaged in insider
trading. The complaint seeks an unspecified amount in damages. The plaintiffs
are purported investors who purchased shares of our common stock from October
26, 1999 through May 24, 2000. The lawsuit is in the discovery phase and a
trial date of November 12, 2002 has been set. We and all of the individual
defendants have taken the position that this lawsuit is without merit. At this
early stage, however, we cannot predict the likely outcome of this litigation.




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

There were no matters submitted to a vote of security holders during the fourth
quarter of 2001.

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PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock is quoted on the NASDAQ National Market under the symbol
THQI. The following table sets forth, for the periods indicated, the high
and low closing sales prices of our common stock as reported by the NASDAQ
National Market:

|     |                |  |                      |       |     |  |  |       | 
|---- | -------------- |  | -------------------- | ----- | --- |  |  | ----- | 
|     |                |  | Closing Sales Prices
|     |                |  |                     
|     |                |  | High                 |       | Low
|     |                |  |                      |       |    
|2001 |                |  |                      |       |     |  |  |      
|     | Fourth Quarter |  |                      | 63.31 |     |  |  | 41.25 | 
|     | Third Quarter  |  |                      | 59.75 |     |  |  | 39.06 | 
|     | Second Quarter |  |                      | 59.63 |     |  |  | 34.75 | 
|     | First Quarter  |  |                      | 38.88 |     |  |  | 22.44 | 
|2000 |                |  |                      |       |     |  |  |      
|     | Fourth Quarter |  |                      | 24.50 |     |  |  | 17.50 | 
|     | Third Quarter  |  |                      | 26.75 |     |  |  | 12.06 | 
|     | Second Quarter |  |                      | 20.00 |     |  |  | 8.88  | 
|     | First Quarter  |  |                      | 29.50 |     |  |  | 17.00 | 

The last reported price of the common stock on
March 15, 2002, as reported by
NASDAQ National Market, was $46.96 per share.

Holders

As of March 15, 2002, there were approximately 289 holders of record of the
common stock.

Dividend Policy

We have never paid cash dividends on our common stock. We currently intend to
retain future earnings, if any, to finance the growth and development of our
business and, therefore, we do not anticipate paying any cash dividends in the
future. Our principal banking agreement provides that we will not pay any cash
dividends.

Securities Issued in Private Transactions

On December 21, 2001, in connection with our acquisition of Rainbow Multimedia
Group, Inc. (Rainbow), we issued an aggregate of 858,203 shares of our common
stock to certain stockholders of Rainbow pursuant to the exemption from
registration provided in Section 4(2) of the Securities Act of 1933, as
amended. The number of shares is subject to change based on the terms of the
merger agreement.

On February 1, 2002, in connection with obtaining the Nickelodeon master
license, we issued to MTV Networks, a division of Viacom International Inc.,
warrants to purchase 50,000 shares of common stock at $43.69 per share having a
fair value of $1.2 million at the time of issuance pursuant to the exemption from
registration provided in Section 4(2) of the Securities Act of 1933, as
amended. The warrants expire
December 31, 2005.

Changes in Securities and Use of Proceeds

On November 13, 2001 we issued 2,750,000 shares of our common stock in a
secondary public offering. As part of the offering, on December 12, 2001, the
underwriters exercised their right to purchase an additional 314,148 shares.
The net proceeds from these issuances were $154.6 million. We intend to use
the net proceeds for general corporate purposes, including working capital,
capital expenditures, product development, joint ventures and strategic
acquisitions.

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On July 20, 2001, our shareholders approved an amendment to our Certificate of
Incorporation to increase the number of authorized shares of our common stock
from 35,000,000 to 75,000,000. On July 24, 2001, we amended our Certificate of
Incorporation to reflect this increase in authorized shares.

As of August 22, 2001, we entered
into an amended and restated Stockholders
Rights Plan (the Plan) with Computershare Investor Services, LLC as Rights
Agent. Pursuant to the Plan, each share of common stock has a preferred stock
purchase right (Right) associated with it. Each Right entitles the holder to
buy one one-thousandth (1/1000) of a share of a Series A Junior Participating
Preferred Stock at a purchase price of $10 per one-one thousandth (1/1000) of a
share, subject to adjustment. The Rights become exercisable (i) 10 days after
a public announcement that a person or group has acquired, or has obtained a
right to acquire, 15% or more of our outstanding common stock, or (ii) 10
business days following the commencement of a tender offer for 15% or more of
our outstanding common stock.

In the event that any person or group acquires 15% or more of our outstanding
common stock, each holder of a Right (other than such acquiring person or
group) will be entitled to purchase, at the exercise price, the number of
shares of common stock having a current market value equal to two times the
exercise price of the Right. We may redeem the Rights in whole, but not in
part, at a price of $.001 per Right (subject to adjustment and payable in cash,
our common stock, or other consideration deemed appropriate by our Board of
Directors) at any time until 10 days following the public announcement that any
person or group has acquired 15% or more of our common stock. Unless we redeem
them earlier, the rights expire on June 21, 2010. This description of the
Rights does not purport to be complete and is qualified in its entirety by
reference to the Amended and Restated Rights Agreement.

On March 8, 2002, we announced
that our Board of Directors declared a three-for-two stock split of
our shares of common stock to be effected in the form of a 50% stock
dividend, which will be distributed on or about April 9, 2002,
to stockholders of record as of the close of business on March 26, 2002. The effect of the stock
dividend is not reflected in the consolidated financial statements.

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

(In thousands, except per share data)

The following table presents certain selected consolidated financial data for
the years 1997 through 2001. The information presented as of December 31, 2001
and 2000 and for each of the years ended December 31, 2001, 2000 and 1999 have
been derived from, and are qualified by reference to, our audited consolidated
financial statements included elsewhere herein. Those financial statements
have been audited by Deloitte & Touche LLP, independent auditors. The
information presented as of December 31, 1999 and for each of the years ended
December 31, 1998 and 1997 were derived from audited financial statements that
are not included elsewhere herein.

This selected consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto
included elsewhere herein.

The table below reflects the May 1999 pooling of interests with PCP&L, the
December 1999 pooling of interests with GA and the August 2000 pooling of
interests with Volition. All prior period information has been restated
accordingly.

STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)

|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |        |        | 
|---------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ----------------------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                               |                                     |                          |         | Years Ended December 31
|                                               |                                     |                          |         |                        
|                                               |                                     |                          |         | 2001                    |         | 2000 |         | 1999    |         | 1998 |         | 1997   
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |        
|Net sales                                      |                                     | $                        | 378,992 |                         |         | $    | 347,003 |         |         | $    | 303,483 |         |         | $ | 216,716 |         |         | $ | 90,227 |       
|Costs and expenses:                            |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                               | Cost of sales                       |                          |         | 154,898                 |         |      |         | 140,699 |         |      |         | 134,563 |         |   |         | 100,019 |         |   |        | 48,127 |       
|                                               | License amortization and royalties  |                          |         | 33,144                  |         |      |         | 34,675  |         |      |         | 28,858  |         |   |         | 19,390  |         |   |        | 6,333  |       
|                                               | Software development amortization   |                          |         | 35,144                  |         |      |         | 42,875  |         |      |         | 19,512  |         |   |         | 28,740  |         |   |        | 8,430  |       
|                                               | Product development                 |                          |         | 21,154                  |         |      |         | 19,151  |         |      |         | 15,511  |         |   |         | 8,925   |         |   |        | 2,930  |       
|                                               | Selling and marketing               |                          |         | 46,745                  |         |      |         | 42,446  |         |      |         | 35,440  |         |   |         | 20,326  |         |   |        | 8,733  |       
|                                               | Payment to venture partner          |                          |         | 8,673                   |         |      |         | 17,707  |         |      |         | 6,119   |         |   |         |        |         |   |        |       |       
|                                               | General and administrative          |                          |         | 25,090                  |         |      |         | 19,530  |         |      |         | 14,970  |         |   |         | 10,107  |         |   |        | 5,605  |       
|                                               | In-process research and
development |                          |         |                        |         |      |         |        |         |      |         |        |         |   |         | 7,232   |         |   |        |       |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|                                               |                                     | Total costs and expenses |         |                         | 324,848 |      |         |         | 317,083 |      |         |         | 254,973 |   |         |         | 194,739 |   |        |        | 80,158 | 
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Income from operations                         |                                     |                          | 54,144  |                         |         |      | 29,920  |         |         |      | 48,510  |         |         |   | 21,977  |         |         |   | 10,069 |       
|Interest income  net                          |                                     |                          | 2,572   |                         |         |      | 1,323   |         |         |      | 1,109   |         |         |   | 819     |         |         |   | 472    |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Income before income taxes                     |                                     |                          | 56,716  |                         |         |      | 31,243  |         |         |      | 49,619  |         |         |   | 22,796  |         |         |   | 10,541 |       
|Income taxes                                   |                                     |                          | 20,703  |                         |         |      | 13,054  |         |         |      | 18,293  |         |         |   | 9,343   |         |         |   | 1,954  |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Net income                                     |                                     | $                        | 36,013  |                         |         | $    | 18,189  |         |         | $    | 31,326  |         |         | $ | 13,453  |         |         | $ | 8,587  |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Net income per share  basic                   |                                     | $                        | 1.65    |                         |         | $    | .91     |         |         | $    | 1.65    |         |         | $ | .75     |         |         | $ | .53    |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Net income per share  diluted                 |                                     | $                        | 1.52    |                         |         | $    | .84     |         |         | $    | 1.48    |         |         | $ | .63     |         |         | $ | .50    |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Shares used in per share calculation 
basic   |                                     |                          | 21,811  |                         |         |      | 20,091  |         |         |      | 19,040  |         |         |   | 17,929  |         |         |   | 16,057 |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       
|Shares used in per share calculation 
diluted |                                     |                          | 23,749  |                         |         |      | 21,568  |         |         |      | 21,197  |         |         |   | 21,229  |         |         |   | 17,179 |       
|                                               |                                     |                          |         |                         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |        |       

BALANCE SHEET DATA
(In thousands)

|                     |  |                         |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|-------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                     |  | Years Ended December 31
|                     |  |                        
|                     |  | 2001                    |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                     |  |                         |         |      |  |      |         |      |  |     
|Working capital      |  | $                       | 319,605 |      |  | $    | 110,269 |      |  | $    | 91,860  |  |  | $ | 48,342  |  |  | $ | 31,614 | 
|Total assets         |  | $                       | 487,966 |      |  | $    | 229,942 |      |  | $    | 184,057 |  |  | $ | 128,218 |  |  | $ | 56,545 | 
|Lines of credit      |  | $                       |        |      |  | $    | 15,473  |      |  | $    | 16,702  |  |  | $ | 9,909   |  |  | $ |       | 
|Stockholders equity |  | $                       | 398,862 |      |  | $    | 132,125 |      |  | $    | 108,306 |  |  | $ | 62,065  |  |  | $ | 33,842 | 

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|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading global developer and publisher of interactive entertainment
software for the major hardware platforms in the home video game market. We
currently develop and publish titles for Sony PlayStation 2, Microsoft Xbox,
Nintendo GameCube, Nintendo Game Boy Advance, PCs, wireless devices and online.
Our titles span most major interactive entertainment software genres,
including action, adventure, childrens, driving, fighting, puzzle, role
playing, simulation, sports and strategy.

Our software is based on intellectual property licensed or assigned from third
parties or created internally. We continually seek to identify and develop
titles based on content from other entertainment media (such as movies and
television programs), sports and entertainment personalities, popular sports
and trends or concepts that have high public visibility or recognition or that
reflect the trends of popular culture. Our portfolio of licensed brands
includes the World Wrestling Federation, Britney Spears, Rugrats, SpongeBob
SquarePants, Scooby-Doo, Star Wars, Hot Wheels, Power Rangersand
Disney/Pixars Monsters, Inc.and others.

We also develop software based on brands created by our eight internal
development studios and by external developers under contract with us. Our
original brands include Red Faction, MX 2002 featuring Ricky Carmichael,
Summoner, New Legendsand Dark Summit. Other than games that we release on
PCs, all of our products are manufactured for us by the manufacturers or their
authorized vendors.

We recently entered into a master interactive license agreement with
Nickelodeon that grants us the exclusive right to develop and publish games
based on all existing and future individual Nickelodeon animated TV and movie
properties targeting children ages 6-11 on every game system through 2005. In
addition, we also entered into an agreement with Nickelodeon to jointly create,
develop and publish original video game content with multi-media franchise
potential through Nickelodeons television, movie, on-line, magazine and
consumer product network. The first title we are working on under this
agreement is the character-based action-adventure Tak and The Power of JuJu
(working title), which is scheduled for release on PlayStation 2 and GameCube
in 2003.

In North America, we market and distribute our software to customers including
Wal-Mart, Toys R Us, Target, Electronics Boutique, Best Buy, GameStop, Kay
Bee Toys and other regional and national general merchandisers, discount store
chains, and specialty retailers. Outside North America, we market and
distribute our software to retailers in 70 countries and territories through
offices in the United Kingdom, France, Germany and Australia.

Our business cycle generally commences with the securing of a license to
publish one or more titles based on a property or agreement with a proven
developer to create a game based on original content. We also develop games
internally through our development studios Outrage, Cranky Pants Games, GA,
Heavy Iron Studios, Helixe, PCP&L, Rainbow and Volition. These licenses
typically require an advance payment to the licensor and a guarantee of minimum
future royalties. SeeCritical Accounting Policies Licenses and Software
Development. After we acquire rights to a property from a licensor or develop
a concept internally, we begin software development for the title. Upon
completion of development and approval of the title by the manufacturer and
licensor, we order products and generally cause a letter of credit to be opened
in favor of the manufacturer or obtain a line of credit from the manufacturer.
Products are shipped at our expense to a public warehouse for domestic
distribution or to warehouses in the United Kingdom, Germany, France or
Australia for foreign distribution. We then sell directly to our major retail
accounts both domestically and in the United Kingdom, Germany, France and
Australia. Foreign sales to distributors in other territories are shipped
directly to the customers locations at their expense.

Unfilled sales orders are commonly referred to as backlog. Since substantially
all of our product orders are fulfilled shortly after we receive them, we do
not believe that the amount of our unfilled sales orders as of the end of a
period is a meaningful indicator of sales in future periods. Accordingly, we
do not report the amount of our unfilled sales orders.

On December 21, 2001, we completed the acquisition of Rainbow. This
acquisition has been accounted for using the purchase method of accounting
under Statement of Financial Accounting Standards (SFAS) No. 141.
Accordingly, Rainbows results of operations and cash flows for the last ten
days of the year are included as part of

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our own. On August 31, 2000, December 13, 1999 and May 24, 1999, we completed
acquisitions of Volition, GA and PCP&L, respectively. These acquisitions have
been accounted for as poolings of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows as if Volition, GA and PCP&L had
always been part of our company.

Concentration of Sales.Some of our individual titles make up a substantial
portion of our gross sales. The following includes games that generated more
than 10% of our gross sales over the last three years. WWF SmackDown! Just
Bring Iton the Sony PlayStation 2 was the only title to
make up more than 10%
of our gross sales in 2001 at 14.6%. In 2000, sales for WWF SmackDown!on the
Sony PlayStation, WWF SmackDown! 2 (Know Your Role)also on the Sony
PlayStation and WWF No Mercyfor the Nintendo 64 were 16.9%, 16.0% and 15.5% of
gross sales, respectively. In 1999, sales for WCW/NWO Thunderfor the Sony
PlayStation, WWF Wrestlemaniafor the Nintendo 64 and Rugrats: Search for
Reptarfor the Sony PlayStation were 12.7%, 12.9% and 11.5%, of gross sales,
respectively.

Most of our sales are made directly to retailers. We distribute our games
primarily to mass merchandisers and national retail chain stores, including
Wal-Mart (representing 14% of gross sales in 2001), Toys R Us (representing
12% of gross sales in 2001), Target, Electronics Boutique, Best Buy, GameStop
and Kay Bee Toys. Sales to our ten largest customers collectively accounted
for approximately 64% of our gross sales in 2001 and 68% of our gross sales in
2000. We do not have any written agreements or other understandings with any
of our customers that relate to their future purchases, so our customers may
terminate their purchases from us at any time.

Revenue Fluctuations and Seasonality.We have experienced, and will likely
continue to experience, significant quarterly fluctuations in net sales and
operating results due to a variety of factors. The software market is highly
seasonal with sales typically significantly higher during the fourth quarter
(due primarily to the increased demand for interactive games during the
year-end holiday buying season). Other factors that cause fluctuations include
the timing of our release of new titles, the popularity of both new titles and
titles released in prior periods, changes in the mix of titles with varying
gross margins, the timing of customer orders, the timing of shipments by the
manufacturers, fluctuations in the size and rate of growth of consumer demand
for software for various platforms, the timing of the introduction of new
platforms and the accuracy of retailers forecasts of consumer demand. Our
expenses are partially based on our expectations of future sales and, as a
result, operating results would be disproportionately and adversely affected by
a decrease in sales or a failure by us to meet our sales expectations. There
can be no assurance that we can maintain consistent profitability on a
quarterly or annual basis.

Profit margins may vary over time as a result of a variety of factors. Profit
margins for cartridge products for the Game Boy platforms can vary based on the
cost of the memory chip used for a particular title. Disc-based products have
significantly lower per unit manufacturing costs than cartridge-based products,
however, they typically have higher development costs and royalties than
cartridge-based products.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions. We believe that of our significant accounting policies, the following may involve a higher
degree of judgment and complexity (See Note
2 to the consolidated financial statements).

Licenses.All minimum guaranteed payments for intellectual property licenses
are initially recorded as an asset (licenses) and as a liability (accrued
royalties) at the contractual amount upon execution of the contract. Payments
for intellectual property licenses are classified as current assets and current
liabilities to the extent they relate to anticipated sales during the
subsequent year and long-term assets and long-term liabilities if the sales are
anticipated after one year.

Licenses are expensed to license amortization and royalties at the contractual
royalty rate based on actual net product sales or on the ratio of current units
sold to total projected units sold, whichever is higher. When, in managements
estimate, future cash flows will not be sufficient to recover previously
capitalized costs, we expense these items to license amortization and
royalties. Such charges are attributable to changes in market conditions or
product quality considerations. As of December 31, 2001, we had licenses of
$25.1 million. If we were required to write off

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licenses, due to changes in market condition or product quality, our results of
operations could be materially adversely affected.

Software Development. We utilize both independent software developers and
internal development teams to develop our software. We account for software
development costs in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed. We capitalize software development costs
once technological feasibility is established and such costs are determined to
be recoverable against future revenues. For products where proven game engine
technology exists, this may occur early in the development cycle. We evaluate
technological feasibility on a product-by-product basis. Amounts related to
software development for which technological feasibility is not met are charged
immediately to product development.

Capitalized software development is expensed to software development
amortization at the contractual rate based on actual net product sales or on
the ratio of current units sold to total projected units sold, whichever is
higher. When, in managements estimate, future cash flows will not be
sufficient to recover previously capitalized costs, we expense these items to
software development amortization. Such charges are attributable to changes in
market conditions or product quality considerations. As of December 31, 2001,
we had software development of $39.1 million. If we were required to write off
software development, due to changes in market condition or product quality,
our results of operations could be materially adversely affected.

Revenue Recognition.We recognize revenue when title and risk of loss
transfers to the customer, provided that no significant vendor support
obligations remain outstanding and that collection of the resulting receivable
is deemed probable by management. Although we generally sell our products on a
no-return basis, in certain circumstances we may allow returns, price
concessions, or allowances on a negotiated basis. We estimate such returns and
allowances based upon managements evaluation of our historical experience,
retailer inventories, the nature of the titles and other factors. Such
estimates are deducted from gross sales. Software is sold under a limited
90-day warranty against defects in material and workmanship. To date, we have
not experienced material warranty claims.

Discounts, Allowances and Returns; Inventory Management.In general, except
for PC titles, our arrangements with our retailers and distributors do not give
them the right to return products to us (other than damaged or defective
products) or to cancel firm orders. However, we sometimes negotiate
accommodations to retailers (and, less often, to distributors), when demand for
specific games falls below expectations, in order to maintain our relationships
with our customers. These accommodations include our not requiring that all
booked orders be filled, negotiated price discounts and credits against future
orders. We may also permit the return of products. Arrangements made with
distributors and retailers for PC titles do customarily require us to accept
product returns.

At the time of product shipment, we establish allowances based on estimates of
future returns and customer accommodations with respect to such products.
These allowances are taken as deductions against gross sales. We base this
amount on our historical experience, retailer inventories, the nature of the
titles and other factors. We also establish allowances for doubtful accounts
based on estimates of future bad debts based on customer credit ratings,
historical experience and other factors. The allowance for doubtful accounts
is expensed to general and administrative expense. For the years ended
December 31, 2001, 2000 and 1999, we took provisions for future returns,
customer accommodations and doubtful accounts of approximately $47.4 million,
$35.4 million and $35.0 million, respectively, during such periods. As of
December 31, 2001 and December 31, 2000, our aggregate reserves against
accounts receivable for returns, customer accommodations and doubtful accounts
were approximately $40.6 million and $31.5 million, respectively.

The identification by us of slow-moving or obsolete inventory requires us to
establish reserves against such inventory or to write-down the value of such
inventory to its estimated net realizable value.

Recently Issued Accounting Pronouncements.In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS No. 133,
certain contracts that were not formerly considered derivatives may now meet
the definition of a derivative. We adopted SFAS No. 133 effective January 1,
2001. The adoption of SFAS No. 133 did not have an impact on our financial
statements.

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In June 2001, the FASB issued two new pronouncements: SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 prohibits the use of the pooling-of-interests method for business
combinations initiated after June 30, 2001 and also applies to all business
combinations accounted for by the purchase method that are completed after June
30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001 that were accounted for by the
purchase method. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 as to all goodwill and other intangible assets recognized in
an entitys statement of financial position at that date, regardless of when
those assets were initially recognized. The acquisition of Rainbow has been
accounted for under SFAS No. 141 and goodwill is not amortized. We will adopt
SFAS No. 142 on January 1, 2002. We amortized approximately $404,000 of
goodwill in 2001. We are currently evaluating the impairment provisions of
SFAS No. 142 and have not determined the impact, if any, they will have on our
financial statements.

In August 2001, the FASB issued a new pronouncement SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
the financial accounting and reporting issues for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121 but retains the
fundamental provisions for (a) recognition/measurement of impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sales. It is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The adoption
of SFAS No. 144 will not have a material impact on our financial statements
because it retains the fundamental provisions of SFAS No. 121 which we have
already adopted.

Euro Currency Conversion

On January 1, 1999, 11 of the 15 member countries of the European Union adopted
the Euro as their common legal currency. The Euro trades on currency exchanges
and is available for cash transactions. From January 1, 1999 through January
1, 2002, participating countries could have maintained their national
(legacy) currencies as legal tender for goods and services. Beginning
January 1, 2002, new Euro-denominated bills and coins were issued, and legacy
currencies will be withdrawn from circulation no later than July 1, 2002. Our
operating subsidiaries in United Kingdom, Germany and France have been affected by the Euro
conversion and have established plans to address any business issues raised
including the competitive impact of cross-border price transparency. It is not
anticipated that there will be any near-term business ramifications; however,
the long-term implications, including any changes or modifications that will
need to be made to business and financial strategies, are still being reviewed.
From an accounting, treasury and computer system standpoint, the Euro currency
conversion did not have a material impact on our financial position or results
of operations.

Results of Operations

Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000

Sales by Platform

The following table sets forth our net sales by platform as a percentage of
sales for the years ended December 31, 2001 and 2000:

|                          |  |             |       |      |  |  |       |  
|------------------------- |  | ----------- | ----- | ---- |  |  | ----- | -
|                          |  | Year Ended 
|Platform Revenue Mix      |  | December 31
|                          |  |            
|                          |  | 2001        |       | 2000
|                          |  |             |       |     
|Sony PlayStation 2        |  |             | 29.2  | %    |  |  | 2.6   | %
|Sony PlayStation          |  |             | 15.9  |      |  |  | 41.0  |  
|Nintendo Game Boy Advance |  |             | 22.1  |      |  |  |      |  
|Nintendo Game Boy Color   |  |             | 16.5  |      |  |  | 20.3  |  
|Nintendo 64               |  |             | 4.5   |      |  |  | 28.6  |  
|Microsoft Xbox            |  |             | 1.4   |      |  |  |      |  
|PC                        |  |             | 9.7   |      |  |  | 3.2   |  
|Other                     |  |             | 0.7   |      |  |  | 4.3   |  
|                          |  |             |       |      |  |  |       |  
|                          |  |             | 100.0 | %    |  |  | 100.0 | %
|                          |  |             |       |      |  |  |       |  

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The following table sets forth our net sales by platform for the years ended
December 31, 2001 and 2000:

|                              |  |              |         |              |  |            |         |          |  |   |         |   |  |  |         |   
|----------------------------- |  | ------------ | ------- | ------------ |  | ---------- | ------- | -------- |  | - | ------- | - |  |  | ------- | --
|Net Sales for the Years Ended |  | December 31, |         | December 31, |  | Increase/  |         |          |  |  
|(In thousands)                |  | 2001         |         | 2000         |  | (Decrease) |         | % Change
|                              |  |              |         |              |  |            |         |         
|Sony PlayStation 2            |  | $            | 110,642 |              |  | $          | 9,064   |          |  | $ | 101,578 |   |  |  | 1,120.7 | % 
|Sony PlayStation              |  |              | 60,340  |              |  |            | 142,429 |          |  |   | (82,089 | ) |  |  | (57.6   | )%
|Nintendo Game Boy Advance     |  |              | 83,830  |              |  |            |        |          |  |   | 83,830  |   |  |  | N/A     |   
|Nintendo Game Boy Color       |  |              | 62,569  |              |  |            | 70,379  |          |  |   | (7,810  | ) |  |  | (11.1   | )%
|Nintendo 64                   |  |              | 17,097  |              |  |            | 99,176  |          |  |   | (82,079 | ) |  |  | (82.8   | )%
|Microsoft Xbox                |  |              | 5,111   |              |  |            |        |          |  |   | 5,111   |   |  |  | N/A     |   
|PC CD-ROM                     |  |              | 36,814  |              |  |            | 11,035  |          |  |   | 25,779  |   |  |  | 233.6   | % 
|Other                         |  |              | 2,589   |              |  |            | 14,920  |          |  |   | (12,331 | ) |  |  | (82.6   | )%
|                              |  |              |         |              |  |            |         |          |  |   |         |   |  |  |         |   
|Net Sales                     |  | $            | 378,992 |              |  | $          | 347,003 |          |  | $ | 31,989  |   |  |  | 9.2     | % 
|                              |  |              |         |              |  |            |         |          |  |   |         |   |  |  |         |   

Sony PlayStation 2 Net Sales

We had 5 new releases of PlayStation 2 titles in 2001 whereas we only had 1 new
PlayStation 2 release in 2000. Key titles for PlayStation 2 released in 2001
include Red Faction, WWF SmackDown! Just Bring Itand MX 2002 featuring Ricky
Carmichael.

Sony PlayStation Net Sales

PlayStation net sales decreased for the year ended December 31, 2001 compared
to the same period of 2000 for two reasons: 1) decreased sales of WWF
SmackDown!and WWF SmackDown! 2 (Know Your Role)which were both released in
2000 (we released no new WWF titles on PlayStation in 2001) and 2) the
anticipated declining market for PlayStation products due to the transition to
PlayStation 2.

Nintendo Game Boy Advance Net Sales

We released 15 Game Boy Advance titles during 2001 including Rocket Power:
Dream Scheme, MX 2002 featuring Ricky Carmichael, Tetris Worlds, Disney/Pixars
Monsters, Inc., Jimmy Neutron: Boy Geniusand Rugrats: Castle Capers.

Nintendo Game Boy Color Net Sales

Game Boy Color net sales decreased during 2001 as compared to the same period
of 2000 due to the introduction of the Game Boy Advance platform. We do not
anticipate releasing new titles for the Game Boy Color platform in the future,
however we do not anticipate that this will have a material effect on our
overall net sales because of the increase in Nintendo Game Boy Advance net
sales.

Nintendo 64 Net Sales

We had 2 releases of Nintendo 64 (N64) product in 2001 versus four N64
releases in 2000. Net sales decreased by 83% due to the weaker market for N64
product as the industry transitioned to the next generation of hardware. We do
not anticipate having new releases of N64 product in the future, however we do
not anticipate that this will have a material effect on our overall net sales
because of the increase in Nintendo GameCube net sales.

Microsoft Xbox

We released our first 2 Xbox titles in the fourth quarter of 2001. The 2
titles were Dark Summitand MX 2002 featuring Ricky Carmichael.

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PC CD-ROM Net Sales

The significant increase in PC CD-ROM net sales for 2001 as compared to the
same period of 2000 is attributed to the worldwide release of Red Factionfor
the PC, numerous childrens titles including, Rocket Power: Extreme Arcade
Games, Bob The Builder: Can We Fix It?, SpongeBob SquarePants: Operation Krabby
Patty, Jimmy Neutron: Boy Geniusand Rugrats: All Growed Up, as well as sales
from Hot Wheelsand Matchboxtitles released under our license agreement with
Mattel. We released 13 PC titles in 2001 whereas we only released 6 PC titles
in 2000.

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Sales by Territory

The following table sets forth, for the years ended December 31, 2001 and 2000,
our net sales for the North America and international territories:

|                              |  |              |         |              |  |            |         |          |  |   |        |   |  |  |      |   
|----------------------------- |  | ------------ | ------- | ------------ |  | ---------- | ------- | -------- |  | - | ------ | - |  |  | ---- | --
|Net Sales for the Years Ended |  | December 31, |         | December 31, |  | Increase/  |         |          |  |  
|(In thousands)                |  | 2001         |         | 2000         |  | (Decrease) |         | % Change
|                              |  |              |         |              |  |            |         |         
|North America                 |  | $            | 262,676 |              |  | $          | 270,116 |          |  | $ | (7,440 | ) |  |  | (2.8 | )%
|International                 |  |              | 116,316 |              |  |            | 76,887  |          |  |   | 39,429 |   |  |  | 51.3 | % 
|                              |  |              |         |              |  |            |         |          |  |   |        |   |  |  |      |   
|Net Sales                     |  | $            | 378,992 |              |  | $          | 347,003 |          |  | $ | 31,989 |   |  |  | 9.2  | % 
|                              |  |              |         |              |  |            |         |          |  |   |        |   |  |  |      |   

North America Net Sales

The decrease in net sales in North America for the year ended December 31, 2001
as compared to the same period of 2000 was primarily due to:

The industrys transition to four new hardware platforms, two of which were
just released in November of 2001. Many of our key genres, wrestling and
childrens, are best suited to the broader demographic which occurs as the
hardware platforms reach a larger installed base. Based on the higher
installed base of all four hardware platforms in 2002 and our increasing
product line, we anticipate our net sales in
North America to increase in 2002.

Although the total amount of actual units shipped in 2001 was 24% higher than in 2000, our net
sales decreased due to declining pricing on legacy products and no new releases
of N64 product which sells at a higher price than other products.

To date, the recent terrorist attacks in the United States have not had a
material impact on our financial position or results of operations. The future
economic consequences of those attacks are still unknown at this time. We
cannot determine if the attacks or any events arising as a result of those
attacks will have a material impact on our business in the future.

International Net Sales

The increase in net sales in the international territories for the year ended
December 31, 2001 as compared to the same period of 2000 was primarily due to:



| |  |  | Our offices in France and Australia conducting business for
the full year as compared to only nine months and three months,
respectively, in 2000.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The release of 5 PlayStation 2 titles in 2001 as compared to
no titles in 2000.                                                                   
|
| |  |  | A 105% increase in net sales of titles for the handheld gaming
systems Nintendo Game Boy Color and Nintendo Game Boy Advance.                     
|
| |  |  | A 48% increase in PC CD-ROM net sales primarily due to Red
Faction for PC CD-ROM.                                                                 

This increase was offset by a 52% decrease in PlayStation net sales due to the
transition to PlayStation 2.

We expect our international net sales to increase
at a slower rate in 2002 as compared to 2001 and as compared to our
expected 2002 North America growth rate. This is due to the launches
of next generation hardware occurring at later dates, resulting in a
smaller installed base.

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Costs and Expenses, Interest Income  net, and Income Taxes

Information about our costs and expenses, interest income  net, and income
taxes for the years ended December 31, 2001 and 2000 is presented below:

|                           |                                    |  |                      |      |      |  |      |      |  
|-------------------------- | ---------------------------------- |  | -------------------- | ---- | ---- |  | ---- | ---- | -
|                           |                                    |  | Percent of Net Sales
|                           |                                    |  |                     
|                           |                                    |  | Years Ended         
|                           |                                    |  | December 31         
|                           |                                    |  |                     
|                           |                                    |  | 2001                 |      | 2000
|                           |                                    |  |                      |      |     
|Costs and expenses:        |                                    |  |                      |      |      |  |      |     
|                           | Cost of sales                      |  |                      | 40.9 | %    |  |      | 40.6 | %
|                           | License amortization and royalties |  |                      | 8.7  |      |  |      | 10.0 |  
|                           | Software development amortization  |  |                      | 9.3  |      |  |      | 12.4 |  
|                           | Product development                |  |                      | 5.6  |      |  |      | 5.5  |  
|                           | Selling and marketing              |  |                      | 12.3 |      |  |      | 12.2 |  
|                           | Payment to venture partner         |  |                      | 2.3  |      |  |      | 5.1  |  
|                           | General and administrative         |  |                      | 6.6  |      |  |      | 5.6  |  
|                           |                                    |  |                      |      |      |  |      |     
|Total costs and expenses   |                                    |  | 85.7                 |      |      |  | 91.4 |     
|                           |                                    |  |                      |      |      |  |      |     
|Income from operations     |                                    |  | 14.3                 |      |      |  | 8.6  |     
|Interest income, net       |                                    |  | 0.7                  |      |      |  | 0.4  |     
|                           |                                    |  |                      |      |      |  |      |     
|Income before income taxes |                                    |  | 15.0                 |      |      |  | 9.0  |     
|Income taxes               |                                    |  | 5.5                  |      |      |  | 3.8  |     
|                           |                                    |  |                      |      |      |  |      |     
|Net income                 |                                    |  | 9.5                  | %    |      |  | 5.2  | %   
|                           |                                    |  |                      |      |      |  |      |     

Cost of Sales

Cost of sales as a percentage of net sales remained relatively constant for the
year ended December 31, 2001 compared to the same period of 2000. We expect
our cost of sales to decrease slightly in 2002 due to a higher percentage of
sales from disc based products that carry lower manufacturing costs than
cartridge-based products.

License Amortization and Royalties

License amortization and royalties decreased as a percentage of net sales for
the year ended December 31, 2001 compared to the same period of 2000 primarily
due to sales of Red Factionand Summonerwhich carries no license amortization
and royalties because we own the intellectual property.

Software Development Amortization

Software development amortization decreased as a percentage of net sales for
the year ended December 31, 2001 compared to the same period of 2000 primarily
due to:



| |  | An increase in the percentage of handheld games sold during the period,
which generally carry lower software development costs than console games.                                                                                                                                                           
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The May 2000 non-cash charge
which included a $7.1 million charge to software development amortization related to
discontinued games or unrecoverable milestone payments. Before the May 2000 non-cash charge,
software development amortization for the year ended December 31, 2000
was 10.3% of net sales.

We expect our software development amortization to increase in 2002 as a
percentage of net sales due to a higher percentage of sales derived from next
generation home console products, which carry higher software development costs
than legacy products and handheld games.

Product Development

Product development expenses remained relatively constant as a percentage of
net sales for the year ended December 31, 2001 compared to the same period of
2000. Product development expenses increased by $2.0 million for the year
ended December 31, 2001 as compared to the same period of 2000. This increase
is related to the increased

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headcount of our corporate product development department required to support
the launch of four new hardware platforms over a twelve-month period and the
increased number of titles under development.

Selling and Marketing

Selling and marketing expenses increased by $4.3 million for the year ended
December 31, 2001 as compared to the same period of 2000. This increase is
directly related to the increase in net sales. Selling and marketing expenses
have remained relatively constant as a percentage of net sales for the years
ended December 31, 2001 and 2000.

Payment to Venture Partner

Payment to JAKKS Pacific, Inc. has decreased as a percentage of total net sales
and in absolute dollars for the year ended December 31, 2001 compared to the
same period of 2000 in direct relation to the decrease in World Wrestling
Federation Entertainment related sales as a percentage of our total net sales
for the year due to fewer titles released in 2001. We expect the expense to
continue to decrease as a percentage of net sales as we continue to diversify
our product portfolio.

General and Administrative

General and administrative expenses increased by $5.6 million due to the
expenses required to support the increased net sales and an increase in our
allowance for doubtful accounts and it also increased as a percentage of net
sales to 6.6% compared to 5.6% for the same period of 2000. The increase as a
percentage of net sales is primarily due to an increase in our bad debt
allowance related to the Chapter 11 bankruptcy filing of Kmart.

Interest Income, net

Interest income, net increased for the year ended December 31, 2001 compared to
the same period of 2000 as a result of higher average cash, cash equivalents
and short-term investment balances due to the proceeds from our secondary
offering on November 13, 2001. As a result of the secondary offering, we
expect our interest income, net to increase as a percentage of net sales in
2002.

Income Taxes

The effective tax rate for the year ended December 31, 2001 was 36.5%, and the
effective tax rate for 2000 was 41.8%. The decrease in the effective tax rate
from 2000 to 2001 is due primarily to the relocation of our warehouse to a
state that has a lower overall tax rate. In addition, the effective tax rate
for 2000 was negatively impacted by the acquisition of Volition which increased
the rate by 2.5%. We expect our effective tax rate for 2002 to be
approximately 37.5%.

Comparison of the Year Ended December 31, 2000 to the Year Ended December 31, 1999

Net income for the year ended December 31, 2000 was $18.2 million ($0.84 per
diluted share), as compared to net income of $31.3 million ($1.48 per diluted
share) for the same period in 1999. The 2000 results were negatively impacted
by a non-cash charge, as discussed below, totaling $9.8 million before taxes
and $5.9 million after taxes ($0.27 per diluted share).

Non-Cash Charge

In May 2000, as part of our regular impaired asset review and also as a result
of changing technology in the video game market, we incurred a write-off of
$9.8 million or $5.9 million after tax. The write-off consisted of costs
associated with software development and related costs for products that had
been discontinued or whose values were deemed unrecoverable through future
undiscounted cash flows. The following costs were recorded in the consolidated
statement of operations in the second quarter of fiscal year 2000 and
classified as follows:

|                                   |  |   |       | 
|---------------------------------- |  | - | ----- | 
|(In thousands)                     |  |   |       | 
|Cost of sales                      |  | $ | 572   | 
|License amortization and royalties |  |   | 1,460 | 
|Software development amortization  |  |   | 7,071 | 
|Product development                |  |   | 102   | 
|Selling and marketing              |  |   | 56    | 
|General and administrative         |  |   | 528   | 
|                                   |  |   |       | 
|                                   |  | $ | 9,789 | 
|                                   |  |   |       | 

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The component amount in cost of sales is a write down of inventory to the lower
of cost or market. The charge in license amortization and royalties
relates directly to unrecoverable minimum guarantees. The charge in
software development amortization relates directly to discontinued
games or unrecoverable milestone payments. The charge in product
development and selling and marketing consists of ancillary product
and advertising costs while general and administrative contains an
increase for provision for doubtful accounts.

Sales by Platform

The following table sets forth our net sales by platform as a percentage of
sales for the years ended December 31, 2000 and 1999:

|                        |  |             |       |      |  |  |       |  
|----------------------- |  | ----------- | ----- | ---- |  |  | ----- | -
|                        |  | Year Ended 
|                        |  | December 31
|                        |  |             |       |      |  | 
|Platform Revenue Mix    |  | 2000        |       | 1999
|                        |  |             |       |     
|Sony PlayStation 2      |  |             | 2.6   | %    |  |  |      | %
|Sony PlayStation        |  |             | 41.0  |      |  |  | 37.1  |  
|Nintendo Game Boy Color |  |             | 20.3  |      |  |  | 16.5  |  
|Nintendo 64             |  |             | 28.6  |      |  |  | 35.2  |  
|PC                      |  |             | 3.2   |      |  |  | 8.4   |  
|Other                   |  |             | 4.3   |      |  |  | 2.8   |  
|                        |  |             |       |      |  |  |       |  
|                        |  |             | 100.0 | %    |  |  | 100.0 | %
|                        |  |             |       |      |  |  |       |  

The following table sets forth our net sales by platform for the years ended
December 31, 2000 and 1999:

|                              |  |              |         |              |  |            |         |          |  |   |         |   |  |  |       |   
|----------------------------- |  | ------------ | ------- | ------------ |  | ---------- | ------- | -------- |  | - | ------- | - |  |  | ----- | --
|Net Sales for the Years Ended |  | December 31, |         | December 31, |  | Increase/  |         |          |  |  
|(In thousands)                |  | 2001         |         | 2000         |  | (Decrease) |         | % Change
|                              |  |              |         |              |  |            |         |         
|Sony PlayStation 2            |  | $            | 9,064   |              |  | $          |        |          |  | $ | 9,064   |   |  |  | N/A   |   
|Sony PlayStation              |  |              | 142,429 |              |  |            | 112,691 |          |  |   | 29,738  |   |  |  | 26.4  | % 
|Nintendo Game Boy Color       |  |              | 70,379  |              |  |            | 50,070  |          |  |   | 20,309  |   |  |  | 40.6  | % 
|Nintendo 64                   |  |              | 99,176  |              |  |            | 106,888 |          |  |   | (7,712  | ) |  |  | (7.2  | )%
|PC CD-ROM                     |  |              | 11,035  |              |  |            | 25,283  |          |  |   | (14,248 | ) |  |  | (56.4 | )%
|Other                         |  |              | 14,920  |              |  |            | 8,551   |          |  |   | 6,369   |   |  |  | 74.5  | % 
|                              |  |              |         |              |  |            |         |          |  |   |         |   |  |  |       |   
|Net Sales                     |  | $            | 347,003 |              |  | $          | 303,483 |          |  | $ | 43,520  |   |  |  | 14.3  | % 
|                              |  |              |         |              |  |            |         |          |  |   |         |   |  |  |      

Sony PlayStation 2 Net Sales

We released our first PlayStation 2 title in the fourth quarter of 2000,
Summoner.

Sony PlayStation Net Sales

PlayStation net sales increased for year ended December 31, 2000 compared to
the same period of 1999 primarily due to the release of WWF SmackDown!and WWF
SmackDown! 2 (Know Your Role)in 2000.

Nintendo Game Boy Color Net Sales

Sales for Game Boy Color increased as a result of the release of 19 titles in
2000 versus only 11 in 1999. Some titles included Rugrats In Paris, Chicken
Run, Who Wants To Be A Millionaireand Power Rangers: Lightspeed Rescue.

Nintendo 64 Net Sales

N64 sales decreased for the year ended December 31, 2000 as compared to the
same period of 1999 due in part to the weaker market for N64 product as the
industry transitioned to the next generation of hardware. We only had 4 N64
releases in 2000 whereas we had 10 N64 releases in 1999.

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PC CD-ROM Net Sales

PC CD-ROM net sales decreased for the year ended December 31, 2000 as compared
to the same period of 1999 due to the release of only 6 PC CD-ROM titles in
2000 as compared to 11 PC CD-ROM titles released in 1999.

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##### Table of Contents



Sales by Territory

The following table sets forth, for the years ended December 31, 2000 and 1999,
our sales for the North America and international territories:

|                              |  |              |         |              |  |            |         |          |  |   |        |  |  |  |    |  
|----------------------------- |  | ------------ | ------- | ------------ |  | ---------- | ------- | -------- |  | - | ------ |  |  |  | -- | -
|Net Sales for the Years Ended |  | December 31, |         | December 31, |  | Increase/  |         |          |  |  
|(In thousands)                |  | 2000         |         | 1999         |  | (Decrease) |         | % Change
|                              |  |              |         |              |  |            |         |         
|North America                 |  | $            | 270,116 |              |  | $          | 228,827 |          |  | $ | 41,289 |  |  |  | 18 | %
|International                 |  |              | 76,887  |              |  |            | 74,656  |          |  |   | 2,231  |  |  |  | 3  | %
|                              |  |              |         |              |  |            |         |          |  |   |        |  |  |  |    |  
|Net Sales                     |  | $            | 347,003 |              |  | $          | 303,483 |          |  | $ | 43,520 |  |  |  | 14 | %
|                              |  |              |         |              |  |            |         |          |  |   |        |  |  |  |    |  

North America Net Sales

The increase in net sales in North America for the year ended December 31, 2000
compared to the same period of 1999 was due to the increased number of titles
released in 2000 compared to 1999. Increased net sales of WWFtitles in 2000
compared to 1999 also contributed to the increase in North America net sales.

International Net Sales

The increase in net sales in the international territories for the year ended
December 31, 2000 as compared to the same period of 1999 was primarily due to
the addition of our French and Australian subsidiaries in March, 2000 and
September, 2000, respectively. This increase in net sales was offset by
decreases in our German net sales, decreases in unit volumes for titles on the
N64 and PlayStation platforms and the strengthening of the US dollar compared
to key foreign currencies. There was also a decline in 2000 of LucasArts Star
Wars Episode Onegames from 1999 when sales peaked due to the release of the
movie by the same name.

Costs and Expenses, Interest Income  net, and Income Taxes

Information about our costs and expenses, interest income  net, and income
taxes for the years ended December 31, 2000 and 1999 is presented below:

|                           |                                    |  |                      |      |      |  |      |      |  
|-------------------------- | ---------------------------------- |  | -------------------- | ---- | ---- |  | ---- | ---- | -
|                           |                                    |  | Percent of Net Sales
|                           |                                    |  |                     
|                           |                                    |  | Years Ended         
|                           |                                    |  | December 31         
|                           |                                    |  |                     
|                           |                                    |  | 2000                 |      | 1999
|                           |                                    |  |                      |      |     
|Costs and expenses:        |                                    |  |                      |      |      |  |      |     
|                           | Cost of sales                      |  |                      | 40.6 | %    |  |      | 44.4 | %
|                           | License amortization and royalties |  |                      | 10.0 |      |  |      | 9.5  |  
|                           | Software development amortization  |  |                      | 12.4 |      |  |      | 6.4  |  
|                           | Product development                |  |                      | 5.5  |      |  |      | 5.1  |  
|                           | Selling and marketing              |  |                      | 12.2 |      |  |      | 11.7 |  
|                           | Payment to venture partner         |  |                      | 5.1  |      |  |      | 2.0  |  
|                           | General and administrative         |  |                      | 5.6  |      |  |      | 4.9  |  
|                           |                                    |  |                      |      |      |  |      |     
|Total costs and expenses   |                                    |  | 91.4                 |      |      |  | 84.0 |     
|                           |                                    |  |                      |      |      |  |      |     
|Income from operations     |                                    |  | 8.6                  |      |      |  | 16.0 |     
|Interest income, net       |                                    |  | 0.4                  |      |      |  | 0.3  |     
|                           |                                    |  |                      |      |      |  |      |     
|Income before income taxes |                                    |  | 9.0                  |      |      |  | 16.3 |     
|Income taxes               |                                    |  | 3.8                  |      |      |  | 6.0  |     
|                           |                                    |  |                      |      |      |  |      |     
|Net income                 |                                    |  | 5.2                  | %    |      |  | 10.3 | %   
|                           |                                    |  |                      |      |      |  |      |     

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Cost of Sales

Cost of sales as a percentage of net sales decreased for the year ended
December 31, 2000 compared to the same period of 1999 primarily due to an
increase in sales of a higher proportion of PlayStation, PlayStation 2 and Game
Boy Color titles, all of which have higher gross margins than Nintendo 64
games.

License Amortization and Royalties

License amortization and royalties increased for the year ended December 31,
2000 compared to the same period of 1999 primarily due to the May 2000 non-cash
charge. Before the May 2000 non-cash charge, license amortization and
royalties for the year ended December 31, 2000 was 9.6%.

Software Development Amortization

Software development amortization increased for the year ended December 31,
2000 compared to the same period of 1999 primarily due to:



| |  | The May 2000 non-cash charge
which included a $7.1 million charge to software development
amortization related to discontinued games or unrecoverable milestone
payments. Before the May 2000 non-cash charge,
software development amortization for the year ended December 31, 2000
was 10.3% of new sales.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | A change in our product mix away from Nintendo 64 titles to other
platforms that generally carry higher software development costs.                                                                                                                                                                          

Product Development

Product development expenses increased slightly as a percentage of net sales
and by $3.6 million in absolute dollars for the year ended December 31, 2000
compared to December 31, 1999. This increase is related to the increased
headcount of our corporate product development department required to support
the launch of four new hardware platforms over a twelve-month period and the
increased number of titles under development.

Selling and Marketing

Selling and marketing expenses for the year ended December 31, 2000 remained
relatively constant as a percentage of net sales compared to the same period of
1999 and increased by $7.0 million in absolute dollars compared to 1999. This
increase is a result of several significant advertising and promotional
campaigns to promote our WWF, Rugrats, Power Rangers, Evil Dead, Summonerand
MTV Sportsbrands, as well as increased warehouse expenses.

Payment to Venture Partner

Payment to JAKKS Pacific, Inc. increased as a percentage of total net sales and
in absolute dollars for the year ended December 31, 2000 compared to the same
period of 1999 in direct relation to the increase in World Wrestling Federation
Entertainment related sales as a percentage of our total net sales for this
period. Because the license with the WWF was not effective until November
1999, there were no WWF product sales in the first ten months of 1999.

General and Administrative

General and administrative expenses increased as a
percentage of net sales by .7% compared to the same period of 1999 and increased in dollar terms by $4.6
million over 1999. This increase is attributed to higher volumes, increased
licensing efforts, and additional backoffice activities to support four new
platform launches in 2000 and 2001.

Interest Income, net

Interest income, net increased by $214,000 compared to 1999 as a result of
increased cash flows from operations and higher average cash and cash
equivalent balances during the period.

Income Taxes

The effective tax rate for the year ended December 31, 2000 was 41.8%; the
effective tax rate for 1999 was 36.9%. The 1999 effective tax rate was
positively impacted by the reversal of a $2.5 million valuation allowance
related to prior years net operating losses. The effective tax rate for 2000
was negatively impacted by the acquisition of Volition which increased the rate
by 2.5%.

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Liquidity and Capital Resources

Our principal uses of cash are product purchases, payments to licensors,
payments to developers and the costs of internal software development. In
order to purchase products from the manufacturers, we typically open letters of
credit in their favor or obtain a line of credit from the manufacturer.

Our cash, cash equivalents and short-term
investments increased to $206.2
million during the year ended December 31, 2001 primarily due to the proceeds
from our November 13, 2001 secondary offering. Cash, cash equivalents and
short-term investments were $253.3 million as of March 15, 2002. Cash provided
by operating activities for the year ended December 31, 2001 was $33.2 million.

We entered into approximately 15 new license agreements in 2001 with minimum
guarantees of approximately $22.6 million. As of December 31, 2001, we had
obligations with respect to future guaranteed minimum license
payments of $17.6
million.

We used approximately $53.1 million to fund external and internal software
development of approximately 120 games during 2001 and used approximately $28.8
million to fund external and internal development of approximately 75 games in
2000.

We used $44.1 million in investing activities during the year ended December
31, 2001, which is primarily made up of $35.1 million in purchases of
short-term investments. We also acquired a 44% interest in NI Sports for $3.3
million in cash. See Notes to Consolidated Financial Statements  Other
Long-Term Assets.

The amount of our accounts receivable is subject
to significant seasonal variations as a consequence of the
seasonality of our sales and is typically highest at the end of the
year.

In November 2001 and December 2001 we completed a secondary public offering of approximately
3,064,000 shares of our $.01 par value common stock at a public offering price
of $53.50. The net proceeds from this offering were $154.6 million. In
addition, we also generated $16.7 million from the exercise of options and
warrants to purchase our common stock. The repayment of borrowings from our
line of credit required expenditures of $15.5 million.

Accordingly, we believe that our cash, cash equivalents and short-term investments, funds
provided by operations and borrowing capacity will be adequate to meet our
anticipated requirements, on both a short-term and long-term basis, for
operating expenses, product purchases and payments for licenses and software
development.

Guarantees and Commitments.In addition to the future guaranteed minimum
license payments mentioned above, we also have various operating lease
commitments of $10.4 million expiring at various times through 2012. We also
have advertising commitments under most of our major license agreements. These
minimum commitments generally range from 2% to 10% of net sales related to the
license. We estimate that our minimum commitment for advertising in 2002 to be
approximately $15-$20 million. As of December 31, 2001,
we had approximately $6.8 million in obligations under our
credit facilities with respect to outstanding
letters of credit and no outstanding borrowings.

Credit Facilities.On August 31, 2000 we entered into a Revolving Credit
Agreement with Union Bank of California and a syndicate of other financial
institutions. Under the terms of the Revolving Credit Agreement, as amended,
we are permitted to borrow (and maintain obligations under outstanding letters
of credit) up to an aggregate of $35,000,000 through August 1, 2002 subject to
the following:

We may maintain outstanding letters of credit for product purchases and
outstanding borrowings in the aggregate up to $35,000,000 between August 1,
2001 and January 31, 2002; and $20,000,000 between February 1, 2002 and July
31, 2002. In addition, outstanding borrowings cannot exceed $10,000,000 for
August 1, 2001 through October 31, 2001; $30,000,000 from November 1, 2001
through December 31, 2001; $20,000,000 from January 1, 2002 through January 31,
2002; and $10,000,000 from February 1, 2002 to July 31, 2002.

We must not have any outstanding borrowings for a period of at least 60 days
during each year of the agreement.

This credit facility is secured by a lien on substantially all of our assets
and contains customary financial and non-financial covenants which require us
to maintain a specified minimum net worth and limits our ability to incur
additional indebtedness, sell assets and enter into certain mergers or
acquisitions. We are not permitted to pay cash dividends. Amounts outstanding
under these credit facilities bear interest, at our choice, at either a) the
banks prime rate (4.8% at December 31, 2001) or b) the London Interbank
Offered Rate (1.87% at December 31, 2001) plus 1.85%.

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Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks arising from transactions in the normal
course of business, principally risk associated with interest rate and foreign
currency fluctuations.

Interest Rate Risk

We have interest rate risk primarily related to our investment portfolio. A
substantial portion of our short-term investments is in a mutual fund made up
of non-mortgage United States Government Securities, corporate notes and
commercial paper and fixed and floating rate asset-backed securities. The
value of this investment may fluctuate with changes in interest rates.
However, we believe this risk is immaterial due to the short-term nature of the
fund. Our interest rate risk related to debt is also immaterial due to the
short maturity of the debt. We have no fixed rate debt.

Foreign Currency Risk

We transact business in many different foreign currencies and may be exposed to
financial market risk resulting from fluctuations in foreign currency exchange
rates, particularly the Great British Pound (GBP) and the Euro which may
result in a loss of earnings to us. The volatility of the GBP and the Euro
(and all other applicable currencies) are monitored frequently throughout the
year. While we have not engaged in foreign currency hedging, we may in the
future use hedging programs, currency forward contracts, currency options
and/or other derivative financial instruments commonly utilized to reduce
financial market risks if it is determined that such hedging activities are
appropriate to reduce risk.

Item 8.     Financial Statements and Supplementary Data

The Financial Statements together with the report of Deloitte & Touche LLP
dated February 13, 2002 and March 8, 2002 as to Note 9, required by this Item are included in Item 14 of this
Annual Report and are incorporated herein by reference.




Item 9.     Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

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PART III




Item 10.     Directors and Executive Officers of the Registrant

The information required under this Item relating to members of our Board of
Directors and Executive Officers will be included in our 2002 Notice of Annual
Meeting of Shareholders and Proxy Statement under the headings Election of
Directors, Executive Officers, Key Employees, Compliance with Section 16
of the Securities Exchange Act of 1934 and Director and Officer Holdings,
which will be filed within 120 days after the close of our fiscal year, and is
incorporated herein by reference.




Item 11.     Executive Compensation

The information required under this Item relating to executive compensation
will be included in our 2002 Notice of Annual Meeting of Shareholders and Proxy
Statement under the heading Executive Compensation, which will be filed
within 120 days after the close of our fiscal year, and is incorporated herein
by reference.




Item 12.     Security Ownership of Certain Beneficial Owners and Management

The information required under this Item relating to security ownership of
certain beneficial owners and management will be included in our 2002 Notice of
Annual Meeting of Shareholders and Proxy Statement under the heading Principal
Shareholders, which will be filed within 120 days after the close of our
fiscal year, and is incorporated herein by reference.




Item 13.     Certain Relationships and Related Transactions

There were no reportable relationships or transactions with management during
the year ended December 31, 2001.

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PART IV




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



|(a) |  | Financial Statements and Financial Statement Schedules.
|--- |  | -------------------------------------------------------

See Index to Financial Statements.



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------

Current Report on Form 8-K dated November 21, 2001, reporting under Item 5.



|(c) |  | Exhibits.
|--- |  | ---------

|              |  |                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|ExhibitNumber |  | Title                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|              |  |                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|2             |  | Agreement of Merger dated as of December 21, 2001, among THQ Inc., Rainbow
Acquisition Company, Rainbow Multimedia Group, Inc., the Stockholders
Representative and the Effective Time Stockholders party thereto (incorporated by
reference to Exhibit 2 to the Registrants Current Report on Form 8-K filed
January 7, 2001).
|3.1           |  | Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-3 filed on
January 9, 1998 (File No. 333-32221) (the S-3
Registration Statement)).                                                                                            
|3.2           |  | Amendment to Certificate of Incorporation (incorporated by reference to Exhibit
3.2 to Post-Effective Amendment No. 1 to the S-3 Registration
Statement).                                                                                                                                                                        
|3.3           |  | Amendment to Certificate of Incorporation (incorporated by reference to Exhibit
3.3 to the Registrants Quarterly Report on Form 10-Q for the period ended June
30, 2001).                                                                                                                                                       
|3.4           |  | Amended and Restated Bylaws (incorporated by reference to Exhibit 3 to the
Registrants Current Report on Form 8-K, dated June 22, 2000 (the June 2000
8-K)).                                                                                                                                                                  
|3.5           |  | Certificate of Designation of Series A Junior Participating Preferred Stock of THQ
Inc. (incorporated by reference to Exhibit A of Amendment No. 2 to the
Registrants Registration Statement on Form 8-A filed on August 28, 2001 (File No.
001-15959)).                                                                        
|3.6           |  | Amendment to Certificate of Designation of Series A Junior Participating Preferred
Stock of THQ Inc. (incorporated by reference to Exhibit 3.6 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2001).                                                                             
|3.7           |  | Amended and Restated Rights Agreement, dated as of August 22, 2001 between the
Registrant and Computershare Investor Services, LLC, as Rights Agent (incorporated
by reference to Exhibit 1 to Amendment No. 2 to the Registrants Registration
Statement on Form 8-A (File No. 001-15959), filed on
August 28, 2001).           
|10.1         |  | Amended and Restated Employment Agreement dated as of January 1, 2001, between the
Company and Brian J. Farrell (incorporated by reference to Exhibit 10.1 to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31,
2000).                                                                          
|10.2         |  | Amended and Restated Employment Agreement dated as of January 1, 2001, between the
Company and Jeffrey C. Lapin (incorporated by reference to Exhibit 10.2 to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31,
2000).                                                                          

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|              |  |                                                                                                                                                                                                                                                                                                                                  |  |  |  | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|ExhibitNumber |  | Title                                                                                                                                                                                                                                                                                                                            |  |  |  | 
|              |  |                                                                                                                                                                                                                                                                                                                                  |  |  |  | 
|10.3         |  | Employment Agreement between Fred A. Gysi and the Company dated October 1, 1997
(incorporated by reference to Exhibit 10.6 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the
1998 10-K)).                                                                                       
|10.4         |  | Form of Severance Agreement with Executive Officers (incorporated by reference to
Exhibit 10.7 to the 1998 10-K).                                                                                                                                                                                                               
|10.5         |  | Amended and Restated 1990 Stock Option Plan (incorporated by reference to Exhibit
10.1 to the Registration Statement on Form S-2 filed on December 23, 1996 (File
No. 333-18641)).                                                                                                                                              
|10.6         |  | Stock Option Agreement dated as of August 28, 1996, between the Company and Brian
J. Farrell (incorporated by reference to Exhibit 10.31 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31,
1996).                                                                                              
|10.7         |  | Amended and Restated 1997 Stock Option Plan (incorporated by reference to Appendix
A to Registrant's 2001 Notice of Meeting and Proxy Statement).                                                                                                                                                                               
|10.8*        |  | Form of Stock Option Agreement for the Amended and Restated 1997 Stock Option Plan.                                                                                                                                                                                                                                             
|10.9         |  | Stock Option Agreement dated as of October 21, 1998, between the Company and
Jeffrey C. Lapin (incorporated by reference to Exhibit 10.8 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999).                                                                                       
|10.10        |  | Form of Stock Option Agreement dated as of December 23, 1998, between the Company
and Messrs. Lawrence Burstein, Bruce Jagid and James Whims (incorporated by
reference to Exhibit 10.9 to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999).                                        
|10.11         |  | Revolving Credit Agreement, dated as of August 31, 2000 by and between the
Company, the Lenders named therein, and Union Bank of California, N.A. (Union
Bank), as Agent (incorporated by reference to Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000).     
|10.12         |  | First Amendment to Revolving Credit Agreement, dated as of October 23, 2000
between the Company, Union Bank as Agent and as Lender, BNP Paribas, and Pacific
Century Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000).
|10.13         |  | Second Amendment to Revolving Credit Agreement, dated as of February 20, 2001,
between the Company, Union Bank as Agent and as Lender, BNP Paribas, and Pacific
Century Bank, N.A. (incorporated by reference to Exhibit 10.3 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
March 30, 2001). 
|10.14         |  | Third Amendment to Revolving Credit Agreement, dated as of June 25, 2001, between
the Company, Union Bank as Agent and as Lender, BNP Paribas, and Pacific Century
Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001).       
|10.15         |  | Fourth Amendment to Revolving Credit Agreement, dated as of July 31, 2001, between
the Company, Union Bank as Agent and as Lender, BNP Paribas, and Pacific Century
Bank, N.A. (incorporated by reference to Exhibit 10.3 to the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2001).      

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|              |  |                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|ExhibitNumber |  | Title                                                                                                                                                                                                                                                                                                                           |  |  |  | 
|              |  |                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|10.16         |  | Fifth Amendment to Revolving Credit Agreement, dated as of August 28,
2001, between the Company, Union Bank as Agent and as Lender, BNP
Paribas, and Pacific Century Bank, N.A. (incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001)
|10.17         |  | Sixth Amendment to Revolving Credit Agreement, dated as of August 28,
2001, between the Company, Union Bank as Agent and as Lender, BNP
Paribas, and Pacific Century Bank, N.A. (incorporated by reference to
Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001)
|10.18*        |  | Seventh Amendment to Revolving Credit Agreement, dated as of January
8, 2002, between the Company, Union Bank as Agent and as Lender, BNP
Paribas, and Pacific Century Bank, N.A.                                                                                                                                              
|21*           |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                 
|23.1*         |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                              



---

| |  | Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto pursuant to Item 14(c) of Form 10-K.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|* |  | Filed herewith.                                                                                                                       

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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.

|                      |           |                                                                                                    
|--------------------- | --------- | ---------------------------------------------------------------------------------------------------
|Dated: March 22, 2002 | THQ  INC.
|                     
|                      | By:       | /s/ Brian J. Farrell
Brian J. Farrell, Chairman of the Board,
President and 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 dates indicated.

|                                         |  |                                                                                                                                                       |  |               
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                |  | Title                                                                                                                                                 |  | Date          
|                                         |  |                                                                                                                                                       |  |               
|                                        
|/s/   Brian J. FarrellBrian J. Farrell   |  | Director, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)                                                  |  | March 22, 2002
|                                        
|/s/  Lawrence BursteinLawrence Burstein  |  | Director                                                                                                                                              |  | March 22, 2002
|                                        
|/s/ James L. WhimsJames L. Whims         |  | Director                                                                                                                                              |  | March 22, 2002
|                                        
|/s/ Jeffrey C. LapinJeffrey C. Lapin     |  | Director, Vice Chairman and Chief
Operating Officer                                                                                                   |  | March 22, 2002
|                                        
|/s/ L. Gregory BallardL. Gregory Ballard |  | Director                                                                                                                                              |  | March 22, 2002
|                                        
|/s/ Fred A. GysiFred A. Gysi             |  | Senior Vice President, Finance &
Administration, Chief Financial
Officer and Secretary (Principal
Financial Officer and Principal
Accounting Officer) |  | March 22, 2002

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THQ INC.
INDEX TO FINANCIAL STATEMENTS

|                                                         |                                                                                                                   |  |      |     | 
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                         |                                                                                                                   |  | Page
|                                                         |                                                                                                                   |  |     
|INDEPENDENT AUDITORS REPORT                             |                                                                                                                   |  | F-2  |    
|CONSOLIDATED FINANCIAL STATEMENTS                        |                                                                                                                   |  |      |    
|Consolidated Balance Sheets  December 31, 2001 and 2000 |                                                                                                                   |  | F-3  |    
|                                                         | Consolidated Statements of Operations for Each of the Three Years in the Period
Ended December 31, 2001           |  |      | F-4 | 
|                                                         | Consolidated Statements of Stockholders Equity for Each of the Three Years in the
Period Ended December 31, 2001 |  |      | F-5 | 
|                                                         | Consolidated Statements of Cash Flows for Each of the Three Years in the Period
Ended December 31, 2001           |  |      | F-7 | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS               |                                                                                                                   |  | F-9  |    

All financial statement schedules have been omitted since either (i) the
schedule or condition requiring a schedule is not applicable or not material or (ii) the
information required by such schedule is contained in the Consolidated
Financial Statements and Notes thereto.

F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Stockholders of THQ Inc.,
Calabasas Hills, California

We have audited the accompanying consolidated balance sheets of THQ Inc. and
subsidiaries (the Company) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2001. 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 of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Los Angeles, California
February 13, 2002 and March 8, 2002 as to Note 9

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##### Table of Contents



THQ INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------- | ------------------------------------------ | -------------------- | ------- | ----------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                                                                                                   |                                           |                                            |                      |         | December 31
|                                                                                                                                                                   |                                           |                                            |                      |         |            
|                                                                                                                                                                   |                                           |                                            |                      |         | 2001        |         | 2000   
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |        
|ASSETS                                                                                                                                                             |                                           |                                            |                      |         |             |         |         |        
|Current assets:                                                                                                                                                    |                                           |                                            |                      |         |             |         |         |        
|                                                                                                                                                                   | Cash and cash equivalents                 |                                            | $                    | 171,059 |             |         | $       | 27,998  |        
|                                                                                                                                                                   | Short-term investments                    |                                            |                      | 35,106  |             |         |         |        |        
|                                                                                                                                                                   | Accounts receivable  net                 |                                            |                      | 126,011 |             |         |         | 135,048 |        
|                                                                                                                                                                   | Inventory                                 |                                            |                      | 9,917   |             |         |         | 10,707  |        
|                                                                                                                                                                   | Licenses                                  |                                            |                      | 16,758  |             |         |         | 8,756   |        
|                                                                                                                                                                   | Software development                      |                                            |                      | 34,664  |             |         |         | 11,818  |        
|                                                                                                                                                                   | Deferred income taxes                     |                                            |                      |        |             |         |         | 9,202   |        
|                                                                                                                                                                   | Income taxes receivable                   |                                            |                      | 290     |             |         |         |        |        
|                                                                                                                                                                   | Prepaid expenses and other current assets |                                            |                      | 7,498   |             |         |         | 4,557   |        
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |        
|                                                                                                                                                                   |                                           |                                            | Total current assets |         |             | 401,303 |         |         |         | 208,086 | 
|Property and equipment  net                                                                                                                                       |                                           |                                            | 13,891               |         |             |         | 10,607  |        
|Licenses  net of current portion                                                                                                                                  |                                           |                                            | 8,345                |         |             |         | 2,382   |        
|Software development  net of current portion                                                                                                                      |                                           |                                            | 4,466                |         |             |         | 949     |        
|Deferred income taxes                                                                                                                                              |                                           |                                            |                     |         |             |         | 581     |        
|Goodwill  net                                                                                                                                                     |                                           |                                            | 48,202               |         |             |         | 1,717   |        
|Other long-term assets  net                                                                                                                                       |                                           |                                            | 11,759               |         |             |         | 5,620   |        
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |        
|TOTAL ASSETS                                                                                                                                                       |                                           | $                                          | 487,966              |         |             | $       | 229,942 |        
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |                                           |                                            |                      |         |             |         |         |        
|Current liabilities:                                                                                                                                               |                                           |                                            |                      |         |             |         |         |        
|                                                                                                                                                                   | Lines of credit                           |                                            | $                    |        |             |         | $       | 15,473  |        
|                                                                                                                                                                   | Accounts payable                          |                                            |                      | 27,186  |             |         |         | 22,956  |        
|                                                                                                                                                                   | Accrued expenses                          |                                            |                      | 22,944  |             |         |         | 23,448  |        
|                                                                                                                                                                   | Accrued royalties                         |                                            |                      | 30,001  |             |         |         | 29,869  |        
|                                                                                                                                                                   | Income taxes payable                      |                                            |                      |        |             |         |         | 6,071   |        
|                                                                                                                                                                   | Deferred income taxes                     |                                            |                      | 1,567   |             |         |         |        |        
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |        
|                                                                                                                                                                   |                                           | Total current liabilities                  |                      |         | 81,698      |         |         |         | 97,817  |        
|Accrued royalties  net of current portion                                                                                                                         |                                           |                                            | 6,686                |         |             |         |        |        
|Deferred income taxes                                                                                                                                              |                                           |                                            | 720                  |         |             |         |        |        
|Commitments and contingencies                                                                                                                                      |                                           |                                            |                     |         |             |         |        |        
|Stockholders equity:                                                                                                                                              |                                           |                                            |                      |         |             |         |         |        
|Common stock, par value $.01, 75,000,000 shares
authorized; 25,986,498 and 20,460,538 shares
issued and outstanding as of December 31, 2001 and
2000, respectively |                                           |                                            | 260                  |         |             |         | 205     |        
|Additional paid-in capital                                                                                                                                         |                                           |                                            | 316,888              |         |             |         | 85,747  |        
|Accumulated other comprehensive loss                                                                                                                               |                                           |                                            | (2,187               | )       |             |         | (1,715  | )      
|Retained earnings                                                                                                                                                  |                                           |                                            | 83,901               |         |             |         | 47,888  |        
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |        
|                                                                                                                                                                   | Total stockholders equity                |                                            |                      | 398,862 |             |         |         | 132,125 |        
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |        
|                                                                                                                                                                   |                                           | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                      | $       | 487,966     |         |         | $       | 229,942 |        
|                                                                                                                                                                   |                                           |                                            |                      |         |             |         |         |        

See notes to consolidated financial statements.

F-3



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##### Table of Contents



THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |         | 
|---------------------------------------------- | ---------------------------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                               |                                    |   | Years Ended December 31
|                                               |                                    |   |                        
|                                               |                                    |   | 2001                    |         | 2000 |   | 1999   
|                                               |                                    |   |                         |         |      |   |        
|Net sales                                      |                                    | $ | 378,992                 |         |      | $ | 347,003 |         |  | $ | 303,483 |        
|Costs and expenses:                            |                                    |   |                         |         |      |   |         |         |  |   |         |        
|                                               | Cost of sales                      |   |                         | 154,898 |      |   |         | 140,699 |  |   |         | 134,563 | 
|                                               | License amortization and royalties |   |                         | 33,144  |      |   |         | 34,675  |  |   |         | 28,858  | 
|                                               | Software development amortization  |   |                         | 35,144  |      |   |         | 42,875  |  |   |         | 19,512  | 
|                                               | Product development                |   |                         | 21,154  |      |   |         | 19,151  |  |   |         | 15,511  | 
|                                               | Selling and marketing              |   |                         | 46,745  |      |   |         | 42,446  |  |   |         | 35,440  | 
|                                               | Payment to venture partner         |   |                         | 8,673   |      |   |         | 17,707  |  |   |         | 6,119   | 
|                                               | General and administrative         |   |                         | 25,090  |      |   |         | 19,530  |  |   |         | 14,970  | 
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Total costs and expenses                       |                                    |   | 324,848                 |         |      |   | 317,083 |         |  |   | 254,973 |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Income from operations                         |                                    |   | 54,144                  |         |      |   | 29,920  |         |  |   | 48,510  |        
|Interest income, net                           |                                    |   | 2,572                   |         |      |   | 1,323   |         |  |   | 1,109   |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Income before income taxes                     |                                    |   | 56,716                  |         |      |   | 31,243  |         |  |   | 49,619  |        
|Income taxes                                   |                                    |   | 20,703                  |         |      |   | 13,054  |         |  |   | 18,293  |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Net income                                     |                                    | $ | 36,013                  |         |      | $ | 18,189  |         |  | $ | 31,326  |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Net income per share  basic                   |                                    | $ | 1.65                    |         |      | $ | .91     |         |  | $ | 1.65    |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Net income per share  diluted                 |                                    | $ | 1.52                    |         |      | $ | .84     |         |  | $ | 1.48    |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Shares used in per share calculation  basic   |                                    |   | 21,811                  |         |      |   | 20,091  |         |  |   | 19,040  |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        
|Shares used in per share calculation  diluted |                                    |   | 23,749                  |         |      |   | 21,568  |         |  |   | 21,197  |        
|                                               |                                    |   |                         |         |      |   |         |         |  |   |         |        

See notes to consolidated financial statements.

F-4



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##### Table of Contents



THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except per share data)

|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   |             |      |          |   |        |        |  |   |         |        |  
|------------------------------------------------------------- | ------------------------------------------------------------------ |  | -------------------------------------------- | - | ------ | - | ------- | - | ------------- | - | ------------ | - | ----- | - | ----------- | ---- | -------- | - | ------ | ------ |  | - | ------- | ------ | -
|                                                              |                                                                    |  | Years Ended December 31, 1999, 2000 and 2001
|                                                              |                                                                    |  |                                             
|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   | Accumulated |      | Retained |   |        |        | 
|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   | Additional   |   | Other |   | Earnings    |      |          |   |       
|                                                              |                                                                    |  | Common                                       |   | Common |   | Paid-in |   | Comprehensive |   | (Accumulated |   |       |   |            
|                                                              |                                                                    |  | Shares                                       |   | Stock  |   | Capital |   | Income (Loss) |   | Deficit)     |   | Total
|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |      
|Balance at January 1, 1999                                    |                                                                    |  | 18,768,591                                   |   |        | $ | 129     |   |               | $ | 63,503       |   |       | $ | 60          |      |          | $ | (1,627 | )      |  | $ | 62,065  |       
|Exercise of warrants and options                              |                                                                    |  | 1,128,643                                    |   |        |   | 8       |   |               |   | 4,955        |   |       |   |            |      |          |   |       |        |  |   | 4,963   |       
|Issuance of warrants                                          |                                                                    |  |                                             |   |        |   |        |   |               |   | 3,627        |   |       |   |            |      |          |   |       |        |  |   | 3,627   |       
|Stock compensation                                            |                                                                    |  |                                             |   |        |   |        |   |               |   | 464          |   |       |   |            |      |          |   |       |        |  |   | 464     |       
|Tax benefit related to the exercise of
employee stock options |                                                                    |  |                                             |   |        |   |        |   |               |   | 6,763        |   |       |   |            |      |          |   |       |        |  |   | 6,763   |       
|Three-for-two stock dividend                                  |                                                                    |  |                                             |   |        |   | 62      |   |               |   | (62          | ) |       |   |            |      |          |   |       |        |  |   |        |       
|Comprehensive income:                                         |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   |             |      |          |   |        |        |  |   |         |       
|                                                              | Net income                                                         |  |                                              |  |        |   |         |  |               |   |              |  |       |   |             |     |          |   |        | 31,326 |  |   |         | 31,326 |  
|                                                              | Other comprehensive income
Foreign currency translation adjustment |  |                                              |  |        |   |         |  |               |   |              |  |       |   |             | (902 | )        |   |        |       |  |   |         | (902   | )
|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   |             |      |          |   |        |        |  |   |         |       
|Comprehensive income                                          |                                                                    |  |                                             |   |        |   |        |   |               |   |             |   |       |   |            |      |          |   |       |        |  |   | 30,424  |       
|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   |             |      |          |   |        |        |  |   |         |       
|Balance at December 31, 1999                                  |                                                                    |  | 19,897,234                                   |   |        |   | 199     |   |               |   | 79,250       |   |       |   | (842        | )    |          |   | 29,699 |        |  |   | 108,306 |       
|Exercise of warrants and options                              |                                                                    |  | 563,304                                      |   |        |   | 6       |   |               |   | 4,299        |   |       |   |            |      |          |   |       |        |  |   | 4,305   |       
|Stock compensation                                            |                                                                    |  |                                             |   |        |   |        |   |               |   | 406          |   |       |   |            |      |          |   |       |        |  |   | 406     |       
|Tax benefit related to the exercise of
employee stock options |                                                                    |  |                                             |   |        |   |        |   |               |   | 1,792        |   |       |   |            |      |          |   |       |        |  |   | 1,792   |       
|Comprehensive income:                                         |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   |             |      |          |   |        |        |  |   |         |       
|                                                              | Net income                                                         |  |                                              |  |        |   |         |  |               |   |              |  |       |   |             |     |          |   |        | 18,189 |  |   |         | 18,189 |  
|                                                              | Other comprehensive income
Foreign currency translation adjustment |  |                                              |  |        |   |         |  |               |   |              |  |       |   |             | (873 | )        |   |        |       |  |   |         | (873   | )
|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   |             |      |          |   |        |        |  |   |         |       
|Comprehensive income                                          |                                                                    |  |                                             |   |        |   |        |   |               |   |             |   |       |   |            |      |          |   |       |        |  |   | 17,316  |       
|                                                              |                                                                    |  |                                              |   |        |   |         |   |               |   |              |   |       |   |             |      |          |   |        |        |  |   |         |       
|Balance at December 31, 2000                                  |                                                                    |  | 20,460,538                                   |   |        | $ | 205     |   |               | $ | 85,747       |   |       | $ | (1,715      | )    |          | $ | 47,888 |        |  | $ | 132,125 |       

F-5



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##### Table of Contents



THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Contd)
(In thousands, except per share data)

|                                                              |                                                                    |                                |            |                                              |   |        |     |         |   |               |         |              |  |       |        |             |     |          |        |        |  |   |         |        |     | 
|------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------ | ---------- | -------------------------------------------- | - | ------ | --- | ------- | - | ------------- | ------- | ------------ |  | ----- | ------ | ----------- | --- | -------- | ------ | ------ |  | - | ------- | ------ | --- | 
|                                                              |                                                                    |                                |            | Years Ended December 31, 1999, 2000 and 2001
|                                                              |                                                                    |                                |            |                                             
|                                                              |                                                                    |                                |            |                                              |   |        |     |         |   |               |         |              |  |       |        | Accumulated |     | Retained |        |        |  |  
|                                                              |                                                                    |                                |            |                                              |   |        |     |         |   |               |         | Additional   |  | Other |        | Earnings    |     |          |        |       
|                                                              |                                                                    |                                |            | Common                                       |   | Common |     | Paid-in |   | Comprehensive |         | (Accumulated |  |       |        |            
|                                                              |                                                                    |                                |            | Shares                                       |   | Stock  |     | Capital |   | Income (Loss) |         | Deficit)     |  | Total
|                                                              |                                                                    |                                |            |                                              |   |        |     |         |   |               |         |              |  |      
|Balance at December 31, 2000                                  |                                                                    |                                | 20,460,538 |                                              |   | $      | 205 |         |   | $             | 85,747  |              |  | $     | (1,715 | )           |     | $        | 47,888 |        |  | $ | 132,125 |       
|Exercise of warrants and options                              |                                                                    |                                | 1,603,609  |                                              |   |        | 16  |         |   |               | 16,705  |              |  |       |       |             |     |          |       |        |  |   | 16,721  |       
|Issuance of common stock from secondary
offering              |                                                                    |                                | 3,064,148  |                                              |   |        | 31  |         |   |               | 154,574 |              |  |       |       |             |     |          |       |        |  |   | 154,605 |       
|Issuance of common stock for Rainbow
acquisition              |                                                                    |                                | 858,203    |                                              |   |        | 8   |         |   |               | 48,640  |              |  |       |       |             |     |          |       |        |  |   | 48,648  |       
|Stock compensation                                            |                                                                    |                                |           |                                              |   |        |    |         |   |               | 299     |              |  |       |       |             |     |          |       |        |  |   | 299     |       
|Tax benefit related to the exercise of
employee stock options |                                                                    |                                |           |                                              |   |        |    |         |   |               | 10,923  |              |  |       |       |             |     |          |       |        |  |   | 10,923  |       
|Comprehensive income:                                         |                                                                    |                                |            |                                              |   |        |     |         |   |               |         |              |  |       |        |             |     |          |        |        |  |   |         |       
|                                                              | Net income                                                         |                                |            |                                             |   |        |     |        |   |               |         |             |  |       |        |            |     |          |        | 36,013 |  |   |         | 36,013 |    
|                                                              | Other comprehensive income
Foreign currency translation adjustment |                                |            |                                             |   |        |     |        |   |               |         |             |  |       |        | (703        | )   |          |        |       |  |   |         | (703   | )  
|                                                              |                                                                    | Unrealized gain on investments |            |                                              |  |        |     |         |  |               |         |              |  |       |        |             | 231 |          |        |        |  |   |         |        | 231 | 
|                                                              |                                                                    |                                |            |                                              |   |        |     |         |   |               |         |              |  |       |        |             |     |          |        |        |  |   |         |       
|Comprehensive income                                          |                                                                    |                                |           |                                              |   |        |    |         |   |               |        |              |  |       |       |             |     |          |       |        |  |   | 35,541  |       
|                                                              |                                                                    |                                |            |                                              |   |        |     |         |   |               |         |              |  |       |        |             |     |          |        |        |  |   |         |       
|Balance at December 31, 2001                                  |                                                                    |                                | 25,986,498 |                                              |   | $      | 260 |         |   | $             | 316,888 |              |  | $     | (2,187 | )           |     | $        | 83,901 |        |  | $ | 398,862 |       
|                                                              |                                                                    |                                |            |                                              |   |        |     |         |   |               |         |              |  |       |        |             |     |          |        |        |  |   |         |       

See notes to consolidated financial statements.

F-6



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##### Table of Contents



THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |         |  
|------------------------------------------------------------------------------------------- | ------------------------------------------------------ | - | ----------------------- | ------- | ---- | - | ------- | ------- | - | - | ------ | ------- | -
|                                                                                            |                                                        |   | Years Ended December 31
|                                                                                            |                                                        |   |                        
|                                                                                            |                                                        |   | 2001                    |         | 2000 |   | 1999   
|                                                                                            |                                                        |   |                         |         |      |   |        
|Cash flows from operating activities:                                                       |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Net income                                                                                  |                                                        | $ | 36,013                  |         |      | $ | 18,189  |         |   | $ | 31,326 |        
|Adjustments to reconcile net income to net cash provided
by (used in) operating activities: |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|                                                                                            | Depreciation and amortization                          |   |                         | 5,416   |      |   |         | 3,225   |   |   |        | 1,678   |  
|                                                                                            | Amortization of licenses and software
development      |   |                         | 35,335  |      |   |         | 50,193  |   |   |        | 19,996  |  
|                                                                                            | Provision for doubtful accounts, discounts and
returns |   |                         | 47,374  |      |   |         | 35,387  |   |   |        | 35,009  |  
|                                                                                            | Litigation settlement                                  |   |                         |        |      |   |         |        |   |   |        | 564     |  
|                                                                                            | Loss on disposal of property and equipment             |   |                         | 117     |      |   |         | 114     |   |   |        | 63      |  
|                                                                                            | Stock compensation                                     |   |                         | 299     |      |   |         | 406     |   |   |        | 464     |  
|                                                                                            | Tax benefit from disqualified dispositions             |   |                         | 10,923  |      |   |         | 1,792   |   |   |        | 6,763   |  
|                                                                                            | Deferred income taxes                                  |   |                         | 11,338  |      |   |         | (112    | ) |   |        | 692     |  
|Changes in operating assets and liabilities:                                                |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|                                                                                            | Accounts receivable                                    |   |                         | (37,665 | )    |   |         | (74,770 | ) |   |        | (72,743 | )
|                                                                                            | Inventory                                              |   |                         | 743     |      |   |         | (5,442  | ) |   |        | 11,200  |  
|                                                                                            | Licenses                                               |   |                         | (22,596 | )    |   |         | (6,680  | ) |   |        | (28,842 | )
|                                                                                            | Software development                                   |   |                         | (53,095 | )    |   |         | (28,763 | ) |   |        | (15,422 | )
|                                                                                            | Prepaid expenses and other current assets              |   |                         | (2,901  | )    |   |         | (2,374  | ) |   |        | (670    | )
|                                                                                            | Accounts payable and accrued expenses                  |   |                         | 1,320   |      |   |         | 19,291  |   |   |        | (3,086  | )
|                                                                                            | Accrued royalties                                      |   |                         | 6,952   |      |   |         | (1,427  | ) |   |        | 15,134  |  
|                                                                                            | Income taxes (receivable) payable                      |   |                         | (6,336  | )    |   |         | 7,107   |   |   |        | (9,203  | )
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Net cash provided by (used in) operating activities                                         |                                                        |   | 33,237                  |         |      |   | 16,136  |         |   |   | (7,077 | )      
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Cash flows used in investing activities:                                                    |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|                                                                                            | Purchase of short-term investments                     |   |                         | (35,124 | )    |   |         |        |   |   |        |        |  
|                                                                                            | Proceeds from sale of property and equipment           |   |                         | 65      |      |   |         | 64      |   |   |        | 39      |  
|                                                                                            | Acquisition adjustment                                 |   |                         |        |      |   |         |        |   |   |        | 2,540   |  
|                                                                                            | Acquisition of property and equipment                  |   |                         | (5,750  | )    |   |         | (7,877  | ) |   |        | (4,447  | )
|                                                                                            | Investment in Yukes Co., Ltd.                         |   |                         |        |      |   |         | (5,020  | ) |   |        |        |  
|                                                                                            | Investment in Network Interactive Sports Ltd.          |   |                         | (3,325  | )    |   |         |        |   |   |        |        |  
|                                                                                            | Increase (decrease) in other long-term assets          |   |                         | 50      |      |   |         | (114    | ) |   |        | (261    | )
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Net cash used in investing activities                                                       |                                                        |   | (44,084                 | )       |      |   | (12,947 | )       |   |   | (2,129 | )      
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Cash flows provided by financing activities:                                                |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|                                                                                            | Net (decrease) increase in short-term borrowings       |   |                         | (15,473 | )    |   |         | (1,229  | ) |   |        | 7,118   |  
|                                                                                            | Net proceeds from issuance of common stock             |   |                         | 154,605 |      |   |         |        |   |   |        |        |  
|                                                                                            | Principal payments on long-term debt                   |   |                         | (1,806  | )    |   |         |        |   |   |        |        |  
|                                                                                            | Proceeds from exercise of warrants and options         |   |                         | 16,721  |      |   |         | 4,305   |   |   |        | 4,963   |  
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Net cash provided by financing activities                                                   |                                                        |   | 154,047                 |         |      |   | 3,076   |         |   |   | 12,081 |        
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Effect of exchange rate changes on cash                                                     |                                                        |   | (139                    | )       |      |   | 279     |         |   |   | (535   | )      
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Net increase in cash and cash equivalents                                                   |                                                        |   | 143,061                 |         |      |   | 6,544   |         |   |   | 2,340  |        
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Cash and cash equivalents  beginning of period                                             |                                                        |   | 27,998                  |         |      |   | 21,454  |         |   |   | 19,114 |        
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        
|Cash and cash equivalents  end of period                                                   |                                                        | $ | 171,059                 |         |      | $ | 27,998  |         |   | $ | 21,454 |        
|                                                                                            |                                                        |   |                         |         |      |   |         |         |   |   |        |        

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|                                                   |  |   |       |  |  |   |       |  |  |   |        |  | 
|-------------------------------------------------- |  | - | ----- |  |  | - | ----- |  |  | - | ------ |  | 
|Supplemental disclosures of cash flow information: |  |   |       |  |  |   |       |  |  |   |        | 
|Cash paid during the year for:                     |  |   |       |  |  |   |       |  |  |   |        | 
|Income taxes                                       |  | $ | 8,204 |  |  | $ | 4,350 |  |  | $ | 19,569 | 
|                                                   |  |   |       |  |  |   |       |  |  |   |        | 
|Interest                                           |  | $ | 74    |  |  | $ | 354   |  |  | $ | 247    | 
|                                                   |  |   |       |  |  |   |       |  |  |   |        | 

On December 21, 2001 we issued 858,203 shares
of common stock and assumed 106,259 stock options as part of the
purchase price of Rainbow Multimedia Group, Inc. The issuance increased common
stock and additional paid-in-capital by $8,000 and $48.6 million respectively,
and was allocated among the assets acquired. (See Note 3)

|                                     |                            |   |        |        |  
|------------------------------------ | -------------------------- | - | ------ | ------ | -
|Estimated fair values (in thousands) |                            |   |        |       
|                                     | Tangible assets acquired   |   | $      | 4,123  |  
|                                     | Intangible assets acquired |   |        | 3,531  |  
|                                     | Liabilities assumed        |   |        | (5,411 | )
|                                     | Goodwill                   |   |        | 46,690 |  
|                                     |                            |   |        |       
|Purchase price                       |                            | $ | 48,933 |       
|                                     |                            |   |        |       

On June 8, 2001, World Wrestling Federation Entertainment exchanged all of its
warrants for 201,660 shares of common stock in a non-cash transaction. On July
23, 2001, Stanley Shenker Associates, Inc. (a related party to the World
Wrestling Federation Entertainment) exchanged all of its warrants for 25,282
shares of common stock in a non-cash transaction.

On August 2, 1999, we issued to the World Wrestling Federation Entertainment
and a related party to the World Wrestling Federation Entertainment, warrants,
expiring December 31, 2009, to purchase 281,250 shares of common stock at
$10.42 per share which had a fair value at the time of issuance of $3.1
million. (See Note 9 and 12).

In 1999, we consolidated the venture with JAKKS Pacific Inc. resulting in the
consolidation of our $2.0 million investment.

In 1999, we renegotiated the purchase of THQ Entertainment and received a
payment of $2.5 million from the sellers.

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Business. THQ Inc., a Delaware corporation, is a developer and publisher of
interactive entertainment software for the leading hardware platforms in the
home video game market. We currently develop and publish titles for Sonys
PlayStation 2, Microsofts Xbox, Nintendo GameCube, Nintendo Game Boy Advance,
personal computers (PCs), wireless devices and online in most interactive
software genres including action, adventure, childrens, driving, fighting,
puzzle, role playing, simulation, sports and strategy. Our customers include
Wal-Mart, Toys R Us, Target, Electronics Boutique, Best Buy, Game Stop, Kay
Bee Toys, and other national and regional retailers, discount store chains and
specialty retailers.

Unless the context otherwise requires, references in this document to THQ or
the Company include THQ Inc. and all of its wholly owned subsidiaries.

License Agreements.We have a license agreement with Sony pursuant to which we
have the non-exclusive right to utilize the Sony name, related trademarks, and
its proprietary information and technology in order to develop and market
software for use with the 128-bit Sony PlayStation 2 in the United States and
Canada which expires in March 2003. We are currently in negotiation for the
Sony PlayStation 2 license agreement for Europe. We also have two license
agreements with Sony pursuant to which we have the non-exclusive right to
utilize the Sony name, related trademarks, and its proprietary information and
technology in order to develop and market software for use with the for use
with the 32-bit Sony PlayStation in North America and Latin America and Europe,
Australia and New Zealand which expire in August 2002 and December 2005,
respectively.

We have a license agreement with Nintendo pursuant to which we have the
non-exclusive right to utilize the Nintendo name, related trademarks, and its
proprietary information and technology in order to develop and market software
for use with the Game Boy Advance handheld game console in the Western
Hemisphere which expires in July 2004. We are currently in negotiation for the
Nintendo Game Boy Advance license agreement for Europe, Australia and New
Zealand. We are also currently in negotiation for the Nintendo GameCube
license agreement. We also have two license agreements with Nintendo pursuant
to which we have the non-exclusive right to utilize the Nintendo name, related
trademarks, and its proprietary information and technology in order to develop
and market software for use with the Game Boy Color handheld game console in
North America and Latin America and Europe, Australia and New Zealand which
expire in March 2004 and October 2002, respectively. We have two license
agreements with Nintendo pursuant to which we have the non-exclusive right to
utilize the Nintendo name, related trademarks, and its proprietary information
and technology in order to develop and market software for use with the 64-bit
Nintendo 64 in North America and Latin America and Europe, Australia and New
Zealand which expire in May 2003 and January 2004, respectively.

We have a license agreement with Microsoft pursuant to which we have the
non-exclusive right to utilize the Microsoft name, related trademarks, and its
proprietary information and technology in order to develop and market software
for use with the 128-bit Microsoft Xbox which expires in November 2004.

Our business is dependent on these license agreements with Sony, Nintendo and
Microsoft. Substantially all of our products are manufactured by Sony,
Nintendo and Microsoft authorized vendors who charge us an amount for each
disc-based product or cartridge manufactured. This charge includes a
manufacturing, printing and packaging fee as well as a royalty for the use of
their respective names, proprietary information and technology.

In addition, we must indemnify Sony, Nintendo and Microsoft, as appropriate,
with respect to all loss, liability and expense resulting from any claim
against Sony, Nintendo and Microsoft involving the development, marketing, sale
or use of our titles, including any claims for copyright or trademark
infringement brought against Sony, Nintendo and Microsoft. As such, we bear
the risk that the properties and information and technology licensed from Sony,
Nintendo and Microsoft and incorporated in the software may infringe the rights
of third parties. Generally, we are entitled to indemnification from our
software developers and property licensors to cover our indemnification
obligations to Sony, Nintendo and Microsoft but no assurance can be given that,
if any claim is brought against us, the developers and/or licensors will have
sufficient resources to indemnify us.

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2. Summary of Significant Accounting Policies

Principles of Consolidation.The consolidated financial statements include the
accounts of THQ Inc. and our wholly owned subsidiaries. Investments in
business entities in which we do not have control, but have the ability to
exercise significant influence over operating and financial policies (generally
20-50% ownership), are accounted for by the equity method. All material
intercompany balances and transactions have been eliminated in consolidation.

Foreign Currency Translation.Assets and liabilities of foreign operations are
translated at current rates of exchange while results of operations are
translated at average rates in effect for the period. Translation gains or
losses are shown as a separate component of shareholders equity as accumulated
other comprehensive income (loss). Foreign currency gains and losses result
from exchange rate changes for transactions denominated in currencies other
than the functional currency. Foreign currency transaction gains and losses
are not material and are included in general and administrative expenses.

Cash Equivalents.We consider all highly liquid investments purchased with
maturities less than three months to be cash equivalents.

Investments.Investments with a maturity greater than three months, but less
than one year, at the time of purchase are considered to be short-term
investments. We invest in highly liquid debt instruments with strong credit
ratings. The carrying amount of the investments approximates fair value due to
their short maturity. We have short-term investments totaling $30.1 million
that are classified as available-for-sale and the related unrealized holding
gains and (losses) are recorded as a separate component of accumulated other
comprehensive income. At December 31, 2001 the unrealized holding loss was
immaterial. We also have $5.0 million in short-term investments that are
classified as held-to-maturity and are stated at cost. The investment in
Yukes Co., Ltd. is also classified as available-for-sale and is included in
other long-term assets in the accompanying balance sheet (See Note 10). The
unrealized holding gain on the investment in Yukes Co., Ltd. was $249,000 at
December 31, 2001.

Fair Values of Financial Instruments.The carrying value of our draws on our
line of credit from our banks are considered to approximate their fair value
because the interest rate of these instruments is based on variable reference
rates.

Concentrations of Credit Risk.Financial instruments which potentially subject
us to concentration of credit risk consist principally of cash and cash
equivalents and accounts receivable. We place cash and cash equivalents with
high credit-quality institutions and limit the amount of credit exposure to any
one institution. Most of our sales are made directly to mass merchandisers and
national retailers. Due to the increased volume of sales to these channels, we
have experienced an increased concentration of credit risk, and as a result,
may maintain individually significant receivable balances with such mass
merchandisers and national retailers. While we frequently monitor and manage
this risk, financial difficulties on the part of one or more of our major
customers may have a material adverse effect on us. We perform ongoing credit
evaluations of our customers and maintain an allowance for potential credit
losses.

Sales (before returns and allowances) to a major customer represented 14%, 17%
and 15% of gross sales in the years ended December 31, 2001, 2000 and 1999,
respectively. This customer accounted for approximately 18% and 24% of
accounts receivable at December 31, 2001 and 2000, respectively. Sales (before
returns and allowances) to another major customer represented 12%, 16% and 11%
of gross sales in the years ended December 31, 2001, 2000 and 1999,
respectively. This customer accounted for approximately 16% and 20% of
accounts receivable at December 31, 2001 and 2000, respectively.

Inventory.Inventory, which consists principally of finished products, are
stated at the lower of cost (moving weighted average) or market. We estimate
the net realizable value of slow-moving inventory on a title by title basis,
and charge the excess of cost over net realizable value to cost of sales.

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Property and Equipment.Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of their useful lives or the remaining lease term. Property and
equipment consist of the following at:

|                                               |  |             |   |      |        |      |        |   |        |   |        |  
|---------------------------------------------- |  | ----------- | - | ---- | ------ | ---- | ------ | - | ------ | - | ------ | -
|(In thousands)                                 |  | December 31
|                                               |  |            
|                                               |  | Lives       |   | 2001 |        | 2000
|                                               |  |             |   |      |        |     
|Building                                       |  | 30 yrs      |   | $    | 689    |      |        | $ |       |  
|Land                                           |  |             |  |      |        |      | 401    |   |        |   |       |  
|Computer equipment and software                |  | 3-10 yrs    |   |      | 16,860 |      |        |   | 12,534 |  
|Furniture, fixtures and equipment              |  | 5 yrs       |   |      | 2,579  |      |        |   | 2,293  |  
|Leasehold improvements                         |  | 3-6 yrs     |   |      | 1,137  |      |        |   | 914    |  
|Automobiles                                    |  | 2-5 yrs     |   |      | 111    |      |        |   |       |  
|Less accumulated depreciation and amortization |  |             |   |      |        |      | (7,886 | ) |        |   | (5,134 | )
|                                               |  |             |   |      |        |      |        |   |        |   |        |  
|                                               |  |             |   |      |        | $    | 13,891 |   |        | $ | 10,607 |  
|                                               |  |             |   |      |        |      |        |   |        |   |        |  

Licenses.All minimum guaranteed payments for intellectual property licenses
are initially recorded as an asset (licenses) and as a liability (accrued
royalties) at the contractual amount upon execution of the contract. Payments
for intellectual property licenses are classified as current assets and current
liabilities to the extent they relate to anticipated sales during the
subsequent year and long-term assets and long-term liabilities if the sales are
anticipated after one year.

Licenses are expensed to license amortization and royalties at the contractual
royalty rate based on actual net product sales or on the ratio of current units
sold to total projected units sold, whichever is higher. When, in managements
estimate, future cash flows will not be sufficient to recover previously
capitalized costs, we expense these items to license amortization and
royalties. Such charges are attributable to changes in market conditions or
product quality considerations.

Software Development. We utilize both independent software developers and
internal development teams to develop our software. We account for software
development costs in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed. We capitalize software development costs
once technological feasibility is established and such costs are determined to
be recoverable against future revenues. For products where proven game engine
technology exists, this may occur early in the development cycle. We evaluate
technological feasibility on a product-by-product basis. Amounts related to
software development for which technological feasibility is not met are charged
immediately to product development.

Capitalized software development is expensed to software development
amortization at the contractual rate based on actual net product sales or on
the ratio of current units sold to total projected units sold, whichever is
higher. When, in managements estimate, future cash flows will not be
sufficient to recover previously capitalized costs, we expense these items to
software development amortization. Such charges are attributable to changes in
market conditions or product quality considerations.

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Goodwill and Long-lived Assets.Goodwill represents the excess purchase price
over net assets acquired and is being amortized, through December 31, 2001, on
a straight-line basis over 10 years, except for the goodwill associated with
the acquisition of Rainbow which has not been amortized under the provisions of
SFAS No. 141. We evaluate long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If the estimated future
cash flows (undiscounted and without interest charges) from the use of an asset
are less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value. The changes in the carrying amount
of goodwill for the years ended December 31, 2001 and 2000,
respectively, are as
follows:

|                                                                      |  |                                |        |      |  |   |       |  
|--------------------------------------------------------------------- |  | ------------------------------ | ------ | ---- |  | - | ----- | -
|(In thousands)                                                        |  | For the Year Ended December 31
|                                                                      |  |                               
|                                                                      |  | 2001                           |        | 2000
|                                                                      |  |                                |        |     
|Balance at beginning of period                                        |  | $                              | 1,717  |      |  | $ | 2,066 |  
|Goodwill acquired during the period                                   |  |                                | 48,758 |      |  |   |      |  
|Amortization during the period                                        |  |                                | (404   | )    |  |   | (215  | )
|Effect of foreign currency exchange rates                             |  |                                | 5      |      |  |   | (134  | )
|                                                                      |  |                                |        |      |  |   |       |  
|                                                                      |  |                                | 50,076 |      |  |   | 1,717 |  
|Less: Goodwill associated with
equity-method investment (See
Note 10) |  |                                | (1,874 | )    |  |   |      |  
|                                                                      |  |                                |        |      |  |   |       |  
|Balance at end of period                                              |  | $                              | 48,202 |      |  | $ | 1,717 |  
|                                                                      |  |                                |        |      |  |   |       |  

Revenue Recognition.We recognize revenue when title and risk of loss
transfers to the customer, provided that no significant vendor support
obligations remain outstanding and that collection of the resulting receivable
is deemed probable by management. Although we generally sell our products on a
no-return basis, in certain circumstances we may allow returns, price
concessions, or allowances on a negotiated basis. We estimate such returns and
allowances based upon managements evaluation of our historical experience,
retailer inventories, the nature of the titles and other factors. Such
estimates are deducted from gross sales (See Note 5). Software is sold under a limited
90-day warranty against defects in material and workmanship. To date, we have
not experienced material warranty claims.

Advertising.Advertising and sales promotion costs are generally expensed as
incurred, except for television airtime and print media costs associated with
media campaigns which are deferred and charged to expense as the airtime or
advertising space is used for the first time. Advertising costs were $14.8
million, $27.1 million and $10.1 million in the years ended December 31, 2001,
2000 and 1999, respectively.

Stock-Based Compensation.We account for our employee stock plans under the
intrinsic value method prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations. We account for equity instruments issued to other than
employees for acquiring goods and services, typically rights to intellectual
property, using the fair value at the date of grant.

Income Taxes.Deferred income taxes are provided for temporary differences
between the financial statement and income tax bases of our assets and
liabilities, based on enacted tax rates. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred income
tax assets will not be realized.

Basic and Diluted Earnings Per Share.The following table is a reconciliation
of the weighted-average shares used in the computation of basic and diluted EPS
for the years presented:

|                                                                |  |                         |        |      |  |      |        |  |  |   |        | 
|--------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|(In thousands, except per share data)                           |  | Years Ended December 31
|                                                                |  |                        
|                                                                |  | 2001                    |        | 2000 |  | 1999
|                                                                |  |                         |        |      |  |     
|Net income used to compute basic and diluted
earnings per share |  | $                       | 36,013 |      |  | $    | 18,189 |  |  | $ | 31,326 | 
|                                                                |  |                         |        |      |  |      |        |  |  |   |        | 
|Weighted average number of shares
outstanding  basic           |  |                         | 21,811 |      |  |      | 20,091 |  |  |   | 19,040 | 
|Dilutive effect of stock options and warrants                   |  |                         | 1,938  |      |  |      | 1,477  |  |  |   | 2,157  | 
|                                                                |  |                         |        |      |  |      |        |  |  |   |        | 
|Number of shares used to compute earnings
per share  diluted   |  |                         | 23,749 |      |  |      | 21,568 |  |  |   | 21,197 | 
|                                                                |  |                         |        |      |  |      |        |  |  |   |        | 

Stock options to purchase 483,000, 1,412,000 and
746,000 shares of common stock in 2001, 2000 and 1999, respectively,
were outstanding but not included in the computation of diluted
earnings per common share because the option exercise price was
greater than the average market price of the common shares.

Recently Issued Accounting Pronouncements.In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS No. 133,
certain contracts that were not formerly considered derivatives may now meet
the definition of a derivative. We adopted SFAS No. 133 effective January 1,
2001. The adoption of SFAS No. 133 did not have an impact on our financial
statements.

In June 2001, the FASB issued two new pronouncements: SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 prohibits the use of the pooling-of-interests method for business
combinations initiated after June 30, 2001 and also applies to all business
combinations accounted for by the purchase method that are completed after June
30, 2001. There are also transition provisions that apply to

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business combinations completed before July 1, 2001 that were accounted for by
the purchase method. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001 as to all goodwill and other intangible assets
recognized in an entitys statement of financial position at that date,
regardless of when those assets were initially recognized. The acquisition of
Rainbow has been accounted for under SFAS No. 141 and goodwill is not
amortized. We will adopt SFAS No. 142 on January 1, 2002. We amortized
approximately $404,000 of goodwill in 2001. We are currently evaluating the
impairment provisions of SFAS No. 142 and have not determined the impact, if
any, they will have on our financial statements.

In August 2001, the FASB issued a new pronouncement SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
the financial accounting and reporting issues for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121 but retains the
fundamental provisions for (a) recognition/measurement of impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sales. It is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The adoption
of SFAS No. 144 will not have a material impact on our financial statements
because it retains the fundamental provisions of SFAS No. 121 which we have
already adopted.

Pervasiveness of Estimates.The preparation of financial statements in
conformity with accounting principles generally accepted in United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The most significant estimates relate to
licenses, software development, accrued returns and allowances and the
allowance for doubtful accounts.

Reclassifications.Certain reclassifications
have been made to the prior years consolidated financial statements
to conform with current year consolidated financial statements.

3. Business Combinations

Rainbow Multimedia Group, Inc.On December 21, 2001, we completed the
acquisition of Rainbow Multimedia Group, Inc., an Arizona corporation
(Rainbow). The results of Rainbows operations have been included in the
consolidated financial statements since that date. Rainbow designs
entertainment content for video game consoles and personal computers, and
creates long and short form computer generated animation for traditional and
interactive media. Rainbow's team of artist and engineers helps strengthen our internal development
and our ability to create original content.

In the acquisition, each share of Rainbow was converted into 0.03598 of a share
of our common stock, or approximately 858,000 shares. The amount of shares is
subject to change pending the final determination of Rainbows net book value
at December 21, 2001. In addition, outstanding Rainbow employee stock options
were assumed by us and converted, at the same conversion rate, into options to
purchase approximately 106,000 shares of our common stock.

The acquisition has been accounted for using the purchase method under SFAS No.
141. The purchase price was determined based on the average market price of
our common stock over the 4-day period before the closing date of December 21,
2001. The purchase price also includes the fair value of stock options
assumed, an estimate of the transaction costs, and an adjustment for Rainbows
estimated net book value at December 21, 2001. The allocation of the purchase
price is based on studies and valuations that are currently being finalized.
We do not believe that the final purchase price allocation will produce
materially different results than those reflected below. The preliminary
allocation of the purchase price is as follows:

|                                     |                            |   |        |        |  
|------------------------------------ | -------------------------- | - | ------ | ------ | -
|Estimated fair values (in thousands) |                            |   |        |       
|                                     | Tangible assets acquired   |   | $      | 4,123  |  
|                                     | Intangible assets acquired |   |        | 3,531  |  
|                                     | Liabilities assumed        |   |        | (5,411 | )
|                                     | Goodwill                   |   |        | 46,690 |  
|                                     |                            |   |        |       
|Purchase price                       |                            | $ | 48,933 |       
|                                     |                            |   |        |       

The following unaudited pro forma financial information for the years ended
December 31, 2001 and 2000, assumes the Rainbow acquisition occurred as of the
beginning of the respective periods, after giving effect to certain
adjustments. The pro forma results have been prepared for comparative purposes
only and are not necessarily indicative of the results of operations that may
occur in the future or that would have occurred had the acquisition of Rainbow
been affected on the dates indicated.

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|                                      |  |                         |         |      |  |   |         | 
|------------------------------------- |  | ----------------------- | ------- | ---- |  | - | ------- | 
|(In thousands, except per share data) |  | Years Ended December 31
|                                      |  |                        
|                                      |  | 2001                    |         | 2000
|                                      |  |                         |         |     
|Net sales                             |  | $                       | 390,601 |      |  | $ | 353,723 | 
|Net income                            |  |                         | 36,575  |      |  |   | 15,007  | 
|Net income per share  basic          |  |                         | 1.62    |      |  |   | .72     | 
|Net income per share  diluted        |  |                         | 1.48    |      |  |   | .67     | 

Other Acquisitions.On August 31, 2000, we completed the acquisition of
Volition, Inc., a Delaware corporation (Volition). In the acquisition, each
share of Volition was converted into 0.10989011 of a share of our common stock,
or approximately 890,000 shares. In addition, outstanding Volition employee
stock options were assumed by us and converted, at the same conversion rate,
into options to purchase approximately 110,000 shares of our common stock.

On December 13, 1999, we completed the acquisition of Genetic Anomalies, Inc.,
a Delaware corporation (GA). In the acquisition, each share of GA was
converted into 0.0536 of a share of our common stock, or approximately 220,000
shares. In addition, outstanding GA employee stock options were assumed by us
and converted, at the same conversion rate, into options to purchase
approximately 45,000 shares of our common stock.

On May 24, 1999, we completed the acquisition of Pacific Coast Power & Light
Company, a California corporation (PCP&L). In the acquisition, each share of
PCP&L was converted into 0.09008 of a share of our common stock, or
approximately 727,000 shares. In addition, outstanding PCP&L employee stock
options were assumed by us and converted, at the same conversion rate, into
options to purchase approximately 196,000 shares of our common stock.

These acquisitions have been accounted for as poolings of interests under
Accounting Principles Board Opinion No. 16. Accordingly, all prior period
consolidated financial statements presented have been restated to include the
combined results of operations, financial position and cash flows as if PCP&L,
GA and Volition had always been part of our company.

All transactions between us, Volition, GA and PCP&L have been eliminated in the
consolidated financial statements.

4. Credit Facility

On August 31, 2000 we entered into a Revolving Credit Agreement with Union Bank
of California and a syndicate of other financial institutions. Under the terms
of the Revolving Credit Agreement, as amended, we are permitted to borrow (and
maintain obligations under outstanding letters of credit) up to an aggregate of
$35,000,000 through August 1, 2002 subject to the following:

We may maintain outstanding letters of credit for product purchases and
outstanding borrowings in the aggregate up to $35,000,000 between August 1,
2001 and January 31, 2002; and $20,000,000 between February 1, 2002 and July
31, 2002. In addition, outstanding borrowings cannot exceed $10,000,000 for
August 1, 2001 through October 31, 2001; $30,000,000 from November 1, 2001
through December 31, 2001; $20,000,000 from January 1, 2002 through January 31,
2002; and $10,000,000 from February 1, 2002 to July 31, 2002.

We must not have any outstanding borrowings for a period of at least 60 days
during each year of the agreement.

This credit facility is secured by a lien on substantially all of our assets
and contains customary financial and non-financial covenants which require us
to maintain a specified minimum net worth and limit the ability for us to incur
additional indebtedness, sell assets and enter into certain mergers or
acquisitions. We are not permitted to pay cash dividends. Amounts outstanding
under these credit facilities bear interest, at our choice, at either a) the
banks prime rate (4.8% at December 31, 2001) or b) the London Interbank
Offered Rate (1.87% at December 31, 2001) plus 1.85%. As of December 31, 2001,
we had approximately $6.8 million in obligations with respect to outstanding
letters of credit and no outstanding borrowings. Under the previous credit
facility at December 31, 2000, we had approximately $5.3 million in obligations
with respect to outstanding letters of credit and $15.5 million in outstanding
borrowings.

5. Accounts Receivable and Accrued Returns and Allowances

Accounts receivable is due primarily from domestic and foreign retailers and
distributors, including mass merchants and specialty stores. Accounts
receivable at December 31, 2001 and 2000 consists of the following:

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|                                                     |  |             |         |      |  |   |         |  
|---------------------------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | -
|(In thousands)                                       |  | December 31
|                                                     |  |            
|                                                     |  | 2001        |         | 2000
|                                                     |  |             |         |     
|Accounts receivable  domestic                       |  | $           | 116,333 |      |  | $ | 137,865 |  
|Other receivables  domestic                         |  |             | 2,419   |      |  |   | 531     |  
|Allowance for domestic returns and doubtful accounts |  |             | (24,000 | )    |  |   | (21,676 | )
|Accounts receivable  foreign                        |  |             | 47,875  |      |  |   | 28,186  |  
|Allowance for foreign returns and doubtful accounts  |  |             | (16,616 | )    |  |   | (9,858  | )
|                                                     |  |             |         |      |  |   |         |  
|Accounts receivable  net                            |  | $           | 126,011 |      |  | $ | 135,048 |  
|                                                     |  |             |         |      |  |   |         |  

The allowance for domestic accrued returns and allowances consists of the
following:

|                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|----------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|(In thousands)                      |  | Years Ended December 31
|                                    |  |                        
|                                    |  | 2001                    |         | 2000 |  | 1999
|                                    |  |                         |         |      |  |     
|Balance at January 1                |  | $                       | (21,676 | )    |  | $    | (16,845 | ) |  | $ | (15,008 | )
|Provision for discounts and returns |  |                         | (29,177 | )    |  |      | (27,390 | ) |  |   | (28,072 | )
|Actual discounts and returns        |  |                         | 26,853  |      |  |      | 22,559  |   |  |   | 26,235  |  
|                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|Ending balance                      |  | $                       | (24,000 | )    |  | $    | (21,676 | ) |  | $ | (16,845 | )
|                                    |  |                         |         |      |  |      |         |   |  |   |         |  

The allowance for foreign accrued returns and allowances consists of the
following:

|                                    |  |                         |         |      |  |      |        |   |  |   |        |  
|----------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|(In thousands)                      |  | Years Ended December 31
|                                    |  |                        
|                                    |  | 2001                    |         | 2000 |  | 1999
|                                    |  |                         |         |      |  |     
|Balance at January 1                |  | $                       | (9,858  | )    |  | $    | (7,326 | ) |  | $ | (3,890 | )
|Provision for discounts and returns |  |                         | (18,209 | )    |  |      | (7,997 | ) |  |   | (6,937 | )
|Actual discounts and returns        |  |                         | 11,451  |      |  |      | 5,465  |   |  |   | 3,501  |  
|                                    |  |                         |         |      |  |      |        |   |  |   |        |  
|Ending balance                      |  | $                       | (16,616 | )    |  | $    | (9,858 | ) |  | $ | (7,326 | )
|                                    |  |                         |         |      |  |      |        |   |  |   |        |  

6. Employee Pension Plan

We sponsor for our United States employees, a defined contribution plan under
Section 401(k) of the Internal Revenue Code. The plan provides that employees
may defer up to 12% of annual compensation, and that we will make a matching
contribution equal to each employees deferral, up to 4% of compensation. We
may also contribute funds to the plan in the form of a profit-sharing
contribution. Expenses under the plan were $1.3 million, $1.1 million and
$477,000 in 2001, 2000 and 1999, respectively.

7. Income Taxes

Income before provision for income taxes consisted of:

|               |  |                 |        |      |  |      |        |  |  |   |        | 
|-------------- |  | --------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|(In thousands) |  | For Years Ended
|               |  |                
|               |  | 2001            |        | 2000 |  | 1999
|               |  |                 |        |      |  |     
|United States  |  | $               | 52,569 |      |  | $    | 29,540 |  |  | $ | 45,776 | 
|Foreign        |  |                 | 4,147  |      |  |      | 1,703  |  |  |   | 3,843  | 
|               |  |                 |        |      |  |      |        |  |  |   |        | 
|               |  | $               | 56,716 |      |  | $    | 31,243 |  |  | $ | 49,619 | 
|               |  |                 |        |      |  |      |        |  |  |   |        | 

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The provision for income taxes consists of the following:

|                           |         |      |        |       |  |      |        |       |   |   |        |        |  
|-------------------------- | ------- | ---- | ------ | ----- |  | ---- | ------ | ----- | - | - | ------ | ------ | -
|(In thousands)             |         | 2001 |        | 2000  |  | 1999
|                           |         |      |        |       |  |     
|Current                    |         |      |        |       |  |      |        |       |   |   |        |       
|                           | Federal |      | $      | 8,000 |  |      | $      | 9,048 |   |   | $      | 13,648 |  
|                           | State   |      |        | 434   |  |      |        | 3,395 |   |   |        | 2,897  |  
|                           | Foreign |      |        | 1,231 |  |      |        | 712   |   |   |        | 1,056  |  
|                           |         |      |        |       |  |      |        |       |   |   |        |       
|                           |         |      | 9,665  |       |  |      | 13,155 |       |   |   | 17,601 |       
|Deferred                   |         |      |        |       |  |      |        |       |   |   |        |       
|                           | Federal |      |        | 9,223 |  |      |        | 209   |   |   |        | 121    |  
|                           | State   |      |        | 1,524 |  |      |        | (200  | ) |   |        | 755    |  
|                           | Foreign |      |        | 291   |  |      |        | (110  | ) |   |        | (184   | )
|                           |         |      |        |       |  |      |        |       |   |   |        |       
|                           |         |      | 11,038 |       |  |      | (101   | )     |   |   | 692    |       
|                           |         |      |        |       |  |      |        |       |   |   |        |       
|Provision for income taxes |         | $    | 20,703 |       |  | $    | 13,054 |       |   | $ | 18,293 |       
|                           |         |      |        |       |  |      |        |       |   |   |        |       

A reconciliation of the provision for income taxes at the federal statutory
rate to the provision recorded in the accompanying financial statements is as
follows:

|                                                 |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|(In thousands)                                   |  | 2001 |      | 2000 |  | 1999
|                                                 |  |      |      |      |  |     
|Federal provision at statutory rate              |  |      | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|State taxes (net of Federal benefit)             |  |      | 2.2  |      |  |      | 4.1  |   |  |  | 5.0  |  
|Change in valuation allowance                    |  |      |     |      |  |      |     |   |  |  | (5.2 | )
|Preacquisition loss from Volition, Inc.          |  |      |     |      |  |      | 2.5  |   |  |  | 1.2  |  
|Rate differences in foreign taxes and other, net |  |      | (0.7 | )    |  |      | 0.2  |   |  |  | 0.9  |  
|                                                 |  |      |      |      |  |      |      |   |  |  |      |  
|                                                 |  |      | 36.5 | %    |  |      | 41.8 | % |  |  | 36.9 | %
|                                                 |  |      |      |      |  |      |      |   |  |  |      |  

Deferred income taxes were:

|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |     |     | 
|-------------------------------- | ------------------------------ | ------------------------------------------------------ | ------ | ------- | ----- | ----- | --- | ------- | --- | ------- | - | ----- | - | ------- | ------ | ------ | ----- | - | ----- | ------ | ----- | - | --- | --- | --- | 
|(In thousands)                   |                                | December 31                                           
|                                 |                                |                                                       
|                                 |                                |                                                        |        | 2001    |       | 2000 
|                                 |                                |                                                        |        |         |       |      
|                                 |                                |                                                        |        | Federal |       | State |     | Foreign |     | Federal |   | State |   | Foreign
|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |        
|Current                          |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|Deferred income tax assets:      |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|                                 |                                | Allowance for doubtful accounts,
discounts and returns |        | $       | 8,400 |       |     | $       | 779 |         |   | $     | 4 |         |        | $      | 7,855 |   |       | $      | 1,347 |   |     | $   | 294 | 
|                                 |                                | License abandonment                                    |        |         |      |       |     |         |    |         |   |       |  |         |        |        | 4,763 |   |       |        | 817   |   |     |     |    | 
|                                 |                                | Package design costs                                   |        |         | 664   |       |     |         | 62  |         |   |       |  |         |        |        | 40    |   |       |        | 7     |   |     |     |    | 
|                                 |                                | Deferred compensation                                  |        |         | 280   |       |     |         | 26  |         |   |       |  |         |        |        |      |   |       |        |      |   |     |     |    | 
|                                 |                                | State income taxes                                     |        |         | 391   |       |     |         |    |         |   |       |  |         |        |        | 846   |   |       |        |      |   |     |     |    | 
|                                 |                                | Net operating loss                                     |        |         | 246   |       |     |         |    |         |   |       |  |         |        |        | 905   |   |       |        |      |   |     |     |    | 
|                                 |                                | Other  net                                            |        |         | 558   |       |     |         | 54  |         |   |       |  |         |        |        | 297   |   |       |        | 242   |   |     |     |    | 
|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|Total deferred income tax assets |                                |                                                        | 10,539 |         |       |       | 921 |         |     |         | 4 |       |   |         | 14,706 |        |       |   | 2,413 |        |       |   | 294 |    
|Deferred income tax liabilities: |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|                                 | Software development costs     |                                                        |        | (11,924 | )     |       |     | (1,107  | )   |         |   |      |   |         |        | (6,601 | )     |   |       | (1,132 | )     |   |     |    |    
|                                 | State income taxes             |                                                        |        |        |       |       |     |        |     |         |   |      |   |         |        | (478   | )     |   |       |       |       |   |     |    |    
|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|                                 | Deferred income taxes          |                                                        | $      | (1,385  | )     |       | $   | (186    | )   |         | $ | 4     |   |         | $      | 7,627  |       |   | $     | 1,281  |       |   | $   | 294 |    
|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|Non-Current                      |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|Deferred income tax assets:      |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|                                 | Deferred compensation          |                                                        | $      |        |       |       | $   |        |     |         | $ |      |   |         | $      | 175    |       |   | $     | 30     |       |   | $   |    |    
|                                 | Other  net                    |                                                        |        | 284     |       |       |     | 26      |     |         |   |      |   |         |        | 321    |       |   |       | 55     |       |   |     |    |    
|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|                                 | Net deferred tax assets        |                                                        |        | 284     |       |       |     | 26      |     |         |   |      |   |         |        | 496    |       |   |       | 85     |       |   |     |    |    
|Deferred income tax liabilities 
|                                 | Identifiable intangible assets |                                                        | (1,030 | )       |       |       |    |         |     |         |  |       |   |         |       |        |       |   |      |        |       |   |    |    
|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    
|Deferred income taxes            |                                | $                                                      | (746   | )       |       | $     | 26  |         |     | $       |  |       |   | $       | 496    |        |       | $ | 85    |        |       | $ |    |    
|                                 |                                |                                                        |        |         |       |       |     |         |     |         |   |       |   |         |        |        |       |   |       |        |       |   |     |    

The valuation reserve decreased by $2.5 million during 1999.

As of December 31, 2001 we had federal net operating loss carryforwards of
approximately $702,000 (expiring from 2009 to 2011).

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##### Table of Contents



At December 31, 2001 we had accumulated foreign earnings of $7.0 million. We
do not plan to repatriate these earnings, therefore, no United States income
tax has been provided on the foreign earnings. If such earnings were
distributed, United States income taxes would be partially reduced for taxes
paid to the jurisdictions in which the income was earned. Additionally, we
have not tax effected the cumulative translation adjustment as we have no
intention of repatriating foreign earnings.

8. Stock Option Plan

We have two stock option plans (the 1990 Plan and 1997 Plan) that provide for
the issuance of up to 1,462,500 and 7,025,000 shares, respectively, available
for employees, consultants and non-employee directors. As of December 31,
2001, no options under the 1990 Plan and 1,645,145 options under the 1997 Plan
were available for grant. Stock options granted under the option plans may be
incentive stock options or nonstatutory stock options. Options may be granted
under the option plans to, in the case of incentive stock options, all
employees (including officers) of THQ; or, in the case of nonstatutory stock
options, all employees (including officers), consultants and non-employee
directors of THQ.

On July 20, 2001, our stockholders approved an amendment to the Amended and
Restated 1997 Stock Option Plan (the 1997 Amended Plan) to increase the
number of shares of common stock for which options may be issued. The 1997
Amended Plan now provides for the issuance of up to 7,025,000 shares of common
stock for option grants to directors, officers and key employees. The purchase
price per share of common stock purchasable upon exercise of each option may
not be less than the fair market value of such share of common stock on the
date that such option is granted. Generally, options granted under this plan
become exercisable over three years and expire within five years from the date
of grant.

On June 8, 2000, the Board of Directors approved the THQ Inc. Non-executive
Employee Stock Option Plan (the NEEP Plan). The NEEP Plan has primarily the
same attributes as the 1990 Plan and the 1997 Plan, but participation is
reserved for employees who are not executive officers and under the NEEP Plan
only nonqualified options will be granted. The NEEP Plan provides for the
issuance of up to 928,000 shares, of which no more than 20% is available for
awards to our non-executive officers and no more than 15% is available for
awards to the non-executive officers or general managers of our subsidiaries or
divisions. As of December 31, 2001, 134,049 options were available for grant.

The exercise price per share of all options granted under the plans in 1999,
2000 and 2001 has been the closing market price of the stock on the date of the
grant.

|                                         |  |                  |       |           |  |  |            |  
|---------------------------------------- |  | ---------------- | ----- | --------- |  |  | ---------- | -
|                                         |  | Weighted Average |       | Number of
|Stock Options                            |  | Exercise Price   |       | Shares   
|                                         |  |                  |       |          
|Balance at January 1, 1999               |  | $                | 7.72  |           |  |  | 2,482,259  |  
|Granted                                  |  | $                | 22.24 |           |  |  | 1,258,200  |  
|Exercised                                |  | $                | 5.48  |           |  |  | (882,119   | )
|Canceled                                 |  | $                | 11.97 |           |  |  | (282,416   | )
|                                         |  |                  |       |           |  |  |            |  
|Balance at December 31, 1999             |  | $                | 15.11 |           |  |  | 2,575,924  |  
|Granted                                  |  | $                | 15.78 |           |  |  | 1,518,959  |  
|Exercised                                |  | $                | 9.15  |           |  |  | (251,665   | )
|Canceled                                 |  | $                | 14.53 |           |  |  | (429,915   | )
|                                         |  |                  |       |           |  |  |            |  
|Balance at December 31, 2000             |  | $                | 15.92 |           |  |  | 3,413,303  |  
|Granted                                  |  | $                | 39.02 |           |  |  | 2,137,874  |  
|Exercised                                |  | $                | 14.14 |           |  |  | (1,085,692 | )
|Canceled                                 |  | $                | 20.21 |           |  |  | (220,677   | )
|                                         |  |                  |       |           |  |  |            |  
|Balance at December 31, 2001             |  | $                | 27.63 |           |  |  | 4,244,808  |  
|                                         |  |                  |       |           |  |  |            |  
|Options exercisable at December 31, 1999 |  | $                | 9.37  |           |  |  | 599,339    |  
|Options exercisable at December 31, 2000 |  | $                | 13.47 |           |  |  | 1,217,779  |  
|Options exercisable at December 31, 2001 |  | $                | 17.26 |           |  |  | 1,172,760  |  

Options granted and shares exercised relating to options granted outside of our
stock option plans during 1999, 2000 and 2001 are listed below. Share exercise
prices for these options equal the market price of our common stock at the date
of the grant except for options issued by PCP&L and GA, which were issued at
below market value. These options were accounted for under APB Opinion No. 25
and we have recognized compensation expense of $299,000,

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$406,000 and $464,000 for 2001, 2000 and 1999, respectively. Generally,
options granted outside of our stock option plans become exercisable over three
years and expire within five years from the date of grant.

|                                         |  |                  |       |           |  |  |           |  
|---------------------------------------- |  | ---------------- | ----- | --------- |  |  | --------- | -
|                                         |  | Weighted Average |       | Number of
|Stock Options                            |  | Exercise Price   |       | Shares   
|                                         |  |                  |       |          
|Balance at January 1, 1999               |  | $                | 4.58  |           |  |  | 1,119,892 |  
|Granted                                  |  | $                | 2.46  |           |  |  | 62,204    |  
|Exercised                                |  | $                | 1.80  |           |  |  | (199,450  | )
|Canceled                                 |  | $                | 4.81  |           |  |  | (26,072   | )
|                                         |  |                  |       |           |  |  |           |  
|Balance at December 31, 1999             |  | $                | 5.02  |           |  |  | 956,574   |  
|Exercised                                |  | $                | 1.95  |           |  |  | (211,639  | )
|Canceled                                 |  | $                | 0.69  |           |  |  | (30,432   | )
|                                         |  |                  |       |           |  |  |           |  
|Balance at December 31, 2000             |  | $                | 6.11  |           |  |  | 714,503   |  
|Granted                                  |  | $                | 20.67 |           |  |  | 106,265   |  
|Exercised                                |  | $                | 4.75  |           |  |  | (291,158  | )
|Canceled                                 |  | $                | 0.86  |           |  |  | (621      | )
|                                         |  |                  |       |           |  |  |           |  
|Balance at December 31, 2001             |  | $                | 9.79  |           |  |  | 528,989   |  
|                                         |  |                  |       |           |  |  |           |  
|Options exercisable at December 31, 1999 |  | $                | 5.21  |           |  |  | 656,196   |  
|Options exercisable at December 31, 2000 |  | $                | 6.72  |           |  |  | 643,352   |  
|Options exercisable at December 31, 2001 |  | $                | 10.24 |           |  |  | 503,851   |  

The following table summarizes information about stock options outstanding at
December 31, 2001:

|                |  |                   |           |                  |  |                  |   |  |  |   |       | 
|--------------- |  | ----------------- | --------- | ---------------- |  | ---------------- | - |  |  | - | ----- | 
|                |  | Number            |           | Weighted Average |  | Weighted        
|Range of        |  | Outstanding at    |           | Remaining        |  | Average Exercise
|Exercise Price  |  | December 31, 2001 |           | Contractual Life |  | Price           
|                |  |                   |           |                  |  |                 
|$0.37 - $11.13  |  |                   | 956,872   |                  |  |                  | 3 |  |  | $ | 8.05  | 
|$11.17 - $18.75 |  |                   | 1,034,565 |                  |  |                  | 3 |  |  | $ | 15.46 | 
|$19.13 - $26.17 |  |                   | 961,582   |                  |  |                  | 3 |  |  | $ | 23.95 | 
|$28.54 - $37.44 |  |                   | 400,325   |                  |  |                  | 4 |  |  | $ | 30.21 | 
|$41.23 - $58.67 |  |                   | 1,420,453 |                  |  |                  | 6 |  |  | $ | 44.80 | 
|                |  |                   |           |                  |  |                  |   |  |  |   |       | 
|                |  |                   | 4,773,797 |                  |  |                  | 4 |  |  | $ | 25.65 | 
|                |  |                   |           |                  |  |                  |   |  |  |   |       | 

|                |  |                    |           |                  |  |   |       | 
|--------------- |  | ------------------ | --------- | ---------------- |  | - | ----- | 
|                |  | Shares Exercisable |           |                  |  |  
|Range of        |  | at December 31,    |           | Weighted Average
|Exercise Price  |  | 2001               |           | Exercise Price  
|                |  |                    |           |                 
|$0.37 - $11.13  |  |                    | 682,524   |                  |  | $ | 7.21  | 
|$11.17 - $18.75 |  |                    | 522,906   |                  |  | $ | 14.22 | 
|$19.13 - $26.17 |  |                    | 370,843   |                  |  | $ | 24.83 | 
|$28.54 - $37.44 |  |                    | 54,375    |                  |  | $ | 31.05 | 
|$41.23 - $58.67 |  |                    | 45,963    |                  |  | $ | 46.99 | 
|                |  |                    |           |                  |  |   |       | 
|                |  |                    | 1,676,611 |                  |  | $ | 15.15 | 
|                |  |                    |           |                  |  |   |       | 

The estimated fair value of the options granted in 2001, 2000 and 1999 was
$47.0 million, $12.7 million and $15.4 million, respectively. We apply APB
Opinion No. 25 and related Interpretations in accounting for stock option
plans. Accordingly, no compensation cost for our stock option plans has been
recognized in 2001, 2000 or 1999, except for options issued by PCP&L and GA,
which were issued at below market value. Had compensation cost for our stock
option plans been determined based on the fair value at the grant dates for
awards under the plans consistent with SFAS No. 123, Accounting for
Stock-Based Compensation, our net income and earnings per share for the years
ended December 31, 2001, 2000 and 1999 would have been reduced to the pro forma
amounts indicated below:

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|                                      |             |                             |      |        |      |  |      |        |  |  |   |        | 
|------------------------------------- | ----------- | --------------------------- | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|(In thousands, except per share data) |             | For Years Ended December 31
|                                      |             |                            
|                                      |             |                             | 2001 |        | 2000 |  | 1999
|                                      |             |                             |      |        |      |  |     
|Net income:                           |             |                             |      |        |      |  |      |        |  |  |   |       
|                                      | As reported |                             | $    | 36,013 |      |  | $    | 18,189 |  |  | $ | 31,326 | 
|                                      | Pro forma   |                             | $    | 17,537 |      |  | $    | 8,371  |  |  | $ | 24,625 | 
|Diluted net income per Share:         |             |                             |      |        |      |  |      |        |  |  |   |       
|                                      | As reported |                             | $    | 1.52   |      |  | $    | .84    |  |  | $ | 1.48   | 
|                                      | Pro forma   |                             | $    | .74    |      |  | $    | .39    |  |  | $ | 1.16   | 

The fair market value of options granted under the stock option plans during
2001, 2000 and 1999 was determined using the Black-Scholes option pricing model
utilizing the following assumptions:

|                                         |  |                             |      |         |  |         |      |   |  |  |      |  
|---------------------------------------- |  | --------------------------- | ---- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                                         |  | For Years Ended December 31
|                                         |  |                            
|                                         |  | 2001                        |      | 2000    |  | 1999   
|                                         |  |                             |      |         |  |        
|Dividend yield                           |  |                             | 0    | %       |  |         | 0    | % |  |  | 0    | %
|Anticipated volatility                   |  |                             | 74   | %       |  |         | 73   | % |  |  | 70   | %
|Weighted average risk-free interest rate |  |                             | 4.33 | %       |  |         | 6.12 | % |  |  | 5.53 | %
|Expected lives                           |  | 4 years                     |      | 4 years |  | 4 years

9. Capital Stock Transactions

On December 21, 2001, we issued 858,203 shares of common stock as part of the
purchase price of Rainbow. (See Note 3)

On November 13, 2001 we issued 2,750,000 shares of our common stock in a
secondary public offering. As part of the offering, on December 12, 2001, the
underwriters exercised their right to purchase an additional 314,148 shares.
The net proceeds from these issuances were $154.6 million. We intend to use
the net proceeds for general corporate purposes, including working capital,
capital expenditures, product development, joint ventures and strategic
acquisitions.

In connection with obtaining the World Wrestling Federation license (See Note
12), in August 1999 we issued to World Wrestling Federation Entertainment and a
related party to World Wrestling Federation Entertainment, warrants to purchase
281,250 shares of common stock at $10.42 per share having a fair value of $3.1
million at the time of issuance. The warrants expire December 31, 2009.

On June 8, 2001, World Wrestling Federation Entertainment exchanged all of its
warrants for 201,660 shares of common stock in a non-cash transaction. On July
23, 2001, Stanley Shenker Associates, Inc. (a related party to World Wrestling
Federation Entertainment) exchanged all of its warrants for 25,282 shares of
common stock in a non-cash transaction. The issuance of shares of our common
stock upon the exchange of warrants to both World Wrestling Federation
Entertainment and Stanley Shenker was made pursuant to the exemption from
registration provided in Section 4(2) of the Securities Act of 1933, as
amended.

On July 20, 2001, our shareholders approved an amendment to our Certificate of
Incorporation to increase the number of authorized shares of our common stock
from 35,000,000 to 75,000,000. On July 24, 2001, we amended our Certificate of
Incorporation to reflect this increase in authorized shares.

On August 31, 2000, we issued 890,110 shares of common stock as part of the
purchase price for Volition. On December 13, 1999, we issued 220,048 shares of
common stock in connection with the acquisition of GA. On May 24, 1999, we
issued 727,436 shares of common stock as part of the purchase price for PCP&L
(See Note 3).

In February 1999, in settlement of litigation, we
issued warrants expiring March 19, 2000 to Millennium Partners to
purchase 150,000 shares of common stock at $16.08 per share. The fair
value of the warrants at issuance was $564,000.

Other than World Wrestling Federation Entertainment and Stanley Shenker
warrants that were exchanged for common stock mentioned above, there were no
additional warrants exercised in 2001. During the years ended December 31,
2000 and 1999 the number of warrants to purchase our common stock exercised
were 100,000 and 64,000, respectively. We received proceeds from the exercise
of such warrants totaling $1.6 million and $766,000 in the years ended December
31, 2000 and 1999, respectively.

In connection with obtaining the Nickelodeon master license, in February 2002,
we issued to MTV Networks, a division of Viacom International Inc., warrants to
purchase 50,000 shares of common stock at $43.69 per share having a fair value
of $1.2 million at the time of issuance. The warrants expire December 31,
2005.

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On March 8, 2002, we announced that our Board
of Directors declared a three-for-two stock split of our shares of
common stock to be effected in the form of a 50% stock dividend,
which will be distributed on or about April 9, 2002, to stockholders
of record as of the close of business on March 26, 2002. The effect
of the stock dividend is not reflected in the consolidated financial
statements.

10. Other Long-Term Assets

On December 21, 2001 we acquired all the outstanding shares of Rainbow
Multimedia Group, Inc. (See Note 3). As part of the determination of the fair
value, we have allocated a portion of the purchase price to the following
identifiable intangible assets:

|                                                            |  |       |                  |              |  |               
|----------------------------------------------------------- |  | ----- | ---------------- | ------------ |  | --------------
|(In thousands)                                              |  | Value |                  | Useful Lives
|                                                            |  |       |                  |             
|Trade name
Trade secrets
Non-compete / Employment contracts |  |       | $1,025
1,800
706 |              |  | indefinite
5
7
|                                                            |  |       |                  |              |  |               
|Total identifiable intangible assets                        |  |       | $3,531           |              |  |               
|                                                            |  |       |                  |              |  |               

Accumulated amortization at December 31, 2001 was not material.

On June 13, 2001, T.HQ International Ltd. and HotGen Studios Ltd. entered into
a Joint Venture Agreement pursuant to which T.HQ International Ltd. acquired a
44% interest in Network Interactive Sports Limited (NI Sports), formerly
wholly owned by HotGen Studios Ltd. In exchange for this interest, T.HQ
International Ltd. agreed to invest $3.3 million in cash. Goodwill, which
resulted from the investment, net of accumulated amortization was $1.9 million
at December 31, 2001. This investment is included in other long-term assets in
the accompanying balance sheet and is accounted for using the equity method.
For the year ended December 31, 2001, our equity in the net loss of the joint
venture is immaterial and included in general and administrative expenses in
the accompanying statements of operations. The financial statements of the
joint venture are immaterial and have therefore not been included.

NI Sports uses client/server technology to offer multi-player games to
subscribers across a variety of platforms including PCs and Wireless
Application Protocol enabled mobile phones. Areas of potential future growth
are extensions of this technology to game consoles, interactive television and
other internet-access devices. NI Sports first product is Sky Sports Football
Manager, an online soccer game for the United Kingdom market which was released
in November 2001.

On March 21, 2000, we acquired less than a 20% interest in Japanese developer,
Yukes Co., Ltd., which at the time was privately held. In December 2001,
Yukes Co., Ltd. had an initial public offering of its common stock which is
now traded on the Japanese Nasdaq stock market. Accordingly, we have started
accounting for this investment under SFAS No. 115 Accounting for Certain
Investments in Debt and Equity Securities (See Note 1). Unrealized holding
gains and losses are excluded from earnings and are included as a component of
other comprehensive income until realized. The original cost of this
investment was $5.0 million. The agreement provides that for a certain time
period, under separate development agreements, Yukes Co., Ltd. will create
exclusively for us wrestling games for the PlayStation and PlayStation 2 in
North America and Europe. Due to the long-term nature of this agreement, this
investment is included in other long-term assets in the accompanying balance
sheet.

11. Related Party
Transactions

In 1998 and 1999, we paid Inland Productions, Inc.,
a software developer in which we acquired a 25% interest on July 1,
1996, $4,891,000 and $4,905,000, respectively. As of December 31,
1998 and 1999, we owned Inland Productions, Inc. $166,000 and
$137,000, respectively. In 2000, Inland Productions, Inc., purchased
the 25% interest we acquired in 1996.

12. Agreement with JAKKS Pacific, Inc. and Titan Sports Inc.

We entered into an agreement with JAKKS Pacific,
Inc., as recently amended, to govern our
relationship with respect to the WWF license we jointly obtained from Titan
Sports, Inc. (now known as World Wrestling Federation Entertainment, Inc.,) in
June 1999. Our relationship with JAKKS was established to develop,
manufacture, distribute, market and sell video games, as well as sublicense
product pursuant to the license from World Wrestling Federation Entertainment.
We control the venture, therefore, all transactions and balances are
consolidated with the Company. The principal terms of this operating agreement
are as follows:



| |  |  | We will be responsible for funding all operations of the venture,
including all payments owing to World Wrestling Federation
Entertainment.                                                                                                                                                                                                                                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | For the period commencing
November 16, 1999 and ending June 30,
2006, JAKKS will be entitled to receive a preferred payment equal to
the greater of a fixed guarantee, payable quarterly, or specified
percentages of the net sales from World Wrestling Federation
Entertainment licensed games (as defined) in amounts that vary based on
the platform. The payment of these amounts is guaranteed by us. We
are

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| |  |  | entitled to the profits and cash distributions remaining after the
payment of these amounts. As of December 31, 2000, we have exceeded the
minimum guarantee for preferred payments.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For periods after June 30, 2006, the amount of the preferred
payment will be subject to renegotiation between the parties. An
arbitration procedure is specified in the event the parties do not
reach agreement.                                                                                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We will be responsible for the day-to-day operations of the
venture. We will continue to be responsible for development, sales and
distribution of World Wrestling Federation Entertainment licensed
games, while JAKKS will continue to be responsible for the approval
process and other relationship matters with World Wrestling Federation
Entertainment. We will both continue to co-market the games.

The license agreement with World Wrestling Federation Entertainment extends
through December 31, 2009, with an option for a five-year automatic extension
if we pay them a specified minimum amount during the initial ten-year period of
the agreement.

In November 2001, through our relationship with JAKKS, we entered into a letter
of intent to expand the license to include exclusive rights to other wrestling
content produced by World Wrestling Federation Entertainment. In exchange for
these rights we have agreed to increase the minimum guarantee to World
Wrestling Federation Entertainment through December 31, 2009. The effects, if any,
of this new agreement on our agreement with JAKKS have not been determined.

13. Stockholders Rights Plan

On August 15, 2001 the Board of Directors (the Board) approved an amended and
restated Stockholders Rights Plan (the Plan). Each share of common stock has
one preferred stock purchase right (Right) associated with it. Pursuant to the Plan, each Right entitles the
holder to buy one one-thousandth (1/1000) of a share of a new series of
preferred stock at an exercise price of $10, subject to adjustment. The Rights
become exercisable 10 days after any person or group acquires, or 10 business
days after any person or group has announced its intention to commence a tender
offer for, 15% or more of the outstanding common stock.

In the event that any person or group acquires 15% or more of our outstanding
common stock, each holder of a Right (other than such person or group) will be
entitled to purchase, at the exercise price, the number of shares of common
stock having a current market value equal to two times the exercise price of
the Right.

If we are acquired in a merger or other business combination, each holder of a
Right will be entitled to purchase, at the exercise price, a number of shares
of common stock of the acquirer having a current market value equal to two
times the exercise price of the Right.

We may redeem the Rights at a redemption price of $.001 per right at any time
until 10 days after the acquisition of 15% of our common stock. At any time
after a person or group has acquired 15% or more but less than 50% of our
common stock, we may exchange all or part of the Rights for shares of common
stock at an exchange ratio of one share of common stock for each Right or
1/1000 of such new series of preferred stock per Right, subject to adjustment.
The rights expire on June 21, 2010.

14. Commitments and Contingencies

Advertising.We have certain minimum advertising commitments under most of our
major license agreements. The minimum commitments generally range from 2% to
10% of net sales related to the license. We estimate that our minimum
commitment for advertising in 2002 to be approximately $15-$20 million.

Leases.We are committed under operating leases with lease termination dates
to 2012. Minimum future rentals pursuant to these leases as of December 31,
2001 are as follows:

|               |      |            |       |           |  |   |     |     | 
|-------------- | ---- | ---------- | ----- | --------- |  | - | --- | --- | 
|(In thousands) |      | Facilities |       | Equipment
|               |      |            |       |          
|               | 2002 |            | $     | 2,751     |  |   | $   | 353 | 
|               | 2003 |            |       | 2,173     |  |   |     | 280 | 
|               | 2004 |            |       | 1,442     |  |   |     | 170 | 
|               | 2005 |            |       | 1,118     |  |   |     | 122 | 
|               | 2006 |            |       | 410       |  |   |     | 11  | 
|Thereafter     |      |            | 1,556 |           |  |   | 5   |    
|               |      |            |       |           |  |   |     |    
|               |      | $          | 9,450 |           |  | $ | 941 |    
|               |      |            |       |           |  |   |     |    

Rent expense was $2.7 million, $2.2 million, and $1.8 million in 2001, 2000 and
1999, respectively.

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Warrants.We are committed under a letter of intent with World Wrestling
Federation Entertainment (See Note 12) to issue warrants to purchase 100,000
shares of common stock upon execution of the long form amendment to the
license, at the then current market price. The warrants will expire on December
31, 2009. We also have a commitment to issue warrants to purchase 10,000
shares of common stock to Tetris Company and warrants to purchase 10,000 shares
of common stock to a related external developer in connection with our license
agreement with Tetris Company. At this time, the warrant terms are being
negotiated. We will record the fair market value of these warrants when they
are issued.

Legal Proceedings.We and certain of our officers and directors are defendants
in a class action lawsuit filed in the United States District Court for the
Central District of California entitled In re THQ Inc. Securities Litigation,
Master File No. CV-00-1783-AHM. On December 20, 2000, the court dismissed this
action with prejudice as to all of the defendants. On April 23, 2001, the
United States District Court for the Central District of California modified
its December 20, 2000 order and permitted plaintiffs to file a third amended
complaint. Defendants have filed an answer denying all of the material
allegations of the third amended complaint and asserting legal and factual
defenses. The third amended complaint alleges that defendants violated Rule
10b-5 and Section 20(a) of the Securities Exchange Act of 1934, including
allegations that defendants manipulated the companys stock price; distributed
false and misleading information concerning revenue recognition, forecasts and
earnings estimates; selectively disclosed material information; and engaged in
insider trading. The complaint seeks an unspecified amount in damages. The
plaintiffs are purported investors who purchased shares of our common stock
from October 26, 1999 through May 24, 2000. The lawsuit is in the discovery
phase and a trial date has been set for November 12, 2002. We and all of the
individual defendants have taken the position that this lawsuit is without
merit. At this early stage, however, we cannot predict the likely outcome of
this litigation.

On February 13, 2001, the World Championship
Wrestling, Inc. filed a civil action against us in Superior Court in
the state of Georgia. The lawsuit alleged a breach of contract
relating to the Interactive License Agreement, dated as of
December 29, 1995, between the WCW and us. The Plaintiffs in the
lawsuit alleged that we had not paid sufficient royalties due under
the agreement for the Nintendo 64 game Revenge. The lawsuit was
dismissed with prejudice on January 8, 2002, in accordance with
a settlement agreement we entered into with World Championship
Wrestling, Inc. on December 21, 2001.

We are involved in other routine litigation arising in the ordinary course of
our business. In the opinion of our management, none of the other pending
litigation will have a material adverse effect on our consolidated financial
condition or results of operations.

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15. Segment and Geographic Information

We operate in one reportable segment in which we are a developer, publisher and
distributor of interactive entertainment software for the leading hardware
platforms in the home video game market. The following information sets forth
geographic information on our sales and long-lived assets for the years ended
December 31, 1999, 2000 and 2001:

|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|-------------------------------------- |  | ------ | ------- | ------- |  | ------- | ------ | ------ |  | --------- | ------ | ------------ |  | - | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                       |  | United |         | United  |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        | 
|(In thousands of dollars)              |  | States |         | Kingdom |  | Germany |        | France |  | Australia |        | Consolidated
|                                       |  |        |         |         |  |         |        |        |  |           |        |             
|Year ended December 31, 1999:          |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Sales to unaffiliated Customers        |  | $      | 228,827 |         |  | $       | 41,404 |        |  | $         | 33,252 |              |  | $ |       |  |  | $ |       |  |  | $ | 303,483 | 
|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Long-lived assets at December
31, 1999 |  | $      | 10,780  |         |  | $       | 1,962  |        |  | $         | 988    |              |  | $ | 1      |  |  | $ |       |  |  | $ | 13,731  | 
|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Year ended December 31, 2000:          |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Sales to unaffiliated Customers        |  | $      | 270,116 |         |  | $       | 44,638 |        |  | $         | 20,442 |              |  | $ | 7,979  |  |  | $ | 3,828  |  |  | $ | 347,003 | 
|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Long-lived assets at December
31, 2000 |  | $      | 16,792  |         |  | $       | 1,957  |        |  | $         | 1,971  |              |  | $ | 320    |  |  | $ | 235    |  |  | $ | 21,275  | 
|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Year ended December 31, 2001:          |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Sales to unaffiliated Customers        |  | $      | 262,676 |         |  | $       | 60,240 |        |  | $         | 25,517 |              |  | $ | 18,185 |  |  | $ | 12,374 |  |  | $ | 378,992 | 
|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|Long-lived assets at December
31, 2001 |  | $      | 80,289  |         |  | $       | 3,541  |        |  | $         | 2,370  |              |  | $ | 267    |  |  | $ | 196    |  |  | $ | 86,663  | 
|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 
|                                       |  |        |         |         |  |         |        |        |  |           |        |              |  |   |        |  |  |   |        |  |  |   |         | 

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16. Quarterly Financial Data (Unaudited)

Our summarized quarterly financial data is as follows:

|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |      | 
|--------------------------------- | ------- | ----- | ------ | ---- |  | --------- | ------- | -------- | - | - | ------ | --- |  | - | ------- | ---- | 
|(Amounts in thousands,            |         | March |        | June |  | September |         | December
|except per share data)            |         | 31    |        | 30   |  | 30        |         | 31      
|                                  |         |       |        |      |  |           |         |         
|Year ended December 31, 2000:     |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Revenues                          |         | $     | 70,390 |      |  | $         | 32,407  |          |   | $ | 53,293 |     |  | $ | 190,913 |     
|Expenses                          |         |       | 63,315 |      |  |           | 46,236  |          |   |   | 50,468 |     |  |   | 155,741 |     
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Income (loss) before income taxes |         |       | 7,075  |      |  |           | (13,829 | )        |   |   | 2,825  |     |  |   | 35,172  |     
|Income taxes                      |         |       | 3,130  |      |  |           | (5,226  | )        |   |   | 1,510  |     |  |   | 13,640  |     
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Net income (loss)                 |         | $     | 3,945  |      |  | $         | (8,603  | )        |   | $ | 1,315  |     |  | $ | 21,532  |     
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Net income (loss) per share:      |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|                                  | Basic   |       | $      | .20  |  |           | $       | (0.43    | ) |   | $      | .07 |  |   | $       | 1.06 | 
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|                                  | Diluted |       | $      | .18  |  |           | $       | (0.43    | ) |   | $      | .06 |  |   | $       | .99  | 
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Year ended December 31, 2001:     |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Revenues                          |         | $     | 59,328 |      |  | $         | 55,236  |          |   | $ | 68,045 |     |  | $ | 196,383 |     
|Expenses                          |         |       | 57,986 |      |  |           | 49,696  |          |   |   | 62,930 |     |  |   | 151,664 |     
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Income before income taxes        |         |       | 1,342  |      |  |           | 5,540   |          |   |   | 5,115  |     |  |   | 44,719  |     
|Income taxes                      |         |       | 482    |      |  |           | 2,086   |          |   |   | 1,901  |     |  |   | 16,234  |     
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Net income                        |         | $     | 860    |      |  | $         | 3,454   |          |   | $ | 3,214  |     |  | $ | 28,485  |     
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|Net income per share:             |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|                                  | Basic   |       | $      | .04  |  |           | $       | .16      |   |   | $      | .15 |  |   | $       | 1.22 | 
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     
|                                  | Diluted |       | $      | .04  |  |           | $       | .15      |   |   | $      | .14 |  |   | $       | 1.12 | 
|                                  |         |       |        |      |  |           |         |          |   |   |        |     |  |   |         |     

Due to rounding some of the figures above may differ slightly from the 10-Qs
previously filed.

F-24