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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

|     |  |                                                                             
|---- |  | ----------------------------------------------------------------------------
|[X]  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
|     |  | OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2003                             
|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: 000-32989

BAM! ENTERTAINMENT, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


|                                |  |                    
|------------------------------- |  | -------------------
|DELAWARE                        |  | 77-0553117         
|(STATE OR OTHER JURISDICTION OF |  | (I.R.S. EMPLOYER   
|INCORPORATION OR ORGANIZATION)  |  | IDENTIFICATION NO.)

333 WEST SANTA CLARA STREET, SUITE 716
SAN JOSE, CALIFORNIA 95113
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(408) 298-7500
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: Common Stock $0.001 par value

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

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

Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange
Act.  Yes  [   ]  No  [X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $11,659,573 million as of September 17, 2003 based
upon the closing price on the Nasdaq SmallCap Market reported for such date.
Stock held by each officer and director and by each person who owns 5% or more
of Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive determination for other purposes.

The number of shares of common stock outstanding as of September 17, 2003: 14,764,040

Documents Incorporated by Reference

Portions of the Registrants Definitive Proxy Statement issued in
connection with the 2003 Annual Meeting of the Stockholders of the Registrant
are incorporated by reference into Part III.





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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 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 8  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                             
|                                           | ITEM 9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|                                           | ITEM 14  CONTROLS AND PROCEDURES                                                             
|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 15  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K                    
|SIGNATURES                                
|Index to Consolidated Financial Statements
|EXHIBIT 10.36(A)                          
|EXHIBIT 10.41(A)                          
|EXHIBIT 10.42(A)                          
|EXHIBIT 21.1                              
|EXHIBIT 23.1                              
|EXHIBIT 31.1                              
|EXHIBIT 31.2                              
|EXHIBIT 32                                



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TABLE OF CONTENTS

|         |  |                                   |  |                                                                                       |      |    | 
|-------- |  | --------------------------------- |  | ------------------------------------------------------------------------------------- | ---- | -- | 
|         |  |                                   |  |                                                                                       | PAGE
|         |  |                                   |  |                                                                                       |     
|PART I   |  |                                   |  |                                                                                       |      |    | 
|         |  | Item 1.                           |  | Business                                                                              |      | 3  | 
|         |  | Item 2.                           |  | Properties                                                                            |      | 25 | 
|         |  | Item 3.                           |  | Legal proceedings                                                                     |      | 25 | 
|         |  | Item 4.                           |  | Submission of matters to a vote of security holders                                   |      | 25 | 
|PART II  |  |                                   |  |                                                                                       |      |    | 
|         |  | Item 5.                           |  | Market for registrants common equity and related stockholder matters                 |      | 26 | 
|         |  | Item 6.                           |  | Selected consolidated financial data                                                  |      | 28 | 
|         |  | Item 7.                           |  | Managements discussion and analysis of financial condition and
results of operations |      | 29 | 
|         |  | Item 7A.                          |  | Quantitative and
Qualitative Disclosures about Market Risk                            |      | 40 | 
|         |  | Item 8.                           |  | Consolidated financial statements and supplementary data                              |      | 42 | 
|         |  | Item 9.                           |  | Changes in and disagreements with accountants on accounting and
financial disclosure  |      | 42 | 
|         |  | Item 9A.                          |  | Controls and
Procedures                                                               |      | 42 | 
|PART III |  |                                   |  |                                                                                       |      |    | 
|         |  | Item 10.                          |  | Directors and executive officers of the registrant                                    |      | 43 | 
|         |  | Item 11.                          |  | Executive compensation                                                                |      | 43 | 
|         |  | Item 12.                          |  | Security ownership of certain beneficial owners and management                        |      | 43 | 
|         |  | Item 13.                          |  | Certain relationships and related transactions                                        |      | 43 | 
|PART IV  |  |                                   |  |                                                                                       |      |    | 
|         |  | Item 15.                          |  | Exhibits, financial statement schedules and reports on Form 8-K                       |      | 44 | 
|         |  | Signatures                        |  |                                                                                       |      | 50 | 
|         |  | Certifications                    |  |                                                                                       |      | 51 | 
|         |  | Consolidated Financial Statements |  | F-1                                                                                   |     

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PART I




ITEM 1  BUSINESS

Certain information contained in this Report constitutes forward-looking
statements which involve risks and uncertainties including, but not limited to,
information with regard to our revenues, earnings, spending, margins, cash
flow, orders, inventory, products, actions, plans, strategies and objectives.
The words believes, anticipates, plans, expects, endeavors, may,
will, intends, estimates, and similar expressions are intended to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties, and our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under Risk Factors
and elsewhere in this Report.

OVERVIEW

We develop and publish interactive entertainment software products. We
currently publish titles for the most popular interactive entertainment
hardware platforms, such as Sonys PlayStation and PlayStation 2, Nintendos
Gamecube, Nintendo 64, Game Boy Color and Game Boy Advance, Microsofts Xbox,
portable handheld devices manufactured by Palm and Handspring, and for personal
computers or PCs. We were incorporated in California in October 1999 under the
name Bay Area Multimedia, Inc. We reincorporated in Delaware in September 2000
and changed our name to BAM! Entertainment, Inc. in December 2000. We
commenced operations in October 1999 and shipped our first products in June
2000.

We license properties from a wide variety of sources, and publish titles based
on the motion picture, sports and television properties of our licensors. We
have entered into strategic license arrangements with entertainment and media
companies that have developed well-known characters and brands and that are
producing popular properties that are expected to form the basis of some of our
future products. Our agreements with licensors and developers generally
require us to make advance royalty payments, and we may be required to spend
money on advertising and promotion. We generally pay royalties based on net
revenues.

We design and develop our titles through third parties with whom we have
established relationships. We believe that the development cycle for new
titles is long, typically ranging from 12 to 24 months, except for Nintendos
Game Boy Advance for which the development cycle typically ranges from six to
nine months. After development of the initial product, we believe that it may
take between six to 12 additional months to develop the product for, or port
the product to, a different hardware platform.

We have offices in both the United States and Europe. International operations
outside of North America are conducted through our office in England, where we
perform international sales and marketing activities and manage local
third-party developers. Domestically, we sell our products to mass
merchandisers such as Toys R Us, Target, Kmart, Wal-Mart and Best Buy,
specialty chains such as GameStop and Electronics Boutique, and independent
distributors. Internationally, we sell our products through mass
merchandisers, distributors and sub-distributors. Our products are manufactured
exclusively by third parties.

We have experienced recurring net losses from inception (October 7, 1999)
through June 30, 2003. During the year ended June 30, 2003, we used cash in
operating activities of $10.5 million and incurred a net loss of $36.2 million.
As of June 30, 2003, we had cash and cash equivalents of $1.1 million and an
accumulated deficit of $59.8 million. These factors, among others, raise
substantial doubt about our ability to continue as a going concern for a
reasonable period of time. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of assets or
the amounts and classification of recorded liabilities that might be necessary
should we be unable to continue as a going concern.

During the year ended June 30, 2003, we undertook measures to reduce spending
and restructured our operations. In February 2003 we retained, through July 31,
2003, the investment banking firm of Gerard Klauer Mattison & Co., Inc. to
assist us in reviewing a range of potential strategic alternatives, including
mergers, acquisitions and additional financing. No transactions arose from this
assistance or were consummated during this period. We may need to either
consummate one or a combination of the potential strategic alternatives, or
otherwise obtain capital via sale or license of certain of our assets, in order
to satisfy our future liquidity requirements. Current market

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conditions present uncertainty as to our ability to effectuate any merger or
acquisition or secure additional financing, as well as our ability to reach
profitability. There can be no assurances that we will be able to effectuate
any such merger or acquisition or secure additional financing, or obtain
favorable terms on such financing if it is available, or as to our ability to
achieve positive cash flow from operations. Continued negative cash flows
create significant uncertainty about our ability to implement our operating
plan and we may have to further reduce the scope of our planned operations. If
cash and cash equivalents, together with cash generated from operations, are
insufficient to satisfy our liquidity requirements, we will not have sufficient
resources to continue operations for the next six months.

As of June 30, 2003, we had $4.0 million, $1.1 million and $89,000 of
capitalized development costs, current and long-term prepaid royalties and licensed assets,
respectively, related to software development projects in progress. Should we
be unable to effectuate either a merger or acquisition or secure sufficient
additional financing, part or all of these development projects in progress
might have to be abandoned and the related costs would have to be written off.

In September 2003, we entered into a
six month Agreement (the Agreement) with a finance
company, pursuant to which the finance company extends us a line of
credit facility to fund domestic inventory purchases. We may sell the
inventory purchased under the Agreement and are required to remit
customer receipts from those sales directly to the finance company up
to the amounts funded by them. We retain collections in excess of the
amounts funded by the finance company,
are responsible for collecting the customer receivables, and bear the
risk of loss on all uncollectible accounts. Under the Agreement, the
finance companys aggregate outstanding funding is limited to
$3.2 million. We are required to pay the finance companys
expenses under the contract, a facility fee equal to 5.0% of the
funds advanced by the finance company, and interest at prime plus
0.5%. The Agreement terminates on March 31, 2004 and any sums
outstanding become repayable on that date. We may repay any sums
advanced prior to the due date of payment without penalty. Our
factoring agreement with a different finance company was mutually
terminated in September 2003.

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Products

The following tables set forth the titles we have released since inception:

|                                             |  |           |  |                              |  |                
|-------------------------------------------- |  | --------- |  | ---------------------------- |  | ---------------
|Title                                        |  | Genre     |  | Hardware platform            |  | Date of release
|                                             |  |           |  |                              |  |                
|Beast Wars(1)                                |  | Action    |  | Nintendo 64/PlayStation      |  | June 2000      
|Contender 2(1)                               |  | Action    |  | PlayStation                  |  | October 2000   
|Jimmy Whites Cueball 2(1)                   |  | Sports    |  | PlayStation                  |  | October 2000   
|Bad Mojo Jojo (Powerpuff Girls)              |  | Adventure |  | Game Boy Color               |  | November 2000  
|Paint the Townsville Green (Powerpuff Girls) |  | Adventure |  | Game Boy Color               |  | November 2000  
|Sgt. Rock                                    |  | Action    |  | Game Boy Color               |  | November 2000  
|Robot Revenge (Dexters Laboratory)          |  | Adventure |  | Game Boy Color               |  | December 2000  
|Yogi Bear                                    |  | Adventure |  | Game Boy Color               |  | December 2000  
|Battle Him (Powerpuff Girls)                 |  | Adventure |  | Game Boy Color               |  | February 2001  
|Xtreme Wheels                                |  | Sports    |  | Game Boy Color               |  | April 2001     
|Fire Pro Wrestling                           |  | Sports    |  | Game Boy Advance             |  | June 2001      
|Hot Potato                                   |  | Puzzle    |  | Game Boy Advance             |  | June 2001      
|Strike it Rich                               |  | Trivia    |  | Palm/Handspring              |  | July 2001      
|CardTopia                                    |  | Card      |  | Palm/Handspring              |  | July 2001      
|Deesaster Strikes (Dexters Laboratory)      |  | Adventure |  | Game Boy Advance             |  | September 2001 
|Science Aint Fair (Dexters Laboratory)     |  | Adventure |  | PC                           |  | September 2001 
|Mojo Jojo A-Go-Go (Powerpuff Girls)          |  | Adventure |  | PC                           |  | September 2001 
|Sports Illustrated for Kids: Baseball        |  | Sports    |  | Game Boy Advance             |  | September 2001 
|Sports Illustrated for Kids: Football        |  | Sports    |  | Game Boy Advance             |  | September 2001 
|Driven                                       |  | Sports    |  | PlayStation 2                |  | October 2001   
|Chemical X-Traction (Powerpuff Girls)        |  | Adventure |  | PlayStation/Nintendo 64      |  | October 2001   
|Mojo Jojo A-Go-Go (Powerpuff Girls)          |  | Adventure |  | Game Boy Advance             |  | November 2001  
|Ecks v Sever                                 |  | Action    |  | Game Boy Advance             |  | November 2001  
|Driven                                       |  | Sports    |  | Game Boy Advance             |  | November 2001  
|Broken Sword                                 |  | Adventure |  | Game Boy Advance             |  | March 2002     
|Savage Skies(1)                              |  | Action    |  | PlayStation 2                |  | March 2002     
|Driven                                       |  | Sports    |  | GameCube                     |  | March 2002     
|Wolfenstein 3D                               |  | Action    |  | Game Boy Advance             |  | March 2002     
|World Rally Championship(1)                  |  | Sports    |  | PlayStation 2                |  | March 2002     
|Mandarks Lab? (Dexters Laboratory)         |  | Adventure |  | PlayStation                  |  | April 2002     
|Star X                                       |  | Action    |  | Game Boy Advance             |  | April 2002     
|Way of the Samurai(1)                        |  | Action    |  | PlayStation 2                |  | May 2002       
|Dropship(1)                                  |  | Action    |  | PlayStation 2                |  | May 2002       
|Wipeout Fusion(1)                            |  | Action    |  | PlayStation 2                |  | June 2002      
|Kong                                         |  | Action    |  | Game Boy Advance             |  | August 2002    
|Chase: Hollywood Stunt Driver                |  | Action    |  | XBox                         |  | September 2002 
|Riding Spirits                               |  | Action    |  | PlayStation 2                |  | September 2002 
|Fire Pro Wrestling 2                         |  | Sports    |  | Game Boy Advance             |  | September 2002 
|The Powerpuff Girls: Gamesville              |  | Adventure |  | PC                           |  | September 2002 
|Ballistic: Ecks v Sever                      |  | Action    |  | Game Boy Advance             |  | September 2002 
|Runabout 3(2)                                |  | Action    |  | PlayStation 2                |  | October 2002   
|Dexters Laboratory: Chess Challenge         |  | Adventure |  | Game Boy Advance             |  | October 2002   
|Reign of Fire                                |  | Action    |  | PlayStation
2/Xbox/GameCube/ |  | October 2002   
|                                             |  |           |  | Game Boy Advance             |  |                
|Powerpuff Girls Him and Seek                 |  | Adventure |  | Game Boy Advance             |  | October 2002   
|Powerpuff Girls Relish Rampage               |  | Adventure |  | PlayStation 2                |  | November 2002  
|My Disney Kitchen                            |  | Adventure |  | PlayStation                  |  | November 2002  
|Winnie The Pooh Pre School                   |  | Adventure |  | PlayStation                  |  | November 2002  
|Winnie the Pooh Kindergarten                 |  | Adventure |  | PlayStation                  |  | November 2002  
|4x4 Evo 2(2)                                 |  | Sports    |  | PlayStation 2                |  | January 2003   
|Samurai Jack  The Amulet of Time            |  | Adventure |  | Game Boy Advance             |  | March 2003     
|Ed, Edd, n Eddy: Jawbreakers                 |  | Adventure |  | Game Boy Advance             |  | March 2003     



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|(1) |  | This title has been released to consumers in North America only.
|--- |  | ----------------------------------------------------------------
|   
|(2) |  | This title has been released to consumers in Europe only.       

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Strategic relationships

We have entered into strategic relationships with entertainment and media
companies that have developed well-known characters and brands and that are
producing popular properties that are expected to form the basis of future
products.

The Cartoon Network.Between March 2000 and February 2003, we entered into four
non-exclusive license agreements that give us the right to develop and
distribute interactive entertainment software based on Warner Bros. Powerpuff
Girls, Dexters Laboratory, Samurai Jackand Ed, Edd, n Eddyproperties on a
multi-national basis. The Powerpuff Girls, Dexters Laboratory, Samurai Jack
and Ed, Edd, n Eddytelevision shows are aired on AOL Time Warners Cartoon
Network. Under these agreements, we are obligated to pay royalties based on a
percentage of net sales of the titles and are obligated to advertise and
promote the titles on the Cartoon Network. Our license agreement for Samurai
Jackterminated in August 2003.

We believe that the Cartoon Network has significant brand awareness among six
to 11 year olds. According to the Cartoon Network, their programs are viewed in
82 million homes in the United States and 145 countries around the world. We
participate in promotional programs with the Cartoon Network and certain
retailers who advertise on the Cartoon Network in connection with the release
of our products.

Franchise Films.In April 2000, we entered into a strategic arrangement with
Franchise Films, Inc. Our agreement gives us the exclusive, first look right to
review screenplays acquired by the studio, develop titles based on films
produced from those screenplays and distribute them worldwide. Our agreement
expires upon the later of three years or the theatrical release of the tenth
film on which we base a product. Franchise Films has also agreed to provide us
with free access to any publicity and advertising materials it prepares and
granted us the right to use these materials to promote and advertise our
products. Under the agreement, we agreed to pay Franchise Films royalties based
on the net sales of the titles based on the films we select and we are
obligated to issue 68,738 shares of our common stock following the theatrical
release of each film for which we have developed a title, up to a maximum of
687,375 shares. We have released titles for the Sony PlayStation 2 and Nintendo
Game Boy Advance based on the film title Driven, which was released in April
2001. We have also released two Nintendo Game Boy Advance titles based on Ecks
v Sever, a film released in September 2002.

Sports Illustrated For Kids.In May 2000, we signed a strategic arrangement
with Time, Inc. for the development of titles utilizing the Sports Illustrated
For Kids brand name. Our four-year, non-exclusive license gives us the right to
publish titles based on popular sports that are appropriate for children ages
seven to 17 and to distribute those titles on a multi-national basis. Our
agreement gives us the right to access a portion of their subscriber base for
market research purposes. Under the agreement, we are obligated to pay a
royalty based on the gross wholesale price of the titles and advertise and
promote the titles in the magazine. In September 2001 we released our first two
titles under this collaboration for Nintendos Game Boy Advance, Sports
Illustrated for Kids Baseballand Sports Illustrated for Kids Football.

Aardman Animations Ltd.In January 2002, we entered into a licensing and
publishing partnership with Aardman Animations Limited, creators of Wallace &
Gromitand Chicken Run. Our five-year agreement gives us an exclusive right to
develop titles based on Aardmans intellectual property and to distribute them
worldwide. Under the agreement we will have to pay royalties to Aardman
calculated as a percentage of sales of the developed products, and we are
required to issue them warrants to purchase up to 50,000 shares of common
stock, in pre-determined multiples of either 5,000 or 10,000 shares, upon the
occurrence of certain pre-determined events. We have commenced development of
Wallace & Gromittitles for Sonys PlayStation 2, Nintendos GameCube and Game
Boy Advance, Microsofts Xbox and personal computers and plan to release these
titles in the fall of 2003. We have exercised our right to develop
products on Creature Comforts, a TV series soon to be shown on
British television.

Riverdeep Inc.In June 2002, we entered into a licensing and publishing
agreement with Riverdeep Inc., owners of the property rights to Carmen
Sandiego. Our agreement gives us an exclusive right to develop titles based on
Carmen Sandiegofor all platforms except personal computers, and to distribute
them worldwide. Under the agreement we will have to pay royalties to Riverdeep
calculated as a percentage of sales of the developed products. The agreement
expires four years after the first commercial distribution of the first title,
or June 2004 if no title is released prior to that date. Our first
title is planned to be released in Fiscal 2004.

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Ovation Entertainment LLC.In May 2002, we entered into a licensing and
publishing agreement with Southpaw Media Group Inc. The agreement was assigned
to Ovation Entertainment LLC in July 2002 and amended in August 2003 following
litigation between the parties. Our agreement gives us the exclusive, first
look right to review screenplays to be produced by the studio, develop titles
based on any films, made for television movies, or television series produced
from those screenplays, and distribute them worldwide. Our agreement expires
upon the later of five years or either the theatrical release or television
air-date of the tenth film or television series on which we base a product, but
in no event later than eight years from the date of the agreement, unless seven
films or television series have been released or aired, respectively, within
seven years from the date of the agreement, in which event the agreement would
expire at the end of the seventh year. Under the agreement, we will have to pay
royalties calculated as a percentage of sales of the developed products, and we
granted a warrant to purchase up to 200,000 shares of our common stock, of
which 15,000 became immediately exercisable upon the signing of the agreement
and the remaining 185,000 only become exercisable upon the occurrence of
certain future events. Upon expiration of the agreement, any unexercised
warrants will cease to be exercisable.

Spyglass Entertainment Group.In October 2000, we entered into a strategic
arrangement with Spyglass Entertainment Group, L.P. The agreement was mutually
terminated in June 2003. The agreement gave us an exclusive right of first
refusal to develop titles based on films produced by the studio and to
distribute them worldwide. In addition, Spyglass Entertainment Group agreed to
provide us with free access to any publicity and advertising materials it
prepared and we had the right to use these materials to promote and advertise
our titles. Under the agreement, we granted Spyglass Entertainment Group a
warrant to purchase up to 470,000 shares of our common stock and agreed to pay
the studio royalties based on the net sales of titles based on its films. We
released titles under the agreement for Sonys PlayStation 2, Microsofts Xbox,
and Nintendos Game Boy Advance and GameCube based on Reign
of Fire, a film
released in August 2002.

Software product design and development

We believe our success will depend in large part on our ability to design and
develop innovative interactive entertainment software based on popular content,
design and develop sequels to our more popular products and offer previously
released products on additional hardware platforms. We pair members of our
internal production staff with external software developers who have varying
design and development capabilities, which we believe provides us with
flexibility to develop titles in a timely, cost-effective manner. Our software
producers take responsibility for the selection of the title concept,
evaluation of the capabilities of the software developer who will prepare the
graphics, artwork and computer code for the title, and the publication,
marketing and distribution of the completed title. The external software
developers are responsible for the completion of technical milestones such as
creation of particular graphics, artwork and sound designs.

Title production and development

At June 30, 2003, our in-house production staff consisted of five employees,
two of whom work in our San Jose office, and three of whom work in our Bath,
England office. Our in-house production staff includes four software producers
who are responsible for monitoring the progress of our independent third-party
software developers with whom we contract to create titles. Our production
staff evaluates the work of each of the external software developers through
design review, progress evaluation, milestone review and quality checks. Each
milestone submission is reviewed by our in-house production staff to ensure
compliance with the products design specifications.

Product development

When we elect to develop a concept or property externally, we contract with an
independent third-party software developer to develop the title under the
supervision of our internal software production staff. When we develop a title
with an independent software developer, we select a title concept and then
evaluate whether the independent developer has sufficient expertise to create
the software code, animation and graphics for that title. After we evaluate the
independent developers capabilities and decide to produce that title with the
developer, our production team prepares a budget, list of development
milestones and a sales and marketing plan. The independent developer then
begins to prepare the software code, graphics and animation for the title. When
the final milestone has been met and our production staff is satisfied that the
title is ready for publication, we publish, distribute and market the title.

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Our production staff also works with independent software developers to modify,
or port, existing titles for distribution in a certain country or across
additional platforms. When we decide to port an existing title in this manner,
our internal production staff prepares a list of development milestones and a
budget and marketing plan for the title. Our internal production staff then
works with the independent software developer to ensure that the milestones are
met and the title is ported to a new platform or readied for distribution to a
new country.

Our agreements with independent software developers are typically entered into
on a title-by-title basis and provide for the payment of the greater of a fixed
amount or royalties based on actual sales. We generally pay independent
software developers installments of the fixed advance based on the achievement
of specific development milestones established by our production staff at the
outset of the development process. Royalties in excess of the fixed advance are
generally based on either a fixed amount per unit sold or as a percentage of
the per unit sales price. We generally obtain ownership of the software code
and related documentation from our independent software developers. In
instances where we do not retain sole ownership of the source code, the owner
may use or license the code for development of other software products that may
compete directly with our products and we may not have sufficient rights in the
source code to produce derivative products. Upon completion of the development
process, each title is play-tested by us and sent to the manufacturer for its
testing, review and approval. Related artwork, user instructions, warranty
information, brochures and packaging designs are also developed by third
parties under our supervision.

We believe that the development process for an original, externally-developed
product for a next generation hardware platform typically takes 12 to 24
months, and for an original, externally-developed product for the Nintento Game
Boy Advance platform, six to nine months. This process is shorter for existing
products currently used on 32-bit and 64-bit hardware platforms. We believe
that it takes approximately six to 12 months to develop an existing title as a
product for a different hardware platform.

Marketing, sales and distribution

Our marketing, sales and distribution efforts are designed to broaden product
distribution and increase the penetration of our products in domestic and
international markets. We rely in part on the name recognition of the motion
picture, sports and television cartoon properties on which many of our products
are based to attract consumers and obtain shelf space from mass merchandisers.
We supplement our domestic direct sales efforts with third-party distributors.
As of June 30, 2003, our sales and marketing staff consisted of ten employees,
seven of whom work in our San Jose, California headquarters and three of whom
work in our Bath, England office.

Our marketing department implement marketing programs and campaigns for each of
our titles. In preparation for a product launch, our marketing activities may
include print and cooperative retail advertising campaigns, game reviews in
consumer and trade publications, pre-release giveaways, and retail in-store
promotions including demonstrations, videos, over-size displays and posters. We
have selectively included in our marketing efforts radio, television and
Internet advertising campaigns. We also allocate a portion of each of our
products sales and marketing budget for cooperative advertising and market
development with retailers. Many of our titles are launched with a multi-tiered
marketing campaign that is developed on an individual basis to promote product
awareness, customer pre-orders and consumer sell-through.

We seek to extend the life cycle and financial return of many of our products
by marketing those products differently throughout the products life. Although
the product life cycle for each title varies based on a number of factors,
including the quality of the title, the number and quality of competing titles,
and in certain instances seasonality, we typically consider a title as back
catalog six months after its initial release. We utilize marketing programs
appropriate for the particular title, which generally includes progressive
sales price reductions over time to increase the products longevity in the
retail channel as we shift advertising support to newer releases.

Domestic activities

We sell our products primarily to mass merchandisers and, to a lesser extent,
to third-party distributors. Our principal customers include Toys R Us,
Kmart, Wal-Mart, GameStop, Best Buy, Electronics Boutique and Target. We do not
have any written agreements or other understandings with any of our customers
that relate to future purchases, so our customers could reduce or terminate
their purchases from us at any time. Revenues from our four

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largest customers collectively accounted for approximately 48% of our net
revenues for the year ended June 30, 2003, as compared to approximately 48% of
our net revenues for the year ended June 30, 2002 and 52% for the year ended
June 30, 2001.

We believe that we provide terms of sale comparable to competitors in our
industry. We sell our products to retailers and distributors through
independent regional sales representatives who operate on a commission basis.
The sales staff is largely responsible for generating retail demand for our
products by presenting new products to our customers in advance of the
products scheduled release dates. They do this by providing technical advice
with respect to the products and by working closely with retailers and
distributors to sell the products. In addition, we provide technical support
for our products through our customer support department. We typically ship our
products within a short period of time after acceptance of purchase orders from
distributors and other customers. Accordingly, we do not have a material
backlog of unfilled orders and net sales in any quarter are substantially
dependent on orders booked in that quarter. To date we have not experienced any
material warranty claims.

We utilize an electronic data interchange with most of our major domestic
customers to efficiently receive, process and ship customer product orders and
to accurately track and forecast sell-through of our products to consumers in
order to determine whether to order additional products from manufacturers.

International activities

Our international sales and marketing activities are currently conducted from
our office located in Bath, England.

Our first international titles were introduced during the year ended June 30,
2001. We pursue our international sales by localizing our products for various
international markets and releasing localized versions of many of our products
simultaneously with the commercial release of corresponding titles in North
America.

In July 2003, we entered into a distribution agreement with Acclaim
Entertainment Ltd (Acclaim) whereby Acclaim exclusively distribute certain
forthcoming products of ours in PAL territories. PAL is the television standard
for the United Kingdom, continental Europe and Australia. Acclaim will be
responsible for the manufacture, sale, distribution and marketing of the
products and will pay us based on net receipts from the sales made by them. The
agreement obligates Acclaim to pay us minimum guarantee advances both before
and after product release dates, but such payments are reduced upon late
delivery of a product, and fully repayable upon cancellation of the product.

Prior to entering into the distribution agreement with Acclaim, we had entered,
in February 2001, into a two-year exclusive license agreement with Ubi Soft
Entertainment S.A. (Ubi Soft), a French distributor of entertainment and
educational multimedia, to distribute, market, and sell certain of our
interactive software products in the Nintendo Game Boy Color format on a
multi-national basis. The agreement obligated Ubi Soft to make minimum
purchases at a set price per title. In July 2001, we expanded our relationship
with Ubi Soft and signed a distribution agreement establishing them as the
exclusive distributor of all of our interactive entertainment software products
across all hardware platform formats in a number of European countries. Under
this agreement, which expired on July 31, 2003, we were obligated to pay a
distribution fee based on a percentage of the net revenues from sales of all
products in the territory, and assist with marketing the products.

The Ubi Soft distribution agreement excluded the United Kingdom, where we sold
our products primarily to mass merchandisers and, to a lesser extent, to
third-party distributors. Our principal customers included Game, Dixons, Toys
R Us, WH Smiths, EUK, and HMV. Our sales staff was largely responsible for
generating retail demand for our products by presenting new products to our
customers in advance of the products scheduled release dates. They did this by
providing technical advice with respect to the products and by working closely
with retailers and distributors to sell the products. We typically shipped our
products within a short period of time after acceptance of purchase orders from
distributors and other customers. Accordingly, we did not have a material
backlog of unfilled orders and net sales in any quarter were substantially
dependent on orders booked in that quarter.

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The Acclaim distribution agreement signed in July 2003 excludes products from
our existing catalogue. We will continue to sell these products directly to
mass merchandisers or third-party distributors in the United Kingdom, and
continental Europe.

Revenues from our international customers collectively accounted for
approximately 24% of our net revenues for the year ended June 30, 2003, as
compared to 11% for the year ended June 30, 2002 and 10% for the year ended
June 30, 2001.

Manufacturing

Nintendo and Sony are the sole manufacturers of the software products sold for
use on their respective hardware platforms. We begin the manufacturing process
by placing a purchase order for the manufacture of our products with Nintendo
or Sony and opening either a letter of credit in favor of the manufacturer or
utilizing our line of credit with the manufacturer. We then send software code
and a prototype of the product to the manufacturer, together with related
artwork, user instructions, warranty information, brochures and packaging
designs for approval, defect testing and manufacture.

Microsoft appoints approved third-party manufacturers to manufacture software
for its hardware platform. Microsoft also offers us the opportunity to enter
into one or more kit licenses, pursuant to which Microsoft would license
software development tools and hardware to assist us in the development of
titles prior to sending these titles to authorized third-party manufacturers
for replication.

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. All of these fees are subject to
adjustment by the manufacturers at their discretion. Nintendo charges us a
fixed amount for each cartridge that includes the royalty. This amount varies
based, in part, on the memory capacity of the cartridges. Sony charges us a
royalty for every disk manufactured. The manufacturers have the right to
review, evaluate, approve and reject a prototype of each title and the titles
packaging and marketing materials.

Competition

The interactive entertainment software industry is intensely competitive and is
characterized by the frequent introduction of new hardware platforms and
titles. Our competitors vary in size from small companies to large
corporations, including the manufacturers of the hardware platforms. We must
obtain a license from and compete with the hardware platform manufacturers in
order to develop and sell titles for their respective hardware platforms, with
each such manufacturer typically being the largest publisher and seller of
software products for its own hardware platforms. As a result of their
commanding positions in the interactive entertainment industry as the
manufacturers of hardware platforms and publishers of titles for their own
hardware platforms, these manufacturers generally have better bargaining
positions with respect to retail pricing, shelf space and purchases than do any
of their licensees.

In addition to the hardware platform manufacturers, we compete with other
interactive entertainment software companies. Significant competitors include
Acclaim Entertainment, Inc., Activision, Inc., Bandai America Incorporated,
Capcom USA, Inc., Eidos PLC, Electronic Arts Inc., Infogrames Entertainment
SA., Konami Corporation of America, Inc., Midway Games Inc., Namco Ltd., Sega
Enterprises, Inc. (USA), Take-Two Interactive Software, Inc., THQ, Inc., Ubi
Soft Entertainment and Vivendi Universal S.A. Many of these competitors are
large corporations that have significantly greater financial, marketing,
personnel and product development resources than us. Due to these greater
resources, certain of these competitors are able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, pay higher fees to
licensors of desirable motion picture, television, sports and character
properties and pay more to third-party software developers than we can. Any
significant increase in the development, marketing and sales efforts of our
competitors could harm our business.

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Intellectual property

Our business relies on the hardware platform manufacturers and our
non-exclusive licenses with them to publish titles and manufacture our products
for their hardware platforms. Our existing hardware platform licenses for
Nintendos Game Boy Color and Game Boy Advance, Nintendo 64, Nintendo GameCube,
Sonys PlayStation and PlayStation 2, and Microsofts Xbox grant us the right
to develop, publish and distribute titles for use on the respective hardware
platforms. Each of these hardware platform licenses requires that we obtain
approval for the publication of new titles on a title-by-title basis and
licenses with Nintendo and Sony require that our titles be manufactured solely
by the respective manufacturer and licenses with Microsoft require that we use
certain approved third party manufacturers. License agreements relating to
these rights generally extend for a term of two to three years. The agreements
are terminable upon the occurrence of a number of factors, including: (1)
breach of the agreement by us; (2) our bankruptcy or insolvency; or (3) our
entry into a relationship with, or acquisition by, a competitor of the
manufacturer. We cannot assure you that we will be able to obtain new or
maintain existing licenses on acceptable terms, or at all.

Upon termination of a hardware 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.

We hold copyrights on our products, product literature and advertising and
other materials. We rely on common law trademark rights to our name and our
logo. We do not currently hold any patents. We outsource all of our product
development to third-party developers and typically retain all intellectual
property rights related to such projects. No third-party developer has
challenged our ownership interest in the intellectual property rights to
projects we have outsourced, but it is always possible that a third-party
developer could issue such a challenge and prevail. We also license products
developed by third parties and pay royalties on the sale of such products.

We regard our products as proprietary and rely primarily on a combination of
copyright, trademark and trade secret laws, confidentiality and nondisclosure
agreements and other methods to protect our proprietary rights. We require our
employees, consultants and other outside individuals and entities, including
employees of third-party developers, to execute confidentiality and
nondisclosure agreements upon the start of employment, consulting or other
contractual relationships with us. These agreements provide that all
confidential information developed or made known to the individual or entity
during the course of the relationship is to be kept confidential and not
disclosed to third parties except in specific circumstances. However, our
ability to police these individuals and entities and enforce these agreements
is costly and uncertain.

We also rely on existing copyright laws to prevent unauthorized distribution of
our products. However, existing copyright laws afford only limited protection.
Policing unauthorized use of our products is difficult and software piracy can
be a persistent problem, especially in certain international markets. We are
aware that unauthorized copying occurs within our industry and if a significant
amount of unauthorized copying of our interactive entertainment software
products were to occur, our business would be harmed. In addition, the laws of
some countries in which our products are or may be distributed either do not
protect our products and intellectual property rights to the same extent as the
laws of the United States, or these laws are weakly enforced. Legal protection
of our rights may be ineffective in these countries, and as we leverage our
products using emerging technologies, such as the Internet and online services,
our ability to protect our intellectual property rights, and to avoid
infringing the intellectual property rights of others, becomes more difficult.
In addition, intellectual property laws are less clear with respect to such
emerging technologies. Accordingly, existing intellectual property laws may not
provide adequate protection to our products that are developed in connection
with emerging technologies.

As the number of titles in the interactive entertainment software industry
increases and the features and content of these titles further overlap,
interactive entertainment software developers may increasingly become subject
to infringement claims. Although we make reasonable efforts to ensure that our
products do not violate the intellectual property rights of others, we cannot
assure you that claims of infringement will not be made. Any such claims, with
or without merit, can be time consuming and expensive to defend and we cannot
assure you that infringement claims

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against us will not result in costly litigation or require us to license the
intellectual property rights of third parties, either of which could harm us.

We may also be subject to legal proceedings and claims from time to time in the
ordinary course of business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties. For
example, we are aware that other parties are utilizing the BAM mark, or marks
that incorporate the letters BAM, in businesses similar to ours, and those
parties may have rights to such mark that are superior to ours. These parties
could challenge our rights to use the name BAM in their markets. In this
event, we could be required to stop using the name in particular markets or to
obtain a license from these parties to use it in such markets.

Our agreements with third-party software developers and property licensors
typically provide for us to be indemnified with respect to certain matters.
However, if any claim is brought by a hardware manufacturer or other party
against us, our software developers or property licensors may not have
sufficient resources to, in turn, indemnify us. In addition, these parties
indemnification of us may not cover the matter that gives rise to the original
claim, and in either case, our business could be harmed.

Employees

As of June 30, 2003, we employed 32 full-time employees, comprising ten in
sales and marketing, five in research and development, and 17 in management,
general and administration. Of the 32 employees, 20 are located in the United
States, and 12 are located in England. None of the employees are represented by
a labor union, and we have experienced no work stoppages. We believe our
employee relations are good.

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RISK FACTORS

In addition to the other information in this Report, the following factors
should be considered in evaluating us and our business.

RISKS RELATED TO OUR FINANCIAL RESULTS

If we are unable to successfully enter into a merger, acquisition or obtain
additional financing, we may not have sufficient cash to continue operations
for the next six months.

In February 2003 we retained, through July 31, 2003, the investment banking
firm of Gerard Klauer Mattison & Co., Inc. to assist us in reviewing a range of
potential strategic alternatives, including mergers, acquisitions and
additional financing. No transactions arose from this assistance or were
consummated during this period. We may need to either consummate one or a
combination of the potential strategic alternatives, or otherwise obtain
capital via sale or license of certain of our assets, in order to satisfy our
future liquidity requirements. Current market conditions present uncertainty as
to our ability to effectuate any such merger or acquisition or secure
additional financing, as well as our ability to reach profitability. There can
be no assurances that we will be able to effectuate any such merger or
acquisition or secure additional financing, or obtain favorable terms on such
financing if it is available, or as to our ability to achieve positive cash
flow from operations. Continued negative cash flows create significant
uncertainty about our ability to implement our operating plan and we may have
to further reduce the scope of our planned operations. If cash and cash
equivalents, together with cash generated from operations, are insufficient to
satisfy our liquidity requirements, we will not have sufficient resources to
continue operations for the next six months.

Because we have a limited operating history, it is difficult to evaluate an
investment in our common stock.

We were organized in October 1999 and released our first interactive
entertainment software product in June 2000. It is difficult to evaluate our
future prospects and an investment in our common stock because we have a
limited operating history and the market for our products is rapidly evolving.
Our prospects are uncertain and must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in the early
stage of development.

Our future performance will depend upon a number of factors, including our ability to:



| |  |  | secure additional financing and fund purchases of inventory;                                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | expand our domestic and international customer base;                                                                                                    
|
| |  |  | secure popular entertainment properties upon which to base future products;                                                                             
|
| |  |  | develop and enhance products in response to new interactive
entertainment hardware platform releases, customer
demand and competitive market conditions;
|
| |  |  | expand our interactive entertainment software development and sales and marketing capabilities;                                                         
|
| |  |  | expand our international operations;                                                                                                                    
|
| |  |  | attract, retain and motivate qualified personnel; and                                                                                                   
|
| |  |  | maintain adequate control of our expenses.                                                                                                              

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We have a history of operating losses and may never achieve profitability.

We incurred net losses of $36.2 million in the year ended June 30, 2003, $15.7
million for the year ended June 30, 2002 and $1.6 million for the year ended
June 30, 2001. We will need to generate significant revenues and control
expenses to achieve profitability. There can be no assurance that our revenues
will grow in the future or that we will achieve sufficient revenues for
profitability.

Our revenues fluctuate due to seasonal demand and the nature of the interactive
entertainment industry.

We have experienced and may continue to experience significant quarterly
fluctuations in net sales and operating results. The interactive entertainment
industry is highly seasonal, with sales typically higher during the fourth and
first calendar quarters. This is due primarily to the increased demand for
games during and immediately following the holiday buying season. Our failure
or inability to introduce products on a timely basis to meet seasonal
fluctuations in demand will, and historically have, harmed our business and
operating results.

Our expense levels are based, in part, on our expectations regarding future
sales. Therefore, our operating results would be, and historically have been,
harmed by a decrease in sales, price erosions, and a failure to meet our sales
expectations. Uncertainties associated with interactive entertainment software
development, lengthy manufacturing lead times, production delays and the
approval process for products by hardware manufacturers and other licensors
make it difficult to predict the quarter in which our products will ship.

These and other factors could harm our business and have a material adverse
effect on our operating results.

Product development schedules are frequently unpredictable and make estimating
quarterly results difficult.

Product development schedules for software products, particularly for new
hardware platforms such as Sonys PlayStation 2, Nintendos GameCube and
Microsofts Xbox, are difficult to predict because they involve creative
processes, use of new development tools for new platforms and the learning
process, research and development, and experimentation associated with
development for new technologies. Our revenues and earnings are dependent on
our ability to meet our product release schedules, and our failure to meet
those schedules have resulted in, and may again result in, revenues and
earnings that fall short of analysts expectations for any individual quarter
and the fiscal year.

Our earnings will be affected upon the issuance of shares of our common stock
pursuant to third-party entertainment property license agreements.

Pursuant to a license agreement with a production company, we are obligated to
issue 68,738 shares of our common stock after the release of any film for which
we elect to produce interactive entertainment software products, up to 10 films
or 687,375 shares of common stock. To date, we have elected to produce titles
for three films and have issued 137,476 shares under this agreement for an
aggregate value of $816,000. We are required to issue these shares when the
films are released and will then incur a non-cash charge. We cannot estimate
the aggregate dollar amount of these future non-cash charges as they will be
based on our share price at a future point in time, but they may be
substantial. All of the non-cash charges on the shares issued to date under
the agreement had been amortized as of June 30, 2003.

In connection with the issuance of warrants pursuant to a separate license
agreement with another production company, we incurred a non-cash charge of
$97,000. We had amortized $8,000 of this charge as of June 30, 2003. The
remaining charge will be amortized upon release of the software products on
which the warrants are issued, over the life of the products, expected to be
between three and six months. Under the agreement, additional warrants to
purchase up to an additional 15,000 shares may be issued, contingent upon
certain future events occurring. Upon issuance of the warrants we will incur an
additional non-cash charge. We cannot estimate the aggregate dollar amount of
these future non-cash charges as they are based on our share price at future
points in time. Each of these future charges will affect our gross margins and
profitability.

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In connection with the issuance of warrants pursuant to a first look agreement
with another production company, we granted a warrant to purchase up to 200,000
shares of our common stock, of which 15,000 became immediately exercisable upon
the signing of the agreement. The remaining 185,000 will only become
exercisable, in multiples of either 4,625 or 13,875 shares, upon certain future
events occurring relating to the development and release of products. Upon the
warrant for 15,000 shares becoming exercisable, we incurred a non-cash charge
of $29,000, which has been fully amortized as of June 30, 2003. We will incur
additional non-cash charges as the remaining 185,000 shares become exercisable.
Upon release of the software products on which the warrants are exercisable, we
will amortize the non-cash charges over the life of the products, which are
expected to be between three and six months. We cannot estimate the aggregate
dollar amount of these future non-cash charges as they will be based on our
share price at future points in time. Each of these future charges will affect
our gross margins and profitability.

RISKS RELATED TO OUR BUSINESS

Our ability to effectuate a financing transaction to fund our operations could
impair the value of your investment, and we cannot assure you that we will be
able to meet our future capital requirements.

If we are not acquired by or merge with another entity or if we are not able to
raise additional capital via sale or license of certain of our assets, we may
need to consummate a financing transaction pursuant to which we receive
additional liquidity. This additional financing may take the form of us raising
additional capital through public or private equity offerings or debt
financing. We cannot be certain that additional capital will be available to us
on favorable terms, or at all. If we cannot effectuate a financing transaction
to raise needed funds on acceptable terms, we will not be able to develop or
enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements. To the extent we raise
additional capital by issuing equity securities, our stockholders will likely
experience substantial dilution. Also, any new equity securities may have
greater rights, preferences or privileges than our existing common stock. A
material shortage of capital will require us to take drastic steps such as
reducing our level of operations, disposing of selected assets or seeking
protection under federal bankruptcy laws.

We depend on a relatively limited number of products for a significant portion
of our revenues.

A significant portion of our revenues is derived each quarter from a relatively
limited number of products that were released in that quarter or the or in the
immediately preceding quarter. During the year ended June 30, 2003, sales of
four products each accounted for between 9% and 13% of our net revenues. During
the year ended June 30, 2002, sales of four products each accounted for between
7% and 11% of our net revenues, while during the year ended June 30, 2001,
sales of four products each accounted for between 14% and 28% of our net
revenues. We expect that a limited number of products will continue to produce
a disproportionately large amount of our net revenues. Due to this dependence
on a limited number of brands, the failure of one or more products to achieve
anticipated results could, and in the past has, significantly harmed our
business and operating results.

Our market is characterized by changing consumer preferences and short product
life cycles. To compete effectively we must continually introduce new products
that achieve market acceptance.

The interactive entertainment software market is characterized by short product
life cycles, changing consumer preferences and frequent introduction of new
products. We believe that our success will be dependent on the production of
successful titles on a continuous basis. We cannot assure you that new products
introduced by us will achieve significant market acceptance or that such
acceptance, if achieved, will be sufficient to permit us to recover development
and other associated costs. Consumer preferences for interactive entertainment
software products are continually changing and are difficult to predict. Even
the most successful titles remain popular for only limited periods of time,
often less than six months. The life cycle of a game generally consists of a
relatively high level of sales during the first few months after introduction,
followed by a decline in sales, and sales price erosion. Accordingly, we expect
that substantially all of our net sales for a particular year will be generated
by titles released in that year and in the latter part of the prior year.

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The development cycle for new titles is long and during this time the market
appeal of a title may decline.

We believe the development cycle for new titles is long, typically ranging from
12 to 24 months. After development of the initial product, we believe it may
take between six and 12 additional months to develop the product for additional
hardware platforms. In order to distribute a product, we must develop and test
the necessary game software, obtain approval from the manufacturer and licensor
if required, and have the initial order of cartridges or disks manufactured.
During the development cycle, the market appeal of a title or of a property on
which the title is based may decline. If market acceptance is not achieved, we
may, and historically have, granted markdown allowances to maintain our
relationship with retailers and our access to distribution channels. Because we
introduce a relatively limited number of new products in a given period, the
failure of one or more of our products to achieve market acceptance could and
have harmed our business.

The introduction of new interactive entertainment hardware platforms creates
risks relating to the development of titles for those hardware platforms.

The interactive entertainment industry is also characterized by rapid
technological change. For example, the 128-bit hardware platform was released
within five years of the release of the 64-bit hardware platform. As a result,
we must continually anticipate these changes and adapt our offerings to
emerging hardware platforms and evolving consumer preferences. Generally,
because of the length of the development cycle, our development efforts must
begin well in advance of the release of new hardware platforms in order to
introduce titles on a timely basis with the release of such hardware platforms.
Further, we have no control over the release dates of new hardware platforms or
the number of units that will be shipped upon such release. It is difficult to
ensure that our schedule for releasing new titles will coincide with the
release of the corresponding hardware platforms. Additionally, if fewer than
expected units of a new hardware platform are produced or shipped, such as
occurred with Microsofts Xbox and Nintendos Gamecube and Game Boy Advance,
developers of titles for those hardware platforms may experience lower than
expected sales.

The introduction of new hardware platforms and technologies can also render
existing titles obsolete and unmarketable. Generally, as more advanced hardware
platforms are introduced, consumer demand for titles for older hardware
platforms diminishes. In addition, a broad range of competing and incompatible
emerging technologies may lead consumers to postpone buying decisions until a
particular hardware platform gains widespread acceptance. As a result of such
reduced consumer demand for titles on older hardware platforms, our titles for
older hardware platforms may not generate sufficient sales to make our titles
profitable.

The development of software products is complex and time consuming and may not
lead to marketable titles.

The development of software products is complex and time consuming. Our
development efforts may not lead to marketable titles or titles that generate
sufficient revenues to recover their development and marketing costs,
especially if a hardware platform does not reach or sustain an expected level
of acceptance. This risk may increase in the future, as continuing increases in
development costs require corresponding increases in net sales in order for us
to achieve profitability.

The technological advancements of the most popular hardware platforms also
allow more complex software products. As software products become more complex,
the risk of undetected errors in products when first introduced increases. We
cannot assure you that, despite testing, errors will not be found in new
products or releases after shipments have been made, resulting in loss of or
delay in timely market acceptance, product returns, loss of revenues and damage
to our reputation. In the past, we have experienced delays in the introduction
of new titles and we anticipate that we will experience similar delays in the
future in connection with the introduction of additional new titles, including
products currently under development. Because net revenues associated with the
initial shipments of a new product generally constitute a high percentage of
the total net revenues associated with the life of a product, any delay in the
introduction of, or the presence of a defect in, one or more new products could
harm the ultimate success of the products or our business and operating
results.

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The costs of developing and marketing products for existing and anticipated
interactive entertainment hardware platforms can be substantial and could harm
our business.

The costs associated with the introduction of products for new hardware
platforms, such as Sonys PlayStation 2, Nintendos GameCube and Microsofts
Xbox, could harm our business as we believe the costs of developing and
publishing titles for these hardware platforms require greater financial and
technical resources than prior development and publishing efforts.
Additionally, during periods of new technology introductions, forecasting our
revenues and earnings is more difficult than in more stable or rising product
markets.

If interactive entertainment hardware platforms fail to achieve significant
market acceptance, it may harm our business.

Our sales are dependent on, among other factors, the popularity and unit sales
of the interactive entertainment hardware platforms of the various
manufacturers. The interactive entertainment industry has experienced periods
of significant growth in consumer interest and popularity, followed by periods
in which consumer demand for interactive entertainment products has slowed.
Unexpected shortfalls in the market acceptance of a particular hardware
platform, such as occurred with Microsofts Xbox and Nintendos Gamecube and
Game Boy Advance, can and have significantly harmed consumer demand for titles
released or scheduled for release for that hardware platform. Therefore, we are
dependent upon the successful marketing efforts of the manufacturers of the
various hardware platforms to meet financial expectations.

Over 48% of our net revenues are derived from sales to our four largest
customers. We could be adversely affected if any of them reduced or terminated
their purchases from us or did not pay their obligations to us.

Revenues from our four largest customers collectively accounted for 48% of our
net revenues for the year ended June 30, 2003, as compared to 48% of our net
revenues for the year ended June 30, 2002, and 52% of our revenues for the year
ended June 30, 2001. As of June 30, 2003, four customers each accounted for
between 8% and 19% of our gross trade accounts receivable, as of June 30, 2002, four
customers each accounted for between 8% and 12% of our gross trade accounts receivable
and as of June 30, 2001, four customers each accounted for
between 9% and 23%
of our gross trade accounts receivable. We have no written agreements or other
understandings with any of our customers that relate to future purchases.
Therefore, purchases by these customers or any others could be reduced or
terminated at any time. A substantial reduction or a termination of purchases
by any of our largest customers would harm us.

Substantially all of our sales are made on credit, which exposes us to bad debt
risk.

Our sales are typically made on credit, with terms that vary depending upon the
customer and other factors. While we attempt to carefully monitor the
creditworthiness of our customers and distributors, we bear the risk of their
inability to pay our receivables and of any delay in payment. A business
failure by any of our largest customers, such as occurred with Kmart in January
2002, would harm us, as could a business failure by any of our distributors or
other retailers.

Product returns and markdown allowances could harm our business.

We have experienced, and are exposed to the risk of product returns and
markdown allowances with respect to our customers. The decrease in demand for
products based upon older hardware platforms may lead to a high level of these
product returns and markdown allowances. We also allow distributors and
retailers to return defective and damaged products in accordance with
negotiated terms. Product returns and markdown allowances that exceed our
expectations could harm our business.

We cannot publish our interactive entertainment software titles without the
approval of hardware manufacturers. Our ability to continue to develop and
market our titles is dependent on the hardware manufacturers continuing to do
business with us.

We are wholly dependent on the manufacturers of interactive entertainment
hardware platforms and our ability to obtain or maintain non-exclusive licenses
with them, both for the rights to publish and to manufacture titles for their

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hardware platforms. We are required to obtain a license to develop and publish
titles for each hardware platform for which we develop and publish titles. Each
license specifies the territory to which it applies, and such licenses range
from as broad as multi-national distribution to as narrow as approval on a
title-by-title basis. Our existing hardware platform licenses for Sonys
PlayStation and PlayStation 2, Nintendos Game Boy Color and Game Boy Advance,
Nintendo 64, Nintendo GameCube, and Microsofts Xbox require that we obtain
approval for the publication of new titles on a title-by-title basis. As a
result, the number of titles we are able to publish for these hardware
platforms, along with our ability to time the release of these titles is
dependent upon decisions made by third party manufacturers. Accordingly, our
revenues from titles for these hardware platforms may be limited. Should any
manufacturer choose not to renew or extend our license agreement at the end of
its current term, or if the manufacturer were to terminate our license for any
reason, we would be unable to publish additional titles for that manufacturers
hardware platform.

We are dependent on Sony and Nintendo for the manufacture of products that we
develop for their hardware platforms.

When we develop interactive entertainment software titles for a hardware
platform offered by Sony or Nintendo, the products are manufactured exclusively
by that hardware manufacturer. Our hardware platform licenses with Sony and
Nintendo provide that the manufacturer may change prices for the manufacturing
of products at any time. In addition, these licenses include other provisions
that give the manufacturer substantial control over our costs and the release
of new titles. Since each of the manufacturers is also a publisher of games for
its own hardware platforms and manufactures products for all of its other
licensees, a manufacturer may give priority to its own products or those of our
competitors in the event of insufficient manufacturing capacity. We would be
materially harmed by unanticipated delays in the manufacturing and delivery of
products.

If we cannot retain our key personnel and attract and retain additional key
personnel, our business will be harmed.

We depend to a significant extent on the contributions and industry experience
of our key personnel, in particular our Chief Executive Officer, Raymond C.
Musci, and our Vice Chairman, Anthony R. Williams. If we fail to retain the
services of our key personnel, our ability to secure additional licenses and
develop and sell new products might be impaired. In addition, our future
success will also depend upon our ability to continue to attract, motivate and
retain highly qualified employees and third-party contractors, particularly
software design and development personnel and outside sales representatives.
Competition for highly skilled employees is intense and we may not be
successful in attracting and retaining such personnel.

We are dependent upon licenses to properties originated and owned by third
parties for the development of our titles.

Many of our titles, such as those from our Powerpuff Girlsseries, Dexters
Laboratoryseries, Ecks v Severand Reign of Fireare based upon entertainment
properties licensed from third parties. We cannot assure you that we will be
able to obtain new licenses, or renew existing ones, on reasonable terms, if at
all. If we are unable to obtain licenses for the properties which we believe
offer significant consumer appeal, we would be required to obtain licenses for
less popular properties or would have to develop all of our titles based upon
internally developed concepts.

To the extent a licensed property is less popular than we anticipate, or is
unsuccessful, sales of titles based on that property may be negatively
impacted.

We have in the past experienced unsuccessful releases of titles based on
properties that we licensed from third parties. Titles based on less popular
properties, or on internally developed concepts, typically require greater
marketing expense in order to establish brand identity and may not achieve
broad market acceptance or prove to be successful.

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We are dependent on third-party interactive entertainment software developers
for developing and completing our titles.

We rely on third-party interactive entertainment software developers for the
development of our interactive entertainment software titles. Quality
third-party developers are continually in high demand. For this reason, we
cannot assure you that the third-party software developers who have developed
titles for us in the past will continue to be available to develop software for
us in the future. Due to the limited number of third-party software developers
and the lack of control that we exercise over them, we cannot assure you that
these developers will complete titles for us on a timely basis or within
acceptable quality standards, if at all.

Our future success is highly dependent on our proprietary software and
intellectual property.

We rely primarily on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other methods to
protect our proprietary rights. We require our employees, consultants and other
outside individuals and entities to execute confidentiality and nondisclosure
agreements upon the start of employment, consulting or other contractual
relationships with us. However, our ability to police these individuals and
entities and enforce these agreements is costly and uncertain. We are aware
that unauthorized copying occurs within our industry. If a significantly
greater amount of unauthorized copying of our interactive entertainment
software products were to occur, our business would be harmed. We generally
obtain ownership of the software code and related documentation from
third-party software developers. In instances where we do not retain sole
ownership of the source code, the owner may use or license the code for
development of other software products that may compete directly with our
products and we may not have sufficient rights in the source code to produce
derivative products.

We rely on existing copyright laws to prevent unauthorized distribution of our
products. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy is a
persistent problem, especially in international markets. In addition, the laws
of some countries in which our products are or may be distributed either do not
protect our products and intellectual property rights to the same extent as the
laws of the United States or are weakly enforced. Legal protection of our
rights may be ineffective in these countries. Any unauthorized use of our
proprietary information could result in costly and time-consuming litigation to
enforce our proprietary rights.

Other parties may assert claims against us that we are infringing upon their
intellectual property rights and we are required to indemnify hardware
manufacturers from certain claims in exchange for the right to purchase titles
and manufacture our software for their hardware application.

We cannot be certain that our products do not infringe upon the intellectual
property rights of others. We may be subject to legal proceedings and claims
from time to time in the ordinary course of our business, including claims of
alleged infringement of the intellectual property rights of third parties. If
our products violate third-party proprietary rights, we cannot assure you that
we would be able to obtain licenses to continue offering such products on
commercially reasonable terms, or at all. In addition, we must indemnify the
hardware manufacturers with respect to all loss, liability and expense
resulting from any claim against them involving the development, marketing,
sale or use of our products. This includes any claims for copyright or
trademark infringement brought against them. As a result, we bear the risk that
the properties upon which our software titles are based, or that the
information and technology licensed from the hardware manufacturer and
incorporated in our software, may infringe the rights of third parties. Any
claims against us or the parties we indemnify relating to the infringement of
third-party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. Their claims
could also result in injunctions preventing us from offering these products.
Such claims could severely harm our financial condition and ability to compete.

We face risks associated with doing business in foreign countries, including
our ability to generate international demand for our products.

We intend to increase our international revenues. We cannot assure you that we
will be able to generate international market demand for our products.
International sales and operations are subject to a number of risks, including:

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| |  |  | international consumer acceptance of existing and proposed titles;                                        
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | the impact of possible recessions in foreign economies;                                                   
|
| |  |  | our ability to protect our intellectual property;                                                         
|
| |  |  | the time and costs associated with translating and localizing products for foreign markets;               
|
| |  |  | foreign currency fluctuations;                                                                            
|
| |  |  | unexpected changes in regulatory requirements;                                                            
|
| |  |  | difficulties and costs of staffing and managing foreign operations, or licensing to foreign entities ; and
|
| |  |  | political and economic instability.                                                                       

A significant downturn in general economic condition which results in a
reduction in discretionary spending has reduced, and may continue to reduce,
demand for our products and could harm our business.

Our product sales are affected by a retail customers ability and desire to
spend disposable income on the purchase of our software titles. Any significant
downturn in general economic conditions which results in a reduction of
discretionary spending could result in a reduction in demand for our products
and could harm our business. The United States economy is currently undergoing
a period of slowdown, which some observers view as a recession. The United
States and world economic condition has been worsened by the terrorist attacks
on September 11, 2001. Moreover, any further terrorist activities, or the
effect of the United States political, economic or military response to such
activities, could result in the further deterioration of the United States and
world economy. Such industry downturns have been, and may continue to be,
characterized by diminished product demand and erosion of average selling
prices. A continued economic downturn or recession would have a significant
adverse effect on our operating results in future periods.

Our officers and directors own a substantial amount of our common stock and
therefore have substantial influence over our operations and can significantly
influence matters requiring stockholder approval.

Our officers and directors beneficially own approximately 50% of our common
stock. As a result, they have the ability to control all matters requiring
approval by our stockholders, including the election and removal of directors,
approval of significant corporate transactions and the decision of whether a
change in control will occur.

RISKS RELATED TO OUR INDUSTRY

Competition within the interactive entertainment software industry is intense
and poses an ongoing threat to the success of our business.

The interactive entertainment industry is intensely competitive. Many of our
competitors have greater name recognition among consumers and licensors of
entertainment properties, broader product lines and greater financial,
marketing and other resources than us. Accordingly, these competitors may be
able to market their products more effectively, make larger offers or
guarantees in connection with the acquisition of licensed entertainment
properties, adopt more aggressive pricing policies or pay more to third-party
developers. We believe that other technology, entertainment and media companies
are increasing their focus on the interactive entertainment software market,
which might result in greater competition for us. In addition, many of our
competitors are developing online interactive entertainment software products
and interactive networks that will be competitive with our interactive
entertainment software products.

Competitive pressures could have the following effects on us:

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| |  |  | as competition for popular entertainment properties increases, our
cost of acquiring licenses for those properties may increase, resulting
in reduced margins;                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we might not be able to achieve full distribution of our products
with our customers;                                                                                                 
|
| |  |  | as competition for retail shelf space becomes more intense, we may
need to increase our marketing expenditures to maintain sales of our
interactive entertainment software titles; and
|
| |  |  | we could be required to reduce the wholesale unit prices of our
titles.                                                                                                               

Competition for limited shelf space and promotional resources among interactive
entertainment software publishers is intense and poses an ongoing threat to the
success of our business.

There is intense competition among developers and publishers of interactive
entertainment software products for high quality retail shelf space and
promotional support from retailers. As the number of titles and hardware
platforms increases, competition for shelf space will intensify and may require
us to increase our marketing expenditures. Due to increased competition for
limited shelf space, retailers and distributors are in an increasingly better
position to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return policies. Our
products constitute a relatively small percentage of any retailers sales
volume, and we cannot assure you that retailers will continue to purchase our
products or to provide our products with adequate levels of shelf space and
promotional support. As a result of their positions in the industry, the
manufacturers of interactive entertainment hardware platforms generally have
better bargaining positions with respect to retail pricing, shelf space and
retailer accommodations than do any of their licensees, including us.

Government restrictions including the possible adoption of an interactive
entertainment software rating system could harm our business.

Legislation is periodically introduced at the state and federal levels in the
United States and in foreign countries to establish a system for providing
consumers with information about graphic violence and sexually explicit
material contained in interactive entertainment software products. Under such a
system, interactive entertainment software publishers would be expected to
comply by identifying particular products within defined rating categories. In
addition, these publishers would be required to communicate these ratings to
consumers through appropriate package labeling and through advertising and
marketing presentations consistent with each products rating. Many foreign
countries have laws which permit governmental entities to censor the content of
products, including interactive entertainment software. In some instances, we
may be required to modify our products to comply with the requirement of such
governmental entities, which could delay the release of those products in such
countries. These delays could harm our business. We currently voluntarily
submit our products to industry-created review boards and publish their ratings
on our game packaging. Some retailers may refuse to carry titles that bear an
unacceptable rating. We believe that mandatory government-run interactive
entertainment software products rating systems eventually will be adopted in
many countries which represent significant markets or potential markets for us.
Due to the uncertainties in the implementation of such a rating system,
confusion in the marketplace may occur. We are unable to predict what effect,
if any, such a rating system would have on our business.

Potential opposition by consumer advocacy groups to certain software content
could harm our business.

Consumer advocacy groups have in the past opposed sales of interactive
entertainment software products containing graphic violence and sexually
explicit content. These groups have pressed for legislation in these areas and
engaged in public demonstrations and media campaigns. While to date such
actions have not harmed our business, we cannot assure you that these groups
will not target our products in the future. If that occurs, we may be required
to significantly change or discontinue one or more of our titles.

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RISKS RELATED TO OUR COMMON STOCK

Our stock price has been volatile and we expect it to continue to be volatile.

Prior to our initial public offering in November 2001, there was no public
market for our common stock. Since our initial public offering the market price
of our common stock has been volatile. We have experienced a decline in the
market price of our common stock from the initial public offering price. The
stock market has experienced significant price and volume fluctuations that
affected the market price for the common stock of many technology,
communications and entertainment and media companies. These market fluctuations
were sometimes unrelated or disproportionate to the operating performance of
these companies. Any significant stock market fluctuations in the future,
irrespective of our actual performance or prospects, could result in a further
decline in the market price of our common stock.

If our common stock is delisted from The Nasdaq SmallCap Market, the liquidity
and price of our common stock may be adversely affected.

Our common stock is listed on The Nasdaq SmallCap Market. In order for our
common stock to continue to be listed on The Nasdaq SmallCap Market, however,
we must continue to satisfy specified listing maintenance standards established
by Nasdaq, including (i) required levels of total assets, net tangible assets,
stockholders equity or revenues, (ii) minimum market value of our public float
and (iii) a minimum bid price per share.

We transferred to The Nasdaq SmallCap Market from The Nasdaq National Market on
March 27, 2003. Nasdaq advised us at the time of transfer that we met all the
specified listing requirements of The Nasdaq SmallCap Market with the exception
of the minimum $1.00 bid price per share requirement and that we had until
November 17, 2003 to regain compliance with this requirement. On
September 29, 2003 Nasdaq advised us that we had regained
compliance with the Rule, and that we now met all the specified
listing requirements of Nasdaq SmallCap Market.

If our common stock is delisted from The Nasdaq SmallCap Market, our common
stock would trade on the Over-The-Counter Bulletin Board, which is viewed by
most investors as a less desirable and less liquid marketplace. Thus,
delisting from The Nasdaq SmallCap Market could adversely affect the liquidity
and price of our common stock and could have a long-term impact on our ability
to raise additional capital in the future.

Anti-takeover provisions in our charter documents and in Delaware law could
prevent or delay a change in control and, as a result, negatively impact our
stockholders.

Provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a merger or acquisition or make removal of incumbent directors or
officers more difficult. These provisions may discourage takeover attempts and
bids for our common stock at a premium over the market price. These provisions
include:



| |  |  | the ability of our board of directors to alter our bylaws without stockholder approval;                                                                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the restriction on the ability of stockholders to call special meetings;                                                                                                                           
|
| |  |  | the restriction on the ability of our stockholders to act by written consent;                                                                                                                      
|
| |  |  | the establishment of advance notice requirements for nominations
for election to our board of directors or for proposing matters that
can be acted on by stockholders at stockholders meetings; and
|
| |  |  | the establishment of a classified board of directors with
staggered, three-year terms, which prevents a majority of the board
from being elected at one time.                                      

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In addition, we are subject to Section 203 of the Delaware General Corporation
Law, which prohibits a publicly held Delaware corporation from engaging in a
merger, asset or stock sale or other transaction with an interested stockholder
for a period of three years following the date such person became an interested
stockholder, unless prior approval of our board of directors is obtained or as
otherwise provided. These provisions of Delaware law also may discourage, delay
or prevent someone from acquiring or merging with us without obtaining the
prior approval of our board of directors, which may cause the market price of
our common stock to decline.

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SPECIAL NOTE ON FORWARD LOOKING STATEMENTS AND REPORTS PREPARED BY
ANALYSTS

This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements with
regards to our revenues, earnings, spending, margins, cash flow, orders,
inventory, products, actions, plans, strategies and objectives.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or simply state future results, performance or
achievements, and may contain the words believe, anticipate, expect,
estimate, intend, plan, project, will be, will continue, will,
result, could, may, might, or any variations of such words with similar
meanings. Any such statements are subject to risks and uncertainties that
would cause our actual results to differ materially from those which are
managements current expectations or forecasts. Such information is subject to
the risk that such expectations or forecasts, or the assumptions underlying
such exceptions or forecasts, become inaccurate. In addition, the risks
included here are not exhaustive. Other sections of this Report may include
additional factors which could adversely impact our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and we cannot predict
all such risk factors, nor can we assess the impact of all such risk factors on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward
looking statements. Given these risks and uncertainties, investors should not
place undue reliance on forward-looking statements as a prediction of actual
results. Investors should also be aware that while we do, from time to time,
communicate with securities analysts, we do not disclose any material
non-public information or other confidential commercial information to them.
Accordingly, individuals should not assume that we agree with any statement or
report issued by any analyst, regardless of the content of the report. Thus,
to the extent that reports issued by securities analysts contain any
projections, forecasts or opinions, such reports are not our responsibility.

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ITEM 2  PROPERTIES

Our headquarters are located in San Jose, California, where we occupy
approximately 9,533 square feet of office space under a lease that expires in
April 2005. We also lease approximately 3,500 square feet for our international
sales office located in Bath, England. This lease expires in September 2008. In
June 2002, we entered into a lease for 3,214 square feet in London where our
internal development studio was located until it was disposed of in January
2003. At that time we granted a sublease, subject to landlords consent, on
those premises. This lease expires in June 2012, although we have the right to
terminate the lease at our option in 2007. We believe that our facilities are
adequate for our current needs and suitable additional or substitute space will
be available in the future to replace our existing facilities, if necessary, or
accommodate expansion of our operations.




ITEM 3  LEGAL PROCEEDINGS

On April 1, 2003, Amaze Entertainment, Inc. asserted counterclaims against us
in an action captioned BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC. et.
al. that we commenced in the Superior Court of California, County of Santa
Clara (Case No. CV814820) on February 18, 2003, and which Amaze had removed to
the United States District Court for the Northern District of California (Case
No. C03 01286 PVT) on or about March 24, 2003. Our action asserted claims for,
inter alia, relief based on rescission, breach of contract, declaratory relief,
and money paid and received with regard to an agreement for a video game titled
Crushed Baseball that Amaze Entertainment was developing for us. Amaze
Entertainments counterclaims alleged breach of contract and unjust enrichment
with regard to each of the Crushed Baseball development agreement and a
separate development agreement for another video game titled Samurai Jack.
The counterclaims seeked, inter alia, compensatory damages of approximately
$3.5 million and additional damages to be proven at trial. On July 11, 2003
Amaze and Bam agreed to compromise and settle all claims either asserted or
that could be asserted in connection with the dispute and to mutually release
any and all future claims and contentions they have against each other. This
compromise requires Amaze to make Bam two payments, one in July 2003 and one in
October 2003. Bam has received the first of these two payments. Under the terms
of the settlement, the agreement to settle would have been terminated and
considered null and void if Amaze had given Bam notice by August 13, 2003 that
it has failed to enter into an agreement with Warner Bros. Consumer Products
Inc. allowing Amaze to commercially exploit the Samurai Jack product. Amaze did
not give such notice by August 13, 2003, and to Bams knowledge, the settlement
agreement is in effect. The settlement agreement stipulates that upon payment
by Amaze to Bam of the sum due in October 2003, the parties will execute a
stipulation for dismissal of the legal actions. Accordingly, the litigation
remains unsettled at this time, and management believes it is too early to
predict the outcome.

On March 27, 2003, a complaint captioned OVATION ENTERTAINMENT, LLC v. BAM!
ENTERTAINMENT, INC. et. al. was filed against us in the Superior Court of
California, County of Los Angeles (Case No. SCO76530). The complaint alleged,
inter alia, claims of breach of contract and fraud against us in connection
with an exclusive first look agreement, which was assigned to Ovation
Entertainment by the licensor originally party to the agreement, for content
relating to motion pictures and television projects to be licensed to us for
development in connection with video games. The lawsuit sought, inter alia,
compensatory damages believed to be in excess of $1 million and interest
thereon, exemplary or punitive damages, and attorneys fees. On August 4,
2003, Ovation and Bam agreed to settle the litigation by amending the terms of
the agreement, and the legal action was dismissed on August 25, 2003. Bam does
not believe that the amendment will have a material adverse effect on Bams
financial position or results of operations.

We occasionally become involved in litigation arising from the normal course of
business. Other than the foregoing, we believe that any liability with respect
to pending legal actions, individually or in the aggregate, will not have a
material adverse effect on our business, financial condition or results of
operations.




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

No matters were submitted to our security holders to be voted during the last
quarter of the fiscal year ended June 30, 2003.

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PART II




ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price range of common stock

Our common stock began trading on the Nasdaq National Market on November 15,
2001 after we completed the initial public offering of 5,750,000 shares of our
common stock at $8.00 per share. Our common stock, which trades under the
symbol BFUN, was transferred to The Nasdaq SmallCap Market on March 27, 2003.
The following table sets forth, for the periods indicated, the high and low
sale prices for our common stock:

|                                |  |      |       |     |  |   |      | 
|------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|                                |  | High |       | Low
|                                |  |      |       |    
|Fiscal year ended June 30, 2003 |  |      |       |     |  |   |      | 
|Fourth quarter                  |  | $    | 0.73  |     |  | $ | 0.14 | 
|Third quarter                   |  | $    | 0.38  |     |  | $ | 0.13 | 
|Second quarter                  |  | $    | 1.11  |     |  | $ | 0.28 | 
|First quarter                   |  | $    | 2.90  |     |  | $ | 0.93 | 
|Fiscal year ended June 30, 2002 |  |      |       |     |  |   |      | 
|Fourth quarter                  |  | $    | 3.55  |     |  | $ | 1.92 | 
|Third quarter                   |  | $    | 8.50  |     |  | $ | 3.00 | 
|Second quarter(1)               |  | $    | 10.97 |     |  | $ | 7.55 | 



---

|(1) |  | For the period from November 14, 2001 to December 31, 2001.
|--- |  | -----------------------------------------------------------

As of September 17, 2003, there were 162 holders of records of our common stock
(including holders who are nominees for an undetermined number of beneficial
owners). These figures do not include beneficial owners who hold shares in
nominee name.

Dividends

We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to
finance the growth and development of our business. Therefore, we do not expect
to pay cash dividends on our capital stock in the foreseeable future. Any
future determination relating to our dividend policy will be made at the
discretion of our board of directors and will depend on a number of factors,
including future earnings, capital requirements, financial conditions,
contractual obligations, future prospects and other factors the board of
directors may deem relevant.

Change in securities and use of proceeds.

Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $0.001 per share and 10,000,000 shares of authorized preferred stock,
par value $0.001 per share. As of June 30, 2003, there were 14,678,290 shares
of our common stock issued and outstanding, and no shares of our preferred
stock issued and outstanding.

In November 2001, we completed the initial public offering (the Offering) of
5,750,000 shares of our common stock. The managing underwriters in the
Offering were Jefferies & Company, Inc. and Morgan Keegan & Company, Inc. (the
Underwriters). The shares of common stock sold in the Offering were
registered under the Securities Act of 1933, as amended, on a registration
statement on Form S-1 (Reg. No. 333-62436) (the Registration Statement) that
was declared effective by the Securities and Exchange Commission (the SEC) on
November 14, 2001.

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The Offering was terminated after all 5,750,000 shares (including 750,000
shares sold pursuant to the exercise of the Underwriters over-allotment
option) registered under the Registration Statement were sold by us at a
purchase price of $8.00 per share. The aggregate price of the Offering amount
registered and sold was $46.0 million. In connection with the Offering, we
paid an aggregate of approximately $3.2 million in underwriting discounts and
commissions to the Underwriters. Expenses incurred in connection with the
Offering, other than underwriting discounts and commissions, totaled
approximately $3.6 million.

After deducting the underwriting discounts and commissions and the estimated
expenses incurred in connection with the Offering, we received net proceeds of
approximately $39.2 million. These proceeds had been fully utilized as of June
30, 2003 as follows:



| |  |  | $26.5 million for product development                       
| | - |  | ------------------------------------------------------------
|
| |  |  | $6.0 million for expansion of sales and marketing activities
|
| |  |  | $6.7 million for additional working capital.                

Recent sales of unregistered securities

During the year ended June 30, 2003, we issued unregistered securities as
described below. None of these transactions involved any underwriters,
underwriting discounts or commissions, or any public offering, and we believe
that each transaction was exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereof and/or
Regulation D promulgated thereunder. All persons had adequate access, through
their relationships with us, to information about us.

In connection with an agreement entered into with a production company during
January 2002, we agreed to issue to the production company warrants to purchase
up to 50,000 shares of our common stock, in pre-determined multiples of either
5,000 or 10,000 shares, upon the occurrence of certain pre-determined events.
Warrants are to be issued at the average closing price of our stock for the
five days immediately prior to the date of issue, have a five year term from
date of issue, and are fully vested and are immediately exercisable upon
issuance. In July 2002, we issued a warrant to purchase 5,000 shares of our
common stock at an exercise price of $2.04 per share under this agreement, and
in May 2003, we issued another warrant to purchase 10,000 shares of our common
stock at an exercise price of $0.38 per share under this agreement.

In January 2003, we issued a warrant to a developer to purchase up to 10,000
shares of common stock at an exercise price of $0.30. The warrant was issued at
the average closing price of our stock for the five days immediately prior to
the date of issue, has a five year term from date of issue, is fully vested and
is immediately exercisable upon issuance.

In September 2002, we issued 68,738 shares of our common stock to a production
company pursuant to a license agreement.

27



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##### Table of Contents






ITEM 6  SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statement of operations data for the years
ended June 30, 2003, 2002, and 2001 and the consolidated balance sheet data as
of June 30, 2003 and 2002 are derived from our audited consolidated financial
statements and notes thereto, included elsewhere herein, and are audited by
Deloitte & Touche LLP, independent public accountants, as set forth in their
report included later in this Report. The consolidated balance sheet as of
June 30, 2001 is derived from audited financial statements that are not
included in this Report. The following data should be read in conjunction with
our consolidated financial statements, including the notes thereto, and
Managements discussion and analysis of financial condition and results of
operations included elsewhere in this Report.

|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |        |   |        |        | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------- | -------------------------------------------- | ------------------------ | - | ------------------- | ------- | ------ | - | ------ | ------ | ------ | - | ------ | ------ | 
|                                                        |                                                                                       |                                       |                                              |                          |   | Year ended June 30,
|                                                        |                                                                                       |                                       |                                              |                          |   |                    
|                                                        |                                                                                       |                                       |                                              |                          |   | 2003                |         | 2002   |   | 2001  
|Consolidated statement of operations data               |                                                                                       | (in thousands, except per share data)
|                                                        |                                                                                       |                                      
|Net revenues                                            |                                                                                       | $                                     | 35,708                                       |                          |   | $                   | 50,734  |        |   | $      | 25,351 |       
|Costs and expenses:                                     |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|                                                        | Cost of revenues                                                                      |                                       |                                              |                          |   |                     |         |        |   |        |        |        |  
|                                                        |                                                                                       |                                       | Cost of goods sold                           |                          |   | 23,124              |         |        |   | 29,826 |        |        |   | 14,827 |       
|                                                        |                                                                                       |                                       | Royalties, software costs, and license costs |                          |   | 18,739              |         |        |   | 12,101 |        |        |   | 2,898  |       
|                                                        |                                                                                       |                                       | Project abandonment costs                    |                          |   | 9,600               |         |        |   | 693    |        |        |   |       |       
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|                                                        |                                                                                       |                                       | Total cost of revenues                       |                          |   | 51,463              |         |        |   | 42,620 |        |        |   | 17,725 |       
|                                                        | Research and development (exclusive of amortization
of deferred stock compensation)   |                                       |                                              | 2,912                    |   |                     |         | 2,519  |   |        |        | 1,073  |  
|                                                        | Sales and marketing (exclusive of amortization of
deferred stock compensation)        |                                       |                                              | 9,220                    |   |                     |         | 11,473 |   |        |        | 4,292  |  
|                                                        | General and administrative (exclusive of
amortization of deferred stock compensation) |                                       |                                              | 7,164                    |   |                     |         | 6,293  |   |        |        | 1,996  |  
|                                                        | Amortization of deferred stock compensation*                                          |                                       |                                              | 418                      |   |                     |         | 1,223  |   |        |        | 618    |  
|                                                        | Restructuring costs                                                                   |                                       |                                              | 426                      |   |                     |         |       |   |        |        |       |  
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|                                                        |                                                                                       |                                       |                                              | Total costs and expenses |   |                     | 71,603  |        |   |        | 64,128 |        |   |        | 25,704 | 
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|Loss from operations                                    |                                                                                       |                                       | (35,895                                      | )                        |   |                     | (13,394 | )      |   |        | (353   | )     
|                                                        | Other expense, net                                                                    |                                       |                                              | (298                     | ) |                     |         | (2,279 | ) |        |        | (1,249 | )
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|Net loss                                                |                                                                                       |                                       | (36,193                                      | )                        |   |                     | (15,673 | )      |   |        | (1,602 | )     
|                                                        | Redeemable convertible preferred stock dividend                                       |                                       |                                              |                         |   |                     |         |       |   |        |        | (5,540 | )
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|Net loss attributable to common stockholders            |                                                                                       | $                                     | (36,193                                      | )                        |   | $                   | (15,673 | )      |   | $      | (7,142 | )     
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|Net loss attributable to common stockholders per share: |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|                                                        | Basic and diluted (1)                                                                 |                                       | $                                            | (2.47                    | ) |                     | $       | (1.65  | ) |        | $      | (4.82  | )
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|Shares used in computation:                             |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|                                                        | Basic and diluted                                                                     |                                       |                                              | 14,654                   |   |                     |         | 9,503  |   |        |        | 1,482  |  
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|*Amortization of deferred stock compensation:           |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|                                                        | Research and development                                                              |                                       | $                                            | (25                      | ) |                     | $       | 126    |   |        | $      | 72     |  
|                                                        | Sales and marketing                                                                   |                                       |                                              | (7                       | ) |                     |         | 70     |   |        |        | 28     |  
|                                                        | General and administrative                                                            |                                       |                                              | 450                      |   |                     |         | 1,027  |   |        |        | 518    |  
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       
|                                                        |                                                                                       | $                                     | 418                                          |                          |   | $                   | 1,223   |        |   | $      | 618    |       
|                                                        |                                                                                       |                                       |                                              |                          |   |                     |         |        |   |        |        |       



---

|(1) |  | The diluted net loss per share computation excludes potential shares of
common stock issuable upon exercise of options and warrants to purchase
common stock, as their effect would be antidilutive. See Notes 1 and 12
of notes to consolidated financial statements for a detailed explanation
of the determination of the shares used in computing basic and diluted net
loss per share.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                       |  |                |        |   |  |  |  |      |  |      |        |  |  |   |        |  
|-------------------------------------- |  | -------------- | ------ | - |  |  |  | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                       |  | June 30,      
|                                       |  |               
|                                       |  | 2003           |        |   |  |  |  | 2002 |  | 2001
|Consolidated balance sheet data        |  | (in thousands)
|                                       |  |               
|Cash and cash equivalents              |  | $              | 1,068  |   |  |  |  |      |  | $    | 4,726  |  |  | $ | 2,170  |  
|Working capital                        |  |                | (1,503 | ) |  |  |  |      |  |      | 19,974 |  |  |   | 4,247  |  
|Total assets                           |  |                | 9,460  |   |  |  |  |      |  |      | 49,467 |  |  |   | 20,992 |  
|Long-term portion of debt              |  |                |       |   |  |  |  |      |  |      |       |  |  |   |       |  
|Redeemable convertible preferred stock |  |                |       |   |  |  |  |      |  |      |       |  |  |   | 17,329 |  
|Total stockholders equity (deficit)   |  |                | 3,260  |   |  |  |  |      |  |      | 38,856 |  |  |   | (4,669 | )




ITEM 7  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain information contained in the following Managements Discussion and
Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of the Securities Act and the
Securities Exchange Act, which can be identified by the use of forward-looking
terminology such as believes, anticipates,
plans, expects, endeavors, may, will, intends, estimates, and similar expressions are intended to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties, and our actual results may differ materially from the
results discussed in the forward-looking statements as a result of certain
factors set forth in Risk Factors and elsewhere in this Report.

OVERVIEW

We develop and publish interactive entertainment software products. We
currently publish titles for the most popular interactive entertainment
hardware platforms, such as Sonys PlayStation and PlayStation 2, Nintendos
Gamecube, Nintendo 64, Game Boy Color and Game Boy Advance, Microsofts Xbox,
portable handheld devices manufactured by Palm and Handspring, and for personal
computers or PCs. We were incorporated in California in October 1999 under the
name Bay Area Multimedia, Inc. We reincorporated in Delaware in September 2000
and changed our name to BAM! Entertainment, Inc. in December 2000. We
commenced operations in October 1999 and shipped our first products in June
2000.

We license properties from a wide variety of sources, and publish titles based
on the motion picture, sports and television properties of our licensors. We
have entered into strategic license arrangements with entertainment and media
companies that have developed well-known characters and brands and that are
producing popular properties that are expected to form the basis of some of our
future products. Our agreements with licensors and developers generally
require us to make advance royalty payments, and we may be required to spend
money on advertising and promotion. We generally pay royalties based on net
revenues.

We design and develop our titles through third parties with whom we have
established relationships. We believe that the development cycle for new
titles is long, typically ranging from 12 to 24 months, except for Nintendos
Game Boy Advance for which the development cycle typically ranges from six to
nine months. After development of the initial product, we believe that it may
take between six to 12 additional months to develop the product for, or port
the product to, a different hardware platform.

We have offices in both the United States and Europe. International operations
outside of North America are conducted through our office in England, where we
perform international sales and marketing activities and manage local
third-party developers. Domestically, we sell our products to mass
merchandisers such as Toys R Us, Target, Kmart, Wal-Mart and Best Buy,
specialty chains such as GameStop and Electronics Boutique, and independent
distributors.

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Internationally, in July 2003 we entered into a distribution agreement with
Acclaim Entertainment Ltd (Acclaim) whereby Acclaim will exclusively
distribute certain forthcoming products of ours in PAL territories. PAL is the
television standard for the United Kingdom, continental Europe and Australia.
Prior to entering this agreement we sold our products internationally through
mass merchandisers, distributors and sub-distributors. Catalogue products will
continue to be sold through mass merchandisers, distributors and
sub-distributors.

Our products are manufactured exclusively by third parties.

We have experienced recurring net losses from inception (October 7, 1999)
through June 30, 2003. During the year ended June 30, 2003, we used cash in
operating activities of $10.5 million and incurred a net loss of $36.2 million.
As of June 30, 2003, we had cash and cash equivalents of $1.1 million and an
accumulated deficit was $59.8 million. These factors, among others, raise
substantial doubt about our ability to continue as a going concern for a
reasonable period of time. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of assets or
the amounts and classification of recorded liabilities that might be necessary
should we be unable to continue as a going concern.

During the year ended June 30, 2003, we undertook measures to reduce spending
and restructured our operations. In February 2003 we retained, through July 31,
2003, the investment banking firm of Gerard Klauer Mattison & Co., Inc. to
assist us in reviewing a range of potential strategic alternatives, including
mergers, acquisitions and additional financing. No transactions arose from this
assistance or were consummated during this period. We may need to either
consummate one or a combination of the potential strategic alternatives, or
otherwise obtain capital via sale or license of certain of our assets, in order
to satisfy our future liquidity requirements. Current market conditions present
uncertainty as to our ability to effectuate any merger or acquisition or secure
additional financing, as well as our ability to reach profitability. There can
be no assurances that we will be able to effectuate any such merger or
acquisition or secure additional financing, or obtain favorable terms on such
financing if it is available, or as to our ability to achieve positive cash
flow from operations. Continued negative cash flows create significant
uncertainty about our ability to implement our operating plan and we may have
to further reduce the scope of our planned operations. If cash and cash
equivalents, together with cash generated from operations, are insufficient to
satisfy our liquidity requirements, we will not have sufficient resources to
continue operations for the next six months.

As of June 30, 2003, we had $4.0 million, $1.1 million and $89,000 of
capitalized development costs, current and long-term prepaid royalties and licensed assets,
respectively, related to software development projects in progress. Should we
be unable to effectuate either a merger or acquisition or to secure sufficient
additional financing, part or all of these development projects in progress
might have to be abandoned and the related costs would have to be written off.

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RESULTS OF OPERATIONS

The following table sets forth the condensed consolidated results of operations
as a percentage of net revenues for the years ended June 30, 2003, 2002, and
2001. The selected consolidated statement of operations data is derived from
our audited consolidated financial statements included elsewhere in this Form
10-K.

|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |       |   |      |       | 
|-------------------------------------------- | ----------------------------------------------- |  | -------------------------------------------- | ------------------------ | - | ------------------- | ----- | ---- | - | ---- | ----- | ----- | - | ---- | ----- | 
|                                             |                                                 |  |                                              |                          |   | Year ended June 30,
|                                             |                                                 |  |                                              |                          |   | 2003                |       | 2002 |   | 2001
|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |     
|Net revenues                                 |                                                 |  | 100.0                                        | %                        |   |                     | 100.0 | %    |   |      | 100.0 | %    
|Costs and expenses:                          |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |      
|                                             | Cost of revenues                                |  |                                              |                          |   |                     |       |      |   |      |       |       |  
|                                             |                                                 |  | Cost of goods sold                           |                          |   | 64.8                |       |      |   | 58.8 |       |       |   | 58.5 |      
|                                             |                                                 |  | Royalties, software costs, and license costs |                          |   | 52.5                |       |      |   | 23.8 |       |       |   | 11.4 |      
|                                             |                                                 |  | Project abandonment costs                    |                          |   | 26.9                |       |      |   | 1.4  |       |       |   |     |      
|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |      
|                                             |                                                 |  | Total cost of revenues                       |                          |   | 144.2               |       |      |   | 84.0 |       |       |   | 69.9 |      
|                                             | Research and development (1)                    |  |                                              | 8.1                      |   |                     |       | 5.0  |   |      |       | 4.2   |  
|                                             | Sales and marketing (1)                         |  |                                              | 25.8                     |   |                     |       | 22.6 |   |      |       | 17.0  |  
|                                             | General and administrative (1)                  |  |                                              | 20.0                     |   |                     |       | 12.4 |   |      |       | 7.9   |  
|                                             | Amortization of deferred stock compensation     |  |                                              | 1.2                      |   |                     |       | 2.4  |   |      |       | 2.4   |  
|                                             | Restructuring costs                             |  |                                              | 1.2                      |   |                     |       |     |   |      |       |      |  
|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |      
|                                             |                                                 |  |                                              | Total costs and expenses |   |                     | 200.5 |      |   |      | 126.4 |       |   |      | 101.4 | 
|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |      
|Loss from operations                         |                                                 |  | (100.5                                       | )                        |   |                     | (26.4 | )    |   |      | (1.4  | )    
|                                             | Other expense, net                              |  |                                              | (0.9                     | ) |                     |       | (4.5 | ) |      |       | (4.9  | )
|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |      
|Net loss                                     |                                                 |  | (101.4                                       | )                        |   |                     | (30.9 | )    |   |      | (6.3  | )    
|                                             | Redeemable convertible preferred stock dividend |  |                                              |                         |   |                     |       |     |   |      |       | (21.9 | )
|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |      
|Net loss attributable to common stockholders |                                                 |  | (101.4                                       | )%                       |   |                     | (30.9 | )%   |   |      | (28.2 | )%   
|                                             |                                                 |  |                                              |                          |   |                     |       |      |   |      |       |      



---

|(1) |  | Excludes amortization of deferred stock compensation.
|--- |  | -----------------------------------------------------

Net revenues

Net revenues were $35.7 million, $50.7 million and $25.4 million for the years
ended June 30, 2003, 2002, and 2001, respectively.

Revenues were lower in the year ended June 30, 2003 over the year ended June
30, 2002 because of fewer titles released and lower sales volumes. Revenues
increased in the year ended June 30, 2002 over the year ended June 30, 2001
because we released more titles and sold increased volumes of product.

We released 20 new products in the year ended June 30, 2003 compared to 23 new
products during the year ended June 30, 2002, and 11 new products in the year
ended June 30, 2001.

To date, a substantial portion of our net revenues has been derived from sales
of a limited number of products. For example, sales of four products each
accounted for between 9% and 13% of our net revenues during the year ended June
30, 2003, sales of four products each accounted for between 7% and 11% of our
net revenues during the year ended June 30, 2002, and sales of four products
each accounted for between 14% and 28% of our net revenues during the year
ended June 30, 2001.

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The following table sets forth our net revenues by customer representing more
than 10% of each periods net revenues for the years ended June 30, 2003, 2002,
and 2001:

|                                                                                       |             |  |                     |    |      |  |      |    |   |  |    |    |   
|-------------------------------------------------------------------------------------- | ----------- |  | ------------------- | -- | ---- |  | ---- | -- | - |  | -- | -- | --
|                                                                                       |             |  | Year ended June 30,
|                                                                                       |             |  |                    
|                                                                                       |             |  | 2003                |    | 2002 |  | 2001
|                                                                                       |             |  |                     |    |      |  |     
|                                                                                       |             |  | (percentages)      
|Customers:                                                                             |             |  |                     |    |      |  |      |    |   |  |    |   
|                                                                                       | Kmart       |  |                     | 16 | %    |  |      | 11 | % |  |    |    | *%
|                                                                                       | Ubisoft     |  |                     | 14 |      |  |      |    | * |  |    |    | * 
|                                                                                       | Toys R Us |  |                     | 10 |      |  |      | 22 |   |  |    | 17 |   
|                                                                                       | Wal-Mart    |  |                     |    | *    |  |      |    | * |  |    | 14 |   
|                                                                                       | Target      |  |                     |    | *    |  |      |    | * |  |    | 12 |   
|                                                                                       |             |  |                     |    |      |  |      |    |   |  |    |    |   
|Total net revenues by
customer representing
more than 10% of the
periods net revenues |             |  | 40                  | %  |      |  | 33   | %  |   |  | 43 | % 
|                                                                                       |             |  |                     |    |      |  |      |    |   |  |    |    |   



---

|* |  | less than 10%
|- |  | -------------

Net revenues by geographical region for the years ended June 30, 2003, 2002,
and 2001 is summarized below:

|                                          |               |   |                     |        |      |   |        |        |  |   |        |        | 
|----------------------------------------- | ------------- | - | ------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                          |               |   | Year ended June 30,
|                                          |               |   |                    
|                                          |               |   | 2003                |        | 2002 |   | 2001  
|                                          |               |   |                     |        |      |   |       
|                                          |               |   | (in thousands)     
|Net revenues from unaffiliated customers: |               |   |                     |        |      |   |        |        |  |   |        |       
|                                          | North America |   | $                   | 27,184 |      |   | $      | 44,005 |  |   | $      | 22,898 | 
|                                          | Europe        |   |                     | 8,331  |      |   |        | 5,104  |  |   |        | 2,453  | 
|                                          | Other         |   |                     | 193    |      |   |        | 1,625  |  |   |        |       | 
|                                          |               |   |                     |        |      |   |        |        |  |   |        |        | 
|Total net revenues                        |               | $ | 35,708              |        |      | $ | 50,734 |        |  | $ | 25,351 |       
|                                          |               |   |                     |        |      |   |        |        |  |   |        |        | 

Cost of revenues

Cost of goods sold was $23.1 million, or 65% of net revenues for the year ended
June 30, 2003, compared to $29.8 million, or 59% of net revenues for the year
ended June 30, 2002, and $14.8 million, or 59% of net revenues, for the year
ended June 30, 2001.

Cost of goods sold were, in absolute dollars, lower in the year ended June 30,
2003 over the year ended June 30, 2002 because of decreased sales volumes. In
absolute dollars, Cost of goods sold increased in the year ended June 30, 2002
over the year ended June 30, 2001 because of increased sale volumes of
products. The increase as a percentage of revenue in both years was due to a
number of factors, including increased price protection and product returns
reserved against sales, increased sales of surplus inventories at discounted
prices, and lower introductory prices on certain titles.

Royalties, software costs, and license costs were $18.7 million, or 52% of net
revenues, for the year ended June 30, 2003, compared to $12.1 million, or 24%
of net revenues, for the year ended June 30, 2002 and $2.9 million, or 11% of
net revenues, for the year ended June 30, 2001. The increase in these costs in
absolute dollars was because we launched more products for sophisticated
hardware systems than in previous years, and expensed prepaid royalty costs
where we considered future recoverability of such costs unlikely. Sophisticated
hardware system products cost more to develop than products for handheld
devices. The increase in these costs as a percentage of revenues was due to the
aforementioned factors, along with increased price protection and product
returns reserved against sales.

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Project abandonment costs were $9.6 million, or 27% of net revenues, for the
year ended June 30, 2003, compared to $693,000, or 1% of net revenues, for the
year ended June 30, 2002 and zero for the year ended June 30, 2001. The
increase in these costs in absolute dollars and as a percentage of revenues for
the year ended June 30, 2003 over the year ended June 30, 2002 was due to
increased numbers of projects being abandoned, and projects being abandoned at
a later stage of development.

Research and development

Research and development expenses were $2.9 million, or 8% of net revenues, for
the year ended June 30, 2003, compared to $2.5 million, or 5% of net revenues,
for the year ended June 30, 2002, and $1.1 million, or 4% of net revenues, for
the year ended June 30, 2001. The increase each year in absolute dollars and as
a percentage of revenues was primarily because of increased headcount and third
party testing costs.

Sales and marketing

Sales and marketing expenses were $9.2 million, or 26% of net revenues, for the
year ended June 30, 2003, compared to $11.5 million, or 23% of net revenues,
for the year ended June 30, 2002, and $4.3 million, or 17% of net revenues, for
the year ended June 30, 2001. The decrease in absolute dollars in the year
ended June 30, 2002 over the year ended June 30, 2001 was primarily because of
reduced advertising and marketing activities, reduced headcount and decreased
sales commissions on lower net revenues. The increase in absolute dollars in
the year ended June 30, 2002 over the year ended June 30, 2001 was as a result
of increased advertising and marketing activities for the 2001 holiday season,
expanded marketing activities in Europe and increased headcount.

General and administrative

General and administrative expenses were $7.2 million, or 20% of net revenues,
for the year ended June 30, 2003, compared to $6.3 million, or 12% of net
revenues, for the year ended June 30, 2002, and $2.0 million, or 8% of net
revenues, for the year ended June 30, 2001. The increase in absolute dollars in
the year ended June 30, 2003 over the year ended June 30, 2002 was primarily
due to increased costs associated with being a public company, increased
professional fees and facilities costs, increased insurance costs including
$900,000 credit insurance costs on sales made to Kmart over the 2002 holiday
season, and increased travel costs. In the year ended June 30, 2003 we
increased the allowance for doubtful accounts receivable against our Kmart
long-term receivable by $547,000. The increase in absolute dollars in the year
ended June 30, 2002 over the year ended June 30, 2001 was due to the hiring of
additional personnel, increased professional fees and facilities costs,
increased travel costs, and increased allowances for doubtful accounts
receivables including a $1.1 million allowance against our long-term receivable
from Kmart.

Amortization of deferred stock compensation

Amortization of deferred stock compensation was $418,000, or 1% of net
revenues, for the year ended June 30, 2003, compared to $1.2 million, or 2% of
net revenues, for the year ended June 30, 2002, and $618,000, or 2% of net
revenues for the year ended June 30, 2001. Amortization of deferred stock
compensation resulted from using the accelerated amortization method to account
for compensatory stock options granted to employees and directors during the
six months ended September 30, 2001.

Restructuring costs

Restructuring costs were $426,000, or 1% of net revenues, for the year ended
June 30, 2003 compared to zero for each of the years ended June 30, 2002 and
2001. We initiated a restructuring of our operations in November 2002.
Restructuring costs comprised headcount reduction severance payments of
$261,000, and costs of $165,000 incurred upon the disposal of our London
development studio. As part of the restructuring, we wrote off
$1.3 million of capitalized development costs during the year
ended June 30, 2003, and included such
in Cost of RevenueProject abandonment costs.

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Other expense, net

Interest income was $148,000 for the year ended June 30, 2003, compared to
$328,000, or 1% of net revenues for the year ended June 30, 2002, and $58,000
for the year ended June 30, 2001. Interest income in each period relates to
interest earned on funds deposited in money market accounts. Interest income
decreased in the year ended June 30, 2003 over the year ended June 30, 2002 as
less funds were held on deposit as a result of funds being used by operations.
Interest income increased in the year ended June 30, 2002 over the year ended
June 30, 2001 as a result of funds raised in our initial public offering
completed in November 2001 being held on deposit.

Interest expense was $594,000, or 2% of net revenues, for the year ended June
30, 2003, compared to $2.6 million, or 5% of net revenues, for the year ended
June 30, 2002, and $1.3 million, or 5% of net revenues, for the year ended June
30, 2001. Interest expense decreased in the year ended June 30, 2003 over the
year ended June 30, 2002 as a result of our operating under a less expensive
short-term operating line subsequent to February 1, 2002. The increase in
interest expense in the year ended June 30, 2002 over the year ended June 30,
2001 was primarily as a result of funding increased inventory purchases through
short-term borrowings.

Net other income (expense) was $151,000 income for the year ended June 30,
2003, compared to $38,000 expense for the year ended June 30, 2002, and $18,000
income in the year ended June 30 2001, and comprised exchange gains and losses.

Redeemable convertible preferred stock dividend

In the year ended June 30, 2001, we recorded a non-cash charge of approximately
$5.5 million, or 22% of net revenues, relating to the beneficial conversion
feature of shares of our Series C Preferred Stock issued in May 2001.

Net loss attributable to common shareholders

We incurred a net loss attributable to common stockholders of $36.2 million,
$15.7 million, and $7.1 million for the years ended June 30, 2003, 2002, and
2001, respectively.

LIQUIDITY AND CAPITAL RESOURCES

In November 2001, we completed our initial public offering, raising $39.2
million net of expenses and underwriters discounts. Subsequent to the
offering, we have used the proceeds of the initial public offering, cash
generated from the sale of products, a product financing arrangement with a
finance company, and short-term liabilities to finance our operations. Prior
to the initial public offering, we financed our operations primarily through
the private sale of equity securities, cash generated from the sale of
products, a product financing arrangement with a finance company, the issuance
of promissory notes to stockholders, a commercial line of credit and short-term
liabilities.

Net cash used in operating activities was $10.5 million for the year ended June
30, 2003, compared to $27.1 million for the year ended June 30, 2002, and $10.3
million for the year ended June 30, 2001. Net cash used in operating
activities was the result of net losses and increases in net operating assets,
comprising accounts receivable, inventories, prepaid royalties, capitalized
software costs and licensed assets, and accruals.

Net cash provided from investing activities was $8.0 million for the year ended
June 30, 2003, compared to net cash used in investing activities of $7.4
million for the year ended June 30, 2002, and $2.2 million for the year ended
June 30, 2001. Net cash provided from investing activities for the year ended
June 30, 2003 consisted primarily of the sale of short-term investments. Net
cash used in investing activities during the year ended June 30, 2002 consisted
primarily of the purchase of short-term investments and property and equipment,
and for the year ended June 30, 2001 consisted of the purchase of property and
equipment and other assets.

Net cash used in financing activities was $1.4 million for the year ended June
30, 2003, compared to net cash provided by financing activities of $36.9
million for the year ended June 30, 2002, and $13.7 million for the year ended
June 30, 2001. Net cash used in financing activities during the year ended June
30, 2003 comprised mostly

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net repayments of short-term borrowings. Net cash provided by financing
activities during the year ended June 30, 2002 comprised mostly net proceeds on
the sale of 5.75 million shares of common stock in our initial public offering
completed in November 2001, plus the issuance of common stock arising from the
exercise of warrants and options, offset by net repayments under a finance
agreement with a finance company. Net cash provided by financing activities
during the year ended June 30, 2001, consisted primarily of the sale of
redeemable convertible preferred stock, net borrowings on finance agreements
and a line of credit with our bankers.

In October 1999, we issued 580,962 shares of common stock to our principal
stockholder at a price of $0.001 per share. Also, in October 1999, we issued
274,950 shares of common stock at $0.11 per share to consultants in exchange
for services performed valued at approximately $30,000. In each of November
1999 and January 2000, we issued our principal stockholder convertible
promissory notes in the principal amount of $500,000, and in May 2000 issued
him an additional convertible promissory note in the principal amount of
$47,000 for operating capital. Each note bore interest at 7% per annum with
principal and accrued interest due on demand after one year from the date of
issuance. Each note was automatically convertible into shares of our Series A
Preferred Stock upon the initial closing of our Series A Preferred Stock
financing. In June 2000, the notes were converted and our principal stockholder
was issued 482,625 shares of our Series A Preferred Stock for $1.0 million;
these shares are convertible into 2,268,338 shares of our common stock. In June
2000, inclusive of shares issued to our principal stockholder upon the
conversion, we sold and issued 976,220 shares of our Series A Preferred Stock
for $2.1 million; at the same time we issued the Series A Preferred Stock, we
issued 614,060 shares of our common stock at $0.11 per share for $59,000 in
cash and for services valued at $7,000. In December 2000, we sold and issued
294,620 shares of our Series B Preferred Stock for $5.2 million. In May 2001,
we sold and issued 245,659 shares of our Series C Preferred Stock for $5.5
million.

In November 2001 we sold 5.75 million shares of common stock in our initial
public offering. At that date, the 976,220 Series A Preferred Stock, 294,620
Series B Preferred Stock, and 245,659 Series C Preferred Stock converted into
7,127,528 shares of our common stock.

During the year ended June 30, 2003, 26,796 shares of common stock were issued
under the employee share purchase plan for proceeds of $27,000. During the year
ended June 30, 2002, 20,562 shares of common stock were issued upon exercise of
stock options for proceeds of $9,000, 4,956 shares of common stock were issued
under the employee share purchase plan for proceeds of $25,000, and a warrant
to purchase 141,000 shares of common stock was exercised for proceeds of
$529,000.

In September 2003, we entered into a six month Agreement (the Agreement) with
a finance company, pursuant to which the finance company extends a line of
credit facility to fund our domestic inventory purchases. We may sell the
inventory purchased under the Agreement and are required to remit customer
receipts from those sales directly to the finance company up to the amounts
funded by them. We retain collections in excess of the amounts funded by the
finance company, we are responsible for collecting the customer receivables,
and we bear the risk of loss on all uncollectible accounts.

Under the Agreement, the finance companys aggregate outstanding funding is
limited to $3.2 million. We are required to pay the finance companys expenses
under the contract, a facility fee equal to 5.0% of the funds advanced by the
finance company, and interest at prime plus 0.5%. The Agreement terminates on
March 31, 2004 and any sums outstanding become repayable on that date. We may
repay any sums advanced prior to the due date of payment without penalty.

The finance company has a security interest in our accounts receivable and
inventory.

Prior to entering into the Agreement, we had entered into a two year factoring
agreement (the Factoring Agreement) with a different finance company in
February 2002, pursuant to which we assigned our North American receivables to
the finance company. The finance company was responsible for collecting
customer receivables, and upon collection, remitted the funds to us, less a
service fee. Under the Factoring Agreement, we could obtain advances, subject
to the finance companys discretion and our compliance with certain liquidity
covenants, in the form of cash or as collateral for letters of credit, up to a
maximum of 75% of outstanding domestic receivables at any point in time. The
Factoring Agreement was mutually terminated in September 2003.

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Under the terms of the Factoring Agreement, we paid a service fee on all
receivables assigned, with a minimum annual fee of $150,000, interest at prime
plus 1% on all cash sums advanced. Upon the termination of the Factoring
Agreement, the minimum annual fee for the second year of the Factoring
Agreement was waived, and we paid a termination payment of $25,000. All fees
were included in interest expense. We bore the collection risk on the accounts
receivable that were assigned, unless the finance company approved the
receivable at the time of assignment, in which case the finance company bore
the risk. The finance company had a security interest in our accounts
receivable, inventory, fixed assets and intangible assets.

As of June 30, 2003 we did not meet the Factoring Agreements liquidity
covenants and had no sums advanced under the Factoring Agreement. As of June
30, 2002, we had advances of $1,359,000 outstanding under the Factoring
Agreement.

Prior to entering into the Factoring Agreement, we had entered into a finance
agreement (the Finance Agreement) with a different finance company, whereby
we assigned purchase orders entered into with our customers to the finance
company and requested the finance company purchase finished goods to fulfill
such customer purchase orders.

The Finance Agreement, entered into in February 2000, specified that the
finance companys funding commitment with respect to a customer purchase order
should not exceed 60% of the retail purchase order price. Under the Finance
Agreement the finance companys aggregate outstanding funding (i.e., advance of
funds or purchase of finished goods to fulfill customer purchase orders) was
limited to $5.0 million. We were responsible for collecting customer
receivables, bore the risk of loss on all uncollectible accounts, and we were
required to remit customer receipts directly to the finance company up to the
amounts funded by the finance company. We retained collections in excess of
the amounts funded by the finance company.

Under the initial terms of the Finance Agreement, we were required to pay the
finance companys expenses under the contract, a deal fee (consisting of a
transaction and initiation fee equal to 5.0% of the face amounts of letters of
credit issued or other funds advanced by the finance company), a daily
maintenance fee of 0.067%, a materials advance fee at prime rate plus 4.0% and
a late payment fee where applicable; all of which are included in interest
expense.

In August 2001, we amended the Finance Agreement, initially increasing the
aggregate outstanding funding amount to $10.0 million, and then decreasing the
transaction and initiation fee to 3% until the earlier of the termination of
the agreement or December 31, 2001, if our initial public offering had not
occurred by that date. We completed our initial public offering in November
2001. In connection with this latter amendment and the execution of a $7.0
million factoring arrangement with an affiliate of the finance company, we
issued a warrant to the finance company to purchase 100,000 shares at an
exercise price of $8.00.

Upon the signing of the Finance Agreement, we paid the finance company a
security deposit of $90,000. An extension payment of $50,000 was made when the
contract was amended in December 2000, and a further amendment fee of $120,000
was incurred when the contract was amended in August 2001. These costs were
recorded as interest expense.

Outstanding borrowings under the Finance Agreement were collateralized by our
inventories, accounts receivable, fixed assets and intangible assets.

The Finance Agreement and the factoring line with the affiliate terminated in
February 2002, and all outstanding amounts funded were fully repaid.

As of June 30, 2003, 2002, and 2001 we had outstanding letters of credit issued
of $0, $2.3 million, and $2.0 million, respectively.

As of June 30, 2003 we had cash and cash equivalents of $1.1 million and no
short-term investments. As of June 30, 2002 we had cash and cash equivalents of
$4.7 million and short-term investments of $8.2 million, and as of June 30,
2001, we had cash and cash equivalents of $2.2 million and no short-term
investments.

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In August 2003, we entered into a promissory note with one of our directors
whereby the director loaned us $250,000. The loan, which bears interest at 6%
per annum, is repayable on or before October 31, 2003.

During the year ended June 30, 2003, we used cash in operating activities of
$10.5 million and incurred a net loss of $36.2 million. As of June 30, 2003,
we had cash and cash equivalents of $1.1 million and an accumulated deficit of
$59.8 million. During the year ended June 30, 2003, we undertook measures to
reduce spending and restructured our operations. In February 2003 we retained,
through July 31, 2003, the investment banking firm of Gerard Klauer Mattison &
Co., Inc. to assist us in reviewing a range of potential strategic
alternatives, including mergers, acquisitions and additional financing. No
transactions arose from this assistance or were consummated during this period.
We may need to either consummate one or a combination of the potential
strategic alternatives, or otherwise obtain capital via sale or license of
certain of our assets, in order to satisfy our future liquidity requirements.
Current market conditions present significant uncertainty as to our ability to
effectuate any merger or acquisition or secure additional financing, as well as
our ability to reach profitability. There can be no assurances that we will be
able to effectuate any such merger or acquisition or secure additional
financing, or obtain favorable terms on such financing if it is available, or
as to our ability to achieve positive cash flow from operations. Continued
negative cash flows create uncertainty about our ability to implement our
operating plan and we may have to further reduce the scope of our planned
operations. If cash and cash equivalents, together with cash generated from
operations, are insufficient to satisfy our liquidity requirements, we will not
have sufficient resources to continue operations for the next six months.

Excluding assets under capital leases, capital expenditures were $338,000 for
the year ended June 30, 2003, compared to $908,000 for the year ended June 30,
2002, and $421,000 for the year ended June 30, 2001. We did not have any
material commitments for capital expenditures at any of those dates.

Our principal commitments at June 30, 2003 comprised operating leases, capital
leases, guaranteed royalty payments, contractual marketing commitments and
factoring agreement minimum annual fees. At June 30, 2003, we had commitments
to spend $1.1 million under operating and capital leases, net of sub-leases,
prepay $500,000 million for royalties under agreements with various content
providers, spend $1.1 million in advertising on the networks and websites of
these content providers and incur $104,000 in factoring agreement annual fees.
Of these amounts, $2.0 million must be paid no later than June 30, 2004.
Guaranteed royalty payments will be applied against any royalties that may
become payable to the content providers.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of financial statements. Note 1 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and
methods used in the preparation of our consolidated financial statements. The
following is a brief discussion of the more significant accounting policies and
methods used by us. In addition, Financial Reporting Release No. 61 also
requires all companies to include a discussion addressing, among other things,
liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments.

Use of estimates

The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
Certain of our accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating
financial estimates. These estimates affect the reported amounts of assets and
liabilities at the dates of the financial statements and reported amounts of
revenues and expenses during the reporting periods. By their nature, these
judgments are subject to an inherent degree of uncertainty. The most
significant estimates and assumptions relate to revenue recognition, adequacy
of allowances for returns and price protection, doubtful accounts receivable,
and cooperative advertising, carrying values of inventories, the future
recoverability of prepaid royalties, capitalized software costs and licensed
assets, and foreign currency translation.

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Net revenues

We derive our revenues from shipment of finished products to our customers.
Under certain conditions, we may allow customers to exchange and return our
products and from time to time provide price protection or allow returns on
certain unsold merchandise in the form of a credit against amounts due from the
customer. Net revenues from product sales are reflected after deducting the
estimated cost of allowances for returns and price protection as well as
discounts given. These estimates are based upon currently known circumstances
and historical results. The calculation of net revenues will be affected by
many factors, including pricing strategies, the channels through which products
are distributed, product maturity, exchange and return provisions and price
protection.

We recognize revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition,and related interpretations, when persuasive evidence of
an arrangement exists, delivery has occurred, the price has been fixed or is
determinable and collectibility has been reasonably assured.

Our sales are typically made on credit, with terms that vary depending upon the
customer and other factors. If a sale is made on credit, and a significant
portion of the fee is due after our normal payment terms, which are normally 30
to 90 days from invoice date, we account for the fee as not being fixed or
determinable and will not recognize revenue until such time as the fee becomes
due. While we attempt to carefully monitor the creditworthiness of our
customers and distributors, we bear the risk of their inability to pay our
receivables and of any delay in payment. If the collectibility of a receivable
becomes uncertain after revenue has been recognized, we will record an
allowance for doubtful accounts against our accounts receivable.

When we recognize revenue, we account for the estimate of future returns and
price protection on the sale as allowances against receivables. We also
estimate cooperative marketing costs on the sale and account for these costs as
a marketing expense and as an allowance against receivables. We continually
monitor, reassess and adjust the adequacy of all these allowances, along with
the allowance for doubtful accounts, based on known circumstances, historical
results, commitments made, anticipated events and anticipated commitments.
Adjustments to these allowances will affect the reported amounts of revenues
and expenses during the reporting periods the adjustments are made.

We expect that substantially all of our net revenues for a particular quarter
will be generated by titles released in that quarter or in the immediately
prior quarter. The market for interactive entertainment software is
characterized by short product life cycles, changing consumer preferences and
frequent introduction of new products. The life cycle of a title generally
consists of a relatively high level of sales during the first few months after
introduction, followed by a decline in sales, with only a small percentage of
sales occurring more than six months after release.

We have experienced, and are likely to continue to experience, quarterly
fluctuations in net revenues. We believe the factors which influence these
fluctuations include (i) the timing of our introduction of new products, (ii)
the level of consumer acceptance of new and existing products, (iii) general
economic and industry conditions that affect consumer spending and retail
purchasing, (iv) the timing of the placement, cancellation or pickup of
customer orders, (v) the timing of expenditures in anticipation of increased
sales, (vi) actions by competitors, (vii) location of product releases, and
(viii) the number of titles released in the period and the hardware platforms
on which they are released. The timing of our introduction of new products is
affected by uncertainties associated with software development, lengthy
manufacturing lead times, production delays and the approval process for
products by hardware manufacturers and other licensors. The interactive
entertainment industry is highly seasonal, with net revenues typically
significantly higher during the fourth and first calendar quarters, due
primarily to the increased demand for titles during the year-end holiday buying
season. A failure or inability to introduce products on a timely basis to meet
seasonal increases in demand will harm our business and operating results. Due
to these and other factors, the operating results for any particular quarter
are not necessarily indicative of the results for the entire fiscal year.

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Cost of revenues

Cost of revenues consists of cost of goods sold and royalties, software costs,
license costs and project abandonment.

Cost of goods sold.Cost of goods sold includes manufacturing costs of
finished goods, freight, inventory management costs and inventory obsolescence
costs. Cost of goods sold will vary depending on the volume of products
manufactured and shipped, the mix of products sold and the shipping channel
used.

Royalties, software costs, and license costs.Royalties, software costs, and
license costs include royalties paid to software licensors, software
amortization and amortization of non-cash charges related to warrants and
rights to acquire our common stock issued to certain production companies.
These costs will be affected in particular periods by many factors, including
the specific terms or agreements under which royalties are paid to third
parties, the commercial acceptance of products, the cost of developing a
product and the timing of stock and warrants issued pursuant to the terms of
our license agreements.

Our agreements with licensors and developers generally require us to make
advance royalty payments and pay royalties based on product sales, which may
have guaranteed minimum payments. Prepaid royalties are amortized commencing
upon the product release at the greater of the contractual royalty rate based
on actual product sales, or the ratio of current revenues to total projected
revenues. We evaluate the future recoverability of prepaid royalties on a
quarterly basis and expense costs if and when they are deemed unrecoverable.
We cannot assure you that the sales of products for which these royalties are
paid or guaranteed payments are made will be sufficient to cover the amount of
these required payments.

Commencing upon product release, we amortize capitalized software development
costs. We capitalize software development costs subsequent to establishing
technological feasibility of a title. Technological feasibility is evaluated
on a product-by-product basis. For products where proven game engine
technology exists, this may be early in the development cycle. Prior to
establishing technological feasibility, software development costs are expensed
to research and development, and to cost of revenues subsequent to establishing
technological feasibility. The following criteria are used to evaluate
recoverability of software development costs: historical performance of
comparable products; the commercial acceptance of prior products released on a
given hardware platform; orders for a product prior to its release and actual
development costs of a product as compared to forward-looking projections.
Amortization of software development costs is based on the greater of the
proportion of current revenues to total projected revenues or the straight-line
method over the estimated product life, generally three to six months. We
analyze our capitalized costs quarterly and take write-offs when, based on our
estimates, future individual product revenues will not be sufficient to recover
our investment.

Project abandonment costs.If we terminate a development project prior to
completion, we expense the capitalized software development costs and licensed
assets costs to project abandonment.

Research and development

Research and development expenses relate to the design and development of new
interactive entertainment software products.Payments made to independent
software developers under development agreements are capitalized to software
development costs once technological feasibility is established or if the
development costs have an alternative future use. Prior to establishing
technological feasibility, software development costs are expensed to research
and development and to cost of revenues subsequent to confirmation of
technological feasibility. Internal development costs are capitalized to
software development costs once technological feasibility is established.
Technological feasibility is evaluated on a product-by-product basis. For
products where proven game engine technology exists, this may occur early in
the development cycle.

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ITEM 7(a) - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk

Market risk is the potential loss arising from the adverse changes in market
rates and prices, such as interest rates and foreign currency exchange rates.
Changes in interest rates and, in the future, changes in foreign currency
exchange rates have and will have an impact on our results of operations.

Interest rate fluctuations. We do not consider our cash and cash equivalents
to be subject to interest rate risk due to the short maturities of the
instruments in which we have invested. We are exposed to interest rate risk on
our product financing arrangement with a finance company. We do not enter into
derivative securities or other financial instruments for trading or speculative
purposes. We estimate that a 10% change in interest rates would have impacted
our results of operations by less than $50,000 for the year ended June 30,
2003.

Foreign exchange rate fluctuations. We face market risk to the extent that
changes in foreign currency exchange rates affect our non-U.S. Dollar
functional currency foreign operations. The functional currency for our
foreign operations is the applicable local foreign currency. The translation
of the applicable foreign currencies into U.S. Dollars is performed for balance
sheet accounts using exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted-average exchange rate during the
period. The gains or losses resulting from such translation are reported as a
separate component of equity as accumulated other comprehensive loss, whereas
gains or losses resulting from foreign currency transactions are included in
results of operations. We do not engage in hedging activities with respect to
foreign exchange rate fluctuations.

Recently issued new accounting pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations,and SFAS No. 142, Goodwill and Other Intangible
Assets.SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives not be amortized, but will instead be tested at least
annually for impairment. We adopted SFAS No. 142 on July 1, 2002. We did not
carry any goodwill or other intangibles on our balance sheets as of June 30,
2003 or 2002, and therefore the adoption of SFAS No. 142 did not have a
material effect on our financial position or operating results.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations.SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement is effective for fiscal
years beginning after June 15, 2002, however earlier application is permitted.
We adopted SFAS No. 143 on July 1, 2002. The adoption of this statement did not
have a material effect on our financial position or operating results.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of,it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of APB No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,for
the disposal of a segment of a business. However, it retains the requirement in
APB No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by
sale, abandonment, or in a distribution to owners) or is classified as held for
sale. We adopted SFAS No 144 on July 1, 2002. The adoption of SFAS No. 144 did
not have a material effect on our financial position or results of operations.

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In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit on Activity
(including Certain Costs Incurred in a Restructuring). We were required to
adopt SFAS No. 146 for restructuring activities initiated after December 31,
2002, and we adopted SFAS No. 146 on January 1, 2003. SFAS No. 146 requires
that the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 94-3, a liability for an
exit cost was recognized at the date of our commitment to an exit plan. SFAS
No. 146 also established that the liability should initially be measured and
recorded at fair value. The adoption of SFAS No. 146 did not have a material
effect on our financial position or results of operations.

In November 2002, the FASB issued FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.The interpretation elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues
a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantors obligations do not apply to product
warranties or to guarantees accounted for as derivatives. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002, and the initial recognition and initial
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. We adopted FIN No. 45 on January 1, 2003.
The adoption of FIN No. 45 did not have a material effect on our financial
position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation. Although it does not require use of
fair value method of accounting for stock-based employee compensation, it does
provide alternative methods of transition. It also amends the disclosure
provisions of SFAS No.123 and APB No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. SFAS No. 148s amendment of the transition and
annual disclosure requirements is effective for fiscal years ending after
December 15, 2002. The amendment of disclosure requirements of APB No. 28 is
effective for interim periods beginning after December 15, 2002. We adopted
SFAS No. 148 and APB No.28 on January 1, 2003.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entitiesan interpretation of ARB No. 51. FIN No. 46 addresses the
consolidation of variable interest entities (VIEs). A VIE is a corporation,
partnership, trust or other legal structure used for business purposes that
either does not have equity investors with substantive voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. A VIE often holds financial assets and may
either be passive or engage in activities such as research and development or
other activities on behalf of other companies. FIN No. 46 requires a VIE to be
consolidated by a company if that company is subject to a majority of the VIEs
risk of loss or if it is entitled to receive a majority of the VIEs residual
returns or both. The company that consolidates a VIE is referred to as the
primary beneficiary of that entity. The consolidation requirements of FIN No.
46 apply to VIEs created after January 31, 2003. For VIEs existing prior to
January 31, 2003, consolidation requirements are effective in the first fiscal
year or interim period beginning after June 15, 2003. Certain disclosure
requirements apply in all financial statements issued after January 31, 2003
regardless of when the VIE was established. We adopted FIN No. 46 on January
31, 2003. The adoption of FIN No. 46 did not have a material effect on our
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which requires
mandatorily redeemable financial instruments to be classified as liabilities,
the result of which requires related expense to be classified as interest
expense rather than minority interest on a prospective basis. SFAS No. 150 is
effective in the three months ended June 30, 2003 for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective July 1,
2003 for previously issued instruments. SFAS No. 150 is not expected to have a
material impact on our financial position or results of operations.

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ITEM 8  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is incorporated by reference to our
Consolidated Financial Statements and Independent Auditors Report beginning at
page F-1 of this Report.




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

None.




ITEM 9A  CONTROLS AND PROCEDURES



|(a) |  | Evaluation of disclosure controls and procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The term disclosure controls and procedures refers to the controls and
procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under
Rules 13a  14 of the Securities Exchange Act of 1934 (the Exchange Act)
is recorded, processed, summarized and reported within required time
periods. As of the end of the period covered by this Annual Report on
Form 10-K (the
Evaluation Date), we carried out an evaluation under the supervision and
with the participation of our Chief Executive Officer and Chief Financial
Officer of the effectiveness of our disclosure controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of the Evaluation Date, such controls and
procedures were effective in ensuring that required information will be
disclosed on a timely basis in our periodic reports filed under the Exchange
Act.
|   
|(b) |  | Changes in internal controls                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | There were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls subsequent to
the Evaluation Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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PART III




ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 is hereby incorporated by reference
from our definitive proxy statement, to be filed pursuant to Regulation 14A
within 120 days after the end of our 2003 fiscal year.




ITEM 11  EXECUTIVE COMPENSATION

The information required by this Item 11 is hereby incorporated by reference
from our definitive proxy statement, to be filed pursuant to Regulation 14A
within 120 days after the end of our 2003 fiscal year.




ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is hereby incorporated by reference
from our definitive proxy statement, to be filed pursuant to Regulation 14A
within 120 days after the end of our 2003 fiscal year.




ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is hereby incorporated by reference
from our definitive proxy statement, to be filed pursuant to Regulation 14A
within 120 days after the end of our 2003 fiscal year.

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PART IV




ITEM 15  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K



|(a) |  | The consolidated financial statements and schedules required to be filed
hereunder are indexed on page F-1 hereof.                                                                                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                                   
|   
|    |  | On May 14, 2003, under Item 12  Results of Operation and Financial
Condition. Regarding the registrants announcement on May 13, 2003 of its
financial results for the third quarter ended March 31, 2003. A copy of the
press release was furnished as Exhibit 99.1 to the Form 8-K.
|   
|(c) |  | Exhibits                                                                                                                                                                                                                                                                              
|   
|    |  | The following exhibits are filed as part of this Form 10-K:                                                                                                                                                                                                                           

|        |     |                        |  |                                                                                                                                                                                                                                                                                                                                                 
|------- | --- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |     | Description of Exhibit
|        |     |                       
|        | 3.1 |                        |  | Second Amended and Restated Certificate of Incorporation (incorporated by reference to the
exhibit of the same number of the Registrants Registration Statement on Form S-1, as amended
(File No. 333-62436), filed with the Securities and Exchange
Commission on June 6, 2001).                                                              
|        |     |                       
|        | 3.1 | (a)                    |  | First Amendment to Second Amended and Restated Certificate of Incorporation of the Registrant
dated August 15, 2001 (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on August 15, 2001).
|        |     |                       
|        | 3.2 |                        |  | Bylaws of the Registrant (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on June 6, 2001).                                                                                              
|        |     |                       
|        | 3.2 | (a)                    |  | Amendment to Bylaws of the Registrant dated December 28, 2000 (incorporated by reference to
the exhibit of the same number of the Registrants Registration Statement on Form S-1, as
amended (File No. 333-62436), filed with the Securities and Exchange Commission on August 15,
2001).                                                      

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|        |      |                        |  |                                                                                                                                                                                                                                                                                                                                                                               
|------- | ---- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |      | Description of Exhibit
|        |      |                       
|        | 3.2  | (b)                    |  | Amendment to Bylaws of Registrant dated June 1, 2001 (incorporated by reference to the
exhibit of the same number of the Registrants Registration Statement on Form S-1, as amended
(File No. 333-62436), filed with the Securities and Exchange
Commission on August 15, 2001).                                                                                             
|        |      |                       
|        | 3.2  | (c)                    |  | Amendment to Bylaws of Registrant dated July 31, 2001 (incorporated by reference to the
exhibit of the same number of the Registrants Registration Statement on Form S-1, as amended
(File No. 333-62436), filed with the Securities and Exchange
Commission on August 15, 2001).                                                                                            
|        |      |                       
|        | 4.1  |                        |  | Specimen Common Stock Certificate (incorporated by reference to the exhibit of the same
number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
September 4, 2001).                                                                                                               
|        |      |                       
|        | 4.2  |                        |  | Warrant to Purchase Shares of Common Stock between the Registrant and Spyglass Entertainment
Group, L.P. (incorporated by reference to the exhibit of the same number of the Registrants
Registration Statement on Form S-1, as amended (File No. 333-62436), filed with the
Securities and Exchange Commission on June 6, 2001).                                            
|        |      |                       
|        | 4.3  |                        |  | Warrant to Purchase Shares of Common Stock dated May 24, 2001 between the Registrant and K&L
2000 LLC (incorporated by reference to exhibit number 4.4 of the Registrants Registration
Statement on Form S-1, as amended (File No. 333-62436), filed with the Securities and
Exchange Commission on August 15, 2001).                                                        
|        |      |                       
|        | 4.4  |                        |  | Warrant to Purchase Shares of Common Stock between the Registrant and Transcap Associates,
Inc. (incorporated by reference to the exhibit of the same number from Registrants Annual
Report on Form 10-K for the year ended June 30, 2002).                                                                                                                                  
|        |      |                       
|        | 4.5  |                        |  | Form of Amended and Restated Warrant to Purchase Shares of Common Stock dated May 24, 2001
between the Registrant and Morgan Keegan & Co., Inc. (incorporated by reference to the
exhibit of the same number of the Registrants Registration Statement on Form S-1, as amended
(File No. 333-62436), filed with the Securities and Exchange Commission on November 13,
2001).
|        |      |                       
|        | 10.1 |                        |  | Amended and Restated 2000 Stock Incentive Plan (incorporated by reference to the exhibit of
the same number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
August 15, 2001).                                                                                                    
|        |      |                       
|        | 10.2 | **                     |  | License Agreement #13247-SJ dated December 12, 2001 between the Registrant and Warner Bros
Consumer Products (incorporated by reference to the exhibit of the same number from
Registrants Quarterly Report on Form 10-Q for the quarter
ended December 31, 2001).                                                                                                           
|        |      |                       
|        | 10.3 | **                     |  | License and Option Agreement dated January 14, 2002 between the Registrant, Bam!
Entertainment Limited and Aardman Animations Limited (incorporated by reference to the
exhibit of the same number from Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).                                                                                     
|        |      |                       
|        | 10.4 |                        |  | Factoring Agreement dated February 25, 2002 between the Registrant and Century Business
Credit Corporation (incorporated by reference to the exhibit of the same number from
Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).                                                                                                                
|        |      |                       
|        | 10.5 |                        |  | Letter of Credit and Security Agreement dated February 25, 2002 between the Registrant and
Century Business Credit Corporation (incorporated by reference to the exhibit of the same
number from Registrants Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).                                                                                            
|        |      |                       
|        | 10.6 |                        |  | Trademark Collateral Agreement dated February 25, 2002 between the Registrant and Century
Business Credit Corporation (incorporated by reference to the exhibit of the same number from
Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).                                                                                                     
|        |      |                       
|        | 10.7 |                        |  | Supplement to Factoring or Security Agreement dated February 25, 2002 between the Registrant
and Century Business Credit Corporation (incorporated by reference to the exhibit of the same
number from Registrants Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).                                                                                      

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|        |       |                        |  |                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ----- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |       | Description of Exhibit
|        |       |                       
|        | 10.8  |                        |  | Lease Agreement dated June 5, 2002 among the Registrant, BAM Entertainment Limited, a
subsidiary of the Registrant, and Nairn Developments Limited, regarding Part Ground Floor
124-130 Southwark Street, London. (incorporated by reference to the exhibit of the same
number from Registrants Annual Report on Form 10-K for the
year ended June 30, 2002).                      
|        |       |                       
|        | 10.9  |                        |  | Lease Agreement dated June 5, 2002 among the Registrant, BAM Entertainment Limited, a
subsidiary of the Registrant, and Nairn Developments Limited, regarding First Floor 124-130
Southwark Street, London. (incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year ended
June 30, 2002).                            
|        |       |                       
|        | 10.10 |                        |  | Confidential License Agreement for Nintendo GameCube dated November 9, 2001 between the
Registrant and Nintendo of America, Inc. (incorporated by reference to the exhibit of the
same number from Registrants Annual Report on Form 10-K
for the year ended June 30, 2002).                                                                                                       
|        |       |                       
|        | 10.11 | **                     |  | Exclusive First Look Agreement dated May 16, 2002 between the Registrant and Southpaw Media
Group, Inc. (incorporated by reference to the exhibit of the same number from Registrants
Annual Report on Form 10-K for the year ended June 30,
2002).                                                                                                                                
|        |       |                       
|        | 10.12 | 10.25                 |  | [Reserved].                                                                                                                                                                                                                                                                                                                                                                         
|        |       |                       
|        | 10.26 | **                     |  | Sony PlayStation Licensed Publisher Agreement dated February 2, 2000 between the Registrant
and Sony Computer Entertainment America, Inc. (incorporated by reference to the exhibit of
the same number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
June 6, 2001).                  
|        |       |                       
|        | 10.27 | **                     |  | Amendment to the Licensed Publisher Agreement dated April 1, 2000 between the Registrant and
Sony Computer Entertainment America, Inc. (incorporated by reference to the exhibit of the
same number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
June 6, 2001).                     
|        |       |                       
|        | 10.28 | **                     |  | PlayStation 2 Licensed Publisher Agreement dated April 1, 2000 between the Registrant and
Sony Computer Entertainment America, Inc. (incorporated by reference to the exhibit of the
same number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
June 6, 2001).                        
|        |       |                       
|        | 10.29 | **                     |  | PlayStation 2 Development System Agreement dated August 2, 2000 between the Registrant and
Sony Computer Entertainment America, Inc. (incorporated by reference to the exhibit of the
same number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
June 6, 2001).                       
|        |       |                       
|        | 10.30 | **                     |  | Licensed Publisher Agreement for Game Boy, Game Boy Color and Game Boy Pocket dated February
18, 2000 between the Registrant and Nintendo of America, Inc. (incorporated by reference to
the exhibit of the same number of the Registrants Registration Statement on Form S-1, as
amended (File No. 333-62436), filed with the Securities and Exchange Commission on June 6,
2001).
|        |       |                       
|        | 10.31 | **                     |  | Licensed Publisher Agreement for Nintendo 64 dated February 18, 2000 between the Registrant
and Nintendo of America, Inc. (incorporated by reference to the exhibit of the same number of
the Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed
with the Securities and Exchange Commission on June 6, 2001).                                 
|        |       |                       
|        | 10.32 |                        |  | Confidential License Agreement for Game Boy Advance dated May 21, 2001 between the Registrant
and Nintendo of America, Inc. (incorporated by reference to the exhibit of the same number of
the Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed
with the Securities and Exchange Commission on June 6, 2001).                               
|        |       |                       
|        | 10.33 | **                     |  | Xbox Publisher License Agreement dated November 28, 2000 between the Registrant and Microsoft
Corporation (incorporated by reference to the exhibit of the same number of the Registrants
Registration Statement on Form S-1, as amended (File No. 333-62436), filed with the
Securities and Exchange Commission on June 6, 2001).                                                 

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|        |       |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | ----- | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |       | Description of Exhibit
|        |       |                       
|        | 10.34 | **                     |  | Retail License Agreement #12177-PPG dated March 8, 2000 between the Registrant and Warner
Bros. Consumer Products (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on June 6, 2001).                                                                                 
|        |       |                       
|        | 10.35 | **                     |  | Amendment #1 to Retail License Agreement #12177-PPG dated November 27, 2000 between the
Registrant and Warner Bros. Consumer Products (incorporated by reference to the exhibit of
the same number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
June 6, 2001).                                                              
|        |       |                       
|        | 10.36 | **                     |  | License Agreement #12697-DEX dated October 4, 2000 between the Registrant and Warner Bros
Consumer Products (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on June 6, 2001).                                                                                       
|        |       |                       
|        | 10.36 | (a)*                   |  | Amendment #1 to Retail License Agreement #12697-DEX dated March 8, 2002 between the
Registrant and Warner Bros. Consumer Products.                                                                                                                                                                                                                                                                                          
|        |       |                       
|        | 10.37 |                        |  | [Reserved].                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |       |                       
|        | 10.38 |                        |  | [Reserved].                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |       |                       
|        | 10.39 | **                     |  | Exclusive Output Agreement dated April 7, 2000 between the Registrant and Franchise Films,
Inc. (incorporated by reference to the exhibit of the same number of the Registrants
Registration Statement on Form S-1, as amended (File No. 333-62436), filed with the
Securities and Exchange Commission on June 6, 2001).                                                                                                   
|        |       |                       
|        | 10.40 |                        |  | First Amendment to Exclusive Output Agreement dated April 2001 between the Registrant and
Franchise Films, Inc. (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on September 4, 2001).                                                                              
|        |       |                       
|        | 10.41 | **                     |  | License Agreement dated July 12, 2000 between the Registrant and Time, Inc. for its Sports
Illustrated for Kids division (incorporated by reference to the exhibit of the same number of
the Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed
with the Securities and Exchange Commission on June 6, 2001).                                                                          
|        |       |                       
|        | 10.41 | (a)*                   |  | Amendment to Licensing Agreement dated June 10, 2003 between the Registrant and Sports
Illustrated for Kids, a division of Time, Inc.                                                                                                                                                                                                                                                                                       
|        |       |                       
|        | 10.42 | **                     |  | Exclusive Output Agreement dated October 25, 2000 between the Registrant and Spyglass
Entertainment Group, L.P. (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on June 6, 2001).                                                                                   
|        |       |                       
|        | 10.42 | (a)                    |  | Amendment to Output Agreement dated May 29, 2003 between the Registrant and Spyglass
Entertainment Group, LP.                                                                                                                                                                                                                                                                                                               
|        |       |                       
|        | 10.43 |                        |  | Office Lease dated November 15, 1999 between the Registrant and Macanan Investments, L.P.
First Amendment to Office Lease dated March 29, 2002 between the Registrant and Macanan
Investments L.P. (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on June 6, 2001).
|        |       |                       
|        | 10.43 | (a)                    |  | First Amendment to Office Lease dated July 31, 2001 between the Registrant and Macanan
Investments L.P. (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on August 15, 2001).                                                                                        
|        |       |                       
|        | 10.43 | (b)                    |  | First Amendment to Office Lease dated March 29, 2002 between the Registrant and Macanan
Investments L.P. (incorporated by reference to Exhibit No. 10.2 from Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                                                              

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|        |       |                        |  |                                                                                                                                                                                                                                                                                                                                                                           
|------- | ----- | ---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |       | Description of Exhibit
|        |       |                       
|        | 10.44 |                        |  | Amended and Restated Employment Agreement dated as of October 1, 1999 between the Registrant
and Raymond C. Musci. (incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year ended
June 30, 2002).                                                                                                           
|        |       |                       
|        | 10.44 | (a)                    |  | Amended Employment Agreement dated as of November 21, 2002 between the Registrant and Raymond
C. Musci. (incorporated by reference to Exhibit No. 10.3 from Registrants Quarterly Report
on Form 10-Q for the quarter ended December 31, 2002).                                                                                                                          
|        |       |                       
|        | 10.45 |                        |  | Amended and Restated Employment Agreement dated as of July 1, 2000 between the Registrant and
Anthony R. Williams. (incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year ended
June 30, 2002).                                                                                                           
|        |       |                       
|        | 10.45 | (a)                    |  | Amended Employment Agreement dated as of November 21, 2002 between the Registrant and Anthony
R. Williams. (incorporated by reference to Exhibit No. 10.4 from Registrants Quarterly
Report on Form 10-Q for the quarter ended December 31,
2002).                                                                                                                       
|        |       |                       
|        | 10.46 |                        |  | [Reserved].                                                                                                                                                                                                                                                                                                                                                               
|        |       |                       
|        | 10.47 |                        |  | Executive Employment Agreement dated March 5, 2002 between the Registrant and Yves Legris
(incorporated by reference to the exhibit of the same number from Registrants Annual Report
on Form 10-K for the year ended June 30, 2002).                                                                                                                                    
|        |       |                       
|        | 10.48 |                        |  | Agreement for Chairman of Board of Directors dated June 7, 2001 between the Registrant and
Robert W. Holmes, Jr. (incorporated by reference to the exhibit of the same number of the
Registrants Registration Statement on Form S-1, as amended (File No. 333-62436), filed with
the Securities and Exchange Commission on August 15, 2001).                             
|        |       |                       
|        | 10.48 | (a)                    |  | Amended Agreement for Chairman of the Board of Directors dated as of November 21, 2002
between the Registrant and Robert W. Holmes, Jr. (incorporated by reference to Exhibit No
10.5 from Registrants Quarterly Report on Form 10-Q for the quarter ended December 31,
2002).                                                                                           
|        |       |                       
|        | 10.49 |                        |  | 2001 Employee Stock Purchase Plan (incorporated by reference to the exhibit of the same
number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
August 15, 2001).                                                                                                             
|        |       |                       
|        | 10.49 | (a)                    |  | Amendment No. 1 to 2001 Employee Stock Purchase Plan (incorporated by reference to the
exhibit of the same number from Registrants Annual Report on Form 10-K for the year ended
June 30, 2002).                                                                                                                                                                         
|        |       |                       
|        | 10.50 |                        |  | Agreement for Sale of Assets dated January 14, 2003 among Bam Studios (Europe) Limited, a
subsidiary of the Registrant, VIS Entertainment PLC, Bam Entertainment PLC, a subsidiary of
the Registrant, and the Registrant. (incorporated by reference to Exhibit No. 10.6 from
Registrants Quarterly Report on Form 10-Q for the quarter
ended December 31, 2002).        
|        |       |                       
|        | 10.51 |                        |  | Lease Agreement between BAM Entertainment Limited, a subsidiary of the Registrant, and BAE
Systems Marine Limited, regarding office on the Second Floor of Upper Borough Court, Bath,
England. (incorporated by reference to Exhibit No. 10.7 from Registrants Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003).                                      
|        |       |                       
|        | 10.52 | **                     |  | Distribution Agreement dated July 31, 2001 between BAM Entertainment Limited, a subsidiary of
the Registrant, and Ubi Soft Entertainment, S.A. (incorporated by reference to the exhibit of
the same number of the Registrants Registration Statement on Form S-1, as amended (File No
333-62436), filed with the Securities and Exchange Commission on
August 15, 2001).
|        |       |                       
|        | 10.52 | (a)**                  |  | Amendment Number One to Distribution Agreement dated August 5, 2002 between BAM Entertainment
Limited, a subsidiary of the Registrant, and Ubi Soft Entertainment, S.A. (incorporated by
reference to Exhibit No. 10.1 from Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002).                                                         
|        |       |                       
|        | 10.52 | (b)**                  |  | Amendment Number Two to Distribution Agreement dated September 6, 2002 between BAM
Entertainment Limited, a subsidiary of the Registrant, and Ubi Soft Entertainment, S.A.
(incorporated by reference to Exhibit No. 10.2 from Registrants Quarterly Report on Form
10-Q for the quarter ended September 30, 2002).                                                      

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|        |       |                        |  |                                                                                                                                                                                                                                                                                                                        
|------- | ----- | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |       | Description of Exhibit
|        |       |                       
|        | 10.53 |                        |  | Form of Indemnification Agreement between the Registrant and its directors and executive
officers (incorporated by reference to the Exhibit No. 10.54 of the Registrants Registration
Statement on Form S-1, as amended (File No. 333-62436), filed with the Securities and
Exchange Commission on November 13, 2001).
|        |       |                       
|        | 10.54 |                        |  | List of Registrants directors and executive officers who entered into Indemnification
Agreement referenced in Exhibit 10.53 with the Registrant (incorporated by reference to
Exhibit No. 10.54(a) from Registrants Annual Report on Form 10-K for the year ended June 30,
2002).                                    
|        |       |                       
|        | 21.1  |                        |  | List of Registrants Subsidiaries.                                                                                                                                                                                                                                                                                     
|        |       |                       
|        | 23.1  |                        |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                      
|        |       |                       
|        | 24.1  |                        |  | Power of attorney (included on signature page).                                                                                                                                                                                                                                                                        
|        |       |                       
|        | 31.1  |                        |  | Certification of Chief Executive Officer
pursuant to Securities Exchange Act Rule 13a  14(a).                                                                                                                                                                                                                         
|        |       |                       
|        | 31.2  |                        |  | Certification of Chief Financial Officer
pursuant to Securities Exchange Act Rule 13a  14(a).                                                                                                                                                                                                                         
|        |       |                       
|        | 32    |                        |  | Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                        



---

|*  |  | The Registrant has applied with the Secretary of the Securities and
Exchange Commission for confidential treatment of certain information
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. The
Registrant has filed separately with its application a copy of the exhibit
including all confidential information, which may be made available for
public inspection pending the Securities and Exchange Commissions review
of the application in accordance with Rule 24b-2.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in the exhibit pursuant to
either Rule 406 of the Securities Act of 1933 or Rule 24b-2 of the
Securities Exchange Act of 1934, as the case may be. Such information was
omitted from the filing and filed separately with the Secretary of the
Securities and Exchange Commission.                                                                                   

49



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
State of California, on September 29, 2003.

| |  |                          |  |                        
| |  | ------------------------ |  | -----------------------
| |  | BAM! ENTERTAINMENT, INC.
| |  |                          |  |                        
| |  | By:                      |  | /S/ RAYMOND C. MUSCI   
| |  |                          |  |                        
| |  |                          |  | Raymond C. Musci       
| |  |                          |  | Chief Executive Officer

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

|                        |  |                                       |  |                   
|----------------------- |  | ------------------------------------- |  | ------------------
|Signature               |  | Title                                 |  | Date              
|                        |  |                                       |  |                   
|/s/ RAYMOND C. MUSCI    |  | Chief Executive Officer, and Director |  | September 29, 2003
|                        |  | (Principal Executive Officer)         |  |                   
|Raymond C. Musci        |  |                                       |  |                   
|                        |  |                                       |  |                   
|/s/ ANTHONY R. WILLIAMS |  | Vice Chairman of the Board            |  | September 29, 2003
|                        |  |                                       |  |                   
|Anthony R. Williams     |  |                                       |  |                   
|                        |  |                                       |  |                   
|/s/ STEPHEN M. AMBLER   |  | Chief Financial Officer and Vice      |  | September 29, 2003
|                        |  | President of Finance (Principal       |  |                   
|Stephen M. Ambler       |  | Financial and Accounting Officer)     |  |                   
|                        |  |                                       |  |                   
|                        |  |                                       |  |                   
|/s/ ROBERT E. LLOYD     |  | Director                              |  | September 29, 2003
|                        |  |                                       |  |                   
|Robert E. Lloyd         |  |                                       |  |                   
|                        |  |                                       |  |                   
|                        |  | Director                              |  | September 29, 2003
|                        |  |                                       |  |                   
|Mark Dyne               |  |                                       |  |                   
|                       
|/s/ DAVID E. TOBIN      |  | Director                              |  | September 29, 2003
|                        |  |                                       |  |                   
|David E. Tobin          |  |                                       |  |                   
|                        |  |                                       |  |                   
|/s/ ANTHONY G. WILLIAMS |  | Director                              |  | September 29, 2003
|                        |  |                                       |  |                   
|Anthony G. Williams     |  |                                       |  |                   
|                        |  |                                       |  |                   
|/s/ ROBERT T. SLEZAK    |  | Director                              |  | September 29, 2003
|                        |  |                                       |  |                   
|Robert T. Slezak        |  |                                       |  |                   

50



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BAM! Entertainment, Inc.




Index to Consolidated Financial Statements


|                                                                                                                                  |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                  |  | Page
|                                                                                                                                  |  |     
|Independent Auditors Report                                                                                                      |  |      | F-2 | 
|Consolidated Balance Sheets as of June 30, 2003 and 2002                                                                          |  |      | F-3 | 
|Consolidated Statements of Operations for the years ended June 30, 2003, 2002 and 2001                                            |  |      | F-4 | 
|Consolidated Statements of Stockholders Equity (Deficit) and Comprehensive Loss for
the years ended June 30, 2003, 2002 and 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001                                            |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                                        |  |      | F-7 | 
|Schedule II  Valuation and qualifying accounts                                                                                   |  |      | S-1 | 

F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of

BAM! Entertainment, Inc.:

We have audited the accompanying consolidated balance sheets of BAM!
Entertainment, Inc. and its subsidiaries (the Company) as of June 30, 2003
and 2002, and the related consolidated statements of operations, stockholders
equity (deficit) and comprehensive loss, and cash flows for each of the three
years in the period ended June, 30, 2003. Our audits also included the
financial statement schedule listed in item 15(a). These financial statements
and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule 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 financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 2003 and 2002,
and the results of its operations and its cash flows for each of the three
years in the period ended June, 30, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly, in
all material respects, the information set forth therein.

These condensed financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred a substantial net loss for the
year ended June 30, 2003 of $36.2 million and has used cash in operating
activities of $10.5 million. As of June 30, 2003, the Company had cash and
cash equivalents of $1.1 million and its accumulated deficit was
$59.8 million.
These factors, among others, raise substantial doubt about the Companys
ability to continue as a going concern for a reasonable period of time.
Managements plan concerning this matter is also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

DELOITTE & TOUCHE LLP
San Jose, California
September 26, 2003

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BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |        | 
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ----- | -------- | ----- | ---- | ------ | ------- | ------ | 
|                                                                                                       |                                                                                                                                                                    |                            |       | June 30,
|                                                                                                       |                                                                                                                                                                    |                            |       |         
|                                                                                                       |                                                                                                                                                                    |                            |       | 2003     |       | 2002
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |     
|ASSETS                                                                                                 |                                                                                                                                                                    |                            |       |          |       |      |        |        
|Current assets:                                                                                        |                                                                                                                                                                    |                            |       |          |       |      |        |        
|                                                                                                       | Cash and cash equivalents                                                                                                                                          |                            | $     | 1,068    |       |      | $      | 4,726   |       
|                                                                                                       | Short-term investments                                                                                                                                             |                            |       |         |       |      |        | 8,185   |       
|                                                                                                       | Accounts
receivable, net of allowance of $2,722 and $3,720 as of June 30, 2003
and 2002, respectively                                                              |                            |       | 539      |       |      |        | 10,183  |       
|                                                                                                       | Inventories                                                                                                                                                        |                            |       | 961      |       |      |        | 3,945   |       
|                                                                                                       | Prepaid royalties                                                                                                                                                  |                            |       | 1,067    |       |      |        | 1,007   |       
|                                                                                                       | Prepaid expenses and other                                                                                                                                         |                            |       | 1,036    |       |      |        | 2,539   |       
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |       
|                                                                                                       |                                                                                                                                                                    | Total current assets       |       |          | 4,671 |      |        |         | 30,585 | 
|Capitalized software and licensed assets                                                               |                                                                                                                                                                    |                            | 4,138 |          |       |      | 15,478 |        
|Property and equipment, net                                                                            |                                                                                                                                                                    |                            | 597   |          |       |      | 987    |        
|Long-term receivable, net of allowance of $1,627 and $1,080 as of June 30, 2003
and 2002, respectively |                                                                                                                                                                    |                            |      |          |       |      | 547    |        
|Other assets                                                                                           |                                                                                                                                                                    |                            | 54    |          |       |      | 1,870  |        
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |       
|Total assets                                                                                           |                                                                                                                                                                    | $                          | 9,460 |          |       | $    | 49,467 |        
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                   |                                                                                                                                                                    |                            |       |          |       |      |        |        
|Current liabilities:                                                                                   |                                                                                                                                                                    |                            |       |          |       |      |        |        
|                                                                                                       | Accounts payable  trade                                                                                                                                           |                            | $     | 3,199    |       |      | $      | 4,755   |       
|                                                                                                       | Short-term borrowings                                                                                                                                              |                            |       |         |       |      |        | 1,359   |       
|                                                                                                       | Royalties payable                                                                                                                                                  |                            |       | 1,242    |       |      |        | 528     |       
|                                                                                                       | Obligations under capital leases  short-term portion                                                                                                              |                            |       | 27       |       |      |        |        |       
|                                                                                                       | Accrued compensation and related benefits                                                                                                                          |                            |       | 785      |       |      |        | 972     |       
|                                                                                                       | Accrued software costs                                                                                                                                             |                            |       | 128      |       |      |        | 1,488   |       
|                                                                                                       | Accrued expenses  other                                                                                                                                           |                            |       | 793      |       |      |        | 1,509   |       
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |       
|                                                                                                       |                                                                                                                                                                    | Total current liabilities  |       |          | 6,174 |      |        |         | 10,611 | 
|Obligations under capital leases  long-term portion                                                   |                                                                                                                                                                    |                            | 26    |          |       |      |       |        
|Commitments, contingencies and guarantees (Note 16)                                                    |                                                                                                                                                                    |                            |       |          |       |      |        |        
|Stockholders equity:                                                                                  |                                                                                                                                                                    |                            |       |          |       |      |        |        
|                                                                                                       | Common stock $0.001 par value; shares authorized; 100,000,000; shares issued and
outstanding: 14,678,290 and 14,582,756 as of June 30, 2003 and 2002,
respectively |                            |       | 15       |       |      |        | 15      |       
|                                                                                                       | Additional paid-in capital                                                                                                                                         |                            |       | 62,986   |       |      |        | 62,988  |       
|                                                                                                       | Deferred stock compensation                                                                                                                                        |                            |       | (245     | )     |      |        | (789    | )     
|                                                                                                       | Accumulated deficit                                                                                                                                                |                            |       | (59,811  | )     |      |        | (23,618 | )     
|                                                                                                       | Accumulated other comprehensive income                                                                                                                             |                            |       | 315      |       |      |        | 260     |       
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |       
|                                                                                                       |                                                                                                                                                                    | Total stockholders equity |       |          | 3,260 |      |        |         | 38,856 | 
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |       
|Total liabilities and stockholders equity                                                             |                                                                                                                                                                    | $                          | 9,460 |          |       | $    | 49,467 |        
|                                                                                                       |                                                                                                                                                                    |                            |       |          |       |      |        |         |       

See notes to consolidated financial statements

F-3



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BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES

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

|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |        |        |        | 
|--------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------ | ------ | ---------- | ------ | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                              |                                                                                       |                                              |                          |        | Year ended
|                                              |                                                                                       |                                              |                          |        | June 30,  
|                                              |                                                                                       |                                              |                          |        |           
|                                              |                                                                                       |                                              |                          |        | 2003       |        | 2002    |        | 2001  
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |       
|Net revenues                                  |                                                                                       | $                                            | 35,708                   |        |            | $      | 50,734  |        |        | $      | 25,351 |       
|Costs and expenses:                           |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|                                              | Cost of revenues                                                                      |                                              |                          |        |            |        |         |        |        |        |        |        |       
|                                              |                                                                                       | Cost of goods sold                           |                          |        | 23,124     |        |         |        | 29,826 |        |        |        | 14,827 |       
|                                              |                                                                                       | Royalties, software costs, and license costs |                          |        | 18,739     |        |         |        | 12,101 |        |        |        | 2,898  |       
|                                              |                                                                                       | Project abandonment costs                    |                          |        | 9,600      |        |         |        | 693    |        |        |        |       |       
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|                                              |                                                                                       | Total cost of revenues                       |                          |        | 51,463     |        |         |        | 42,620 |        |        |        | 17,725 |       
|                                              | Research and development (exclusive of
amortization of deferred stock compensation)   |                                              |                          | 2,912  |            |        |         | 2,519  |        |        |        | 1,073  |       
|                                              | Sales and marketing (exclusive of amortization
of deferred stock compensation)        |                                              |                          | 9,220  |            |        |         | 11,473 |        |        |        | 4,292  |       
|                                              | General and administrative (exclusive of
amortization of deferred stock compensation) |                                              |                          | 7,164  |            |        |         | 6,293  |        |        |        | 1,996  |       
|                                              | Amortization of deferred stock compensation*                                          |                                              |                          | 418    |            |        |         | 1,223  |        |        |        | 618    |       
|                                              | Restructuring costs                                                                   |                                              |                          | 426    |            |        |         |       |        |        |        |       |       
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|                                              |                                                                                       |                                              | Total costs and expenses |        |            | 71,603 |         |        |        | 64,128 |        |        |        | 25,704 | 
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|Loss from operations                          |                                                                                       |                                              | (35,895                  | )      |            |        | (13,394 | )      |        |        | (353   | )     
|                                              | Interest income                                                                       |                                              |                          | 148    |            |        |         | 328    |        |        |        | 58     |       
|                                              | Interest expense                                                                      |                                              |                          | (597   | )          |        |         | (2,569 | )      |        |        | (1,325 | )     
|                                              | Other income (expense)                                                                |                                              |                          | 151    |            |        |         | (38    | )      |        |        | 18     |       
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|Net loss                                      |                                                                                       |                                              | (36,193                  | )      |            |        | (15,673 | )      |        |        | (1,602 | )     
|                                              | Redeemable convertible preferred stock dividend                                       |                                              |                          |       |            |        |         |       |        |        |        | (5,540 | )     
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|Net loss attributable to common stockholders  |                                                                                       | $                                            | (36,193                  | )      |            | $      | (15,673 | )      |        | $      | (7,142 | )     
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|Net
loss per share:                           |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|                                              | Basic and diluted                                                                     |                                              | $                        | (2.47  | )          |        | $       | (1.65  | )      |        | $      | (4.82  | )     
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|Shares used in computation:                   |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|                                              | Basic and diluted                                                                     |                                              |                          | 14,654 |            |        |         | 9,503  |        |        |        | 1,482  |       
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|*Amortization of deferred stock compensation: |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|                                              | Research and development                                                              |                                              | $                        | (25    | )          |        | $       | 126    |        |        | $      | 72     |       
|                                              | Sales and marketing                                                                   |                                              |                          | (7     | )          |        |         | 70     |        |        |        | 28     |       
|                                              | General and administrative                                                            |                                              |                          | 450    |            |        |         | 1,027  |        |        |        | 518    |       
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       
|                                              |                                                                                       | $                                            | 418                      |        |            | $      | 1,223   |        |        | $      | 618    |       
|                                              |                                                                                       |                                              |                          |        |            |        |         |        |        |        |        |       

See notes to consolidated financial statements

F-4



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##### Table of Contents



BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) AND COMPREHENSIVE
LOSS (in thousands, except share amounts)



|                                                                                                                           |  |              |            |            |  |            |    |             |  |              |        |   |  |   |    |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ---------- | -- | ----------- |  | ------------ | ------ | - |  | - | -- | - |  | - | ------ | -
|                                                                                                                           |  | Common stock |            | Additional |  | Receivable |    | Deferred   
|                                                                                                                           |  |              |            | paid-in    |  | from       |    | Stock      
|                                                                                                                           |  | Shares       |            | Amount     |  | capital    |    | Stockholder |  | Compensation
|                                                                                                                           |  |              |            |            |  |            |    |             |  |             
|Balance, June 30, 2000                                                                                                     |  |              | 1,469,972  |            |  |            | 1  |             |  |              | 97     |   |  |   | (1 | ) |  |   |       |  
|Issuance of common stock in connection with a
license agreement                                                            |  |              | 68,738     |            |  |            |   |             |  |              | 746    |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |              |           |            |  |            |   |             |  |              | 910    |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants to a
service provider in connection with Series B
redeemable convertible preferred stock |  |              |           |            |  |            |   |             |  |              | 283    |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants to a
service provider in connection with Series C
redeemable convertible preferred stock |  |              |           |            |  |            |   |             |  |              | 159    |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants to a
service provider in connection with a
proposed initial public offering              |  |              |           |            |  |            |   |             |  |              | 456    |   |  |   |   |   |  |   |       |  
|Issuance of stock options to consultant                                                                                    |  |              |           |            |  |            |   |             |  |              | 10     |   |  |   |   |   |  |   |       |  
|Deferred stock compensation                                                                                                |  |              |           |            |  |            |   |             |  |              | 2,714  |   |  |   |   |   |  |   | (2,714 | )
|Collection of note receivable from stockholder                                                                             |  |              |           |            |  |            |   |             |  |              |       |   |  |   | 1  |   |  |   |       |  
|Amortization of deferred stock compensation                                                                                |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   | 618    |  
|Net loss                                                                                                                   |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Redeemable convertible preferred stock
dividend                                                                            |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Change in accumulated translation adjustment                                                                               |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Comprehensive loss                                                                                                         |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|                                                                                                                           |  |              |            |            |  |            |    |             |  |              |        |   |  |   |    |   |  |   |        |  
|Balance, June 30, 2001                                                                                                     |  |              | 1,538,710  |            |  |            | 1  |             |  |              | 5,375  |   |  |   |   |   |  |   | (2,096 | )
|Issuance of common stock in initial public
offering, net of issuance costs of $6.8
million                                 |  |              | 5,750,000  |            |  |            | 6  |             |  |              | 39,151 |   |  |   |   |   |  |   |       |  
|Conversion of preferred stock upon completion
of initial public offering                                                   |  |              | 7,127,528  |            |  |            | 7  |             |  |              | 17,322 |   |  |   |   |   |  |   |       |  
|Exercise of stock options                                                                                                  |  |              | 20,562     |            |  |            |   |             |  |              | 9      |   |  |   |   |   |  |   |       |  
|Issuance of common stock under employee stock
purchase plan                                                                |  |              | 4,956      |            |  |            |   |             |  |              | 25     |   |  |   |   |   |  |   |       |  
|Issuance of common stock from exercise of
warrants                                                                         |  |              | 141,000    |            |  |            | 1  |             |  |              | 528    |   |  |   |   |   |  |   |       |  
|Issuance of stock options to consultant                                                                                    |  |              |           |            |  |            |   |             |  |              | 62     |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |              |           |            |  |            |   |             |  |              | 86     |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |              |           |            |  |            |   |             |  |              | 29     |   |  |   |   |   |  |   |       |  
|Deferred stock compensation                                                                                                |  |              |           |            |  |            |   |             |  |              | 129    |   |  |   |   |   |  |   | (129   | )
|Deferred stock compensation credit on
cancellations                                                                        |  |              |           |            |  |            |   |             |  |              | (213   | ) |  |   |   |   |  |   | 129    |  
|Amortization of deferred stock compensation                                                                                |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   | 1,307  |  
|Issuance of common stock warrants to a
service provider in connection with a finance
agreement                             |  |              |           |            |  |            |   |             |  |              | 485    |   |  |   |   |   |  |   |       |  
|Net loss                                                                                                                   |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Change in unrealized gain on
available-for-sale marketable securities                                                      |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Change in accumulated translation adjustment                                                                               |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Comprehensive loss                                                                                                         |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|                                                                                                                           |  |              |            |            |  |            |    |             |  |              |        |   |  |   |    |   |  |   |        |  
|Balance, June 30, 2002                                                                                                     |  |              | 14,582,756 |            |  |            | 15 |             |  |              | 62,988 |   |  |   |   |   |  |   | (789   | )
|Issuance of common stock in connection with a
license agreement                                                            |  |              | 68,738     |            |  |            |   |             |  |              | 70     |   |  |   |   |   |  |   |       |  
|Issuance of common stock under employee stock
purchase plan                                                                |  |              | 26,796     |            |  |            |   |             |  |              | 27     |   |  |   |   |   |  |   |       |  
|Issuance of stock options to consultant                                                                                    |  |              |           |            |  |            |   |             |  |              | 12     |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |              |           |            |  |            |   |             |  |              | 11     |   |  |   |   |   |  |   |       |  
|Issuance of common stock warrants to a
developer                                                                           |  |              |           |            |  |            |   |             |  |              | 4      |   |  |   |   |   |  |   |       |  
|Deferred stock compensation credit on
cancellations                                                                        |  |              |           |            |  |            |   |             |  |              | (126   | ) |  |   |   |   |  |   | 36     |  
|Amortization of deferred stock compensation                                                                                |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   | 508    |  
|Net loss                                                                                                                   |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Change in unrealized gain on
available-for-sale marketable securities                                                      |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Change in accumulated translation adjustment                                                                               |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|Comprehensive loss                                                                                                         |  |              |           |            |  |            |   |             |  |              |       |   |  |   |   |   |  |   |       |  
|                                                                                                                           |  |              |            |            |  |            |    |             |  |              |        |   |  |   |    |   |  |   |        |  
|Balance, June 30, 2003                                                                                                     |  |              | 14,678,290 |            |  | $          | 15 |             |  | $            | 62,986 |   |  | $ |   |   |  | $ | (245   | )
|                                                                                                                           |  |              |            |            |  |            |    |             |  |              |        |   |  |   |    |   |  |   |        |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ------------- |  | ----------- | --- | ------------- |  | ----- | ------- | - |  | - | ------- | -
|                                                                                                                           |  |             |         |               |  | Accumulated |     | Total         |  |       |         |  
|                                                                                                                           |  |             |         |               |  | other       |     | stockholders |  | Total
|                                                                                                                           |  | Accumulated |         | comprehensive |  | equity      |     | comprehensive
|                                                                                                                           |  | deficit     |         | income (loss) |  | (deficit)   |     | loss         
|                                                                                                                           |  |             |         |               |  |             |     |              
|Balance, June 30, 2000                                                                                                     |  |             | (803    | )             |  |             |    |               |  |       | (706    | ) |  |   |         |  
|Issuance of common stock in connection with a
license agreement                                                            |  |             |        |               |  |             |    |               |  |       | 746     |   |  |   |         |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |             |        |               |  |             |    |               |  |       | 910     |   |  |   |         |  
|Issuance of common stock warrants to a
service provider in connection with Series B
redeemable convertible preferred stock |  |             |        |               |  |             |    |               |  |       | 283     |   |  |   |         |  
|Issuance of common stock warrants to a
service provider in connection with Series C
redeemable convertible preferred stock |  |             |        |               |  |             |    |               |  |       | 159     |   |  |   |         |  
|Issuance of common stock warrants to a
service provider in connection with a
proposed initial public offering              |  |             |        |               |  |             |    |               |  |       | 456     |   |  |   |         |  
|Issuance of stock options to consultant                                                                                    |  |             |        |               |  |             |    |               |  |       | 10      |   |  |   |         |  
|Deferred stock compensation                                                                                                |  |             |        |               |  |             |    |               |  |       |        |   |  |   |         |  
|Collection of note receivable from stockholder                                                                             |  |             |        |               |  |             |    |               |  |       | 1       |   |  |   |         |  
|Amortization of deferred stock compensation                                                                                |  |             |        |               |  |             |    |               |  |       | 618     |   |  |   |         |  
|Net loss                                                                                                                   |  |             | (1,602  | )             |  |             |    |               |  |       | (1,602  | ) |  |   | (1,602  | )
|Redeemable convertible preferred stock
dividend                                                                            |  |             | (5,540  | )             |  |             |    |               |  |       | (5,540  | ) |  |   |         |  
|Change in accumulated translation adjustment                                                                               |  |             |        |               |  |             | (4  | )             |  |       | (4      | ) |  |   | (4      | )
|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  
|Comprehensive loss                                                                                                         |  |             |        |               |  |             |    |               |  |       |        |   |  | $ | (1,606  | )
|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  
|Balance, June 30, 2001                                                                                                     |  |             | (7,945  | )             |  |             | (4  | )             |  |       | (4,669  | ) |  |   |         |  
|Issuance of common stock in initial public
offering, net of issuance costs of $6.8
million                                 |  |             |        |               |  |             |    |               |  |       | 39,157  |   |  |   |         |  
|Conversion of preferred stock upon completion
of initial public offering                                                   |  |             |        |               |  |             |    |               |  |       | 17,329  |   |  |   |         |  
|Exercise of stock options                                                                                                  |  |             |        |               |  |             |    |               |  |       | 9       |   |  |   |         |  
|Issuance of common stock under employee stock
purchase plan                                                                |  |             |        |               |  |             |    |               |  |       | 25      |   |  |   |         |  
|Issuance of common stock from exercise of
warrants                                                                         |  |             |        |               |  |             |    |               |  |       | 529     |   |  |   |         |  
|Issuance of stock options to consultant                                                                                    |  |             |        |               |  |             |    |               |  |       | 62      |   |  |   |         |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |             |        |               |  |             |    |               |  |       | 86      |   |  |   |         |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |             |        |               |  |             |    |               |  |       | 29      |   |  |   |         |  
|Deferred stock compensation                                                                                                |  |             |        |               |  |             |    |               |  |       |        |   |  |   |         |  
|Deferred stock compensation credit on
cancellations                                                                        |  |             |        |               |  |             |    |               |  |       | (84     | ) |  |   |         |  
|Amortization of deferred stock compensation                                                                                |  |             |        |               |  |             |    |               |  |       | 1,307   |   |  |   |         |  
|Issuance of common stock warrants to a
service provider in connection with a finance
agreement                             |  |             |        |               |  |             |    |               |  |       | 485     |   |  |   |         |  
|Net loss                                                                                                                   |  |             | (15,673 | )             |  |             |    |               |  |       | (15,673 | ) |  |   | (15,673 | )
|Change in unrealized gain on
available-for-sale marketable securities                                                      |  |             |        |               |  |             | 52  |               |  |       | 52      |   |  |   | 52      |  
|Change in accumulated translation adjustment                                                                               |  |             |        |               |  |             | 212 |               |  |       | 212     |   |  |   | 212     |  
|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  
|Comprehensive loss                                                                                                         |  |             |        |               |  |             |    |               |  |       |        |   |  | $ | (15,409 | )
|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  
|Balance, June 30, 2002                                                                                                     |  |             | (23,618 | )             |  |             | 260 |               |  |       | 38,856  |   |  |   |         |  
|Issuance of common stock in connection with a
license agreement                                                            |  |             |        |               |  |             |    |               |  |       | 70      |   |  |   |         |  
|Issuance of common stock under employee stock
purchase plan                                                                |  |             |        |               |  |             |    |               |  |       | 27      |   |  |   |         |  
|Issuance of stock options to consultant                                                                                    |  |             |        |               |  |             |    |               |  |       | 12      |   |  |   |         |  
|Issuance of common stock warrants in
connection with a license agreement                                                   |  |             |        |               |  |             |    |               |  |       | 11      |   |  |   |         |  
|Issuance of common stock warrants to a
developer                                                                           |  |             |        |               |  |             |    |               |  |       | 4       |   |  |   |         |  
|Deferred stock compensation credit on
cancellations                                                                        |  |             |        |               |  |             |    |               |  |       | (90     | ) |  |   |         |  
|Amortization of deferred stock compensation                                                                                |  |             |        |               |  |             |    |               |  |       | 508     |   |  |   |         |  
|Net loss                                                                                                                   |  |             | (36,193 | )             |  |             |    |               |  |       | (36,193 | ) |  |   | (36,193 | )
|Change in unrealized gain on
available-for-sale marketable securities                                                      |  |             |        |               |  |             | (52 | )             |  |       | (52     | ) |  |   | (52     | )
|Change in accumulated translation adjustment                                                                               |  |             |        |               |  |             | 107 |               |  |       | 107     |   |  |   | 107     |  
|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  
|Comprehensive loss                                                                                                         |  |             |        |               |  |             |    |               |  |       |        |   |  | $ | (36,138 | )
|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  
|Balance, June 30, 2003                                                                                                     |  | $           | (59,811 | )             |  | $           | 315 |               |  | $     | 3,260   |   |  |   |         |  
|                                                                                                                           |  |             |         |               |  |             |     |               |  |       |         |   |  |   |         |  

See notes to consolidated financial statements

F-5



---



##### Table of Contents



BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |         |       |        |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------- | ---------------------------------------------- | ---------------------------------------------------- | --- | ------------------- | ------- | ------- | ----- | ------- | ------- | ------- | ----- | ------ | ------- | -
|                                                                            |                                                                                             |                        |                                                |                                                      |     | Year ended June 30,
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                    
|                                                                            |                                                                                             |                        |                                                |                                                      |     | 2003                |         | 2002    |       | 2001   
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |        
|Cash flows from operating activities:                                       |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|Net loss                                                                    |                                                                                             | $                      | (36,193                                        | )                                                    |     | $                   | (15,673 | )       |       | $       | (1,602  | )      
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Depreciation and amortization                                                               |                        |                                                | 27,950                                               |     |                     |         | 13,137  |       |         |         | 1,859   |      
|                                                                            | Provision for bad debts, sales returns, price protection and cooperative advertising        |                        |                                                | 12,939                                               |     |                     |         | 14,660  |       |         |         | 1,989   |      
|                                                                            | Consulting services performed in exchange for common stock and options                      |                        |                                                | 12                                                   |     |                     |         | 62      |       |         |         | 10      |      
|                                                                            | Fair value of common stock warrants issued to a developer                                   |                        |                                                | 4                                                    |     |                     |         |        |       |         |         |        |      
|                                                                            | Other                                                                                       |                        |                                                | (52                                                  | )   |                     |         | 52      |       |         |         | (4      | )    
|                                                                            | Changes in operating assets and liabilities:                                                |                        |                                                |                                                      |     |                     |         |         |       |         |         |         |      
|                                                                            |                                                                                             |                        | Accounts receivable                            |                                                      |     | (2,280              | )       |         |       | (17,752 | )       |         |       | (8,062 | )      
|                                                                            |                                                                                             |                        | Inventories                                    |                                                      |     | 3,298               |         |         |       | (1,958  | )       |         |       | (1,457 | )      
|                                                                            |                                                                                             |                        | Prepaid expenses and other                     |                                                      |     | 1,608               |         |         |       | (1,744  | )       |         |       | 115    |        
|                                                                            |                                                                                             |                        | Prepaid royalties                              |                                                      |     | (60                 | )       |         |       | 174     |         |         |       | (1,031 | )      
|                                                                            |                                                                                             |                        | Capitalized
software costs and licensed assets |                                                      |     | (13,285             | )       |         |       | (20,188 | )       |         |       | (5,416 | )      
|                                                                            |                                                                                             |                        | Other
assets  long-term royalties             |                                                      |     | (331                | )       |         |       | (1,840  | )       |         |       | (134   | )      
|                                                                            |                                                                                             |                        | Accounts payable  trade                       |                                                      |     | (2,272              | )       |         |       | 2,437   |         |         |       | 1,371  |        
|                                                                            |                                                                                             |                        | Royalties payable                              |                                                      |     | 608                 |         |         |       | 176     |         |         |       | 62     |        
|                                                                            |                                                                                             |                        | Accrued compensation and related benefits      |                                                      |     | (187                | )       |         |       | (54     | )       |         |       | 805    |        
|                                                                            |                                                                                             |                        | Accrued software costs                         |                                                      |     | (1,450              | )       |         |       | 687     |         |         |       | 781    |        
|                                                                            |                                                                                             |                        | Accrued expenses  other                       |                                                      |     | (841                | )       |         |       | 742     |         |         |       | 444    |        
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            |                                                                                             |                        |                                                | Net cash used in operating activities                |     |                     | (10,532 | )       |       |         | (27,082 | )       |       |        | (10,270 | )
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|Cash flows from investing activities:                                       |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Proceeds from sale of property and equipment                                                |                        |                                                | 153                                                  |     |                     |         |        |       |         |         |        |      
|                                                                            | Purchase of property and equipment                                                          |                        |                                                | (338                                                 | )   |                     |         | (908    | )     |         |         | (421    | )    
|                                                                            | Proceeds from sale of short-term investments                                                |                        |                                                | 8,185                                                |     |                     |         |        |       |         |         |        |      
|                                                                            | Purchase of short-term investments                                                          |                        |                                                |                                                     |     |                     |         | (8,185  | )     |         |         |        |      
|                                                                            | Decrease (increase) in other assets                                                         |                        |                                                | (24                                                  | )   |                     |         | 1,700   |       |         |         | (1,730  | )    
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            |                                                                                             |                        |                                                | Net cash provided by (used in) investing activities: |     |                     | 7,976   |         |       |         | (7,393  | )       |       |        | (2,151  | )
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|Cash flows from financing activities:                                       |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Advances under short-term borrowings                                                        |                        |                                                | 8,628                                                |     |                     |         | 20,322  |       |         |         | 14,912  |      
|                                                                            | Repayments of short-term borrowings                                                         |                        |                                                | (9,987                                               | )   |                     |         | (23,127 | )     |         |         | (11,358 | )    
|                                                                            | Payments under capital leases                                                               |                        |                                                | (27                                                  | )   |                     |         |        |       |         |         |        |      
|                                                                            | Gross proceeds from issuance of common stock in initial public offering                     |                        |                                                |                                                     |     |                     |         | 46,000  |       |         |         |        |      
|                                                                            | Payment of initial public offering expenses                                                 |                        |                                                |                                                     |     |                     |         | (6,843  | )     |         |         |        |      
|                                                                            | Net proceeds from exercise of warrants                                                      |                        |                                                |                                                     |     |                     |         | 529     |       |         |         |        |      
|                                                                            | Net proceeds from issuance of stock under employee stock purchase plan                      |                        |                                                | 27                                                   |     |                     |         | 25      |       |         |         |        |      
|                                                                            | Net proceeds from exercise of common stock options                                          |                        |                                                |                                                     |     |                     |         | 9       |       |         |         |        |      
|                                                                            | Net proceeds from issuance of redeemable convertible preferred stock                        |                        |                                                |                                                     |     |                     |         |        |       |         |         | 10,128  |      
|                                                                            | Collection of note receivable from stockholder                                              |                        |                                                |                                                     |     |                     |         |        |       |         |         | 1       |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            |                                                                                             |                        |                                                | Net cash provided by (used in) financing activities  |     |                     | (1,359  | )       |       |         | 36,915  |         |       |        | 13,683  |  
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|Net increase (decrease) in cash and cash equivalents                        |                                                                                             |                        | (3,915                                         | )                                                    |     |                     | 2,440   |         |       |         | 1,262   |        
|Net effect on cash and cash equivalents from change in exchange rates       |                                                                                             |                        | 257                                            |                                                      |     |                     | 116     |         |       |         |        |        
|Cash and cash equivalents, beginning of period                              |                                                                                             |                        | 4,726                                          |                                                      |     |                     | 2,170   |         |       |         | 908     |        
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|Cash and cash equivalents, end of period                                    |                                                                                             | $                      | 1,068                                          |                                                      |     | $                   | 4,726   |         |       | $       | 2,170   |        
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|Supplementary disclosure of cash flow information:                          |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            |                                                                                             | Cash paid for interest |                                                | $                                                    | 597 |                     |         | $       | 2,084 |         |         | $       | 1,325 |       
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|Non cash investing and financing activities:                                |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Conversion of redeemable convertible preferred stock                                        |                        | $                                              |                                                     |     |                     | $       | 17,329  |       |         | $       |        |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Issuance of common stock in connection with a finance agreement                             |                        | $                                              |                                                     |     |                     | $       | 485     |       |         | $       |        |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Common stock options issued in connection with consulting services performed                |                        | $                                              | 12                                                   |     |                     | $       | 62      |       |         | $       | 10      |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Issuance of common stock in connection with a license agreement                             |                        | $                                              | 70                                                   |     |                     | $       |        |       |         | $       | 746     |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Issuance of common stock warrants in connection with license agreements                     |                        | $                                              | 11                                                   |     |                     | $       | 115     |       |         | $       | 910     |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Issuance of common stock warrants to a developer                                            |                        | $                                              | 4                                                    |     |                     | $       |        |       |         | $       |        |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Property and equipment acquired under capital leases                                        |                        | $                                              | 80                                                   |     |                     | $       |        |       |         | $       |        |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Gain on available-for-sale marketable securities (realized)/unrealized                      |                        | $                                              | (52                                                  | )   |                     | $       | 52      |       |         | $       |        |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Deferred stock compensation, net of cancellations                                           |                        | $                                              | (90                                                  | )   |                     | $       | (84     | )     |         | $       | 2,714   |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Issuance of common stock warrants in connection with a proposed initial public offering     |                        | $                                              |                                                     |     |                     | $       |        |       |         | $       | 456     |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        
|                                                                            | Issuance of common stock warrants in connection with redeemable convertible preferred
stock |                        | $                                              |                                                     |     |                     | $       |        |       |         | $       | 442     |      
|                                                                            |                                                                                             |                        |                                                |                                                      |     |                     |         |         |       |         |         |        

See notes to consolidated financial statements

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BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended June 30, 2003, 2002, and 2001

1.     ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business BAM! Entertainment, Inc. and subsidiaries (the
Company) is a developer and publisher of interactive entertainment software
products for popular interactive entertainment hardware platforms and personal
computers. The Company licenses popular properties that have consumer
recognition and appeal from a wide variety of sources and publishes software
based on their motion picture, television, sports and cartoon character
properties. The Company sells its software to mass merchandisers and
independent distributors.

Principles of Consolidation These consolidated financial statements include
the Company and its wholly-owned subsidiaries in the United Kingdom. All
intercompany transactions and balances have been eliminated in consolidation.

Going Concern and Liquidity Uncertainties These consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in these consolidated financial statements, during the
year ended June 30, 2003, the Company used cash in operating activities of
$10.5 million and incurred a net loss of $36.2 million. As of June 30, 2003,
the Company had cash and cash equivalents of $1.1 million and its accumulated
deficit was $59.8 million. These factors, among others, raise substantial doubt
about the Companys ability to continue as a going concern for a reasonable
period of time. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of assets or the
amounts and classification of recorded liabilities that might be necessary
should the Company be unable to continue as a going concern.

During the year ended June 30, 2003, the Company undertook measures to reduce
spending and restructured its operations. In February 2003 the Company
retained, through July 31, 2003, the investment banking firm of Gerard Klauer
Mattison & Co., Inc. to assist it in reviewing a range of potential strategic
alternatives, including mergers, acquisitions and additional financing. No
transactions arose from this assistance or were consummated during this period.
The Company may need to either consummate one or a combination of the potential
strategic alternatives, or otherwise obtain capital via sale or license of
certain of its assets, in order to satisfy its future liquidity requirements.
The Company is also not in compliance with the liquidity covenants under its
current line of credit, and may not be able to obtain advances under the line
until it is back in compliance. The Company currently has no funds advanced to
it under the agreement. If the Company is unsuccessful in its efforts to comply
with the liquidity requirements of its line of credit, or obtain another line
of credit to replace the existing line, it may not be able to fund inventory
purchases in the future. Current market conditions present uncertainty as to
the Companys ability to effectuate any merger or acquisition or secure
additional financing, as well as its ability to reach profitability. There can
be no assurances that the Company will be able to effectuate any such merger or
acquisition or secure additional financing, or obtain favorable terms on such
financing if it is available, or as to the Companys ability to achieve
positive cash flow from operations. Continued negative cash flows create
significant uncertainty about the Companys ability to implement its operating
plan and the Company may have to further reduce the scope of its planned
operations. If cash and cash equivalents, together with cash generated from
operations, are insufficient to satisfy the Companys liquidity requirements,
the Company will not have sufficient resources to continue operations for the
next six months.

As of June 30, 2003, the Company had $4.0 million, $1.1 million and $89,000 of
capitalized development costs, current and long-term prepaid royalties and licensed assets,
respectively, related to software development projects in progress. Should the
Company not be able to effectuate either a merger or acquisition or to secure
sufficient additional financing, part or all of these development projects in
progress might have to be abandoned and the related costs would have to be
written off.

Reclassifications Certain 2002 and 2001 amounts have been reclassified to
conform with 2003 presentation. Such reclassifications had no effect on
net revenues, net loss or shareholders equity.

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Stock Split On August 15, 2001, the Company effected a common stock split of
4.7 to one with an adjusted par value of $0.001 and increased the number of
authorized shares of common stock to 100,000,000 shares and preferred stock to
10,000,000 shares. All common share and per share amounts in these consolidated
financial statements have been adjusted to give effect to this stock split.

Foreign Currency Translation The functional currency for the Companys
foreign operations is the applicable local currency. The translation of the
applicable foreign currencies into U.S. dollars is performed for balance sheet
accounts using exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted-average exchange rate during the
period. The gains or losses resulting from such translation are reported as a
separate component of equity as accumulated other comprehensive income (loss),
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.

Use of Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates include, but
are not limited to: allowances for price protection, uncollectible accounts
receivable, sales returns and cooperative advertising; inventory valuations;
recoverability of prepaid royalties, capitalized software costs and licensed
assets; depreciation and amortization; taxes and contingencies. Actual results
could differ from those estimates.

Certain Significant Risks Financial instruments which potentially subject the
Company to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are held with
financial institutions and consist primarily of cash in bank accounts. The
Company generates revenue primarily from large retailers in the United States
and generally does not require its customers to provide collateral or other
security to support accounts receivable. To reduce credit risk, management
performs ongoing credit evaluations of its customers financial condition and
maintains allowances for estimated potential bad debt losses.

The Company participates in a dynamic high-technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Companys future financial position, results of operations or cash
flows: ability to obtain future financing; advances and trends in new
technologies and industry standards; competitive pressures in the form of new
and more popular products by competitors; changes in the overall demand by
customers and consumers for products offered by the Company; unexpected
quantities of product returns and price protection allowances; changes in
certain strategic relationships or customer relationships; the loss of
significant customers; litigation or claims against the Company based on
intellectual property, patent, product, regulatory or other factors; the
inability to procure the necessary third-party licenses or proprietary software
needed to develop its products; risks associated with changes in domestic and
international economic and/or political conditions or regulations; risks
associated with regulation within the industry; availability of necessary
product components; the Companys ability to attract and retain employees
necessary to support its growth; the Companys reliance on senior management;
the Companys limited operating history; inability to manage the growth of the
business; delays and cost overruns on products under development; risks
associated with development of products by third-party developers; failure to
anticipate changing consumer preferences; dependence on hardware manufacturers
for the provision of the platforms necessary to generate revenue; the Companys
inability to protect its proprietary rights or to avoid claims from other
companies; short product life cycles; and the reliance on platform
manufacturers in manufacturing the Companys products.

Cash and Cash Equivalents The Company considers all highly liquid debt
instruments purchased with maturities at the date of purchase of three months
or less to be cash equivalents. The recorded carrying amounts of the Companys
cash and cash equivalents approximate their fair market value due to their
short maturities.

Short-term investments The Company invests excess cash in what the Company
believes to be high quality and easily marketable instruments to ensure that
cash is readily available for use in its current operations. Accordingly, all
marketable securities are classified as available-for-sale in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115.
All investments are reported at fair market value with the

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related unrealized holding gains and losses reported as a component of
accumulated other comprehensive income (loss).

Inventories Inventories, which consist of finished goods, are stated at the
lower of cost (based upon the first-in, first-out method) or market value. The
Company estimates the net realizable value of slow moving inventories on a
product-by-product basis and charges the excess of cost over net realizable
value to cost of revenues.

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 of three years.

Prepaid Royalties Advance
royalty payments for intellectual property licenses are capitalized and
recorded as prepaid royalties. Royalty payments for intellectual property
licenses are classified as current assets to the extent they relate to
anticipated sales during the subsequent year and long-term assets if the sales
are anticipated after one year. Royalty payments are based on sales and
royalties are generally payable on a quarterly basis. Prepaid royalties are
amortized to cost of revenues commencing upon the product release at the
greater of the contractual royalty rate based on actual product sales, or the
ratio of current revenues to total projected revenues. The Company evaluates
the future recoverability of prepaid royalties on a quarterly basis and
expenses them to costs of revenue if and when they are deemed unrecoverable.

Capitalized Software Costs and
Licensed Assets The Company utilizes independent software developers (who are paid advances
against future royalties) to develop its software. The Company accounts for
prepaid royalties relating to development agreements and capitalized software
costs in accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed.Payments made to
independent software developers under development agreements are capitalized to
software development costs once technological feasibility is established or if
the development costs have an alternative future use. Prior to establishing
technological feasibility, software development costs are expensed to research
and development and to cost of revenues subsequent to technological
feasibility. Technological feasibility is evaluated on a product-by-product
basis. For products where proven game engine technology exists, this may occur
early in the development cycle.

Commencing upon product release, capitalized software development costs are
amortized to royalties, software costs, and license costs. Software development
costs are expensed to royalties, software costs, and license costs if and when
they are deemed unrecoverable. The following criteria are used to evaluate
recoverability of software development costs: the commercial acceptance of
prior products released on a given hardware platform; orders for a product
prior to its release; and actual development costs of a product as compared to
forward-looking projections. Amortization of such costs is based on the greater
of the proportion of current revenues to total projected revenues, or the
straight-line method over the estimated product life (generally three to six
months). The Company evaluates the future recoverability of capitalized amounts
on a quarterly basis. Research and development costs are expensed as incurred.

If the Company terminates a development project prior to completion, it
expenses the capitalized software development costs and licensed assets costs
to project abandonment.

Fair Value of Financial Instruments The Companys financial instruments
include cash equivalents, short-term investments and short-term debt. Cash
equivalents and short term-investments are stated at fair market value, based
on quoted market prices. The recorded carrying amount of the Companys
short-term debt approximates fair value since such debt instruments bear
interest at rates which approximate market rates.

Long-Lived Assets The Company evaluates long-lived assets, such as property
and equipment and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets, as defined in SFAS No. 144, Accounting for the
Impairment or Disposal of Long- Lived Assets.

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Income Taxes The Company accounts for income taxes under an asset and
liability approach. Deferred income taxes reflect the impact of temporary
differences between assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax reporting purposes, and
operating loss and other tax credit carryforwards measured by applying
currently enacted tax laws. Valuation allowances are provided when necessary to
reduce net deferred tax assets to an amount that is more likely than not to be
realized in the future.

Stock-Based Compensation The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees,and to nonemployees using the fair value method in accordance with
SFAS No. 123, Accounting for Stock-Based Compensationand in accordance with
Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments
That Are Issued To Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosurerequires disclosure in the summary of
significant accounting policies of the effects of an entitys accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. The Company
adopted SFAS No. 148 on January 1, 2003.

Since the Company continues to account for its stock-based awards to employees
using the intrinsic value method in accordance with APB No. 25, SFAS No. 123
requires the disclosure of pro forma net income (loss) as if the Company had
adopted the fair value method. Under APB 25, stock-based compensation is based
on the difference, if any, on the date of grant, between the fair value of the
Companys stock and the exercise price. Unearned compensation is amortized
using the multiple option award valuation and amortization approach method and
expensed over the vesting period of the respective options.

The following table illustrates the effect on net loss and net loss per share
if the company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation. For purposes of SFAS 123 pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options vesting period (in thousands):

|                                                                                                                                          |                                                    |   |                                       |       |      |   |         |       |   |   |        |       |  
|----------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | - | ------------------------------------- | ----- | ---- | - | ------- | ----- | - | - | ------ | ----- | -
|                                                                                                                                          |                                                    |   | Year ended                           
|                                                                                                                                          |                                                    |   | June 30,                             
|                                                                                                                                          |                                                    |   |                                      
|                                                                                                                                          |                                                    |   | 2003                                  |       | 2002 |   | 2001   
|                                                                                                                                          |                                                    |   |                                       |       |      |   |        
|                                                                                                                                          |                                                    |   | (in thousands, except per share data)
|Net loss attributable to common stockholders                                                                                              |                                                    | $ | (36,193                               | )     |      | $ | (15,673 | )     |   | $ | (7,142 | )    
|Add: Stock-based employee compensation expense
included in net loss attributable to common
stockholders                                   |                                                    |   | 418                                   |       |      |   | 1,223   |       |   |   | 618    |      
|Less: Stock-based employee compensation expense under
the fair value method for stock option awards                                       |                                                    |   | (1,603                                | )     |      |   | (2,170  | )     |   |   | (694   | )    
|Less: Stock-based employee compensation expense under
the fair value method for purchases of stock under
the employee stock purchase plan |                                                    |   | (26                                   | )     |      |   | (15     | )     |   |   |       |      
|                                                                                                                                          |                                                    |   |                                       |       |      |   |         |       |   |   |        |      
|Pro forma net loss attributable to common stockholders                                                                                    |                                                    | $ | (37,404                               | )     |      | $ | (16,635 | )     |   | $ | (7,218 | )    
|                                                                                                                                          |                                                    |   |                                       |       |      |   |         |       |   |   |        |      
|                                                                                                                                          | Basic
and diluted net loss per share  as reported |   | $                                     | (2.47 | )    |   | $       | (1.65 | ) |   | $      | (4.82 | )
|                                                                                                                                          |                                                    |   |                                       |       |      |   |         |       |   |   |        |      
|                                                                                                                                          | Basic
and diluted net loss per share  pro forma   |   | $                                     | (2.55 | )    |   | $       | (1.75 | ) |   | $      | (4.87 | )
|                                                                                                                                          |                                                    |   |                                       |       |      |   |         |       |   |   |        |      

Redeemable Convertible Preferred Stock Dividend Beneficial conversion charges
arise in connection with financing arrangements where the Company has issued
redeemable convertible preferred stock at a discount to the deemed fair market
value of the common stock of the Company at the commitment date, which is
generally the date of issuance. Depending on the nature and purpose of the
arrangement, the Company values the beneficial conversion feature by
subtracting the related effective conversion price from the deemed fair value
of the Companys common stock, and then multiplying the difference by the
number of shares of common stock that would be issued upon conversion. The
value of the beneficial conversion

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feature and accretes this value over the expected period that the redeemable
convertible preferred stock becomes convertible.

Revenue Recognition The Company recognizes revenue in accordance with
Statement of Position 97-2, Software Revenue Recognition,and related
interpretations, when persuasive evidence of an arrangement exists, delivery
has occurred, the price has been fixed or is determinable and collectibility
has been reasonably assured. This occurs when finished goods in the form of
software on a cartridge, CD-ROM or similar media are shipped to the customer.
Under certain conditions, the Company may allow customers to exchange and
return its products and from time to time provide price protection or allow
returns on certain unsold merchandise in the form of a credit against amounts
due from the customer. On a product by product basis, revenue from product
sales is reflected net of the allowance for returns and price protection. The
Company estimates the amount of future returns, and price protection based upon
current known circumstances and historical results.

Cost of Revenues Cost of revenues includes manufacturing costs of the
finished goods, freight, inventory management costs, royalties incurred,
software amortization, project abandonment, and amortization of non-cash
charges related to warrants and rights to acquire common stock issued to
production companies.

Advertising Advertising and sales promotion costs are generally expensed as
incurred, except for television airtime and print media costs associated with
media companies which are deferred and charged to expense as the airtime or
advertising space is used for the first time. Advertising costs were
$3,076,000, $5,701,000 and $2,160,000 for the years ended June 30, 2003, 2002,
and 2001, respectively.

Net Loss per Share Basic earnings/(loss) per share (EPS) excludes dilution
and is computed by dividing net earnings/(loss) attributable to common
shareholders by the weighted average number of common shares outstanding for
the period excluding the weighted average common shares subject to repurchase.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock (redeemable convertible preferred stock,
common stock options and warrants using the treasury stock method) were
exercised or converted into common stock. Potential common shares in the
diluted EPS computation are excluded in net loss periods as their effect would
be antidilutive.

Comprehensive Income (Loss)  In fiscal 2000, the Company adopted SFAS No. 130,
Reporting Comprehensive Income,which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources. Comprehensive loss for the years ended June 30,
2003, 2002 and 2001 have been disclosed within the statement of stockholders
equity (deficit).

Recently Adopted and Issued Accounting Pronouncements In June 2001, the
Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business
Combinations,and SFAS No. 142, Goodwill and Other Intangible Assets.SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives not be amortized,
but will instead be tested at least annually for impairment. The Company was
required to adopt SFAS No. 142 no later than for its fiscal year beginning July
1, 2001. The Company did not carry any goodwill or other intangibles on its
balance sheet as of June 30, 2002, and the adoption of SFAS No. 142 did not
have a material effect on the Companys consolidated financial position or
results of operations.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations.SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement is effective for fiscal
years beginning after June 15, 2002, however earlier application is permitted.
The Company adopted SFAS No. 143 on July 1, 2002. The adoption of this
statement did not have a material effect on the Companys consolidated
financial position or results of operations.

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In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of,it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of APB No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,for
the disposal of a segment of a business. However, it retains the requirement in
APB No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by
sale, abandonment, or in a distribution to owners) or is classified as held for
sale. The Company adopted SFAS No 144 on July 1, 2002. The adoption of SFAS No.
144 did not have a material effect on the Companys consolidated financial
position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally EITF 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred
in a Restructuring). The Company was required to adopt SFAS No. 146 for
restructuring activities initiated after December 31, 2002, and the Company
adopted SFAS No. 146 on January 1, 2003. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of a commitment to an exit plan. SFAS No. 146 also
established that the liability should initially be measured and recorded at
fair value. The adoption of SFAS No. 146 did not have a material effect on the
Companys consolidated financial position or results of operations.

In November 2002, the FASB issued FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.The interpretation elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues
a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the guarantee and
must disclose that information in its interim and annual financial statements.
The provisions related to recognizing a liability at inception of the guarantee
for the fair value of the guarantors obligations do not apply to product
warranties or to guarantees accounted for as derivatives. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002, and the initial recognition and initial
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company adopted FIN No. 45 on January 1,
2003. The adoption of FIN No. 45 did not have a material effect on the
Companys consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation. Although it does not require use of
fair value method of accounting for stock-based employee compensation, it does
provide alternative methods of transition. It also amends the disclosure
provisions of SFAS No.123 and APB No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. SFAS No. 148s amendment of the transition and
annual disclosure requirements is effective for fiscal years ending after
December 15, 2002. The amendment of disclosure requirements of APB No. 28 is
effective for interim periods beginning after December 15, 2002. The Company
adopted SFAS No. 148 and APB No.28 on January 1, 2003.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entitiesan interpretation of ARB No. 51. FIN No. 46 addresses the
consolidation of variable interest entities (VIEs). A VIE is a corporation,
partnership, trust or other legal structure used for business purposes that
either does not have equity investors with substantive voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. A VIE often holds financial assets and may
either be passive or engage in activities such as research and development or
other activities on behalf of other companies. FIN No. 46 requires a VIE to be
consolidated by a company if that company is subject to a majority of the VIEs
risk of loss or if it is entitled to receive a majority of the VIEs residual
returns or both. The company that consolidates a VIE is referred to as the
primary beneficiary of that entity. The consolidation requirements of FIN No.
46 apply to VIEs created after January

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31, 2003. For VIEs existing prior to January 31, 2003, consolidation
requirements are effective in the first fiscal year or interim period beginning
after June 15, 2003. Certain disclosure requirements apply in all financial
statements issued after January 31, 2003 regardless of when the VIE was
established. The Company adopted FIN No. 46 on January 31, 2003. The adoption
of FIN No. 46 did not have a material effect on the Companys consolidated
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which requires
mandatorily redeemable financial instruments to be classified as liabilities,
the result of which requires related expense to be classified as interest
expense rather than minority interest on a prospective basis. SFAS No. 150 is
effective in the three months ended June 30, 2003 for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective July 1,
2003 for previously issued instruments. SFAS No. 150 is not expected to have a
material impact on the Companys consolidated financial position or results of
operations.

2. SHORT TERM INVESTMENTS

The Company has classified all of its short-term investments as
available-for-sale securities, as the sale of such securities may be required
prior to maturity to implement management strategies. As of June 30, 2003, the
Company did not hold any short-term investments. As of June 30, 2002, the
Companys short-term investments comprised U.S. Government Securities of
$3,402,000, Corporate Notes of $1,058,000 and Foreign Debt Securities of
$3,725,000, with original maturities ranging between 90 days and two years.
Unrealized holding gains on the portfolio as of June 30, 2002 were $52,000.

3. PREPAID ROYALTIES

Prepaid royalties consisted of
the following at June 30:

|                        |  |        |       |                |  |        |       |  |  | 
|----------------------- |  | ------ | ----- | -------------- |  | ------ | ----- |  |  | 
|                        |  |        |       | 2003           |  | 2002  
|                        |  |        |       |                |  |       
|                        |  |        |       | (in thousands)
|Total
prepaid royalties |  | $      | 1,067 |                |  | $      | 2,847 | 
|Less current portion:   |  | (1,067 | )     |                |  | (1,007 | )    
|                        |  |        |       |                |  |        |       | 
|Long term portion       |  | $      |      |                |  | $      | 1,840 | 
|                        |  |        |       |                |  |        |       | 

Long term prepaid royalties are
included in Other Assets.

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4. PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following at June 30:

|                                                |  |                |       |      |  |   |       |  
|----------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                                                |  | 2003           |       | 2002
|                                                |  |                |       |     
|                                                |  | (in thousands)
|Furniture, equipment and leasehold improvements |  | $              | 649   |      |  | $ | 530   |  
|Computer equipment                              |  |                | 502   |      |  |   | 678   |  
|Computer software                               |  |                | 137   |      |  |   | 213   |  
|                                                |  |                |       |      |  |   |       |  
|                                                |  |                | 1,288 |      |  |   | 1,421 |  
|Less accumulated depreciation:                  |  |                | (691  | )    |  |   | (434  | )
|                                                |  |                |       |      |  |   |       |  
|Total property and equipment, net               |  | $              | 597   |      |  | $ | 987   |  
|                                                |  |                |       |      |  |   |       |  

Included in furniture, equipment and leasehold improvements are assets leased
under capital lease agreements of $80,000 and $0 as of June 30, 2003 and 2002,
respectively. Total accumulated depreciation on assets leased under capital
lease agreements were $29,000 and $0 as of June 30, 2003 and 2002,
respectively.

5. RECEIVABLES

Trade accounts receivable

Accounts receivable, net of
allowances, is comprised of the following at June 30:

|                                  |  |                |        |      |  |   |        |  
|--------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                  |  | 2003           |        | 2002
|                                  |  |                |        |     
|                                  |  | (in thousands)
|Accounts
receivable, gross        |  | $              | 3,261  |      |  | $ | 13,903 |  
|Less
the following allowances:    |  |                |        |      |  |   |        |  
|Doubtful
accounts                 |  |                | (93    | )    |  |   | (433   | )
|Sales
return and price protection |  |                | (2,460 | )    |  |   | (2,707 | )
|Cooperative
advertising           |  |                | (169   | )    |  |   | (580   | )
|                                  |  |                |        |      |  |   |        |  
|Accounts
receivable, net          |  | $              | 539    |      |  | $ | 10,183 |  
|                                  |  |                |        |      |  |   |        |  

Long-term receivable

On January 22, 2002 Kmart, a customer of the Company, filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On January
22, 2002 the Company had an accounts receivable balance from Kmart of $1.7
million. The Company was an unsecured creditor, and as such was at risk of not
recovering in full its accounts receivable balance. Accordingly, in the year
ended June 30, 2002 the Company recorded an allowance of $1.1 million against
the receivable. As Kmart stated that at earliest it would complete its
reorganization in May 2003, the Company classified the receivable, net of
allowance, as a long-term asset.

In the year ended June 30, 2003 Management reevaluated and increased the
allowance to cover the full accounts receivable balance.

Subsequent to January 22, 2002 Kmart arranged debtor-in-possession financing
and the Company sold product to Kmart under this arrangement. The Company also
purchased credit insurance for sales made to Kmart during October and
November 2002 at a cost of $900,000. Credit insurance costs are included in
general and administrative expense.

Accounts receivables under the debtor-in-possession financing were classified
as current assets.

Kmart completed its reorganization and emerged from Chapter 11 on May 6, 2003.
Under its plan of reorganization Kmart will distribute Kmart Corporation common
stock to the unsecured creditors on a pro-rata basis, at an approximate
recovery rate of 9.7% on approved payables. Kmart has yet to distribute to the
Company any of this common stock, and is unable to state when it will make such
distribution or how much the distribution to the Company will be. Accordingly,
the Company did not account for any potential recoverable sums as of June 30,
2003.

6. OTHER ASSETS

Other assets as of June 30, 2003 and 2002 comprise rent deposits of $54,000 and
$30,000, respectively, and long term prepaid royalties of $0 and
$1.8 million, respectively.

7. SHORT-TERM BORROWINGS

In September 2003, the Company entered into a six month Agreement (the
Agreement) with a finance company, pursuant to which the finance company
extends a line of credit facility to fund domestic inventory purchases to the
Company. The Company may sell the inventory purchased under the Agreement and
is required to remit customer receipts from those sales directly to the finance
company up to the amounts funded by them. The Company retains

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collections in excess of the amounts funded by the finance company, is
responsible for collecting the customer receivables, and bears the risk of loss
on all uncollectible accounts.

Under the Agreement, the finance companys aggregate outstanding funding is
limited to $3.2 million. The Company is required to pay the finance companys
expenses under the contract, a facility fee equal to 5.0% of the funds advanced
by the finance company, and interest at prime plus 0.5%. The Agreement
terminates on March 31, 2004 and any sums outstanding become repayable on that
date. The Company may repay any sums advanced prior to the due date of payment
without penalty.

The finance company has a security interest in the Companys accounts
receivable and inventory.

Prior to entering into the Agreement, the Company had entered into a two year
factoring agreement (the Factoring Agreement) with a different finance
company in February 2002, pursuant to which the Company assigned its North
American receivables to the finance company. The finance company was
responsible for collecting customer receivables, and upon collection, remitted
the funds to the Company, less a service fee. Under the Factoring Agreement,
the Company could obtain advances, subject to the finance companys discretion
and the Companys compliance with certain liquidity covenants, in the form of
cash or as collateral for letters of credit, up to a maximum of 75% of
outstanding domestic receivables at any point in time. The Factoring Agreement
was mutually terminated in September 2003.

Under the terms of the Factoring Agreement, the Company paid a service fee on
all receivables assigned, with a minimum annual fee of $150,000, interest at
prime plus 1% on all cash sums advanced. Upon the termination of the Factoring
Agreement, the minimum annual fee for the second year of the Factoring
Agreement was waived, and the Company paid a termination payment of $25,000.
All fees were included in interest expense. The Company bore the collection
risk on the accounts receivable that were assigned, unless the finance company
approved the receivable at the time of assignment, in which case the finance
company bore the risk. The finance company had a security interest in the
Companys accounts receivable, inventory, fixed assets and intangible assets.

As of June 30, 2003 the Company did not meet the Factoring Agreements
liquidity covenants and had no sums advanced under the Factoring Agreement. As
of June 30, 2002, the Company had advances of $1,359,000 outstanding under the
Factoring Agreement.

Prior to entering into the Factoring Agreement, the Company had entered into a
finance agreement (the Finance Agreement) with a different finance company,
whereby it assigned purchase orders entered into with customers to the finance
company and requested the finance company purchase finished goods to fulfill
such customer purchase orders.

The Finance Agreement, entered into in February 2000, specified that the
finance companys funding commitment with respect to a customer purchase order
should not exceed 60% of the retail purchase order price. Under the Finance
Agreement the finance companys aggregate outstanding funding (i.e., advance of
funds or purchase of finished goods to fulfill customer purchase orders) was
limited to $5.0 million. The Company was responsible for collecting customer
receivables, bore the risk of loss on all uncollectible accounts, and was
required to remit customer receipts directly to the finance company up to the
amounts funded by the finance company. The Company retained collections in
excess of the amounts funded by the finance company.

Under the initial terms of the Finance Agreement, the Company was required to
pay the finance companys expenses under the contract, a deal fee (consisting
of a transaction and initiation fee equal to 5.0% of the face amounts of
letters of credit issued or other funds advanced by the finance company), a
daily maintenance fee of 0.067%, a materials advance fee at prime rate plus
4.0% and a late payment fee where applicable; all of which are included in
interest expense.

In August 2001, the Company amended the Finance Agreement, initially increasing
the aggregate outstanding funding amount to $10.0 million, and then decreasing
the transaction and initiation fee to 3% until the earlier of the termination
of the agreement or December 31, 2001, if the Companys initial public offering
had not occurred by that date. The Company completed its initial public
offering in November 2001. In connection with this latter

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amendment and the execution of a $7.0 million factoring arrangement with an
affiliate of the finance company, the Company issued a warrant to the finance
company to purchase 100,000 shares at an exercise price of $8.00.

Upon the signing of the Finance Agreement, the Company paid the finance company
a security deposit of $90,000. An extension payment of $50,000 was made when
the contract was amended in December 2000, and a further amendment fee of
$120,000 was incurred when the contract was amended in August 2001. These costs
were recorded as interest expense.

Outstanding borrowings under the Finance Agreement were collateralized by the
Companys inventories, accounts receivable, fixed assets and intangible assets.

The Finance Agreement and the factoring line with the affiliate terminated in
February 2002, and all outstanding amounts funded were fully repaid.

As of June 30, 2003 the Company had no outstanding letters of credit issued on
its behalf. As of June 30, 2002, the Company had outstanding letters of credit
issued on its behalf of $2,286,000.

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK

Redeemable Convertible Preferred Stock

Under the Companys certificate of incorporation, as amended on August 15,
2001, the Company is authorized to issue 10,000,000 shares of redeemable
convertible preferred stock. The Company issued 976,220 shares of Series A
redeemable convertible preferred stock on June 30, 2000 for cash, services and
through the conversion of promissory notes. On December 28, 2000, the Company
issued 294,620 shares of Series B redeemable convertible preferred stock and on
May 24, 2001, the Company issued 245,659 shares of Series C redeemable
convertible preferred stock. Upon completion of the Companys initial public
offering in November 2001, each outstanding share of the Companys issued
redeemable convertible preferred stock automatically converted into 4.7 shares
of the Companys common stock.

Common Stock

In October 1999, the Company issued 580,962 shares of common stock to its
founder in exchange for a note receivable from the founder. Also in October
1999, the Company issued 274,950 shares at $0.11 per share to consultants in
exchange for services performed valued at $30,000.

In June 2000, an additional 614,060 shares were issued at $0.11 per share in
exchange for cash of $59,000 and services valued at $7,000.

In November 2001, the Company completed its initial public offering, selling
5,750,000 common shares at $8.00 per share. Upon the closing, each outstanding
share of the Companys redeemable convertible preferred stock automatically
converted into 4.7 shares of the Companys common stock, resulting in the
issuance of 7,127,528 shares of common stock.

As more fully described in Note 16, in September 2002 the Company issued 68,738
shares of common stock pursuant to a license agreement with a production
company. The Company capitalized the cost of this issuance at the fair market
value of the common stock, equal to $70,000, and fully amortized this amount to
royalties, software costs, and license costs during the year ended June 30,
2003. The Company had previously issued 68,738 shares of common stock pursuant
to this license agreement in April 2001. The Company capitalized the cost of
this issuance at the fair market value of the common stock, equal to $746,000,
and fully amortized this amount to royalties, software costs, and license
costs during the year ended June 30, 2002.

During the year ended June 30, 2003, 26,796 shares of common stock were issued
under the Companys employee share purchase plan. During the year ended June
30, 2002, 20,562 shares of the Companys common stock were

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issued upon exercise of stock options, 4,956 shares of common stock were issued
under the Companys employee share purchase plan, and 141,000 shares of the
Companys common stock were issued upon exercise of a warrant.

Warrants

Warrants to purchase a total of 878,450 and 853,450 shares of common stock were
outstanding as of June 30, 2003 and 2002, respectively.

Under an agreement (the Agreement) entered into with a production company
during October 2000, the Company obtained the exclusive right of first refusal,
for a period of five years, to develop products based on films produced by the
production company and to distribute them worldwide. The Agreement was mutually
terminated in June 2003. Under the Agreement the production company provided
the Company with free access to any publicity materials it prepared. In
exchange for these rights, the Company paid royalties to the production company
calculated as a percentage of sales of the developed products. Also, in
connection with the Agreement the Company issued the production company
warrants to purchase 470,000 shares of common stock at an exercise price of
$1.06 per share. The warrants expire in September 2006. Under the warrant
agreement, 50% of the warrants became vested and exercisable upon execution of
the Agreement, while the remaining warrants became vested in equal portions in
December 2000, representing the dates on which the production company
delivered, in accordance with the Agreement, written notice that a specific
film will be available to be exploited by the Company and when the Company
exercised its right of first refusal for another film under the Agreement. The
fair value of these warrants at the grant date was estimated to be $708,000,
using the Black-Scholes option pricing model with the following assumptions:
expected term equal to six years; risk-free interest rate of 5.8%; volatility
of 95%; and no dividends during the expected term. Of this amount $354,000
relates to 50% of the warrants that vested upon execution of the Agreement and
was being amortized on a straight-line basis over the five-year term of the
Agreement. During the years ended June 30, 2003, 2002, and 2001, $53,000,
$71,000 and $48,000, respectively, was amortized to royalties, software costs,
and license costs. Upon termination of the Agreement in June 2003, all
previously unamortized sums, totaling $182,000, were amortized to project
abandonment costs. The remaining 50% of the warrants vested in December 2000
and the fair value of these warrants of $556,000 were capitalized to prepaid
royalties, capitalized software costs and licensed assets. The fair value of
this 50% of the warrants was estimated at the date of vesting using the
Black-Scholes option pricing model with the following assumptions: expected
term equal to six years; risk-free interest rate of 5.0%; volatility of 95%;
and no dividends during the expected term. During the year ended June 30, 2003,
$278,000 was amortized to royalties, software costs, and license costs on the
release of a subject title, and the remaining $278,000 was amortized to project
abandonment costs on the termination of a development project prior to
completion.

In connection with the Series B redeemable convertible preferred stock
offering, the Company issued warrants to a service provider to purchase 141,000
shares of its common stock at an exercise price of $3.76 per share. The
warrants expired on the earlier of either (i) December 2003, (ii) upon the
completion of a public offering of common stock with aggregate proceeds greater
than $15,000,000 and at a price per share not less than $15.96 per share or
(iii) upon the completion of a subsequent private equity financing or in the
event of a change in control, sale or disposition of substantially all of the
Companys assets or recapitalization, reclassification or reorganization of the
Companys stock resulting in aggregate proceeds greater than $10,000,000 and at
a price per share not less than $7.45 per share. The value of these warrants at
the grant date was estimated using the Black-Scholes option pricing model with
the following assumptions: expected term equal to three years; risk-free
interest rate of 5.1%; volatility of 95%; and no dividends during the expected
term. The fair value of these warrants of $283,000 was recorded as an issuance
cost against the proceeds of the Series B redeemable convertible preferred
stock offering. The warrant was exercised during the year ended June 30, 2002.

In connection with the Series C redeemable convertible preferred stock
offering, the Company issued warrants to a service provider to purchase 16,450
shares of its common stock at an exercise price of $4.80 per share. In November
2001, this warrant was amended to increase the exercise price to $16.50 per
share. The warrants expire in May 2006. The value of these warrants at the
grant date was estimated using the Black-Scholes option pricing model with the
following assumptions: expected term equal to five years; risk-free interest
rate of 5.1%; volatility of 95%; and no dividends during the expected term. The
fair value of these warrants of $159,000 was recorded as an issuance cost
against the proceeds of the Series C redeemable convertible preferred stock
offering.

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The Company calculated the beneficial conversion feature related to the
issuance of the 245,659 shares of Series C redeemable convertible preferred
stock, in accordance with EITF 00-27 Application of Issue No. 98-5 to Certain
Convertible Instrumentsas follows:



| |  |  | The Company calculated the difference between the aggregate deemed
fair market value of the common stock into which the Series C
redeemable convertible preferred stock is convertible of $13,200,000,
and the aggregate purchase price paid for the Series C redeemable
convertible preferred stock of $5,540,000, i.e. $7,660,000, and limited
the amount of the deemed dividend that will be recorded against the
accumulated deficit to the gross amount of proceeds allocated to these
shares of Series C redeemable convertible preferred stock to $5,540,000
in accordance with paragraph 6 of EITF 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Since the shares of Series C redeemable convertible preferred stock
were immediately convertible at the date of issue, the Company recorded
the amount of the deemed dividend in the financial statements for the
year ended June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

In May 2001, in exchange for legal services rendered by a service provider in
connection with a proposed initial public offering, the Company issued warrants
to purchase 47,000 shares of its common stock at an exercise price of $4.80 per
share. The warrants expire in May 2006. The value of these warrants at the
grant date was estimated using the Black-Scholes option pricing model with the
following assumptions: expected term equal to five years; risk-free interest
rate of 5.1%; volatility of 95%; and no dividends during the expected term. The
fair value of these warrants of $456,000 was capitalized to other assets and
was recorded as an issuance cost in connection with the Companys initial
public offering.

In connection with a Finance Agreement, as described in Note 7, the Company
issued a warrant in August 2001 to a finance company to purchase 100,000 shares
at an exercise price equal to $8 per share, being the initial public offering
price. The fair value of the warrant was initially estimated to be $806,000 at
the time of issuance of the warrant, then subsequently remeasured at $485,000
at the time of the initial public offering using the Black-Scholes option
pricing model with the following assumptions: expected term equal to three
years; risk-free interest rate of 2.9%; volatility of 95%; and no dividends
during the expected term, The fair value was capitalized to prepaid expenses
and was amortized to interest expense over the term of the Finance Agreement,
which ended in February 2002. During the year ended June 30, 2002, the
$485,000 was amortized to interest expense.

In connection with an agreement entered into with a production company during
January 2002, the Company obtained the exclusive right of first refusal, for a
period of five years, to develop products based on certain properties owned by
the production company and to distribute them worldwide. In exchange for these
rights, the Company will have to pay royalties to the production company
calculated as a percentage of sales of the developed products. Also, in
connection with the agreement, the Company is required to issue to the
production company warrants to purchase up to 50,000 shares of common stock, in
pre-determined multiples of either 5,000 or 10,000 shares, upon the occurrence
of certain pre-determined events. Warrants will be issued at the average
closing price of the Companys stock for the five days immediately prior to the
date of issuance, have a five year term from date of issuance, are fully vested
and are immediately exercisable upon issuance. The Company has issued warrants
to purchase 35,000 shares of common stock under this agreement as follows:
January 2002  warrant to purchase 10,000 shares, March 2002  warrant to
purchase 10,000 shares, July 2002  warrant to purchase 5,000 shares, and May
2003  warrant to purchase 10,000 shares. The fair value of the warrant to
purchase 10,000 shares issued in January 2002 was estimated to be $42,000 at
the grant date, using the Black-Scholes option pricing model with the following
assumptions: expected term equal to five years; risk-free interest rate of
4.3%; volatility of 95%; and no dividends during the expected term. The fair
value of the warrant to purchase 10,000 shares issued in March 2002 was
estimated to be $44,000 at the grant date, using the Black-Scholes option
pricing model with the following assumptions: expected term equal to five
years; risk-free interest rate of 4.8%; volatility of 95%; and no dividends
during the expected term. The fair value of the warrant to purchase 5,000
shares issued in July 2002 was estimated to be $8,000 at the grant date, using
the Black-Scholes option pricing model with the following assumptions:
expected term equal to five years; risk-free interest rate of 4.7%; volatility
of 88%; and no dividends during the expected term. The fair value of the
warrant to purchase 10,000 shares issued in May 2003 was estimated to be $3,000
at the grant date, using the Black-Scholes option pricing model with the
following assumptions: expected term equal to five years; risk-free interest
rate of 2.3%; volatility of 139%; and no dividends during the expected

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term. The fair values of the warrants were capitalized to prepaid royalties,
capitalized software costs and licensed assets and will be amortized over the
life of the products (generally between three and six months) to which they
relate when these products are released. As the remaining 15,000 warrants
contingently issuable under this arrangement are dependent upon the occurrence
of certain pre-determined events, the Company will only measure the value of
these warrants in accordance with EITF 96-18 Accounting for Equity Instruments
That Are Issued To Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Servicesif and when the warrants are issued. When the
software product is released, the Company will amortize the non-cash charge
over the life of the product, which is expected to be between three and six
months. The Company cannot estimate the aggregate dollar amount of these future
non-cash charges as they are based on the Companys share price at a future
point in time. During the year ended June 30, 2003, $8,000 was amortized to
project abandonment costs. No costs were amortized to royalties, software
costs, and license costs during the years ended June 30, 2002 and 2001.

In May 2002, in connection with a licensing and publishing agreement entered
into with a publishing company, the Company granted to the production company a
warrant, with a ten year term from the date of issue, to purchase up to 200,000
shares of its common stock at an exercise price of $2.60, of which 15,000
became immediately exercisable upon the signing of the agreement, and the
remaining 185,000 only become exercisable in multiples of 4,625 shares upon
each election by the Company to produce a title based on any films, made for
television movies, or television series produced from screenplays to be
produced by the publishing company, up to a maximum ten titles, and multiples
of 13,875 shares upon the theatrical release or television air-date of each
film for which the Company develops a title. Upon expiration of the agreement,
any unexercised warrants will cease to be exercisable. The agreement was
assigned to another production company in July 2002. The agreement expires upon
the later of five years or either the theatrical release or television air-date
of the tenth film or television series on which the Company bases a product,
but in no event later than eight years from the date of the agreement, unless
seven films or television series have been released or aired, respectively,
seven years from the date of the agreement, in which event the agreement would
expire at such time. The fair value of the 15,000 shares immediately
exercisable upon the signing of the agreement was estimated to be $29,000 at
the grant date, using the Black-Scholes option pricing model with the following
assumptions: expected term equal to five years; risk-free interest rate of
4.6%; volatility of 95%; and no dividends during the expected term.

The fair value of the remaining 185,000 shares will be calculated as and when
shares become exercisable and will be capitalized to prepaid royalties,
capitalized software costs and licensed assets. As the warrants contingently
exercisable under this arrangement are dependent upon the occurrence of certain
pre-determined events, the Company will only measure the value of these
warrants in accordance with EITF 96-18 Accounting for Equity Instruments That
Are Issued To Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Servicesif and when the warrants become exercisable. When
the software product is released, the Company will amortize the non-cash charge
over the life of the product, which is expected to be between three and six
months. The Company cannot estimate the aggregate dollar amount of these future
non-cash charges as they are based on the Companys share price at a future
point in time. The Company fully amortized the licensed asset of $29,000 to
royalties, software costs, and license costs during the year ended June 30,
2003. No costs were amortized to royalties, software costs, and license costs
during the years ended June 30, 2002 and 2001.

In January 2003, the Company issued a warrant to a developer to purchase up to
10,000 shares of common stock. The warrant was issued at the average closing
price of the Companys stock for the five days immediately prior to the date of
issue, has a five year term from date of issue, and is fully vested and is
immediately exercisable upon issuance. The fair value of the warrant was
estimated to be $4,000 at the grant date, using the Black-Scholes option
pricing model with the following assumptions: expected term equal to five
years; risk-free interest rate of 4.0%; volatility of 125%; and no dividends
during the expected term. The fair value of the warrant was expensed to
research and development in the year ended June 30, 2003.

Stock Plans

Under the Companys 2000 Stock Incentive Plan adopted on July 10, 2000, and
amended in May 2001, August 2001 and August 2002, the Company may grant options
to purchase or directly issue up to 3,500,000 shares of common stock to
employees, directors and consultants at prices not less than the fair market
value (as determined by the Board of Directors) at the date of grant for
incentive stock options and not less than 85% of fair market value at the

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date of grant for nonstatutory stock options. These options generally vest over
a four-year period and expire ten years from the date of grant.

In August 2001, the Company adopted the 2001 Stock Incentive Plan (UK Part)
(the UK Plan) as Schedule A to the 2000 Stock Incentive Plan. The UK Plan
provides for the grant of stock options to UK employees who satisfy certain
criteria. The UK Plan contains certain restrictions intended to comply with UK
taxation laws, including restrictions on exercise, limitations on the size of
options grants, requirements with respect to changes in capitalization and
other matters.

The Board of Directors, in their determination of fair market value on the date
of grant, takes into consideration many factors including, but not limited to,
the Companys stock price on the Nasdaq SmallCap Market, the Companys
financial performance, current economic trends, actions by competitors, market
maturity, emerging technologies, near-term backlog and, in certain
circumstances, valuation analyses performed by independent appraisers. These
valuation analyses utilize generally accepted valuation methodologies such as
the income and market approaches to valuing the Companys business.

Stock option activity, including stock option activity outside the plan, is
summarized as follows:

|                                                                                               |  |                     |           |          |  |          |      | 
|---------------------------------------------------------------------------------------------- |  | ------------------- | --------- | -------- |  | -------- | ---- | 
|                                                                                               |  | Options outstanding
|                                                                                               |  |                    
|                                                                                               |  |                     |           |          |  | Weighted
|                                                                                               |  |                     |           |          |  | average 
|                                                                                               |  | Number of           |           | exercise
|                                                                                               |  | shares              |           | price   
|                                                                                               |  |                     |           |         
|Balances, June 30, 2000                                                                        |  |                     |          |          |  | $        |     | 
|Granted (weighted average fair value of $3.74 per share)                                       |  |                     | 833,075   |          |  |          | 3.21 | 
|Cancelled                                                                                      |  |                     | (18,800   | )        |  |          | 0.46 | 
|                                                                                               |  |                     |           |          |  |          |      | 
|Balances, June 30, 2001 (70,500 shares vested
at a weighted average price of $3.35 per share)  |  |                     | 814,275   |          |  |          | 3.28 | 
|Granted (weighted average fair value of $2.62 per share)                                       |  |                     | 1,060,560 |          |  |          | 4.61 | 
|Cancelled                                                                                      |  |                     | (117,430  | )        |  |          | 3.94 | 
|Exercised                                                                                      |  |                     | (20,562   | )        |  |          | 0.46 | 
|                                                                                               |  |                     |           |          |  |          |      | 
|Balances, June 30, 2002 (333,189 shares vested
at a weighted average price of $3.49 per share) |  |                     | 1,736,843 |          |  |          | 3.95 | 
|Granted (weighted average fair value of $0.50 per share)                                       |  |                     | 1,456,690 |          |  |          | 0.66 | 
|Cancelled                                                                                      |  |                     | (888,927  | )        |  |          | 2.55 | 
|Exercised                                                                                      |  |                     |          |          |  |          |     | 
|                                                                                               |  |                     |           |          |  |          |      | 
|Balances, June 30, 2003                                                                        |  |                     | 2,304,606 |          |  | $        | 2.41 | 
|                                                                                               |  |                     |           |          |  |          |      | 

During the years ended June 30, 2003, 2002, and 2001, the Company granted stock
options outside the plan to acquire 0, 268,800, and 0 shares, respectively.
There were stock options outside the plan to acquire 268,800 shares outstanding
as of both June 30, 2003 and 2002.

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Additional information regarding options outstanding as of June 30, 2003 is as
follows:

|                  |  |                  |  |              |       |                       |  |                     |           |                |  |                  |     |  |  |   |       |  |  |  |         |  |  |   |       | 
|----------------- |  | ---------------- |  | ------------ | ----- | --------------------- |  | ------------------- | --------- | -------------- |  | ---------------- | --- |  |  | - | ----- |  |  |  | ------- |  |  | - | ----- | 
|                  |  |                  |  |              |       |                       |  | Options outstanding |           |                |  |                  |     |  |  |  
|                  |  |                  |  |              |       |                       |  |                     |           | Vested options
|                  |  |                  |  |              |       |                       |  |                     |           |                |  | Weighted average |     |  |  |   |       | 
|Range of exercise |  |                  |  |              |       | Remaining contractual |  | Weighted average    |           | Number         |  | Weighted average
|prices            |  | Number of shares |  | life (years) |       | exercise price        |  | of shares           |           | exercise price
|                  |  |                  |  |              |       |                       |  |                     |           |               
|$  0.00           |  | -                |  | $            | 1.00  |                       |  |                     | 944,766   |                |  |                  | 9.2 |  |  | $ | 0.46  |  |  |  | 185,253 |  |  | $ | 0.47  | 
|$  1.01           |  | -                |  | $            | 2.00  |                       |  |                     | 338,586   |                |  |                  | 8.9 |  |  |   | 1.35  |  |  |  | 105,193 |  |  |   | 1.27  | 
|$  2.01           |  | -                |  | $            | 3.00  |                       |  |                     | 190,343   |                |  |                  | 8.8 |  |  |   | 2.01  |  |  |  | 66,103  |  |  |   | 2.01  | 
|$  3.01           |  | -                |  | $            | 4.00  |                       |  |                     | 396,453   |                |  |                  | 8.4 |  |  |   | 3.36  |  |  |  | 340,836 |  |  |   | 3.33  | 
|$  4.01           |  | -                |  | $            | 5.00  |                       |  |                     | 272,600   |                |  |                  | 7.9 |  |  |   | 4.79  |  |  |  | 171,942 |  |  |   | 4.79  | 
|$  7.01           |  | -                |  | $            | 8.00  |                       |  |                     | 64,625    |                |  |                  | 8.1 |  |  |   | 7.92  |  |  |  | 53,977  |  |  |   | 7.96  | 
|$11.01            |  | -                |  | $            | 12.00 |                       |  |                     | 97,233    |                |  |                  | 8.1 |  |  |   | 11.70 |  |  |  | 52,521  |  |  |   | 11.70 | 
|                  |  |                  |  |              |       |                       |  |                     |           |                |  |                  |     |  |  |   |       |  |  |  |         |  |  |   |       | 
|                  |  |                  |  |              |       |                       |  |                     | 2,304,606 |                |  |                  |     |  |  |   | 2.41  |  |  |  | 975,825 |  |  |   | 3.44  | 
|                  |  |                  |  |              |       |                       |  |                     |           |                |  |                  |     |  |  |   |       |  |  |  |         |  |  |   |       | 

As of June 30, 2003 and 2002 there were 1,443,632 and 38,895 shares,
respectively, of common stock available for future grant under the plan.

Employee Stock Purchase Plan

The Company adopted an employee stock purchase plan on August 9, 2001. Under
the plan, during consecutive six-month offering periods, eligible employees are
allowed to have salary withholdings of up to 15% of their compensation to
purchase shares of common stock at a price equal to 85% of the lower of the
market value of the stock at the beginning of the offering period or at the end
of the purchase period. The initial offering period commenced upon the
effective date of the initial public offering of the Companys common stock.
For the first offering period, shares of common stock were purchased at a price
equal to 85% of the lower of the price per share in the initial public offering
or the market value on the purchase date. The Company initially reserved
705,000 shares of common stock under this plan. In the year ended June 30,
2003, the Company issued 26,796 shares of common stock under the plan. In the
year ended June 30, 2002, the Company issued 4,956 shares of common stock under
the plan.

As of June 30, 2003 and 2002 there were 673,248 and 700,044 shares,
respectively, of common stock available for issuance under the plan.

Deferred Stock Compensation

As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25.
Accordingly, the Company records deferred stock compensation equal to the
difference between the grant price and deemed fair value of the Companys
common stock on the date of grant. Deferred stock compensation is being
amortized to expense over the vesting period of the options, generally four
years, using a multiple option award valuation approach, which results in
accelerated amortization of the expense resulting in amortization of deferred
stock compensation of $418,000, $1,223,000, and $618,000 for the years ended
June 30, 2003, 2002, and 2001, respectively. Deferred stock compensation
aggregated $(90,000) credit for the year ended June 30, 2003 and was comprised
of deferred stock compensation credits arising on stock option cancellations in
the year as a result of using a multiple option award valuation and
amortization approach. Deferred stock compensation aggregated $(84,000) credit
for the year ended June 30, 2002 and was comprised of $129,000 of deferred
stock compensation on new option grants less $213,000 of deferred stock
compensation credits arising on stock option cancellations in the year as a
result of using a multiple option award valuation and amortization approach.
Deferred stock compensation aggregated $2,714,000 for the year ended June 30,
2001.

During the year ended June 30, 2003, the Company made three grants of options
to purchase a total of 17,000 shares of common stock to a consultant at a
weighted average exercise price of $0.63 per share. These options vested on the
date of grant and expire ten years from the date of grant, or three months
after the consultant ceases to provide service if earlier. The Company expensed
the fair value of these options at the grant dates which was estimated to be

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$12,000 using the Black-Scholes option pricing model with the following
assumptions: expected term equal to 10 years; risk-free interest rate between
3.0% and 3.1%; volatility between 101% and 125%; and no dividends during the
expected term. The consultant ceased providing service in May 2003.

During the year ended June 30, 2002, the Company granted options to purchase
5,875 shares of common stock to a consultant at a weighted average exercise
price of $11.70 per share. These options vested on the date of grant and expire
ten years from the date of grant, or three months after the consultant ceases
to provide service if earlier. The Company expensed the fair value of these
options at grant date which was estimated to be $62,000 using the Black-Scholes
option pricing model with the following assumptions: expected term equal to 10
years; risk-free interest rate of 5.0%; volatility of 95%; and no dividends
during the expected term.

9. COST OF REVENUES  ROYALTIES, SOFTWARE COSTS, LICENSE COSTS, AND PROJECT ABANDONMENT

Cost of Revenues Royalties, software costs, and license costs include
amortization of non-cash licensed assets of $431,000, $817,000 and $48,000 for
the years ended June 30, 2003, 2002, and 2001, respectively.

Royalties, software costs, and license costs include amortization of impaired
royalties of $2,171,000, $0 and $0 for the years ended June 30, 2003, 2002, and
2001, respectively.

Project abandonment costs include amortization of non-cash licensed assets of
$467,000, $0 and $0 for the years ended June 30, 2003, 2002, and 2001,
respectively.

During the years ended June 30,
2003, 2002 and 2001, the Company amortized $14,675,000, $9,600,000 and
$954,000, respectively, of capitalized software costs as part of
royalties, software costs, and licensed assets, and recorded
$9,133,000, $693,000 and $0, respectively, of capitalized software
costs as part of project abandonment costs.

10. RESTRUCTURING COSTS

In November 2002, the Company initiated a restructuring of its operations. As
part of the restructuring, the Company reduced its headcount across all
departments, by a total of 30 employees, and certain members of the
Companys management also agreed to a reduction of salary for
the period December 2002 through June 2003. As compensation for the
reduction, those members of management taking the salary reduction
were granted stock options in the Company. The Company's Chief
Executive Officer was granted a total of 116,978 options, and other
management were granted a total of 174,167 options, under this
arrangement. The Company also transferred, under UK
law, an additional 12 product development employees to VIS Entertainment plc
upon the sale of its London based studio in January 2003.

Restructuring costs, which included employee severance payments, write down
costs on property and equipment, and legal fees associated with the disposal of
the London based studio, for the year ended June 30, 2003, were as follows (in
thousands):

|                               |                                   |   |                 |   |                |   |                  |     |                 |   |               |     |  |   |   |   | 
|------------------------------ | --------------------------------- | - | --------------- | - | -------------- | - | ---------------- | --- | --------------- | - | ------------- | --- |  | - | - | - | 
|                               |                                   |   | Year ended     
|                               |                                   |   | June 30, 2003  
|                               |                                   |   |                
|                               |                                   |   |                 |   |                |   | Restructuring    |     |                 |   |               |     |  |   |  
|                               |                                   |   | Restructuring   |   | costs expensed |   |                  |     |                 |   | Restructuring
|                               |                                   |   | costs unpaid as |   | in the year    |   | Restructuring    |     | costs unpaid as
|                               |                                   |   | of June 30,     |   | ended June 30, |   | costs paid as of |     | of June 30,    
|                               |                                   |   | 2002            |   | 2003           |   | June 30, 2003    |     | 2003           
|                               |                                   |   |                 |   |                |   |                  |     |                
|Nature of restructuring costs: |                                   |   |                 |   |                |   |                  |     |                 |   |               |     |  |   |   |  
|                               | Employee severance costs          |   | $               |  |                |   | $                | 276 |                 |   | $             | 276 |  |   | $ |  | 
|                               | Property and equipment writedowns |   |                 |  |                |   |                  | 102 |                 |   |               | 102 |  |   |   |  | 
|                               | Legal fees                        |   |                 |  |                |   |                  | 29  |                 |   |               | 29  |  |   |   |  | 
|                               | Other                             |   |                 |  |                |   |                  | 19  |                 |   |               | 19  |  |   |   |  | 
|                               |                                   |   |                 |   |                |   |                  |     |                 |   |               |     |  |   |   |   | 
|Total                          |                                   | $ |                |   |                | $ | 426              |     |                 | $ | 426           |     |  | $ |  |  
|                               |                                   |   |                 |   |                |   |                  |     |                 |   |               |     |  |   |   |   | 

As part of this restructuring, during
the year ended June 30, 2003 the
Company wrote off $1.302 million of capitalized development
costs and included such costs in Cost of Revenues - Project
Abandonment costs.

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11. INCOME TAXES

Income taxes were $0 for the each of the years ended June 30, 2003, 2002, and
2001.

Significant components of the Companys net deferred tax assets consist of the
following as of June 30:

|                          |                                    |                   |  |       |        |   |                |       |       |   |        |      | 
|------------------------- | ---------------------------------- | ----------------- |  | ----- | ------ | - | -------------- | ----- | ----- | - | ------ | ---- | 
|                          |                                    |                   |  |       |        |   | 2003           |       | 2002 
|                          |                                    |                   |  |       |        |   |                |       |      
|                          |                                    |                   |  |       |        |   | (in thousands)
|Deferred tax assets:      |                                    |                   |  |       |        |   |                |       |       |   |        |     
|                          | Stock compensation                 |                   |  |       |        |   | $              | 747   |       |   | $      | 604  | 
|                          | Warrants                           |                   |  |       |        |   |                | 66    |       |   |        | 353  | 
|                          | Reserves and accruals              |                   |  |       |        |   |                | 1,032 |       |   |        | 1505 | 
|                          | Non operating loss carryforwards  | Federal and State |  |       | 11,076 |   |                |       | 2,169 |  
|                          | Foreign                            |                   |  | 6,001 |        |   |                | 2,110 |      
|                          | Other                              |                   |  |       |        |   |                | 187   |       |   |        | 109  | 
|                          |                                    |                   |  |       |        |   |                |       |       |   |        |     
|Total deferred tax assets |                                    |                   |  |       |        |   | 19,109         |       |       |   | 6,850  |     
|Valuation allowance:      |                                    |                   |  |       |        |   | (19,109        | )     |       |   | (6,850 | )   
|                          |                                    |                   |  |       |        |   |                |       |       |   |        |     
|Net deferred tax asset    |                                    |                   |  |       |        | $ |               |       |       | $ |       |     
|                          |                                    |                   |  |       |        |   |                |       |       |   |        |     

The Company established a 100% valuation allowance at June 30, 2003 and 2002
due to the uncertainty of realizing future tax benefits from its net operating
loss carryforwards and other deferred tax assets.

At June 30, 2003, the Company has federal and state net operating loss
carryforwards of approximately $27,821,000 and $23,280,000, respectively,
expiring through 2023 and 2013, respectively. Foreign net operating loss
carryforwards at June 30, 2003 are approximately $6,001,000. During the years
ended June 30, 2003, 2002, and 2001, the Company utilized $0, $373,000 and
$370,000 of federal net operating losses, respectively, to offset taxable
income.

Current federal and California laws include substantial restrictions on the
utilization of net operating losses and credits in the event of an ownership
change of a corporation. Accordingly, the Companys ability to utilize net
operating loss and tax credit carryforwards may be limited as a result of such
ownership change. Such a limitation could result in the expiration of
carryforwards before they are utilized.

The Companys effective tax rate differs from the federal statutory rate as
follows:

|                                    |  |               |       |      |  |      |       |    |  |  |       |   
|----------------------------------- |  | ------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                    |  | Year ended   
|                                    |  | June 30,     
|                                    |  |              
|                                    |  | 2003          |       | 2002 |  | 2001
|                                    |  |               |       |      |  |     
|                                    |  | (percentages)
|Income taxes at U.S. statutory rate |  |               | (35.0 | )%   |  |      | (35.0 | )% |  |  | (35.0 | )%
|Meals and entertainment             |  |               |      |      |  |      |      |    |  |  | 0.3   |   
|Stock compensation expense          |  |               | 0.8   |      |  |      | 0.6   |    |  |  | 2.6   |   
|Valuation allowances                |  |               | 34.2  |      |  |      | 34.4  |    |  |  | 32.1  |   
|                                    |  |               |       |      |  |      |       |    |  |  |       |   
|Effective tax rate                  |  |               |      | %    |  |      |      | %  |  |  |      | % 
|                                    |  |               |       |      |  |      |       |    |  |  |       |   

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12. COMPUTATION OF LOSS PER SHARE

The following table sets forth the computations of basic and diluted loss per
share:

|                                                  |                                                                                |   |                                       |        |      |   |         |       |   |   |        |       |  
|------------------------------------------------- | ------------------------------------------------------------------------------ | - | ------------------------------------- | ------ | ---- | - | ------- | ----- | - | - | ------ | ----- | -
|                                                  |                                                                                |   | Year ended                           
|                                                  |                                                                                |   | June 30,                             
|                                                  |                                                                                |   |                                      
|                                                  |                                                                                |   | 2003                                  |        | 2002 |   | 2001   
|                                                  |                                                                                |   |                                       |        |      |   |        
|                                                  |                                                                                |   | (in thousands, except per share data)
|Net loss attributable to common stockholders      |                                                                                | $ | (36,193                               | )      |      | $ | (15,673 | )     |   | $ | (7,142 | )    
|                                                  |                                                                                |   |                                       |        |      |   |         |       |   |   |        |      
|Calculation of loss per share, basic and diluted: |                                                                                |   |                                       |        |      |   |         |       |   |   |        |      
|                                                  | Weighted average number of common stock shares
outstanding  basic and diluted |   |                                       | 14,654 |      |   |         | 9,503 |   |   |        | 1,482 |  
|                                                  |                                                                                |   |                                       |        |      |   |         |       |   |   |        |      
|                                                  | Net loss  basic and diluted                                                   |   | $                                     | (2.47  | )    |   | $       | (1.65 | ) |   | $      | (4.82 | )
|                                                  |                                                                                |   |                                       |        |      |   |         |       |   |   |        |      

The following table summarizes common stock equivalents that are not included
in the denominator used in the diluted net loss per share calculation because
to do so would be antidilutive for the periods indicated:

|                                                |                                |  |                |     |      |  |       |       |  |  |       |       | 
|----------------------------------------------- | ------------------------------ |  | -------------- | --- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                                                |                                |  | Year ended    
|                                                |                                |  | June 30,      
|                                                |                                |  |               
|                                                |                                |  | 2003           |     | 2002 |  | 2001 
|                                                |                                |  |                |     |      |  |      
|                                                |                                |  | (in thousands)
|Options to purchase common stock                |                                |  | 247            |     |      |  | 467   |       |  |  | 292   |      
|Warrants to purchase common stock               |                                |  | 200            |     |      |  | 442   |       |  |  | 319   |      
|Series A redeemable convertible preferred stock |                                |  |               |     |      |  | 1,770 |       |  |  | 4,588 |      
|Series B redeemable convertible preferred stock |                                |  |               |     |      |  | 534   |       |  |  | 707   |      
|Series C redeemable convertible preferred stock |                                |  |               |     |      |  | 446   |       |  |  | 121   |      
|                                                |                                |  |                |     |      |  |       |       |  |  |       |      
|                                                | Total common stock equivalents |  |                | 447 |      |  |       | 3,659 |  |  |       | 6,027 | 
|                                                |                                |  |                |     |      |  |       |       |  |  |       |      

13. EMPLOYEE BENEFIT PLANS

In January 2000, the Company adopted a 401(k) tax deferred savings plan (the
401(k) Plan) to provide for retirement of its employees. Employee contributions
are limited to a maximum amount subject to IRS guidelines in any calendar year.
The Company may make matching contributions and employer profit sharing
contributions at the Board of Directors discretion. For the years ended June
30, 2003, 2002, and 2001, the Company made employer contributions to the 401(k)
Plan of $207,000, $125,000, and $41,000, respectively.

In March 2001 the Companys UK subsidiary set up a Group Personal Pension Plan
to provide for retirement of its employees. Employee contributions are limited
to a maximum amount subject to the UK Inland Revenue guidelines. For
participants, the UK subsidiary contributes three percent of basic salary plus
a half percent for each additional one percent contribution in excess of three
percent. For the years ended June 30, 2003, 2002, and 2001, the Companys UK
subsidiary made employer contributions to the Group Personal Pension Plan of
$82,000, $84,000, and $22,000, respectively.

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14. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

As defined by the requirements of SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information,the Company operates in one reportable
segment: the development and publishing of interactive entertainment products.

Financial information by geographical region is summarized below:

|                                          |               |   |                |         |      |   |         |        |   |   |        |        |  
|----------------------------------------- | ------------- | - | -------------- | ------- | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                                          |               |   | Year ended    
|                                          |               |   | June 30,      
|                                          |               |   |               
|                                          |               |   | 2003           |         | 2002 |   | 2001   
|                                          |               |   |                |         |      |   |        
|                                          |               |   | (in thousands)
|Net revenues from unaffiliated customers: |               |   |                |         |      |   |         |        |   |   |        |       
|                                          | North America |   | $              | 27,182  |      |   | $       | 44,005 |   |   | $      | 22,898 |  
|                                          | Europe        |   |                | 8,333   |      |   |         | 5,104  |   |   |        | 2,453  |  
|                                          | Other         |   |                | 193     |      |   |         | 1,625  |   |   |        |       |  
|                                          |               |   |                |         |      |   |         |        |   |   |        |        |  
|Consolidated                              |               | $ | 35,708         |         |      | $ | 50,734  |        |   | $ | 25,351 |       
|                                          |               |   |                |         |      |   |         |        |   |   |        |        |  
|Income (loss) from operations:            |               |   |                |         |      |   |         |        |   |   |        |       
|                                          | North America |   | $              | (23,456 | )    |   | $       | (7,469 | ) |   | $      | 469    |  
|                                          | Europe        |   |                | (12,439 | )    |   |         | (5,925 | ) |   |        | (822   | )
|                                          |               |   |                |         |      |   |         |        |   |   |        |        |  
|Consolidated                              |               | $ | (35,895        | )       |      | $ | (13,394 | )      |   | $ | (353   | )     
|                                          |               |   |                |         |      |   |         |        |   |   |        |        |  

|                     |                                     |   |                |         |      |   |        |         |  
|-------------------- | ----------------------------------- | - | -------------- | ------- | ---- | - | ------ | ------- | -
|                     |                                     |   | June 30,      
|                     |                                     |   |               
|                     |                                     |   | 2003           |         | 2002
|                     |                                     |   |                |         |     
|                     |                                     |   | (in thousands)
|Identifiable assets: |                                     |   |                |         |      |   |        |        
|                     | North America                       |   | $              | 28,937  |      |   | $      | 53,313  |  
|                     | Europe                              |   |                | 4,186   |      |   |        | 15,648  |  
|                     | Intercompany items and eliminations |   |                | (23,663 | )    |   |        | (19,494 | )
|                     |                                     |   |                |         |      |   |        |         |  
|Total                |                                     | $ | 9,460          |         |      | $ | 49,467 |        
|                     |                                     |   |                |         |      |   |        |         |  
|Long-Lived assets:   |                                     |   |                |         |      |   |        |        
|                     | North America                       |   | $              | 1,486   |      |   | $      | 8,663   |  
|                     | Europe                              |   |                | 3,303   |      |   |        | 10,219  |  
|                     |                                     |   |                |         |      |   |        |         |  
|Total                |                                     | $ | 4,789          |         |      | $ | 18,882 |        
|                     |                                     |   |                |         |      |   |        |         |  

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15. CUSTOMER CONCENTRATIONS

The following table summarizes net revenues and accounts receivable for
customers which accounted for 10% or more of net revenues or gross
trade accounts
receivable:

|         |   |  |                     |    |            |  |      |    |      |  |              |    |   |  |  |    |   |  |  |    |  
|-------- | - |  | ------------------- | -- | ---------- |  | ---- | -- | ---- |  | ------------ | -- | - |  |  | -- | - |  |  | -- | -
|         |   |  |                     |    |            |  |      |    |      |  | Net revenues
|         |   |  | Accounts receivable |    |           
|         |   |  |                     |    | Year ended
|         |   |  | June 30,            |    | June 30,  
|         |   |  |                     |    |           
|         |   |  | 2003                |    | 2002       |  | 2003 |    | 2002 |  | 2001        
|         |   |  |                     |    |            |  |      |    |      |  |             
|         |   |  | (percentages)      
|Customer |   |  |                     |    |            |  |      |    |      |  |              |    |   |  |  |    |   |  |  |   
|         | A |  |                     | 19 | %          |  |      | 10 | %    |  |              |   | % |  |  |   | % |  |  |   | %
|         | B |  |                     | 18 |            |  |      |   |      |  |              | 16 |   |  |  | 11 |   |  |  |   |  
|         | C |  |                     |   |            |  |      | 12 |      |  |              |   |   |  |  |   |   |  |  |   |  
|         | D |  |                     |   |            |  |      |   |      |  |              | 14 |   |  |  |   |   |  |  |   |  
|         | E |  |                     |   |            |  |      |   |      |  |              | 10 |   |  |  | 22 |   |  |  | 17 |  
|         | F |  |                     |   |            |  |      |   |      |  |              |   |   |  |  |   |   |  |  | 14 |  
|         | G |  |                     |   |            |  |      |   |      |  |              |   |   |  |  |   |   |  |  | 12 |  

16. COMMITMENTS, CONTINGENCIES, GUARANTEES AND LEGAL PROCEEDINGS

Commitments, Contingencies and Guarantees

Under an agreement entered into between the Company and a production company,
the Company has a first look right to review screenplays acquired by the
production company and to develop products based on films produced from those
screenplays. In exchange for these rights, the Company will have to pay
royalties to the production company calculated as a percentage of sales of the
developed products. For each film (up to a total of ten films) that the Company
selects, 68,738 fully vested and non-forfeitable shares of common stock will be
issued following the theatrical release of each film for which the Company has
developed a product, up to a maximum of 687,375 shares of common stock. As the
shares contingently issuable under this arrangement are dependent upon the
theatrical release of the film for which the Company has elected to develop
products, the Company will only measure the value of these shares in accordance
with EITF 96-18 Accounting for Equity Instruments That Are Issued To Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Servicesif
and when this contingency is satisfied. If the software product is released
after the release of the film, the Company will amortize the non-cash charge
over the life of the product, which is expected to be between three and six
months. If the software product is released prior to the release of the film,
the Company will at each interim period assess whether it is probable that the
value of the shares issuable is recoverable through future sales of the product
to which it relates. If this is probable, the non-cash charge will be amortized
to licensed costs over the life of the product, while the Company will expense
the non-cash charge at the time of the issuance of the shares if it is not
probable that the value of the shares issued is recoverable through future
sales of the product to which these shares relate. The Company cannot estimate
the aggregate dollar amount of these future non-cash charges as they are based
on the Companys share price at a future point in time. As of June 30, 2003 and
2002 the Company has elected to produce software products for three films
pursuant to this agreement. One of these films had its theatrical release
during the year ended June 30, 2001 and another had its theatrical release
during the year ended June 30, 2002. Accordingly, the Company has issued
137,476 shares of common stock to the production company to date. The Company
is not required to issue stock on the remaining film until such time as the
film is released, which is anticipated to be in the summer of calendar year
2004.

In connection with an agreement entered into with a production company during
January 2002, the Company obtained the exclusive right of first refusal, for a
period of five years, to develop products based on certain properties

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owned by the production company and to distribute them worldwide. In exchange
for these rights, the Company will have to pay royalties to the production
company calculated as a percentage of sales of the developed products. Also,
in connection with the agreement, the Company is required to issue to the
production company warrants to purchase up to 50,000 shares of common stock, in
pre-determined multiples of either 5,000 or 10,000 shares, upon the occurrence
of certain pre-determined events. Warrants will be issued at the average
closing price of the Companys stock for the five days immediately prior to the
date of issuance, have a five year term from date of issuance, are fully vested
and are immediately exercisable upon issuance. The Company has issued warrants
to purchase 35,000 shares of common stock under this agreement as follows:
January 2002  warrant to purchase 10,000 shares, March 2002  warrant to
purchase 10,000 shares, July 2002  warrant to purchase 5,000 shares, and May
2003  warrant to purchase 10,000 shares. As the remaining 15,000 warrants
contingently issuable under this arrangement are dependent upon the occurrence
of certain pre-determined events, the Company will only measure the value of
these warrants in accordance with EITF 96-18 Accounting for Equity Instruments
That Are Issued To Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Servicesif and when the warrants are issued. When the
software product is released, the Company will amortize the non-cash charge
over the life of the product, which is expected to be between three and six
months. The Company cannot estimate the aggregate dollar amount of these future
non-cash charges as they are based on the Companys share price at a future
point in time.

In May 2002, in connection with a licensing and publishing agreement entered
into with a publishing company, the Company granted the production company a
warrant, with a ten year term from the date of issue, to purchase up to 200,000
shares of its common stock at an exercise price of $2.60, of which 15,000
became immediately exercisable upon the signing of the agreement, and the
remaining 185,000 only become exercisable in multiples of 4,625 shares upon
each election by the Company to produce a title based on any films, made for
television movies, or television series produced from screenplays to be
produced by the publishing company, up to a maximum ten titles, and multiples
of 13,875 shares upon the theatrical release or television air-date of each
film for which the Company develops a title. Upon expiration of the agreement,
any unexercised warrants will cease to be exercisable. The agreement expires
upon the later of five years, and the earlier of either the theatrical release
or television air-date of the tenth film or television series on which the
Company bases a product, and eight years. The fair value of the remaining
185,000 shares will be calculated as and when shares become exercisable and
will be capitalized to prepaid royalties, capitalized software costs and
licensed assets. As the warrants contingently exercisable under this
arrangement are dependent upon the occurrence of certain pre-determined events,
the Company will only measure the value of these warrants in accordance with
EITF 96-18 Accounting for Equity Instruments That Are Issued To Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Servicesif
and when the warrants become exercisable. When the software product is
released, the Company will amortize the non-cash charge over the life of the
product, which is expected to be between three and six months. The Company
cannot estimate the aggregate dollar amount of these future non-cash charges as
they are based on the Companys share price at a future point in time. The
agreement was assigned by the production company to another production company
in July 2002. Under various licensing agreements entered into between the
Company and content providers, the Company had contractual marketing
commitments to spend $4,450,000 and $6,150,000 in advertising on the content
providers networks and online mediums as of June 30, 2003 and 2002,
respectively. As of June 30, 2003 and 2002, the Company had made payments
totaling $3,337,000 and $3,202,000, respectively, under these agreements.
Future minimum annual advertising payments under these contractual marketing
commitments are as follows:

|                    |                 |   |                |     | 
|------------------- | --------------- | - | -------------- | --- | 
|                    |                 |   | June 30, 2003 
|                    |                 |   |               
|                    |                 |   | (in thousands)
|Fiscal year ending: |                 |   |                |    
|                    | 2004            |   | $              | 863 | 
|                    | 2005            |   |                | 250 | 
|                    | 2006 and beyond |   |                |    | 
|                    |                 |   |                |     | 
|Total               |                 | $ | 1,113          |    
|                    |                 |   |                |     | 

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In connection with a number of licensing and developing agreements, the Company
is required to pay guaranteed minimum royalties with respect to these
agreements. As of June 30, 2003 and 2002, the Company had capitalized payments
totaling $5,865,000 and $4,422,000 respectively under these agreements. These
guaranteed amounts will be applied against future royalties that may become
payable to the respective licensors under the agreement. Future minimum annual
royalty payments under these contractual licensing and developing commitments
are as follows:

|                    |                 |   |                |     | 
|------------------- | --------------- | - | -------------- | --- | 
|                    |                 |   | June 30, 2003 
|                    |                 |   |               
|                    |                 |   | (in thousands)
|Fiscal year ending: |                 |   |                |    
|                    | 2004            |   | $              | 500 | 
|                    | 2005 and beyond |   |                |    | 
|                    |                 |   |                |     | 
|Total               |                 | $ | 500            |    
|                    |                 |   |                |     | 

Under a two year factoring agreement as described in Note 7, which commenced in
February 2002, a minimum annual service fee of $150,000 is payable to the
factoring company. The fee becomes payable based on the volume of receivables
factored. As of June 30, 2003 the Company had a commitment to incur a further
$104,000 in minimum annual service fees prior to February 2004.

The Company leases facilities under various noncancelable operating leases.
Future minimum annual rental payments under the lease agreements, net of
sub-lease income, are as follows:

|                    |                 |   |                |     | 
|------------------- | --------------- | - | -------------- | --- | 
|                    |                 |   | June 30, 2003 
|                    |                 |   |               
|                    |                 |   | (in thousands)
|Fiscal year ending: |                 |   |                |    
|                    | 2004            |   | $              | 446 | 
|                    | 2005            |   |                | 393 | 
|                    | 2006            |   |                | 78  | 
|                    | 2007            |   |                | 78  | 
|                    | 2008            |   |                | 78  | 
|                    | 2009            |   |                | 19  | 
|                    | 2010 and beyond |   |                |    | 
|                    |                 |   |                |     | 
|Total               |                 | $ | 1,092          |    
|                    |                 |   |                |     | 

The Company leases equipment under various noncancelable capital leases. Future
minimum annual rental payments under the lease agreements are as follows:

|                                    |                               |   |                |    | 
|----------------------------------- | ----------------------------- | - | -------------- | -- | 
|                                    |                               |   | June 30, 2003 
|                                    |                               |   |               
|                                    |                               |   | (in thousands)
|Fiscal year ending:                 |                               |   |                |   
|                                    | 2004                          |   | $              | 29 | 
|                                    | 2005                          |   |                | 27 | 
|                                    | 2006 and beyond               |   |                |   | 
|                                    |                               |   |                |    | 
|                                    | Future minimum lease payments |   |                | 56 | 
|                                    | Amount representing interest  |   |                | 3  | 
|                                    |                               |   |                |    | 
|Net obligation under capital leases |                               | $ | 53             |   
|                                    |                               |   |                |    | 

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Rent expense for the years ended June 30, 2003, 2002, and 2001, was $518,000,
$389,000, and $135,000, respectively.

As of June 30, 2003 and 2002, a finance company had a continuing security
interest in the Companys domestic accounts receivable, inventory, fixed assets
and intangible assets against advances made under a factoring agreement between
the finance company and the Company. The Company accounts for all cash
advances made under the agreement as a current liability and for outstanding
letters of credit as a contingent liability. As of June 30, 2003 and 2002, the
Company had letters of credit outstanding under the agreement of $0 and $2.3
million, respectively.

The Company offers a limited warranty on products sold. The Company does not
maintain a general warranty reserve as estimated future warranty costs are
accounted for in price protection and return reserves accrued at the time of
sale of the Companys products.

Legal Proceedings

From time to time the Company may be involved in litigation relating to claims
arising out of its operations in the ordinary course of business. As of June
30, 2003, the Company was party to the following legal proceedings:

On April 1, 2003, Amaze
Entertainment, Inc. asserted counterclaims against the Company
in an action captioned BAM! ENTERTAINMENT INC. v. AMAZE ENTERTAINMENT, INC. et.
al. that the Company commenced in the Superior Court of California, County of Santa
Clara (Case No. CV814820) on February 18, 2003, and which Amaze had removed to
the United States District Court for the Northern District of California (Case
No. C03 01286 PVT) on or about March 24, 2003. The Company's action asserted claims for,
inter alia, relief based on rescission, breach of contract, declaratory relief,
and money paid and received with regard to an agreement for a video game titled
Crushed Baseball that Amaze Entertainment was developing
for the Company. Amaze
Entertainments counterclaims alleged breach of contract and unjust enrichment
with regard to each of the Crushed Baseball development agreement and a
separate development agreement for another video game titled Samurai Jack.
The counterclaims seeked, inter alia, compensatory damages of approximately
$3.5 million and additional damages to be proven at trial. On July 11, 2003
Amaze and Bam agreed to compromise and settle all claims either asserted or
that could be asserted in connection with the dispute and to mutually release
any and all future claims and contentions they have against each other. This
compromise requires Amaze to make Bam two payments, one in July 2003 and one in
October 2003 of $325,000 each. Bam has received the first of these
two payments. No income related to either of these payments has been
recorded as of June 30, 2003. Under the terms
of the settlement, the agreement to settle would have been terminated and
considered null and void if Amaze had given Bam notice by August 13, 2003 that
it has failed to enter into an agreement with Warner Bros. Consumer Products
Inc. allowing Amaze to commercially exploit the Samurai Jack product. Amaze did
not give such notice by August 13, 2003, and to Bams knowledge, the settlement
agreement is in effect. The settlement agreement stipulates that upon payment
by Amaze to Bam of the sum due in October 2003, the parties will execute a
stipulation for dismissal of the legal actions. Accordingly, the litigation
remains unsettled at this time, and management believes it is too early to
predict the outcome.

On March 27, 2003, a complaint captioned OVATION ENTERTAINMENT, LLC v. BAM!
ENTERTAINMENT, INC. et. al. was filed against the Company in the Superior Court of
California, County of Los Angeles (Case No. SCO76530). The complaint alleged,
inter alia, claims of breach of contract and fraud against the Company in connection
with an exclusive first look agreement, which was assigned to Ovation
Entertainment by the licensor originally party to the agreement, for content
relating to motion pictures and television projects to be licensed to
the Company for
development in connection with video games. The lawsuit sought, inter alia,
compensatory damages believed to be in excess of $1 million and interest
thereon, exemplary or punitive damages, and attorneys fees. On August 4,
2003, Ovation and Bam agreed to settle the litigation by amending the terms of
the agreement, and the legal action was dismissed on August 25, 2003. Bam does
not believe that the amendment will have a material adverse effect on Bams
financial position or results of operations.

17. RELATED PARTY TRANSACTIONS

In October 1999, the Company issued 580,962 shares of common stock to an
officer in exchange for a note receivable from the officer. The note was repaid
in April 2001.

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In November 1999 the Company entered into an agreement to lease its principal
facilities under a noncancelable operating lease. As a condition of this
agreement, an officer of the Company entered into a separate agreement with the
lessor to guarantee the Companys obligations under the agreement. The
guarantee was terminated in April 2002.

In February 2000, the Company entered into an agreement with a financing
company to finance the purchase of materials required to produce products. As a
condition of this agreement, an officer of the Company entered into a separate
agreement with the financing company to guarantee the Companys obligations
under the agreement. The guarantee lapsed in February 2002.

In November 2000, the Company entered into a revolving note agreement with a
bank. The note was secured by a personal guarantee from an officer of the
Company and by a security interest in a money market account maintained at the
bank in the name of a director of the Company. The guarantee and security
interest lapsed in December 2000.

The Company incurred legal services of $56,000, $290,000 and $195,000 for the
years ended June 30, 2003, 2002, and 2001, respectively, to a law firm whose
partner served as a Director of the Company from October 1999 through November
2002 and who currently serves as Secretary of the Company.

18. QUARTERLY FINANCIAL DATA (unaudited)

|             |                                       |  |                                          |        |            |  |         |         |          |  |          |        |   |  |   |        |   |  |   |         |  
|------------ | ------------------------------------- |  | ---------------------------------------- | ------ | ---------- |  | ------- | ------- | -------- |  | -------- | ------ | - |  | - | ------ | - |  | - | ------- | -
|             |                                       |  | Quarter ended                            |        |            |  |        
|             |                                       |  |                                          |        | Year ended
|             |                                       |  | Sept 30,                                 |        | Dec 31,    |  | Mar 31, |         | June 30, |  | June 30,
|             |                                       |  | 2002                                     |        | 2002       |  | 2003    |         | 2003     |  | 2003    
|             |                                       |  |                                          |        |            |  |         |         |          |  |         
|             |                                       |  | (in thousands, except per share amounts)
|Fiscal 2003: |                                       |  |                                          |        |            |  |         |         |          |  |          |        |   |  |   |        |   |  |   |        
|             | Net revenues                          |  | $                                        | 8,740  |            |  | $       | 22,005  |          |  | $        | 2,866  |   |  | $ | 2,097  |   |  | $ | 35,708  |  
|             | Operating loss                        |  |                                          | (8,174 | )          |  |         | (13,269 | )        |  |          | (5,149 | ) |  |   | (9,303 | ) |  |   | (35,895 | )
|             | Net loss                              |  |                                          | (8,421 | )          |  |         | (13,429 | )        |  |          | (5,124 | ) |  |   | (9,219 | ) |  |   | (36,193 | )
|             | Net loss per share, basic and diluted |  |                                          | (0.58  | )          |  |         | (0.92   | )        |  |          | (0.35  | ) |  |   | (0.63  | ) |  |   | (2.47   | )

|             |                                       |  |                                          |        |            |  |         |        |          |  |          |        |   |  |   |        |   |  |   |         |  
|------------ | ------------------------------------- |  | ---------------------------------------- | ------ | ---------- |  | ------- | ------ | -------- |  | -------- | ------ | - |  | - | ------ | - |  | - | ------- | -
|             |                                       |  | Quarter ended                            |        |            |  |        
|             |                                       |  |                                          |        | Year ended
|             |                                       |  | Sept 30,                                 |        | Dec 31,    |  | Mar 31, |        | June 30, |  | June 30,
|             |                                       |  | 2001                                     |        | 2001       |  | 2002    |        | 2002     |  | 2002    
|             |                                       |  |                                          |        |            |  |         |        |          |  |         
|             |                                       |  | (in thousands, except per share amounts)
|Fiscal 2002: |                                       |  |                                          |        |            |  |         |        |          |  |          |        |   |  |   |        |   |  |   |        
|             | Net revenues                          |  | $                                        | 10,827 |            |  | $       | 18,914 |          |  | $        | 7,017  |   |  | $ | 13,976 |   |  | $ | 50,734  |  
|             | Operating income (loss)               |  |                                          | 219    |            |  |         | (2,567 | )        |  |          | (5,913 | ) |  |   | (5,133 | ) |  |   | (13,394 | )
|             | Net loss                              |  |                                          | (489   | )          |  |         | (3,775 | )        |  |          | (6,233 | ) |  |   | (5,176 | ) |  |   | (15,673 | )
|             | Net loss per share, basic and diluted |  |                                          | (0.32  | )          |  |         | (0.52  | )        |  |          | (0.43  | ) |  |   | (0.35  | ) |  |   | (1.65   | )

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19. SUBSEQUENT EVENTS

In July 2003, the Company entered into a distribution agreement with Acclaim
Entertainment Ltd (Acclaim) whereby Acclaim agreed to
distribute, on an exclusive basis, certain
forthcoming products of the Company in PAL territories. PAL is the television
standard for the United Kingdom, continental Europe and Australia. Acclaim
will be responsible for the manufacture, sale, distribution and marketing of
the products and will pay the Company based on net receipts from the sales made
by them.

In August 2003, Robert W. Holmes, Jr. and Steven J. Massarsky both resigned
from the Board of Directors to pursue other interests.

In August 2003, the Company entered into a Promissory Note with a Director
whereby the Director loaned the Company $250,000. The loan, which bears
interest at 6% per annum, is repayable on or before October 31, 2003.

In September 2003, the Company entered into a six month Agreement (the
Agreement) with a finance company, pursuant to which the finance company
extends a line of credit facility to fund domestic inventory purchases to the
Company. The Company may sell the inventory purchased under the Agreement and
is required to remit customer receipts from those sales directly to the finance
company up to the amounts funded by them. The Company retains collections in
excess of the amounts funded by the finance company, is responsible for
collecting the customer receivables, and bears the risk of loss on all
uncollectible accounts. Under the Agreement, the finance companys aggregate
outstanding funding is limited to $3.2 million. The Company is required to pay
the finance companys expenses under the contract, a facility fee equal to 5.0%
of the funds advanced by the finance company, and interest at prime plus 0.5%.
The Agreement terminates on March 31, 2004 and any sums outstanding become
repayable on that date. The Company may repay any sums advanced prior to the
due date of payment without penalty. The Companys factoring agreement with a
different finance company was mutually terminated in September 2003.

See also Note 16  Legal
Proceedings for a description of other subsequent events.

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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                                |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|----------------------------------------------- |  | -------------- | ----- | --------- |  | ---------- | ------ | ------ |  | - | ------ | --------- |  | - | ----- | 
|                                                |  | Balance
      |       |           |  |            |        |        |  |   |        | Balance

|                                                |  | Beginning      |       |           |  |            |        |        |  |   |        | End of   
|Description                                     |  | of Period      |       | Additions |  | Deductions |        | Period
|                                                |  |                |       |           |  |            |        |       
|                                                |  | (in thousands)
|Year ended June 30, 2003                        |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|Allowance for doubtful accounts                 |  | $              | 1,513 |           |  | $          | 706    |        |  | $ | 499    |           |  | $ | 1,720 | 
|Allowance for sales return and price protection |  | $              | 2,707 |           |  | $          | 11,133 |        |  | $ | 11,380 |           |  | $ | 2,460 | 
|Allowance for cooperative advertising           |  | $              | 580   |           |  | $          | 1,100  |        |  | $ | 1,511  |           |  | $ | 169   | 
|                                                |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|                                                |  | $              | 4,800 |           |  | $          | 12,939 |        |  | $ | 13,390 |           |  | $ | 4,349 | 
|                                                |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|Year ended June 30, 2002                        |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|Allowance for doubtful accounts                 |  | $              | 70    |           |  | $          | 1,529  |        |  | $ | 86     |           |  | $ | 1,513 | 
|Allowance for sales return and price protection |  | $              | 650   |           |  | $          | 10,648 |        |  | $ | 8,591  |           |  | $ | 2,707 | 
|Allowance for cooperative advertising           |  | $              | 443   |           |  | $          | 2,483  |        |  | $ | 2,346  |           |  | $ | 580   | 
|                                                |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|                                                |  | $              | 1,163 |           |  | $          | 14,660 |        |  | $ | 11,023 |           |  | $ | 4,800 | 
|                                                |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|Year ended June 30, 2001                        |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|Allowance for doubtful accounts                 |  | $              | 77    |           |  | $          | 143    |        |  | $ | 150    |           |  | $ | 70    | 
|Allowance for sales return and price protection |  | $              |      |           |  | $          | 893    |        |  | $ | 243    |           |  | $ | 650   | 
|Allowance for cooperative advertising           |  | $              |      |           |  | $          | 953    |        |  | $ | 510    |           |  | $ | 443   | 
|                                                |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 
|                                                |  | $              | 77    |           |  | $          | 1,989  |        |  | $ | 903    |           |  | $ | 1,163 | 
|                                                |  |                |       |           |  |            |        |        |  |   |        |           |  |   |       | 

S-1