<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                                       OR

[ X ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM MARCH 31, 2000 TO JUNE 30, 2000
                                                     COMMISSION FILE NO. 0-27338

                                INFOGRAMES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                   DELAWARE                           13-3689915
        (State or Other Jurisdiction of            (I.R.S. Employer
        Incorporation or Organization)            Identification No.)

                      417 FIFTH AVENUE, NEW YORK, NY 10016
                    (Address of principal executive offices)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 726-6500

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $ 0.01 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|

      The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant, based on the $8.00 closing sale price of the
Common Stock on August 30, 2000 as reported on the Nasdaq National Market, was
approximately $63.4 million. As of August 30, 2000, there were 20,686,638 shares
of the registrant's Common Stock outstanding (adjusted to reflect the
one-for-five reverse stock split effected on June 26, 2000).
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                                INFOGRAMES, INC.
                 JUNE 30, 2000 TRANSITIONAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                ----
<S>                                                                             <C>
FORWARD LOOKING INFORMATION.................................................     ii
PART I      ................................................................      1
  ITEM 1.   Business........................................................      1
  ITEM 2.   Properties......................................................     14
  ITEM 3.   Legal Proceedings...............................................     14
  ITEM 4.   Submission of Matters to Vote of Security Holders...............     16
PART II     ................................................................     16
  ITEM 5.   Market for Registrant's Common Equity and Related Stockholder
            Matters     ....................................................     16
  ITEM 6.   Selected Financial Data.........................................     18
  ITEM 7.   Management's Discussion and Analysis of Financial Condition and
            Results of Operations...........................................     19
  ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk......     29
  ITEM 8.   Index to the Financial Statements and Supplementary Data........     30
  ITEM 9.   Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure............................................     30
PART III    ................................................................     31
  ITEM 10.  Directors and Executive Officers................................     31
  ITEM 11.  Executive Compensation..........................................     33
  ITEM 12.  Security Ownership of Certain Beneficial Owners and Management       38
  ITEM 13.  Certain Relationships and Related Transactions..................     40
PART IV     ................................................................     43
  ITEM 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K     43
SIGNATURES  ................................................................     49
CONSOLIDATED FINANCIAL STATEMENTS...........................................    F-1
</TABLE>
<PAGE>   3
                           FORWARD-LOOKING INFORMATION

      When used in this Transitional Report on Form 10-K, the words "intends,"
"expects," "plans," "estimates," "projects," "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Except
for historical information contained herein, the matters discussed and the
statements made herein concerning the Company's future prospects are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Although the Company believes that its plans, intentions and
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such plans, intentions or expectations will be achieved.
There can be no assurance that future results will be achieved, and actual
results could differ materially from the forecasts and estimates. Important
factors that could cause actual results to differ materially include, but are
not limited to, worldwide business and industry conditions (including consumer
buying and retailer ordering patterns), adoption of new hardware systems,
product delays, changes in research and development spending, software
development requirements and their impact on product launches, Company customer
relations (in particular, levels of sales to Wal-Mart and other mass merchants),
retail acceptance of the Company's published and third-party titles, competitive
conditions and other risk factors, including, but not limited to, those
discussed in "Risk Factors" below at pages 9 to 14.


                                       ii
<PAGE>   4
                                     PART I

ITEM 1.  BUSINESS

      Note: On June 27, 2000, our Board of Directors approved the change of our
fiscal year from a year ended on March 31, which was the fiscal year end used in
our last Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the "SEC"), to the new fiscal year end of June 30. This report for
the three month period ended June 30, 2000 covers the transition period. Unless
otherwise indicated, references to fiscal 2000 mean the fiscal year ended March
31, 2000, references to fiscal 1999 mean the fiscal year ended March 31, 1999,
and fiscal 2001 will refer to the fiscal year ending June 30, 2001.

                                    OVERVIEW

      Infogrames, Inc. (formerly GT Interactive Software Corp.), a Delaware
corporation (the "Company"), is a leading worldwide developer, publisher and
distributor of interactive entertainment software for use on PCs, the Sony
PlayStation and Nintendo 64 platforms. The Company also is currently developing
software for new platforms such as Sony PlayStation 2. During calendar year
1999, the Company had the fifth highest U.S. market share in number of units
sold in the PC software game category. The Company is also a leader in certain
sub-segments of the "edutainment" software market, including the fast growing
children's education and leisure entertainment segments. According to PC Data,
in 1999, the Company's Humongous studio ranked as the number three publisher in
the U.S. market for PC education software on the basis of units sold.

      In May 2000, in connection with the acquisition by Infogrames
Entertainment SA ("Infogrames SA") of a majority stake in the Company, the
Company changed its name from GT Interactive Software Corp. to Infogrames, Inc.
and announced that all of its products will be marketed under the Infogrames
brand. The Company believes that the Infogrames brand is well respected in the
interactive entertainment software industry and that this new branding strategy
will strengthen the Company's image with customers and the industry as a whole.

      On June 26, 2000, the Company effected a one-for-five reverse stock split
of the Company's common stock, par value $0.01 per share (the "Common Stock") to
meet certain requirements of the Nasdaq National Market.  See "Risk Factors --
Until Recently Our Common Stock Did Not Meet the Nasdaq National Market's
Minimum Share Price Requirement and Was Subject to Delisting." Except as
otherwise noted, references to share prices and the number of shares of Common
Stock in this Transitional Report reflect the reverse stock split.

      The Company has two reportable segments: publishing and distribution.
Publishing relates to the development (both internally and externally) and sale
of interactive entertainment software for the children's education, leisure
entertainment and gaming enthusiast's markets. Distribution relates to the sale
by the Company of its own and third-party published software to various mass
merchants and other retailers.

      The Company's publishing business consists of three divisions: Children's,
Leisure and Frontline. The Company's Children's Division develops and publishes
children's educational and entertainment software for the personal computer. The
Company's Leisure Division develops and publishes lower-priced PC entertainment,
reference and productivity titles for mass market consumption. The Company's
Frontline Division develops, internally and through third-party developers, and
publishes cutting edge new release entertainment software for the gaming
enthusiast for use on multiple hardware platforms.

      The Company distributes both its own and third-party published software
through an established distribution network. The Company believes that it is one
of the few software publishers that sells its products directly to substantially
all of the major retailers of computer software in the U.S. The Company's
distribution division also markets older titles to retailers, extending the
economic life of those products. The Company believes it is one of the largest
distributors of consumer software to mass merchants in the U.S. The Company
supplies consumer software (including its own and third-party published
software) to approximately 2,470 Wal-Mart stores, approximately 2,096 Kmart
stores and approximately 921 Target stores. The Company also distributes
consumer software to other major retailers including Office Depot, Best Buy,
CompUSA, AAFES, Sam's Club and Babbage's.
<PAGE>   5
      During fiscal 2000, the Company made a significant effort to reorganize
and refocus its distribution and value lines and the Company has continued this
effort during the three months ended June 30, 2000. In July 1999, the Company
began outsourcing its warehouse operations in the U.S. to Arnold Logistics
("Arnold Logistics"). The warehouse operations include the receipt and storage
of inventory as well as the distribution of inventory to mass market and other
retailing customers. This allows the Company to reduce distribution costs and to
streamline operations to focus on producing more hit titles. Through this
refocus, the Company decided to reduce its involvement in distribution of
third-party product and the value lines of business. This has led to charges of
approximately $11.1 million during the three month period ended June 30, 2000.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."

      In connection with its restructuring and reorganization as a result of the
Infogrames transaction, the Company has decided to concentrate its efforts in
North America. Effective December 31, 1999, the Company began the process of
closing its European operations. Because of Infogrames SA's strong European
presence, the Company has entered into an agreement with Infogrames SA to
provide distribution of the Company's products in Europe and Australia. The
Company believes that full-time operations in Europe are no longer necessary or
efficient and that it will be able to access European markets through the strong
distribution channels of Infogrames SA while concentrating its resources in
other strategic areas.

                                   PUBLISHING

      The Company's publishing business consists of three divisions: Children's,
Leisure and Frontline. The Company's Frontline and Children's Divisions publish
premium-priced, higher production value titles for use on multiple platforms
that are developed internally or through third-party developers and marketed
both domestically and internationally. The Company's Leisure segment publishes
value-priced PC titles for mass market consumption.

CHILDREN'S PUBLISHING

      Humongous Entertainment, Inc. ("Humongous") is a leading developer and
publisher of interactive children's edutainment software. Humongous was acquired
by the Company in July 1996 and has been the primary vehicle through which the
Company has penetrated the children's edutainment market. Through internally
generated hit titles such as Freddi Fish, Putt Putt and Pajama Sam, and through
licensed products like Nickelodeon's Blue's Clues, Humongous has risen to become
the third-largest participant in the educational software market category,
capturing 7.2% of total dollar market sales in the U.S. for 1999. According to
PC Data, Humongous published the best-selling (Blue's Clues ABC Time
Activities), third best-selling (Blue's Clues Birthday Adventure) and sixth
best-selling (Blue's 123 Time Activities) entertainment titles of 1999. Other
titles released by Humongous include Putt Putt(R) Enters the Race(TM), Putt
Putt(R) Travels through Time(TM), Backyard Soccer(TM), Backyard Baseball(TM),
Freddi Fish 4: The Case of the Hogfish Rustlers of Briny Gulch(TM) and Pajama
Sam 2: Thunder and Lightning Aren't So Frightening(TM).

LEISURE PUBLISHING

      The Leisure Division was established in June 1996 with the acquisition of
WizardWorks Group, Inc. ("WizardWorks"). Since that time, the Company has become
a leading publisher of value-priced leisure and recreational software.

      The Company's Leisure Division publishes and distributes titles through
three labels:

      WizardWorks. In the fall of 1997, the Leisure Division virtually created a
brand new market when it introduced Deer Hunter for PC, under the WizardWorks
label. In approximately four months, this interactive hunting simulation game
rose to the top of the PC Data charts to become the best-selling PC game in the
U.S. for the first six months of 1998. The Company believes that the success of
Deer Hunter reflected a growing consumer trend in which the interest of those
who typically do not play computer games is sparked by a combination of
compelling software themes, the availability of PCs for under $1,000 and value
software's sub-$20 retail price. WizardWorks has since expanded the interactive
outdoor sporting market with a number of titles, including Deer Hunter II, Deer
Hunter II Extended Season, Deer Hunter's Extended Season, Deer Hunter Companion,
Sporting Clays, Rocky Mountain Trophy Hunter, Rocky Mountain Trophy Hunter II,
Pro Bass Fishing, Deep Sea Trophy Fishing, Bird Hunter Waterfowl Edition, Grand
Slam Turkey Hunt, Alaskan Expedition, Bird Hunter Upland Edition and African
Safari Trophy Hunter 3D.


                                       2
<PAGE>   6
      The Company's hunting software games for PC, published under the
WizardWorks brand, comprise more than 38% of the market share in units and
dollars for all hunting software games. Additionally, of the top 10 1999 hunting
PC games in units, 44% came from this label. The Company has shipped
approximately one million units of its hit title Deer Hunter and approximately
800,000 units of the sequel, Deer Hunter II.

      In fiscal 2000, the Company also published other titles under the
WizardWorks brand such as Dirt Track Racing and Harley Davidson, along with a
number of other titles targeted for the casual computer user.

      CompuWorks. Under the CompuWorks brand, the Company offers productivity
and small office/home office software products. The Company has published such
recent CompuWorks titles as Joy of Cooking, America's Greatest Chili Cookbook,
National Golf Course Directory, Feng Shui, Holiday Card Creator '98, Yes 2K and
Learn Office 2000.

      MacSoft. The Company believes its MacSoft label is the leading Macintosh
games software publisher in the U.S. MacSoft publishes frontline PC Games for
the Macintosh market, including Company-developed games, as well as third-party
games under license to the Company. Recent successful titles published by
MacSoft include Unreal, Civilization II: Gold Edition, Falcon 4.0, America's
Greatest Solitaire Games, Deer Hunter, Real Pool, Civilization II and Quake.
Other recent titles published by MacSoft include Lode Runner 2, Rocky Mountain
Trophy Hunter, Dark Vengeance, Klingon Honor Guard and America's Greatest Arcade
Hits 3D. MacSoft also publishes productivity titles including MacPublisher and
Desktop Labels Pro.

FRONTLINE PUBLISHING

      The Company's Frontline Division is responsible for the development and
publishing of cutting-edge, new release entertainment for the gaming enthusiast.
This division has been the source of some of the industry's most successful
titles including Driver, Duke Nukem, Oddworld, Unreal Tournament and Total
Annihilation. Frontline releases are largely responsible for the Company's
fifth-place market share position in PC Data's 1999 rankings for the PC games
category. The Company has successfully exploited Frontline's strengths in
cutting edge PC entertainment software to gain entry into the high growth
videogame console platform market. In the three month period ended June 30,
2000, approximately 7% of the division's revenues were generated from sales of
PlayStation, Nintendo and other console software.

      The Frontline Division publishes entertainment software developed by a
variety of internal and third-party studios. Approximately 36% of Frontline's
revenues for the three month period ended June 30, 2000 were generated from
products developed by the Company's internally owned studios.

      The Company has substantially reduced the number of new releases published
annually by the Frontline Division. This more selective approach to new releases
is expected to result in lower research and development costs, increased
efficiency, greater focus and more control over production schedules. In support
of this effort, the Company has closed three internal studios and is currently
reducing the size of another. A summary description of each of Frontline's
continuing internal studios is set forth below.

  Internal Development Studios

      SingleTrac. In October 1997, the Company acquired SingleTrac Entertainment
Technologies, Inc. ("SingleTrac"), the developer of hit PlayStation titles
including JetMoto I and II, Twisted Metal I and II and WarHawk. Since it was
acquired by the Company, SingleTrac has produced Rogue Trip and Streak. As of
June 30, 2000 the Company has begun the closing of SingleTrac in connection with
the Company's reorganization and refocus of its frontline publishing business.
Total charges for the three months ended June 30, 2000 are approximately $2.0
million. The Company expects to complete this plan by September 30, 2000.

      Reflections. The Company acquired Newcastle, England-based Reflections
Interactive Limited ("Reflections") in December 1998. Reflections was the
developer of the PlayStation hits: Destruction Derby and Destruction Derby II.
In the twelve month period ended June 30, 2000, the Company shipped
approximately three million units of Driver, Reflections' newest title.
Additionally, the Company has announced sequels of Driver, scheduled to be
released in fiscal 2001.


                                       3
<PAGE>   7
      Oddworld Inhabitants. In November 1996, the Company invested in
convertible preferred stock of Oddworld Inhabitants, Inc. ("Oddworld"), which is
convertible into approximately 50% of the common equity of Oddworld. The Company
also entered into an exclusive worldwide publishing agreement with Oddworld.
Since that time, Oddworld has developed and shipped the first two successful
installments of its Oddworld series: Abe's Oddysee and Abe's Exoddus. Each title
has sold more than one million units worldwide.

      Legend Entertainment.  The Company acquired Legend Entertainment
Company ("Legend") in December 1998.  Legend has developed a number of titles
for the Company, including Unreal Mission Pack I and Wheel of Time and is
currently developing Unreal 2.

  External Product Development

      Since its inception, the Company has established publishing and
distribution relationships with various independent developers. For the three
month period ended June 30, 2000, approximately 64% of the Company's Frontline
publishing revenues were derived from products developed by independent,
third-party developers. For example, the Duke Nukem franchise created by 3D
Realms has generated for the Company gross unit sales, including add-ons and
sequels, to date in excess of three million units worldwide. From May 1998
through June 2000, the Company shipped more than 1.5 million units of Unreal
franchise releases created by Epic Games, another third-party developer.

      Acquired titles are marketed under the Company's name as well as the name
of the original developer. The agreements with third-party developers provide
the Company with exclusive publishing and distribution rights for a specific
period of time for specified platforms and territories. Those agreements may
grant to the Company the right to publish sequels, enhancements and add-ons to
the product originally being developed and produced by the developer. In
consideration for its services, the developer receives a royalty based on sales
of the product that it has developed. A portion of this royalty may be prepaid,
with payments tied to the completion of detailed performance milestones.

      The Company manages the production of external development projects by
appointing a producer to oversee the product's development and to work with the
third-party developer to design, develop and test the software. This producer
also helps ensure that performance milestones are met in a timely manner. The
Company generally has the right to cease making payments to an independent
developer if such developer fails to complete its performance milestones in a
timely fashion.


                                       4
<PAGE>   8
                                  DISTRIBUTION

      The Company's strength in distribution in North America, as well as its
distribution presence in Europe and Australia through Infogrames SA, ensures
access to valuable shelf space for its published products. The Company believes
that it is one of the few software publishers that sells directly to
substantially all of the major retailers of computer software in the U.S. and
that it is one of the largest distributors of computer software to mass
merchants in the U.S. The Company supplies consumer software (including its own
and third-party published software) to approximately 2,470 Wal-Mart stores,
approximately 2,096 Kmart stores and approximately 921 Target stores.

      The Company also distributes consumer software (including its own and
third-party published software) to other major retailers including Office Depot,
Best Buy, CompUSA, AAFES, Sam's Club and Babbage's. The Company values its
distribution relationships with these major retailers because they also allow
the Company to more readily sell its own, higher margin software to them.

      Technology. Utilizing its point-of-sale replenishment systems and
electronic data interchange links with its largest mass merchant accounts, the
Company is able to handle high sales volumes to those customers efficiently,
manage and replenish inventory on a store-by-store basis and assemble for its
customers regional and store-by-store data based on product sell-through. The
Company utilizes proprietary technology systems for order processing, inventory
management, purchasing and tracking of shipments, thereby increasing the
efficiency and accuracy of order processing and payments and shortening order
turnaround time. These systems automatically track software orders from order
processing to point-of-sale, thereby enhancing customer satisfaction through
prompt delivery of the desired software titles.

      Fulfillment. Historically, the Company's warehouse operations provided
fulfillment services within North America to the Company and third-party
developers. Such services included physical receipt and storage of inventory and
its distribution to the mass market and other retailers. After evaluating the
costs associated with the fulfillment function, including, among other things,
the costs of projected future investments in plants and technology, the Company
decided to outsource its warehouse operations to Arnold Logistics in July 1999.

      Distribution of Third-Party Products. Based on the strength of its current
consumer software distribution operation, the Company has successfully attracted
other publishers to utilize its mass merchant distribution capabilities for
their products. Such products are generally acquired by the Company and
distributed under the name of the publisher who is, in turn, responsible for the
publishing, packaging, marketing and customer support of such products. The
Company's agreements with other publishers typically provide for certain retail
distribution rights in designated territories for a specific period of time,
after which those rights are subject to negotiated renewal.

      Value. In June 1995, the Company acquired Slash Corporation, a leading
publisher, merchandiser and distributor of value-priced software. The value
business purchases older titles from other publishers and sells them as "value"
titles to retailers. This helps the publisher extend the life cycle of its
products. The products are intended for retail price points of $4.98 to $19.99
and may include boxed products as well as products in jewel cases. The value
business may purchase finished goods or may license the rights to produce
finished goods from the publisher. The Company sells value programs to some
retailers in which the Company is responsible for stocking a four-foot or
eight-foot section in the retailers' stores.

GEOGRAPHY

      In connection with its restructuring and reorganization and the Infogrames
transaction, the Company has decided to concentrate its efforts in North
America. Effective December 1, 1999, the Company began the process of closing
its European operations. Because of Infogrames SA's strong European presence,
the Company has entered into an agreement with Infogrames SA to provide
distribution of the Company's products in Europe and, effective July 1, 2000, in
Australia, pursuant to which the Company is entitled to receive 30% of the gross
profit on such products. The Company believes that Infogrames SA's strong
presence in Europe and Australia will provide effective distribution in Europe
and Australia of the Company's titles while allowing the Company to focus its
efforts in North America. The Company continues to maintain an office in
Australia, the results of operations of which are consolidated in the results of
operations of the Company.


                                       5
<PAGE>   9
SALES AND MARKETING

      The Company utilizes a wide range of sales and marketing techniques to
promote sales of its products including (i) in-store promotions utilizing
display towers and endcaps, (ii) advertising in computer and general consumer
publications, (iii) on-line marketing, (iv) direct mailings and (v) television
advertising. The Company monitors and measures the effectiveness of its
marketing strategies throughout the product life cycle. Historically, the
Company has devoted a substantial amount of its marketing resources to its
Frontline published products and intends to do so in the future. The Company
believes that such marketing is essential for cultivating product successes and
brand-name loyalty.

      The Company's marketing programs have expanded along with the Company's
publishing business, with an emphasis both on launching products and on raising
the public's awareness of new brands and franchises. The Company may begin to
develop an integrated marketing program for a product more than a year in
advance of its release. This integrated marketing approach may include extensive
press contacts, development of point-of-purchase displays, print and television
advertising, Internet promotion, press events and a global synchronized launch.

      The Internet is an integral element of the Company's marketing efforts
used, in part, to generate awareness for titles months prior to their market
debut. The Company incorporates the Internet into its marketing programs through
the creation of product-dedicated mini-sites and on-line promotions. In
addition, the Company provides editorial material to on-line publications that
reach the core gaming audience.

      To capitalize on the innovative nature of its products, the Company has
developed a public relations program that has resulted in coverage for the
Company by trade journals and also by well-recognized publications such as The
New York Times, Entertainment Weekly, Newsweek and USA Today. Among the
marketing strategies the Company utilizes is the creation of special press
events to coincide with the launch of a new product. The Company also uses
independent field sales representative organizations to assist in servicing its
mass merchant accounts.

      In fiscal 1999, the Company consolidated its three North American sales
organizations into a single sales organization in order to improve the
efficiency of its sales effort. Currently, the Company has 14 customer sales
representatives who serve as the primary contacts with the Company's largest 25
customers. In addition, the Company has five divisional sales representatives
who work with the Company's customer sales representatives and their customers
to help provide leadership and direction to the Company's selling efforts.

      In connection with the Company's restructuring and reorganization and the
Infogrames transaction, for the period from November 16, 1999 through June 30,
2000, the Company was granted the non-exclusive right in the U.S. and Canada to
act as the sales agent for Infogrames North America, Inc., an indirect wholly
owned subsidiary of Infogrames SA ("INA"), for INA's products, pursuant to which
the Company received 3% of net receipts for such products. The parties
subsequently entered into an affiliated label agreement for the period from July
1, 2000 to June 30, 2001 providing for payment to the Company of 15% of net
revenue for sales, distribution, credit and collection services.

HARDWARE LICENSES

      The Company currently develops software for use with the Sony PlayStation
and PlayStation 2 and Nintendo 64 and Gameboy video game systems pursuant to
licensing agreements with Sony and Nintendo, respectively. Each license allows
the Company to create one or more products for the applicable system, subject to
certain approval rights as to quality which are reserved by each licensor. Each
license also requires that the Company pay the licensor a per-unit license fee
from product sales.

      The Company currently is not required to obtain any license for the
development and distribution of PC CD-ROMs. Accordingly, the Company's per-unit
manufacturing cost for PC-CD products is less than the per-unit manufacturing
cost for console products.


                                       6
<PAGE>   10
OPERATIONS

      In July 1999, the Company began outsourcing its warehouse operations in
the U.S. to Arnold Logistics. The warehouse operations include the receipt and
storage of inventory as well as the distribution of inventory to mass market and
other retailing customers. In connection with the outsourcing agreement, the
Company discontinued the use of its Edison, New Jersey facilities for warehouse
operations and terminated the employment of approximately 525 employees who
performed related services for the Company.

      The Company's CD-ROM disk duplication and the printing of user manuals and
packaging materials are performed to the Company's specifications by outside
sources. Disks, user manuals and sales brochures have been, for the most part,
assembled for sale by the Company. Commencing in September, 2000, the Company
has entered into an agreement with JVC to assemble the disks, user manuals and
sales brochures. To date, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products, or
material returns due to product defects. No concentration for the supply of the
Company's publishing needs currently exists and a number of vendors are
available.

      Sony and Nintendo manufacture the Company's products that are compatible
with their respective video game consoles, as well as the manuals and packaging
for such products, and ship finished products to the Company for distribution.
Sony PlayStation products consist of proprietary format CD-ROMs and are
typically delivered to the Company by Sony within a relatively short lead time.
Manufacturers of Nintendo and other video game cartridges typically deliver
software to the Company within 45 to 60 days after receipt of a purchase order.
To date, the Company has not experienced any material difficulties or delays in
the manufacture and assembly of its products. However, a shortage of components
or other factors beyond the Company's control could impair the ability of the
Company to bring its products to market in a timely manner and, accordingly,
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors -- Because Some Licensors
Have Significant Control Over the Company's Products, There May Be Material
Delays or Increases in the Cost of Manufacturing Those Products."

EMPLOYEES

      As of June 30, 2000, the Company had 651 employees worldwide.
Domestically, there were a total of 619 employees with 136 in administration and
finance, 48 in operations, 112 in sales and marketing, 321 in product
development and 2 in manufacturing and distribution. As of June 30, 2000, the
Company terminated its affiliation with Local 734 of the Laborers International
Union of North America of the AFL-CIO, which represented certain employees in
manufacturing and distribution, as the Company's manufacturing and distribution
operations were outsourced. This process was done in an amicable manner.

      Internationally, as of June 30, 2000, the Company had 32 employees with 15
in administration, 5 in operations, 10 in sales and marketing and 2 in product
development. Most of the Company's international employees will no longer be
employed by the Company after June 30, 2000 as a result of the Company's
decision to shut down its European operations, although some employees may be
transferred to Infogrames SA.

      In connection with the Company's restructuring and reorganization and the
Infogrames transaction, as of November 16, 1999, Infogrames SA has been
providing certain management and support services to the Company, including
financial, legal and administrative personnel and services, on a cost plus
expenses basis pursuant to the terms of a Services Agreement between the
parties. The Services Agreement expires on December 31, 2000, unless otherwise
terminated earlier or extended by the parties.

COMPETITION

      The interactive entertainment software publishing industry is intensely
competitive, and relatively few products achieve market acceptance. The
availability of significant financial resources has become a major competitive
factor in the industry primarily as a result of the increasing development,
acquisition, production and marketing budgets required to publish quality
titles. The Company competes with other publishers of interactive entertainment
software, including Electronic Arts Inc., Mattel Inc., Hasbro Corporation, Havas
SA and Activision, Inc. In addition, some large software companies (including
Microsoft Corporation), media companies, and film studios are increasing their
focus on the interactive


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<PAGE>   11
entertainment software market and may become significant competitors of the
Company. See "Factors Affecting Future Performance -- Significant Competition In
Our Industry Could Adversely Affect Our Business."

      Infogrames SA has granted the Company a non-exclusive, royalty-free
license to use the name Infogrames, which license may not be canceled on less
than one-year's notice unless the Company breaches its obligations under the
license. Pursuant to this license, all of the Company's products will be
marketed under the Infogrames brand. The Company believes that the Infogrames
brand is well respected in the interactive entertainment software industry and
that this new branding strategy will strengthen the Company's image with
customers and the industry as a whole. In addition, management believes that a
number of factors provide the Company with competitive opportunities in the
industry, including its extensive catalog of multi-platform products, strength
in the mass market, and strong sales forces in North America and, through
Infogrames SA, in Europe and Australia. The Company believes that solid
franchises such as Driver and attractive licenses with Harley Davidson, as well
as its base of productive publishing assets, provide the Company with a
competitive angle to market its products.


                                       8
<PAGE>   12
                                  RISK FACTORS

      This Risk Factors section is written to be responsive to the Securities
and Exchange Commission's "Plain English" guidelines. In this section, the words
"we," "our," "ours" and "us" refer only to Infogrames, Inc. and its subsidiaries
and not any other person.

      Set forth below and elsewhere in this Form 10-K and in other documents
we file with the Securities and Exchange Commission are important risks and
uncertainties that could cause our actual results of operations, business and
financial condition to differ materially from the results contemplated by the
forward-looking statements contained in this Form 10-K.  See "Forward-Looking
Information."

      INFOGRAMES SA CONTROLS THE COMPANY AND COULD PREVENT AN ACQUISITION
FAVORABLE TO OUR OTHER STOCKHOLDERS. Infogrames SA beneficially owns
approximately 60% of our common stock, which gives it sufficient voting power to
prevent any unsolicited acquisition of the Company, including an acquisition
favorable to our other stockholders. Infogrames SA and its affiliates have
sufficient voting power to control any merger, consolidation or sale of all or
substantially all of our assets and to elect members of the Board of Directors.
Three of the six members of the Board are employees of Infogrames SA or its
affiliates, not including the Company.

      OUR SUCCESS DEPENDS ON INFOGRAMES SA's SUCCESS AND WILLINGNESS TO CONTINUE
TO SUPPORT THE COMPANY. The Company depends upon Infogrames SA for its senior
executives, certain management and support services, financial funding and
distribution of its products in Europe and Australia. The success of the Company
is dependent upon Infogrames SA's success and its willingness to continue to
support the Company. Management believes that the Company's ability to operate
on a stand-alone basis may be limited. Although the Company is exploring various
strategic alternatives, there can be no assurance that any such transactions
will be consummated, or that if consummated any such transactions will improve
the Company's business, operating results or financial condition.

      WE WILL NEED ADDITIONAL FINANCING. Since its acquisition of a majority
stake in the Company, Infogrames SA has to date provided financing to the
Company, although there can be no assurance that it will continue to do so.
Management believes that existing cash, cash equivalents and short-term
investments, together with cash expected to be generated from operations, cash
available under the Credit Agreement with Infogrames SA and continued financial
support from Infogrames SA, will be sufficient to fund the Company's operations
and cash flows throughout fiscal 2001. While management believes that
replacement funding will be available from Infogrames SA or other sources, there
can be no assurance that future financing will be available on favorable terms,
if at all.

      OUR ACQUISITION OF INFOGRAMES NORTH AMERICA, INC. MAY NOT BE COMPLETED ON
A TIMELY BASIS AND, UPON COMPLETION, MAY NOT RESULT IN THE BENEFITS ANTICIPATED.
On September [6], 2000, we entered into an Agreement and Plan of Merger with
Infogrames SA, California U.S. Holdings, Inc., a wholly-owned subsidiary of
Infogrames SA ("CUSH"), and INA, a wholly owned subsidiary of CUSH, pursuant to
which we will acquire all of the capital stock of INA. While we believe that
this transaction will create stockholder value by providing greater economies of
scale, cost reduction, a more diversified product portfolio, increased market
strength with vendors and customers and increased financial strength as a result
of the reduction of debt, we cannot assure you that it will be completed in a
timely manner or that we will realize all of these expected benefits. In
addition, we will need to spend a significant amount of time and resources to
integrate INA into the Company, which may divert management's attention from
running the business of the Company.

      THE LOSS OF EITHER WAL-MART OR TARGET AS KEY CUSTOMERS COULD NEGATIVELY
AFFECT OUR BUSINESS. Our sales to Wal-Mart and Target accounted for
approximately 37% and 14%, respectively, of net revenues for the three months
ended June 30, 2000 and our gross accounts receivable from Wal-Mart and Target
were approximately $15.5 million and $16.4 million, respectively, at June 30,
2000. Our business, operating results and financial condition would be adversely
affected if:

      -     we lost Wal-Mart or Target as a customer,

      -     we began shipping fewer products to Wal-Mart or Target,


                                       9
<PAGE>   13
      -     we were unable to collect receivables from Wal-Mart or Target, or

      -     we experienced any other adverse change in our relationship with
            Wal-Mart or Target.

      We do not have any written agreements or understandings with either
Wal-Mart or Target. Consequently, our relationship with either Wal-Mart or
Target could end at any time. We cannot assure you that Wal-Mart and Target will
continue to use us as a major supplier of consumer software, or at all. During
the second half of 1997, Wal-Mart began purchasing software directly from five
publishers whose software was previously sold to Wal-Mart through the Company.
During the calendar years 1999 and 2000, Wal-Mart has continued, and can be
expected to continue, to buy software directly from other publishers, rather
than purchasing software through the Company. These direct purchases could
significantly reduce our sales to Wal-Mart.

      OUR REVENUES WILL DECLINE AND OUR COMPETITIVE POSITION WILL BE ADVERSELY
AFFECTED IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS. Our
continued success in the publishing business depends on the timely introduction
of successful new products, sequels or enhancements of existing products to
replace declining revenues from older products. A significant delay in
introducing new products, sequels or enhancements could materially and adversely
affect the ultimate success of our products and, in turn, our business,
operating results and financial condition, particularly in view of the
seasonality of our business. For example, the introduction of five major titles
was delayed from the fourth quarter of fiscal 1999 to the first half of the
fiscal year ended March 31, 2000, significantly contributing to operating losses
during the fourth quarter of fiscal 1999. The process of introducing new
products, sequels or product enhancements is extremely difficult and will only
become more difficult as new platforms and technologies emerge. Competitive
factors in our industry demand that we create increasingly sophisticated
products, which in turn makes it difficult to produce and release these products
on a predictable schedule.

      WE MAY BE UNABLE TO DEVELOP, MARKET AND PUBLISH NEW PRODUCTS IF WE ARE
UNABLE TO SECURE OR MAINTAIN RELATIONSHIPS WITH INDEPENDENT SOFTWARE DEVELOPERS.
Although we have substantially increased our internal software capabilities over
the last five years, we are still dependent, to a meaningful degree, upon
independent software developers. For the three months ended June 30, 2000,
approximately 36% of our Frontline publishing revenues were derived from
products developed by independent developers. Consequently, our success depends
in part on our continued ability to obtain or renew product development
agreements with independent developers. However, we cannot assure you that we
will be able to obtain or renew these product development agreements on
favorable terms, or at all, nor can we assure you that we will be able to obtain
the rights to sequels of successful products which were originally developed by
independent developers for the Company. In addition, many of our competitors
have greater access to capital than we do, which puts us at a competitive
disadvantage when bidding to attract independent developers to enter into
publishing agreements with us.

      Our agreements with independent software developers are easily terminable,
often without notice, if either party declares bankruptcy, becomes insolvent,
ceases operations or materially breaches its agreement and fails to cure that
breach within a designated time frame. In addition, many independent software
developers have limited financial resources. Many are small companies with a few
key individuals without whom a project may be difficult or impossible to
complete. Consequently, we are exposed to the risk that these developers will go
out of business before completing a project, or simply cease work on a project,
for which we have hired them.

      COMPETITION FOR INDEPENDENT SOFTWARE DEVELOPERS IS INTENSE AND MAY PREVENT
US FROM SECURING OR MAINTAINING RELATIONSHIPS WITH INDEPENDENT SOFTWARE
DEVELOPERS. We may be unable to secure or maintain relationships with
independent developers if our competitors can offer them better shelf access,
better marketing support, more development funding, higher royalty rates, or
other selling advantages. Even if these independent developers have developed
products for us in the past, we cannot assure you that they will continue to
develop products for us in the future. In fact, we have in the past worked with
independent developers who later entered into agreements with our competitors
because of our competitors' ability or willingness to pay higher royalty rates
or advances.

      FLUCTUATIONS IN OUR QUARTERLY NET REVENUES AND OPERATING RESULTS MAY
RESULT IN REDUCED PROFITABILITY AND LEAD TO REDUCED PRICES FOR OUR STOCK. Our
quarterly net revenues and operating results have varied in the past and can be
expected to vary in the future. As a result, we cannot assure you that we


                                       10
<PAGE>   14
will be consistently profitable on a quarterly or annual basis. If our operating
results in any future quarter fall below the expectations of market analysts or
investors, the price of our common stock will likely decrease.

      Our business has experienced, and is expected to continue to experience,
significant seasonality. Typically, our net sales are significantly higher
during the fourth calendar quarter because of increased consumer demand during
the year-end holiday season. In other calendar quarters, our net revenues may be
lower and vary significantly.

      OUR REVENUE GROWTH AND COMPETITIVE POSITION MAY BE ADVERSELY AFFECTED IF
WE ARE UNABLE TO ANTICIPATE AND ADAPT TO RAPIDLY CHANGING TECHNOLOGY. The
consumer software industry is characterized by rapidly changing technology. The
introduction of new technologies, including new technologies that support
multi-player games and new media formats such as on-line delivery and digital
video disks (DVDs), could render our previously released products obsolete or
unmarketable. We must continually anticipate the emergence of, and adapt our
products to, new technologies and systems. In addition, the development cycle
for products designed to operate on new systems can be significantly longer than
our current development cycles. When we choose to publish or develop a product
for a new system, we may need to make a substantial development investment one
or two years in advance of when we actually ship products for that system. If we
develop products for a new system that is ultimately unpopular, our revenues
from that product may be less than expected and we may not be able to recoup our
investment. Conversely, if we choose not to publish products for a new system
that is ultimately popular, our revenue growth and competitive position may be
adversely affected. While 32- and 64-bit game systems, such as Sony PlayStation
and Nintendo 64, continue to be popular and their installed base has reached
significant levels in the U.S. and worldwide, new systems such as Microsoft's
Xbox are being developed. For example, Sony introduced the PlayStation 2, a
128-bit system that incorporates DVD technology, in Japan in March 2000 and
plans to introduce it to overseas markets by fall 2000. If successfully
developed, these new systems would require us to reassess our commitment to 32-
and 64-bit game systems or any new systems which are introduced.

      BECAUSE SOME LICENSORS HAVE SIGNIFICANT CONTROL OVER THE COMPANY'S
PRODUCTS, THERE MAY BE MATERIAL DELAYS OR INCREASES IN THE COST OF MANUFACTURING
THOSE PRODUCTS. We are required to obtain a license to develop and distribute
software for each of the video game systems for which we develop products. We
currently have licenses from Sony to develop products for the Sony PlayStation
and PlayStation 2, and Nintendo and Gameboy to develop products for Nintendo 64.
Our contracts with Sony and Nintendo often grant them significant control over
the manufacturing of the Company products. For example, we are obligated to
submit new games to Sony or Nintendo for approval prior to development and/or
manufacture. In some circumstances, this could adversely affect the Company by:

      -     leaving the Company unable to have its products manufactured and
            shipped to customers,

      -     increasing manufacturing lead times and expense to us over the lead
            times and costs we could achieve independently,

      -     delaying the manufacture and, in turn, the shipment of products, and

      -     requiring the Company to take significant risks in prepaying for and
            holding its inventory of products.

      These factors could materially and adversely affect our business,
operating results and financial condition.

      THE LOSS OF OUR SENIOR MANAGEMENT AND SKILLED PERSONNEL COULD NEGATIVELY
AFFECT OUR BUSINESS. In late 1999 and early 2000, we replaced several of our
most senior executive officers. Our success will depend to a significant degree
upon the performance and contribution of our senior management team and upon our
ability to attract, motivate and retain highly qualified employees with
technical, management, marketing, sales, product development and other creative
skills. In the computer software industry, competition for highly skilled and
creative employees is intense and costly. We expect this competition to continue
for the foreseeable future, and we may experience increased costs in order to
attract and retain skilled employees.


                                       11
<PAGE>   15
      We cannot assure you that we will be successful in attracting and
retaining skilled personnel. Our business, operating results and financial
condition could be materially and adversely affected if we lost the services of
senior employees or if we failed to replace other employees who leave or to
attract additional qualified employees.

      SIGNIFICANT COMPETITION IN OUR INDUSTRY COULD ADVERSELY AFFECT OUR
BUSINESS. The market for our products is highly competitive and relatively few
products achieve significant market acceptance. Currently, we compete primarily
with other publishers of interactive entertainment software for both personal
computers and video game consoles. Our competitors include Electronic Arts Inc.,
Mattel Inc., Hasbro Corporation, Havas SA, and Activision. In addition, some
large software companies (including Microsoft), media companies and film
studios, such as Walt Disney Company, are increasing their focus on the
interactive entertainment and edutainment software market and may become
significant competitors of the Company. As compared to the Company, many of our
current and future competitors may have significantly greater financial,
technical and marketing resources than we do. As a result, these current and
future competitors may be able to:

      -     respond more quickly to new or emerging technologies or changes in
            customer preferences,

      -     carry larger inventories,

      -     undertake more extensive marketing campaigns,

      -     adopt more aggressive pricing policies, and

      -     make higher offers or guarantees to software developers and
            licensors than the Company.

      We may not have the resources required for us to respond effectively to
market or technological changes or to compete successfully with current and
future competitors. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on our business, operating results or financial
condition. We cannot assure you that we will be able to successfully compete
against our current or future competitors or that competitive pressures will not
have a material adverse effect on our business, operating results and financial
condition.

      REVENUES FROM OUR DISTRIBUTION BUSINESS MAY DECLINE AS COMPETITION
INCREASES AND INTERNET TECHNOLOGY IMPROVES. During the three months ended June
30, 2000, revenues from our distribution business were approximately 18% of net
revenues. Several of our customers have begun to purchase directly from software
publishers rather than purchasing software through the Company. New video game
systems and electronic delivery systems may be introduced into the software
market and potential new competitors may enter the software development and
distribution market, resulting in greater competition. In addition, revenues
from our distribution business may be adversely affected as Internet technology
is improved to enable consumers to purchase and download full-version software
products or order products directly from publishers or from unauthorized or
illegal sources over the Internet.

      REVENUES FROM OUR DISTRIBUTION BUSINESS MAY DECLINE IF THE THIRD-PARTY
PRODUCTS WHICH WE DISTRIBUTE FOR OTHER COMPANIES BECOME UNAVAILABLE TO US. As
part of our distribution program, we provide our mass merchant customers with a
wide variety of titles. To achieve this product mix, we must supplement the
distribution of our own published products with third-party software products,
including products published by our competitors. We cannot assure you that these
competitors will continue to provide us with their products for distribution to
our mass merchant customers. Our inability to obtain software titles developed
or published by our competitors, coupled with our inability to obtain these
titles from other distributors, could have a material adverse effect on our
relationships with our mass merchant customers and our ability to obtain shelf
space for our own products. This, in turn, could have a material adverse effect
on our business, operating results and financial condition.

      WE MAY FACE INCREASED COMPETITION AND DOWNWARD PRICE PRESSURE IF WE ARE
UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Our success is heavily
dependent upon our confidential and proprietary intellectual property. We sell a
significant portion of our published software under licenses from independent
developers and, in these cases, we do not acquire the copyrights for the
underlying work. We rely primarily on a combination


                                       12

<PAGE>   16
 of confidentiality and non-disclosure agreements, patent, copyright, trademark
and trade secret laws, as well as other proprietary rights laws and legal
methods, to protect our proprietary rights and the rights of our developers.
However, current U.S. and international laws afford us only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy our products or obtain and use information that we regard as
proprietary. Software piracy is a persistent problem in the computer software
industry. Policing unauthorized use of our products is extremely difficult
because consumer software can be easily duplicated and disseminated.
Furthermore, the laws of some foreign countries may not protect our proprietary
rights to as great an extent as U.S. law. Software piracy is a particularly
acute problem in some international markets such as South America, the Middle
East, the Pacific Rim and the Far East. Our business, operating results and
financial condition could be materially and adversely affected if a significant
amount of unauthorized copying of our products were to occur. We cannot assure
you that our attempts to protect our proprietary rights will be adequate or that
our competitors will not independently develop similar or competitive products.

         WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH WOULD BE
COSTLY TO RESOLVE. As the number of available software products increases, and
their functionality overlaps, software developers and publishers may
increasingly become subject to infringement claims. We are not aware that any of
our products infringe on the proprietary rights of third parties. However, we
cannot assure you that third parties will not assert infringement claims against
the Company in the future with respect to current or future products. There has
been substantial litigation in the industry regarding copyright, trademark and
other intellectual property rights. We have also initiated litigation to assert
our intellectual property rights. Whether brought by or against the Company,
these claims can be time consuming, result in costly litigation and divert
management's attention from the day-to-day operations of the Company, which can
have a material adverse effect on our business, operating results and financial
condition.

         WE MAY BE AT A COMPETITIVE DISADVANTAGE IF WE ARE UNABLE TO
SUCCESSFULLY IMPLEMENT OUR INTERNET STRATEGY. To take advantage of Internet
opportunities, we have, and will continue to:

         -    expand our World Wide Web sites and the development of our
              Internet infrastructure and capabilities,

         -    expand our electronic distribution capabilities,

         -    incorporate on-line functionality into existing products, and

         -    develop and invest in new Internet-based businesses and products,
              including multi-player entertainment products.

         Implementing our Internet strategy has been costly. We have incurred,
and expect to incur, significant additional costs in connection with these
efforts. These costs include those associated with the acquisition and
maintenance of hardware and software necessary to permit on-line commerce and
multi-player games, as well as the related maintenance of our website and
personnel. Although we believe these platforms and technologies are an integral
part of our business, we cannot assure you that our Internet strategy will be
successful or that we will be able to recoup the cost of our investment.

         WE ARE CURRENTLY IN LITIGATION WHICH COULD BE COSTLY IF WE LOSE. As
described under Item 3, "Legal Proceedings," the Company is currently a
defendant, or subject to counterclaims, in a number of lawsuits. In all of these
lawsuits, we believe that the plaintiffs' complaints are without merit. Although
we intend to defend ourselves vigorously against these actions, doing so is
costly and time consuming and may divert management's attention from our
day-to-day operations. In addition, we cannot assure you that these actions will
be ultimately resolved in our favor or that an adverse outcome will not have a
material adverse effect on our business, operating results and financial
condition.

         IF ACTUAL RETURNS EXCEED OUR RETURN RESERVE, OUR BUSINESS MAY BE
NEGATIVELY AFFECTED. To cover returns, we establish a return reserve at the time
we ship our products. We estimate the potential for future returns based on
historical return rates, seasonality of sales, retailer inventories of our
products, and other factors. While we are able to recover the majority of our
costs when third-party products are returned, we bear the full financial risk
when our own products are returned. In addition, the license fees we pay Sony
and Nintendo are non-refundable and we cannot recover these fees when our
console products are returned. Although we believe we maintain adequate reserves
with

                                       13
<PAGE>   17
respect to product returns, we cannot assure you that actual returns will not
exceed reserves, which could adversely affect our business, operating results
and financial condition.

         UNTIL RECENTLY OUR COMMON STOCK DID NOT MEET THE NASDAQ NATIONAL
MARKET'S MINIMUM SHARE PRICE REQUIREMENT AND WAS SUBJECT TO DELISTING.

         As a condition to continued listing on the Nasdaq Stock Market's
National Market, Nasdaq rules require that the minimum bid price for our common
stock be at least $5 per share for ten consecutive days. We were notified by the
Nasdaq Stock Market ("Nasdaq") that our common stock did not meet this
requirement and that proceedings were instituted to delist our common stock from
the Nasdaq National Market. On June 2, 2000, we filed a notice of appeal with
the Nasdaq Listing Qualifications Hearing Department. This notice had the effect
of automatically staying the delisting proceedings until a Nasdaq Listing
Qualification Panel could be convened to consider our appeal. On June 26, 2000,
we effected a one-for-five reverse stock split in order to bring our common
stock in compliance with Nasdaq's listing requirements. On June 27th, the first
day of trading following the reverse stock split, our common stock met the
minimum bid requirement. On July 6th, our appeal was heard by the Nasdaq Listing
Qualification Panel. On August 9, 2000, we received notice from the Nasdaq that
the panel had determined to continue the listing of our common stock on the
Nasdaq National Market and the hearing file was closed. Although we cannot
predict whether our common stock will continue to meet the listing requirements,
we intend to remain in full compliance with Nasdaq requirements.

ITEM 2.  PROPERTIES

         The Company's principal administrative, sales, marketing and
development facilities are located in approximately 90,000 square feet of space
at 417 Fifth Avenue in New York City under a lease expiring in 2007, which
commenced in December 1996. The Company subleased 30,000 square feet of this
space beginning on April 1, 2000.

         The Leisure Division has a lease for 23,400 square feet of office space
in Plymouth, Minnesota that expires in February 2003.

         In Scottsdale, Arizona, the Company leases a 25,000-square-foot office
space under a lease expiring in March 2006 that has been sublet for the
remaining term. It also leased a 2,900-square-foot office space under a lease
that expired in May 2000.

         The Company has leased approximately 83,000 square feet of office space
under two separate leases to house its Humongous subsidiary in Bothell,
Washington, under leases expiring in May 2008 and June 2004.

         The Company has assumed leases in connection with certain of its
acquisitions and entered into leases for certain of its internal development
studios totaling approximately 76,000 square feet with lease expiration dates
from June 2000 through September 2010. These properties are located in Utah,
England, the Netherlands, Germany and France.

         The Company maintains two facilities in London, England totaling
approximately 19,200 square feet, from which it conducted a substantial portion
of its European operations, under leases that expire in December 2000 and March
2012. The Company is in the process of shutting down its European operations and
is seeking to assign the lease expiring in March 2012 to Infogrames SA.

         The Company also maintains approximately 6,200 square feet of office
space in Australia under leases that expire in September 2000 and November 2000.

ITEM 3.  LEGAL PROCEEDINGS

         Scavenger. On September 18, 1997, Scavenger, Inc. ("Scavenger"), a
software developer, filed a lawsuit against the Company in Supreme Court, New
York County, claiming that the Company breached a software development contract
between the parties dated November 28, 1995. Scavenger alleges that the Company,
after paying $2.5 million in advances and accepting delivery of gold master
disks for two computer games, refused to pay any more advances, including
advances relating to the development of two additional games under the
agreement. Scavenger is suing for the remaining advances

                                       14
<PAGE>   18
($4.3 million) and for future royalties ($5 million), and also seeks
consequential damages for allegedly being forced out of business ($100 million)
and losing contracts with unspecified third parties ($4 million) as a result of
the Company's alleged breach. The Company filed an answer and counterclaim, in
which it denies any liability to Scavenger and alleges, among other things, that
the contract was lawfully terminated when Scavenger failed to deliver the two
remaining games after receiving from the Company written notice to cure its
material breaches. By its counterclaim, the Company seeks damages and
restitution for at least $5 million on grounds of breach of contract and unjust
enrichment.

         By order entered March 3, 2000, the Court granted Scavenger's motion
for partial summary judgment on its claim for $1.9 million allegedly due on the
two delivered games and judgment was entered on March 14, 2000 in the amount of
$2,411,114 (reflecting pre-judgment interest on the claim). The Company posted a
bond in the amount of the judgment and immediately appealed from this order and
judgment to the Appellate Division, First Department. On June 8, 2000, the
Appellate Division, First Department affirmed the order and judgment entered by
the Supreme Court. The Company has moved for leave to appeal to the Court of
Appeals.

         In its order of March 3, 2000, the Court denied Scavenger's motion for
partial summary judgment seeking $2.4 million on the two games never delivered.
In addition, the Court denied Scavenger's motion for leave to amend the
complaint to add claims for fraud and seeking damages of $100 million.

         The Company moved for partial summary judgment seeking dismissal of the
claim for consequential damages ($75-125 million) and additional royalties ($5
million). By order entered June 21, 2000, the Court denied the Company's motion
and granted Scavenger leave to conduct an audit of royalties allegedly due to
Scavenger. The Company has perfected an appeal to the Appellate Division--First
Department from that portion of the order which denied the motion for partial
summary judgment on the claim for consequential damages. That appeal is expected
to be heard in September 2000. The Company also moved for reargument of the same
portion of the order before the trial court. On September 7, 2000, on the record
of oral argument, the trial court granted the Company's motion to reargue with
respect to Scavenger's fourth cause of action for consequential damages ($100
million) and, on reargument, granted the motion for partial summary judgment
dismissing the claim. Scavenger intends to appeal. The Company will withdraw the
appeal it had filed with respect to this claim.

         Finally, the Company has made a motion in the Supreme Court to dismiss
the second cause of action (seeking $2.4 million in royalty advances, plus
interest) on the ground that the Court's reasoning in granting Scavenger partial
summary judgment on the first cause of action requires dismissal of the second
cause. Scavenger has cross-moved for summary judgment on this cause, arguing
that the Court's ruling on the first cause of action should lead to judgment in
favor of Scavenger on the second cause. These motions were submitted September
1, 2000.

         Herzog. In January, February and March 1998, ten substantially similar
complaints were filed against the Company, its former Chairman and its former
Chief Executive Officer, and in certain actions, its former Chief Financial
Officer, in the U.S. District Court for the Southern District of New York. The
plaintiffs, in general, purport to sue on behalf of a class of persons who
purchased shares (and as to certain complaints, purchased call options or sold
put options) of the Company during the period from August 1, 1996 through
December 12, 1997. The plaintiffs allege that the Company violated the federal
securities laws by making misrepresentations and omissions of material facts
that allegedly artificially inflated the market price of the Company's Common
Stock during the class period. The plaintiffs further allege that the Company
failed to expense properly certain prepaid royalties for software products that
had been terminated or had failed to achieve technological feasibility, or had
insufficient sales to recoup the paid advances, which misstatements purportedly
had the effect of overstating the Company's net income and net assets. Motions
were made by certain groups of plaintiffs for their appointment as lead
plaintiffs in the actions. On October 7, 1998, the Court appointed lead
plaintiffs and lead counsel to the plaintiffs in the actions. The plaintiffs'
consolidated and amended complaint was filed and served in early January 1999.
By order dated January 23, 1999, the plaintiffs were granted leave to file a
second consolidated and amended complaint, which added claims under Section
10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and Rule 10b-5 under the Exchange Act against the Company's independent
auditors, Arthur Andersen LLP. The Company and Arthur Andersen LLP each filed
motions to dismiss the second consolidated and amended complaint. By order and
opinion dated November 29, 1999, the Court granted the motion to dismiss.
Plaintiffs have appealed from the dismissal of the action, and oral argument on
the appeal was held on June 8, 2000. On July 11, 2000, the Court of Appeals for
the Second Circuit issued an opinion and judgment reversing the dismissal of the
complaint as to the Company (but not as to Arthur Andersen LLP) and remanding
the action to the district court. On July 21, 2000, the Company filed with the
Court of Appeals a petition for

                                       15
<PAGE>   19
rehearing with suggestion for rehearing en banc. On September 1, 2000, the Court
of Appeals denied the petition for rehearing and suggestion for rehearing en
banc.

         James. On April 12, 1999, an action was commenced by the administrators
for three children who were murdered on December 1, 1997 by Michael Carneal at
Heath High School in McCracken County, Kentucky. The action was brought against
25 defendants, including the Company and other corporations in the video game
business, companies that produced or distributed the movie "The Basketball
Diaries," and companies that allegedly provide obscene Internet content. The
complaint alleges, with respect to the Company and other video game
corporations, that Carneal was influenced by the allegedly violent content of
certain video games and that the video game manufacturers are liable for
Carneal's conduct. The complaint seeks $10 million in compensatory damages and
$100 million in punitive damages. The Company and approximately ten other
videogame corporations have entered into a joint defense agreement and have
retained counsel. By order entered April 6, 2000, the Court granted a motion to
dismiss the complaint. Plaintiffs have filed a motion to vacate the dismissal of
the action. On June 16, 2000 the district court denied the motion to vacate. On
June 28, 2000, plaintiffs appealed the dismissal of the action to the Court of
Appeals for the Sixth Circuit.

         Fenris. On March 12, 1999, Fenris Wolf Ltd. ("Fenris"), a software
developer, filed a lawsuit in New York Supreme Court claiming that the Company
failed to adequately pursue bundling opportunities for the software game "Rebel
Moon Rising MMX" and unlawfully rejected the ninth milestone deliverable for the
software game "Rebel Moon Revolution" under a development contract between the
parties dated June 26, 1996. The complaint asserts five claims of breach and
intentional interference, which seek $100,000 for the nonpayment and rejection
of milestone nine, $400,000 for the balance of payments under the contract,
$775,000 for alleged lost bundling opportunities, $775,000 for alleged
intentional interference with bundling arrangements and $500,000 for alleged
interference with contractual relations. In an October 20, 1999 opinion and
order, the court granted the Company's motion to dismiss three of the five
claims so that only the milestone nine contract and bundling claims remain.
Fenris has filed a notice of appeal from the dismissal of the $400,000 claim for
the balance of payments under the contract; and the Company has filed a
counterclaim for breach seeking to recover not less than the $800,000 in
milestone payments advanced for the development of "Rebel Moon Revolution."
Fenris has moved for summary judgment on its first cause of action ($100,000),
and the Company has moved for summary judgment dismissing the bundling claim. By
order entered September 1, 2000, the Supreme Court denied in Fenris both Fenris'
motion for partial summary judgment on its first cause of action and the
Company's motion for partial summary judgment dismissing the bundling claim.

         The Company believes that these complaints are without merit and
intends to defend itself vigorously against these actions. Additionally, the
Company is involved in various claims and legal actions arising in the ordinary
course of business, the ultimate resolution of which management believes will
not be material to the Company's results of operations or financial condition.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

         On July 25, 2000, the Company held an Annual Meeting of stockholders.
At the meeting, the stockholders voted on the following proposals: (i) to elect
two Class I directors and two Class II directors; (ii) to ratify the appointment
of Deloitte & Touche LLP ("Deloitte & Touche") as the Company's independent
auditor; and (iii) to approve and adopt the Infogrames, Inc. 2000 Stock
Incentive Plan.

         Denis Guyennot and Ann E. Kronen were elected as Class I directors
whose terms expire in 2002. Steven A. Denning and Thomas Schmider were elected
as Class II directors whose terms expire in 2003. The Class III directors, Bruno
Bonnell and Thomas A. Heymann, were not up for election. The Class I and Class
II directors were elected by the following number of votes:

<TABLE>
<CAPTION>
           NOMINEE                         FOR              AGAINST/ABSTAIN
           -------                         ---              ---------------
<S>                                      <C>                <C>
      Steven A. Denning                  80,219,391              182,907
      Denis Guyennot                     79,696,277              706,021
</TABLE>

                                       16
<PAGE>   20
<TABLE>
<S>                                      <C>                <C>
      Ann E. Kronen                      80,220,622              181,676
      Thomas Schmider                    79,696,631              705,667
</TABLE>


         The stockholders ratified the appointment of Deloitte & Touche for the
fiscal year ended March 31, 2000, and, in connection with the change of the
Company's fiscal year end from March 31 to June 30, the transitional fiscal year
ended June 30, 2000 and the fiscal year ending June 30, 2001.

<TABLE>
<CAPTION>
                  FOR                AGAINST/ABSTAIN
                  ---                ---------------
<S>                                  <C>
              80,361,392                  32,021
</TABLE>


         The Board of Directors presented the 2000 Stock Incentive Plan (the
"2000 Plan") to the stockholders for their approval. The 2000 Plan provides
initially for the issuance of a total of up to 3,000,000 authorized and unissued
shares of Common Stock, treasury shares and/or shares acquired by the Company
for purposes of the 2000 Plan, and may be increased annually commencing January
1, 2001, at the discretion of the Board of Directors. Awards under the 2000 Plan
may be made in the form of (i) incentive stock options, (ii) non-qualified stock
options, (iii) stock appreciation rights, (iv) restricted stock, (v) restricted
stock units, (vi) dividend equivalent rights and (vii) other stock based awards.

<TABLE>
<CAPTION>
                  FOR                AGAINST/ABSTAIN
                  ---                ---------------
<S>                                  <C>
              79,322,023                 1,040,835
</TABLE>

                                       17
<PAGE>   21
                                    PART II

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

         The Company's Common Stock is quoted on the Nasdaq National Market. The
high and low sale prices for the Common Stock as reported by the Nasdaq National
Market for the three month transition period ended March 31, 1998 and the fiscal
years ended March 31, 1999 and 2000 and the three month transition period ended
June 30, 2000 are summarized below. These over-the-counter market quotations
reflect inter-dealer prices, without retail mark-ups, mark-downs, or commissions
and may not necessarily represent actual transactions. On June 26, 2000, the
Company effected a one-for-five reverse stock split of the Common Stock to meet
certain requirements of the Nasdaq National Market. See "Risk Factors -- Until
Recently Our Common Stock Did Not Meet the Nasdaq National Market's Minimum
Share Price Requirement and Was Subject to Delisting." Except as otherwise
noted, references to share prices and the number of shares of Common Stock in
this Transitional Report on Form 10-K reflect the reverse stock split.

<TABLE>
<CAPTION>
                                                                                            HIGH         LOW
                                                                                            ----         ---
<S>                                                                                      <C>         <C>
Fiscal 1999
   First Quarter..................................................................       $  55 5/8   $  35
   Second Quarter.................................................................       $  45       $  22 1/2
   Third Quarter..................................................................       $  37 3/16  $  18 3/4
   Fourth Quarter.................................................................       $  29 1/16  $  19 3/8
Fiscal 2000
   First Quarter..................................................................       $  22 1/2   $  13 3/4
   Second Quarter.................................................................       $  18 7/16  $  12 13/16
   Third Quarter..................................................................       $  15 15/16 $  8 9/32
   Fourth Quarter.................................................................       $  21 1/4   $  9 3/8
Three Month Period Ended June 30, 2000............................................       $  18 3/4   $  5 1/8
</TABLE>


         On August 30, 2000, the last reported sale price of the Common Stock on
the Nasdaq National Market was $8.00. As of August 30, 2000, there were
approximately 7,160 beneficial owners of the Common Stock.

         The Company currently anticipates that it will retain all of its future
earnings for use in the expansion and operation of its business. The Company has
not paid any cash dividends nor does it anticipate paying any cash dividends on
its Common Stock in the foreseeable future. In addition, the payment of cash
dividends may be limited by financing agreements entered into by the Company in
the future.

RECENT SALES OF UNREGISTERED SECURITIES

         There were no sales of unregistered securities for the three month
period ended June 30, 2000.

                                       18
<PAGE>   22
ITEM  6.  SELECTED FINANCIAL DATA

         The following tables set forth selected consolidated financial
information of the Company which, for each of the years in the two year period
ended December 31, 1997, the three months ended March 31, 1998, the years ended
March 31, 1999 and 2000, and the three month period ended June 30, 2000 is
derived from the audited consolidated financial statements of the Company.
Consolidated financial information for the three months ended March 31, 1997,
the twelve months ended March 31, 1998 and the three months ended June 30, 1999
is unaudited. These tables should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Transitional Report on Form 10-K. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                    YEARS ENDED      THREE MONTHS ENDED            YEARS ENDED             THREE MONTHS ENDED
                                   DECEMBER 31,           MARCH 31,                 MARCH 31,                   JUNE 30,
                                  ---------------      ---------------      --------------------------     ------------------
                                  1996       1997      1997       1998      1998       1999       2000       1999       2000
                                  ----       ----      ----       ----      ----       ----       ----       ----       ----
                                                     (UNAUDITED)          (UNAUDITED)                      (UNAUDITED)
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                             <C>        <C>       <C>        <C>       <C>        <C>       <C>         <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................    $365,490   $530,677  $ 93,381   $105,767  $543,063   $572,342   $375,569   $121,325   $ 32,983
Cost of Goods Sold..........     214,580    315,134    57,883     57,092   314,343    329,959    296,301     62,143     16,150
                                --------   --------  --------   --------  --------   --------   --------   --------   --------
Gross Profit................     150,910    215,543    35,498     48,675   228,720    242,383     79,268     59,182     16,833
Selling and distribution
  expenses..................      76,235     98,689    16,538     24,467   106,618    147,499    147,814     33,876     16,829
General and administrative
  expenses..................      31,157     46,611     8,623     10,655    48,643     66,616     87,113     11,761     16,146
Research and development....       5,633     13,824     2,397     10,866    22,293     76,870     66,574     16,366      9,582
Royalty advance write-off...          --     73,821        --         --    73,821         --         --         --         --
Restructuring and other
  charges...................          --         --        --         --        --     17,479     37,948         --     11,081
Purchased research and
  development...............          --     11,008        --         --    11,008      5,000         --         --         --
SingleTrac retention bonus..          --      2,400        --         --     2,400      1,680         --         --         --
Amortization of goodwill....       1,092      1,295       347        636     1,584      3,349      3,110        888        561
                                --------   --------  --------   --------  --------   --------   --------   --------   --------
Operating income (loss).....      36,793    (32,105)    7,593      2,051   (37,647)   (76,110)  (263,291)    (3,709)   (37,366)
Interest Expense............          --     (1,010)       --       (557)   (1,567)    (5,108)   (17,167)    (1,959)    (3,318)
Other Income (loss).........       3,974     (1,065)      247       (832)   (2,144)      (207)      (793)      (293)      (384)
                                --------   --------  --------   --------  --------   --------   --------   --------   --------
Income (loss) before
  provision for (benefit
  from) income taxes........      40,767    (34,180)    7,840        662   (41,358)   (81,425)  (281,251)    (5,961)   (41,068)
Total provision for (benefit
  from) income taxes........      15,628     (9,157)    3,386        304   (12,239)   (29,628)    40,882     (2,109)       876
                                --------   --------  --------   --------  --------   --------  ---------   --------   --------
Net income (loss) from
  continuing operations.....      25,139    (25,023)    4,454        358   (29,119)   (51,797)  (322,133)    (3,852)   (41,944)
Discontinued operations:
  Loss from operations of OZM         --         --        --         --        --     (3,531)        --         --         --
  Loss on disposal of OZM...          --         --        --         --        --    (15,510)      (477)        --         --
                                --------   --------  --------   --------  --------   --------  ---------   --------   --------
  Loss from discontinued
   operations...............          --         --        --         --        --    (19,041)      (477)        --         --
                                --------   --------  --------   --------  --------   --------  ---------   --------   --------
Net income (loss) before
  extraordinary item........      25,139    (25,023)    4,454        358   (29,119)   (70,838)  (322,610)    (3,852)   (41,944)
Extraordinary item:
  Gain on early
   extinguishment of debt
   (net of tax of $1,312)...          --         --        --         --        --         --      1,888         --         --
                                --------   --------  --------   --------  --------   --------  ---------   --------   --------
Net income (loss) before
  dividends on preferred stock    25,139    (25,023)    4,454        358   (29,119)   (70,838)  (320,722)    (3,852)        --
Less dividends on preferred
  stock.....................          --         --        --         --        --        226         --        600         --
                                --------   --------  --------   --------  --------   --------  ---------   --------   --------
Net income (loss)
  attributable to common
  stockholders..............    $ 25,139   $(25,023) $  4,454   $    358  $(29,119)  $(71,064) $(320,722)  $ (4,452)  $(41,944)
                                ========   ========  ========   ========  ========   ========  ==========  ========   ========
</TABLE>

                                       19
<PAGE>   23
<TABLE>
<CAPTION>
                                    YEARS ENDED      THREE MONTHS ENDED               YEARS ENDED               THREE MONTHS ENDED
                                    DECEMBER 31,           MARCH 31,                    MARCH 31,                    JUNE 30,
                                  ----------------   -------------------      ----------------------------      ------------------
                                  1996        1997      1997       1998       1998        1999        2000       1999         2000
                                  ----        ----      ----       ----       ----        ----        ----       ----         ----
                                                     (UNAUDITED)           (UNAUDITED)                        (UNAUDITED)
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                             <C>        <C>        <C>        <C>        <C>         <C>         <C>         <C>         <C>
Basic income (loss) per share
  from continuing operations..  $  1.89    $ (1.87)   $   0.33   $   0.03   $  (2.16)   $  (3.72)   $ (19.58)   $(0.31)     $ (2.03)
Basic loss per share from
  discontinued operations.....      -.-        -.-         -.-        -.-        -.-    $  (1.37)   $   (.03)       --           --
Basic income per share from
  extraordinary item..........      -.-        -.-         -.-        -.-        -.-         -.-        0.11        --           --
                                -------    -------    --------   --------   --------    --------    --------    ------      -------
Basic income (loss) per
  share.......................  $  1.89    $ (1.87)   $   0.34   $   0.03   $  (2.16)   $  (5.10)   $ (19.50)   $(0.31)     $ (2.03)
Weighted average shares
  outstanding(1)..............   13,278     13,396      13,279     13,588     13,473      13,931      16,451    14,574       20,680
                                =======    =======    ========   ========   ========    ========    ========    ======      =======
Diluted income (loss) per
  share from continuing
  operations..................  $  1.84    $ (1.87)   $   0.33   $   0.03   $  (2.16)   $  (3.73)   $ (19.58)   $(0.31)     $ (2.03)
Diluted income (loss) per
  share from discontinued
  operations..................      -.-        -.-         -.-        -.-        -.-    $  (1.37)   $  (0.03)       --           --
Diluted income per share from
  extraordinary item..........      -.-        -.-         -.-        -.-        -.-         -.-        0.11        --           --
                                -------    -------    --------   --------   --------    --------    --------    ------      -------
Diluted income (loss) per
  share.......................  $  1.84    $ (1.87)   $   0.33   $   0.03   $  (2.16)   $  (5.10)   $ (19.50)   $(0.31)     $ (2.03)
Weighted average shares
  outstanding(1)..............   13,663     13,396      13,472     13,677     13,473      13,931      16,451    14,574       20,680
                                =======    =======    ========   ========   ========    ========    ========    ======      =======
</TABLE>

(1) Reflects the one-for-five reverse stock split approved by the Company's
Board of Directors which was effected on June 26, 2000. All periods have been
restated to reflect the reverse stock split.

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,                    MARCH 31,               JUNE 30,
                                                                   ------------          ----------------------------      --------
                                                                  1996       1997        1998        1999        2000        2000
                                                                  ----       ----        ----        ----        ----        ----
BALANCE SHEET DATA:
<S>                                                             <C>        <C>         <C>         <C>         <C>         <C>
Cash and cash equivalents and short-term investments.......     $ 76,584   $ 39,713    $ 17,329    $ 13,512    $ 19,587    $ 12,302
Working capital (deficit)..................................      113,652     77,965      69,994     131,770    (104,834)   (138,922)
Total assets...............................................      308,794    370,165     295,862     438,911     159,207     114,779
Total debt.................................................        1,415     54,619      28,017      98,750     169,526     197,863
Stockholders' equity (deficit).............................      152,138    134,241     138,889     127,133    (154,219)   (199,965)
</TABLE>


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

OVERVIEW

         The Company develops, publishes, and distributes interactive
entertainment for the children's education ("edutainment"), leisure
entertainment, and gaming enthusiast's markets for a variety of platforms. The
Company employs a portfolio approach to achieve a broad base of published
products across most major consumer software categories. Since it commenced
operations in February 1993, the Company has experienced rapid growth and its
product and customer mix has changed substantially.

         Publishing and distribution are the two major activities of the
Company. Publishing is divided into Frontline, Leisure and Children's
publishing. Because each of these product categories has different associated
costs, the Company's margins have depended and will depend, in part, on the
percentage of net revenues attributable to each category. In addition, a
particular product's margin may depend on whether it has been internally or
externally developed and on what platforms it is published. Further, the
Company's margins may vary significantly from quarter to quarter depending on
the timing of its new published product releases. To the extent that mass
merchants require greater proportions of third-party software products, some of
which may yield lower margins, the Company's operating results may be impacted
accordingly.

         The worldwide interactive entertainment software market is comprised
primarily of software for two distinct platforms: PCs and dedicated game
consoles. The market has grown dramatically in recent years with its growth
driven by the increasing installed base of multimedia PCs and current generation
game console systems. In addition, the development of enabling multimedia
technologies, the proliferation of software titles, the development of new and
expanding distribution channels and the emergence of a strong international
market for interactive entertainment software have spurred the rapid expansion
of the interactive entertainment market.

                                       20
<PAGE>   24
         There has been an increased rate of change and complexity in the
technological innovations affecting the Company's products, coupled with
increased competitiveness for shelf space and buyer selectivity. The market for
Frontline titles has become increasingly hit-driven, which has led to higher
production budgets, more complex development processes, longer development
cycles and generally shorter product life cycles. The importance of the timely
release of hit titles, as well as the increased scope and complexity of the
product development and production process, have increased the need for
disciplined product development processes that limit cost and schedule overruns.
This in turn has increased the importance of leveraging the technologies,
characters or storylines of such hit titles into additional interactive
entertainment software products in order to spread development costs among
multiple products. In this environment, the Company is determined to achieve a
balance between development done by its own internal development studios and
that done by third-party developers.

         Along with its industry competitors, the Company had historically
capitalized royalties advanced to third-party developers as a prepayment in
current assets and evaluated the realization of these royalty advances on a
quarterly basis. The market changes noted above have made it extremely difficult
to determine the likelihood of individual product acceptance and success. As a
result, in the quarter ended December 31, 1997, the Company expensed royalty
advances of $73.8 million on products that were in development or on sale. In
connection with this change in the dynamics of the marketplace, the Company
changed its accounting, beginning on January 1, 1998, for future royalty
advances, treating such costs as research and development expenses, which are
expensed as incurred. Multi-year output advances will continue to be capitalized
as royalty advances and expensed over the development periods, in accordance
with generally accepted accounting principles.

         The distribution channels for interactive software have changed
significantly in recent years. Traditionally, consumer software was sold through
specialty stores. Today, consumer software is increasingly sold through mass
merchants such as Wal-Mart, Kmart and Target, as well as major retailers,
including Office Depot, Best Buy, CompUSA, AAFES, Sam's Club and Babbage's. The
Internet and on-line networks also present a new channel through which
publishers and distributors can distribute their products to end-users.

         Sales are recorded net of expected future returns. Higher than
anticipated returns were experienced in the last fiscal year, and management has
taken a substantial provision for price protection as stated below. Management
continually assesses and re-evaluates the rate of returns and price protection
based on business conditions and market factors.

         In 1998, the Company acquired One Zero Media, Inc. ("OZM"), Reflections
Interactive Limited ("Reflections"), Legend and Home Software Benelux B.V.
("Homesoft"). Financial results of these companies have been included in the
Company's Consolidated Financial Statements for the period since the
acquisitions, which were accounted for as purchases. At March 31, 1999, OZM is
accounted for as a discontinued operation, as it was the Company's intention to
sell OZM. OZM was sold on July 28, 1999 for $5.2 million in cash. This resulted
in an additional loss for the three months ended September 30, 1999 from
discontinued operations of $0.5 million. The initial loss recorded in the prior
fiscal year of $19.0 million included a provision of $5.0 million for operating
losses during the phase-out period.

         Effective January 1, 1998, the Company changed its fiscal year from
December 31 to March 31. Effective April 1, 2000, the Company changed its fiscal
year from March 31 to June 30. Accordingly, the discussion of financial results
set forth below compares the three month period ended June 30, 2000 to the three
month period ended June 30, 1999, the twelve months ended March 31, 2000 to the
twelve months ended March 31, 1999, the twelve months ended March 31, 1999 to
the twelve months ended March 31, 1998, the three months ended March 31, 1998 to
the three months ended March 31, 1997 and the twelve months ended December 31,
1997 to the twelve months ended December 31, 1996.

                                       21
<PAGE>   25
RESULTS OF OPERATIONS

         The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for each of the years in the two
years ended December 31, 1997, the three months ended March 31, 1998, the twelve
months ended March 31, 1999 and 2000, which is derived from the audited
consolidated financial statements of the Company. The consolidated financial
information for the three months ended March 31, 1997, the twelve months ended
March 31, 1998 and the three months ended June 30, 1999 is derived from the
unaudited financial statements of the Company.

<TABLE>
<CAPTION>
                                    YEARS ENDED       THREE MONTHS ENDED             YEARS ENDED           THREE MONTHS ENDED
                                    DECEMBER 31,           MARCH 31,                  MARCH 31,                 JUNE 30,
                                   ---------------    ------------------     --------------------------    ------------------
                                   1996       1997      1997       1998      1998       1999       2000      1999       2000
                                   ----       ----      ----       ----      ----       ----       ----      ----       ----
                                                     (unaudited)          (unaudited)                     (unaudited)
<S>                               <C>        <C>       <C>        <C>       <C>        <C>        <C>       <C>        <C>
Net revenues................      100.0%     100.0%    100.0%     100.0%    100.0%     100.0%     100.0%    100.0%     100.0%
Cost of goods sold..........       58.7       59.4      62.0       54.0      57.9       57.7       78.9      51.2       49.0
                                  -----      -----     -----      -----     -----      -----      -----     -----      -----
Gross profit................       41.3       40.6      38.0       46.0      42.1       42.3       21.1      48.8       51.0
Selling and distribution
  expenses..................       19.9       18.6      17.7       23.1      19.6       25.8       39.4      27.9       31.0
General and administrative
  expenses..................        9.5        8.8       9.2       10.1       9.0       11.6       23.2       9.7       49.0
Research and development....        1.5        2.6       2.6       10.3       4.1       13.4       17.7      13.5       29.0
Royalty advance write-off...        -.-       13.9       -.-        -.-      13.6        -.-        -.-       -.-        -.-
Restructuring and other
  charges...................        -.-        -.-       -.-        -.-       -.-        3.1       10.1       -.-       33.6
Purchased research and
  development...............        -.-        2.1       -.-        -.-       2.0        0.9        -.-       -.-        -.-
SingleTrac retention bonus..        -.-        0.4       -.-        -.-       0.4        0.3        -.-       -.-        -.-
Amortization of goodwill....        0.3        0.2       0.4        0.6       0.3        0.6        0.8       0.7        1.7
                                  -----      -----     -----      -----     -----      -----      -----     -----      -----
Operating income (loss).....       10.1       (6.0)      8.1        1.9      (6.9)     (13.4)     (70.1)     (3.1)    (113.3)
Interest expense............        -.-       (0.2)      -.-       (0.5)     (0.3)      (0.8)      (4.6)     (1.6)     (10.0)
Other income (loss).........        1.1       (0.2)      0.3       (0.8)     (0.4)      (0.1)      (0.2)     (0.2)      (1.2)
                                  -----      -----     -----      -----     -----      -----      -----     -----      -----
Income (loss) before
  provision for (benefit
  from) Income taxes........       11.2       (6.4)      8.4        0.6      (7.6)     (14.3)     (74.9)     (4.9)    (124.5)
Provision for (benefit from)
  income taxes..............        4.3       (1.7)      3.6        0.3      (2.2)      (5.2)      10.9      (1.7)      (3.0)
Net income (loss) from
  continuing operations.....        6.9       (4.7)      4.8        0.3      (5.4)      (9.1)     (85.8)     (3.2)    (127.1)
Discontinued operations:
  Loss from operations of OZM       -.-        -.-       -.-        -.-       -.-       (0.6)       -.-       -.-        -.-
  Loss on disposal of OZM...        -.-        -.-       -.-        -.-       -.-       (2.7)      (0.1)      -.-        -.-
                                  -----      -----     -----      -----     -----      -----      -----     -----      -----
  Loss from discontinued
   operations...............        -.-        -.-       -.-        -.-       -.-       (3.3)      (0.1)      -.-        -.-
                                  -----      -----     -----      -----     -----      -----      -----     -----      -----
  Net income (loss) before
   extraordinary item.......        6.9       (4.7)      4.8        0.3      (5.4)     (12.4)     (85.9)     (3.2)    (127.1)
Extraordinary item:
  Gain on early
   extinguishment of debt,
   net of tax...............        -.-        -.-       -.-        -.-       -.-        -.-        0.5       -.-        -.-
                                  -----      -----     -----      -----     -----      -----      -----     -----      -----
Net income (loss) before
  dividends on preferred stock      6.9       (4.7)      4.8        0.3      (5.4)     (12.4)     (85.4)     (3.2)    (127.1)
  Less dividends on preferred
   stock....................        -.-        -.-       -.-        -.-       -.-        -.-        -.-      (0.5)       -.-
                                  -----      -----     -----      -----     -----      -----      -----     -----      -----
Net income (loss)
  attributable to common
  stockholders..............        6.9%      (4.7)%     4.8%       0.3%     (5.4)%    (12.4)%    (85.4)%    (3.7)%   (127.1)%
                                    ===       ====       ===        ===      ====      =====      =====      ====     ======
</TABLE>


THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
(UNAUDITED)

         Net revenues for the three months ended June 30, 2000 decreased
approximately $88.3 million, or 73.0%, to $33.0 million from $121.3 million in
the comparable 1999 period. This decrease is attributable to the restructuring
of the Company's publishing business, the acquisition by Infogrames SA of a
controlling interest in the Company and the subsequent decision to downsize its
distribution business. Additionally, some of the Company's larger retail
customers are purchasing consumer software directly from several large
publishers, which was previously sold through the Company.

         Total publishing revenue decreased 47.0% to $27.0 million in 2000 from
$50.9 million in the comparable 1999 period. Approximately 89.6% of such
revenues related to PC product revenues and 10.4% of such revenues related to
console games in 2000, as compared to 34.0% and 66.0%, respectively, in the
comparable 1999 period.

         While the consumer software business is typically seasonal, the
granting of price protection and returns of products in 2000 were greater than
anticipated. As consumer pricing has become more competitive, the Company is
finding more

                                       22
<PAGE>   26
frequently that it is necessary to offer mark-downs for products which have not
yet sold through to the consumer, or to accept a higher level of returns of
product that are not selling at retail, or both.

         A significant portion of the Company's revenues in any quarter are
generally derived from software first released in that quarter or in the
immediately preceding quarter. See "Risk Factors -- Our Revenues Will Decline
and Our Competitive Position Will Be Adversely Affected If We Are Unable to
Introduce New Products on a Timely Basis."

         Cost of goods sold for 2000 decreased approximately $46.0 million, or
74.0%, to $16.2 million from $62.1 million in the comparable 1999 period. Cost
of goods sold as a percentage of net revenues decreased to 49.0% in 2000 as
compared to 51.2% in the comparable 1999 period. The decrease was due to a
change in the mix of products sold, resulting in lower sales of third-party
product, which bears a higher cost than published product, both domestically
and internationally.

         Gross profit decreased from $59.2 million (48.8% of net revenues) in
the comparable 1999 period to $16.8 million (51.0% of net revenues) for the
three months ended June 30, 2000. This decrease primarily is due to reduced
sales volume and change in cost of goods sold as described above. Gross profit
is primarily impacted by the percentage of sales of CD software as compared to
the percentage of sales of cartridge software. Gross profit may also be impacted
from time to time by the percentage of foreign sales, and the level of returns
and price protection and concessions to retailers and distributors. The
Company's margins on sales of CD software (currently, PlayStation, PCs and
Dreamcast) are higher than those on cartridge software (currently, Nintendo 64
and Game Boy Color) as a result of significantly lower CD software product
costs.

         Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During 2000, these expenses decreased
approximately $17.0 million, or 50.3%, to $16.8 million from $33.9 million in
the comparable 1999 period. Selling and distribution expenses as a percentage of
net revenues for 2000 increased to 31.0% as compared to 27.9% in the comparable
1999 period. The increase, as a percentage of net revenues, was due to lower
overall sales volume, and the increase in co-op advertising costs incurred
during the current period. This was partially offset by the reduction of freight
costs due to decreased sales volume in the current period.

         General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses in 2000 increased approximately $4.4 million, or 37.2%, to $16.1
million from $11.8 million in the comparable 1999 period. General and
administrative expenses as a percentage of net revenues increased to 49.0% in
2000 from 9.7% in the comparable 1999 period. This increase was due primarily to
additional costs associated with management's reorganization of operations as a
result of the acquisition of controlling interest in the Company by Infogrames
SA.

         Research and development expenses primarily includes payment of royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title, such as
salaries and other related costs. These expenses in 2000 decreased approximately
$6.8 million, or 41.5%, to $9.6 million from $16.4 million in the comparable
1999 period. Research and development, as a percentage of net revenues,
increased to 29.0% in 2000 from 13.5% in the comparable 1999 period. The
increase in research and development expenses as a percentage of net revenues is
primarily due to the decrease in overall sales volume despite the Company
entering into fewer new contracts with external developers. Research and
development expenses of the Company's internal development studios, which
primarily include Humongous, Legend and Reflections, decreased to $9.6 million
in 2000 from $10.7 million in the comparable 1999 period.

         Restructuring and other charges of approximately $11.1 million,
recorded in 2000, relates to a reorganization and refocus by the Company as a
result of the Infogrames SA transaction, as well as the Company's reorganization
of its Frontline publishing business. Approximately $0.4 million relates to the
write-off of goodwill, $9.4 million of impaired assets and transition rent, and
$1.3 million related to the planned severance of 49 employees, primarily
administrative and product development functions. The remaining employees to be
terminated received notification prior to the fiscal year ended June 30, 2000,
with terminations scheduled to be effective over the subsequent three months.
Management expects to complete the Company's reorganization by September 30,
2000. During the three months ended June 30, 2000, 62 employees were terminated
under the restructuring plan.

                                       23
<PAGE>   27
         Amortization of goodwill for 2000 decreased approximately $0.3 million,
or 36.8%, to $0.6 million from $0.9 million in the comparable 1999 period. This
decrease is attributable to the lower amortization expense as a result of the
write-off of all goodwill, other than the Legend and Reflections studios, in
connection with the Company's reorganization plans.

         Interest expense increased approximately $1.3 million during 2000 to
$3.3 million from $2.0 million in the comparable 1999 period. The increase was
attributable to the increase in interest costs associated with increased
borrowings under the Credit Agreement. and amortization of deferred financing
costs relating to the Credit Agreement and the subordinated notes held by
Infogrames SA.

         The Company's effective tax rate for 2000 was 2% compared to 35% in the
comparable 1999 period. The decrease in the rate is attributable to the Company
not providing a tax benefit for losses in the current period, offset by the
Company's requirement to pay alternative minimum tax.

TWELVE MONTHS ENDED MARCH 31, 2000 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1999

         Net revenues for fiscal 2000 decreased approximately $196.8 million, or
34.4%, to $375.6 million from $572.3 million in fiscal 1999. This decrease is
attributable to the restructuring of the Company's publishing business, the
acquisition by Infogrames SA of a controlling interest in the Company and the
Company's decision to downsize its distribution business, whereby substantially
less product was shipped in the last four months of the fiscal year.
Additionally, some of the Company's larger retail customers continue to purchase
consumer software directly from several large publishers whose software was
previously sold through the Company.

         Total publishing revenue decreased 15.7% to $252.3 million in fiscal
2000 from $299.4 million in fiscal 1999. Approximately 55% of such revenues
related to PC product revenues and 45% of such revenues related to console game
revenues in fiscal 2000, as compared to 58% and 42%, respectively, in fiscal
1999.

         While the consumer software business is typically seasonal, the
granting of price protection and returns of products in fiscal 2000 exceeded
expectations. As consumer pricing has become more competitive, the Company is
finding more frequently that it is necessary to offer mark-downs for products
which have not yet sold through to the consumer, or to accept a higher level of
returns of product that are not selling at retail, or both. A large portion of
aging customer chargebacks relating to price protection, co-op advertising and
uncollectible accounts were reserved for in fiscal 2000.

         A significant portion of the Company's revenues in any quarter are
generally derived from software first released in that quarter or in the
immediately preceding quarter. See "Risk Factors -- Our Revenues Will Decline
and Our Competitive Position Will Be Adversely Affected If We Are Unable to
Introduce New Products on a Timely Basis."

         Cost of goods sold for fiscal 2000 decreased approximately $33.7
million, or 10.2%, to $296.3 million from $330.0 million in fiscal 1999. Cost of
goods sold as a percentage of net revenues increased to 78.9% in fiscal 2000 as
compared to 57.7% in fiscal 1999. The increase, as a percentage of net revenues,
was due to lower overall sales volume, coupled with substantial reserves for
unsellable product, particularly third-party product, which bears a higher cost
than published product, both domestically and internationally.

         Gross profit decreased from $242.4 million (42.3% of net revenues) for
the year ended March 31, 1999 to $79.3 million (21.1% of net revenues) for the
year ended March 31, 2000. This decrease primarily is due to reduced sales
volume and higher cost of goods sold as described above. Gross profit is
primarily impacted by the percentage of sales of CD software as compared to the
percentage of sales of cartridge software. Gross profit may also be impacted
from time to time by the percentage of foreign sales, and the level of returns
and price protection and concessions to retailers and distributors. The
Company's margins on sales of CD software (currently, PlayStation, PCs and
Dreamcast) are higher than those on cartridge software (currently, Nintendo 64
and Game Boy Color) as a result of significantly lower CD software product
costs.

         Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During fiscal 2000, these expenses increased
approximately $0.3 million, or 0.2%, to $147.8 million from $147.5 million in
fiscal 1999. Selling and distribution expenses

                                       24
<PAGE>   28
as a percentage of net revenues for fiscal 2000 increased to 39.4% as compared
to 25.8% in fiscal 1999. The increase, as a percentage of net revenues, was due
to lower overall sales volume, and the increase in co-op advertising costs due
to the write-down of receivables. This was partially offset by the reduction of
freight costs due to decreased sales volume.

         General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses in fiscal 2000 increased approximately $20.5 million, or 30.8%,
to $87.1 million from $66.6 million in fiscal 1999. General and administrative
expenses as a percentage of net revenues increased to 23.2% in fiscal 2000 from
11.6% in fiscal 1999. This increase was due primarily to an increase in salary
expense relating to the severance packages of several senior officers during the
fiscal year, the write-off of uncollectible account receivables, and additional
costs incurred associated with management's reorganization of operations as a
result of the acquisition of a controlling interest in the Company by Infogrames
SA.

         Research and development expenses primarily includes payment of royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title such as salaries
and other related costs. These expenses in fiscal 2000 decreased approximately
$10.3 million, or 13.4%, to $66.6 million from $76.9 million in fiscal 1999.
Research and development, as a percentage of net revenues, increased to 17.7% in
fiscal 2000 from 13.4% in fiscal 1999. The decrease in research and development
expenses is primarily due to the Company entering into fewer new contracts with
external developers, partially offset by a $7.8 million earned-out royalty
payment to Reflections for the title Driver during the three months ended
September 30, 1999, which was paid in cash and Common Stock. Research and
development expenses of the Company's internal development studios, which
primarily include Humongous, Legend and Reflections, increased to $45.7 million
in fiscal 2000 from $34.9 million in fiscal 1999.

         Restructuring and other charges of approximately $37.9 million,
recorded in the third and fourth quarters of fiscal 2000, relate to a
reorganization of the Company's Frontline publishing business, the shutdown of a
substantial portion of European publishing operations and outsourcing and
down-sizing of the Company's distribution and assembly functions. Approximately
$17.6 million relates to the write-off of goodwill as a result of the
consolidation of the value distribution division and the Company's publishing
division, $12.1 million relates to the shutdown of European operations,
including the write-off of all goodwill other than that relating to the
Reflections studio, $6.1 million relates to impaired assets and $2.1 million
relates to the planned severance of 221 employees, primarily administrative
functions. The remaining employees to be terminated received notification prior
to the fiscal year ended March 31, 2000, with terminations scheduled to be
effective over the subsequent three months. Management expects to complete the
Company's reorganization by September 30, 2000. As of March 31, 2000, 88
employees were terminated under the restructuring plan.

         Amortization of goodwill for fiscal 2000 decreased approximately $0.2
million, or 7.1%, to $3.1 million from $3.3 million in fiscal 1999. This
decrease is attributable to the lower amortization expense as a result of the
write-off of all goodwill, other than the Legend and Reflections studios, in
connection with the Company's reorganization plans.

         Interest expense increased approximately $12.1 million during fiscal
2000 to $17.2 million from $5.1 million in fiscal 1999. The increase was
partially attributable to the increase in interest costs associated with
increased borrowings under the Old Credit Agreement (as defined below) and the
Credit Agreement. The amortization of deferred financing costs relating to the
Credit Agreement and the subordinated notes held by General Atlantic Partners,
LLC (together with its affiliates, "GAP") and members of the Cayre family also
contributed to the increase in interest and other income (expense), net.

         The Company's effective tax rate for fiscal 2000 was 15% compared to
36% in fiscal 1999. The valuation allowance increased by $134,591 in fiscal
2000, consisting of a valuation allowance of $48,806 for the beginning deferred
tax asset balance and a valuation allowance of $85,785 for the net change in the
deferred tax asset during the year. Such valuation allowance was necessary due
to the current year operating results and the terminated plans to sell certain
of the Company's businesses which would have resulted in the utilization of the
deferred tax asset. A full valuation allowance has been recorded against the net
deferred tax asset since it is more likely than not that such assets will not be
realized in the foreseeable future.

         Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations -- Reporting Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions"

                                       25
<PAGE>   29
("APB 30"), as of March 31, 2000, the Consolidated Financial Statements of the
Company reflect the planned disposal of OZM as a discontinued operation.
Accordingly, the revenues, costs and expenses, assets and liabilities, and cash
flows of this business have been excluded from the respective captions in the
Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated
Statements of Comprehensive Income and Consolidated Statements of Cash Flows,
and have been reported through its planned date of disposition as "Loss from
discontinued operations." As of March 31, 1999, OZM was accounted for as a
discontinued operation and was sold in July 1999. This resulted in a loss from
discontinued operations of $19.5 million, $0.5 million of which is recognized in
the fiscal year 2000.

         The gain on early extinguishment of debt of $3.2 million ($1.3 million
net of tax) relates to the net gain recognized on the issuance of subordinated
convertible notes in exchange for shares of Series A Convertible Preferred Stock
("Preferred Stock") and subordinated notes of the Company held by GAP and the
write-off of deferred financing costs associated with warrants issued in
connection with the assumption of the Credit Agreement and warrants issued to
GAP and subsequently acquired by Infogrames SA concurrent with the Infogrames SA
transaction on December 16, 1999.

TWELVE MONTHS ENDED MARCH 31, 1999 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1998

         Net revenues for fiscal 1999 increased approximately $29.3 million, or
5.4%, to $572.3 million from $543.1 million in the twelve months ended March 31,
1998. This growth in net revenues was attributable to increases in net revenues
of Children's publishing, Leisure publishing and Distribution of $23.2 million,
or 108%, $12.5 million, or 39%, and $12.3 million, or 5%, respectively. The
increase in Children's net revenue is attributable to the release of Blue's
Clues related titles during fiscal 1999. The increase in Leisure's net revenue
is attributable to the increased and continuing success of Deer Hunter, Deer
Hunter II and Rocky Mountain Trophy Hunter. The increase in Distribution net
revenues for fiscal 1999 is primarily due to an increase in the number of stores
supplied and serviced by the Company.

         These increases are offset by a reduction in Frontline net revenue of
$18.7 million, or 8%. The decrease is largely attributable to a $13.5 million,
or 71% decrease in royalty income.

         Cost of goods sold for fiscal 1999 increased approximately $15.6
million, or 5.0%, to $330.0 million from $314.3 million in the twelve months
ended March 31, 1998. Cost of goods sold as a percentage of net revenues
decreased to 57.7% in fiscal 1999 as compared to 57.9% in the twelve months
ended March 31, 1998. Excluding increased charges for obsolete inventory between
the periods, the cost of goods percentage would have been 55.4% of net revenue
in fiscal 1999. This decrease is primarily a result of increased sales in the
Children's and Leisure categories of publishing.

         Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During fiscal 1999, these expenses increased
approximately $40.9 million, or 38.3%, to $147.5 million from $106.7 million in
the twelve months ended March 31, 1998. Selling and distribution expenses as a
percentage of net revenues for fiscal 1999 increased to 25.8% as compared to
19.6% in the twelve months ended March 31, 1998. The increase, as a percentage
of net revenues, was primarily attributable to the increase of print advertising
worldwide to support the new and existing releases of the Company's published
product and increased cooperative advertising, and increased premium freight
costs due to higher unit volume and the expense of consolidating inventory of
the Company's Plymouth, MN distribution center into its Edison, NJ distribution
center, as compared to the twelve months ended March 31, 1998. The overall
increase was also attributable to increased sales volume.

         General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses in fiscal 1999 increased approximately $18.0 million, or 37.0%,
to $66.6 million from $48.6 million in the twelve months ended March 31, 1998.
General and administrative expenses as a percentage of net revenues increased to
11.6% in fiscal 1999 from 9.0% in the twelve months ended March 31, 1998. This
increase was due primarily to increased depreciation associated with the
expansion of the Company's worldwide facilities and the implementation of
enterprise software to enhance the Company's management information systems
worldwide, the increase in bad debt expenses, additional legal and accounting
fees incurred as part of the discontinued private placement of senior
subordinated debt and the write-off of an equity investment.

         Research and development primarily includes payment for royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title such as salaries
and other

                                       26
<PAGE>   30
related costs. These expenses in fiscal 1999 increased approximately $54.6
million, or 244.8%, to $76.9 million from $22.3 million in the twelve months
ended March 31, 1998. Research and development, as a percentage of net revenues,
increased to 13.4% in fiscal 1999 from 4.1% in the twelve months ended March 31,
1998. This increase is primarily due to the change in accounting effective
January 1, 1998, whereby royalty advances on products that are currently in
development are expensed as incurred, and the additional headcount attributable
to increased in-house development capacity. Research and development of the
Company's internal development studios, which, during the relevant periods,
primarily included SingleTrac, Cavedog, Humongous, Legend, Reflections and
Bootprint increased to $34.9 in fiscal 1999 from $17.6 million in the twelve
months ended March 31, 1998. Excluding the impact of the change in accounting,
research and development expenses would have increased $28.2 million from $48.7
million to $76.9 million, or 58%.

         Restructuring charges of approximately $17.5 million, recorded in the
fourth quarter of fiscal 1999, relate to a reorganization of the Company's
Frontline publishing business, a contemplated relocation of corporate
headquarters to California and outsourcing of the Company's distribution
function. Approximately $9.8 million relates to the planned severance of 135
employees, $7.1 million relates to impaired assets and $0.6 million relates to
rent for the transition period. This reorganization was announced on March 19,
1999, and was expected to be completed by March 19, 2000.

         The charge for royalty advance write-off of $73.8 million during the
twelve months ended March 31, 1998 represents a change in estimate and
accounting whereby royalty advances on products that were currently in
development or on sale were expensed. In connection with this change, the
Company prospectively expensed royalty advances in a manner comparable with
internal software development costs, which are expensed to research and
development as incurred.

         In connection with the acquisitions of SingleTrac in October 1997 and
Reflections in December 1998, the Company incurred charges of $11.0 million and
$5.0 million, respectively, for purchased research and development. In addition,
the Company incurred a charge of $2.4 million and $1.7 million in the twelve
months ended March 31, 1998 and fiscal 1999, respectively, for a retention bonus
for the SingleTrac employees, which was based on the achievement of certain
performance goals.

         Merger costs consist of legal, accounting and other professional fees
incurred by the Company for the canceled acquisition of MicroProse, Inc., during
the twelve months ended March 31, 1998.

         Amortization of goodwill increased approximately $1.8 million, or
111.4% in fiscal 1999, to $3.3 million from $1.6 million in the twelve months
ended March 31, 1998. This increase is attributable to the purchases of
Reflections, Homesoft, Prism and Legend in fiscal 1999.

         Interest and other expenses increased approximately $1.6 million during
fiscal 1999 to $5.3 million from $3.7 million in the twelve months ended March
31, 1998. This increase was primarily attributable to the increase in interest
costs associated with borrowings under the Company's then existing Revolving
Credit Agreement.

         The Company's effective tax rate for fiscal 1999 was 36% compared to
30% in the twelve months ended March 31, 1998. The increased rate is
attributable to the lower proportion of non-deductible expenses, primarily
purchased research and development and goodwill, in 1999.

         In February 1999, certain partnerships affiliated with GAP purchased
from the Company 0.6 million shares of the Preferred Stock for an aggregate
purchase price of $30.0 million. These shares of Preferred Stock accumulated
dividends at 8.0% and were convertible into 6.0 million shares of Common Stock
(not adjusted to reflect the one-for-five reverse stock split effected on June
20, 2000) at a conversion price of $5 per share.

         The Preferred Stock was exchanged for convertible notes in connection
with the Infogrames SA transaction in December 1999. See Note 2 in the
Consolidated Financial Statements included herein.

         Pursuant to APB 30, the Consolidated Financial Statements of the
Company reflect the planned disposal of OZM as a discontinued operation.
Accordingly, the revenues, costs and expenses, assets and liabilities, and cash
flows of this business have been excluded from the respective captions in the
Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated
Statements of Comprehensive Income and Consolidated Statements of Cash Flows,
and have been reported

                                       27
<PAGE>   31
through its planned date of disposition as "Loss from discontinued operations."
As of March 31, 1999, OZM is accounted for as a discontinued operation and it is
the Company's present intention to sell OZM, resulting in an anticipated loss
from discontinued operations of $19.0 million. The loss from operations of OZM
represents net expenses of $4.6 million on net revenues of $1.1 million. The
loss on disposal of OZM includes a provision of $5.0 million for operating
losses during the phase-out period, and is primarily attributable to the
write-off of goodwill of approximately $18.3 million. There is no tax benefit
recorded on the loss from discontinued operations, as OZM has historically
generated net losses.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

         Net revenues for 1998 increased approximately $12.4 million, or 13.3%,
to $105.8 million from $93.4 million in the comparable 1997 period. This growth
in net revenues was primarily attributable to a 49% increase in publishing
revenue which includes Frontline, Children's and Leisure. Frontline net revenue
increased $9.4 million, or 36%, from $26.4 million to $35.9 million, as a result
of the sales of Duke Nukem titles for the PlayStation, Nintendo 64 and the PC,
Hexen for Nintendo 64, OddWorld: Abe's Oddysee for the PlayStation, Total
Annihilation for the PC, East Meets West, and Quake for Nintendo 64,
internationally. Leisure publishing's net revenue increased $4.1 million, or
103% as a result of continued strong sales of Deer Hunter and Wild Turkey Hunt
for the PC. Children's net revenue increased $2.6 million or 120% as a result of
newly released titles such as Freddi Fish 3: The Case of the Stolen Conch Shell.
The overall increase in net revenues was partially offset by the decrease in
distribution net revenues to $57.1 million, or 54% of net revenues, in 1998 from
$60.8 million, or 65% of net revenues, in the comparable 1997 period, as a
result of Wal-Mart purchasing software directly from several publishers whose
software was previously sold to Wal-Mart by the Company.

         Cost of goods sold primarily includes costs of purchased products. Cost
of goods sold for 1998 decreased approximately $0.8 million, or 1.4%, to $57.1
million from $57.9 million in the comparable 1997 period. Cost of goods sold as
a percentage of net revenues decreased to 54.0% in 1998 as compared to 62.0% in
the comparable 1997 period. The decrease, as a percentage of net revenues, was
primarily due to the Company's change in accounting with respect to royalty
advances, resulting in the expensing of such advances to research and
development as incurred, rather than recouping such advances based on sales.
Additionally, the Company's overall sales mix of its published product, which
generally have higher margins, increased to 46% of net revenues in 1998 compared
to 35% in the comparable 1997 period. The decrease in cost of goods sold was
partially offset by the higher sales of console titles, which generally have
higher costs than PC titles. Console titles accounted for 45% of published
product revenue in 1998 compared to 17% during the comparable 1997 period.

         Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During 1998 these expenses increased
approximately $7.9 million, or 47.9%, to $24.5 million from $16.5 million in the
comparable 1997 period. Selling and distribution expenses as a percentage of net
revenues for 1998 increased to 23.1% as compared to 17.7% in the comparable 1997
period. The increase, as a percentage of net revenues, was primarily
attributable to the increase of print advertising worldwide to support the new
and existing releases of the Company's published product and increased
cooperative advertising associated with higher published Frontline revenues as
compared to the comparable 1997 period. The overall increase was also
attributable to increased sales volume.

         General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses in 1998 increased approximately $2.0 million, or 23.6%, to $10.7
million from $8.6 million in the comparable 1997 period. General and
administrative expenses as a percentage of net revenues increased to 10.1% in
1998 from 9.2% in the comparable 1997 period. This increase was due primarily to
additional personnel required to support the expansion of the Company's
publishing operations and the related amortization associated with the expansion
of the Company's worldwide facilities and the implementation of enterprise
software to enhance the Company's management information systems worldwide.

         Research and development expenses primarily include payment for royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title such as salaries
and other related costs. These expenses in 1998 increased approximately $8.5
million, or 353.3%, to $10.9 million from $2.4 million in the comparable 1997
period. Research and development expenses as a percentage of net revenues
increased to 10.3% in 1998 from 2.6% in the comparable 1997 period. This
increase is primarily due to the change in accounting effective for the three
months ended March 31, 1998, whereby royalty advances on products that are
currently in development or on

                                       28
<PAGE>   32
sale are expensed as incurred, and the additional headcount attributable to
increased in-house development capacity primarily the result of the SingleTrac
acquisition.

         Interest and other income (expense), net, decreased approximately $1.6
million during 1998 to an expense of $1.4 million from income of $0.2 million in
the comparable 1997 period. This decrease was primarily attributable to the
decrease in short-term investments and the increase in interest costs associated
with borrowings under the Company's credit agreement.

         The Company's effective tax rate for 1998 was 46% compared to 43% in
the comparable 1997 period. The increase is attributable to the higher
proportion of nondeductible expenses, primarily goodwill, in the current period.

TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996

         Net revenues increased approximately $165.2 million, or 45.2%, to
$530.7 million in 1997 from $365.5 million in 1996. Publishing's net revenues
increased by $113.3 million from $152.4 million to $265.7 million or 74%. This
growth in net revenues was primarily attributable to an increase in Frontline
net revenue of $100.9 from $120.5 million to $221.4 million or 84%. The release
of newly published titles, both domestically and internationally, which included
OddWorld: Abe's Oddysee for the PlayStation, Duke Nukem 3D for Nintendo 64 and
the PlayStation, Hexen for Nintendo 64 and the PlayStation and Total
Annihilation for the PC. The international release of Doom II, Mortal Kombat
Trilogy, San Francisco Rush, NBA Hangtime and Mace for Nintendo 64, the domestic
release of Shadow Warrior for the PC, Critical Depth for the PlayStation, Blood
for the PC and Courier Crisis for the PlayStation, as well as the continuing
strong sales of Duke Nukem 3D and Quake and an increase in royalty income (from
licensing of certain of the Company's products in selected international
markets) also contributed to the growth in net revenues. Children's net revenue
increased $5.6 million from $11.1 million to $16.7 million or 50% primarily as a
result of the release of Putt Putt(R) Travels Through TimeO. Leisure's net
revenue increased $6.8 million, from $20.8 million to $27.6 million, or 33%, as
a result of increased sales of Deer Hunter, Sportsmen's Paradise and Duke 3D
shareware. Distribution's net revenue increased $53.0 million from $213 million
to $265 million, or 25%, as a result of increases in sales from its existing
mass merchant shelf space and an increase in the number of mass merchant stores
supplied and serviced by the Company. This increase was partially offset by the
reduction in revenues resulting from Wal-Mart's decision in the second half of
1997 to purchase products directly from five publishers whose products had been
previously distributed by the Company.

         Cost of goods sold primarily includes costs of purchased products and
royalties paid to software developers. Cost of goods sold increased
approximately $100.6 million, or 46.9%, to $315.1 million in 1997 from $214.6
million in 1996. Cost of goods sold as a percentage of net revenues increased to
59.4% in 1997 as compared to 58.7% in 1996. The increase of 0.7% was primarily
due to the decline in the average wholesale price of the Company's value priced
products and an increase in the sales of Nintendo 64 titles, which have lower
margins. This increase was mostly offset by a shift in the Company's overall
sales mix toward its published products which increased to an aggregate of
approximately 50% of net revenue in 1997 compared to approximately 42% during
1996 and a change in product mix within the products distributed for third
parties to higher margin products.

         Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. These expenses increased approximately $22.5
million, or 29.5%, to $98.7 million in 1997 from $76.2 million in 1996. The
increase is attributable to the overall increase in sales volume. Selling and
distribution expenses as a percentage of net revenues for 1997 decreased to
18.6% as compared to 19.9% for 1996. This decrease was primarily attributable to
the reduction of freight as a percentage of net revenues and the Company
realizing greater economies of scale.

         General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses in 1997 increased approximately $15.4 million, or 46.6%, to $45.6
million in 1997 from $31.2 million in 1996. General and administrative expenses
as a percentage of net revenues decreased to 8.6% in 1997 from 9.5% in 1996.
This increase in expenses was due primarily to additional personnel required to
support the expansion of the Company's research, development and publishing
operations, an increase in the reserve for bad debts and an increase in
depreciation expense due to the write-off of the leasehold improvements at the
Company's former headquarters.

                                       29
<PAGE>   33
         Research and development expenses primarily include direct costs of
developing and producing a title such as salaries and other related costs. These
expenses in 1997 increased approximately $8.2 million, or 145.4%, to $13.8
million from $5.6 million in 1996. Research and development expenses as a
percentage of net revenues increased to 2.6% in 1997 from 1.5% in 1996. This
increase is primarily due to the in-house development of Humongous titles.

         The charge for royalty advance write-off of $73.8 million during 1997
represents a change in estimate and accounting whereby royalty advances on
products that are currently in development or on sale were expensed. In
connection with this change, the Company will prospectively expense royalty
advances in a manner comparable with internal software development costs, which
are expensed as incurred.

         In connection with the acquisition of SingleTrac, the Company incurred
a charge of $11.0 million for purchased research and development. In addition,
the Company incurred a charge of $2.4 million for a retention bonus for the
SingleTrac employees, which was based on the achievement of certain performance
goals. Pursuant to the SingleTrac purchase agreement, the Company structured a
retention oriented bonus pool of up to approximately $10.0 million in cash and
Common Stock, which was distributed to SingleTrac employees based on the
achievement of certain performance goals of SingleTrac during calendar year
1998.

         Merger costs consist of legal, accounting and other professional fees
incurred by the Company for the canceled acquisition of MicroProse, Inc., during
1997 and to complete other acquisitions and for the Company's canceled secondary
stock offering during 1996.

         Interest and other income (expense), net, decreased approximately $6.0
million during 1997. This decrease was primarily attributable to the decrease in
short-term investments and cash balances and the interest costs associated with
borrowings under the Company credit agreement.

         The Company's effective tax rate, as a percentage of pre-tax income
(loss), decreased in 1997 to 27% compared to 38% in 1996 due to the
non-deductible one-time charge related to the acquisition of in-process research
and development during the year.

         For 1997, the net loss was $25.0 million, or $1.87 per share, compared
to net income of $25.1 million, or $1.84 per share for 1996, with earnings per
share for both 1997 and 1996 calculated based on the basic method. Excluding
one-time charges resulting from the charge for the royalty advance expense,
purchased research and development, the retention bonus for the SingleTrac
employees and the merger costs, the Company would have recognized net income of
$33.9 million or $0.51 per share. Exclusive of the one-time charge for merger
costs, net income for 1996 would have been $27.3 million or $0.40 per share.

LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 2000, the Company's working capital deficit was $138.9
million compared to a working capital surplus of $32.4 million at June 30, 1999.
Cash and cash equivalents were $12.3 million at June 30, 2000 compared to $7.8
million at June 30, 1999.

         During the three months ended June 30, 2000, $22.8 million was provided
by financing activities. The cash flow from financing activities primarily was
used to fund $32.3 million for net cash used in operating activities which
resulted from operating losses, and a reduction in the accounts payable balance
(for past due accounts). This was offset by a decline in receivables due to a
reduction in volume of revenues and the write-off of aging customer chargebacks
relating to price protection, co-op advertising and uncollectible accounts.
Approximately $0.8 million in cash was used in investing activities to purchase
property and equipment, primarily additional computer hardware and software for
the development of internal systems.

         The Company does not currently have any material commitments with
respect to any capital expenditures.

                                       30
<PAGE>   34
         On January 21, 1997, the Company entered into a revolving credit
agreement (as amended, the "Old Credit Agreement") with certain banks expiring
on December 31, 1998. On September 11, 1998, the borrowings under the Old Credit
Agreement were repaid and the Old Credit Agreement was terminated.

         Simultaneously, on September 11, 1998, the Company entered into the
Credit Agreement with First Union National Bank, as agent for the syndicate of
Banks, as subsequently amended, expiring on March 31, 2000. Under the Credit
Agreement, the Company borrowed approximately $71 million for ongoing working
capital requirements, letters of credit and other general corporate purposes,
secured by domestic accounts receivable and inventory and other assets of the
Company. To induce the Banks to amend the Credit Agreement, the Company issued
on June 29, 1999 to the Banks warrants to purchase, at an exercise price of
$0.05 per share, an aggregate of 150,000 shares of the Company's Common Stock.
Of these, warrants to purchase 55,000 shares of Common Stock were immediately
exercisable, warrants to purchase 50,000 shares of Common Stock became
exercisable on October 31, 1999 and warrants to purchase the remaining 45,000
shares of Common Stock (the "Bank Warrants") became exercisable on February 28,
2000 if the Credit Agreement was not repaid prior to that date.

         As of February 15, 2000, Infogrames SA entered into an agreement with
the Banks, pursuant to which Infogrames SA assumed the Banks' interest in the
Credit Agreement. In connection with the assumption by Infogrames SA of the
Credit Agreement, (i) the maturity date was extended from March 31, 2000 to June
30, 2000, (ii) the interest rate, which was the Prime Rate plus 1.0% or LIBOR
plus 2.5% at the option of the Company, was set at LIBOR plus 2.5%, (iii) a
$250,000 amendment fee, which would have been payable to the Banks on March 31,
2000 unless the Credit Agreement was refinanced by February 16, 2000, was
reduced to $125,000 and paid to Infogrames SA, (iv) certain mandatory prepayment
restrictions and operational covenants were revised to be less restrictive and
(v) revisions were made to provide alternative letter of credit facilities to
the Company. In addition, in connection with the assumption of the Credit
Agreement by Infogrames SA, the Bank Warrants were surrendered and canceled and
warrants to acquire 45,000 shares of Common Stock, at an exercise price of $0.05
per share, were issued to Infogrames SA.

         On June 29, 2000, Infogrames SA and the Company amended the Credit
Agreement to increase the aggregate commitment available under the facility to
$125 million and to extend the maturity date to September 30, 2000.

         At June 30, 2000, the Company had outstanding debt of approximately
$98.5 million, representing borrowings under the Credit Agreement, and no
letters of credit outstanding.

         The Company expects continued volatility in the use of cash due to
varying seasonal, receivable payment cycles and quarterly working capital needs
to finance its publishing businesses and corporate plan of reorganization.

         The Company believes that existing cash, cash equivalents and
short-term investments, together with cash expected to be generated from
operations, cash available under the Credit Agreement and continued financial
support from Infogrames SA will be sufficient to fund the Company's operations
and cash flows for the next twelve months.

         The Company is also party to various litigations arising in the course
of its business, the resolution of none of which, the Company believes, will
have a material adverse effect on the Company's liquidity, financial condition
and results of operations.

         The Company entered into a merger agreement with INA, a company under
common control, on September 6, 2000. The Company will acquire INA through the
creation of a wholly-owned subsidiary that will merge with and into INA, with
INA surviving the merger. Upon completion of the merger, INA will be a wholly
owned subsidiary of the Company.

RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD

         Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires companies to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt SFAS No. 133 in fiscal 2001,
in accordance with the

                                       31
<PAGE>   35
deferral provision in SFAS No. 137. The adoption of SFAS No. 133 will not have a
material effect on the Company's financial statements.

         In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of
fiscal 2001. Infogrames Inc. is currently evaluating the impact of SAB 101 on
the Company's results of operations and financial position.

         In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 (FIN No. 44), Accounting for Certain Transactions
Involving Stock Compensation - an interpretation of APB 25. FIN No. 44 clarifies
(i) the definition of employee for purposes of applying APB Opinion No. 25, (ii)
the criteria for determining whether a plan qualifies as a noncompensatory
plan, (iii) the accounting consequences of various modifications to the terms of
a previously fixed stock option or award, and (iv) the accounting for an
exchange of stock compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in this interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain of the conclusions of FIN No. 44 covering events
occurring during the period after December 15, 1998 or January 12, 2000 did not
have a material effect on the Company's financial position and results of
operations. The Company does not expect that the adoption of the remaining
conclusions will have a material effect on the financial position or results of
operations.

EURO CONVERSION

         As part of the European Economic and Monetary Union (EMU), a single
currency (the "Euro") will replace the national currencies of most of the
European countries in which the Company conducts business. The conversion rates
between the Euro and the participating nations' currencies have been fixed
irrevocably as of January 1, 1999, with the participating national currencies
being removed from circulation between January 1, and June 30, 2002 and replaced
by Euro notes and coinage. During the "transition period" from January 1, 1999
through December 31, 2001, public and private entities as well as individuals
may pay for goods and services using either checks, drafts, or wire transfers
denominated in Euros or the participating country's national currency.

         Under the regulations governing the transition to a single currency,
there is a "no compulsion, no prohibition" rule which states that no one is
obliged to utilize the Euro until the notes and coinage have been introduced on
January 1, 2002. In keeping with this rule, the Company is Euro "compliant"
(able to receive Euro denominated payments and able to invoice in Euros as
requested by vendors and suppliers, respectively) as of January 1, 1999 in the
affected countries. Full conversion of all affected country operations to the
Euro is expected to be completed by the time national currencies are removed
from circulation. Phased conversion to the Euro is currently underway and the
effects on revenues costs and various business strategies are being assessed.
The cost of software and business process conversion is not expected to be
material.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Due to the global nature of the Company's operations, the Company is
subject to the exposures that arise from foreign exchange rate fluctuations. The
Company's objective in managing its exposure to foreign currency fluctuations is
to minimize net earnings volatility associated with foreign exchange rate
changes. The Company may enter into foreign currency forward exchange contracts
to hedge foreign currency transactions which are primarily related to certain
receivables denominated in foreign currencies. The Company's hedging activities
do not subject it to exchange rate risk because gains and losses on these
contracts offset losses and gains on the assets, liabilities and transactions
being hedged.

         The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term obligations since the
majority of the Company's long-term obligations are at fixed rates.

                                       32
<PAGE>   36
ITEM 8.  INDEX TO THE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Consolidated Financial Statements, and notes thereto, and the
Financial Statement Schedule of the Company, are presented on pages F-1 through
F-32 hereof as set forth below:

<TABLE>
<CAPTION>
                                                                                                                        PAGE

         INFOGRAMES, INC.  AND SUBSIDIARIES
<S>                                                                                                              <C>
            Independent Auditors' Report.....................................................................            F-1
            Consolidated Balance Sheets as of March 31, 1999 and 2000 and June 30, 2000......................            F-3
            Consolidated Statements of Operations and Comprehensive (Loss) Income for the Year Ended
              December 31, 1997, the Three Months Ended March 31, 1998, the Years
              Ended March 31, 1999 and 2000 and the Three Months Ended June 30, 2000........................             F-5
            Consolidated Statements of Cash Flows for the Year Ended December 31, 1997.......................
              the Three Months Ended March 31, 1998, the Years Ended March 31, 1999
              and 2000 and the Three Months Ended June 30, 2000.............................................             F-6
            Consolidated Statements of Stockholders' Equity (Deficit) for the Year Ended
              December 31, 1997, the Three Months Ended March 31, 1998, the Years
              Ended March 31, 1999 and 2000 and the Three Months Ended June 30, 2000........................             F-7
            Notes to the Consolidated Financial Statements...................................................    F-8 to F-31
         FINANCIAL STATEMENT SCHEDULE
            For the Year Ended December 31, 1997, the Three Months Ended March
              31, 1998, the Years Ended March 31, 1999 and 2000 and the Three
              Months Ended June 30, 2000
            Schedule II -- Valuation and Qualifying Accounts.................................................           F-32
</TABLE>

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

         On March 20, 2000, the Company's Board of Directors appointed Deloitte
& Touche LLP as its independent accountants, replacing Arthur Andersen LLP (the
"Former Accountants").

         During the Company's two most recent fiscal years, there were no
disagreements with the Former Accountants on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of the Former
Accountants, would have caused them to make reference to the subject matter of
the disagreement in their report. None of the Former Accountants' reports on the
Company's financial statements for either of the past two years contained an
adverse opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principles.

         In addition, there were no reportable events in accordance with Item
304(a)(1)(v)(A)-(D) of Regulation S-K.

         A letter from the Former Accountants addressed to the Securities and
Exchange Commission in accordance with Item 304(a)(3) of Regulation S-K, stating
that they agree with the Registrant's response to Item 4 of the Registrant's
Current Report on Form 8-K, dated March 20, 2000, was filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000,
which is herein incorporated by reference.

                                       33
<PAGE>   37
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
NAME                                  AGE   POSITION                           SINCE    TERM OF OFFICE
----                                  ---   --------                           -----    --------------
<S>                                   <C>   <C>                                <C>      <C>
Executive Officers and Directors:
Bruno Bonnell                         42    Chairman of the Board of           1999     2001
                                            Directors and Chief Executive
                                            Officer
Denis Guyennot                        37    Director, President, Chief         2000     2002
                                            Operating Officer and Secretary
Steven A. Denning (1)                 51    Director                           1995     2003
Thomas A. Heymann (1)                 42    Director                           1999     2001
Ann E. Kronen (1)                     42    Director                           2000     2002
Thomas Schmider                       38    Director                           1999     2003
David J. Fremed                       39    Chief Financial Officer            2000        -
Harry M. Rubin                        47    President, International Division  1998        -
</TABLE>

-----------------------------
(1)      Member of the audit committee.

         BRUNO BONNELL has served as a director since December 16, 1999 and has
been Chairman of the Board and Chief Executive Officer of the Company since
February 11, 2000. Since June 1983, Mr. Bonnell has also been the Chairman of
the Board of Directors and Chief Executive Officer of Infogrames SA, the
Company's parent corporation.

         DENIS GUYENNOT has served as a director of the Company since February
10, 2000. Since February 19, 2000, he has also served as President, Chief
Operating Officer and Secretary of the Company. From January 1999 to January
2000, Mr. Guyennot served as President of Distribution for Infogrames
Entertainment Europe. From July 1998 to January 1999, Mr. Guyennot served as
President of Infogrames South of Europe. In 1988, Mr. Guyennot founded Ecudis, a
distributor of interactive software in Europe, which was acquired by Infogrames
in July 1998.

         STEVEN A. DENNING has served as a director of the Company since
February 1995. Mr. Denning is the Executive Managing Member of General Atlantic
Partners, LLC, a private equity investment firm focused exclusively on Internet
and information technology investments on a global basis. Mr. Denning is also an
employee of General Atlantic Service Corporation. Mr. Denning serves on the
Board of Directors of Eclipsys Corporation and Exult, Inc. as well as the boards
of several private companies in which affiliates of General Atlantic Partners,
LLC are investors.

         THOMAS A. HEYMANN has served as a director since February 8, 1999. From
February 8, 1999 until February 10, 2000, he was Chairman of the Board and Chief
Executive Officer of the Company. From November 1994 to February 1999, Mr.
Heymann was President of The Disney Store, Inc.

         ANN E. KRONEN has served as a director of the Company since February
10, 2000. Since 1996, Ms. Kronen has been an independent consultant specializing
in strategic planning and management development issues. Previously, she was
Vice President of Product Development for Disney Educational Publishing.

         THOMAS SCHMIDER has served as a director of the Company since December
16, 1999. Since June 1983, Mr. Schmider has been the Managing Director of
Infogrames SA, the Company's parent corporation. Mr. Schmider serves on the
board of directors of several private companies that are affiliates of
Infogrames SA.

         DAVID J. FREMED has served as Chief Financial Officer of the Company
since May 2000. From 1996 until May 2000, Mr. Fremed served in various financial
capacities, including Chief Financial Officer and Treasurer of Marvel
Enterprises, Inc. (formerly Toy Biz, Inc.). Prior to that, Mr. Fremed was Vice
President and Controller of Toy Biz, Inc.

                                       34
<PAGE>   38
         HARRY M. RUBIN has served as President of the International Division of
the Company since April 1998. Prior to that, Mr. Rubin was Executive Vice
President and General Manager, International Division and Business Affairs of
the Company.

BOARD COMPOSITION

         The Board of Directors of the Company directs the management of the
business and affairs of the Company, as provided by Delaware law, and conducts
its business through meetings of the Board and an Audit Committee. In addition,
from time to time, special committees may be established under the direction of
the Board when necessary to address specific issues.

         The Board of Directors held three meetings in the three month period
ended June 30, 2000. During the period in which he or she served as a director,
each director attended at least 75% of the aggregate of the total number of
meetings of the Board of Directors plus the total number of meetings of the
committees of the Board on which he or she served.

         The Audit Committee currently is composed of Mr. Denning, Mr. Heymann
and Ms. Kronen. Prior to December 16, 1999, the Audit Committee was composed of
Stanley Cayre, William Ford and Jordan Levy, former members of the Board of
Directors. The Audit Committee reviews the adequacy of internal controls, the
results and scope of annual audits and other services provided by the Company's
independent public accountants. The Audit Committee met once in the three month
period ended June 30, 2000. The Board of Directors has adopted an Audit
Committee Charter, which sets forth the function and responsibilities of the
Audit Committee.

         The Company currently does not have a Compensation Committee. Following
the acquisition by Infogrames SA of its interest in the Company and the
subsequent reconstitution of the Board of Directors, the Board deferred the
election of a Compensation Committee and agreed to act in the interim as a whole
with respect to the Company's compensation plans, programs and policies for
executive officers, monitoring the performance and compensation of executive
officers and other key employees, and related decisions concerning matters of
executive compensation.

         The Company does not have a nominating committee. The functions
customarily performed by a nominating committee are performed by the Board of
Directors as a whole. Any stockholder who wishes to make a nomination at an
annual or special meeting for the election of directors must do so in compliance
with the applicable procedures set forth in the By-laws.

DIRECTOR COMPENSATION

         Directors who also serve as employees of the Company do not receive any
compensation for their service on the Board of Directors. The Company currently
does not have any standard arrangements with respect to the compensation of
non-employee directors.

         Prior to December 16, 1999, each non-employee director of the Company
was paid an annual retainer of $15,000 and a fee of $1,000 for each meeting of
the Board of Directors or any committee thereof he attended.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Exchange Act requires the directors and executive
officers of the Company and persons who beneficially own more than ten percent
of the Common Stock (collectively, the "Reporting Persons") to report their
ownership of and transactions in the Common Stock to the SEC. Copies of these
reports are also required to be supplied to the Company. The Company believes,
upon a review of the copies of such reports received by the Company and written
representations furnished by the Reporting Persons to the Company, that during
the three months ended June 30, 2000 the Reporting Persons complied with all
applicable Section 16(a) reporting requirements.

                                       35
<PAGE>   39
ITEM 11.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

         The following table sets forth information concerning compensation
earned by the Company's Chief Executive Officer, its two most highly compensated
executive officers for the fiscal years ended March 31, 1999 and 2000 and its
two other most highly paid executive officers for the fiscal years ended March
31, 1999 and 2000 (collectively, the "Named Executive Officers") for services
rendered in all capacities to the Company for the fiscal years ended March 31,
1999 and 2000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                             ANNUAL COMPENSATION                             LONG-TERM COMPENSATION
                                -----------------------------------------------    ---------------------------------------------
                                                                                   RESTRICTED      SECURITIES
                                                                   OTHER ANNUAL      STOCK         UNDERLYING      ALL OTHER
NAME AND PRINCIPAL POSITION     YEAR     SALARY($)    BONUS($)     COMPENSATION     AWARDS($)      OPTIONS(#)    COMPENSATION($)
---------------------------     ----     ---------    --------     ------------     ---------      ----------    ---------------
<S>                             <C>      <C>          <C>          <C>             <C>             <C>           <C>
Bruno Bonnell..............     2000          --            --              --              --           --               --
   Chief Executive
     Officer(1)

Thomas A. Heymann..........     2000      576,692           --         129,854(2)           --           --       1,008,888(3)
   Former Chief Executive       1999       70,615      250,000              --              --      600,000(4)           --
     Officer(1)

Denis Guyennot.............     2000           --           --              --              --      100,000              --
   President, Chief
     Operating Officer and
     Secretary(5)

Harry M. Rubin.............     2000      420,385       58,000(6)           --              --           --              --
   President of the             1999      381,769           --              --              --           --              --
     International Division     1998      300,000      151,800(7)           --              --       50,000(8)           --

John T. Baker IV...........     2000      289,423      200,000          94,420(2)           --      150,000(10)     575,000(11)
   Former President and Chief
     Operating Officer(9)

David J. Fremed............     2000           --           --              --              --           --              --
   Chief Financial
     Officer(12)

Charles F. Bond............     2000      344,262      327,083              --              --           --           4,800(16)
   Former President, Value      1999      354,231      631,250(14)          --              --       40,000(15)       4,800(16)
     Products,  Close-outs      1998      308,078       25,000(7)           --              --           --           4,750(16)
     Division(13)
</TABLE>

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

(1)    Mr. Heymann resigned as the Company's Chief Executive Officer effective
       February 10, 2000, and Mr. Bonnell was appointed Chief Executive Officer
       effective February 11, 2000. See "Employment Contracts, Termination of
       Employment and Change-in-Control Arrangements -- Severance Agreement with
       Thomas A. Heymann." Mr. Bonnell did not receive any compensation from the
       Company in fiscal year 2000.

(2)    Represents housing expenses paid by the Company.

(3)    Represents (i) a severance payment of $1,000,000 paid to Mr. Heymann
       pursuant to his severance agreement and (ii) $8,888 in life insurance
       premiums.

(4)    Pursuant to Mr. Heymann's severance agreement, Mr. Heymann forfeited
       600,000 options and became fully vested in options to purchase 112,500
       shares of common stock at an exercise price of $25.00. See "Employment
       Contracts, Termination of Employment and Change-in-Control Arrangements
       -- Severance Agreement with Thomas A. Heymann."

(5)    Mr. Guyennot became President, Chief Operating Officer and Secretary on
       February 19, 2000. Because Mr. Guyennot did not join the Company's
       payroll until April 3, 2000, there is no salary or bonus information
       presented for the fiscal year ended March 31, 2000.

(6)    Represents bonus earned during the fiscal year ended March 31, 1999.

(7)    Represents bonus earned during the fiscal year ended December 31, 1997.

(8)    These stock options fully vested on December 16, 1999 upon a change of
       control of the Company.

(9)    Mr. Baker was President and Chief Operating Officer of the Company from
       April 12, 1999 until February 18, 2000.

(10)   Mr. Baker was granted 150,000 options on April 28, 1999, which were
       forfeited upon his resignation on February 18, 2000.

                                       36
<PAGE>   40
(11)   Represents $575,000 paid to Mr. Baker pursuant to his severance
       agreement. See "Employment Contracts, Termination of Employment and
       Change-in-Control Arrangements -- Severance Agreement with John T. Baker
       IV."

(12)   Mr. Fremed became Chief Financial Officer of the Company in May 2000.

(13)   Mr. Bond left the employ of the Company on January 31, 2000.

(14)   Includes an annual bonus payable under the original employment agreement,
       which the Company and Mr. Bond entered into in connection with the
       acquisition of Slash Corporation. This bonus was earned in the year
       indicated, but paid in the immediately subsequent year.

(15)   Mr. Bond forfeited these options upon leaving the Company in January
       2000.

(16)   Represents Company contributions on behalf of the Named Executive
       Officers to the Company's 401(k) Profit Sharing Plan.

         Since April 2000, the Company has leased a house in New York for use by
the directors and executive officers of the Company at a cost of $10,000 per
month.

         Option Grants. Shown below is information regarding grants of stock
options under the Company's stock incentive plans to the Named Executive
Officers during the fiscal year ended March 31, 2000.

<TABLE>
<CAPTION>
                                                                                INDIVIDUAL GRANTS
                                               ------------------------------------------------------------------------------
                                                NUMBER OF
                                               SECURITIES              % OF TOTAL
                                               UNDERLYING            OPTIONS GRANTED
                                                 OPTIONS              TO EMPLOYEES         EXERCISE PRICE        EXPIRATION
NAME                                             GRANTED             IN FISCAL YEAR           ($/SH)(2)             DATE
----                                             -------             --------------           ---------             ----
<S>                                            <C>                   <C>                   <C>                   <C>
Bruno Bonnell.............................             --                     --                   --                 --
Thomas A. Heymann.........................             --                     --                   --                 --
Denis Guyennot............................        100,000(1)               24.11               9.3775             1/4/11
Harry M. Rubin............................             --                     --                   --                 --
John T. Baker IV..........................             --                     --                   --                 --
David J. Fremed...........................             --                     --                   --                 --
Charles F. Bond...........................             --                     --                   --                 --
</TABLE>

(1)    The option becomes exercisable in four equal annual installments
       commencing on January 4, 2001.

(2)    The exercise price per share of the options granted was equal to the fair
       market value of the Common Stock on the date of grant.

                                       37
<PAGE>   41
         The following table shows the hypothetical value of the options granted
at the end of the option terms (ten years) if the stock price were to appreciate
annually by 5% and 10%, respectively. These assumed rates of growth are required
by the SEC for illustration purposes only and are not intended to forecast
possible future stock prices.

<TABLE>
<CAPTION>
                                                                                       POTENTIAL REALIZABLE VALUE AT ASSUMED
                                                            NUMBER OF                   ANNUAL RATES OF STOCK PRICE
                                                           SECURITIES                   APPRECIATION FOR OPTION TERM(1)
                                                           UNDERLYING                   -------------------------------
NAME                                                     OPTIONS GRANTED             5%($)                      10%($)
----                                                     ---------------             -----                      ------
<S>                                                      <C>                         <C>                   <C>
Bruno Bonnell.......................................            --                        --                      --
Thomas A. Heymann...................................            --                        --                      --
Denis Guyennot......................................       100,000                   589,589               1,494,134
Harry M. Rubin......................................            --                        --                      --
John T. Baker IV....................................            --                        --                      --
David J. Fremed.....................................            --                        --                      --
Charles F. Bond.....................................            --                        --                      --
</TABLE>

(1)    Represents the product of (i) the difference between (A) the product of
       the per-share fair market value at the time of the grant compounded
       annually at the assumed rate of appreciation over the term of the option,
       and (B) the per-share exercise price of the option, and (ii) the number
       of shares underlying the grant at the fiscal year end.

         Aggregated Option Exercises and Quarter-End Option Values. Shown below
is information relating to the exercise of stock options during the fiscal year
ended March 31, 2000 for each of the Company's Named Executive Officers and the
year-end value of unexercised options held by the Named Executive Officers.

<TABLE>
<CAPTION>
                                                                                     NUMBER OF          VALUE OF UNEXERCISED
                                                                               SECURITIES UNDERLYING        IN-THE-MONEY
                                                                                UNEXERCISED OPTIONS          OPTIONS AT
                                              SHARES                           AT JUNE 30, 2000 (#)     JUNE 30, 2000 ($)(1)
                                            ACQUIRED ON         VALUE              (EXERCISABLE/            (EXERCISABLE/
NAME                                        EXERCISE(#)      REALIZED($)          UNEXERCISABLE)           UNEXERCISABLE)
----                                        -----------      -----------          --------------           --------------
<S>                                         <C>              <C>               <C>                      <C>
Bruno Bonnell...........................         --                 --                     0/0                      0/0
Thomas A. Heymann.......................         --                 --               112,500/0                      0/0
Denis Guyennot..........................         --                 --               0/100,000                0/656,250
Harry M. Rubin..........................         --                 --               115,546/0                 60,707/0
John Baker..............................         --                 --                     0/0                      0/0
David J. Fremed.........................         --                 --                     0/0                      0/0
Charles F. Bond.........................         --                 --                 6,200/0                      0/0
</TABLE>

(1)    Market value of underlying shares of Common Stock, based on the average
       of the high and low sales price ($15.9375), on March 31, 2000, minus the
       aggregate exercise price.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

   Severance Agreement with Thomas A. Heymann

         Thomas A. Heymann resigned as Chief Executive Officer of the Company
effective February 15, 2000. The Company and Mr. Heymann entered into a
severance agreement dated February 15, 2000 (the "Heymann Severance Agreement"),
which provides for payments by the Company to Mr. Heymann of $2.0 million in two
equal installments by no later than January 6, 2001. Pursuant to the Heymann
Severance Agreement, Mr. Heymann received options to purchase 112,500 shares of
the Common Stock at an exercise price of $25.00 per share. The options are
exercisable immediately and have a term expiring two years from the date of
termination of his employment.

         In connection with Mr. Heymann's resignation, the Company entered into
a consulting agreement with Mr. Heymann effective through February 14, 2002 (the
"Heymann Consulting Agreement"). Pursuant to the Heymann Consulting

                                       38
<PAGE>   42
Agreement, Mr. Heymann will receive $1.2 million in two equal installments by no
later than January 6, 2001. In addition, Mr. Heymann and his dependents are
entitled to participate in the Company's health benefit plan for 18 months after
the effective date of the Heymann Consulting Agreement. The Heymann Consulting
Agreement contains a covenant not to compete with or solicit employees of the
Company for a period of two years.

   Severance Agreement with John T. Baker IV

         John T. Baker IV resigned as President of the Company effective
February 18, 2000. The Company and Mr. Baker entered into a severance agreement
dated February 18, 2000 (the "Baker Severance Agreement"), which provides for
payments by the Company to Mr. Baker of $1.15 million in two equal installments
by no later than January 1, 2001.

         Pursuant to the Baker Severance Agreement, Mr. Baker forfeited all
options to purchase Common Stock.

         In connection with Mr. Baker's resignation, the Company entered into a
consulting agreement with Mr. Baker effective through February 14, 2002 (the
"Baker Consulting Agreement"). Pursuant to the Baker Consulting Agreement, Mr.
Baker will receive $1.15 million in two equal installments by no later than
January 6, 2001. In addition, Mr. Baker and his dependents are entitled to
participate in the Company's health benefit plan for 18 months after the
effective date of the Baker Consulting Agreement. The Baker Consulting Agreement
contains a covenant not to compete with or solicit employees of the Company for
a period of two years.

   Severance Agreement with Jack J. Cayre

         The Company and Jack J. Cayre entered into an agreement and release
dated March 7, 2000 (the "Cayre Severance Agreement") which terminates the
employment agreement dated August 18, 1998 (the "Cayre Employment Agreement")
between the Company and Mr. Cayre effective as of February 18, 2000. Pursuant to
the Cayre Severance Agreement, the Company will pay Mr. Cayre (1) severance
payments equal to his base salary from February 18, 2000 through February 18,
2002, payable at the times and in the amounts such base salary would have been
so paid under the Cayre Employment Agreement; (2) a $2,000 per calendar month
automobile allowance from February 18, 2000 through June 30, 2002 and (3) in
lieu of a bonus, payments of $62,344.09 on July 1, 2001 and January 1, 2002;
payments of $65,210.92 on July 1, 2001 and January 1, 2002; and payments of
$60,183.77 on July 31, 2002 and January 1, 2003. Mr. Cayre will continue to
participate in the Company's medical plans through June 30, 2002.

   Severance Agreement with Harry M. Rubin

         The Company and Harry M. Rubin entered into an agreement and release
dated April 7, 2000 and a letter agreement dated June 15, 2000 (together, the
"Rubin Severance Agreement"), which will terminate certain provisions of the
employment agreement dated as of April 28, 1998 (the "Rubin Employment
Agreement") between the Company and Mr. Rubin if Mr. Rubin elects to resign from
the Company on or prior to September 30, 2000 (the "Termination Date"). Pursuant
to the Rubin Severance Agreement, if Mr. Rubin resigns from the Company on or
prior to the Termination Date, the Company will pay Mr. Rubin (1) severance
payments equal to his base salary for two years from the Termination Date,
payable at the times and in the amounts such base salary would have been so paid
under the Rubin Employment Agreement; (2) a $2,000 per calendar month automobile
allowance for two years from the Termination Date; (3) in lieu of a bonus,
payments of $101,250 on October 1, 2000 and January 1, 2001; payments of
$107,625 on July 1, 2001 and January 1, 2002; and payments of $113,006 on July
1, 2002 and January 1, 2003; and (4) reimbursement for taxes payable by Mr.
Rubin as a result of the life insurance payments made by the Company prior to
the Termination Date. Mr. Rubin will also continue to participate in the
Company's medical plans through the second anniversary of the Termination Date.

   Employment Agreement with David J. Fremed

         On April 20, 2000, the Company entered into an employment agreement
with David J. Fremed, appointing him as Senior Vice President, Finance and Chief
Financial Officer of the Company beginning May 8, 2000. Mr. Fremed received a
sign-on bonus of $20,000 and will receive an annual salary of $275,000. Mr.
Fremed will be eligible to participate in the Company's Corporate Incentive
Program, pursuant to which he may receive a bonus of up to 40% of his base
salary. In addition, Mr. Fremed will receive options to purchase 30,000 shares
of Common Stock, which will vest at a rate of 25% per

                                       39
<PAGE>   43
year over a four-year period. If Mr. Fremed's employment is terminated without
cause within two years of his employment with the Company, he will receive a
severance payment equal to six months of his base salary.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information, as of May 15, 2000,
concerning the Common Stock of the Company beneficially owned by (i) each
director of the Company, (ii) the Named Executive Officers and all executive
officers and directors as a group and (iii) each stockholder known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock. Unless otherwise indicated in the footnotes to the table, the beneficial
owners named have, to the knowledge of the Company, sole voting and dispositive
power with respect to the shares beneficially owned, subject to community
property laws where applicable. The number of shares of Common Stock reflects
the one-for-five reverse stock split effected on June 26, 2000.

<TABLE>
<CAPTION>
                                                                                    AMOUNT AND NATURE
                                                                                      OF BENEFICIAL
                                                                                   OWNERSHIP OF SHARES
NAME OF BENEFICIAL OWNER                                                           OF COMMON STOCK(1)           PERCENTAGE**
------------------------                                                           ------------------           ------------
<S>                                                                                <C>                          <C>
General Atlantic Partners, LLC.................................................            3,985,705(2)            17.2
   3 Pickwick Plaza, Greenwich, CT 06830
Steven A. Denning..............................................................            3,985,705(3)            17.2
California U.S. Holdings, Inc..................................................           20,368,296(4)            71.8
   84, rue du ler Mars 1943, Villeurbanne, 69100 France

Infogrames Entertainment SA....................................................           20,368,296(5)            71.8
   84, rue du ler Mars 1943, Villeurbanne, 69100 France
Bruno Bonnell..................................................................           20,368,296(5)            71.8
Thomas Schmider................................................................           20,368,296(5)            71.8
Thomas A. Heymann..............................................................              112,500(6)               *
Ann E. Kronen..................................................................                    0(7)               *
Denis Guyennot.................................................................                    0(8)               *
Charles F. Bond................................................................                6,200(9)               *
Harry M. Rubin.................................................................              115,546(10)              *
John T. Baker IV...............................................................                    0(11)              *
David J. Fremed................................................................                  340(12)              *
All executive officers and directors as a group (9 persons)....................           24,588,587(13)          79.0%
</TABLE>

*      Less than 1%

**     As of August 15, 2000, 20,686,638 shares of Common Stock were
       outstanding, excluding shares issuable upon exercise or conversion of
       outstanding options, warrants, convertible notes and other convertible
       securities.

(1)    For purposes of this table, beneficial ownership of securities is defined
       in accordance with the rules of the SEC and means generally the power to
       vote or exercise investment discretion with respect to securities,
       regardless of any economic interests therein. Except as otherwise
       indicated, the beneficial owners of shares of Common Stock listed above
       have sole investment and voting power with respect to such shares,
       subject to community property laws where applicable. In addition, for
       purposes of this table, a person or group is deemed to have "beneficial
       ownership" of any shares that such person has the right to acquire by
       July 14, 2000. For purposes of calculating the percentage of outstanding
       shares held by each person listed above, any shares which such person has
       the right to acquire by July 14, 2000 are deemed to be outstanding, but
       not for the purpose of calculating the percentage ownership of any other
       person.

(2)    Includes (i) 836,909 shares held by General Atlantic Partners 16, L.P.
       ("GAP 16"), 418,455 shares held by General Atlantic Partners 19, L.P.
       ("GAP 19"), 129,541 shares held by GAP Coinvestment Partners, L.P. ("GAP
       Coinvestment") and 100,800 shares held by General Atlantic Partners II,
       L.P. ("GAP II"), and (ii) 2,040,600 shares of Common Stock issuable upon
       conversion of a convertible note held by General Atlantic Partners 54,
       L.P. ("GAP 54") and 59,400 shares of Common Stock issuable upon
       conversion of a convertible note held by GAP Coinvestment

                                       40
<PAGE>   44
       Partners II, L.P. ("GAP Coinvestment II"). The general partner of GAP 16,
       GAP 19, GAP II and GAP 54 is General Atlantic Partners, LLC, a Delaware
       limited liability company. The managing members of General Atlantic
       Partners, LLC are also the general partners of GAP Coinvestment and GAP
       Coinvestment II. Mr. Denning, a director of the Company, is the Executive
       Managing Member of General Atlantic Partners, LLC and a general partner
       of GAP Coinvestment and GAP Coinvestment II. Mr. Denning disclaims
       beneficial ownership of shares owned by GAP 16, GAP 19, GAP 54 and GAP
       Coinvestment, GAP Coinvestment II and GAP II, except to the extent of his
       pecuniary interest therein.

(3)    See footnote 2.

(4)    Includes a proxy for the vote of 260,000 shares of Common Stock held by
       the Cayre family; 955,000 shares of Common Stock issuable upon exercise
       of warrants; and 6,727,304 shares of Common Stock issuable upon
       conversion of a convertible note. Infogrames SA may be deemed to
       beneficially own all of the shares held by CUSH because CUSH is a
       wholly-owned subsidiary of Infogrames SA. Mr. Bruno Bonnell may be deemed
       to beneficially own all of the shares held by CUSH because he is the
       Chairman of the Board of Directors, President and Chief Executive Officer
       of Infogrames SA. Mr. Thomas Schmider may be deemed to beneficially own
       all of the shares held by CUSH because he is the Managing Director of
       Infogrames SA. Each of Mr. Bonnell and Mr. Schmider disclaims beneficial
       ownership of such shares.

(5)    See footnote 4. Messrs. Bonnell and Schmider were elected to serve as
       members of the Board of Directors of the Company on December 16, 1999.
       Mr. Bonnell was elected Chairman of the Board and Chief Executive Officer
       of the Company effective February 11, 2000. Mr. Bonnell is the beneficial
       owner of approximately 9% of Infogrames SA. Mr. Schmider is the
       beneficial owner of approximately 8% of Infogrames SA.

(6)    Mr. Heymann is a Director of the Company. Mr. Heymann resigned as
       Chairman of the Board and Chief Executive Officer of the Company
       effective February 11, 2000. Represents 112,500 shares underlying options
       exercisable within 60 days.

(7)    Ms. Kronen is a Director of the Company.

(8)    Mr. Guyennot is a Director and the President and Chief Operating Officer
       of the Company.

(9)    Mr. Bond resigned as President, Value Products, Close-Outs Division
       effective January 31, 2000. Represents 6,200 shares underlying options
       exercisable within 60 days.

(10)   Mr. Rubin is President, International Division of the Company. Represents
       115,546 shares underlying options exercisable within 60 days.

(11)   Mr. Baker resigned as President and Chief Operating Officer of the
       Company effective February 18, 2000.

(12)   Mr. Fremed is Senior Vice President, Finance and Chief Financial Officer
       of the Company. Represents 340 shares owned by Mr. Fremed.

(13)   See footnote 1. Includes (i) 955,000 shares issuable upon the exercise of
       warrants to purchase Common Stock; (ii) 6,727,304 shares issuable upon
       conversion of the note held by CUSH; (iii) 2,500,000 shares issuable upon
       conversion of the notes held by GAP Coinvestment II and GAP 54; and (iv)
       34,246 shares subject to options exercisable within 60 days.

CHANGE OF CONTROL OF THE COMPANY

         On December 16, 1999, pursuant to a Securities Purchase Agreement (the
"Purchase Agreement"), dated as of November 15, 1999, by and among the Company,
Infogrames SA and CUSH, the Company issued to CUSH and CUSH acquired from the
Company: (i) 5,714,286 shares of Common Stock, at a purchase price of $8.75 per
share and (ii) a 5% subordinated convertible note in the aggregate principal
amount of $60,587,206.72 (the "Note"), which as of August 15, 2000 is
convertible into an aggregate of 6,727,304 shares of Common Stock at a
conversion price of $9.25 per share, subject to antidilution adjustments (such
transaction, the "Purchase"). In connection with the purchase of Company Common
Stock from the Cayre family, the members of the Cayre family granted Parent an
irrevocable proxy to vote the 1.3 million shares of Company Common Stock
retained by them for the election and removal of directors of the Company as
Parent in its absolute discretion determines to be appropriate. The Cayre family
retains the right to transfer any of the 1.3 million shares of Company Common
Stock that it still owns, and upon transfer, Parent will no longer have the
right to vote such shares.

                                       41
<PAGE>   45
         Concurrently with the consummation of the Purchase, CUSH acquired (i)
an aggregate of 6,711,707 shares of Common Stock from Joseph J. Cayre, Kenneth
Cayre, Stanley Cayre, Jack J. Cayre, their children and various associated
trusts (together, the "Cayre family") for an aggregate purchase price of $25
million and (ii) subordinated notes of the Company in the principal amount of
$10 million, plus accrued interest, held by the Cayre family. Joseph J. Cayre,
Kenneth Cayre, Stanley Cayre and Jack J. Cayre are former directors of the
Company.

         Also concurrently with the consummation of the Purchase, CUSH acquired
from General Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, L.P.
(together, "GAP") warrants to purchase 900,000 shares of Common Stock, at an
exercise price of $0.05 per share (the "GAP Warrants"), for nominal
consideration.

         In addition, pursuant to a Securities Exchange Agreement, dated as of
November 15, 1999, by and among the Company and GAP (the "Securities Exchange
Agreement"), the Company issued to GAP non-interest-bearing subordinated
convertible notes in the aggregate principal amount of $50 million, which are
convertible into an aggregate of 2,500,000 shares of Common Stock at a
conversion price of $20.00 per share, subject to antidilution adjustments (the
"GAP Notes"), in exchange for 120,000 shares of the Company's Series A
Convertible Preferred Stock with a liquidation preference of $30 million and
subordinated notes of the Company in the principal amount of $20 million, plus
accrued interest, held by GAP.

         After consummation of the above described transactions, Infogrames SA
and CUSH may be deemed to beneficially own an aggregate of approximately 20.1
million shares of Common Stock on a fully diluted basis, or 71.7% of the voting
securities of the Company. Infogrames SA acquired these securities using funds
from its working capital.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATED PARTY TRANSACTIONS

         GAP. On February 23, 1999, GAP purchased an aggregate of 600,000 shares
of Series A Convertible Preferred Stock (the "Preferred Stock") for an aggregate
purchase price of $30,000,000. Each share of Preferred Stock was convertible
into 10 shares of common stock.

         On June 29, 1999, GAP entered into a Subordinated Loan Commitment
Letter (the "Commitment Letter") pursuant to which GAP agreed to loan to the
Company on July 30, 1999 an aggregate of $20,000,000 if the Company had not paid
in full on July 30, 1999 certain amounts owed pursuant to the then existing
credit agreement.

         On June 29, 1999, pursuant to a Warrant Agreement, dated as of June 29,
1999 (the "Warrant Agreement"), among the Company, GAP, Joseph J. Cayre, Kenneth
Cayre and Stanley Cayre, the Company issued to GAP warrants to purchase, at an
exercise price equal to $0.05 per share, 100,000 shares of Common Stock, in
consideration of the execution by GAP of the Commitment Letter. Pursuant to the
Warrant Agreement, the aggregate number of warrants was subject to automatic
increase by the following number of warrants (the "Additional Warrants") on the
following dates upon the occurrence of the following events (the "Triggering
Events"): (i) 300,000 on July 30, 1999, if the parties to the Warrant Agreement
made the subordinated loans under the Commitment Letter, (ii) 500,000 on
November 1, 1999, if the Company had not executed on or prior to October 31,
1999, an agreement (a "Sale Agreement") relating to a recapitalization,
reorganization, merger, sale or other business combination transaction after the
consummation of which the stockholders of the Company did not hold at least a
majority of the voting power of the surviving person, (iii) 500,000 on the date
of termination of such Sale Agreement if the Company entered into such an
agreement on or prior to October 31, 1999, but such Sale Agreement thereafter
terminated for any reason, (iv) 600,000 on February 29, 2000 if the Company had
not closed the transactions contemplated by the Sale Agreement on or prior to
February 28, 2000 and repaid in full the subordinated loans made pursuant to the
Commitment Letter and (v) 600,000 on June 30, 2000, and the last day of each
fiscal quarter thereafter if the Company had not repaid in full during such
quarter the subordinated loans made pursuant to the Commitment Letter. The
Additional Warrants have an exercise price of $0.05 per share.

         On July 29, 1999, in accordance with the Commitment Letter, GAP made a
$20,000,000 unsecured subordinated loan to the Company. Concurrently, in
accordance with the Warrant Agreement, the Company issued to GAP 1,500,000
Additional Warrants to purchase shares of Common Stock. On October 31, 1999, in
accordance with the Warrant Agreement, the Company issued to GAP 500,000
Additional Warrants to purchase shares of Common Stock.

                                       42
<PAGE>   46
         On December 16, 1999, pursuant to the Securities Exchange Agreement,
the Company issued to GAP the GAP Notes in consideration of the surrender to the
Company by GAP of the Preferred Stock and its subordinated note of the Company
with a face value of $20,000,000.

         On December 16, 1999, pursuant to the Equity Purchase and Voting
Agreement, dated as of November 15, 1999, among Infogrames SA, CUSH and GAP, GAP
transferred to CUSH the GAP Warrants in consideration of $990.

         Infogrames SA. In connection with the Infogrames transaction, the
Company entered into an agreement with Infogrames SA, effective as of December
16, 1999, pursuant to which Infogrames SA provides distribution of the Company's
products in Europe, and effective July 1, 2000 in Australia, pursuant to which
the Company is entitled to receive 30% of the gross profit on such products.

         In connection with the Infogrames transaction, the Company entered into
an agreement with Infogrames SA pursuant to which Infogrames SA provides certain
management and support services to the Company on a costs plus expenses basis.
The Services Agreement expires on December 31, 2000, unless earlier terminated
or extended by the parties.

         As of February 15, 2000, Infogrames SA, through CUSH, entered into an
agreement with First Union National Bank, as agent for a syndicate of banks
(together, the "Banks"), pursuant to which Infogrames SA assumed the Banks'
interest in the Company's Credit Agreement. In connection with the assumption by
Infogrames SA of the Credit Agreement, warrants to acquire 45,000 shares of the
Company's Common Stock, at an exercise price of $0.05 per share, were issued to
Infogrames.

         In connection with change of the Company's name to Infogrames, Inc.,
the Company entered into an agreement, effective as of May 10, 2000, pursuant to
whether the Company has received from Infogrames SA a non-exclusive,
royalty-free license to use the name Infogrames, which license may not be
canceled on less than one year's notice unless the Company breaches its
obligations under the license.

         During the three month period ended June 30, 2000, the Company
purchased $1.2 million of product from Infogrames SA, of which $1.1 million
remains payable, representing approximately 1% of total products purchased by
the Company for such period.

         Infogrames North America, Inc. In connection with the Infogrames
transaction, for the period from November 16, 1999 through June 30, 2000, the
Company was granted the non-exclusive right in the U.S. and Canada to act as the
sales agent for INA, a wholly owned subsidiary of Infogrames SA, for INA's
products pursuant to which the Company received 3% of net receipts for such
products. The parties subsequently entered into an affiliated label agreement
for the period from July 1, 2000 to June 30, 2001 providing for payment to the
Company of 15% of net revenue for sales, distribution, credit and collection
services.

         Transactions between Infogrames UK Limited and GT Interactive Software
(Europe) Limited. GT Interactive Software (Europe) Limited ("GT UK") entered
into a number of transactions with Infogrames UK Limited ("Infogrames UK")
relating to the consolidation of its operations with Infogrames UK. Fixed assets
having a net book value of $722,000 were transferred to Infogrames UK for
$626,000. The resulting loss is included in restructuring charges for the period
ended March 31, 2000. Inventory having a cost of $270,000 was transferred at
original cost. Infogrames UK agreed to assume the ongoing costs of running GT
UK's office from March 1, 2000, including the salary costs of a number of
employees who transferred to Infogrames UK. Such salary charges totaled $265,000
and such charges that relate to ongoing operations other than salaries totaled
$94,000 for the month of March 2000. The lease on the UK office was formally
assigned to Infogrames UK in June 2000, although the rent for this office has
been borne by Infogrames UK from March 1, 2000. $38,000 of such rent was
re-charged to Infogrames UK for the month of March 2000. A deferred rent
liability of $203,000 arising from an initial rent free period on the office was
transferred to Infogrames UK.

         The following transactions occurred during the fiscal year 2000 between
the Company and former directors and officers of the Company. Information is
presented through the former directors' date of resignation, December 16, 1999.

         Leases. In May 1995, GT Interactive Software (Europe) Limited, the
Company's European subsidiary, entered into a lease with respect to its then
principal executive offices with Marylebone 248 Realty LLC ("Marylebone 248"),
an entity controlled by Joseph J. Cayre, former Chairman Emeritus of the Board
of Directors and Jack J. Cayre, former Executive Vice President and director of
the Company. This lease was terminated in August 1999. From April 1, 1999
through August 15,

                                       43
<PAGE>   47
 1999, the Company paid approximately $119,000 in rent to Marylebone 248.

         GoodTimes Home Video Corp. GoodTimes Home Video Corp. ("GTHV"), a
majority of whose stock was formerly owned by Joseph J. Cayre, Stanley Cayre and
Kenneth Cayre, performed certain assembly and packaging services for the
Company. As of March 31, 2000, the Company had commitments outstanding to GTHV
of approximately $2.1 million.

         REPS. In servicing its mass merchant accounts, the Company uses field
representatives supplied by REPS, a company owned by Joseph J. Cayre, Stanley
Cayre and Kenneth Cayre. REPS provides such services to the Company as well as
to third parties not affiliated with the Cayre family. The Company had an
agreement with REPS pursuant to which REPS supplied such services through May 1,
2000. The Company is currently operating on a month-to-month basis under the
terms of the expired agreement. From April 1, 1999 through December 16, 1999,
the Company paid approximately $2,686,000 in fees to REPS.

                                       44
<PAGE>   48
                                     PART IV

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

         (a)(1) and (2) Financial Statements and Financial Statement Schedules

         See Item 8 hereof.

         (a)(3) Exhibits

2.1         Agreement and Plan of Reorganization by and among the Company, GT
            Acquisition Sub, Inc., WizardWorks Group, Inc. and the Stockholders
            of WizardWorks Group, Inc., dated June 24, 1996 is incorporated
            herein by reference to Exhibit 2.1 to the Company's Current Report
            on Form 8-K filed on July 9, 1996.

2.2         Escrow Agreement by and among the Company, Paul D. Rinde, as the
            Stockholder Representative of WizardWorks Group, Inc., and Republic
            National Bank of New York, as Escrow Agent, dated June 24, 1996 is
            incorporated herein by reference to Exhibit 2.2 to the Company's
            Current Report on Form 8-K filed on July 9, 1996.

3.1         Amended and Restated Certificate of Incorporation is incorporated
            herein by reference to Exhibit 3.1 to the Company's Annual Report on
            Form 10-K for the fiscal year ended March 31, 2000.

3.2         Amended and Restated By-laws are incorporated herein by reference to
            Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1998.

4.1         Specimen form of stock certificate for Common Stock is incorporated
            herein by reference to Exhibit 4.1 to the Company's Annual Report on
            Form 10-K for the fiscal year ended March 31, 2000.

4.2         Certificate of the Powers, Designations, Preferences and Rights of
            the Series A Convertible Preferred Stock is incorporated herein by
            reference to Exhibit 3.1 to Company's Current Report on Form 8-K
            filed on March 2, 1999.

4.3         Stockholders' Agreement by and among Joseph J. Cayre, Kenneth Cayre,
            Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I
            attached thereto and the Company is incorporated herein by reference
            to an exhibit filed as a part of the Company's Registration
            Statement on Form S-1 filed October 20, 1995.

4.3a        Amendment to Stockholders Agreement, dated as of December 18, 1995,
            by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J.
            Cayre, the Trusts parties thereto and the Company is incorporated
            herein by reference to Exhibit 10.30 to the Company's Annual Report
            on Form 10-K for the year ended December 31, 1996.

4.4         Registration Rights Agreement by and among Joseph J. Cayre, Kenneth
            Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I
            attached thereto and the Company is incorporated herein by reference
            to an exhibit filed as a part of the Company's Registration
            Statement on Form S-1 filed October 20, 1995.

4.5         Amended and Restated Registration Rights Agreement, dated as of
            February 15, 2000, between California U.S. Holdings, Inc. and the
            Company is incorporated herein by reference to Exhibit 4.5 to the
            Company's Annual Report on Form 10-K for the fiscal year ended March
            31, 2000.

10.1        The 1995 Stock Incentive Plan (as amended on October 31, 1996) is
            incorporated herein by reference to Exhibit 10.1 to Amendment No. 2
            to the Company's Registration Statement on Form S-1, filed December
            6, 1996.*

10.2        The 1997 Stock Incentive Plan is incorporated herein by reference to
            Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1997.*



                                       45
<PAGE>   49
10.3        The 1997 Stock Incentive Plan (as amended on June 17, 1998) is
            incorporated herein by reference to Exhibit 10.5 to the Company's
            Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.*

10.4        The 2000 Stock Incentive Plain is incorporated herein by reference
            to Appendix B to the Company's proxy statement dated June 29, 2000.*

10.5        The 1998 Employee Stock Purchase Plan is incorporated herein by
            reference to Exhibit 10.6 to the Company's Quarterly Report on Form
            10-Q for the quarter ended June 30, 1998.*

10.6        Non-Competition Agreement, dated June 22, 1995, between the Company
            and Charles F. Bond is incorporated herein by reference to Exhibit
            10.6 to the Company's Registration Statement on Form S-1 filed
            October 20, 1995.*

10.7        Employment Agreement, dated April 19, 1996, between the Company and
            Andrew Gregor is incorporated herein by reference to Exhibit 10.5 to
            the Company's Quarterly Report on Form 10-Q for the quarter ended
            March 31, 1996.*

10.7a       Letter Agreement, dated March 12, 1999, between the Company and
            Andrew Gregor is incorporated herein by reference to Exhibit 10.51
            to the Company's Annual Report on Form 10-K for the fiscal year
            ended March 31, 1999.*

10.8        Employment Agreement, dated April 28, 1998, between the Company and
            David I. Chemerow is incorporated herein by reference to Exhibit
            10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
            ended June 30, 1998.*

10.8a       Amendment, dated May 5, 1999, to the Employment Agreement, dated May
            15, 1997, as previously amended on April 28, 1999, between the
            Company and David Chemerow is incorporated herein by reference to
            Exhibit 10.54 to the Company's Annual Report on Form 10-K for the
            fiscal year ended March 31, 1999.*

10.9        Employment Agreement, dated April 28, 1998, between the Company and
            Ronald Chaimowitz is incorporated herein by reference to Exhibit
            10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
            ended June 30, 1998.*

10.9a       Agreement, dated February 19, 1999, between the Company and Ronald
            Chaimowitz is incorporated herein by reference to Exhibit 10.52 to
            the Company's Annual Report on Form 10-K for the fiscal year ended
            March 31, 1999.*

10.10       Employment Agreement, dated April 28, 1998, between the Company and
            Harry M. Rubin is incorporated herein by reference to Exhibit 10.3
            to the Company's Quarterly Report on Form 10-Q for the quarter ended
            June 30, 1998.*

10.10a      Agreement and Release, dated April 7, 2000, by and between Harry M.
            Rubin and the Company is incorporated herein by reference to Exhibit
            10.10a to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 2000.*

10.10b      Letter Agreement, dated June 15, 2000, by and between Harry M. Rubin
            and the Company is incorporated herein by reference to Exhibit
            10.10b to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 2000.*

10.11       Employment Agreement, dated July 1, 1998, between the Company and
            Charles F. Bond is incorporated herein by reference to Exhibit 10.1
            to the Company's Quarterly Report on Form 10-Q for the quarter ended
            September 30, 1998.*



                                       46
<PAGE>   50
10.12       Employment Agreement, dated August 18, 1998, between the Company and
            Jack J. Cayre is incorporated herein by reference to Exhibit 10.2 to
            the Company's Quarterly Report on Form 10-Q for the quarter ended
            September 30, 1998.*

10.12a      Agreement and Release, dated March 7, 2000, by and between Jack J.
            Cayre and the Company is incorporated herein by reference to Exhibit
            10.12a to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 2000.*

10.13       Employment Agreement between the Company and Thomas A. Heymann is
            incorporated herein by reference to Exhibit 10.2 to the Company's
            Current Report on 8-K filed on March 2, 1999.*

10.13a      Separation Agreement, dated as of February 15, 2000, between the
            Company and Thomas A. Heymann is incorporated herein by reference to
            Exhibit 10.13a to the Company's Annual Report on Form 10-K for the
            fiscal year ended March 31, 2000.*

10.14       Employment Agreement, dated April 2, 1999, between the Company and
            John T. Baker IV is incorporated herein by reference to Exhibit
            10.53 to the Company's Annual Report on Form 10-K for the fiscal
            year ended March 31, 1999.*

10.14a      Separation Agreement, dated as of February 18, 2000, between the
            Company and John T. Baker IV is incorporated herein by reference to
            Exhibit 10.14a to the Company's Annual Report on Form 10-K for the
            fiscal year ended March 31, 2000.*

10.15       Letter Agreement, dated April 20, 2000, by and between David Fremed
            and the Company is incorporated herein by reference to Exhibit 10.15
            to the Company's Annual Report on Form 10-K for the fiscal year
            ended March 31, 2000.*

10.16       Lease Agreements between the Company and 16 East 40th Associates is
            incorporated herein by reference to Exhibit 10.15 to Company's
            Registration Statement on Form S-1 filed October 20, 1995.

10.17       Lease Agreement between the Company and Plymouth 2200, LLP, dated
            September 6, 1996 is incorporated herein by reference to Exhibit
            10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
            ended September 30, 1996.

10.18       Agreement of Lease, dated as of December 12, 1996, by and between
            the Company and F.S. Realty Corp is incorporated herein by reference
            to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the
            year ended December 31, 1996.

10.19       Services Agreement between the Company and GoodTimes Home Video
            Corp., dated as of January 1, 1995, is incorporated herein by
            reference to Exhibit 10.2 to the Company's Registration Statement on
            Form S-1 filed October 20, 1995.

10.20       GTIS Master Option and License Agreement between the Company and the
            Williams Entertainment Group, dated December 28, 1994, and the
            Amendment to such agreement, dated March 31, 1995, are incorporated
            herein by reference to Exhibit 10.10 to the Company's Registration
            Statement on Form S-1 filed October 20, 1995.

10.21       GTIS Master Option and License Agreement (Home Video Games) between
            the Company and the Williams Entertainment Group, dated March 31,
            1995 is incorporated herein by reference to Exhibit 10.11 to the
            Company's Registration Statement on Form S-1 filed October 20, 1995.

10.22       Agreement by and between the Company and REPS is incorporated herein
            by reference to an exhibit filed as a part of the Company's
            Registration Statement on Form S-1 filed October 20, 1995.



                                       47
<PAGE>   51
10.23       Warehouse Services Contract, dated March 2, 1999, by and between the
            Company and Arnold Transportation Services, Inc. t/d/b/a Arnold
            Logistics is incorporated herein by reference to Exhibit 10.50 to
            the Company's Annual Report on Form 10-K for the fiscal year ended
            March 31, 1999.

10.24       Distribution Agreement between Infogrames Entertainment SA and the
            Company, dated as of December 16, 1999, is incorporated herein by
            reference to Exhibit 7 to the Schedule 13D filed by Infogrames
            Entertainment SA and California U.S. Holdings, Inc. on January 10,
            2000.

10.24a      Amendment to Distribution Agreement between Infogrames Entertainment
            SA and the Company dated as of July 1, 2000.

10.25       Trademark Agreement, dated as of May 10, 2000, by and between
            Infogrames Entertainment SA and the Company is incorporated herein
            by reference to Exhibit 10.25 to the Company's Annual Report on Form
            10-K for the fiscal year ended March 31, 2000.

10.26       Credit Agreement, dated as of September 11, 1998, by and among the
            Company, the Lenders thereto, NationsBanc Montgomery Securities,
            LLC, as Syndication Agent, Fleet Bank, N.A., as Documentation Agent,
            and First Union National Bank, as Administrative Agent, is
            incorporated herein by reference to Exhibit 10.3 to the Company's
            Quarterly Report on Form 10-Q for the quarter ended September 30,
            1998.

10.26a      Second Amendment, Waiver and Agreement, dated as of June 29, 1999,
            by and among the Company, the Lenders thereto and First Union
            National Bank, as Administrative Agent, is incorporated herein by
            reference to Exhibit 10.1 to the Company's Current Report on 8-K
            filed on August 5, 1999.

10.26b      Third Amendment, Consent, Waiver and Agreement, dated as of November
            15, 1999, by and among the Company, the Lenders thereto and First
            Union National Bank, as Administrative Agent is incorporated herein
            by reference to Exhibit 10.3 to the Company's Current Report on Form
            8-K filed on November 19, 1999.

10.26c      Right of First Refusal Offer Agreement, dated November 15, 1999, by
            and among California U.S. Holdings, Inc. and the Lenders named
            therein is incorporated herein by reference to Exhibit 13 to the
            Schedule 13D filed by Infogrames Entertainment SA and California
            U.S. Holdings, Inc. on December 14, 1999.

10.26d      Amended and Restated Unconditional Subsidiary Guaranty Agreement,
            dated as of November 15, 1999, among certain subsidiaries of the
            Company, California U.S. Holdings, Inc. and First Union National
            Bank, as administrative agent, for the benefit of the Lenders is
            incorporated herein by reference to Exhibit 15 to the Schedule 13D
            filed by Infogrames Entertainment SA and California U.S. Holdings,
            Inc. on December 14, 1999.

10.26e      Second Amended and Restated Security Agreement, dated as of November
            15, 1999, by and among the Registrant, certain of its subsidiaries,
            First Union National Bank, as Administrative Agent, and California
            U.S. Holdings, Inc. is incorporated herein by reference to Exhibit
            10.4 to the Company's Current Report on Form 8-K filed on November
            19, 1999.

10.26f      Second Amended and Restated Pledge Agreement, dated as of November
            15, 1999, by the Company and certain of its subsidiaries in favor of
            First Union National Bank, as Administrative Agent, and California
            U.S. Holdings, Inc. is incorporated herein by reference to Exhibit
            10.5 to the Company's Current Report on Form 8-K filed on November
            19, 1999.

10.26g      Master Assignment and Acceptance, dated as of February 15, 2000, by
            and among the Company, the Assignors and Infogrames Entertainment SA
            is incorporated herein by reference to Exhibit 10.26g to the
            Company's Annual Report on Form 10-K for the fiscal year ended March
            31, 2000.

10.26h      Warrant Agreement, dated as of February 15, 2000, by and among the
            Company and Infogrames Entertainment SA is incorporated herein by
            reference to Exhibit 10.26h to the Company's Annual Report on Form
            10-K for the fiscal year ended March 31, 2000.



                                       48
<PAGE>   52
10.26i      Warrant Certificate, dated as of February 15, 2000, issued to
            California U.S. Holdings, Inc. is incorporated herein by reference
            to Exhibit 10.26i to the Company's Annual Report on Form 10-K for
            the fiscal year ended March 31, 2000.

10.26j      Fourth Amendment to the Credit Agreement, dated as of February 15,
            2000, by and between the Company and Infogrames Entertainment SA is
            incorporated herein by reference to Exhibit 10.26j to the Company's
            Annual Report on Form 10-K for the fiscal year ended March 31, 2000.

10.26k      Reimbursement and Cash Collateral Agreement, dated as of February
            15, 2000, by and between the Company and First Union National Bank
            is incorporated herein by reference to Exhibit 10.26k to the
            Company's Annual Report on Form 10-K for the fiscal year ended March
            31, 2000.

10.26l      Collateral Assignment Agreement, dated as of February 15, 2000, by
            and among First Union National Bank, Infogrames SA, the Company and
            the Guarantors is incorporated herein by reference to Exhibit 10.26l
            to the Company's Annual Report on Form 10-K for the fiscal year
            ended March 31, 2000.

10.26m      Fifth Amendment to the Credit Agreement, dated as of March 31, 2000,
            by and between the Company and Infogrames Entertainment SA is
            incorporated herein by reference to Exhibit 10.26m to the Company's
            Annual Report on Form 10-K for the fiscal year ended March 31, 2000.

10.26n      Sixth Amendment to the Credit Agreement, dated as of June 29, 2000,
            by and between the Company and Infogrames Entertainment SA is
            incorporated herein by reference to Exhibit 10.26n to the Company's
            Annual Report on Form 10-K for the fiscal year ended March 31, 2000.

10.27       Stock Purchase Agreement, dated February 8, 1999, among the Company,
            General Atlantic Partners 54, L.P. and GAP Coinvestment Partners II,
            L.P. is incorporated herein by reference to Exhibit 10.1 to the
            Company's Current Report on 8-K filed on March 2, 1999.

10.28       Warrant Agreement, dated as of June 29, 1999, among the Company, GAP
            54, GAPCO II and the other parties named therein is incorporated
            herein by reference to Exhibit 1 to the Schedule 13D filed by
            General Atlantic Partners, LLC and certain of its affiliates on
            August 10, 1999.

10.29       Letter Agreement, dated June 29, 1999, among GAP 54, GAPCO II,
            Joseph J. Cayre, Kenneth Cayre and Stanley Cayre is incorporated
            herein by reference to Exhibit 2 to the Schedule 13D filed by
            General Atlantic Partners, LLC and certain of its affiliates on
            August 10, 1999.

10.30       Form of Option Agreement, dated as of July 30, 1999, among GAP 54,
            GAPCO II and the other parties named therein is incorporated herein
            by reference to Exhibit 3 to the Schedule 13D filed by General
            Atlantic Partners, LLC and certain of its affiliates on August 10,
            1999.

10.31       Securities Purchase Agreement, dated as of November 15, 1999, by and
            among Infogrames Entertainment SA, California U.S. Holdings, Inc.
            and the Company is incorporated herein by reference to Exhibit 10.1
            to the Company's Current Report on 8-K filed on November 19, 1999.

10.32       Securities Exchange Agreement, dated as of November 15, 1999, by and
            among the Company, General Atlantic Partners 54, L.P., and GAP
            Coinvestment Partners II, L.P. is incorporated herein by reference
            to Exhibit 10.2 to the Company's Current Report on 8-K filed on
            November 19, 1999.

10.33       Promissory Note of the Company in the aggregate principal amount of
            $25,000,000 payable to California U.S. Holdings, Inc. is
            incorporated herein by reference to Exhibit 10.6 to the Company's
            Current Report on 8-K filed on November 19, 1999.



                                       49
<PAGE>   53
10.34       Warrant to Purchase 50,000 shares of Common Stock, issued to
            California U.S. Holdings, Inc. is incorporated herein by reference
            to Exhibit 5 to the Schedule 13D filed by Infogrames Entertainment
            SA and California U.S. Holdings, Inc. on December 14, 1999.

10.35       Form of GAP Warrant is incorporated herein by reference to Exhibit 9
            to the Schedule 13D filed by Infogrames Entertainment SA and
            California U.S. Holdings, Inc. on December 14, 1999.

10.36       Note Purchase Agreement, dated as of November 15, 1999, between
            certain members of the Cayre Group and California U.S. Holdings,
            Inc. is incorporated herein by reference to Exhibit 11B to the
            Schedule 13D filed by Infogrames Entertainment SA and California
            U.S. Holdings, Inc. on December 14, 1999.

10.37       Equity Purchase and Voting Agreement, dated as of November 15, 1999,
            among Infogrames Entertainment SA, California U.S. Holdings, Inc.,
            GAP 16, GAP 19, GAP II, GAP 54, GAPCO and GAPCO II is incorporated
            herein by reference to Exhibit 3 to the Schedule 13D filed by
            General Atlantic Partners, LLC and certain of its affiliates on
            December 23, 1999.

10.38       Form of GAP 54 Note is incorporated herein by reference to Exhibit 4
            to the Schedule 13D filed by General Atlantic Partners, LLC and
            certain of its affiliates on December 23, 1999.

10.39       Form of GAPCO II Note is incorporated herein by reference to Exhibit
            5 to the Schedule 13D filed by General Atlantic Partners, LLC and
            certain of its affiliates on December 23, 1999.

10.40       5% Subordinated Convertible Note of the Company is incorporated
            herein by reference to Exhibit 6 to the Schedule 13D filed by
            Infogrames Entertainment SA and California U.S. Holdings, Inc. on
            January 10, 2000.

10.41       Services Agreement dated as of January 1, 2000 between Infogrames
            Entertainment SA and the Company.

10.42       Sales Agency Agreement dated as of November 16, 1999 between
            Infogrames North America, Inc. and the Company.

10.43       Affiliated Label Agreement dated as of July 1, 2000 between
            Infogrames North America, Inc. and the Company.

16.1        Letter from Arthur Andersen LLP, dated March 20, 2000, addressed to
            the Securities and Exchange Commission in accordance with Item
            304(a)(3) is incorporated herein by reference to Exhibit 16.1 to the
            Company's Current Report on Form 8-K dated March 20, 2000.

21.1        The Company's Subsidiaries is incorporated herein by reference to
            Exhibit 16.1 to the Company's Annual Report on Form 10-K for the
            fiscal year ended March 31, 1999.

22.1        Information Statement on Schedule 14C filed on January 25, 2000 is
            incorporated herein by reference.

22.2        Information Statement on Schedule 14C filed on May 12, 2000 is
            incorporated herein by reference.

22.3        Information Statement on Schedule 14C filed on June 5, 2000 is
            incorporated herein by reference.

23.1        Consent of Arthur Andersen LLP.

24.1        Power of Attorney

27.1        Financial Data Schedule for the three month period ended June 30,
            2000.

99.1        Amended and Restated Audit Committee Charter is incorporated herein
            by reference to Appendix A to the Company's proxy statement dated
            June 29, 2000.



                                       50
<PAGE>   54
Exhibits indicated with an * symbol are an executive contract or compensatory
plan or arrangement filed pursuant to Item 14 of Form 10-K.

         A copy of any of the exhibits included in this Transitional Report on
Form 10-K may be obtained by written request to the Company, upon payment of a
fee of $0.10 per page to cover costs. Requests should be sent to the Company at
the address set forth on the front cover, attention Director, Investor
Relations.

         (c)  Reports on Form 8-K

         The Company filed the following Current Reports on Form 8-K during the
quarterly period ended June 30, 2000:

<TABLE>
<CAPTION>
          DATE OF REPORT     ITEMS REPORTED     FINANCIAL STATEMENTS FILED
          --------------     --------------     --------------------------
<S>                          <C>                <C>
          May 10, 2000            5,7                     None
          June 2, 2000             5                      None
          June 27, 2000            8                      None
</TABLE>



                                       51
<PAGE>   55
                                   SIGNATURES

         Pursuant to the requirements of the 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.


                                          INFOGRAMES, INC.

                                          By:   /s/ DAVID J. FREMED
                                             -----------------------------------
                                               Name:  David J. Fremed
                                               Title:  Chief Financial Officer
                                               Date:  September ___, 2000

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


<TABLE>
<CAPTION>
             SIGNATURE                                           TITLE(S)                            DATE
             ---------                                           --------                            ----
<S>                                     <C>                                                 <C>

        /s/  BRUNO BONNELL              Chairman of the Board of Directors and Chief        September ___, 2000
-----------------------------------         Executive Officer (principal executive
           Bruno Bonnell                    officer) and Director


      /s/  STEVEN A. DENNING            Director                                            September ___, 2000
-----------------------------------
         Steven A. Denning


        /s/  DENIS GUYENNOT             Director and President, Chief Operating             September ___, 2000
-----------------------------------         Officer and Secretary
          Denis Guyennot


      /s/  THOMAS A. HEYMANN            Director                                            September ___, 2000
-----------------------------------
         Thomas A. Heymann


        /s/  ANN E. KRONEN              Director                                            September ___, 2000
-----------------------------------
           Ann E. Kronen

       /s/  THOMAS SCHMIDER             Director                                            September ___, 2000
-----------------------------------
          Thomas Schmider

       /s/  DAVID J. FREMED             Chief Financial Officer (principal financial        September ___, 2000
-----------------------------------         officer and principal accounting officer)
          David J. Fremed

* By:  /s/  DAVID J. FREMED                                                                 September ___, 2000
-----------------------------------
(David J. Fremed, Attorney-in-Fact)
</TABLE>



                                       52
<PAGE>   56
                        INFOGRAMES, INC. AND SUBSIDIARIES

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Infogrames, Inc.
New York, New York

         We have audited the accompanying consolidated balance sheets of
Infogrames, Inc. and its subsidiaries (the "Company") as of March 31, 2000 and
June 30, 2000 and the related consolidated statements of operations and
comprehensive (loss) income, stockholders' equity (deficit) and cash flows for
the year ended March 31, 2000 and the three months ended, June 30, 2000. Our
audits also included the consolidated financial statement schedule listed in the
index at Item 14. These consolidated financial statements and the consolidated
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the consolidated financial
statements and the 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of Infogrames,
Inc. and its subsidiaries as of March 31, 2000 and June 30, 2000 and the
consolidated results of their operations and their cash flows for the year ended
March 31, 2000 and the three months ended, June 30, 2000 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.

         As discussed in Note 1 to the Consolidated Financial Statements, the
Company changed its method of accounting for future royalty advances effective
January 1, 1998, treating such costs as research and development expenses.


/s/  Deloitte & Touche LLP



New York, New York
September 8, 2000



                                      F-1
<PAGE>   57
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Infogrames, Inc. and subsidiaries:

         We have audited the accompanying consolidated balance sheet of
Infogrames, Inc., formerly GT Interactive Software Corp. (a Delaware
corporation) and subsidiaries as of March 31, 1999 and the related consolidated
statements of operations, comprehensive (loss) income, stockholders' equity
(deficit) and cash flows for year ended December 31, 1997, for the three months
ended March 31, 1998 and for the year ended March 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

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

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements and supplementary data is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.



                                           ARTHUR ANDERSEN LLP


New York, New York
June 29, 1999

      (EXCEPT WITH RESPECT TO THE REVERSE STOCK SPLIT DISCUSSED IN NOTE 1,
                     AS TO WHICH THE DATE IS JUNE 29, 2000)


                                      F-2
<PAGE>   58
                        INFOGRAMES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                         MARCH 31,         JUNE 30,
                                                                     ----------------      --------
                                                                     1999        2000        2000
                                                                     ----        ----        ----
<S>                                                                <C>         <C>         <C>
ASSETS
Current assets:
   Cash and cash equivalents ..................................    $ 13,407    $ 19,587    $ 12,302
   Short-term investments .....................................         105        --          --
   Receivables, net ...........................................     110,019      37,001      22,456
   Inventories, net ...........................................     158,208      38,179      30,907
   Royalty advances ...........................................       9,195        --          --
   Deferred income taxes ......................................      36,142        --          --
   Income taxes receivable ....................................       1,973       2,550       1,357
   Prepaid expenses and other current assets ..................      12,947      10,096       7,241
                                                                   --------    --------    --------
   Total current assets .......................................     341,996     107,413      74,263
Property and equipment, net ...................................      36,808      25,761      15,094
Investments ...................................................       7,412       9,293       8,237
Goodwill, net of accumulated amortization of $5,078, $2,564 and
  $2,945, respectively ........................................      34,194       8,047       7,067
Deferred income taxes .........................................      12,664        --          --
Other assets ..................................................       5,837       8,693      10,118
                                                                   --------    --------    --------
   Total assets ...............................................    $438,911    $159,207    $114,779
                                                                   ========    ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable ...........................................    $152,556    $ 87,926    $ 64,515
   Accrued liabilities ........................................      35,505      37,123      33,071
   Revolving credit facility ..................................        --        71,698      98,543
   Royalties payable ..........................................      18,515      14,487      15,972
   Deferred income ............................................         173        --            58
   Income taxes payable .......................................       2,569          55        --
   Due to related party .......................................         908         958       1,026
                                                                   --------    --------    --------
   Total current liabilities ..................................     210,226     212,247     213,185
Long-term debt ................................................      98,750      97,828      99,320
Other long-term liabilities ...................................       2,802       3,351       2,239
                                                                   --------    --------    --------
   Total liabilities ..........................................     311,778     313,426     314,744
                                                                   --------    --------    --------
</TABLE>



                                      F-3
<PAGE>   59

<TABLE>
<CAPTION>
                                                                                         MARCH 31,            JUNE 30,
                                                                                    ------------------        --------
                                                                                    1999          2000          2000
                                                                                    ----          ----          ----
<S>                                                                              <C>           <C>           <C>
Commitments and contingencies Stockholders' equity (deficit):
   Series A convertible preferred stock, $0.01 par, 5,000 shares authorized,
   600 shares issued and outstanding, stated at liquidation preference of $50
   per share as of March 31, 1999, 0 shares issued and outstanding as of
   March 31, 2000 and June 30, 2000(1) ......................................       30,000          --            --
   Common stock, $0.01 par, 150,000 shares authorized, 14,555, 20,675
   shares and 20,685 issued and outstanding, respectively(1) ................          145           207           207
Additional paid-in capital ..................................................      161,655       227,378       227,383
Accumulated deficit .........................................................      (62,876)     (383,598)     (425,542)
Accumulated other comprehensive (loss) income ...............................       (1,791)        1,794         1,309
Treasury shares, at cost, 0 shares as of March 31, 1999 and 2000, and 1,661
  as of June 30, 2000 .......................................................         --            --          (3,322)
                                                                                 ---------     ---------     ---------
Total stockholders' equity (deficit) ........................................      127,133      (154,219)     (199,965)
                                                                                 ---------     ---------     ---------
Total liabilities and stockholders' equity (deficit) ........................    $ 438,911     $ 159,207     $ 114,779
                                                                                 =========     =========     =========
</TABLE>

(1)       Reflects the one-for-five reverse stock split approved by the
          Company's Board of Directors which was effected on June 26, 2000. All
          periods have been restated to reflect the reverse stock split.

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


                                      F-4
<PAGE>   60
                        INFOGRAMES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                         AND COMPREHENSIVE (LOSS) INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                     THREE MONTHS                               THREE MONTHS
                                                      YEAR ENDED         ENDED             YEARS ENDED             ENDED
                                                     DECEMBER 31,      MARCH 31,             MARCH 31,            JUNE 30,
                                                         1997            1998           1999          2000          2000
                                                         ----            ----           ----          ----          ----
<S>                                                   <C>             <C>            <C>           <C>           <C>
Net revenues ....................................     $ 530,677       $ 105,767      $ 572,342     $ 375,569     $  32,983
Cost of goods sold ..............................       315,134          57,092        329,959       296,301        16,150
                                                      ---------       ---------      ---------     ---------     ---------
   Gross profit .................................       215,543          48,675        242,383        79,268        16,833
Selling and distribution expenses ...............        98,689          24,467        147,499       147,814        16,829
General and administrative expenses .............        46,611          10,655         66,616        87,113        16,146
Research and development ........................        13,824          10,866         76,870        66,574         9,582
Royalty advance write-off .......................        73,821            --             --            --            --
Restructuring and other charges .................          --              --           17,479        37,948        11,081
Purchased research and development ..............        11,008            --            5,000          --            --
SingleTrac retention bonus ......................         2,400            --            1,680          --            --
Amortization of goodwill ........................         1,295             636          3,349         3,110           561
                                                      ---------       ---------      ---------     ---------     ---------
   Operating (loss) income ......................       (32,105)          2,051        (76,110)     (263,291)      (37,366)
Interest expense ................................        (1,010)           (557)        (5,108)      (17,167)       (3,318)
Other expense ...................................        (1,065)           (832)          (207)         (793)         (384)
                                                      ---------       ---------      ---------     ---------     ---------
   (Loss) income before (benefit
      from) provision for income taxes ..........       (34,180)            662        (81,425)     (281,251)      (41,068)
(Benefit from) provision for income taxes .......        (9,157)            304        (29,628)       40,882           876
                                                      ---------       ---------      ---------     ---------     ---------
   Net (loss) income from continuing operations .       (25,023)            358        (51,797)     (322,133)      (41,944)
Discontinued operations:
   Loss from operations of OZM ..................          --              --           (3,531)         --            --
   Loss on disposal of OZM ......................          --              --          (15,510)         (477)         --
                                                      ---------       ---------      ---------     ---------     ---------
   Loss from discontinued operations ............          --              --          (19,041)         (477)         --
                                                      ---------       ---------      ---------     ---------     ---------
   Net (loss) income before extraordinary item ..       (25,023)            358        (70,838)     (322,610)      (41,944)
Extraordinary item:
   Gain on early extinguishment of debt,
      net of tax of $1,312 ......................          --              --             --           1,888          --
                                                      ---------       ---------      ---------     ---------     ---------
      Net (loss) income before dividends on
        preferred stock .........................       (25,023)            358        (70,838)     (320,722)      (41,944)
                                                      ---------       ---------      ---------     ---------     ---------
Less dividends on preferred stock ...............          --              --              226          --            --
                                                      ---------       ---------      ---------     ---------     ---------
      Net (loss) income attributable to common
        stockholders ............................     $ (25,023)      $     358      $ (71,064)    $(320,722)    ($ 41,944)
                                                      =========       =========      =========     =========     =========
Basic and diluted (loss) income per share from
   continuing operations ........................     $   (1.87)      $    0.03      $   (3.73)    $  (19.58)    $   (2.03)
Basic and diluted (loss) income per share from
   discontinued operations ......................          --              --            (1.37)        (0.03)         --
Basic and diluted income per share from
   extraordinary item ...........................          --              --             --            0.11          --
                                                      ---------       ---------      ---------     ---------     ---------
Basic and diluted (loss) income per share .......     $   (1.87)      $    0.03      $   (5.10)    $  (19.50)    $   (2.03)
                                                      =========       =========      =========     =========     =========
Weighted average shares outstanding(1) ..........        13,396          13,588         13,931        16,451        20,680
                                                      =========       =========      =========     =========     =========

Net (loss) income before dividends on
   preferred stock ..............................     $ (25,023)      $     358      $ (70,838)    $(320,722)    $ (41,944)
Other comprehensive (loss) income:
   Foreign currency translation adjustments .....        (2,732)          1,169           (667)        1,817           572
   Unrealized holding (loss) gain on securities .          (199)           --               11         1,768        (1,057)
                                                      ---------       ---------      ---------     ---------     ---------
      Comprehensive (loss) income ...............     $ (27,954)      $   1,527      $ (71,494)    $(317,137)    $ (42,429)
                                                      =========       =========      =========     =========     =========
</TABLE>

(1)   Reflects the one-for-five reverse stock split approved by the Company's
      Board of Directors which was effected on June 26, 2000. All periods have
      been restated to reflect the reverse stock split.

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


                                      F-5
<PAGE>   61
                        INFOGRAMES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                              THREE MONTHS                              THREE MONTHS
                                                               YEAR ENDED        ENDED             YEARS ENDED             ENDED
                                                              DECEMBER 31,      MARCH 31,            MARCH 31,            JUNE 30,
                                                                                                ------------------
                                                                  1997            1998          1999          2000          2000
                                                                  ----            ----          ----          ----          ----
<S>                                                           <C>             <C>            <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income before dividends on preferred stock .....    $ (25,023)      $     358     $ (70,838)    $(320,722)    $ (41,944)
Adjustments to reconcile net (loss) income to net
   cash (used in) provided by operating activities:
   Depreciation and amortization ..........................        7,434           2,511        14,606        16,081         3,032
   Write-off of investment ................................         --              --           2,676          --            --
   Purchased research and development .....................       11,008            --           5,000          --            --
   Royalty advance write-off ..............................       73,821            --            --            --            --
   Deferred income taxes ..................................       (1,010)          1,010       (32,666)       48,806           876
   Deferred income ........................................       (1,690)            187            21          (118)            3
   Purchase of barter credits .............................         --              --            --            --          (1,188)
   Write-off of assets in connection with
      restructuring charges ...............................         --              --           7,362        30,391         9,592
   Sales and distribution fee .............................         --              --            --            --            (440)
   Loss from discontinued operations ......................         --              --          19,041           477          --
   Extraordinary gain on General Atlantic Partners,
      LLC (GAP) 0% subordinated convertible note ..........         --              --            --          15,649          --
   Amortization of discount on long-term debt .............         --              --            --             718           956
   Accrued interest on Revolving Credit Facility ..........         --              --            --           1,461         2,542
   Write-off of deferred financing costs in
      connection with the GAP securities exchange .........         --              --            --           8,985          --
   Write-off of deferred financing costs in
      connection with the early extinguishment
      of Credit Agreement .................................         --              --            --           3,188          --
   Issuance of common stock in lieu of partial
      royalty payment .....................................         --              --            --           4,208          --
   Issuance of common stock pursuant to employee
      stock purchase plan .................................         --              --            --             581          --
   Changes in operating assets and liabilities:
      Receivables, net ....................................      (83,683)         60,175       (57,490)       73,576        13,929
      Inventories, net ....................................      (54,102)          6,896       (10,498)      100,448         7,288
      Royalty advances ....................................      (20,505)          5,870           814         9,195          --
      Due to related party, net ...........................         (349)            581           (17)           50           169
      Prepaid expenses and other current assets ...........        2,206          (3,409)       (5,884)        1,499         2,176
      Accounts payable ....................................       38,607         (46,942)       47,956       (44,330)      (24,231)
      Accrued liabilities .................................       (3,699)         (7,168)       14,169         1,754        (5,281)
      Royalties payable ...................................       14,054          (7,037)      (21,907)       (4,036)        1,466
      Income taxes payable ................................       (3,804)         (2,423)       (1,133)       (2,746)         --
      Income taxes receivable .............................      (15,171)          4,487         8,711          (577)        1,346
      Long-term liabilities ...............................       (8,186)           (666)        1,220           552        (1,223)
      Other ...............................................          522          (2,043)       (2,226)       (2,549)       (1,429)
                                                               ---------       ---------     ---------     ---------     ---------
        Net cash (used in) provided by operating
          activities ......................................      (69,570)         12,387       (81,083)      (57,459)      (32,361)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ..................................         (259)           --            --            --            --
Purchases of property and equipment .......................      (18,269)         (7,641)      (22,607)       (8,864)         (839)
Sales of short-term investments, net ......................        4,613            --            --            --            --
Acquisitions, net of cash acquired of approximately
   $135, $0, $1,678, $0 and $0, respectively ..............       (5,833)           --          (2,701)         --            --
                                                               ---------       ---------     ---------     ---------     ---------
        Net cash used in investing activities .............      (19,748)         (7,641)      (25,308)       (8,864)         (839)
                                                               =========       =========     =========     =========     =========
</TABLE>



                                      F-6
<PAGE>   62
<TABLE>
<CAPTION>
                                                                              THREE MONTHS                              THREE MONTHS
                                                               YEAR ENDED        ENDED             YEARS ENDED             ENDED
                                                              DECEMBER 31,      MARCH 31,            MARCH 31,            JUNE 30,
                                                                                                ------------------
                                                                  1997            1998          1999          2000          2000
                                                                  ----            ----          ----          ----          ----
<S>                                                           <C>             <C>            <C>           <C>          <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit
   facility, net ..........................................       54,600         (26,600)       70,750       (27,052)       25,077
Issuance of Infogrames 5% subordinated convertible
   note ...................................................                         --                        50,000
Issuance of General Atlantic Partners, LLC
   subordinated note ("GAP") ..............................         --              --            --          20,000          --
Issuance of subordinated Cayre ............................         --              --            --          10,000          --
Issuance of common stock to Infogrames, net ...............         --              --            --          48,677          --
Proceeds from exercise of warrants ........................        2,102            --            --            --            --
Proceeds from exercise of stock options ...................          786             114           376           146             5
Purchase of treasury shares ...............................         --              --            --            --          (2,322)
Issuance (redemption) of preferred stock ..................         --              --          30,000       (30,000)         --
                                                               ---------       ---------     ---------     ---------     ---------
        Net cash provided by (used in) financing activities       57,488         (26,486)      101,126        71,771        22,760
Effect of exchange rates on cash and cash equivalents .....         (429)           (644)        1,448           732         3,155
                                                               ---------       ---------     ---------     ---------     ---------
Net (decrease) increase in cash and cash equivalents ......      (32,259)        (22,384)       (3,817)        6,180        (7,285)
Cash and cash equivalents--beginning of period .......            71,867          39,608        17,224        13,407        19,587
                                                               ---------       ---------     ---------     ---------     ---------
Cash and cash equivalents--end of period .............         $  39,608       $  17,224     $  13,407     $  19,587     $  12,302
                                                               =========       =========     =========     =========     =========
</TABLE>


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

                                      F-7
<PAGE>   63
                        INFOGRAMES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                  SERIES A        SERIES A
                                                 CONVERTIBLE     CONVERTIBLE     COMMON                   ADDITIONAL
                                                  PREFERRED       PREFERRED       STOCK       COMMON       PAID-IN
                                                 STOCK SHARES       STOCK       SHARES(1)      STOCK       CAPITAL

<S>                                              <C>             <C>            <C>          <C>          <C>
Balance, December 31, 1996 ...................         --         $    --          13,280    $     132    $ 118,753
Issuance of stock in connection with
   the acquisition of SingleTrac .............         --              --             140            1        7,168
Exercise of warrants .........................         --              --             100            1        2,101
Exercise of stock options ....................         --              --              60            1          784
Net loss .....................................         --              --            --           --           --
Currency translation adjustment ..............         --              --            --           --           --
Unrealized loss on securities ................         --              --            --           --           --
                                                  ---------       ---------     ---------    ---------    ---------
Balance, December 31, 1997 ...................         --              --          13,580          135      128,806
Issuance of stock options in
   connection with the acquisition
   of SingleTrac .............................         --              --            --           --          3,007
Exercise of stock options ....................         --              --              20            1          113
Net income ...................................         --              --            --           --           --
Currency translation adjustment ..............         --              --            --           --           --
                                                  ---------       ---------     ---------    ---------    ---------
Balance, March 31, 1998 ......................         --              --          13,600          136      131,926
Issuance of preferred stock ..................      120,000          30,000          --           --           --
Issuance of stock options in connection
   with acquisitions .........................         --              --            --           --          1,356
Issuance of stock in connection with
   acquisitions ..............................         --              --             920            8       27,999
Exercise of stock options ....................         --              --              35            1          374
Net loss .....................................         --              --            --           --           --
Currency translation adjustment ..............         --              --            --           --           --
Unrealized gain on securities ................         --              --            --           --           --
                                                  ---------       ---------     ---------    ---------    ---------
Balance, March 31, 1999 ......................      120,000          30,000        14,555          145      161,655
Exchange of preferred stock for long-term debt     (120,000)        (30,000)         --           --           --

Issuance of warrants to Infogrames ...........         --              --            --           --          8,983
Issuance of warrants in connection with
   revolving credit facility .................         --              --            --           --          3,188
Issuance of common stock in lieu of partial
   royalty payment ...........................         --              --             300            3        4,205
Issuance of common stock pursuant to employee
   stock purchase plan .......................         --              --              40            1          582
Issuance of common stock to Infogrames, net ..         --              --           5,740           57       48,620

Exercise of stock options ....................         --              --              40            1          145
Net loss .....................................         --              --            --                        --
Currency translation adjustment ..............         --              --            --                        --
Unrealized gain on securities ................         --              --            --                        --
                                                  ---------       ---------     ---------    ---------    ---------
Balance, March 31, 2000 ......................         --              --          20,675          207      227,378
Exercise of stock options ....................         --              --              10         --              5
Net loss .....................................         --              --            --           --           --
Currency translation adjustment ..............         --              --            --           --           --
Unrealized loss on securities ................         --              --            --           --           --
Treasury Shares ..............................         --              --            --           --           --
                                                  ---------       ---------     ---------    ---------    ---------
Balance, June 30, 2000 .......................         --         $    --          20,685    $     207    $ 227,383
                                                  =========       =========     =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                 ACCUMULATED
                                                  RETAINED          OTHER                     TREASURY
                                                  EARNINGS      COMPREHENSIVE    TREASURY      SHARES
                                                  (DEFICIT)     (LOSS) INCOME     SHARES        COST         TOTAL

<S>                                              <C>            <C>              <C>          <C>          <C>
Balance, December 31, 1996 ...................    $  32,627       $     627           --      $    --      $ 152,139
Issuance of stock in connection with
   the acquisition of SingleTrac .............         --              --             --           --          7,169
Exercise of warrants .........................         --              --             --           --          2,102
Exercise of stock options ....................         --              --             --           --            785
Net loss .....................................      (25,023)           --             --           --        (25,023)
Currency translation adjustment ..............         --            (2,732)          --           --         (2,732)
Unrealized loss on securities ................         --              (199)          --           --           (199)
                                                  ---------       ---------      ---------    ---------    ---------
Balance, December 31, 1997 ...................        7,604          (2,304)          --           --        134,241
Issuance of stock options in
   connection with the acquisition
   of SingleTrac .............................         --              --             --           --          3,007
Exercise of stock options ....................         --              --             --           --            114
Net income ...................................          358            --             --           --            358
Currency translation adjustment ..............         --             1,169           --           --          1,169
                                                  ---------       ---------      ---------    ---------    ---------
Balance, March 31, 1998 ......................        7,962          (1,135)          --           --        138,889
Issuance of preferred stock ..................         --              --             --           --         30,000
Issuance of stock options in connection
   with acquisitions .........................         --              --             --           --          1,356
Issuance of stock in connection with
   acquisitions ..............................         --              --             --           --         28,007
Exercise of stock options ....................         --              --             --           --            375
Net loss .....................................      (70,838)           --             --           --        (70,838)
Currency translation adjustment ..............         --              (667)          --           --           (667)
Unrealized gain on securities ................         --                11           --           --             11
                                                  ---------       ---------      ---------    ---------    ---------
Balance, March 31, 1999 ......................      (62,876)         (1,791)          --           --        127,133
Exchange of preferred stock for long-term debt         --              --             --           --
                                                                                                             (30,000)
Issuance of warrants to Infogrames ...........         --              --             --           --          8,983
Issuance of warrants in connection with
   revolving credit facility .................         --              --             --           --          3,188
Issuance of common stock in lieu of partial
   royalty payment ...........................         --              --             --           --          4,208
Issuance of common stock pursuant to employee
   stock purchase plan .......................         --              --             --           --            583
Issuance of common stock to Infogrames, net ..         --              --             --           --
                                                                                                              48,677
Exercise of stock options ....................         --              --             --           --            146
Net loss .....................................     (320,722)           --             --           --       (320,722)
Currency translation adjustment ..............         --             1,817           --           --          1,817
Unrealized gain on securities ................         --             1,768           --           --          1,768
                                                  ---------       ---------      ---------    ---------    ---------
Balance, March 31, 2000 ......................     (383,598)          1,794           --           --       (154,219)
Exercise of stock options ....................         --              --             --           --              5
Net loss .....................................      (41,944)           --             --           --        (41,944)
Currency translation adjustment ..............         --               572           --           --            572
Unrealized loss on securities ................         --            (1,057)          --           --         (1,057)
Treasury Shares ..............................         --              --            1,661      (3,322)       (3,322)
                                                  ---------       ---------      ---------    ---------    ---------
Balance, June 30, 2000 .......................    $(425,542)      $   1,309          1,661    $ (3,322)    $(199,965)
                                                  =========       =========      =========    =========    =========
</TABLE>

(1)    Reflects the one-for-five reverse stock split approved by the Company's
       Board of Directors which became effective on June 26, 2000. All periods
       have been restated to reflect the reverse stock split.

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


                                      F-8
<PAGE>   64
                        INFOGRAMES, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Nature of Business

         Infogrames, Inc., formerly GT Interactive Software Corp., a Delaware
corporation (the "Company"), is a leading worldwide developer, publisher and
distributor of interactive entertainment software for use on various platforms,
including PCs, Sony PlayStation and Nintendo 64. The Company derives its
revenues primarily from the sale of its created, published, licensed and
purchased products to mass merchants, specialty software stores, computer
superstores and distributors located throughout North America and also in
various international locations. The Company was incorporated in September 1992
and commenced operations in February 1993. The Company relied on support
from its parent, Infogrames Entertainment SA ("Infogrames SA") in the recent
past. The Company believes that it is Infogrames SA's present intention to
continue such support as Infogrames SA deems necessary to fund its operations
and its cash flows for the next twelve months.

   Principles of Consolidation

         The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany transactions and
balances have been eliminated.

   Revenue Recognition

         Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized, a reserve is provided for expected future
returns net of the related cost of such items.

         The Company is not contractually obligated to accept returns, except
for defective product. However, the Company may permit its customers to return
or exchange product and may provide pricing allowance for estimated returns,
price concessions and other allowances. Such allowance is reflected as a
reduction to accounts receivable when the Company expects to grant credits for
such items.

   Cash and Cash Equivalents

         Cash and cash equivalents consist of cash in banks and highly liquid,
short-term investments with original maturities of three months or less at the
date acquired.

   Inventories

         Inventories are stated at the lower of cost (based upon the first-in,
first-out method) or market. Allowances are established (and reassessed
quarterly) to reduce the recorded cost of obsolete inventory and slow moving
inventory to its net realizable value.

   Royalty Advances

         During the fourth quarter of 1997, the convergence of marketplace
forces led the Company to reconsider its royalty advance evaluation process.
Rapid technological innovation, shelf-space competition, shorter product life
cycles and buyer selectivity have made it extremely difficult to determine the
likelihood of individual product acceptance and success. As a result, the
Company expensed royalty advances of approximately $73.8 million on products
that were in development or on sale as of December 31, 1997. The Company has,
effective January 1, 1998, changed its accounting for future royalty advances,
treating such costs as research and development expenses, which are expensed as
incurred. These changes created symmetry in accounting for both internally and
externally developed products. Multi-year output advances are expensed over the
development periods, in accordance with generally accepted accounting
principles.


                                      F-9
<PAGE>   65
   Goodwill

         Goodwill is currently amortized using the straight-line method over
periods not exceeding 5 years. Management reassesses quarterly the
appropriateness of both the carrying value and remaining life of goodwill,
principally based on forecasts of future undiscounted cash flows of businesses
acquired. See Note 21 for information concerning the restructuring reserve, and
related impairment write offs of goodwill.

   Property and Equipment

         Property and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the related assets.

   Income Taxes

         The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires the
use of the liability method of accounting for deferred income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates in effect for the years in which the
differences are expected to reverse.

   Fair Values of Financial Instruments

         Statement of Financial Accounting Standards No. 107 "Disclosure About
Fair Value of Financial Instruments" requires certain disclosures regarding the
fair value of financial instruments. Cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, royalties payable, revolving
credit facility and amounts due to and from related parties are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of these instruments. The fair value of long-term debt closely
approximates its carrying value. The Company uses quoted market prices to
calculate these fair values, when available.

   Investments

         Management classifies equity securities as available-for-sale
securities under the provisions defined in the Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management determines the appropriate classification of its
investments at the time of purchase and reevaluates such determination at each
balance sheet date. Available-for-sale securities are carried at market value
with the unrealized gains and losses reported as a component of accumulated
comprehensive income. The cost of investments sold is determined on the
first-in, first-out method.

         The Company also maintains equity investments under 20 percent of the
outstanding equity of the investee entity on the cost basis of accounting. The
Company evaluates these investments for impairment on a quarterly basis (See
Note 6).

   Impairment of Long Lived Assets

         The Company reviews long-lived assets, such as fixed assets and certain
identifiable intangibles to be held and used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value, as defined in Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."



                                      F-10
<PAGE>   66
   Research and Development Costs

         Research and development costs related to the design, development and
testing of new software products are charged to expense as incurred. Effective
January 1, 1998, research and development costs also include payments for
royalty advances to third-party developers on products that are currently in
development.

   Advertising Expenses

         Advertising costs are expensed as incurred. Advertising expense for the
year ended December 31, 1997, the three months ended March 31, 1998, the years
ended March 31, 1999 and 2000 and the three months ended June 30, 2000 amounted
to approximately $32.0 million, $7.9 million, $49.1 million, $64.0 million and
$5.0 million, respectively.

   Foreign Currency

         Assets and liabilities of foreign subsidiaries have been translated at
year-end exchange rates, while revenues and expenses have been translated at
average exchange rates in effect during the year. Resulting cumulative
translation adjustments have been recorded as accumulated other comprehensive
(loss) income.

   New Accounting Pronouncements

         Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires companies to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt SFAS No. 133 in the first
quarter of fiscal 2001, in accordance with the deferral provision in SFAS No.
137. The adoption of SFAS No. 133 will not have a material effect on the
Company's consolidated financial statements.

         In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of
fiscal 2001. Infogrames Inc. is currently evaluating the impact of SAB 101 on
the Company's consolidated results of operations and financial position.

        In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44),
Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB 25. FIN No. 44 clarifies (i) the definition of employee
for purposes of applying APB Opinion No. 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions in this interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. The adoption of certain of
the conclusions of FIN No. 44 covering events occurring during the period after
December 15, 1998 or January 12, 2000 did not have a material effect on the
Company's financial position and results of operations. The Company does not
expect that the adoption of the remaining conclusions will have a material
effect on the financial position or results of operations.

   Reclassifications

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

   Net Income (Loss) Per Share

         Basic earnings per share ("EPS") is computed as net earnings after
preferred dividends divided by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock-based compensation plans
including stock options, restricted stock awards, warrants and other convertible
securities using the treasury stock method. The convertible debt, warrants and
all shares issuable under stock based compensation plans would be anti-dilutive
and therefore have not been considered in the diluted EPS calculation in the
years ended March 31, 1999 and 2000, and in the three months ended June 30,
2000, respectively.

   Discontinued Operations

         Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations--Reporting Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("APB 30"), the consolidated financial statements of the Company reflect the
disposal of OZM as a discontinued operation. Accordingly, the revenues, costs
and expenses, assets and liabilities, and cash flows of this business have been
excluded from the respective captions in the Consolidated Balance Sheets,
Consolidated Statements of Operations, Consolidated Statements


                                      F-11
<PAGE>   67
of Comprehensive Income and Consolidated Statements of Cash Flows, and have been
reported through its date of disposition as "Loss from discontinued operations."

   Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.

   Fiscal Year

         Effective January 1, 1998, the Company changed its fiscal year end from
December 31 to March 31. Accordingly, the fiscal year ended March 31, 1998
represents three months of operations. Effective April 1, 2000, the Company
changed its fiscal year end from March 31 to June 30. Accordingly, the fiscal
period June 30, 2000 represents three months of operations. (See Note 23.)

   Reverse Stock Split

         On April 6, 2000, the Company's Board of Directors approved a
one-for-five reverse stock split of the issued and outstanding shares of the
Company's common stock, which became effective June 26, 2000. All periods have
been restated to reflect the reverse stock split.

   Unaudited Interim Financial Information

         The unaudited interim consolidated financial information for the
three months ended June 30, 1999 has been prepared on the same basis as the
audited consolidated financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of this interim
information. Such unaudited interim consolidated financial data is presented
in Note 22 to the consolidated financial statements.

NOTE 2--PURCHASE OF MAJORITY INTEREST BY INFOGRAMES SA

         As of December 31, 1999, Infogrames SA and subsidiaries purchased
approximately 60 percent of the voting stock of the Company through the
following transactions:

         -    On November 15, 1999, Infogrames SA purchased from the Company a
              $25 million principal amount Short-Term Senior Secured Note
              ("Short-Term Note"). In connection with this transaction, the
              Company issued to Infogrames SA warrants to purchase 10,000 shares
              of common stock at an exercise price of $0.05 per share.

         -    On December 16, 1999, the Company consummated the following of
              transactions with Infogrames SA and certain partnerships
              affiliated with General Atlantic Partners, LLC ("GAP"). Infogrames
              SA, the founding Cayre family, and GAP entered into further
              transactions as well.

         -    Infogrames SA purchased 6,711,701 shares of the Company's common
              stock from the Cayre family, founders of GT Interactive
              Software Corp., for $25.0 million and also purchased from
              the Cayre family $10 million of subordinated notes ("Cayre Notes")
              of the Company.

         -    Infogrames SA purchased 5,714,286 shares of Common Stock from the
              Company for $50 million ($8.75 per share) and $60.6 million
              principal amount of a new 5% subordinated convertible note of the
              Company in exchange for $25 million in cash, the Cayre Notes, the
              Short-Term Note and $0.6 million accrued interest. The new 5%
              subordinated convertible note is convertible into common stock at
              $9.25 per share.

         -    The Company issued to GAP $50 million principal amount of
              non-interest bearing subordinated convertible notes in exchange
              for 600,000 shares of Series A Preferred Stock and $20 million of
              subordinated notes of the


                                      F-12
<PAGE>   68
              Company, and accrued interest thereon, held by GAP. These notes
              are convertible into common stock at $20.00 per share.

         -    Infogrames SA acquired from GAP warrants to purchase 900,000
              shares of common stock of the Company at an exercise price of
              $0.05 per share, for nominal consideration.

         As a result of these transactions, as of December 31, 1999, Infogrames
SA owns approximately 12 million shares of the Company's common stock.

         The Company has relied on support from its parent, Infogrames SA, in
the recent past. The Company believes that it is Infogrames SA's present
intention to continue such support as Infogrames SA deems necessary to fund
operations and cash flows for the next twelve months.

NOTE 3--ACQUISITIONS

         In January 1997, the Company acquired all of the outstanding capital
stock of Premier Promotion Limited, the parent company of One Stop Direct
Limited, for approximately $0.4 million in cash. This transaction was accounted
for as a purchase.

         In October 1997, the Company acquired SingleTrac Entertainment
Technologies, Inc. ("SingleTrac"), a software developer, for cash and stock.
Total consideration, including acquisition costs, was approximately $14.7
million, of which $5.4 million was cash and the balance of the purchase price
was the issuance of 100,000 newly issued shares of the Company's common stock
and the assumption of approximately 100,000 stock options. The acquisition was
accounted for as a purchase. The purchase price was allocated to net assets
acquired, purchased in-process research and development ("R&D"), and goodwill
and other intangibles. Purchased in-process R&D includes the value of products
in the development stage and not considered to have reached technological
feasibility and was, therefore, expensed. Accordingly, approximately $11.0
million of acquisition cost was expensed in the fourth quarter of 1997. In
connection with the acquisition of SingleTrac on October 15, 1997, the Company
issued approximately 146,000 shares of its common stock and assumed
approximately 61,000 stock options.

         In November 1998, the Company acquired One Zero Media, Inc. ("OZM"), an
Internet entertainment content company, in exchange for approximately 500,000
newly issued shares of the Company's common stock and approximately 100,000
stock options to purchase the Company's common stock. Total consideration,
including acquisition costs, was approximately $17.2 million, which was
allocated to net assets acquired and goodwill. The acquisition was accounted for
as a purchase, because it was the Company's intention to sell an ownership
interest in OZM. At March 31, 1999, the Company decided to sell OZM within the
next six months and therefore OZM is accounted for as a discontinued operation.
OZM was sold in July 1999. This resulted in a loss from discontinued operations
of $19.5 million, $0.5 million of which is recognized in the current fiscal
year. In connection with the acquisition of OZM on November 4, 1998, the Company
issued approximately 458,000 shares of its common stock and assumed
approximately 117,000 stock options.

         In December 1998, the Company acquired Reflections Interactive Limited
("Reflections"), a developer of interactive entertainment software for computer
games, in exchange for approximately 460,000 newly issued shares of the
Company's common stock. Total consideration, including acquisition costs, was
approximately $13.5 million. The acquisition was accounted for as a purchase.
The purchase price was allocated to net assets acquired, purchased in-process
R&D and goodwill. Accordingly, $5.0 million of acquisition cost was expensed in
the quarter ended December 31, 1998. Additionally, the Company acquired Prism
Leisure Tontragervertriebs GmbH ("Prism"), a distributor of value-priced
software based in Germany, for nominal consideration. The acquisition was
accounted for as a purchase. The purchase price was allocated to net assets
acquired and goodwill. In connection with the acquisition of Reflections on
December 23, 1998, the Company issued approximately 457,000 shares of its common
stock. Goodwill, net of accumulated amortization, approximated $6.1 million and
$5.8 million for March 31, 2000 and June 30, 2000, respectively.

         In December 1998, the Company formed GT Interactive European Holdings
B.V., a European holding company, which acquired all of the outstanding capital
stock of Home Software Benelux B.V. ("Homesoft"), a distributor of entertainment
software, for approximately $1.0 million in cash. The acquisition was accounted
for as a purchase.



                                      F-13
<PAGE>   69
         In December 1998, the Company purchased the assets of Legend
Entertainment Company ("Legend"), a developer of entertainment software. Total
consideration, including acquisition costs, was approximately $2.0 million. The
purchase price was allocated to goodwill. In connection with the asset purchase
of Legend on December 22, 1998, the Company issued approximately 9,000 shares of
its common stock. These shares are restricted from being sold until no later
than December 22, 2002. Goodwill, net of accumulated amortization, approximated
$1.5 million and $1.4 million for March 31, 2000 and June 30, 2000.

NOTE 4--RECEIVABLES, NET

         Receivables consist of the following:

<TABLE>
<CAPTION>
                                                      MARCH 31,         JUNE 30,
                                                      ---------         --------
                                                  1999        2000        2000
                                                  ----        ----        ----
                                                         (IN THOUSANDS)
<S>                                             <C>         <C>         <C>
Trade accounts receivable ..................    $179,823    $109,146      83,555
Royalties receivable .......................          17         178        --
                                                --------    --------    --------
                                                 179,840     109,324      83,555
Less:  Allowance for doubtful accounts .....      10,713      23,337      23,081
Sales return reserve .......................      59,108      48,986      38,018
                                                --------    --------    --------
                                                $110,019    $ 37,001    $ 22,456
                                                ========    ========    ========
</TABLE>

NOTE 5--INVENTORIES, NET

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                                 MARCH 31,              JUNE 30,
                                                 ---------              --------
                                            1999           2000           2000
                                            ----           ----           ----
                                                      (IN THOUSANDS)
<S>                                       <C>            <C>            <C>
Finished goods ....................       $146,312       $ 77,677       $ 73,857
Return inventory ..................         26,319          7,351          3,249
Raw materials .....................          4,194          1,238          1,764
                                          --------       --------       --------
                                           176,825         86,266         78,870
Less:  Obsolescence Reserve .......         18,617         48,087         47,963
                                          --------       --------       --------
                                          $158,208       $ 38,179       $ 30,907
                                          ========       ========       ========
</TABLE>

         The obsolescence reserve at March 31, 2000 includes an aggregate
charge of approximately $56.0 million recorded in that year relating to
management's decision to focus on certain product lines and exit others. This
charge is recorded in cost of sales and is part of the restructuring and
reorganization of the Company. See Note 21 for additional information relating
to the restructuring of the Company's operations.

NOTE 6--INVESTMENTS

         In 1995, the Company invested $63,000 in Zomax Incorporated ("Zomax"),
an outsource provider of process management services to software publishers,
computer manufacturers and other producers of multimedia products. As of June
30, 2000 the Company held approximately 62,140 shares of Zomax at a market price
of $13.13 per share.

         In 1996, the Company purchased for approximately $2.7 million in cash a
9.9% investment in, and entered into a multi-titled publishing agreement with
Mirage, a U.K. developer of entertainment software. Since the total of the
expected future cash flows is less than the carrying amount of the investment,
the Company recognized a loss of $2.7 million on its investment during fiscal
1999.



                                      F-14
<PAGE>   70
         In 1996, the Company invested approximately $7.1 million in convertible
preferred stock of OddWorld, a developer of entertainment software, which is
convertible into approximately 50% of the common equity.

         In 1997, the Company purchased for $225,000 in cash a 9.9% investment
in GameWizards, Inc., a developer of electronic and print-based strategy guides
on behalf of developers and publishers of software products.

NOTE 7--PROPERTY AND EQUIPMENT, NET

         Property and equipment consists of the following:


<TABLE>
<CAPTION>
                                                   MARCH 31,            JUNE 30,
                                                   --------             -------
                                              1999          2000          2000
                                              ----          ----          ----
                                                       (IN THOUSANDS)
<S>                                         <C>           <C>           <C>
Computer equipment ...................      $17,172       $17,527       $ 9,048
Machinery and equipment ..............        6,622         4,952         1,722
Capitalized computer software ........       17,918        20,139         8,061
Furniture and fixtures ...............        7,059         5,513         5,212
Leasehold improvements ...............        7,733         4,041         3,310
                                            -------       -------       -------
                                             56,504        52,172        27,353
Less:  Accumulated Depreciation ......       19,696        26,411        12,259
                                            -------       -------       -------
                                            $36,808       $25,761       $15,094
                                            =======       =======       =======
</TABLE>

         Depreciation expense for the year ended December 31, 1997, the three
months ended March 31, 1998 and the years ended March 31, 1999 and 2000 and the
three months ended June 30, 2000 amounted to approximately $6.1 million, $1.9
million, $11.3 million, $13.0 million, and $2.5 million, respectively.

         During the three months ended June 30, 2000, the Company wrote off
total net assets of $9.2 million. This decision was made in part with the
Company's strategic plan to reorganize and re-focus its business and its desire
to exit certain product lines. See Note 21 for additional information relating
to restructuring of the Company's operations.

NOTE 8--ACCRUED LIABILITIES

         Accrued liabilities consists of the following:


<TABLE>
<CAPTION>
                                                     MARCH 31,           JUNE 30,
                                                     --------            -------
                                                 1999         2000         2000
                                                 ----         ----         ----
                                                        (IN THOUSANDS)
<S>                                            <C>          <C>          <C>
Restructuring reserve ...................      $ 8,992      $10,209      $ 9,836
Accrued advertising .....................        2,414        1,389          307
Accrued professional fees ...............        1,251          983        1,900
Accrued salary and related costs ........        4,602        5,007        4,018
Litigation reserve ......................         --          2,400        2,750
Accrued freight and distributions .......        5,890        2,611        1,236
Accrued consulting fees .................         --           --          2,858
Other ...................................       12,356       14,524       10,166
                                               -------      -------      -------
                                               $35,505      $37,123      $33,071
                                               =======      =======      =======
</TABLE>


         See Note 21 for information on the details of the restructuring charge
recorded by the Company.


                                      F-15
<PAGE>   71
NOTE 9--INCOME TAXES

         The components of the (benefit from) provision for income taxes are as
follows: (IN THOUSANDS)


<TABLE>
<CAPTION>
                                              THREE MONTHS                             THREE MONTHS
                                YEAR ENDED        ENDED           YEARS ENDED             ENDED
                               DECEMBER 31,     MARCH 31,           MARCH 31,            JUNE 30,
                                   1997           1998         1999         2000           2000
                                 --------       --------     --------     --------       --------
<S>                            <C>            <C>            <C>          <C>          <C>
Federal:
   Current .................     $(10,308)      $   (407)    $   --       $ (6,612)      $   --
   Deferred ................       (1,265)           836      (23,563)      38,499            287
                                 --------       --------     --------     --------       --------
         ...................      (11,573)           429      (23,563)      31,887            287
                                 --------       --------     --------     --------       --------
State and local:
   Current .................          185             36         --           --
   Deferred ................       (1,726)            33       (4,202)       4,424           --
                                 --------       --------     --------     --------       --------
         ...................       (1,541)            69       (4,202)       4,424           --
                                 --------       --------     --------     --------       --------
Foreign:
   Current .................        3,957           (194)       1,186           33
   Deferred ................         --             --         (3,049)       4,538            589
                                 --------       --------     --------     --------       --------
         ...................        3,957           (194)      (1,863)       4,571       $    589
                                 --------       --------     --------     --------       --------
Provision for (benefit from)
   income taxes ............     $ (9,157)      $    304     $(29,628)    $ 40,882       $    876
                                 ========       ========     ========     ========       ========
</TABLE>

The reconciliation of the income tax provision (benefit) computed at the Federal
statutory rate to the reported provision for (benefit from) income taxes is as
follows: (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                       THREE MONTHS                                THREE MONTHS
                                         YEAR ENDED        ENDED             YEARS ENDED              ENDED
                                        DECEMBER 31,      MARCH 31,            MARCH 31,             JUNE 30,
                                            1997            1998          1999           2000         2000
                                         ---------       ---------     ---------      ---------     ---------
<S>                                     <C>            <C>             <C>            <C>           <C>
(Benefit from) provision for income
   taxes computed at Federal
   statutory rate ...................    $ (11,963)      $     232     $ (28,499)     $ (98,438)    $ (14,373)
Increase (decrease) in (benefit
   from) provision for income taxes
   resulting from:
State and local taxes, net of
   Federal tax (benefit) provision ..       (1,541)             36        (3,324)       (10,969)       (1,603)
Foreign taxes in excess of Federal
   statutory rate provision (benefit)            9            (175)         (512)        17,598         3,042
Purchased research and development ..        4,293            --            --             --            --
Other, net ..........................           45             211         2,707         (1,900)          312
Increase to deferred tax asset
   valuation allowance ..............         --              --            --          134,591        13,498
                                         ---------       ---------     ---------      ---------     ---------
(Benefit from) provision for
   income taxes .....................    $  (9,157)      $     304     $ (29,628)     $  40,882     $     876
                                         =========       =========     =========      =========     =========
Effective income tax rate ...........           27%             46%           36%            15%            2%
                                         =========       =========     =========      =========     =========
</TABLE>



                                      F-16
<PAGE>   72
         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The components
of the Company's deferred tax assets and liabilities are as follows: (IN
THOUSANDS)



<TABLE>
<CAPTION>
                                                         THREE MONTHS
                                    YEAR ENDED               ENDED
                                     MARCH 31,              JUNE 30,
                                1999          2000            2000
                             ---------     ---------       ---------
<S>                          <C>           <C>           <C>
DEFERRED TAX ASSETS:
Inventory valuation .....    $   7,825     $  20,454       $  19,241
Deferred income .........          118            77              77
Sales return reserve ....         (302)        1,702           1,899
Tax loss carryforwards ..       26,729        92,781         109,144
Restructuring reserve ...        5,822         4,814           3,186
Other ...................        8,614        14,763          14,542
                             ---------     ---------       ---------
                                48,806       134,591       $ 148,089
                             ---------     ---------
                                48,806       134,591         148,089
Less valuation allowance          --        (134,591)       (148,089)
                                           ---------       ---------
Net deferred tax asset ..    $  48,806     $    --         $    --
                             =========     =========       =========
</TABLE>

         As of June 30, 2000, the Company has combined net operating loss
carryforwards of approximately $285.8 million for tax purposes. These loss
carryforwards are available to offset future taxable income and will expire
beginning in the years 2011 through 2019. Under Section 382 of the Internal
Revenue Code, the Company's pre-ownership-change loss carryforwards are subject
to an annual limitation which could reduce or defer the utilization of these
losses.

         The valuation allowance increased by approximately $13.5 million in
2000, attributable to the net change in the deferred tax asset during the year,
thereby increasing the cumulative valuation allowance to $148.0 million. The
valuation increased by $134,591 in fiscal 2000, consisting of a valuation
allowance of $48,806 for the beginning deferred tax asset balance and a
valuation allowance of $85,785 for the net change in the deferred tax asset
during the year. A full valuation allowance has been recorded against the net
deferred tax asset because it is more likely than not that such asset will not
be realized in the foreseeable future.

         The Company has not recognized a deferred tax liability of
approximately $1.1 million for the undistributed earnings of its 100
percent-owned foreign subsidiaries as of June 30, 2000. The Company currently
does not expect those unremitted earnings to reverse and become taxable to the
Company in the foreseeable future. A deferred tax liability will be recognized
when the Company expects that it will recover those undistributed earnings in a
taxable manner. As of June 30, 2000, the undistributed earnings of these
subsidiaries were approximately $7.2 million.

NOTE 10--STOCKHOLDERS' EQUITY

         On November 12, 1999, the Company's Board of Directors approved an
amendment to the Company's Amended and Restated Certificate of Incorporation
(the "Charter Amendment"), which increases the total number of shares of
authorized capital stock of the Company from 155 million shares to 305 million
shares. The Charter Amendment became effective on February 14, 2000. There is
currently authorized 300 million shares of the Company's common stock and five
million shares of the Company's Series A Convertible Preferred Stock. Refer to
Note 2 for stockholders' equity transactions relating to the purchase by
Infogrames SA of a majority interest in the Company.

         As of December 31, 1997, March 31, 1998, 1999 and 2000 and June 30,
2000, the Company had warrants outstanding to purchase an aggregate of
approximately 251,000, 251,000, 246,000, 246,000 and 246,000 shares,
respectively, of Common Stock to content-providers at exercise prices (ranging
from $42.50 to $70.00) not less than the fair market value at the date of issue.
Refer to Note 2 for stockholders' equity transactions relating to the purchase
by Infogrames SA of a majority interest in the Company.



                                      F-17
<PAGE>   73
         On June 26, 2000, the Company repurchased approximately 1.6 million
shares of its common stock in connection with severance agreements with certain
of its employees. The repurchased shares of common stock are held as treasury
stock.

NOTE 11--STOCK OPTIONS

         The Company has three stock option plans which began in 1995, 1997 and
2000, (the "Plans"). The Company accounts for these Plans under Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized.

         Generally, under the Plans, options are granted to employees to
purchase shares of the Company's common stock at no less than the fair market
value at the date of the grant, vest over a period of four or five years and are
exercisable for a period of ten years from the grant date.

         A summary of the status of the Company's Plans at December 31, 1997,
March 31, 1998, 1999 and 2000 and June 30, 2000 and changes during the year
ended December 31, 1997, the three months ended March 31, 1998, the fiscal years
ended March 31, 1999 and 2000 and the three months ended June 30, 2000 are as
follows:


<TABLE>
<CAPTION>
                                                                         DECEMBER 31, 1997
                                                                         -----------------
                                                                    PRICE PER       WEIGHTED AVERAGE
                                                    SHARES            SHARE          EXERCISE PRICE
                                                    ------            -----          --------------
                                                (in thousands)
<S>                                             <C>               <C>               <C>
Outstanding at beginning of year............         1,152        $ 0.20-117.50         $ 53.95
Granted.....................................           881           1.80-70.00           43.15
Exercised...................................           (54)          0.20-46.90           14.45
Forfeited...................................          (268)         1.75-117.50           76.80
Expired.....................................           (54)         39.70-88.75           56.30
                                                    ------        -------------         -------
Outstanding at end of year..................         1,657        $  0.20-72.50         $ 45.65
                                                    ======        =============         =======
</TABLE>

<TABLE>
<CAPTION>
                                                                         MARCH 31, 1998
                                                                         --------------
                                                                    PRICE PER       WEIGHTED AVERAGE
                                                    SHARES            SHARE          EXERCISE PRICE
                                                    ------            -----          --------------
                                                (in thousands)
<S>                                             <C>               <C>               <C>
Outstanding at beginning of
  fiscal year...............................         1,657        $  0.20-72.50         $ 45.65
Granted.....................................           309          31.55-39.70           34.15
Exercised...................................            (7)          0.90-10.40            5.50
Forfeited...................................            --                   --              --
Expired.....................................            (1)          1.75-70.00           35.00
                                                    ------        -------------         -------
Outstanding at end of fiscal year...........         1,958        $  0.20-72.50         $ 43.95
                                                    ======        =============         =======
</TABLE>

<TABLE>
<CAPTION>
                                                                         MARCH 31, 1999
                                                                         --------------
                                                                    PRICE PER       WEIGHTED AVERAGE
                                                    SHARES            SHARE          EXERCISE PRICE
                                                    ------            -----          --------------
                                                (in thousands)
<S>                                             <C>               <C>               <C>
Outstanding at beginning of
  fiscal year...............................         1,958        $  0.20-72.50         $ 43.95
Granted.....................................         1,139          0.01-100.00           32.85
Exercised...................................           (40)          0.01-39.70            7.40
Forfeited...................................           (99)          0.90-70.00           46.20
Expired.....................................           (47)          1.75-70.00           46.05
                                                    ------        -------------         -------
Outstanding at end of fiscal year...........         2,911        $ 0.01-100.00         $ 40.10
                                                    ======        =============         =======
</TABLE>


                                      F-18
<PAGE>   74
<TABLE>
<CAPTION>
                                                                         MARCH 31, 2000
                                                                         --------------
                                                                    PRICE PER       WEIGHTED AVERAGE
                                                    SHARES            SHARE          EXERCISE PRICE
                                                    ------            -----          --------------
                                                (in thousands)
<S>                                             <C>               <C>               <C>
Outstanding at beginning of year............         2,911        $ 0.01-100.00         $ 40.10
Granted.....................................           415           9.40-19.70           14.75
Exercised...................................           (61)          0.01-10.40            2.35
Forfeited...................................        (1,049)         1.75-100.00           33.25
Expired.....................................          (321)         0.90-100.00           52.95
                                                    ------        -------------         -------
Outstanding at end of year..................         1,895        $  0.01-72.50         $ 37.60
                                                    ======        =============         =======
</TABLE>

<TABLE>
<CAPTION>
                                                                          JUNE 30, 2000
                                                                          -------------
                                                                    PRICE PER       WEIGHTED AVERAGE
                                                    SHARES            SHARE          EXERCISE PRICE
                                                    ------            -----          --------------
                                                (in thousands)
<S>                                             <C>               <C>               <C>
Outstanding at beginning of year............         1,895        $  0.01-72.50         $ 37.63
Granted.....................................           526           9.38-13.75           13.37
Exercised...................................           (10)          0.01-10.38            0.50
Forfeited...................................           (85)         14.69-70.00           32.31
Expired.....................................          (115)          0.88-72.50           46.14
                                                    ------        -------------         -------
Outstanding at end of year..................         2,211        $  0.22-70.00         $ 31.78
                                                    ======        =============         =======
</TABLE>

         The following table summarizes information concerning currently
outstanding and exercisable options; (in thousands)


<TABLE>
<CAPTION>
  RANGES OF           NUMBER         REMAINING       WEIGHTED AVERAGE             NUMBER       WEIGHTED AVERAGE
EXERCISE PRICE     OUTSTANDING         LIFE           EXERCISE PRICE           EXERCISABLE      EXERCISE PRICE
--------------    ------------      ----------      -----------------         ------------     ----------------
<S>               <C>               <C>             <C>                      <C>               <C>
 $0.22 - 10.94             146            9.0       $            8.65                   16     $           2.17
$11.25 - 70.00           2,065            7.2       $           33.42                1,276     $          41.69
--------------    ------------      ---------       -----------------        -------------     ----------------
                         2,211                                                       1,294

</TABLE>


         As of June 30, 2000, there were approximately 2,211,000 options
outstanding at prices ranging from $0.22 to $70.00, of which approximately
1,294,000 options were exercisable at prices ranging from $0.22 to $70.00.

         If compensation cost for these plans were determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," the Company's net income (loss) before dividends on preferred
stock and earnings per share would have been reduced to the following pro forma
amounts:


<TABLE>
<CAPTION>
                                                     THREE MONTHS                               THREE MONTHS
                                       YEAR ENDED        ENDED            YEARS ENDED              ENDED
                                      DECEMBER 31,     MARCH 31,           MARCH 31,              JUNE 30,
                                          1997           1998          1999           2000          2000
                                          ----           ----          ----           ----          ----
                                                        (in thousands, except per share date)
<S>                                   <C>            <C>            <C>           <C>           <C>
Net (loss) income before dividends
   on preferred stock
   As reported ....................    $ (25,023)       $  358      $ (70,838)    $ (320,722)      (41,944)
   Pro forma ......................      (32,141)          217        (77,566)      (320,937)      (42,032)
Basic net (loss) income per share
   As reported ....................    $   (1.87)       $ 0.03      $   (5.10)    $   (19.50)     $  (2.03)
   Pro forma ......................    $   (2.40)       $ 0.02      $   (5.57)    $   (19.51)     $  (2.03)
Diluted net (loss) income per share
   As reported ....................    $   (1.87)       $ 0.03      $   (5.10)    $   (19.50)     $  (2.03)
   Pro forma ......................    $   (2.40)       $ 0.02      $   (5.59)    $   (19.51)     $  (2.03)
</TABLE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended December 31, 1997, the three
months ended March 31, 1998 and the years ended March 31, 1999 and 2000, and the
three months ended June 30, 2000: no dividends will be paid for the entire term
of the option, expected volatility of 67.5% for 1997, the three months ended
March 31, 1998, the year ended March 31, 1999, and 81.0% for the year ended
March 31, 2000 and the three months ended June 30, 2000, risk-free interest
rates averaging 6.22% for 1997, 5.45% for the three months ended March 31, 1998,
4.74% for the year ended March 31, 1999, 5.82% for the year ended March 31, 2000
and 6.31% for the three months ended June 30, 2000, and expected lives of four
years in 1997, the three months ended March 31, 1998, the years ended March 31,
1999 and 2000, and the three months ended June 30, 2000. The weighted average
fair value of options granted was $19.45 in 1997, $19.15 in 1998, $14.30 in
1999, $9.30 in 2000 and $13.37 for the three months ended June 30, 2000.



                                      F-19
<PAGE>   75
NOTE 12--RELATED PARTY TRANSACTIONS

   Purchase of majority interest by Infogrames SA

         On November 15, 1999, Infogrames SA and/or its subsidiaries purchased
from the Company the Short-Term Note. In connection with this transaction, the
Company issued to Infogrames SA warrants to purchase 10,000 shares of common
stock of the Company at an exercise price of $0.05 per share.

         On December 16, 1999, the Company consummated a number of transactions
with Infogrames SA and certain members of the founding Cayre family.

         Infogrames SA purchased 6,711,701 shares of common stock from the Cayre
family, the founders of GT Interactive Software Corp.,  for $25.0 million in
cash and also purchased from the Cayre family $10.0 million of subordinated
notes (the "Cayre Notes") of the Company.

         Infogrames SA purchased 5,714,286 shares of common stock from the
Company for $50 million in cash ($8.75 per share) and $60.6 million principal
amount of a new 5% subordinated convertible note of the Company (the "5% Note")
in exchange for $25 million in cash, the Cayre Notes, the Short-Term Notes and
$0.6 million of accrued interest. Interest of $1.6 million was accrued on the 5%
Note through June 30, 2000. The 5% Note is convertible into common stock at
$9.25 per share.

         As a result of these transactions, as of December 31, 1999, Infogrames
SA owned approximately 12.42 million shares of the Company's common stock, or
60% of the voting securities of the Company. Pursuant to the Securities Purchase
Agreement dated November 15, 1999 between the Company and Infogrames SA, the
Company was required to pay not more than $2.0 million of Infogrames SA's
attorney's and accountant's fees. As of June 30, 2000, $0.6 million remained
payable to Infogrames SA for these fees.

         In connection with the assumption by Infogrames SA of the Company's
credit agreement as of February 15, 2000, the Company issued to Infogrames SA
warrants to purchase 45,000 shares of common stock at an exercise price of $0.05
per share.

   Purchases of product from Infogrames SA

         During the three month period ended June 30, 2000, the Company
purchased $0.7 million of product from Infogrames SA, representing approximately
1% of total purchases by the Company for such period. As of June 30, 2000, the
Company had approximately $1.9 million outstanding related to purchase of
product from Infogrames SA.

   Transactions with former Shareholders and Directors

         The following transactions occurred between the Company and the former
directors through their date of resignation, and accordingly, the information
presented is from April 1, 1999 through December 16, 1999, the date that
Infogrames SA purchased a majority interest in the Company.

   Leases

         In May 1995, GT Interactive Software (Europe) Limited, the Company's
European subsidiary, entered into a lease with respect to its then principal
executive offices with Marylebone 248 Realty LLC ("Marylebone 248"), an entity
controlled by Joseph J. Cayre, former Chairman Emeritus of the Board of
Directors and Jack J. Cayre, former Executive Vice president and a director of
the Company. This lease was terminated in August 1999. From April 1, 1999
through August 15, 1999, the Company paid approximately $119,000 in rent to
Marylebone 248.

   Transactions with GoodTimes Home Video Corp. ("GTHV")

         GTHV, a majority of whose stock was formerly owned by Joseph J. Cayre,
Stanley Cayre and Kenneth Cayre, performed certain assembly and packaging
services for the Company. The Company enters into arms length manufacturing


                                      F-20
<PAGE>   76
transactions with GTHV on an as needed basis. The total amount charged to
operations for manufacturing services for the year ended December 31, 1997
amounted to approximately $2.5 million. The Company made cash payments totaling
approximately $330,000 and $1.1 million to GTHV during the three months ended
March 31, 1998 and the year ended March 31, 1999, respectively. During 1996, the
Company sold approximately $3.5 million of software to GTHV at fair market
value. GTHV also performed certain assembly and packaging services for the
Company. From April 1, 1999 through December 16, 1999, the Company paid
approximately $260,000 in fees for such services. As of June 30, 2000, the
Company had no outstanding liabilities to GTHV.

   REPS Agreement

         In servicing its mass merchant accounts, the Company uses field
representatives supplied by REPS, a company owned by Joseph J. Cayre, Stanley
Cayre and Kenneth Cayre. REPS provides such services to the Company as well as
to third parties not affiliated with the Cayre family. The Company had an
agreement with REPS pursuant to which REPS supplied such services through May 1,
2000. The Company is currently operating on a month to month basis under the
terms of the expired agreement. The total amount charged to operations for these
services amounted to approximately $4.8 million, $1.4 million and $4.1 million
for the year ended December 31, 1997, the three months ended March 31, 1998 and
the year ended March 31, 1999, respectively. Prior to entering into the REPS
agreement with GTHV, from April 1, 1999 through December 16, 1999, the Company
paid approximately $2.7 million in fees to REPS.

   Travel Services

         The Company occasionally hired Excel Aire Service, Inc. ("Excel") to
provide business travel services for its officers and employees. Excel leases
its planes from JT Aviation Corp. ("JTAC"), a company owned by Joseph J. Cayre.
Excel is not owned in whole or in part by any member of the Cayre family. Excel
provided air travel to the Company at an hourly rate and on an as needed as
available basis. During the year ended December 31, 1997, the three months ended
March 31, 1998 and the year ended March 31, 1999, the Company's aggregate air
travel fees paid to JTAC were approximately $370,000, $40,000, and $217,000,
respectively. During the year ended March 31, 1999, the Company paid
approximately $311,000 to Excel. From April 1, 1999 through December 16, 1999,
the Company paid approximately $69,000 to Excel.

         The Company occasionally hired JC Aviation Corp ("JCAC"), a company
owned by Jack J. Cayre, Executive Vice President and Director of the Company, to
provide business transportation services for its officers. During the year ended
December 31, 1997, the Company paid approximately $26,000 to JCAC. There were no
payments made during any subsequent periods to JCAC.

   ClientLogic Corporation

         Transactions with ClientLogic Corporation ("ClientLogic"). The Company
has entered into agreements with ClientLogic (formerly doing business as
SOFTBANK Services Group) pursuant to which ClientLogic (i) provides toll-free
customer support for some of the Company's published products and (ii) takes
direct customer orders and provides fulfillment services for the Company, in
each case on a per service basis. Both agreements provide for automatic renewal
on a month to month basis upon expiration unless terminated by either party.
During the year ended December 31, 1997, the three months ended March 31, 1998
and the year ended March 31, 1999, the Company had charged to operations
approximately $230,000, $41,000 and $251,000 respectively, in fees to
ClientLogic. Jordan A. Levy, a former director of the Company, is Vice-Chairman
of ClientLogic.

   RCS Computer Experience

         From time to time, the Company purchases computer equipment from and
sells computer software to RCS Computer Experience, LLC ("RCS"). In June 1998,
Rockwell Computer Services, LLC, a company controlled by Joseph J. Cayre,
purchased approximately a 70% interest in RCS. During the year ended March 31,
1999, the Company paid approximately $24,000 to RCS and generated approximately
$54,000 in net revenues from RCS.



                                      F-21
<PAGE>   77
         The Company has entered into agreements with an unaffiliated leasing
company for computer equipment. This leasing company purchases computer
equipment from various vendors including RCS. During the year ended March 31,
1999, the leasing company paid approximately $231,000 to RCS for equipment
leased by the Company.

         The Company believes that the terms of the foregoing transactions are
no less favorable to the Company than could be obtained by the Company from
unrelated parties on an arm's-length basis.

   Transactions between Infogrames UK Limited and GT Interactive Software
(Europe) Limited

         GT Interactive Software (Europe) Limited, a wholly-owned subsidiary of
Infogrames ("GT UK"), entered into a number of transactions with Infogrames UK
Limited ("Infogrames UK") relating to the consolidation of its operations with
Infogrames UK. Fixed assets having a net book value of $722,000 were transferred
to Infogrames UK for $626,000 during fiscal 2000. The resulting loss is included
in restructuring charges. Inventory having a cost of $270,000 was transferred at
original cost. Infogrames UK agreed to assume the ongoing costs of running GT
UK's office from March 1, 2000 including the salary costs of a number of
employees who transferred to Infogrames UK. Such salary charges totaled $265,000
and such charges that relate to ongoing operations other than salaries totaled
$94,000 for the month of March 2000. The lease on the UK office was formally
assigned to Infogrames UK in June 2000, although the rent for this office has
been borne by Infogrames UK from March 1, 2000. $38,000 of such rent was
re-charged to Infogrames UK for the month of March 2000. A deferred rent
liability of $203,000 arising from an initial rent free period on the office was
transferred to Infogrames UK.

   Loans

         Gregor Loan. On August 31, 1996, the Company extended a loan to Andrew
Gregor, a former Chief Financial Officer of the Company, in the principal amount
of $250,000. The loan, including interest, amounted to $290,000 and was forgiven
as part of Mr. Gregor's severance package and charged to restructuring charges
in the fourth quarter of fiscal 1999. See Note 21 for information concerning
other restructuring charges.

         SingleTrac Loans. The Company has extended non-interest bearing loans
to three former employees of the Company who were former stockholders of
SingleTrac. The principal amount of each such loan is $100,000. Such loans
become due and payable at the earliest of the sale of their stock of the
Company, in November 1999 or six months following termination of the borrowers'
respective employment with the Company. Each of the borrowers has pledged 4,000
shares of the Company's common stock, as collateral security for the loans. One
loan was forgiven on July 9, 1999 pursuant to an amended employment agreement,
which provided for the loan forgiveness pursuant to termination of employment.
$20,000 of another loan has been partially earned by the former employee, and
the $80,000 balance repaid to the Company in May 2000. The Company intends to
pursue collection of the third loan, which is still outstanding.

         Humongous Loan. The Company extended a demand promissory note to the
former President of Humongous, a wholly-owned subsidiary. The note bears
interest at a rate of 8.75% per annum and is secured by a residential first
mortgage and security interest in all shares of common stock of the Company
owned beneficially by such individual. The balance outstanding, including
interest, at June 30, 2000 is approximately $1.6 million. The Company is
currently negotiating a repayment schedule for this outstanding loan.

         OZM Loan. The Company extended a loan to an employee of OZM in the
principal amount of $150,000. Such loan bears interest at 7 1/2% per annum and
is due in three equal annual installments commencing December 7, 1998.



                                      F-22
<PAGE>   78
NOTE 13--LEASES

         The Company accounts for its leases as operating leases, with
expiration dates ranging from 2000 through 2012. Future minimum annual rental
payments under the leases are as follows for the fiscal years then ended:

<TABLE>
<CAPTION>
                                                               (in thousands)
<S>                                                            <C>
2001......................................................        $  5,737
2002......................................................           4,820
2003......................................................           4,304
2004......................................................           3,920
2005......................................................           3,340
Thereafter................................................           6,483
                                                                  --------
                                                                  $ 28,604
                                                                  ========
</TABLE>

         Total rent expense charged to operations for the year ended December
31, 1997, the three months ended March 31, 1998, the years ended March 31, 1999
and 2000 and the three months ended June 30, 2000 amounted to approximately $4.9
million, $1.2 million, $7.3 million, $9.1 million and $1.0 million,
respectively.

NOTE 14--COMMITMENTS AND CONTINGENCIES

         On January 21, 1997, the Company entered into a revolving credit
agreement (as amended, the "Old Credit Agreement") with certain banks expiring
on December 31, 1998. On September 11, 1998, the borrowings under the Old Credit
Agreement were repaid and the Old Credit Agreement was terminated.

         Simultaneously, on September 11, 1998, the Company entered with First
Union National Bank, as agent for a syndicate of banks (the "Banks"), into a new
revolving credit agreement (the "Credit Agreement") as subsequently amended,
expiring on March 31, 2000. Under the Credit Agreement, the Company borrowed
approximately $71 million for ongoing working capital requirements, letters of
credit and other general corporate purposes, secured by domestic accounts
receivable and inventory and other assets of the Company. To induce the Banks to
amend the Credit Agreement, the Company issued the Banks warrants to purchase,
at an exercise price of $0.05 per share, an aggregate of 150,000 shares of the
Company's Common Stock. Of these, warrants to purchase 55,000 shares of Common
Stock were immediately exercisable, warrants to purchase 50,000 shares of Common
Stock became exercisable on October 31, 1999 and warrants to purchase the
remaining 45,000 shares of Common Stock (the "Bank Warrants") became exercisable
on February 28, 2000 if the Credit Agreement was not repaid prior to that date.

         As of February 15, 2000, Infogrames SA entered into an agreement with
the Banks, pursuant to which Infogrames SA assumed the Banks' interest in the
Credit Agreement. In connection with the assumption by Infogrames SA of the
Credit Agreement, (i) the maturity date was extended from March 31, 2000 to June
30, 2000, (ii) the interest rate, which was the Prime Rate plus 1.0% or LIBOR
plus 2.5% at the option of the Company, was set at LIBOR plus 2.5%, (iii) a
$250,000 amendment fee, which would have been payable to the Banks on March 31,
2000 unless the Credit Agreement was refinanced by February 16, 2000, was
reduced to $125,000 and paid to Infogrames SA, (iv) certain mandatory prepayment
restrictions and operational covenants were revised to be less restrictive and
(v) revisions were made to provide alternative letter of credit facilities to
the Company. In addition, the Bank Warrants were surrendered and cancelled and
warrants to purchase 45,000 shares of Common Stock, at an exercise price of
$0.05 per share, were issued to Infogrames SA.

         On June 29, 2000, Infogrames SA and the Company amended the Credit
Agreement to increase the aggregate commitment available under the facility to
$125 million and to extend the maturity date to September 30, 2000.

         At June 30, 2000, the Company had outstanding borrowings under the
Credit Agreement of approximately $98.5 million, and no letters of credit
outstanding. Outstanding borrowings under the Credit Agreement are classified as
current in the consolidated balance sheet as of June 30, 2000, accrued interest
$2.5 million has been recorded but not yet paid under the Credit Agreement as of
June 30, 2000.



                                      F-23
<PAGE>   79
         Long term debt consists of the following at June 30, 2000:

<TABLE>
<CAPTION>
                                                                (in thousands)
<S>                                                             <C>
5% subordinated convertible note.............................      $62,236
GAP 0% subordinated convertible notes........................       37,084
                                                                   -------
                                                                   $99,320
                                                                   =======
</TABLE>

The above indebtedness matures in full on December 16, 2004.

Refer to Note 2 for additional obligations of the Company incurred concurrent
with the Infogrames transaction.

NOTE 15--LEGAL PROCEEDINGS

   Scavenger

On September 18, 1997, Scavenger, Inc. ("Scavenger"), a software developer,
filed a lawsuit against the Company in Supreme Court, New York County, claiming
that the Company breached a software development contract between the parties
dated November 28, 1995. Scavenger alleges that the Company, after paying $2.5
million in advances and accepting delivery of gold master disks for two computer
games, refused to pay any more advances, including advances relating to the
development of two additional games under the agreement. Scavenger is suing for
the remaining advances ($4.3 million) and for future royalties ($5 million), and
also seeks consequential damages for allegedly being forced out of business
($100 million) and losing contracts with unspecified third parties ($4 million)
as a result of the Company's alleged breach. The Company filed an answer and
counterclaim, in which it denies any liability to Scavenger and alleges, among
other things, that the contract was lawfully terminated when Scavenger failed to
deliver the two remaining games after receiving from the Company written notice
to cure its material breaches. By its counterclaim, the Company seeks damages
and restitution for at least $5 million on grounds of breach of contract and
unjust enrichment.

         By order entered March 3, 2000, the Court granted Scavenger's motion
for partial summary judgment on its claim for $1.9 million allegedly due on the
two delivered games and judgment was entered on March 14, 2000 in the amount of
$2.4 million (reflecting pre-judgment interest on the claim). The Company posted
a bond in the amount of the judgment and immediately appealed from this order
and judgment to the Appellate Division, First Department. On June 8, 2000, the
Appellate Division, First Department affirmed the order and judgment entered by
the Supreme Court. The Company has moved for leave to appeal to the Court of
Appeals. As of June 30, 2000 the Company accrued approximately $2.4 million
related to this judgement.

         In its order of March 3, 2000, the Court denied Scavenger's motion for
partial summary judgment seeking $2.4 million on the two games never delivered.
In addition, the Court denied Scavenger's motion for leave to amend the
complaint to add claims for fraud and seeking damages of $100 million.

         The Company moved for partial summary judgment seeking dismissal of the
claim for consequential damages ($75-125 million) and additional royalties ($5
million). By order entered June 21, 2000, the Court denied the Company's motion
and granted Scavenger leave to conduct an audit of royalties allegedly due to
Scavenger. The Company has perfected an appeal to the Appellate Division--First
Department from that portion of the order which denied the motion for partial
summary judgment on the claim for consequential damages. That appeal is expected
to be heard in September 2000. The Company also moved for reargument of the same
portion of the order before the trial court. On September 7, 2000, on the record
of oral argument, the trial court granted the Company's motion to reargue with
respect to Scavenger's fourth cause of action for consequential damages ($100
million) and, on reargument, granted the motion for partial summary judgment
dismissing the claim. Scavenger intends to appeal. The Company will withdraw the
appeal it had filed with respect to this claim.

         Finally, the Company has made a motion in the Supreme Court to dismiss
the second cause of action (seeking $2.4 million in royalty advances, plus
interest) on the ground that the Court's reasoning in granting Scavenger partial
summary judgment on the first cause of action requires dismissal of the second
cause. Scavenger has cross-moved for summary judgment on this cause, arguing
that the Court's ruling on the first cause of action should lead to judgment in
favor of Scavenger on the second cause.
These motions were submitted September 1, 2000.



                                      F-24
<PAGE>   80
   Herzog

         In January, February and March 1998, ten substantially similar
complaints were filed against the Company, its former Chairman and its former
Chief Executive Officer, and in certain actions, its former Chief Financial
Officer, in the U.S. District Court for the Southern District of New York. The
plaintiffs, in general, purport to sue on behalf of a class of persons who
purchased shares (and as to certain complaints, purchased call options or sold
put options) of the Company during the period from August 1, 1996 through
December 12, 1997. The plaintiffs allege that the Company violated the federal
securities laws by making misrepresentations and omissions of material facts
that allegedly artificially inflated the market price of the Company's common
stock during the class period. The plaintiffs further allege that the Company
failed to expense properly certain prepaid royalties for software products that
had been terminated or had failed to achieve technological feasibility, or had
insufficient sales to recoup the paid advances, which misstatements purportedly
had the effect of overstating the Company's net income and net assets. Motions
were made by certain groups of plaintiffs for their appointment as lead
plaintiffs in the actions. On October 7, 1998, the Court appointed lead
plaintiffs and lead counsel to the plaintiffs in the actions. The plaintiffs'
consolidated and amended complaint was filed and served in early January 1999.
By order dated January 23, 1999, the plaintiffs were granted leave to file a
second consolidated and amended complaint, which added claims under Section
10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and Rule 10b-5 under the Exchange Act against the Company's former independent
auditors, Arthur Andersen LLP. The Company and Arthur Andersen LLP each filed
motions to dismiss the second consolidated and amended complaint. By order and
opinion dated November 29, 1999 the Court granted the motion to dismiss.
Plaintiffs have appealed from the dismissal of the action, and oral argument on
the appeal was held on June 8, 2000. On July 11, 2000, the Court of Appeals for
the Second Circuit issued an opinion and judgment reversing the dismissal of the
complaint as to the Company (but not as to Arthur Andersen LLP) and remanding
the action to the district court. On July 21, 2000, the Company filed with the
Court of Appeals a petition for rehearing with suggestion for rehearing en banc.
On September 1, 2000, the Court of Appeals denied the petition for rehearsing
and suggestion for rehearing en banc. Management believes that the ultimate
outcome of this matter will not have a material effect on the consolidated
financial position or results of operations.

   James

         On April 12, 1999, an action was commenced by the administrators for
three children who were murdered on December 1, 1997 by Michael Carneal at the
Heath High School in McCracken County, Kentucky. The action was brought against
25 defendants, including the Company and other corporations in the videogame
business, companies that produced or distributed the movie "The Basketball
Diaries", and companies that provide allegedly obscene internet content. The
complaint alleges, with respect to the Company and other videogame corporations,
that Carneal was influenced by the allegedly violent content of certain
videogames and that the videogame manufacturers are liable for Carneal's
conduct. The complaint seeks $10 million in compensatory damages and $100
million in punitive damages. The Company and approximately 10 other videogame
corporations have entered into a joint defense agreement and have retained
counsel. By order entered April 6, 2000, the Court granted a motion to dismiss
the complaint. Plaintiffs have filed a motion to vacate the dismissal of the
action. On June 16, 2000 the district court denied the motion to vacate. On June
28, 2000, plaintiffs appealed the dismissal of the action to the Court of
Appeals for the Sixth Circuit. Management believes that the ultimate outcome of
this matter will not have a material effect on the consolidated financial
position or results of operations.

   Fenris

         On March 12, 1999, Fenris Wolf Ltd. ("Fenris"), a software developer,
filed a lawsuit in New York Supreme Court claiming that the Company failed to
adequately pursue bundling opportunities for the software game "Rebel Moon
Rising MMX" and unlawfully rejected the ninth milestone deliverable for the
software game "Rebel Moon Revolution" under a development contract between the
parties dated June 26, 1996. The complaint asserts five claims of breach and
intentional interference, which seek $100,000 for the nonpayment and rejection
of milestone nine, $400,000 for the balance of payments under the contract,
$775,000 for alleged lost bundling opportunities, $775,000 for alleged
intentional interference with bundling arrangements and $500,000 for alleged
interference with contractual relations. In an October 20, 1999 opinion and
order, the court granted the Company's motion to dismiss three of the five
claims so that only the milestone nine contract and bundling claims remain.
Fenris has filed a notice of appeal from the dismissal of the $400,000 claim for
the balance of payments under the contract; and the Company has filed a
counterclaim for breach seeking to recover not less than the $800,000 in
milestone payments advanced for the development of "Rebel Moon Revolution."
Fenris has moved for summary judgment on its first cause of action ($100,000),
and the Company has moved for summary judgment dismissing the bundling claim. By
order entered September 1, 2000, the Supreme Court denied in Fenris both Fenris'
motion for partial summary judgment on its first cause of action and the
Company's motion for partial summary judgment dismissing the bundling claim.
Management believes that the ultimate outcome of this matter will not have a
material effect on the consolidated financial position or results of operations.

         Additionally, the Company is involved in various claims and legal
actions arising in the ordinary course of business, the ultimate resolution of
which management believes will not be material to the Company's results of
operations or financial condition.



                                      F-25
<PAGE>   81
NOTE 16--EMPLOYEE SAVINGS PLAN

         The Company maintains an Employee Savings Plan which qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
The plan is available to all U.S. employees who meet the eligibility
requirements. Under the plan, participating employees may elect to defer a
portion of their pretax earnings, up to the maximum allowed by the Internal
Revenue Service (up to the lesser of 15% of compensation or $10,000 for calendar
year 1999), with matching of 50% of the employee's contribution up to 6 percent
provided by the Company. Generally, the plan assets in a participant's account
will be distributed to a participant or his or her beneficiaries upon
termination of employment, retirement, disability or death. All plan
administrative fees are paid by the Company. Generally, the Company does not
provide its employees any other post retirement or post employment benefits,
except discretionary severance payments upon termination of employment. Plan
expense approximated $467,000, $187,000, $739,000, $530,000, and $200,000 for
the year ended December 31, 1997, the three months ended March 31, 1998, the
years ended March 31, 1999 and 2000, and the three months ended June 30, 2000,
respectively.

NOTE 17--ROYALTY ADVANCES

         The Company has committed to pay advance royalty payments under certain
royalty agreements. These obligations are not guaranteed and are dependent, in
part, on the delivery of the contracted services by the licensor. Future advance
royalty payments due under these royalty agreements are as follows for the
fiscal years then ended:

<TABLE>
<CAPTION>
                                                      (in thousands)
<S>                                                   <C>
         2001....................................        $ 10,984
         2002....................................             850
         2003....................................             100
         Thereafter..............................              --
                                                         --------
                                                         $ 11,934
                                                         ========
</TABLE>

NOTE 18--CONCENTRATION OF CREDIT RISK

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

         The Company had sales constituting 46%, 47%, 40%, 35%, and 52% of net
revenue to two customers in the years ended December 31, 1997, the three months
ended March 31, 1998, the years ended March 31, 1999 and 2000 and the three
months ended June 30, 2000, respectively. Sales to one customer constituted 38%,
39%, 30%, 24%, and 37% of net revenue during the year ended December 31, 1997,
the three months ended March 31, 1998, the years ended March 31, 1999 and 2000
and the three months ended June 30, 2000, respectively, while sales to a second
customer constituted 8%, 8%, 10%, 11%, and 14% of the net revenue for the same
periods, respectively.

         Accounts receivable due from three significant customers aggregated
48%, 43% and 48% of accounts receivable at March 31, 1999 and 2000 and the three
months ended June 30, 2000.

NOTE 19--OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREAS

         The Company has two reportable segments: publishing and distribution.
Publishing is comprised of frontline, leisure and children's publishing.
Distribution constitutes the sale of the Company's and other publishers' titles
to various mass merchants and other retailers.

         The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on operating income of these segments.



                                      F-26
<PAGE>   82
         The Company's reportable segments are strategic business units with
different associated costs and profit margins. They are managed separately
because each business unit requires different planning, merchandising and
marketing strategies.

         The following unaudited summary represents the consolidated net
revenues and operating income (loss) by reportable segment for the year ended
December 31, 1997, the three months ended March 31, 1998, the year ended March
31, 1999 and 2000 and the three months ended June 30, 2000:


<TABLE>
<CAPTION>
                                     PUBLISHING    DISTRIBUTION    CORPORATE      TOTAL
                                     ----------    ------------    ---------      -----
                                                         (IN THOUSANDS)
<S>                                  <C>           <C>             <C>          <C>
Year ended December 31, 1997:
      Net revenues ...............     265,700        264,977          --        530,677
      Operating income (loss) ....      55,629         50,295       (48,455)      57,469
Three months ended March 31, 1998:
      Net revenues ...............      48,700         57,067          --        105,767
      Operating income (loss) ....       7,884          9,151       (14,348)       2,687
Year ended March 31, 1999:
      Net revenues ...............     299,400        272,942          --        572,342
      Operating income (loss) ....      24,447         30,520      (103,569)     (48,602)
Year ended March 31, 2000:
      Net revenues ...............     252,301        123,268          --        375,569
      Operating income (loss) ....      19,156         11,526      (252,915)    (222,233)
Three months ended June 30, 2000:
      Net revenues ...............      27,041          5,942          --         32,983
      Operating income ...........      (5,990)        (3,460)      (16,274)     (25,724)
</TABLE>


         The following represents the reconciliation of operating income (loss)
as reported for reportable segments to consolidated totals for the year ended
December 31, 1997, the three months ended March 31, 1998, the year ended March
31, 1999 and 2000 and the three months ended June 30, 2000:


<TABLE>
<CAPTION>
                                                       THREE MONTHS                                THREE MONTHS
                                        YEAR ENDED         ENDED              YEARS ENDED             ENDED
                                       DECEMBER 31,       MARCH 31,             MARCH 31,            JUNE 30,
                                           1997             1998          1999          2000           2000
                                           ----             ----          ----          ----           ----
                                                                      (IN THOUSANDS)
<S>                                    <C>             <C>             <C>           <C>           <C>
Operating income (loss) as reported
   for reportable segments ........     $  57,469        $   2,687     $ (48,602)    $(222,233)     $ (25,724)
Amortization of goodwill ..........        (1,295)            (636)       (3,349)       (3,110)          (561)
Restructuring and other charges ...       (88,279)               0       (24,159)      (37,948)       (11,081)
                                        ---------        ---------     ---------     ---------      ---------
Operating (loss) income ...........     $ (32,105)       $   2,051     $ (76,110)    $(263,291)     $ (37,366)
                                        =========        =========     =========     =========      =========
</TABLE>



                                      F-27
<PAGE>   83
         Information about the Company's operations in the U.S. and other
geographic locations for the year ended December 31, 1997, the three months
ended March 31, 1998, the year ended March 31, 1999 and 2000 and the three
months ended June 30, 2000 are presented below.


<TABLE>
<CAPTION>
                                                                    OTHER
                                        UNITED       UNITED       GEOGRAPHIC
                                        STATES       KINGDOM       LOCATIONS      TOTAL
                                        ------       -------       ---------      -----
                                                        (IN THOUSANDS)
<S>                                   <C>           <C>           <C>           <C>
1997:
      Net revenues ...............    $ 423,197     $  94,322     $  13,158     $ 530,677
      Operating (loss) income ....      (44,332)       10,204         2,023       (32,105)
      Capital expenditures .......        2,257        15,889           123        18,269
      Total assets ...............       55,453       349,019        11,516       415,988
Three months ended March 31, 1998:
      Net revenues ...............    $  87,538     $  14,132     $   4,097     $ 105,767
      Operating income (loss) ....        1,270          (295)        1,076         2,051
      Capital expenditures .......          144         7,462            35         7,641
      Total assets ...............      281,422        39,904        11,411       332,737
Year ended March 31, 1999:
      Net revenues ...............    $ 469,670     $  76,132     $  26,540     $ 572,342
      Operating (loss) income ....      (68,947)      (13,666)        6,503       (76,110)
      Capital expenditures .......        2,196        20,121           290        22,607
      Total assets ...............      374,084        49,296        15,531       438,911
Year ended March 31, 2000:
      Net revenues ...............    $ 287,173     $  70,748     $  17,648     $ 375,569
      Operating loss .............     (222,122)      (37,793)       (3,376)     (263,291)
      Capital expenditures .......          937         6,115         1,812         8,864
      Total assets ...............      138,783        10,749         9,675       159,207
Three months ended June 30, 2000:
      Net revenues ...............    $  30,405     $     415     $   2,163        32,983
      Operating loss .............      (34,289)       (1,200)       (1,877)      (37,366)
      Capital expenditures .......          710           130          --             840
      Total assets ...............    $ 102,579     $   7,060     $   5,140     $ 114,779
</TABLE>




                                      F-28
<PAGE>   84
NOTE 20--SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                              THREE MONTHS                            THREE MONTHS
                                                YEAR ENDED       ENDED            YEARS ENDED            ENDED
                                               DECEMBER 31,     MARCH 31,          MARCH 31,            JUNE 30,
                                                   1997           1998         1999         2000          2000
                                                   ----           ----         ----         ----          ----
                                                                     (IN THOUSANDS)
<S>                                            <C>            <C>            <C>          <C>         <C>
Issuance of common stock in connection with
   the acquisition of SingleTrac ..........      $ 7,169        $  --        $  --        $  --            --
Issuance of stock options in connection
   with the acquisition of SingleTrac .....         --            3,007         --           --            --
Issuance of common stock in connection
   with the acquisition of OZM ............         --             --         15,473         --            --
Issuance of stock options in connection
   with the acquisition of OZM ............         --             --          1,347         --            --
Issuance of common stock in connection
   with the acquisition of Reflections ....         --             --         12,279         --            --
Issuance of common stock in connection
   with the acquisition of Legend .........         --             --            255         --            --
Issuance of stock options in connection
   with the acquisition of Legend .........         --             --              9         --            --
Accrual for purchase price adjustment
   for One Stop ...........................         --            3,095         --           --            --
Warrants issued in connection with New
   Credit Agreement .......................         --             --           --          3,188          --
Warrants issued to GAP and acquired by
   Infogrames SA ..........................         --             --           --          8,833          --
Warrants issued in connection with
   Short-Term Note ........................         --             --           --            150          --
Discount on GAP 0% Subordinated
   Convertible Note .......................         --             --           --         14,351          --
Deferred financing costs in connection
   with Long-Term debt ....................         --             --           --          4,776          --
Common stock issued in lieu of partial
   royalty payment ........................         --             --           --          4,208          --
Cash paid for income taxes ................       10,243              2       11,118        2,713          --
Cash paid for interest ....................        1,802            727        5,826        7,536          --
</TABLE>

NOTE 21--RESTRUCTURING AND OTHER CHARGES

         During December 1999, the Company's management approved and adopted a
formal plan (the "Restructuring Plan") relating to a reorganization of the
Company's Frontline publishing business, the shutdown of a substantial portion
of European publishing operations and outsourcing and downsizing of the
Company's distribution and assembly function. As a result of the implementation
of the Restructuring Plan, the Company has incurred restructuring and other
charges of approximately $37.9 million in fiscal 2000, mostly recorded in the
three months ended December 31, 1999. As a result of the implementation of the
Restructuring Plan, the Company has incurred approximately $17.6 million
relating to the write-off of goodwill due to the consolidation of the value
distribution division with the Company's publishing division, $12.1 million
relates to the shutdown of European operations, including the write-off of all
goodwill other than the Reflections studio, $6.1 million relates to impaired
assets and $2.1 million relates to the planned severance of certain employees.
The liability at March 31, 1999 relates to the planned severance of 135
employees. As of March 31, 2000, the Company terminated 88 employees from the
administration and finance, manufacturing and distribution and product
development departments. During the three months ended June 30, 2000 the Company
recorded additional restructuring charges of approximately $11.1 million. These
charges relate to $0.4 million of goodwill write-off, $9.4 million related to
impaired assets and transition rent


                                      F-29
<PAGE>   85
and $1.3 million of severance for 30 employees, mostly in administration and
product development. As of June 30, 2000, the Company terminated 81 additional
employees. The restructuring reserve at June 30, 2000 represents severance due
of approximately $7.4 million related to severance to be paid to 243 employees,
transition rent of $0.5 million and anticipated expenses to shut down European
operations of approximately $1.9 million. Management anticipates completing
restructuring activities by September 30, 2000.

         Total restructuring charges of approximately $17.5 million in fiscal
1999 includes approximately $7.0 million of asset impairment charges, $635,000
of additional rent for the transition period, and $9.8 million of severance for
135 employees, including executive officers, to be paid out over periods not to
exceed fifteen months. The restructuring reserve as of March 31, 1999 of
approximately $9.0 million represented severance due of approximately $8.4
million and transition rent due of $635,000. In connection with the
reorganization of the Company's Frontline business, the Company wrote off
approximately $3.3 million of Singletrac's goodwill. The remaining balance of
$600,000 related to future use of Singletrac's label. The majority of the
remaining asset impairment charges of approximately $3.8 million related to the
write-off of assets located at the Company's distribution center.

         The following table sets forth adjustments to the restructuring
reserve: (IN THOUSANDS)

<TABLE>
<CAPTION>
                                       ADDITIONAL
                          BALANCE,    RESTRUCTURING                                  BALANCE,
                          MARCH 31,     AND OTHER                       CASH         MARCH 31,
                            1999         CHARGES      WRITE-OFFS      PAYMENTS         2000
                            ----         -------      ----------      --------         ----
<S>                       <C>         <C>             <C>             <C>            <C>
Severance ..........      $  8,357      $  4,720       $   --         $ (5,144)      $  7,933
Shutdown of European
    operations .....          --           3,128           --           (1,236)         1,892
Impairment charges .          --          29,783        (29,783)          --             --
Transition rent ....           635           317           --             (568)           384
                          --------      --------       --------       --------       --------
                          $  8,992      $ 37,948       $(29,783)      $ (6,948)      $ 10,209
                          ========      ========       ========       ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                       ADDITIONAL
                          BALANCE,    RESTRUCTURING                                  BALANCE,
                          MARCH 31,     AND OTHER                       CASH         JUNE 30,
                            2000         CHARGES      WRITE-OFFS      PAYMENTS         2000
                            ----         -------      ----------      --------         ----
<S>                       <C>         <C>             <C>             <C>            <C>
Severance ..........      $  7,933      $  1,284       $   --         $ (1,800)      $  7,417
Shutdown of European
    operations .....         1,892          --             --             --            1,892
Impairment charges .          --           9,592         (9,592)          --
Transition rent ....           384           205           --              (62)           527
                          --------      --------       --------       --------       --------
                          $ 10,209      $ 11,081       $ (9,592)      $ (1,862)      $  9,836
                          ========      ========       ========       ========       ========
</TABLE>

NOTE 22--QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share
data)

         Summarized quarterly financial data for the fiscal year ended March 31,
1999 are as follows:

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                                                      ------------------
                                                     JUNE 30,   SEPTEMBER 30,   DECEMBER 31,    MARCH 31,
                                                     --------   -------------   ------------    ---------
<S>                                                 <C>         <C>             <C>            <C>
Net revenues .................................      $ 116,391     $ 116,151      $ 246,303     $  93,497
Gross profit .................................         60,493        60,193        126,691        (4,990)
Operating income (loss) ......................          4,112         3,034         33,706      (116,962)
Net income (loss) from continuing operations .          1,803         1,369         17,332       (72,301)
Loss from discontinued operations ............           --            --             (560)      (18,481)
Net income (loss) before dividends
   on preferred stock ........................          1,803         1,369         16,772       (90,782)
Basic net income (loss) per share
   from continuing operations ................      $    0.13     $    0.10      $    1.24     $   (4.97)
</TABLE>


                                      F-30
<PAGE>   86
<TABLE>
<S>                                                 <C>         <C>             <C>            <C>
Basic net (loss) per share from
   discontinued operations ...................      $    --       $    --        $   (0.04)    $   (1.27)
Basic net income (loss) per share ............      $    0.13     $    0.10      $    1.20     $   (6.24)
Weighted average shares outstanding ..........         13,612        13,618         13,949        14,555
Diluted net income (loss) per share
   from continuing operations ................      $    0.13     $    0.10      $    1.24     $   (4.97)
Diluted net (loss) per share from discontinued
  operations .................................      $    --       $    --        $   (0.04)    $   (1.27)
Diluted net income (loss) per share ..........      $    0.13     $    0.10      $    1.20     $   (6.24)
Weighted average shares outstanding ..........         13,798        13,713         14,019        14,555
</TABLE>

         Summarized quarterly financial data for the fiscal year ended March 31,
2000 are as follows:

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                             ------------------
                                             JUNE 30,    SEPTEMBER 30,   DECEMBER 31,    MARCH 31,
                                             --------    -------------   ------------    ---------
<S>                                         <C>          <C>             <C>            <C>
Net revenues .........................      $ 121,325     $  91,426       $ 101,727     $  61,091
Gross profit .........................         59,182        26,806          12,307       (24,027)
Operating loss .......................         (3,709)      (52,112)        (94,943)     (112,527)
Net loss from continuing operations ..         (3,852)      (56,060)       (121,594)     (140,627)
Loss from discontinued operations ....           --            (477)           --            --
Net loss before extraordinary items ..         (3,852)      (56,537)       (119,706)     (140,627)
Gain from extraordinary item, net
   of tax of $1,312 ..................           --            --             1,888          --
Net loss before dividends on
   preferred stock ...................         (3,852)      (56,537)       (119,706)     (140,627)
Basic and diluted net loss per share
   from continuing operations ........      $   (0.26)    $   (3.80)      $   (7.68)    $   (9.66)
Basic and diluted net loss per share
   from discontinued operations ......      $    --       $   (0.03)      $    --       $    --
Basic and diluted net income per share
   from extraordinary items ..........      $    --       $    --         $    0.11     $    --
Basic and diluted net loss per share .      $   (0.26)    $   (3.83)      $   (7.57)    $   (9.66)
Weighted average shares outstanding ..         14,574        14,772          15,816        14,555
</TABLE>

         Summarized quarterly financial data for the three months ended June 30,
2000 is as follows:

<TABLE>
<CAPTION>
                                             THREE MONTHS
                                               JUNE 30,
                                               --------
<S>                                          <C>
Net revenues ...........................        32,983
Gross Profit ...........................        16,833
Operating loss .........................       (37,366)
Net loss from continuing operations.....       (41,944)
Basic and diluted net loss per share
  from continuing operations ...........       $ (2.03)
Basic and diluted net loss per share....       $ (2.03)
Weighted average shares outstanding.....        20,680
</TABLE>

         The quarterly earnings per share information is computed separately for
such period. Therefore, the sum of such quarters per share amounts may differ
from the total for the year.



                                      F-31
<PAGE>   87
NOTE 23--SUBSEQUENT EVENTS

         The Company entered into a merger agreement with Infogrames North
America, Inc., a wholly-owned subsidiary of Infogrames SA ("INA"), a Company
under common control, on September 6, 2000. The Company will acquire INA through
the creation of a wholly-owned subsidiary that will merge with and into INA,
with INA surviving the merger. Upon completion of the merger, INA will be a
wholly owned subsidiary of the Company.



                                      F-32
<PAGE>   88
                        INFOGRAMES, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                    ADDITIONS
                                       BALANCE -    CHARGED TO                  BALANCE -
                                       BEGINNING    COSTS AND                     END
DESCRIPTION                            OF PERIOD     EXPENSES     DEDUCTIONS    OF PERIOD
-----------                            ---------     --------     ----------    ---------
<S>                                    <C>          <C>           <C>           <C>

ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Three months ended June 30, 2000....   $ 23,337      $  1,510      $ (1,766)    $ 23,081
                                       ========      ========      ========     ========
Year ended March 31, 2000 ..........   $ 10,713      $ 12,992      $   (368)    $ 23,337
                                       ========      ========      ========     ========
Year ended March 31, 1999 ..........   $  3,252      $ 11,429      $ (3,968)    $ 10,713
                                       ========      ========      ========     ========
Three months ended March 31, 1998...   $  4,379      $    411      $ (1,538)    $  3,252
                                       ========      ========      ========     ========
Year ended December 31, 1997 .......   $  4,069      $  4,106      $ (3,796)    $  4,379
                                       ========      ========      ========     ========

RESERVE FOR OBSOLESCENCE:
Three months ended June 30, 2000....   $ 48,087      $  6,787      $ (6,911)    $ 47,963
                                       ========      ========      ========     ========
Year ended March 31, 2000 ..........   $ 18,617      $ 38,953      $ (9,483)    $ 48,087
                                       ========      ========      ========     ========
Year ended March 31, 1999 ..........   $ 15,574      $ 16,634      $(13,591)    $ 18,617
                                       ========      ========      ========     ========
Three months ended March 31, 1998...   $ 16,016      $    165      $   (607)    $ 15,574
                                       ========      ========      ========     ========
Year ended December 31, 1997 .......   $ 11,008      $  5,883      $   (875)    $ 16,016
                                       ========      ========      ========     ========

RESTRUCTURING RESERVE:
Three months ended June 30, 2000....     10,209      $ 11,081      $(11,454)    $  9,836
                                       ========      ========      ========     ========
Year ended March 31, 2000 ..........   $  8,992      $  8,392      $ (7,175)    $ 10,209
                                       ========      ========      ========     ========
Year ended March 31, 1999 ..........   $     --      $ 10,437      $ (1,445)    $  8,992
                                       ========      ========      ========     ========
</TABLE>




                                      F-33