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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K



(Mark One)



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------

For the fiscal year ended March 31, 2004

OR

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

For the transition period from

Commission File Number 0-16986

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ACCLAIM ENTERTAINMENT, INC.

(Exact name of the registrant as specified in its charter)

|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|Delaware                                                      |  | 38-2698904                      
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification No.)
|                                                              | 
|One Acclaim Plaza, Glen Cove, New York                        |  | 11542                           
|(Address of principal executive offices)                      |  | (Zip Code)                      

(516) 656-5000

(Registrants telephone number)

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

None

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

|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of Each Class                     |  | Name of Each Exchange on Which Registered
|Common Stock, par value $0.02 per share |  | Nasdaq Small-Cap Market                  

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



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



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



On June 19, 2004, 129,573,500 shares of common stock of the registrant were issued and outstanding and the aggregate market value of voting common stock held by non-affiliates was $36,468,082.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants definitive Proxy Statement, to be filed
with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K, with respect to the 2004 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual Report on
Form 10-K. This report consists of 114 sequentially numbered pages. The Exhibit Index is located at sequentially numbered page 107.

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ACCLAIM ENTERTAINMENT, INC.



2004 FORM 10-K ANNUAL REPORT



TABLE OF CONTENTS



|         |  |                                                                                       |  |         
|-------- |  | ------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                       |  | Page No.
|PART I   |  | 1                                                                                    
|Item 1.  |  | Business                                                                              |  | 1       
|Item 2.  |  | Properties                                                                            |  | 22      
|Item 3.  |  | Legal Proceedings                                                                     |  | 22      
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 23      
|         | 
|PART II  |  | 24                                                                                   
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 24      
|Item 6.  |  | Selected Financial Data                                                               |  | 26      
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 27      
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 56      
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 57      
|Item 9.  |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  |  | 106     
|Item 9A. |  | Controls and Procedures                                                               |  | 106     
|         | 
|PART III |  | 106                                                                                  
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 106     
|Item 11. |  | Executive Compensation                                                                |  | 107     
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 107     
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 107     
|Item 14. |  | Principal Accountant Fees and Services                                                |  | 107     
|         | 
|PART IV  |  | 107                                                                                  
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 107     
|         |  | Signatures                                                                            |  | 113     



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As used in this Annual Report on Form 10-K, unless the context otherwise requires, all references to
we, us, our, Acclaim or the Company refer to Acclaim Entertainment, Inc., and subsidiaries. The term common stock means our common stock, $.02 par value.



This Annual Report on Form 10-K, including Item 1 (Business)
and Item 7 (Managements Discussion and Analysis of Financial Condition and Results of Operations), contains forward-looking statements about circumstances that have not yet occurred. All statements, trend analysis and other
information contained below relating to markets, our products and trends in revenue, as well as other statements including words such as anticipate, believe or expect and statements in the future tense are
forward-looking statements. These forward-looking statements are subject to business and economic risks, and actual events or our actual future results could differ materially from those set forth in the forward-looking statements due to such risks
and uncertainties. We will not necessarily update this information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to, those
discussed under the heading Factors Affecting Future Performance included herein. Our website is located at www.acclaim.com. On our website, we make available, as soon as reasonably practicable after electronic filing with the Securities
and Exchange Commission, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports. All of these reports are provided to the public free of charge.



PART I



|Item |  | 1.Business
|---- |  | ----------



Overview



Acclaim Entertainment, Inc. was founded in 1987 as a
Delaware corporation, and maintains operations in the United States, the United Kingdom, Germany, France, Spain and Australia. We develop, publish, market and distribute, under our brand names, interactive entertainment software for a variety of
hardware platforms, including Sonys PlayStation® 2, Microsofts Xbox, and, on a more limited basis, Nintendos GameCube and Game Boy Advance and personal computer systems. We develop software internally, as well as engaging third parties to develop software on our behalf.



We internally develop our software products through our five software development studios located in the United States and
the United Kingdom. Additionally, we contract with independent software developers to create software products for us.



Through our subsidiaries in North America, the United Kingdom, Germany, France, Spain, and Australia, we distribute our software products directly to
retailers and other outlets, and we also utilize regional distributors outside those territories to distribute and market our software to many other territories throughout the world. As an additional aspect of our business, we distribute software
products that have been developed by third parties. A less significant aspect of our business is the development and publication of strategy guides relating to our software products and the issuance of certain special edition comic
magazines to support certain of our brands.



Since the
Companys inception, we have developed products for each generation of major gaming platforms, including IBM® Windows-based personal computers and compatibles, Sega Genesis, Super Nintendo Entertainment System®, Nintendo Game Boy®, Game Boy® Advance
and Game Boy® Color, Sony PlayStation®, Nintendo® 64, Sega Dreamcast, Sony Playstation® 2, Microsoft Xbox, and Nintendo GameCube. We also initially developed software for the Nintendo Entertainment System and the Sega Master System.



Substantially all of our revenue is derived from one industry segment, the
development, publication, marketing and distribution of interactive entertainment software. For information regarding our foreign and domestic operations, see Note 23 (Segment Information) of the Notes to the Consolidated Financial Statements
included herein.



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We are required to file periodic reports, proxy and information statements and other information with the
SEC. You may read any materials filed by us at the SECs public reference room at 450 Fifth Street, N.W., Washington, D.C. You may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our SEC
filings are also available to the public on the SECs Internet website located at http://www.sec.gov.



Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K may be found on our website at www.acclaim.com.



Recent Developments



On May 4, 2004 we entered into a Waiver and Amendment agreement (the
Amendment) with our primary lender, GMAC Commercial Finance LLC (GMAC), under which GMAC has agreed to waive the Companys financial covenant defaults under our GMAC Credit Agreement for the quarter ended March 31, 2004.
In addition, GMAC agreed to provide an additional $3 million overadvance in the form of a supplemental discretionary loan. Pursuant to the Amendment, the GMAC Credit Agreement and related financing agreements were to terminate on June 20, 2004. On
June 18, 2004, we entered into an Extension Agreement with GMAC which amended the Waiver and Amendment agreement signed by us and GMAC on May 4, 2004. Under the Extension Agreement, GMAC has agreed to extend the date upon which our banking agreement
with GMAC will terminate, from June 20, 2004 to August 4, 2004.



On May 4, 2004, we entered into a letter of intent with a proposed new lender, for an asset-based credit facility, with an equity component, to replace the GMAC loan facility. We are working with the proposed new lender in order to
implement the new facility which is subject to the execution of definitive documentation by both parties. Timely implementation of the new facility will be crucial to avoid severe interruption of our business. See Risk Factors; Our Ability
to Meet Cash Requirements and Maintain Necessary Liquidity Depends on Our Ability to Timely Transition our Credit Facility.



Also in May 2004, we received notification from The Major League Baseball Players Association (MLBPA) that we were late in making certain royalty
payments and our license was terminated and that if we did not make the payments in a timely fashion, as well as certain other remedies, that our license would not be reinstated. We have made all required payments to the MLBPA and are current with
our payment obligations with certain MLB players, however we have not reached agreement with the MLBPA regarding the other requested remedies and MLBPA is considering the license terminated. We disagree with MLBPAs interpretation of the
license agreement provisions and have advised them as such. We are in continued discussions with MLBPA on this matter.



In April and May 2004, we received notification from Battleborne Entertainment, Inc. (Battleborne) that due to various contractual disputes
between us and Battleborne regarding our development agreement with Battleborne relating to the development of the videogame entitledCombat Elite: WWII Paratroopers, they were terminating the development agreement. We disagree with their
interpretations of the development agreement and demanded that Battleborne fulfill its contractual obligations under the development agreement. In June 2004, Battleborne brought an action in New York state Supreme Court, Nassau County, seeking a
temporary restraining order enjoining the release of the title until the contractual disputes have been resolved. The TRO was granted and the matter was scheduled by the court for expedited discovery by both sides. We are also in continued
discussions with Battleborne in an effort to resolve this matter amicably.



In June 2004, we received notification from Classic Media, Inc. (Classic), the licensor of the intellectual property Turok, that due to failure to make certain royalty payments relating to the
videogame title Turok: Evolution that our license agreement with Classic was terminated. We are in discussions with Classic in an effort to resolve this matter amicably.



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On May 5, 2004 we announced that, as a result of our internal review of our financial reports for our
fiscal year ended March 31, 2004 we discovered an accounting error which occurred during the 2001 fiscal year. In fiscal 2001, we incorrectly recorded a $9.5 million bank advance relating to a junior participation transaction between the Company,
its primary lender and six junior participants (see note 15F). The error resulted in an understatement of debt and an overstatement of net earnings in fiscal 2001 by $9.5 million. The correction of the error resulted in a reduction of bonuses for
fiscal 2001 that were based on pre-tax income by $0.6 million, which were repaid to us in June 2004. We also identified adjustments for reconciling items related to bank advances aggregating $0.4 million that were recorded in the fourth quarter of
fiscal 2002 that should have been recorded in the third quarter of fiscal 2002. As a result of these accounting errors, we have restated, in this Form 10-K, our previously issued financial statements for the quarters ended June 2, 2001 and August
31, 2001 and the fiscal year ended August 31, 2001, balance sheets as of each quarter and fiscal year end from December 2, 2001 through December 28, 2003, statement of operations for the quarters ended June 2, 2002 and August 31, 2002 and statement
of cash flows for the fiscal year ended August 31, 2002 and all the quarters within fiscal 2002. Please see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations as well as Note 2 (Restatement) of
the Notes to the Consolidated Financial Statements included herein.



Strategy



Our objective is to become a
worldwide leader in the development, publication and distribution of quality interactive entertainment software products that deliver a highly compelling and satisfying consumer entertainment experience. Our strategy includes the following elements:



Create and Maintain Diversity in Product Mix, Platforms and
Markets.    We are committed to maintaining a diversified mix of product offerings which mitigates our operating risks, and broadens our demographic market appeal. See Risk Factors: We Depend on a Relatively Small
Number of Franchises for a Significant Portion of Our Revenue and Profits. Therefore, we strive to develop and publish games spanning a wide range of entertainment categories, including action, action adventure, extreme sports, sports and
racing, which can be played on the current videogame systems, including Sonys PlayStation® 2, Microsofts Xbox, Nintendos GameCube console systems and Nintendos Game Boy Advance hand held device as well as personal computers. We may design our software for use on multiple platforms, where economically justified, in order to reach a greater potential consumer base. Accordingly, there
are a number of factors that we take into consideration in determining the appropriate gaming system for each of the titles we develop, including, amongst other things, the gaming systems user demographics, the potential growth of the
installed base of each game system and the competitive landscape at the time of a products release.



Create, Acquire and Maintain Strong Brands.    We attempt to focus our game developing and publishing activities principally on
titles that are, or have the potential to become, franchise properties possessing sustainable consumer appeal and brand recognition. Such titles can serve as the basis for sequels, prequels and related new titles, which can be released over an
extended period of time, similar to the film industry. We have entered into a number of strategic relationships with the owners of various forms of intellectual property, which have allowed us to acquire the rights to publish games and create
franchises based upon such intellectual properties. See Risk Factors: Our Future Success Depends on Our Ability to Release Popular Products.



Product Selection and Development Processes.    The success of our publishing business depends, in significant part, on our
ability to develop games that will generate high unit volume sales while simultaneously meeting our quality standards. Our publishing units use a formal control process (The Greenlight Process) for the selection, development, production and quality
assurance of our products. We apply this process to products under development with external, as well as internal, resources. This Greenlight Process includes upfront concept evaluation as well as in-depth reviews of each project at numerous
intervals during the development process by a team that includes senior management and a number of operating managers from our brand management, sales, marketing, and product development areas.



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In-house Development Group.    We have an in-house development staff, both
domestically and internationally, who work in teams to create our software. We are striving to provide our creative teams the independence and flexibility they need to build an environment that fosters creativity and teamwork. Employing in-house
development teams provides us with the following advantages:



| |  |  | They collaborate with each other sharing development techniques, software tools, game engines and useful experience, to form a strong collective and creative environment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | They can re-focus their efforts quickly to meet the changing needs of key projects;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | They have more control over product quality, scheduling and costs; and
| | - |  | ----------------------------------------------------------------------



| |  |  | They are not subject to the competing needs of other publishers.
| | - |  | ----------------------------------------------------------------



Historically, we have developed our titles using a strategic combination of our internal development group and external development resources. We select
our external developers based on their track record and expertise in producing titles within certain categories. As part of that strategy, one external developer will often produce the same game for multiple platforms and will produce sequels to the
original game. This selection process allows us to strengthen and leverage the particular expertise of our internal and external development resources.



Software Development



During the year ended March 31, 2004, approximately 38% of our gross revenue was derived from software developed at our internal studios. The balance of
our gross revenue for the year ended March 31, 2004 was derived from software developed by third-party developers. Through the first six months of fiscal 2005, we estimate that the majority of our revenue will be derived from software developed in
our own studios, through the release of our titles Alias, All Star Baseball, Legends of Wrestling: Showdown, The Red Star and 100 Bullets.



The development time for a title on both the dedicated game platforms and personal computers is between twelve and thirty-six months and the average
development cost for a title ranges from $2 million to $8 million. The development time for Game Boy Advance is between six and nine months and the average development cost for a title ranges from $200,000 to $400,000. Gross margin percentages for
cartridge based Game Boy® Advance software are
significantly lower than the gross margin percentages for disc-based software and the manufacturing time is significantly longer than that associated with disc-based software. The manufacturing lead time for disc-based software is approximately one
to three weeks from the placement of an order, as opposed to four to six weeks for cartridge based software.



Our product development methodology and organization are modeled on elements of the consumer packaged goods and software industry. Brand managers assess
the market and establish the direction for each brand. Producers manage and monitor the quality, delivery schedule, development milestones, and budget for each title, to ensure that the title follows the approved product specifications, and
coordinate the testing and final approval of the title.



Additionally, we test all software, whether developed by our internal studios or by third-party developers, for bugs prior to the titles manufacture. The software is also tested for bugs by the hardware manufacturers. The software
titles for personal computers are also tested for bugs both internally and by independent testing organizations. To date, we have not had to recall any of our software due to bugs.



Products



We utilize a brand structure and market our titles under distinct key brands including Acclaim and Acclaim Sports. We support this strategy through
the regularly scheduled introduction of new titles featuring these brands. In the twelve months ended March 31, 2004, we released a total of 47 titles for PlayStation 2, Xbox, GameCube, Game Boy Advance and personal computers. Through the first six
months of fiscal 2005, we currently plan on



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releasing a total of approximately 20 titles for PlayStation 2, Xbox and personal computers. In fiscal 2004, we released 13 titles for PlayStation 2, 14
titles for Xbox, 9 titles for Gamecube, 5 titles for Nintendo Game Boy and 6 titles for PC. See Risk Factors: Our Future Success Depends on our Ability to Release Popular Products.



The average life cycle of a new software title is largely dependent on its
initial success and will generally range from three months to upwards of twelve to eighteen months, with the majority of sales of the game occurring in the first thirty to one hundred and twenty days after the games release. Therefore, we are
constantly required to introduce new titles in order to generate revenue and/or replace declining revenue from older titles.



Our titles incorporate a variety of exclusive and non-exclusive licenses, including:



| |  |  | Professional sportsMajor League Baseball, Major League Baseball Players Association (see Recent Developments) andThe National Basketball Association;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Television and filmAlias;
| | - |  | --------------------------



| |  |  | Sports personalitiesDerek Jeter and Hulk Hogan;
| | - |  | ------------------------------------------------



| |  |  | Extreme sports personalitiesDave Mirra;
| | - |  | ----------------------------------------



| |  |  | RacingJuiced, Speed Kingsand XGRA; and
| | - |  | ---------------------------------------



| |  |  | Comic books100 Bullets, The Red Star, Turok and Shadowman.
| | - |  | -----------------------------------------------------------



Some of the agreements granting us the rights to use these brands are restricted to individual properties, while some of the agreements cover a series of
properties or grant rights to create software based on or featuring particular licenses over a period of time. See Risk Factors: Inability to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or
Result in Reduced Product Sales and Note 3 (License Agreements) to the Notes to the Consolidated Financial Statements included herein.



The following table shows the number of software titles we released in the years indicated across the various game platforms:



|                   |  |                               |               |                                  |               |                    |                |                    |                |    |  |   
|------------------ |  | ----------------------------- | ------------- | -------------------------------- | ------------- | ------------------ | -------------- | ------------------ | -------------- | -- |  | --
|                   |  | Fiscal YearEndedMarch 31,2004 |               | Twelve Months EndedMarch 31,2003 |               | Seven Months Ended |                | Fiscal Years Ended
|                   |  |                               |              
|                   |  |                               | March 31,2003 |                                  | March 31,2002 |                    | August 31,2002 |                    | August 31,2001
|                   |  |                               |               |                                  |               |                    |                | (Unaudited)        |                |    |  |   
|Microsoft Xbox     |  | 14                            |               | 10                               |               | 6                  |                | 2                  |                | 6  |  |  
|Nintendo GameCube  |  | 9                             |               | 13                               |               | 8                  |                | 8                  |                | 13 |  |  
|Sony PlayStation 2 |  | 13                            |               | 12                               |               | 9                  |                | 8                  |                | 11 |  | 9 
|Sony PlayStation   |  |                              |               |                                 |               |                   |                |                   |                |   |  | 12
|Sega Dreamcast     |  |                              |               |                                 |               |                   |                |                   |                |   |  | 5 
|Nintendo Game Boy  |  | 5                             |               | 11                               |               | 4                  |                | 4                  |                | 11 |  | 6 
|PC                 |  | 6                             |               | 1                                |               | 1                  |                | 1                  |                | 1  |  | 3 
|                   |  |                               |               |                                  |               |                    |                |                    |                |    |  |   
|Total              |  | 47                            |               | 47                               |               | 28                 |                | 23                 |                | 42 |  | 35
|                   |  |                               |               |                                  |               |                    |                |                    |                |    |  |   



Market



We do, and will continue to, develop and publish products for multiple
hardware platforms, as this diversification is a key element of our business strategy. In the past, no hardware platform or video game system has achieved substantial long-term dominance in the interactive entertainment market, however, Sony
Playstation 2 maintains the largest installed base of console systems. New entrants into the interactive entertainment and multimedia industries, such as cable and satellite television, telephone companies, and diversified media and
entertainment companies, in addition to a proliferation of new technologies, such as online



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networks and the Internet, have increased the competition in our markets. See Risk Factors: Industry Trends, Platforms Transitions and Technological
Change May Adversely Affect Our Revenue and Profitabilityand Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition with the Hardware Manufacturers Affects Our Revenue and
Profitability.



Platform License Agreements



We and various Sony computer entertainment companies (collectively,
Sony) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the Sony name and its proprietary information and technology in order to develop and distribute software
for PlayStation and PlayStation 2 in various territories throughout the world, including North America, Australia, Europe and Asia. We pay to Sony a royalty fee, plus the manufacturing cost, for each unit Sony manufactures for us. This payment is
made upon the manufacture of the units. In March 2004, our agreements with Sony for PlayStation platforms renewed automatically and expire in March 2005. We do not expect any difficulties in renewing these licenses in the future. See Risk
Factors: If We are Unable to Obtain or Renew Licenses from Hardware Companies, We Will Not be Able to Release Software for Popular Systems.



We and various Nintendo entertainment companies (collectively, Nintendo) have entered into agreements pursuant to which we maintain a
non-exclusive, non-transferable license to utilize the Nintendo name and its proprietary information and technology in order to develop and distribute software for GameCube in North America and for Game Boy Advance in Australia, Europe,
New Zealand and North America, Game Boy and Game Boy Color in various territories, including North America, Australia, Europe and New Zealand. For Game Boy Advanced software we pay Nintendo a fixed amount per unit, based in part, on memory capacity
and chip configuration. This amount includes the cost of manufacturing, printing and packaging of the unit, as well as a royalty for the use of Nintendos name, proprietary information and technology. For GameCube software we pay Nintendo a
fixed amount which includes the cost of manufacturing the disc and printing of the packaging of the unit, as well as a royalty for the use of Nintendos name, propriety information and technology. These fees and charges are subject to
adjustment by Nintendo in its discretion. Our agreements with Nintendo expire at various times in 2004, and we do not expect any difficulties in renewing those licenses. See Risk Factors: If We are Unable to Obtain or Renew Licenses from
Hardware Companies, We Will Not be Able to Release Software for Popular Systems.



Acclaim and Microsoft have entered into an agreement pursuant to which we have a non-exclusive, non-transferable license to design, develop and distribute software for the Xbox system. Territories where Xbox software
may be distributed by us are determined on a title-by-title basis by Microsoft when the concept of the applicable software title is approved by Microsoft. We pay Microsoft a royalty fee for each unit of finished products manufactured on our behalf
by third-party manufacturers approved by Microsoft. Our agreement with Microsoft expires in 2004 and renews automatically for 1 year terms. We do not expect any difficulties in renewing that license. See Risk Factors: If We are Unable to
Obtain or Renew Licenses from Hardware Companies, We Will Not be Able to Release Software for Popular Systems.



We do not have the right to directly manufacture any CDs, DVDs or cartridges that contain our software for Sonys PlayStation or PlayStation 2, or
Nintendos GameCube, Game Boy Color or Game Boy Advance systems. We do have the right to manufacture CDs or DVDs for the Xbox system through subcontractors pre-approved by Microsoft. See Risk Factors: If We are Unable to Obtain or
Renew Licenses from Hardware Companies, We Will Not be Able to Release Software for Popular Systems.



Pursuant to the agreements with the hardware manufacturers, Sony, Microsoft and Nintendo have the right to review and evaluate, under standards which vary
for each hardware manufacturer, the content and playability of each title and the right to inspect and evaluate all art work, packaging and promotional materials used by us in connection with the software. We are responsible for resolving, at our
own expense, any warranty or repair claims brought with respect to the software. To date, we have not experienced any material warranty claims.



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Under each of our platform license agreements, we bear the risk that the information and technology
licensed from Sony, Microsoft and Nintendo, and incorporated in the software may infringe the rights of third parties. Further, we must indemnify Sony, Microsoft and Nintendo with respect to, among other things, any claims for copyright or trademark
infringement brought against them, as applicable, and arising from the development and distribution of the game programs incorporated in the software by us. To date, we have not received any material claims of infringement. See discussion below on
Patent, Trademark, Copyright and Product Protection.



Marketing and Advertising



The target
consumers for our titles vary due to the specific content of the title and the titles rating from the Entertainment Software Ratings Board. The primary audience for these titles is generally comprised of males aged twelve to thirty-five. For
PC titles our target audience is primarily males aged fifteen to thirty-five.



In developing a marketing strategy for a title, we seek story concepts and brands or franchises that we believe will appeal to the interests of the titles target consumer. We strive to create marketing campaigns
which are consistent with this strategy and which we believe will appeal to the targeted consumers for each of those titles. We market our software through:



| |  |  | Television, radio, print, outdoor and Internet advertising;
| | - |  | -----------------------------------------------------------



| |  |  | Our website (www.acclaim.com) and the Internet sites of others;
| | - |  | ---------------------------------------------------------------



| |  |  | Product sampling through demonstration software;
| | - |  | ------------------------------------------------



| |  |  | Consumer contests and promotions;
| | - |  | ---------------------------------



| |  |  | In-store promotions, displays and retailer assisted co-operative advertising;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Publicity activities; and
| | - |  | -------------------------



| |  |  | Trade shows.
| | - |  | ------------



In addition, we enter into cooperative advertising arrangements with certain of our customers, where our software is featured in the retailers own advertisements to its customers. Dealer displays and in-store
merchandising are also used to increase consumer awareness of our products.



Online, Broadband and Wireless Technologies



We think that there will be opportunities for further exploitation of our intellectual properties through the Internet, online services, hand held and other wireless devices and dedicated Internet online game services, as the hardware
platform technology evolves and becomes more accepted. We are actively exploring the establishment of online game playing opportunities for the Internet and wireless services as (1) a method for realizing additional revenue from our products and (2)
an additional platform for our products. We also plan to develop online components which will support online play for certain of our existing franchises, as well as for new software titles currently being developed for the next generation platforms.
As an example, we released an online version of All-Star Baseball 2005, Worms 3D, and intend to release an online version of ATV Quad Power Racing 3 and Juiced for one or more of the game platforms. As wireless and online technologies
evolve, we think that a number of our intellectual properties may have the potential to be exploited through these mediums.



Manufacturing



We prepare a set of master program copies, documentation and packaging materials for our products for each respective hardware platform upon which the
product is released. Except with respect to products for use on the Sony and Nintendo systems, our disc duplication, packaging, printing, manufacturing, warehousing, assembly and shipping are performed by third party subcontractors. In order to
maintain protection over their hardware



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technologies, Sony and Nintendo generally specify or control the manufacturing of the finished products. We deliver the master materials to the licensor or
its approved replicator, which then manufactures the finished goods and delivers them to us and/or our warehouse facility for distribution to our customers. At the time our product unit orders are filled by the manufacturer, we become responsible
for the costs of manufacturing and the applicable per unit royalty on such units, even if the units do not ultimately sell. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products or
material returns due to product defects.



Production, Sales and Distribution



Pursuant to our agreements with Nintendo and Sony, each
platform manufactures the CDs or DVDs embodying the software we have developed for its system. Pursuant to our agreement with Nintendo, we are required to open a letter of credit simultaneously with the placing of a purchase order for the software.
Game Boy Advance software is delivered to us approximately four to six weeks after order placement. Disc-based software for the three platforms is manufactured and then delivered to our warehouse within seven to twenty one days after we place the
order with the manufacturer. The timing is dependant on seasonality and whether it is an initial order or a re-order. See Risk Factors: If We Are Unable to Obtain or Renew Licenses from Hardware Companies, We Will Not be Able to Release
Software for Popular Systems.



We manufacture,
through subcontractors, all of our software titles for personal computers. Orders for PC software are generally filled within ten to twenty-one days after order placement. Reorders for such software are generally filled within ten days.



We distribute our software by tailoring our distribution methods to each
geographic market. In North America, our software is sold directly by our sales force, complemented by a regional sales representative organization which receive commissions based on the net sales of each product sold. We maintain an in-house sales
management team to supervise the regional sales representatives. These sales representatives also act as sales representatives for some of our competitors. One of the sales representative organizations marketing our software is owned by James
Scoroposki, an officer, director and principal stockholder of Acclaim. See Note 22B (Related Party Transactions) in the Notes to the Consolidated Financial Statements included herein.



We market our software domestically, primarily to mass merchants, large retail toy store chains, and specialty stores. Our
key domestic retail customers include Wal-Mart, Toys R Us, Best Buy, Electronics Boutique, GameStop, Target and Circuit City. We also distribute products through the rental market primarily to Blockbuster, Movie Gallery and Hollywood Video. Our
sales to Wal-Mart accounted for approximately 7%, 6%, 10%, and 12% of our gross revenue for the fiscal year ended March 31, 2004, seven months ended March 31, 2003, fiscal 2002 and 2001, respectively. Sales to Toys R Us accounted for approximately
4%, 8%, 9%, and 11% of our gross revenue for the twelve months ended March 31, 2004, seven months ended March 31, 2003, fiscal 2002, and 2001, respectively. Our customers do not have any commitments to purchase our software.



Internationally, we administer the sales, marketing, and distribution
activities of our European subsidiaries through a central management division, Acclaim Europe, based in London. For sales in other markets, we appoint regional distributors.



We generally are not contractually obligated to accept returns except for defective products, however, we grant price
concessions to our customers who primarily are major retailers that control market access to the consumer, when those concessions are necessary to maintain our relationships with the retailers and access to their retail channel customers. If the
consumers demand for a specific title falls below expectations or significantly declines below previous rates of sell-through, then, we generally will provide a price concession or credit to spur further sales by retailers to maintain the
relationship. In circumstances when a price concession cannot be agreed upon, we generally will accept a product return. As the market for each generation of game consoles matures and as more titles become available, the risk of product price
concessions and returns increases.



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We establish sales allowances at the time we record revenue for expected product price concessions and returns based primarily on (1) market acceptance of
our products, (2) level of retail inventories, (3) seasonal factors, and (4) historical price concession and return rates. Management continually monitors and adjusts these allowances to take into account actual developments and sales results in the
marketplace. There can be no assurance that actual price concessions will not exceed our established allowances and reserves. See Risk Factors: If Price Concessions and Returns Exceed Allowances, We May Incur Losses and
Managements Discussion and Analysis of Financial Condition and Results of OperationsNet Revenue.



Our warranty policy is to provide the original purchaser with replacement or repair of defective software for a period of ninety days after sale. To date,
we have not experienced significant warranty claims.



Intellectual Property
Licenses



Some of our software titles are based upon
brands or franchises that we have licensed from third parties, such as Major League Baseball, the National Basketball Association and their respective players associations and Disney Interactive. See Recent Developments. Typically, we are
obligated to make certain non-refundable advance payments against royalties that may become due from the sales of the games, which embody such licensed rights. We can recoup these advance payments against royalty payments otherwise due in connection
with future software sales. License agreements relating to these rights generally extend for a term of two to three years. These agreements are terminable upon the occurrence of a number of factors, including our material breach of the agreement,
failure to pay amounts due to the licensor in a timely manner, bankruptcy or insolvency.



Some of these licenses are limited to specific territories and/or specific game platforms. Each license typically provides that the licensor retains the right to exploit the licensed property for all other purposes,
including the right to license the property for use with other products and, in some cases, software for other game platforms. From time to time, licenses may not be renewed or may be terminated. See Risk Factors: Inability to Procure
Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales.



Patent, Trademark, Copyright and Product Protection



Each hardware manufacturer incorporates a security device in the software and in each of their respective hardware platforms. This is done in an effort to
prevent unlicensed manufacture of software and infringement of the hardware manufacturers proprietary rights. Under our various license agreements with Sony, Microsoft and Nintendo, we are obligated to obtain all available trademark, copyright and
patent protection for the original work we develop and embody in, or use in conjunction with, the software we create. We are also required to display on game packaging materials the proper notice of such protection, as well as notice of the
licensors intellectual property rights.



Each software
title may embody a number of separately protected intellectual properties such as the trademark for the brand featured in the software, the software copyrights, the name and label trademarks, and the copyright for Sonys, Microsofts and
Nintendos proprietary technical information.



We have
registered the Acclaim logo and name in the United States and in numerous foreign territories and we own the copyrights for many of our game programs. Nintendo, Game Boy, Game Boy Color,
GameCube, Game Boy Advance, and N64 are trademarks of Nintendo; Sony, Sony Computer Entertainment, PlayStation, and PlayStation 2 are trademarks of Sony;
Microsoft and Xbox are trademarks of Microsoft and Sega, Saturn and Dreamcast are trademarks of Sega. We do not own the trademarks, copyrights or patents covering the proprietary
information and technology utilized in the game systems marketed by Sony, Microsoft or Nintendo. Additionally, in certain instances, we do not own the trademarks, copyrights or patents for properties licensed from third parties, or the brands,
concepts or game programs featured in and comprising the software. Accordingly, we must rely on the trademarks, copyrights and



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patents of these third-party licensors for protection from infringement of such intellectual property. Under our license agreements with certain independent
software developers, we may bear the risk of claims of infringement brought by third parties and arising from the sale of our software.



Competition



The interactive entertainment software business is highly competitive. It is characterized by the continuous introduction of new titles and the
development of new technologies. Our competitors vary in size from very small companies with limited resources to very large corporations with greater financial, marketing and product development resources than ours. The availability of significant
financial resources has become a major competitive factor in the interactive entertainment software industry, primarily as a result of the costs associated with the development and marketing of game software. See Risk Factors:
Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition With the Hardware Manufacturers Affects Our Revenue and Profitability.



We compete with Sony, Microsoft and Nintendo, which each publish software for their respective hardware platforms. We also
compete with numerous companies which are, like us, licensed by the platform manufacturers to develop software products for use on their systems. These competitors include Activision, Capcom, Eidos, Electronic Arts, Atari, Konami, Lucas Arts,
Midway, Namco, Sega, Take-Two Interactive, THQ and Ubi Soft, among others. We also face additional competition from the entry of new companies, including large diversified entertainment companies such as Disney Interactive and Fox Interactive, into
our market.



Data derived from the Toy Retail Sales Tracking
Service (TRSTS) indicates that, for calendar 2003, our market share of software sold for PlayStation 2 was 1.6%, for Xbox was 1.9%, for GameCube was 2.2% and for PCs was 0.8%. For calendar 2002, our market share of software sold for
PlayStation 2 was 3.1%, for Xbox was 2.6%, for GameCube was 4.4% and for Game Boy Advance was 1.6%. The market for software for PCs is fragmented and we have a small share of that market.



Competition in the interactive entertainment software industry is based primarily upon:



| |  |  | Availability of significant financial resources;
| | - |  | ------------------------------------------------



| |  |  | The quality of titles;
| | - |  | ----------------------



| |  |  | Reviews received for a title from independent reviewers who publish reviews in magazines, websites, newspapers and other industry publications;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Publishers access to retail shelf space;
| | - |  | -----------------------------------------



| |  |  | The success of the game console for which the title is written;
| | - |  | ---------------------------------------------------------------



| |  |  | The price of each title;
| | - |  | ------------------------



| |  |  | The number of titles then available for the system for which each title is published; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | The marketing campaign supporting a title at launch and through its life.
| | - |  | -------------------------------------------------------------------------



We rely upon our product quality, marketing and sales abilities, proprietary technology and product development capability, the depth of our worldwide
retail distribution channels and management experience to compete in the interactive entertainment industry. See Risk Factors: Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition With the
Hardware Manufacturers, Affects Our Revenue and Profitability.



Comic Book and Other Publishing



Our
subsidiary, Acclaim Comics, publishes strategy guides relating to our software products and special issue comic books. We have not derived significant revenue and profit from the sale of Acclaim Comics



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products. Although we intend to continue releasing software for multiple platforms based on characters licensed or created by Acclaim Comics, as well as
strategy guides relating to our software and, at times, special issue comic books, as a result of our exiting the comic book publishing business in fiscal 2000, future revenue derived by Acclaim Comics will primarily depend on: (1) the
licensing and merchandising of certain characters in interactive entertainment and other media, such as motion pictures or television, (2) the use of those characters in our software, and (3) the publication and sale of software strategy guides and
special issue comic books.



Seasonality



Our business is highly seasonal. We typically experience our highest revenue
and profit in the calendar year-end holiday season, our third fiscal quarter, and a seasonal low in revenue and profits in our first fiscal quarter.



Employees



On March 31, 2004 we had 585 employees. We believe that our relationship with our employees is good. None of our employees are subject to a collective
bargaining agreement, and we have not experienced any labor-related work stoppages.



Financial Information about Foreign and Domestic Operations and Export Sales



See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 23 (Segment Information) of the Notes to the Consolidated Financial Statements included
herein.



Directors and Executive Officers



The following table sets forth information regarding our Board of Directors
and executive officers:



|                     |  |                                                                                    |  |    
|-------------------- |  | ---------------------------------------------------------------------------------- |  | ---
|Name                 |  | Position                                                                           |  | Age
|Gregory E. Fischbach |  | Co-Chairman of the Board                                                           |  | 62 
|James Scoroposki     |  | Co-Chairman of the Board, Senior Executive Vice President, Secretary and Treasurer |  | 55 
|Rodney Cousens       |  | Global President and Chief Executive Officer                                       |  | 53 
|Kenneth L. Coleman   |  | Director                                                                           |  | 61 
|Bernard Fischbach    |  | Director                                                                           |  | 58 
|Michael Tannen       |  | Director                                                                           |  | 63 
|Robert Groman        |  | Director                                                                           |  | 61 
|James Scibelli       |  | Director                                                                           |  | 53 
|Gerard F. Agoglia    |  | Executive Vice President and Chief Financial Officer                               |  | 53 



Gregory E.
Fischbach, a founder of our Company, served as our President from our formation until October 1996 and then again from January 1999 through December 2001. Mr. Fischbach also served as our Chief Executive Officer from our formation through June
1, 2003. Mr. Fischbach has been a member of our Board of Directors since 1987 and our Co-Chairman of our Board of Directors since March 1989. Mr. Fischbach remains as Co-Chairman of our Board of Directors.



James Scoroposki, a founder of our Company, has been our Senior
Executive Vice President since December 1993, a member of our Board of Directors since 1987, Co-Chairman of our Board of Directors since March 1989 and our Secretary and Treasurer since our formation. Mr. Scoroposki was also our Chief Financial
Officer from April 1988 to May 1990, Executive Vice President from our formation to November 1993 and acting Chief Financial and Accounting Officer from November 1997 to August 1999. Since December 1979, he has also been the President and sole
shareholder of Jaymar Marketing Inc., a sales representative organization.



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Rodney Cousens was appointed our President and Chief Executive Officer in May of 2003. Prior to
that time, Mr. Cousens has held positions within the Company of Chief Operating Officer and President of the Company since January of 2003, President and Chief Operating OfficerInternational of Acclaim Europe, since October 1996. Additionally,
from June 1994 to October 1996, Mr. Cousens held the position of President of Acclaim Europe, and from March 1991 to June 1994, Mr. Cousens held the position of Vice President of Acclaim Europe. Mr. Cousens first became an executive officer of the
Company in August 1998.



Kenneth L. Coleman has been a
member of the Board of Directors since July 1997. Mr. Coleman was Executive Vice President of Global Sales, Service and Marketing for Silicon Graphics, Inc. (SGI), a $2.3 billion computer systems company. In his 14-year career at SGI, Mr. Coleman
held several senior management positions including Senior Vice President of Global Services and Senior Vice President of Administration and Business Development. Since 2002, Mr. Coleman was the founder of ITM Software and serves as its Chairman and
CEO. Since January 1998, Mr. Coleman has served as a director of MIPS Technologies, Inc., a licensor of microprocessor architecture, in Mountain View, California. Since 2001, he has served as a director of United Online, Inc. a provider of
value-priced Internet access through its NetZero, Juno and BlueLight Internet consumer brands, in Westlake Village, California. Since 2003, he served as a director of City National Bank, which provides banking, trust and investment services in
Southern California, the San Francisco Bay Area and New York City.



Bernard J. Fischbach has been a member of our Board of Directors since 1987 and has, for more than the preceding five years, been a partner in the law firm of Fischbach, Perlstein & Lieberman LLP (and its predecessor firms) in
Los Angeles, California.



Robert H. Groman has been a
member of our Board of Directors since 1989 and has, for more than the preceding five years, been a partner in the law firm of Groman, Ross & Tisman, P.C. (and its predecessor firms) in Long Island, New York.



James Scibelli has been a member of our Board of Directors since 1993
and has, since March 1986, served as president of Roberts & Green, Inc., a New York financial consulting firm offering a variety of financial and investment consulting services. Mr. Scibelli is also a member of RG Securities LLC, a licensed
broker-dealer in New York.



Michael Tannen has been a
member of our Board of Directors since 1989 and has, for more than the preceding five years been the Managing Partner of Tannen Media Investment Fund LLC, an investment company specializing in early stage investments in media, entertainment and
telecommunications companies. Acting on his own and through Tannen Media Ventures, Inc., a media investment company, he has been a business advisor, consultant and producer representing various media companies.



Gerard F. Agoglia became an executive officer of Acclaim in August
2000, when he joined Acclaim as Executive Vice President and Chief Financial Officer. Formerly, Mr. Agoglia was Senior Vice President, Chief Financial Officer of Lantis Eyewear Corporation, responsible for strategic initiatives including several
successful acquisitions. Prior to such time, Mr. Agoglia served as Corporate Controller of Calvin Klein, Inc. Mr. Agoglia has over 20 years of corporate financial management experience in the apparel and accessories industries. Mr. Agoglia is a
Certified Public Accountant and has a Masters of Business Administration degree.



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FACTORS AFFECTING FUTURE PERFORMANCE



Our future operating results depend upon many factors and are subject to various risks and uncertainties. The known material
risks and uncertainties which may cause our operating results to vary from anticipated results or which may negatively affect our operating results and profitability are as follows:



Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Depends on Our Ability to Timely Transition Our
Credit Facility.



Our short-term liquidity has been
supplemented with borrowings under our North American and International credit facilities with GMAC, our primary lender. As of March 31, 2004, GMAC had advanced to us a supplemental discretionary loan of $2.0 million which we repaid in full as of
April 8, 2004. As of March 31, 2004, we received waivers from GMAC with respect to those financial covenants contained in the credit agreement for which we were not in compliance.



On May 4, 2004, GMAC and we amended our North American credit agreement to allow for a supplemental discretionary loan of
$3.0 million and the termination of the North American and International credit agreements on June 20, 2004. On June 18, 2004, we entered into an Extension Agreement with GMAC which amended the Waiver and Amendment agreement signed by us and GMAC on
May 4, 2004. Under the Extension Agreement, GMAC has agreed to extend the date upon which our banking agreement with GMAC will terminate, from June 20, 2004 to August 4, 2004. Additionally, on May 4, 2004, we entered into a letter of intent with a
proposed new lender, for a $30.0 million asset-based credit facility, with an equity component, to replace the credit agreement with GMAC. We are currently working with the proposed new lender in order to implement timely the new credit facility
which is subject to the execution of definitive documentation by both parties; however, there is no assurance that the new credit facility or any other facility will be consummated. Failure to obtain a new facility would materially adversely affect
our operations and liquidity and we could be forced to cease operations or seek bankruptcy protection.



Our Ability to Maintain Necessary Liquidity Rests in Part on Our Ability to Achieve Our Projected Revenue Levels, Continue to Derive Benefit from
Reduced Operating Expenses, and to Sustain Cooperation from Key Suppliers and Vendors.



During fiscal 2003, to enhance our short-term liquidity, we implemented targeted expense reductions through a business restructuring. In connection with
the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff
related expenses and lowered our overall marketing expenditures.



In February 2004, we completed the sale of our 9% senior convertible subordinated notes from which we raised gross proceeds of $15 million. In September and October 2003, we completed the sale of our 16% convertible subordinated notes,
resulting in gross proceeds of $11.9 million. As of June 22, 2004, investors holding $5.5 million of the 16% convertible subordinated notes had converted their notes into 9.6 million shares of our common stock. As of June 29, 2004, we were in
default on our 16% convertible notes with respect to interest payments and late registration payments due under the notes. We are in continued discussions with the holders of the convertible notes and believe that we will be successful in obtaining
a waiver of those defaults; however, there can be no assurance that we will be successful in obtaining these waivers.



Our future liquidity will significantly depend in whole or in part on our ability to (1) timely replace by August 4, 2004 the credit facility with a new
lender, (2) timely develop and market new software products that meet or exceed our operating plans, (3) continue to realize long-term benefits from our implemented expense reductions, (4) resolve or obtain waivers for any defaults under our
convertible note agreements and (5) continue to receive the support of certain key suppliers and vendors. If we do not timely implement the new credit facility, substantially achieve our overall projected revenue levels as reflected in our business
operating plan, continue to



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realize additional benefits from the expense reductions we have already implemented and continue to receive the support of key suppliers and vendors, we will
need to make further significant expense reductions, including, without limitation, the sale of assets or the consolidation or closing of certain operations, additional staff reductions, and/or the delay, cancellation or reduction of certain product
development and marketing programs. Additionally, some of these measures may require third party consents or approvals from our primary lender or future lenders and others, and there can be no assurance those consents or approvals will be obtained.



If these measures are not attained, we cannot assure our
stockholders that our future operating cash flows will be sufficient to meet our operating requirements and debt service requirements. If any of the preceding events were to occur, our operations and liquidity would be materially and adversely
affected and we could be forced to cease operations. See If Cash Flows from Operations Are Not Sufficient to Meet Our Operational Needs, We May Be Forced To Sell Assets, Refinance Debt, Raise Additional Financing from Outside Investors or
Further Downsize or Cease Our Operations, and Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability.



Going Concern Consideration



Our independent auditors report for our fiscal 2004 financial
statements, prepared by KPMG LLP, includes an explanatory paragraph relating to substantial doubt as to the ability of Acclaim to continue as a going concern, due to working capital and stockholders deficits as of March 31, 2004 and the
recurring use of cash in operating activities. The fiscal 2004 financial statements do not include any adjustments that might result from the outcome of this uncertainty. For the fiscal year ended March 31, 2004 we had a net loss of $56.4 million
and used $26.0 million of cash in operating activities. As of March 31, 2004, we had a stockholders deficit of $98.0 million, a working capital deficit of $110.9 million and $1.1 million of cash and cash equivalents. Our accompanying
consolidated financial statements have been prepared assuming that we will continue as a going concern. Our working capital and stockholders deficits as of March 31, 2004 and the recurring use of cash in operating activities raise substantial
doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



If Cash Flows from Operations Are Not Sufficient to Meet Our Operational Needs, We May Be Forced To Sell Assets,
Refinance Debt, Raise Additional Financing from Outside Investors or Further Downsize or Cease Our Operations



During fiscal 2003, we implemented certain expense reduction initiatives that began to reduce our operating expenses during fiscal 2003 and which
continued to reduce our expenses in fiscal 2004. Our operating plan for fiscal 2005 focuses on (1) maintaining our lower rate of fixed and variable expenses worldwide, (2) continuing to limit and eliminate non-essential expenses and (3) maintaining
our reduced employee related expenses. Although we believe the actions we are taking will contribute to returning our operations to profitability, we cannot assure our stockholders and investors that we will achieve the net revenues, net earnings
and cash flow from operations necessary to achieve sufficient liquidity and avoid further expense reduction actions such as selling assets or consolidating operations, further reducing staff, refinancing debt and/or otherwise further restructuring
or ceasing our operations. See Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability.



A Violation of our Financing Agreements Could Result in GMAC or our Subsequent Lender Declaring a Default and Seeking
Remedies



If we fail to comply with the financial or
other covenants contained in our Waiver and Extension agreement with GMAC, we will be in default under the credit agreement. If we fail to replace GMAC with another lender by August 4, 2004 or if we are not in compliance or if a default occurs under
the credit agreement and is not timely cured by us or waived by GMAC, then GMAC could stop advancing funds to us and seek remedies against us, including: (1) penalty rates of interest; (2) immediate repayment of our outstanding debt; and/or
(3) the foreclosure on any assets securing our debt. Pursuant to the terms of the credit agreement, we are required



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to maintain specified levels of working capital and tangible net worth, among other requirements. As of March 31, 2004, we received waivers from GMAC
with respect to those financial covenants contained in the credit agreement for which we were not in compliance. If waivers are necessary in the future, we cannot be assured that we will be able to obtain waivers of any future covenant violations,
as we have in the past. If Acclaim is liquidated or reorganized, after payment to the creditors, there are likely to be insufficient assets remaining for any distribution to our stockholders.



If We are Unable to Obtain or Renew Licenses from Hardware Companies,
We Will Not be Able to Release Software for Popular Systems



We are substantially dependent on each hardware company (especially Microsoft and Sony) (1) as the sole licensor of the specifications needed to develop software for its game system; (2) as the manufacturer of the software developed by us
for its game systems; (3) to protect the intellectual property rights to their game consoles and technology; and (4) to discourage unauthorized persons from producing software for its game systems.



Substantially all of our revenue has historically been derived from sales of
software for game systems. If we cannot obtain licenses to develop software from developers of popular interactive entertainment game platforms or if any of our existing license agreements are terminated, we will not be able to release software for
those systems, which would have a negative impact on our results of operations and profitability. Although we cannot assure stockholders that when the term of existing license agreements end we will be able to obtain extensions or that we will be
successful in negotiating definitive license agreements with developers of new systems, to date we have always been able to obtain extensions or new agreements with the hardware companies.



Our revenue growth may also be dependent on constraints the hardware
companies impose. If new license agreements contain product quantity limitations, our revenue, cash flows and profitability may be negatively impacted.



In addition, when we develop software titles for the PlayStation 2 system, the products are manufactured exclusively by Sony. Since each of the hardware
companies is also a publisher of games for its own hardware system, they may give priority to their own products or those of our competitors in the event of insufficient manufacturing capacity. We could be materially harmed by unanticipated delays
in the manufacturing and delivery of products.



Inability
to Procure Commercially Valuable Intellectual Property Licenses May Prevent Product Releases or Result in Reduced Product Sales



Our titles often embody trademarks, trade names, logos, or copyrights licensed by third parties, such as the National Basketball Association, Major League
Baseball and their respective players associations, and/or individual athletes or celebrities. See Recent Developments for a description of several pending disputes with licensors. The loss of one or more of these licenses would prevent
us from releasing a title and limit our economic success. Furthermore, some of our competitors have significantly greater resources than we do and, thus, are better positioned to secure intellectual property licenses. We cannot assure stockholders
that our licenses will be extended on reasonable terms or at all, or that we will be successful in acquiring or renewing licenses to property rights with significant commercial value.



License agreements relating to these rights generally extend for a term of two to three years and are terminable upon the
occurrence of a number of factors, including the material breach of the agreement by either party, failure to pay amounts due to the licensor in a timely manner, or a bankruptcy or insolvency by either party.



If Our Securities Were Delisted From the Nasdaq SmallCap Market, It May
Negatively Impact the Liquidity of Our Common Stock



In the fourth quarter of fiscal 2000, our securities were delisted from quotation on the Nasdaq National Market. Our common stock is currently trading on the Nasdaq SmallCap Market. No assurance can be given as to



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our ongoing ability to meet the Nasdaq SmallCap Market maintenance requirements. As of the date of this filing, we currently do not meet the minimum bid nor
market capitalization requirements for continued listing on the Nasdaq SmallCap Market.



On January 24, 2003, we received a letter from The Nasdaq Stock Market, Inc. stating that, because our common stock had not closed at or above the minimum $1.00 per share bid price requirement for 30 consecutive
trading days, we had not met the minimum bid price requirements for continued listing as set forth in Marketplace Rule 4310(c)(4), and we had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in
accordance with Marketplace Rule 4310(c)(8)(D) we were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the minimum bid requirement.



On January 21, 2004, we received a letter from Nasdaq indicating that the Company had been granted an extension, until
January 24, 2005, within which to regain compliance with the minimum $1.00 bid price per share requirement of The Nasdaq SmallCap Market. In the notice, the Nasdaq staff noted that since the Company meets the initial inclusion criteria for The
Nasdaq SmallCap Market under Marketplace Rule 4310(c), it is eligible for this additional compliance period. However, if prior to January 24, 2005, the bid price of the Companys common stock does not close at $1.00 per share or more for a
minimum of 10 consecutive trading days, then the Company is required to (1) seek shareholder approval for a reverse stock split at or before its next shareholder meeting and (2) promptly thereafter effectuate the reverse stock split. The Company has
committed in writing to Nasdaq to effectuate those measures in the event compliance is not achieved prior to January 24, 2005. If at any time before January 24, 2005, the bid price of the Companys common stock closes at $1.00 per share or more
for a minimum of 10 consecutive trading days, the Nasdaq staff will provide notification that the Company complies with Marketplace Rule 4310(c)(8)(D). The Company cannot provide any assurance that it will receive an affirmative vote of its
stockholders authorizing a reverse stock split, if required, nor that the Company will regain compliance with the minimum bid price requirement.



If our common stock was to be delisted from trading on the Nasdaq SmallCap Market, trading, if any, in our common stock may continue to be conducted on
the OTC Bulletin Board or in the non-Nasdaq over-the-counter market. Delisting of the common stock would result in, among other things, limited release of the market price of the common stock and limited company news coverage and could restrict
investors interest in the common stock as well as materially adversely affect the trading market and prices for the common stock and our ability to issue additional securities or to secure additional financing. In addition, the delisting of
our common stock would raise the interest rate on our 9% Senior Subordinated Convertible Notes to 13% from 9%.



Revenue and Liquidity are Dependent on Timely Introduction of New Titles



The timely shipment of a new title depends on various factors, including the development process, debugging, approval by
hardware licensors and approval by third-party licensors. It is likely that some of our titles will not be released in accordance with our operating plans. Because net revenue associated with the initial shipments of a new product generally
constitute a high percentage of the total net revenue associated with the life of a product, a significant delay in the introduction of one or more new titles would negatively affect or limit sales and would have a negative impact on our financial
condition, liquidity and results of operations. We cannot assure stockholders that our new titles will be released in a timely fashion in accordance with our business plan for fiscal 2005.



The average life cycle of a new title generally ranges from three months to
upwards of twelve to eighteen months, with the majority of sales occurring in the first thirty to one hundred twenty days after release. Factors such as competition for access to retail shelf space, consumer preferences and seasonality could result
in the shortening of the life cycle for older titles and increase the importance of our ability to release new titles on a timely basis. Therefore, we are constantly required to introduce new titles in order to generate revenue and/or to replace
declining revenue from older titles. In the past, we experienced delays in the introduction of new titles, which have had a negative impact on our results of operations. The complexity of next-generation systems has



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resulted in higher development expenditures, longer development cycles and the need to carefully monitor and plan the product development process. If we do
not introduce titles in accordance with our operating plans for a period, our results of operations, liquidity and profitability in that period could be negatively affected.



We Depend On A Relatively Small Number of Franchises For A Significant Portion Of Our Revenue And Profits



A significant portion of our revenue is derived from
products based on a relatively small number of franchises each year. In addition, many of these products have substantial production or acquisition costs and marketing budgets. In fiscal 2004, approximately 47% of our gross revenue was derived from
five software product franchises. In fiscal 2003, approximately 55% of our gross revenue was derived from five software product franchises. We expect that a limited number of popular brands will continue to produce a disproportionately large amount
of our revenue. Due to this dependence on a limited number of brands, the failure of one or more products based on these brands to achieve anticipated results may significantly harm our business and financial results. For example, during the fourth
quarter of fiscal 2002, our failure to achieve our projected revenue from two titles, Turok: Evolution andAggressive Inline, due to lower than anticipated consumer acceptance of the products, resulted in a net loss for the fourth
quarter and fiscal year 2002 and continued to contribute to losses during fiscal 2003.



Industry Trends, Platform Transitions and Technological Change May Adversely Affect Our Revenue and Profitability



The life cycle of existing game systems and the market acceptance and popularity of new game systems significantly affects the success of our products.
We cannot guarantee that we will be able to predict accurately the life cycle or popularity of each system. If we (1) do not develop software for game consoles that achieve significant market acceptance; (2) discontinue development of software for a
system that has a longer-than-expected life cycle; (3) develop software for a system that does not achieve significant popularity; or (4) continue development of software for a system that has a shorter-than-expected life cycle, our revenue and
profitability may be negatively affected and we could experience losses from operations.



When new platforms are announced or introduced into the market, consumers typically reduce their purchases of software products for the current platforms, in anticipation of new platforms becoming available. During
these periods, sales of our software products can be expected to slow down or even decline until the new platforms have been introduced and have achieved wide consumer acceptance. Each of the three current principal hardware producers launched a new
platform in 2000 to 2002. Sony made the first shipments of its PlayStation 2 console system in North America and Europe in the fourth quarter of calendar year 2000. Microsoft made the first shipments of its Xbox console system in North America in
November 2001 and in Europe and Japan in the first quarter of calendar 2002. Nintendo made the first shipments of its Nintendo GameCube console system in North America in November 2001 and in Europe in May 2002. Additionally, in June 2001, Nintendo
launched its Game Boy Advance hand held device. On occasion the video and computer games industry is affected, in both favorable and unfavorable ways, by a competitors entry into, or exit from, the hardware or software sectors of the industry.
For example, in early 2001, Sega exited the hardware business, ceased distribution and sales of its Dreamcast console and redeployed its resources to develop software for multiple consoles. Additionally, the entry of Microsoft in November 2001 into
the video game console market with the Xbox has benefited us and other video game publishers by expanding the total size of the market for video games. The effects of this type of entry or exit can be significant and difficult to anticipate.



We believe the next hardware transition cycle will occur
sometime during 2005 and 2006. Delays in the launch, shortages, technical problems or lack of consumer acceptance of these platforms could adversely affect our sales of products for these platforms.



Our Future Success Depends On Our Ability To Release Popular Products



The life of any one software product is relatively
short, in many cases less than one year. It is therefore important for us to be able to continue to develop new products that are favorably received by consumers. If we



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are unable to do this, our business and financial results may be negatively affected. We focus our development and publishing activities principally on
products that are, or have the potential to become, franchise brand properties. Many of these products are based on intellectual property and other character or story rights acquired or licensed from third parties. These license and distribution
agreements are limited in scope and time, and we may not be able to renew key licenses when they expire or to include new products in existing licenses. The loss of a significant number of our intellectual property licenses or of our relationships
with licensors would have a material adverse effect on our ability to develop new products and therefore on our business and financial results.



Profitability is Affected by Research and Development Expenditure Fluctuations Due to Platform Transitions and Development for Multiple Platforms



While our cash outlays for product development for
the fiscal year ended March 31, 2004 were lower than the twelve months ended March 31, 2003, our product development cash outlays may increase in the future as a result of the higher costs associated with releasing more games across multiple
platforms and commencing development of software for the anticipated new hardware platforms, among other reasons. We anticipate that our profitability will continue to be impacted by the levels of research and development expenditures relative to
revenue and by fluctuations relating to the timing of development in anticipation of future platforms.



During fiscal 2004, we focused our development efforts and costs on the development of tools and engines necessary for PlayStation 2, Xbox, GameCube and
PCs. The release schedule for fiscal 2005 continues to primarily support the PlayStation 2 and Xbox consoles and on a more limited basis the GameCube and Game Boy Advance platforms as well as PC. Additionally, we will be required to expend
significant funds to develop tools and engines to enable us to develop software titles for the new hardware platforms expected to be introduced in calendar years 2005 and 2006. If we do not have sufficient cash to develop quality tools and engines
for the new platforms, our operations and financial results would be negatively affected.



If Price Concessions and Returns Exceed Allowances, We May Incur Losses



In the past, particularly during platform transitions, we have had to increase our price concessions granted to our retail customers. Coupled with more
competitive pricing, if our allowances for price concessions and returns are exceeded, our financial condition and results of operations will be negatively impacted, as has occurred in the past. We grant price concessions to our customers (primarily
major retailers which control market access to the consumer) when we deem those concessions are necessary to maintain our relationships with those retailers and continued access to their retail channel customers. If the consumers demand for a
specific title falls below expectations or significantly declines below previous rates of retail sell-through, then a price concession or credit may be requested by our customers to spur further retail channel sell through.



Management makes significant estimates and assumptions based on actual
historical experience regarding allowances for estimated price concessions and product returns. Management establishes allowances at the time of product shipment, taking into account the potential for price concessions and product returns based
primarily on: market acceptance of products; level of retail inventories and retail sell-through rates; seasonality; and historical price concession and product return rates. Management monitors and adjusts these allowances quarterly to take into
account actual developments and results in the marketplace. We believe that our estimates of allowances for price concessions and returns are adequate and reasonable, but we cannot guarantee the adequacy of our current or future allowances.



As noted above, when the consumer market acceptance of a
software title decreases, resulting in lower retail sell-through, the potential for price concessions and returns for those titles increases. In the fourth quarter of fiscal 2002, we released the software titles Turok: Evolution and Aggressive
Inline, which we anticipated would be significant revenue drivers and valuable additions to our product catalog. The market reception to these titles, as evidenced by the retail sell-through rates to consumers in the first quarter of fiscal 2003
and beyond, fell substantially below our revenue expectations. As a result of the retail sell-through, significant quantities of these



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products remained in the retail channel. Accordingly, we provided our retail customers with price concessions for these products more rapidly after the
initial release date than was our historical practice and, in the fourth quarter of fiscal 2002, recorded a $17.9 million provision for price concessions and returns on these products that exceeded historical allowance rates and that we believed
would have resulted in additional sell-through to our retailers customers through the 2002 holiday season.



During fiscal 2003, while the price concessions we previously offered our retail customers did increase the retail sell-through rate, the rate of
reduction of retail channel inventory did not attain the level we had originally estimated. Consequently, we experienced significantly more returns of these two products from our retail customers than we originally had estimated. Additionally, the
market for GameCube products softened after the 2002 holiday season, which required us to provide price concessions on certain of our products for that platform to lower prices than we originally estimated at that stage in the platform life cycle.
Finally, the actual sell-through rates of Legends of Wrestling and BMX were less than the projected retail sell-through rates we had used in our previous estimates of allowances, which were based on historical experience and actual
sell-through rates for those products through August 31, 2002. As a result of these unanticipated events, we provided our retail customers additional price concessions. The resulting $14.4 million increase to the provision for price concessions and
returns negatively impacted net revenues, gross profit and net income for fiscal 2003.



Our allowances for price concession and returns were $20.2 million as of March 31, 2004 and $48.3 million as of March 31, 2003. Please see Note 1F (Business and Significant Accounting Policies: Net Revenue) of the
Notes to the Consolidated Financial Statements included herein.



We Depend On Skilled Personnel



Our
success depends to a significant extent on our ability to identify, hire and retain skilled personnel. The software industry is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with
technical, marketing, sales, product development and management skills. We may not be able to attract and retain skilled personnel or may incur significant costs in order to do so. If we are unable to attract additional qualified employees or retain
the services of key personnel, our business and financial results could be negatively impacted.



Competition for Market Acceptance and Retail Shelf Space, Pricing Competition, and Competition With the Hardware Manufacturers Affects Our Revenue
and Profitability



The interactive entertainment
software industry is intensely competitive and new interactive entertainment software products and platforms are regularly introduced. Our competitors vary in size from small companies to very large corporations with significantly greater financial,
marketing and product development resources than we have. Due to these greater resources, certain of our competitors can undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors for desirable
motion picture, television, sports and character properties and pay more to third party software developers than we can. Only a small percentage of titles introduced in the market achieve any degree of sustained market acceptance. If our titles are
not successful, our operations and profitability will be negatively impacted.



Competition in the video and computer games industry is based primarily upon:



| |  |  | availability of significant financial resources;
| | - |  | ------------------------------------------------



| |  |  | the quality of titles;
| | - |  | ----------------------



| |  |  | reviews received for a title from independent reviewers who publish reviews in magazines, websites,
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | newspapers and other industry publications;
| | - |  | -------------------------------------------



| |  |  | publishers access to retail shelf space;
| | - |  | -----------------------------------------



| |  |  | the success of the game console for which the title is written;
| | - |  | ---------------------------------------------------------------



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| |  |  | the price of each title; and
| | - |  | ----------------------------



| |  |  | the number of titles then available for the system for which each title is published.
| | - |  | -------------------------------------------------------------------------------------



We compete primarily with other publishers of personal computer and video game console interactive entertainment software.
Significant third party software competitors currently include, among others: Activision; Capcom; Eidos; Electronic Arts; Atari; Konami; Namco; Midway Games; Sammy; Take-Two; THQ; and Vivendi Universal Publishing. In addition, integrated video game
console hardware and software companies such as Sony, Nintendo and Microsoft compete directly with us in the development of software titles for their respective systems. The hardware developers have a price, marketing and distribution advantage with
respect to software marketed by them.



As each game system
cycle matures, significant price competition and reduced profit margins result, as we experienced in fiscal 2000. In addition, competition from new technologies may reduce demand in markets in which we have traditionally competed. As a result of
prolonged price competition and reduced demand as a result of competing technologies, our operations and liquidity have in the past been, and in the future may be, negatively impacted.



Revenue Varies Due to the Seasonal Nature of Video and Computer Game Software Purchases



Our business is highly seasonal. We typically experience our highest revenue
and profit in the calendar year-end holiday season, our third fiscal quarter and a seasonal low in revenue and profits in our first fiscal quarter. The seasonal pattern is due primarily to the increased demand for software during the year-end
holiday selling season and the reduced demand for software during the summer months. Our earnings vary significantly and are materially affected by releases of popular products and, accordingly, may not necessarily reflect the seasonal patterns of
the industry as a whole. We expect that operating results will continue to fluctuate significantly in the future. See Fluctuations in Quarterly Operating Results Lead to Unpredictability of Revenue and Earnings below.



Fluctuations in Quarterly Operating Results Lead to Unpredictability
of Revenue and Earnings



The timing of the release of
new titles can cause material quarterly revenue and earnings fluctuations. A significant portion of revenue in any quarter is often derived from sales of new titles introduced in that quarter or shipped in the immediately preceding quarter. If we
are unable to begin volume shipments of a significant new title during the scheduled quarter, as has been the case in the past, our revenue and earnings will be negatively affected in that period. In addition, because a majority of the unit sales
for a title typically occur in the first thirty to one hundred twenty days following its introduction, revenue and earnings may increase significantly in a period in which a major title is introduced and may decline in the following period or in a
period in which there are no major title introductions.



Quarterly operating results also may be materially impacted by factors, including the level of market acceptance or demand for titles and the level of development and/or promotion expenses for a title. Consequently, if net revenue in a
period is below expectations, our operating results and financial position in that period are likely to be negatively affected, as has occurred in the past.



Our Software May Be Subject To Governmental Restrictions Or Rating Systems



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



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products in those countries. Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict
what effect, if any, such rating systems would have on our business. While to date such actions have not caused material harm to our business, we cannot assure you that the actions taken by certain retailers and distributors in the future, would not
cause material harm to our business.



Our Stock Price is
Volatile and Stockholders May Not be Able to Recoup Their Investment



There is a history of significant volatility in the market prices of securities of companies engaged in the software industry, including Acclaim. Movements in the market price of our common stock from time to time
have negatively affected stockholders ability to recoup their investment in the stock. The price of our common stock is likely to continue to be highly volatile, and stockholders may not be able to recoup their investment. If our future
revenue, cash used in or provided by operations (liquidity), profitability or product releases do not meet expectations, the price of our common stock may be negatively affected.



Infringement Could Lead to Costly Litigation and/or the Need to Enter into License Agreements, Which May Result in
Increased Operating Expenses



Existing or future
infringement claims by or against us may result in costly litigation or require us to license the proprietary rights of third parties, which could have a negative impact on our results of operations, liquidity and profitability.



We believe that our proprietary rights do not infringe upon the proprietary
rights of others. As the number of titles in the industry increases, we believe that claims and lawsuits with respect to software infringement will also increase. From time to time, third parties have asserted that some of our titles infringed their
proprietary rights. We have also asserted that third parties have likewise infringed our proprietary rights. These infringement claims have sometimes resulted in litigation by and against us. To date, none of these claims has negatively impacted our
ability to develop, publish or distribute our software. We cannot guarantee that future infringement claims will not occur or that they will not negatively impact our ability to develop, publish or distribute our software.



Factors Specific to International Sales May Result in Reduced Revenue
and/or Increased Costs



International sales have
historically represented material portions of our revenue and are expected to continue to account for a significant portion of our revenue in future periods. Sales in foreign countries may involve expenses incurred to customize titles to comply with
local laws. In addition, titles that are successful in the domestic market may not be successful in foreign markets due to different consumer preferences. We continue to evaluate our international product development and release schedule to maximize
the delivery of products that appeal specifically to that marketplace. International sales are also subject to fluctuating exchange rates.



Charter and Anti-Takeover Provisions Could Negatively Affect Rights of Holders of Common Stock



Our board of directors has the authority to issue shares of preferred stock
and to determine their characteristics without stockholder approval. In this regard, in June 2000, the board of directors approved a stockholder rights plan. If the Series B junior participating preferred stock is issued it would be more difficult
for a third party to acquire a majority of our voting stock.



In addition to the Series B preferred stock, our board of directors may issue additional preferred stock and, if this is done, the rights of common stockholders may be negatively impacted by the rights of those preferred stockholders.



We are also subject to anti-takeover provisions of Delaware
corporate law, which may impede a tender offer, change in control or takeover attempt that is opposed by the Board. In addition, employment arrangements with some members of management provide for severance payments upon termination of their
employment if there is a change in control.



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Shares Eligible for Future Sale



As of June 19, 2004, we had 129,573,500 shares of common stock issued and
outstanding, (including 4,000,000 shares of our common stock issued in equal amounts to our co-chairmen, which shares are being held by us pending stockholder approval of the issuance and which our co-chairmen have no current right to vote, pledge,
sell or otherwise hypothecate), of which 17,278,975 are restricted securities within the meaning of Rule 144 under the Securities Act. Generally, under Rule 144, a person who has held restricted shares for one year may sell such shares,
subject to certain volume limitations and other restrictions, without registration under the Securities Act.



As of June 19, 2004, 74,138,105 shares of common stock are covered by effective registration statements under the Securities Act for resale on a delayed
or continuous basis by certain of our security holders.



As of
March 31, 2004, a total of 20,538,143 shares of common stock are issuable upon the exercise of warrants to purchase our common stock.



We have also registered on Form S-8 a total of 24,236,000 shares of common stock (issuable upon the exercise of options) under our 1988 Stock Option Plan
and our 1998 Stock Incentive Plan, and a total of 2,448,425 shares of common stock under our 1995 Restricted Stock Plan. As of March 31, 2004, options to purchase a total of 12,693,184 shares of common stock were outstanding under the 1988 Stock
Option Plan and the 1998 Stock Incentive Plan, of which 9,552,951 were exercisable.



In connection with licensing and distribution arrangements, acquisitions of other companies, the repurchase of notes and financing arrangements, we have issued and may continue to issue common stock or securities
convertible into common stock. Any such issuance or future issuance of substantial amounts of common stock or convertible securities could adversely affect prevailing market prices for the common stock and could adversely affect our ability to raise
capital.



|Item |  | 2.Properties.
|---- |  | -------------



Our corporate headquarters is located in a 70,000 square foot office building in Glen Cove, New York, which we purchased in fiscal 1994. We also lease a 22,000 square foot facility and a separate 5,000 square foot facility, both in the
U.K., where our international operations are headquartered. Please see Note 15 (Debt) and Note 16 (Obligations under Capital and Operating Leases) of the Notes to the Consolidated Financial Statements included herein.



In addition, our development studios lease in the aggregate 47,000 square
feet of office space in Ohio, Texas and the U.K. Our foreign subsidiaries lease office space in France, Germany, Spain, Australia and the U.K. We anticipate that these facilities are adequate for our current and foreseeable future needs.



|Item |  | 3.Legal Proceedings.
|---- |  | --------------------



On July 11, 2003, we were notified by the Securities and Exchange Commission (the Commission) that we have been included in a formal, non-public inquiry entitled In the Matter of Certain Videogame
Manufacturers that the Commission is conducting. In connection with that inquiry we were required to provide to the Commission certain information. The Commission has advised us that this request for information should not be construed
as an indication from the SEC or its staff that any violation of the law has occurred, nor should it reflect negatively on any person, entity or security. We have and are continuing to fully cooperate with the inquiry.



In 2003, fourteen class action complaints asserting violations of federal
securities laws were filed against the Company and certain of its officers and/or directors. By order dated July 3, 2003, the Court consolidated all fourteen actions into one action entitled In re Acclaim Entertainment, Inc. Securities Litigation,
Master File



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No. 2, 03-CV-1270 (E.D.N.Y.) (JS) (ETB), and appointed class members Penn Capital Management, Robert L. Mannard and Steve Russo as lead plaintiffs, and
also approved lead plaintiffs selection of counsel. Plaintiffs served a Consolidated Amended Complaint (the Consolidated Complaint) on or about September 1, 2003. The defendants in the consolidated action are the Company, Gregory
Fischbach, Edmond Sanctis, James Scoroposki and Gerard F. Agoglia. The Consolidated Complaint alleges a class period from October 14, 1999 through January 13, 2003. The Consolidated Complaint alleges that the Company engaged in a variety of wrongful
practices which rendered statements made by the Company and its financial statements to be false and misleading. Among other purported wrongful practices, the Consolidated Complaint alleges that Acclaim engaged in channel stuffing, a
practice by which Acclaim allegedly delivered excess inventory to its distributors to meet or exceed analysts earnings expectations and inflate its sales results; entered into conditional sales agreements whereby Acclaims
customers allegedly were induced to accept delivery of Acclaim products prior to a quarter-end reporting period on the condition that Acclaim would accept the return of any unsold product after the quarter-end, and that Acclaim falsified sales
reports and manipulated the timing and recognition of price concessions and discounts granted to its retail customers. The Consolidated Complaint further alleges that Acclaim engaged in improper accounting practices, including the improper
recognition of sales revenue; manipulation of reserves associated with concessions, chargebacks and/or sales discounts granted to customers; and the improper reporting of software development costs. The Consolidated Complaint alleges that as a
result of these practices defendants violated § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and that the individual defendants violated § 20(a) of the 1934 Act. The Consolidated Complaint seeks compensatory damages in
an unspecified amount. On December 3, 2003 the Company moved to dismiss the Consolidated Complaint. Plaintiffs opposed the motion to dismiss on January 20, 2004, and the Company submitted its reply papers on February 20, 2004. The court denied the
motion. A scheduling conference has been scheduled for August 9, 2004. We are defending this action vigorously and are not in a position to determine the impact on the financial statements, if any, or the ultimate resolution of this matter.



In April and May 2004, we received notification from
Battleborne Entertainment, Inc. (Battleborne) that due to various contractual disputes between us and Battleborne regarding the development agreement entered into between us and Battleborne relating to the development of the videogame
entitledCombat Elite: WWII Paratroopers, they were terminating the development agreement. We disagree with their interpretations of the development agreement and demanded that Battleborne fulfill its contractual obligations under the
development agreement. In June 2004, Battleborne brought an action in New York state supreme court, Nassau County, seeking a temporary restraining order enjoining the release of the title until the contractual disputes have been resolved. The
temporary restraining order was granted and we opposed the matter. The matter was scheduled by the court for expedited discovery by both sides. We are also in continued discussions with Battleborne in an effort to resolve this matter amicably.



In June 2004, we received notification from Classic Media,
Inc. (Classic), the licensor of the intellectual property Turok, that due to failure to make certain royalty payments relating to the videogame title Turok: Evolution that our license agreement with Classic was terminated.
We have been and continue to be in discussions with Classic in an effort to resolve this matter amicably.



We are also party to numerous litigations regarding, among other things, the failure to make payments, including licensor royalty payments, when due. Most
of these litigations arose in the ordinary course of our business; the resolution of which, individually we believe, will not have a material adverse effect on our consolidated financial position or results of operations; however, if a significant
number of these matters were not resolved in our favor, they could have a material adverse effect on our consolidated financial position or results of operations. In addition, if matters relating to the failure to pay licensor royalties when due are
not ultimately determined in our favor or settled, then we will lose the use of those licenses.



|Item |  | 4.Submission of Matters to a Vote of Security Holders.
|---- |  | ------------------------------------------------------



None.



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PART II



|Item |  | 5.Market for Registrants Common Equity and Related Stockholder Matters.
|---- |  | ------------------------------------------------------------------------



Market Price



Our common stock was traded on The Nasdaq National Market until July 31, 2000 when it was delisted and transferred to the Nasdaq Small Cap Market. Our
trading symbol remains unchanged as AKLM. As of June 14, 2004, the closing sale price of our common stock was $0.35 per share. As of this date, there were approximately 1,712 holders of record of our common stock.



Summarized below is the range of high and low sales prices for our common
stock for each of the periods indicated:



|                                             |  |       |      |     |   |     
|-------------------------------------------- |  | ----- | ---- | --- | - | ----
|                                             |  | Price
|                                             |  | High  |      | Low
|Fiscal Year 2004                             |  |       |      |     |   |     
|First Quarter                                |  | $     | 1.11 |     | $ | 0.37
|Second Quarter                               |  |       | 1.10 |     |   | 0.41
|Third Quarter                                |  |       | 0.94 |     |   | 0.57
|Fourth Quarter                               |  |       | 0.89 |     |   | 0.54
|Fiscal Year 2003                             |  |       |      |     |   |     
|September 30, 2002 through December 29, 2002 |  | $     | 1.49 |     | $ | 0.60
|December 30, 2002 through March 31, 2003     |  |       | 0.90 |     |   | 0.37
|Fiscal Year 2002                             |  |       |      |     |   |     
|First Quarter                                |  | $     | 6.25 |     | $ | 2.08
|Second Quarter                               |  |       | 5.84 |     |   | 3.25
|Third Quarter                                |  |       | 5.90 |     |   | 4.00
|Fourth Quarter                               |  |       | 5.27 |     |   | 1.47
|Fiscal Year 2001                             |  |       |      |     |   |     
|First Quarter                                |  | $     | 2.47 |     | $ | 0.84
|Second Quarter                               |  |       | 2.03 |     |   | 0.31
|Third Quarter                                |  |       | 4.00 |     |   | 0.72
|Fourth Quarter                               |  |       | 5.50 |     |   | 3.30



As of June 19, 2004,
we had 129,573,500 shares of common stock issued and outstanding (including 4,000,000 shares of our common stock issued in equal amounts to our co-chairmen, which our co-chairmen have no current right to vote, pledge, sell or otherwise hypothecate),
of which 17,278,975 are restricted securities within the meaning of Rule 144 under the Securities Act. Generally, under Rule 144, a person who has held restricted shares for one year may sell such shares, subject to certain volume
limitations and other restrictions, without registration under the Securities Act.



As of June 19, 2004, 74,138,105 shares of common stock are covered by effective registration statements under the securities Act for resale on a delayed or continuous basis by certain of our security holders.



As of March 31, 2004, a total of 20,538,143 shares of common
stock are issuable upon the exercise of warrants to purchase our common stock.



We have also registered on Form S-8 a total of 24,236,000 shares of common stock (issuable upon the exercise of options) under our 1988 Stock Option Plan and our 1998 Stock Incentive Plan, and a total of 2,448,425
shares of common stock under our 1995 Restricted Stock Plan. As of March 31, 2004, options to purchase a total of 12,693,184 shares of common stock were outstanding under the 1988 Stock Option Plan and the 1998 Stock Incentive Plan, of which
9,552,951 were exercisable.



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Dividend Policy



We have never declared or paid any cash dividends on our common stock and have no present intention to declare or pay cash dividends on our common stock
in the foreseeable future. We are subject to various financial covenants with our primary lender that could limit our ability and/or prohibit us to pay dividends in the future and the terms of our 9% Notes preclude the payment of cash dividends.
Please see discussion regarding our primary lender under Liquidity and Capital Resources in Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7. and Note 15
(Debt) of the Notes to the Consolidated Financial Statements included herein. We intend to retain earnings, if any, which we may realize in the foreseeable future to finance our operations.



Equity Instruments



Summarized below are our equity compensation plans as of March 31, 2004.



|                                                       |  |                                                                                    |  |                                                                     |      |                                                                                                                                      |           
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------- |  | ------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------ | ----------
|Plan Category                                          |  | Number of securitiesto be issued uponexercise ofoutstanding optionsand warrants(a) |  | Weighted-Averageexercise price ofoutstanding optionsand warrants(b) |      | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding
securitiesreflected in column(a))
|Equity compensation plans approved by stockholders     |  | 12,693,184                                                                         |  | $                                                                   | 3.21 |                                                                                                                                      | 15,213,386
|Equity compensation plans not approved by stockholders |  | 20,538,143                                                                         |  | $                                                                   | 0.59 |                                                                                                                                      |          
|                                                       |  |                                                                                    |  |                                                                     |      |                                                                                                                                      |           
|Total                                                  |  | 33,231,327                                                                         |  | $                                                                   | 1.59 |                                                                                                                                      | 15,213,386
|                                                       |  |                                                                                    |  |                                                                     |      |                                                                                                                                      |           



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|Item |  | 6.Selected Financial Data.
|---- |  | --------------------------



You should read the tables below together with the Consolidated Financial
Statements and the related notes, which are included in Item 8 of this Annual Report on Form 10-K and Managements Discussion and Analysis of Financial Condition and Results of Operations which is included in Item 7 of this
Annual Report on Form 10-K.



|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|--------------------------------------- |  | ------------------------------------- | ------- | - | ------------------ | - | ------- | -------------- |  | - | ------------------ | - |  | --------------- | ------- | - | --------------- | - | ------- | --------------- |  | - | --------------- | - |  | - | -------- | - |  | - | ------- | -
|                                        |  | (In thousands, except per share data) |        
|                                        |  | Twelve Months Ended                   |         |   | Seven Months Ended |   |         |                |  |   | Fiscal Years Ended |  
|                                        |  | March 31, 2004                        |         |   | March 31, 2003     |   |         | March 31, 2003 |  |   | March 31, 2002     |   |  | August 31, 2002 |         |   | August 31, 2001 |   |         | August 31, 2000 |  |   | August 31, 1999 |  
|                                        |  |                                       |         |   |                    |   |         |               
|                                        |  |                                       |         |   | (Unaudited)        |   |         |                |  |   | (Unaudited)        |   |  |                 |         |   | (Restated)*     |   |         |                 |  |   |                 |  
|Net revenue                             |  | $                                     | 142,679 |   |                    | $ | 210,090 |                |  | $ | 101,589            |   |  | $               | 160,188 |   |                 | $ | 268,688 |                 |  | $ | 188,068         |   |  | $ | 188,626  |   |  | $ | 430,974 |  
|Cost of revenue                         |  |                                       | 78,598  |   |                    |   | 132,001 |                |  |   | 76,507             |   |  |                 | 62,891  |   |                 |   | 118,386 |                 |  |   | 62,023          |   |  |   | 105,396  |   |  |   | 200,980 |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Gross profit                            |  |                                       | 64,081  |   |                    |   | 78,089  |                |  |   | 25,082             |   |  |                 | 97,297  |   |                 |   | 150,302 |                 |  |   | 126,045         |   |  |   | 83,230   |   |  |   | 229,994 |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Operating expenses                      |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Marketing and selling                   |  |                                       | 32,183  |   |                    |   | 59,941  |                |  |   | 32,295             |   |  |                 | 30,132  |   |                 |   | 57,892  |                 |  |   | 31,631          |   |  |   | 71,632   |   |  |   | 72,245  |  
|General and administrative              |  |                                       | 37,308  |   |                    |   | 42,798  |                |  |   | 24,470             |   |  |                 | 25,165  |   |                 |   | 43,374  |                 |  |   | 40,269          |   |  |   | 56,378   |   |  |   | 64,322  |  
|Research and development                |  |                                       | 38,129  |   |                    |   | 46,393  |                |  |   | 25,392             |   |  |                 | 23,133  |   |                 |   | 44,139  |                 |  |   | 39,860          |   |  |   | 57,410   |   |  |   | 50,452  |  
|Stock-based compensation                |  |                                       | 1,140   |   |                    |   | 79      |                |  |   | 79                 |   |  |                 |        |   |                 |   |        |                 |  |   |                |   |  |   |         |   |  |   |        |  
|Restructuring charges                   |  |                                       | 514     |   |                    |   | 4,824   |                |  |   | 4,824              |   |  |                 |        |   |                 |   |        |                 |  |   |                |   |  |   |         |   |  |   |        |  
|Impairment on building held for sale    |  |                                       |        |   |                    |   | 2,146   |                |  |   | 2,146              |   |  |                 |        |   |                 |   |        |                 |  |   |                |   |  |   |         |   |  |   |        |  
|Litigation recovery                     |  |                                       |        |   |                    |   |        |                |  |   |                   |   |  |                 |        |   |                 |   |        |                 |  |   |                |   |  |   |         |   |  |   | (1,753  | )
|Goodwill writedown                      |  |                                       |        |   |                    |   |        |                |  |   |                   |   |  |                 |        |   |                 |   |        |                 |  |   |                |   |  |   | 17,870   |   |  |   |        |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Total operating expenses                |  |                                       | 109,274 |   |                    |   | 156,181 |                |  |   | 89,206             |   |  |                 | 78,430  |   |                 |   | 145,405 |                 |  |   | 111,760         |   |  |   | 203,290  |   |  |   | 185,266 |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|(Loss) earnings from operations         |  |                                       | (45,193 | ) |                    |   | (78,092 | )              |  |   | (64,124            | ) |  |                 | 18,867  |   |                 |   | 4,897   |                 |  |   | 14,285          |   |  |   | (120,060 | ) |  |   | 44,728  |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Other income (expense)                  |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Interest expense, net                   |  |                                       | (5,420  | ) |                    |   | (4,964  | )              |  |   | (3,317             | ) |  |                 | (4,119  | ) |                 |   | (5,765  | )               |  |   | (10,172         | ) |  |   | (7,691   | ) |  |   | (6,344  | )
|Non-cash financing expense              |  |                                       | (3,330  | ) |                    |   | (1,078  | )              |  |   | (756               | ) |  |                 | (1,182  | ) |                 |   | (1,504  | )               |  |   | (350            | ) |  |   |         |   |  |   |        |  
|(Loss) gain on early retirement of debt |  |                                       |        |   |                    |   |        |                |  |   |                   |   |  |                 | (1,221  | ) |                 |   | (1,221  | )               |  |   | 2,795           |   |  |   |         |   |  |   |        |  
|Other (expense) income                  |  |                                       | (2,446  | ) |                    |   | (616    | )              |  |   | 201                |   |  |                 | (843    | ) |                 |   | (1,660  | )               |  |   | 1,699           |   |  |   | (3,902   | ) |  |   | 646     |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Total other expense                     |  |                                       | (11,196 | ) |                    |   | (6,658  | )              |  |   | (3,872             | ) |  |                 | (7,365  | ) |                 |   | (10,150 | )               |  |   | (6,028          | ) |  |   | (11,593  | ) |  |   | (5,698  | )
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|(Loss) earnings before income taxes     |  |                                       | (56,389 | ) |                    |   | (84,750 | )              |  |   | (67,996            | ) |  |                 | 11,502  |   |                 |   | (5,253  | )               |  |   | 8,257           |   |  |   | (131,653 | ) |  |   | 39,030  |  
|Income tax provision (benefit)          |  |                                       | 19      |   |                    |   | 33      |                |  |   | (191               | ) |  |                 | (944    | ) |                 |   | (720    | )               |  |   | (106            | ) |  |   | 91       |   |  |   | 2,972   |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Net (loss) earnings                     |  | $                                     | (56,408 | ) |                    | $ | (84,783 | )              |  | $ | (67,805            | ) |  | $               | 12,446  |   |                 | $ | (4,533  | )               |  | $ | 8,363           |   |  | $ | (131,744 | ) |  | $ | 36,058  |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Net (loss) earnings per share data:     |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Basic                                   |  | $                                     | (0.53   | ) |                    | $ | (0.92   | )              |  | $ | (0.73              | ) |  | $               | 0.15    |   |                 | $ | (0.05   | )               |  | $ | 0.14            |   |  | $ | (2.36    | ) |  | $ | 0.66    |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  
|Diluted                                 |  | $                                     | (0.53   | ) |                    | $ | (0.92   | )              |  | $ | (0.73              | ) |  | $               | 0.14    |   |                 | $ | (0.05   | )               |  | $ | 0.13            |   |  | $ | (2.36    | ) |  | $ | 0.57    |  
|                                        |  |                                       |         |   |                    |   |         |                |  |   |                    |   |  |                 |         |   |                 |   |         |                 |  |   |                 |   |  |   |          |   |  |   |         |  

|                                 |  |                |          |   |                |   |         |                 |  |   |                 |   |  |                 |         |   |                 |   |         |   |  |   |        
|-------------------------------- |  | -------------- | -------- | - | -------------- | - | ------- | --------------- |  | - | --------------- | - |  | --------------- | ------- | - | --------------- | - | ------- | - |  | - | -------
|                                 |  |                |          |   |                |  
|                                 |  | March 31, 2004 |          |   | March 31, 2003 |   |         | August 31, 2002 |  |   | August 31, 2001 |   |  | August 31, 2000 |         |   | August 31, 1999
|                                 |  |                |          |   | (Restated)     |   |         | (Restated)      |  |   | (Restated)      |   |  |                 |         |   |                
|Consolidated Balance Sheet Data: |  |                |          |   |                |   |         |                 |  |   |                 |   |  |                 |         |   |                 |   |         |   |  |   |        
|Working capital (deficiency)     |  | $              | (110,941 | ) |                | $ | (72,426 | )               |  | $ | (16,217         | ) |  | $               | (48,343 | ) |                 | $ | (76,769 | ) |  | $ | 29,391 
|Total assets                     |  |                | 47,338   |   |                |   | 79,937  |                 |  |   | 182,895         |   |  |                 | 115,630 |   |                 |   | 93,093  |   |  |   | 271,248
|Short-term debt                  |  |                | 41,119   |   |                |   | 44,899  |                 |  |   | 64,008          |   |  |                 | 54,153  |   |                 |   | 30,108  |   |  |   | 27,652 
|Long-term debt                   |  |                | 240      |   |                |   | 632     |                 |  |   | 4,737           |   |  |                 | 14,473  |   |                 |   | 55,847  |   |  |   | 51,732 
|Stockholders (deficit) equity   |  |                | (97,983  | ) |                |   | (55,088 | )               |  |   | 10,425          |   |  |                 | (29,285 | ) |                 |   | (93,980 | ) |  |   | 31,359 



|* |  | Please see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations as well as Note 2 (Restatement) of the Notes to the Consolidated
Financial Statements included herein.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item |  | 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations.
|---- |  | --------------------------------------------------------------------------------------------



In January 2003, our Board of Directors approved a plan to change our fiscal year end from August 31 to March 31. The accompanying consolidated financial
statements include our results of operations for the audited fiscal year ended March 31, 2004, the seven-month transition fiscal year ended March 31, 2003, the comparative unaudited results of operations for the seven months ended March 31, 2002 and
the audited results of operations for the fiscal year ended August 31, 2002 and 2001 (restated). Our quarterly closing dates occur on the Sunday closest to the last day of the calendar quarter, which encompasses the following quarter ending dates
for fiscal 2005.



|        |  |                   
|------- |  | ------------------
|Quarter |  | Quarter End Date  
|First   |  | June 27, 2004     
|Second  |  | September 26, 2004
|Third   |  | December 26, 2004 
|Fourth  |  | March 31, 2005    



Overview



We develop, publish, distribute and market video and computer game software
for interactive entertainment consoles and, to a lesser extent, personal computers. We internally develop our software products through our five software development studios located in the United States and the United Kingdom. Additionally, we
contract with independent software developers to create software products for us.



Through our subsidiaries in North America, the United Kingdom, Germany, France, Spain and Australia, we distribute our software products directly to retailers and other outlets, and we also utilize regional
distributors in those areas and in the Pacific Rim to distribute software within those geographic areas. As an additional aspect of our business, we distribute software products which have been developed by third parties. A less significant aspect
of our business is the development and publication of strategy guides relating to our software products and the issuance of certain special edition comic magazines to support some of our brands.



Since our inception, we have developed products for each generation of major
gaming platforms, including IBM® Windows-based
personal computers and compatibles, 16-bit Sega
Genesis video game system, 16-bit Super Nintendo
Entertainment System®, 32-bit Nintendo Game
Boy®, Game Boy® Advance and Game Boy® Color, 32-bit Sony PlayStation®, 64-bit Nintendo® 64, Sega Dreamcast, 128-bit Sony PlayStation® 2, 128-bit Microsoft Xbox, and 128-bit Nintendo GameCube. We also initially developed software for the 8-bit Nintendo Entertainment System and the 8-bit Sega Master System.



Substantially all of our revenue is derived from one industry segment, the
development, publication, marketing and distribution of interactive entertainment software. For information regarding our foreign and domestic operations, see Note 23 (Segment Information) of the Notes to the Consolidated Financial Statements
included herein.



Restatement



We have restated our previously issued consolidated financial statements for
the quarters ended June 2, 2001 and August 31, 2001 and the fiscal year ended August 31, 2001, balance sheets as of each quarter and fiscal year end from December 2, 2001 through December 28, 2003, statement of operations for the quarters ended June
2, 2002 and August 31, 2002 and statement of cash flows for the fiscal year ended August 31, 2002 and all the quarters within fiscal 2002. The restatement resulted from an accounting error in March 2001, when we entered into a $9.5 million bank
participation agreement with our primary lender (See Note 15F of the Notes to the Consolidated Financial Statements as of and for the fiscal year ended March 31, 2004 included herein), and recorded the advance balance incorrectly. The error resulted
in an understatement of debt and an overstatement of net earnings in fiscal 2001 by $9.5 million. The correction of the error resulted in a reduction of bonuses for fiscal 2001 that were based on pre-tax income by $0.6 million, which were repaid to
us in June 2004. The restatement also resulted from the correction of adjustments for reconciling items related to bank advances aggregating $0.4 million that were recorded in the fourth quarter of fiscal 2002 that should have been recorded in the
third quarter of fiscal 2002. Please see Note 2 (Restatement) of the Notes to the Consolidated Financial Statements included herein.



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Critical Accounting Policies



Use of Estimates



The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted
in the United States of America requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate the estimates to determine
their accuracy and make adjustments when we deem it necessary. Note 1 (Business and Significant Accounting Policies) of the notes to the audited consolidated financial statements as of and for the fiscal year ended March 31, 2004 included herein,
describes the significant accounting policies and methods we use in the preparation of our consolidated financial statements. We use estimates for, but not limited to, accounting for the allowance for price concessions and returns, the valuation of
inventory, the recoverability of advance royalty payments and the amortization of capitalized software development costs. We base estimates on our historical experience and on various other assumptions that we believe are relevant under the
circumstances, the results from which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Our critical accounting
policies include the following:



Revenue Recognition



We apply the provisions of Statement of Position
97-2, Software Revenue Recognition in conjunction with the applicable provisions of Staff Accounting Bulletin No. 104, Revenue Recognition. Accordingly, we recognize revenue for software when there is (1)
persuasive evidence that an arrangement exists, which is generally a customer purchase order, (2) the software is delivered, (3) the selling price is fixed and determinable and (4) collectibility of the customer receivable is deemed probable. We do
not customize our software or provide post contract support to our customers.



The timing of when we recognize revenue generally differs for our retail customers and distributor customers. For retail customers, we recognize software product revenue when title transfers to the retail customers.
Because we generally do not provide extended payment terms and our revenue arrangements with retail customers do not include multiple deliverables such as upgrades, post-contract customer support or other elements, our selling price for software
products is fixed and determinable when titles are shipped to our retail customers. We generally deem collectibility probable at the time titles are shipped to retail customers because the majority of these sales are to major retailers that possess
significant economic substance, the arrangements consist of payment terms of 60 days, and the customers obligation to pay is generally not contingent on resale of the product in the retail channel. For distributor customers, collectibility is
deemed probable and we recognize revenue on the earlier to occur of when the distributor pays the invoice or when the distributor provides persuasive evidence that the product has been resold, assuming all other revenue recognition criteria have
been met. For product shipped on consignment, we recognize revenue when the customer provides persuasive evidence that the product has been resold.



Allowances for Price Concessions and Returns



We are generally not contractually obligated and generally do not accept returns, except for defective product. However, we grant price concessions to our
customers who primarily are major retailers that control market access to the consumer when those concessions are necessary to maintain our relationships with the retailers and gain access to their retail channel customers. If the consumers
demand for a specific title falls below expectations or significantly declines below previous rates of sell-through, then, we generally will provide a price concession or credit to spur further sales by the retailer to maintain the customer
relationship. In circumstances when a price concession cannot be agreed upon, we generally will accept a product return. We record revenue net of an allowance for estimated price concessions and returns. We must make significant estimates and
judgments when determining the appropriate allowance for price concessions and returns in any accounting period. In order to derive and evaluate those estimates, we analyze historical price concessions and



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returns, current sell-through of product and retailer inventory, current economic trends, changes in consumer demand and acceptance of our products in the
marketplace, among other factors.



The level of consumer market
acceptance a software title enjoys is the most important indicator of the level of price concessions and returns we will grant retail customers for that title. When consumer market acceptance decreases for a title, evidenced by lower unit retail
sell-through, the potential for price concessions and returns for that title increases. As retail sell-through is the most important indicator of consumer market acceptance, we use monthly retail sell-through statistics as a primary factor in
estimating the allowance for price concessions and returns. In addition to sell-through rates, the price at which a software title was sold to customers and the number of units remaining in the retail channel have a significant impact on our
estimate of future price concessions and returns. In the fourth quarter of fiscal 2002, we released the software titles Turok: Evolution and Aggressive Inline, which we anticipated would be significant revenue drivers and valuable
additions to our product catalog. The market reception to these titles, as evidenced by the retail sell-through rates to consumers in the first quarter of fiscal 2003 and beyond, fell substantially below our revenue expectations. As a result of the
lower than anticipated retail sell-through, significant quantities of these products remained in the retail channel. Accordingly, we provided our retail customers with price concessions for these products more rapidly after the initial release date
than was our historical practice and, in the fourth quarter of fiscal 2002, recorded a $17.9 million provision for price concessions and returns on these products that exceeded historical allowance rates and that we believed would have resulted
in additional sell-through to our retailers customers through the calendar 2002 holiday season.



During fiscal 2003, while the price concessions we previously offered our retail customers did increase the retail sell-through rate, the rate of
reduction of retail channel inventory did not attain the level we had originally estimated. Consequently, we experienced significantly more returns of these two products from our retail customers than we originally had estimated. Additionally, the
market for GameCube products softened after the 2002 holiday season, which required us to provide price concessions on certain of our products for that platform to lower prices than we originally estimated at that stage in the platform cycle.
Finally, the actual sell-through rates of Legends of Wrestling and BMX were less than the projected retail sell-through rates we had used in our previous estimates of allowances, which were based on historical experience and actual
sell-through rates for those products through August 31, 2002. As a result of these unanticipated events, we provided our retail customers additional price concessions. The resulting $14.4 million increase to the provision for price concessions and
returns negatively impacted net revenues, gross profit and net income for fiscal 2003. No further significant adjustments were made to allowances during the fiscal year ended March 31, 2004.



Allowances for price concessions and returns are reflected as a reduction of
accounts receivable when we have agreed to grant credits to the customer; otherwise, they are reflected as an accrued liability.



Prepaid Royalties



We pay non-refundable royalty advances to licensors of intellectual properties and classify those payments as prepaid royalties. Royalty advance payments
are recoupable against future royalties due for software or intellectual properties we licensed under the terms of our license agreements. We expense prepaid royalties at contractual royalty rates based on actual product sales. We also charge to
expense the portion of prepaid royalties that we expect will not be recovered through royalties due on future product sales. Material differences between actual future sales and those projected may result in the amount and timing of royalty expense
to vary. For example, if the non-refundable prepaid royalty balance to a licensor was $3.0 million, the royalty rate as a percentage of net revenue was 10% and projected net revenue of the software title utilizing the license was $30.0 million,
we would deem the non-refundable royalty advance fully recoverable and record no expense to write down the prepaid royalty to net realizable value. If the projected net revenue of the software title were $20.0 million, we would write-off as an
expense $1.0 million of the non-refundable prepaid royalty balance. We classify royalty advances as current or noncurrent assets based on the portion of estimated future net product sales that are expected to occur within the next fiscal year.



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Capitalized Software Development Costs



We account for our software development costs in accordance with Statement
of Financial Accounting Standard No. 86, Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed. Under SFAS No. 86, we expense software development costs as incurred until we determine that the
software is technologically feasible. Generally, to establish whether the software is technologically feasible, we require the product to be a sequel and possess a proven software game engine that has been successfully utilized in a previous
product. We assess its detailed program designs to verify that the working model of the software game engine has been tested against the product design. Once we determine that the entertainment software is technologically feasible and we have a
basis for estimating the recoverability of the development costs from future cash flows, we capitalize the remaining software development costs until the software product is released.



Once we release a software title, we commence amortizing the related capitalized software development costs. We record
amortization expense as a component of cost of revenue. We calculate the amortization of a software titles capitalized software development costs using two different methods, and then amortize the greater of the two amounts. Under the first
method, we divide the current period gross revenue for the released title by the total of current period gross revenue and anticipated future gross revenue for the title and then multiply the result by the titles total capitalized software
development costs. Under the second method, we divide the titles total capitalized costs by the number of periods in the titles estimated economic life up to a maximum of three months. Material differences between our actual gross
revenue and those we project may result in the amount and timing of amortization to vary. If we deem a titles capitalized software development costs unrecoverable based on our expected future gross revenue and corresponding cash flows, we
write off the unrecoverable costs and record a charge to development expense or cost of revenue, as appropriate.



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Operating Results



Summarized below are our operating results for the twelve months ended March 31, 2004 and 2003, the seven months ended March 31, 2003 and March 31, 2002,
and the fiscal years ended August 31, 2002, and 2001, and the related changes in operating results between those periods. You should read the tables below together with the consolidated financial statements and the related notes to the consolidated
financial statements included herein.



Twelve Months Ended
March 31, 2004 Compared to Twelve Months Ended March 31, 2003



|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|------------------------------------ |  | ----------------------------- | ------- | - | ---------------- | - | ------- | ------- |  | - | ------- | - |  | ---- | -
|                                     |  | (Dollars in thousands)        |        
|                                     |  |                               |         |   |                  |   |         | Changes | 
|                                     |  | Twelve Months Ended March 31, |         |   | 2004 Versus 2003 |  
|                                     |  | 2004                          |         |   | 2003             |   |         | $       |  |   | %       |  
|Net revenue                          |  | $                             | 142,679 |   |                  | $ | 210,090 |         |  | $ | (67,411 | ) |  | -32  | %
|Cost of revenue                      |  |                               | 78,598  |   |                  |   | 132,001 |         |  |   | (53,403 | ) |  | -40  | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Gross profit                         |  |                               | 64,081  |   |                  |   | 78,089  |         |  |   | (14,008 | ) |  | -18  | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Gross profit percentage              |  |                               | 45      | % |                  |   | 37      | %       |  |   |         |   |  |      |  
|Operating expenses                   |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Marketing and selling                |  |                               | 32,183  |   |                  |   | 59,941  |         |  |   | (27,758 | ) |  | -46  | %
|General and administrative (1)       |  |                               | 37,308  |   |                  |   | 42,798  |         |  |   | (5,490  | ) |  | -13  | %
|Research and development             |  |                               | 38,129  |   |                  |   | 46,393  |         |  |   | (8,264  | ) |  | -18  | %
|Stock-based compensation             |  |                               | 1,140   |   |                  |   | 79      |         |  |   | 1,061   |   |  | 1343 | %
|Restructuring                        |  |                               | 514     |   |                  |   | 4,824   |         |  |   | (4,310  | ) |  | -89  | %
|Impairment on building held for sale |  |                               |        |   |                  |   | 2,146   |         |  |   | (2,146  | ) |  | -100 | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Total operating expenses             |  |                               | 109,274 |   |                  |   | 156,181 |         |  |   | (46,907 | ) |  | -30  | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Loss from operations                 |  |                               | (45,193 | ) |                  |   | (78,092 | )       |  |   | 32,899  |   |  | -42  | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Other income (expense)               |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Interest expense, net                |  |                               | (5,420  | ) |                  |   | (4,964  | )       |  |   | (456    | ) |  | 9    | %
|Non-cash financing expense           |  |                               | (3,330  | ) |                  |   | (1,078  | )       |  |   | (2,252  | ) |  | 209  | %
|Other expense                        |  |                               | (2,446  | ) |                  |   | (616    | )       |  |   | (1,830  | ) |  | 297  | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Total other expense                  |  |                               | (11,196 | ) |                  |   | (6,658  | )       |  |   | (4,538  | ) |  | 68   | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Loss before income taxes             |  |                               | (56,389 | ) |                  |   | (84,750 | )       |  |   | 28,361  |   |  | -33  | %
|Income tax provision                 |  |                               | 19      |   |                  |   | 33      |         |  |   | (14     | ) |  | -42  | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Net loss                             |  | $                             | (56,408 | ) |                  | $ | (84,783 | )       |  | $ | 28,375  |   |  | -33  | %
|                                     |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  

---

|1) |  | Excludes stock-based compensation of $1,140 for the twelve months ended March 31, 2004 and $79 for the twelve months ended March 31, 2003.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------



31



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##### Table of Contents

Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31, 2002



|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|------------------------------------ |  | ---------------------------- | ------- | - | ---------------- | - | ------- | ------- |  | - | ------- | - |  | ---- | -
|                                     |  | (Dollars in thousands)       |        
|                                     |  |                              |         |   |                  |   |         | Changes | 
|                                     |  | Seven Months Ended March 31, |         |   | 2003 Versus 2002 |  
|                                     |  | 2003                         |         |   | 2002             |   |         | $       |  |   | %       |  
|                                     |  |                              |         |   | (Unaudited)      |   |         |         |  |   |         |  
|Net revenue                          |  | $                            | 101,589 |   |                  | $ | 160,188 |         |  | $ | (58,599 | ) |  | -37  | %
|Cost of revenue                      |  |                              | 76,507  |   |                  |   | 62,891  |         |  |   | 13,616  |   |  | 22   | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Gross profit                         |  |                              | 25,082  |   |                  |   | 97,297  |         |  |   | (72,215 | ) |  | -74  | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Gross profit percentage              |  |                              | 25      | % |                  |   | 61      | %       |  |   |         |   |  |      |  
|Operating expenses                   |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Marketing and selling                |  |                              | 32,295  |   |                  |   | 30,132  |         |  |   | 2,163   |   |  | 7    | %
|General and administrative (1)       |  |                              | 24,470  |   |                  |   | 25,165  |         |  |   | (695    | ) |  | -3   | %
|Research and development             |  |                              | 25,392  |   |                  |   | 23,133  |         |  |   | 2,259   |   |  | 10   | %
|Stock-based compensation             |  |                              | 79      |   |                  |   |        |         |  |   | 79      |   |  | N/A  |  
|Restructuring charges                |  |                              | 4,824   |   |                  |   |        |         |  |   | 4,824   |   |  | N/A  |  
|Impairment on building held for sale |  |                              | 2,146   |   |                  |   |        |         |  |   | 2,146   |   |  | N/A  |  
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Total operating expenses             |  |                              | 89,206  |   |                  |   | 78,430  |         |  |   | 10,776  |   |  | 14   | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|(Loss) earnings from operations      |  |                              | (64,124 | ) |                  |   | 18,867  |         |  |   | (82,991 | ) |  | -440 | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Other income (expense)               |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Interest expense, net                |  |                              | (3,317  | ) |                  |   | (4,119  | )       |  |   | 802     |   |  | -19  | %
|Non-cash financing expense           |  |                              | (756    | ) |                  |   | (1,182  | )       |  |   | 426     |   |  | -36  | %
|Loss on early retirement of debt     |  |                              |        |   |                  |   | (1,221  | )       |  |   | 1,221   |   |  | -100 | %
|Other income (expense)               |  |                              | 201     |   |                  |   | (843    | )       |  |   | 1,044   |   |  | -124 | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Total other expense                  |  |                              | (3,872  | ) |                  |   | (7,365  | )       |  |   | 3,493   |   |  | -47  | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|(Loss) earnings before income taxes  |  |                              | (67,996 | ) |                  |   | 11,502  |         |  |   | (79,498 | ) |  | -691 | %
|Income tax benefit                   |  |                              | (191    | ) |                  |   | (944    | )       |  |   | 753     |   |  | -80  | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Net (loss) earnings                  |  | $                            | (67,805 | ) |                  | $ | 12,446  |         |  | $ | (80,251 | ) |  | -645 | %
|                                     |  |                              |         |   |                  |   |         |         |  |   |         |   |  |      |  

---

|1) |  | Excludes stock-based compensation of $79 for the twelve months ended March 31, 2003.
|-- |  | ------------------------------------------------------------------------------------



Fiscal 2002 Compared to Fiscal 2001



|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|--------------------------------------- |  | ----------------------------- | ------- | - | ---------------- | - | ------- | ------- |  | - | ------- | - |  | ---- | -
|                                        |  | (Dollars in thousands)        |        
|                                        |  |                               |         |   |                  |   |         | Changes | 
|                                        |  | Fiscal Years Ended August 31, |         |   | 2002 Versus 2001 |  
|                                        |  | 2002                          |         |   | 2001             |   |         | $       |  |   | %       |  
|                                        |  |                               |         |   | (Restated)       |   |         |         |  |   |         |  
|Net revenue                             |  | $                             | 268,688 |   |                  | $ | 188,068 |         |  | $ | 80,620  |   |  | 43   | %
|Cost of revenue                         |  |                               | 118,386 |   |                  |   | 62,023  |         |  |   | 56,363  |   |  | 91   | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Gross profit                            |  |                               | 150,302 |   |                  |   | 126,045 |         |  |   | 24,257  |   |  | 19   | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Gross profit percentage                 |  |                               | 56      | % |                  |   | 67      | %       |  |   |         |   |  |      |  
|Operating expenses                      |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Marketing and selling                   |  |                               | 57,892  |   |                  |   | 31,631  |         |  |   | 26,261  |   |  | 83   | %
|General and administrative              |  |                               | 43,374  |   |                  |   | 40,269  |         |  |   | 3,105   |   |  | 8    | %
|Research and development                |  |                               | 44,139  |   |                  |   | 39,860  |         |  |   | 4,279   |   |  | 11   | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Total operating expenses                |  |                               | 145,405 |   |                  |   | 111,760 |         |  |   | 33,645  |   |  | 30   | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Earnings from operations                |  |                               | 4,897   |   |                  |   | 14,285  |         |  |   | (9,388  | ) |  | -66  | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Other income (expense)                  |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Interest expense, net                   |  |                               | (5,765  | ) |                  |   | (10,172 | )       |  |   | 4,407   |   |  | -43  | %
|Non-cash financing expense              |  |                               | (1,504  | ) |                  |   | (350    | )       |  |   | (1,154  | ) |  | 330  | %
|(Loss) gain on early retirement of debt |  |                               | (1,221  | ) |                  |   | 2,795   |         |  |   | (4,016  | ) |  | -144 | %
|Other (expense) income                  |  |                               | (1,660  | ) |                  |   | 1,699   |         |  |   | (3,359  | ) |  | -198 | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Total other expense                     |  |                               | (10,150 | ) |                  |   | (6,028  | )       |  |   | (4,122  | ) |  | 68   | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|(Loss) earnings before income taxes     |  |                               | (5,253  | ) |                  |   | 8,257   |         |  |   | (13,510 | ) |  | -164 | %
|Income tax benefit                      |  |                               | (720    | ) |                  |   | (106    | )       |  |   | (614    | ) |  | 579  | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  
|Net (loss) earnings                     |  | $                             | (4,533  | ) |                  | $ | 8,363   |         |  | $ | (12,896 | ) |  | -154 | %
|                                        |  |                               |         |   |                  |   |         |         |  |   |         |   |  |      |  



32



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##### Table of Contents

Net Revenue



Net revenue is derived primarily from shipping interactive entertainment software to customers. Our software functions on dedicated game platforms,
including Sonys PlayStation 2 and PlayStation 1, Microsofts Xbox, as well as Nintendos GameCube, Game Boy Advance and PCs. We record revenue net of a provision for price concessions and returns, as discussed above under
Critical Accounting Policies.



Summarized
below is information about our gross revenue by game console for the twelve months ended March 31, 2004 and March 31, 2003, the seven months ended March 31, 2003 and March 31, 2002, and the fiscal years ended August 31, 2002, and 2001. Please note
that the numbers in the schedule below do not include the effect of provisions for price concessions and returns because we do not track them by game console. Accordingly, the numbers presented may vary materially from those that we would disclose
were we able to present the information net of provisions for price concessions and returns.



|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|------------------------------------- |  | ------------------------------ | - | ------------- | -------------------------------- | - | ------------- | ------------------ | - | -------------- | ------------------ | - | -------------- | --- | - |  | --- | -
|                                      |  | Fiscal YearEnded March 31,2004 |   |               | Twelve MonthsEnded March 31,2003 |   |               | Seven Months Ended |   |                | Fiscal Years Ended |  
|                                      |  |                                |   | March 31,2003 |                                  |   | March 31,2002 |                    |   | August 31,2002 |                    |   | August 31,2001 |    
|                                      |  |                                |   |               | (Unaudited)                      |   |               |                    |   |                | (Unaudited)        |   |                |     |   |  |     |  
|Cartridge-based software:             |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Nintendo Game Boy                     |  | 2                              | % |               | 5                                | % |               | 4                  | % |                | 8                  | % |                | 7   | % |  | 11  | %
|Nintendo 64                           |  |                               |   |               |                                 |   |               |                   |   |                |                   |   |                |    |   |  | 2   | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Subtotal for cartridge-based software |  | 2                              | % |               | 5                                | % |               | 4                  | % |                | 8                  | % |                | 7   | % |  | 13  | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Disc-based software:                  |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Sony PlayStation 2: 128-bit           |  | 55                             | % |               | 55                               | % |               | 64                 | % |                | 57                 | % |                | 52  | % |  | 33  | %
|Sony PlayStation 1: 32-bit            |  | 3                              | % |               | 2                                | % |               | 3                  | % |                | 7                  | % |                | 4   | % |  | 41  | %
|Microsoft Xbox: 128-bit               |  | 24                             | % |               | 17                               | % |               | 15                 | % |                | 8                  | % |                | 13  | % |  |    |  
|Nintendo GameCube: 128-bit            |  | 13                             | % |               | 19                               | % |               | 13                 | % |                | 19                 | % |                | 22  | % |  |    |  
|Sega Dreamcast: 128-bit               |  |                               |   |               |                                 |   |               |                   |   |                |                   |   |                |    |   |  | 9   | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Subtotal for disc-based software      |  | 95                             | % |               | 93                               | % |               | 95                 | % |                | 91                 | % |                | 91  | % |  | 83  | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|PC software                           |  | 3                              | % |               | 2                                | % |               | 1                  | % |                | 1                  | % |                | 2   | % |  | 4   | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Total                                 |  | 100                            | % |               | 100                              | % |               | 100                | % |                | 100                | % |                | 100 | % |  | 100 | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Gross revenue by studio:              |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Internal                              |  | 38                             | % |               | 50                               | % |               | 39                 | % |                | 54                 | % |                | 57  | % |  | 24  | %
|External                              |  | 62                             | % |               | 50                               | % |               | 61                 | % |                | 46                 | % |                | 43  | % |  | 76  | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Total                                 |  | 100                            | % |               | 100                              | % |               | 100                | % |                | 100                | % |                | 100 | % |  | 100 | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Gross revenue by segment:             |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Domestic                              |  | 45                             | % |               | 60                               | % |               | 50                 | % |                | 72                 | % |                | 70  | % |  | 70  | %
|International                         |  | 55                             | % |               | 40                               | % |               | 50                 | % |                | 28                 | % |                | 30  | % |  | 30  | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|Total                                 |  | 100                            | % |               | 100                              | % |               | 100                | % |                | 100                | % |                | 100 | % |  | 100 | %
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  
|New titles released                   |  | 47                             |   |               | 47                               |   |               | 28                 |   |                | 23                 |   |                | 42  |   |  | 35  |  
|                                      |  |                                |   |               |                                  |   |               |                    |   |                |                    |   |                |     |   |  |     |  



33



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##### Table of Contents

Summarized below is information about our software franchises, all released on multiple platforms, that
represented 5% or more of gross revenue for the twelve months ended March 31, 2004 and March 31, 2003, the seven months ended March 31, 2003 and March 31, 2002 and the fiscal years ended August 31, 2002 and 2001:



|                     |  |                                  |   |                |                                    |   |                |                    |   |                 |                    |   |                 |    |   |  |    |  
|-------------------- |  | -------------------------------- | - | -------------- | ---------------------------------- | - | -------------- | ------------------ | - | --------------- | ------------------ | - | --------------- | -- | - |  | -- | -
|                     |  | Fiscal Year Ended March 31, 2004 |   |                | Twelve Months Ended March 31, 2003 |   |                | Seven Months Ended |   |                 | Fiscal Years Ended |  
|Software Franchise   |  |                                  |   | March 31, 2003 |                                    |   | March 31, 2002 |                    |   | August 31, 2002 |                    |   | August 31, 2001 |   
|                     |  |                                  |   |                | (Unaudited)                        |   |                |                    |   |                 | (Unaudited)        |   |                 |    |   |  |    |  
|Burnout              |  | 18                               | % |                | 15                                 | % |                | 20                 | % |                 | 12                 | % |                 | 11 | % |  |   |  
|ATV                  |  | 10                               | % |                | 4                                  | % |                | 7                  | % |                 | 2                  | % |                 | 2  | % |  | 3  | %
|NBA Jam              |  | 7                                | % |                |                                   |   |                |                   |   |                 | 1                  | % |                 | 1  | % |  | 1  | %
|Gladiator            |  | 6                                | % |                |                                   |   |                |                   |   |                 |                   |   |                 |   |   |  |   |  
|Baldur's Gate        |  | 6                                | % |                |                                   |   |                |                   |   |                 |                   |   |                 |   |   |  |   |  
|Vexx                 |  | 4                                | % |                | 3                                  | % |                | 5                  | % |                 |                   |   |                 |   |   |  |   |  
|Crazy Taxi           |  | 4                                | % |                | 4                                  | % |                | 4                  | % |                 | 8                  | % |                 | 6  | % |  | 10 | %
|Mary Kate & Ashley   |  | 2                                | % |                | 3                                  | % |                | 5                  | % |                 | 5                  | % |                 | 3  | % |  | 13 | %
|Turok                |  | 3                                | % |                | 24                                 | % |                | 8                  | % |                 |                   |   |                 | 20 | % |  |   |  
|All Star Baseball    |  | 4                                | % |                | 7                                  | % |                | 8                  | % |                 | 15                 | % |                 | 11 | % |  | 5  | %
|Extreme G            |  | 3                                | % |                | 1                                  | % |                | 1                  | % |                 | 5                  | % |                 | 3  | % |  | 4  | %
|Supercross           |  | 3                                | % |                | 1                                  | % |                | 1                  | % |                 | 5                  | % |                 | 3  | % |  | 4  | %
|BMX                  |  | 2                                | % |                | 3                                  | % |                | 2                  | % |                 | 17                 | % |                 | 11 | % |  | 25 | %
|BMX XXX              |  |                                 |   |                | 4                                  | % |                | 9                  | % |                 |                   |   |                 |   |   |  |   |  
|Legends of Wrestling |  | 1                                | % |                | 9                                  | % |                | 11                 | % |                 | 8                  | % |                 | 8  | % |  |   |  
|18 Wheeler           |  | 1                                | % |                | 1                                  | % |                | 1                  | % |                 | 5                  | % |                 | 3  | % |  |   |  
|Aggressive Inline    |  |                                 |   |                | 7                                  | % |                | 2                  | % |                 |                   |   |                 | 6  | % |  |   |  



Twelve Months Ended
March 31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, net revenue of $142.7 million decreased by $67.4 million, or 32%, from $210.1 million for the twelve months ended March 31, 2003. The decrease was caused by a $144.5 million decrease in gross
revenue, partially offset by a $77.1 million decrease in the net provision for price concessions and returns.



The $144.5 million decrease in gross revenue was primarily attributable to the lower average number of units sold per title released, and lower average
selling prices per unit sold as compared with the prior year period. Catalog title sales, which generally sell at lower price points than newly released titles, represented a greater percentage of revenue at lower average selling prices per unit
sold. Catalog titles comprised approximately 50% of revenue for fiscal 2004 compared to approximately 40% in the comparable period of the prior year. The $77.1 million decrease in the net provision for price concession and returns resulted from
the reduction in gross revenues and the higher retail sell-through rates of our products during fiscal 2004 relative to the prior year as well as the increase in the provision in the first quarter of fiscal 2003 for Turok: Evolution and
Aggressive Inline based on lower than historical retail sell-through rates for those products and a higher than historical allowance provision rate.



Sales of software titles for the top three game systems accounted for 92% of gross revenue for the twelve months ended March 31, 2004 compared to 91% for
the twelve months ended March 31, 2003. We achieved the greatest level of sales from software titles released for PlayStation 2 which to date has the highest installed base of the current three game systems.



34



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##### Table of Contents

Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31, 2002



For the seven months ended March 31, 2003, net revenue of $101.6 million
decreased by $58.6 million, or 37%, from $160.2 million for the seven months ended March 31, 2002. The decrease was caused by a $16.1 million decrease in gross revenue and a $42.5 million increase in the net provision for price concessions and
returns.



The $16.1 million decrease in gross revenue was
primarily attributable to sequel titles generating lower gross revenues during the seven months ended March 31, 2003 than the earlier versions generated in the same period of the prior year due to a reduction in the average domestic selling price
per unit as well as lower unit quantities shipped for certain sequel products. The $42.5 million increase in the net provision for price concessions and returns was primarily due to a $25.7 million increase in the estimated amount of price
concessions and returns for product shipments in the seven months ended March 31, 2003 that will be provided primarily to major retailers because of the general decrease in retail channel sell through rates of our products caused by greater
competition in the marketplace, the general lack of market acceptance of platform genre games, as well as lower consumer acceptance of games released for the GameCube platform.



In addition, in the fourth quarter of fiscal 2002, we released the software titles Turok: Evolution and Aggressive
Inline which we anticipated would be significant revenue drivers and valuable additions to our product catalog. The market reception to these products, as evidenced by the retail sell-through rates to consumers in the first quarter of fiscal
2003 and subsequently, fell significantly below our expectations. As a result of the poor retail sell-through, significant quantities of these products remained in the retail channel as of September 30, 2002. Accordingly, we provided our retail
customers price concessions for these products more rapidly after the initial release date than was our historical practice and, in the fourth quarter of fiscal 2002, recorded a $17.9 million provision for price concessions and returns on these
products that exceeded historical allowance rates and that we believed would have resulted in additional sell-through to our retailers customers through the holiday season. During the seven months ended March 31, 2003, while the price
concessions we offered our retail customers did increase the retail sell-through rate, the rate of reduction of retail channel inventory did not attain the level we had originally estimated and consequently, we also experienced significantly more
returns of these two products from our retail customers than we originally had estimated. Additionally, the market for GameCube products softened after the 2002 holiday season, which required us to provide price concessions on our products for that
platform to lower prices than originally estimated and the actual retail sell-through rates of Legends of Wrestling and BMX were less than the projected retail sell-through rates we had used in our previous estimates of allowances,
which were based on historical experience, and actual sell-through rates for those products through August 31, 2002. As a result of these events, we needed to provide our retail customers additional price concessions. The resulting $14.4 million
increase to the provision for price concessions and returns negatively impacted net revenues for the seven months ended March 31, 2003.



Sales of software titles for the top three game systems accounted for 92% of gross revenue for the seven months ended March 31, 2003 compared to 84% for
the seven months ended March 31, 2002. We achieved the greatest level of sales from software titles released for PlayStation 2 which to date has the highest installed base of the three game systems.



Products developed by our internal studios generated 39% of our gross revenue
for the seven months ended March 31, 2003 as compared to 54% for the seven months ended March 31, 2002.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, net revenue of $268.7 million increased by $80.6 million, or 43%, from $188.1 million (restated) for fiscal 2001. The increase was driven
by a $131.7 million increase in gross revenue from newly released software titles for the three next-generation game systems: PlayStation 2, Xbox, and GameCube, which



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was partially offset by a $51.1 million increase in the net provision for price concessions and returns. The increase in the net provision for price
concessions and returns resulted primarily from an increase in gross revenue for fiscal 2002 over fiscal 2001, an increase in the average number of units per software title shipped into the retail channel, reductions from the fiscal 2001 positive
retail sell-through rates of our products as well as a $13.6 million provision recorded in the fourth quarter of fiscal 2002 based on lower than historical retail sell-through rates and a higher than historical provision rate for Turok:
Evolution and Aggressive Inline, which products were released in the fourth quarter of fiscal 2002.



Sales of software titles for the top three game systems accounted for 87% of gross revenue for fiscal 2002 as compared to 33% for fiscal 2001. We achieved
the greatest level of sales from software titles released for PlayStation 2 which to date has the highest installed base of the three game systems.



Increased unit volume contributed $47.9 million (restated) to the increase in net revenue for fiscal 2002 as compared to fiscal 2001, while higher average
selling prices contributed the remaining $32.8 million (restated). Please see discussion of Gross Profit.



Products developed by our internal studios generated 57% of our gross revenue for fiscal 2002 as compared to 24% for fiscal 2001. The increase is
primarily attributable to Turok: Evolution, which represented 20% of our gross revenue for fiscal 2002.



Gross Profit



Gross
profit is derived from net revenue after deducting cost of revenue. Cost of revenue primarily consists of product manufacturing costs (primarily disc and manufacturing royalty costs), amortization of capitalized software development costs and fees
paid to third-party distributors for certain software sold overseas. Our gross profit is significantly affected by the:



| |  |  | level of our provision for price concessions and returns which directly affects our net revenue (please see discussion of Net Revenue),
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | level of capitalized software development costs for specific game titles,
| | - |  | -------------------------------------------------------------------------



| |  |  | level of inventory write downs to the lower of cost or market and
| | - |  | -----------------------------------------------------------------



| |  |  | fees paid to third-party distributors for software sold overseas.
| | - |  | -----------------------------------------------------------------



Gross profit as a percentage of net revenue for foreign game software sales to third-party distributors are generally one-third lower than those on sales
we make directly to foreign retailers.



Twelve Months Ended
March 31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, gross profit of $64.1 million (45% of net revenue) decreased by $14.0 million from $78.1 million (37% of net revenue) for the twelve months ended March 31, 2003. The decreased gross profit was
primarily caused by a:



| |  |  | $40.8 million decrease due to a lower number of units sold and lower average selling prices per unit sold (please see Net Revenue), partially offset by a
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $13.1 million increase in gross profit associated with slightly lower per unit costs of software sold and a
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | $13.7 million decrease in amortization of capitalized software development costs due primarily to the releases of the sequels Burnout 2, Legends of Wrestling 2, BMX3, All Star
Baseball 2003, ATV Quad 2 and Turok: Evolution during the prior year period.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the twelve months ended March 31, 2004, amortization of capitalized software development costs amounted to $7.5 million as compared to $21.2 million for the twelve months ended March 31, 2003 due to the



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greater number of titles meeting the technological feasibility requirement for capitalization and higher capitalized costs associated with titles released in
fiscal 2003.



Capitalized software development costs, net,
amounted to $0.1 million as of March 31, 2004 and $6.9 million as of March 31, 2003.



Gross profit in fiscal 2005 will depend in large part on our ability to identify, develop and timely publish, in accordance with our product release schedule, software that sells through at projected levels at retail.
See Risk Factors: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of Our Primary Lender and Vendors and Our Ability to Achieve Our Projected Revenue Levels and Reduced Operating
Expenses.



Seven Months Ended March 31,
2003 Compared to Seven Months Ended March 31, 2002



For
the seven months ended March 31, 2003, gross profit of $25.1 million (25% of net revenue) decreased by $72.2 million from $97.3 million (61% of net revenue) for the seven months ended March 31, 2002. The decreased gross profit was primarily due to
a:



| |  |  | $10.5 million increase in amortization of capitalized software development costs due primarily to the releases of Vexx, All Star Baseball 2004andLegends of Wrestling
II,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $42.5 million increase in the provision for price concessions and returns (please see Net Revenue),
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | $19.2 million decrease in revenue due to lower selling prices per unit related to a multi-tiered pricing strategy whereby certain software titles were sold at lower price points
during the seven months ended March 31, 2003 than in the same period of the prior year, and a
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $3.9 million write down of excess inventory to its expected net realizable value.
| | - |  | ---------------------------------------------------------------------------------



For the seven months ended March 31, 2003, amortization of capitalized software development costs amounted to $17.1 million
as compared to $6.6 million for the seven months ended March 31, 2002. Capitalized software development costs, net, amounted to $6.6 million as of March 31, 2003 and $15.1 million as of August 31, 2002.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, gross profit of $150.3 million (56% of net revenue)
increased by $24.3 million, or 19%, from $126.0 million (restated) (67% of net revenue) for fiscal 2001. The increased gross profit was due to:



| |  |  | higher PlayStation 2, Xbox, and GameCube disc-based software sales volume, partially offset by a
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | higher provision for price concessions and returns, including $13.6 million related to Turok: Evolution and Aggressive Inline (please see discussion of Net
Revenue) and an
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $8.9 million increase in amortization of capitalized software development costs particularly related to Turok: Evolution and All-Star Baseball2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



For fiscal 2002, gross profit as a percentage of
net revenue was 56% as compared to 67% for fiscal 2001. The 11 percentage point decrease resulted primarily from:



| |  |  | an $8.9 million or five fold increase in amortization of capitalized software development costs compared to the prior year amount of $1.8 million,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | lower margin off-price sales of catalog game software to designated customers in a new distribution channel created in fiscal 2002 and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sales of newly released game titles in the rental market.
| | - |  | ---------------------------------------------------------



For fiscal 2002, amortization of capitalized software development costs amounted to $10.7 million as compared to $1.8 million for fiscal 2001. Capitalized
software development costs, net, amounted to $15.1 million as of August 31, 2002 and $5.6 million as of August 31, 2001.



Operating Expenses



For the twelve months ended March 31, 2004, operating expenses of $109.3 million (77% of net revenue) decreased by $46.9 million, or 30%, from $156.2
million (74% of net revenue) for the twelve months ended March 31, 2003. For the seven months ended March 31, 2003, operating expenses of $89.2 million (88% of net revenue) increased by $10.8 million, or 14%, from $78.4 million (49% of net revenue)
for the seven months ended March 31, 2002. For fiscal 2002, operating expenses of $145.4 million (54% of net revenue) increased by $ 33.1 million, or 30%, from $111.8 million (59% of net revenue) for fiscal 2001.



Marketing and Selling



Marketing and selling expenses consist primarily of personnel, advertising,
cooperative advertising, trade shows, promotions, sales commissions and licensing costs.



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, marketing and selling expenses of $32.2 million (23% of net revenue) decreased by $27.8 million, or 46%, from
$59.9 million (29% of net revenue) for the twelve months ended March 31, 2003. The decrease in the current year relative to the comparative prior year period resulted primarily from lower marketing and selling personnel headcount, lower variable
marketing and selling expenditures on reduced revenues and managements decision to curtail discretionary marketing and advertising expenditures in order to preserve short-term liquidity (please see discussion under Liquidity and
Capital Resources), as well as lower sales commissions and royalties related to the decrease in net revenue.



Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31, 2002



For the seven months ended March 31, 2003, marketing and selling expenses of $32.3 million (32% of net revenue) increased by
$2.2 million, or 7%, from $30.1 million (19% of net revenue) for the seven months ended March 31, 2002. The increase was primarily due to a $4.0 million increase in licensing costs, partially offset by a $1.8 million decrease in marketing and
advertising expenditures that were curtailed to improve short-term liquidity. The increase in licensing costs resulted from a $4.4 million reduction of accrued expenses for obligations that ceased under certain expired intellectual property
agreements in the same period of the prior year. Excluding such reduction, licensing costs would have decreased by $0.4 million for the seven months ended March 31, 2003 compared to the same period of the prior year.



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Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, marketing and selling expenses of $57.9 million (22% of net revenue) increased by $26.3 million, or
83%, from $31.6 million (17% of net revenue) for fiscal 2001. The increase was primarily related to expenses incurred to help generate and support higher net revenue in fiscal 2002. The increased marketing and selling expenditures did not have as
positive an effect on fiscal 2002 net revenue as we had expected, which resulted in a 5 percentage point increase in marketing and selling expenses as a percentage of net revenue. Expense increases included:



| |  |  | $13.1 million in advertising and trade show expenses,
| | - |  | -----------------------------------------------------



| |  |  | $11.5 million in licensing costs,
| | - |  | ---------------------------------



| |  |  | $5.7 million in cooperative advertising expenses and
| | - |  | ----------------------------------------------------



| |  |  | $2.4 million in sales commissions.
| | - |  | ----------------------------------



These increases were partially offset by a:



| |  |  | $4.9 million reduction of accrued expenses for obligations that ceased under several expired intellectual property agreements and a
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.1 million recovery of previously expensed licensing fees.
| | - |  | ------------------------------------------------------------



General and Administrative



General and administrative expenses consist of employee-related expenses of executive and administrative departments, fees for professional services,
non-studio occupancy costs and other infrastructure costs.



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, general and administrative expenses of $37.3 million (26% of net revenue) decreased by $5.5 million, or 13%,
from $42.8 million (20% of net revenue) for the twelve months ended March 31, 2003. The decrease resulted primarily from reductions in employee related costs of $1.2 million, fixed occupancy costs of $2.3 million, depreciation of $2.5 million,
technology costs of $0.9 million and variable distribution costs of $1.0 million partially offset by higher professional fees of $2.1 million.



Occupancy costs decreased from lower communication costs. Depreciation expense decreased due to the reclassification of our UK building to held-for-sale
in March 2003, at which time we ceased depreciating the building. As of March 31, 2004, we had received a deposit for the sale and leaseback of the building. Please see Note 8 (Building Held for Sale) of the Notes to the Consolidated Financial
Statements as of and for the fiscal year ended March 31, 2004 included herein.



Administrative employee headcount increased slightly to 170 as of March 31, 2004 as compared to 160 as of March 31, 2003. Please see Restructuring, and Liquidity and Capital
Resources as well as Note 14 (Accrued Restructuring Charges) of the notes to the audited consolidated financial statements as of and for the twelve months ended March 31, 2004 included herein.



Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31,
2002



For the seven months ended March 31, 2003, general
and administrative expenses of $24.5 million (24% of net revenue) decreased by $0.6 million, or 2%, from $25.2 million (16% of net revenue) for the seven months ended March 31, 2002. The decrease resulted from savings in employee related expenses of
$1.0 million and consulting fees of $0.4 million partially offset by higher insurance and accounting expenses of $0.8 million. The 8% increase in general and administrative expenses as a percentage of net revenue resulted from decreased net revenue
in the seven months ended March 31, 2003 as compared to the same period of the prior year.



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Administrative employee headcount was approximately 160 as of March 31, 2003 as compared to 230 as of
August 31, 2002 reflecting an approximate 30% reduction. The decrease in headcount resulted from the business restructuring we implemented during the seven months ended March 31, 2003 in order to lower our operating expenses and increase our future
operating cash flows.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, general and administrative expenses of
$43.4 million (16% of net revenue) increased by $3.1 million, or 8%, from $40.3 million (restated) (21% of net revenue) for fiscal 2001. The increase was due primarily to an increase in employee-related expenses due to increased headcount. As a
percentage of net revenue, general and administrative expenses were 16% for fiscal 2002 as compared to 21% for fiscal 2001. The 5 percentage point improvement in general and administrative expenses as a percentage of net revenue resulted primarily
from managed cost containment measures as well as economies of scale achieved due to the increase in net revenue for fiscal 2002 over fiscal 2001.



Research and Development



Research and development expenses consist of employee-related and occupancy costs associated with our internal studios as well as contractual costs for
external software development.



Twelve Months Ended March
31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, research and development expenses of $38.1 million (27% of net revenue) decreased by $8.3 million, or 18%, from $46.4 million (22% of net revenue) for the twelve months ended March 31, 2003. Fewer
titles under development in fiscal year 2004 met the test of technological feasibility, as compared to the prior year, thereby increasing software development expenses by $17.2 million. More than offsetting these additional costs were savings of:



| |  |  | $10.2 million from lower employee related and overhead costs associated with internal development studios, principally resulting from the closure of our Salt Lake City software
development studio at the end of calendar 2002 and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $14.9 million from lower external development costs due to the structuring of development agreements and the reduced number of titles under development.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31,
2002



For the seven months ended March 31, 2003, research
and development expenses of $25.4 million (25% of net revenue) increased by $2.3 million, or 10%, from $23.1 million (14% of net revenue) for the seven months ended March 31, 2002.



The increase was primarily due to a:



| |  |  | $2.1 million write-off of software development costs related to several software titles for which we ceased development primarily because they were no longer considered economically
viable,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $2.0 million increase in employee related costs associated with certain internal development studios, and a
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | $1.0 million decrease in the amount of software development costs capitalized because costs incurred related to software titles under development that met the test of technological
feasibility were lower in 2003 as compared to 2002 (please see discussion of Capitalized Software Development Costs under Critical Accounting Policies).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The above noted increases were partially offset by a:



| |  |  | $2.0 million decrease in employee related costs associated with the closing of our Salt Lake City development studio (please see Restructuring Charges) and a
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.3 million decrease in external development costs.
| | - |  | ----------------------------------------------------



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, research and development expenses of $44.1 million (16% of net revenue) increased by $4.3 million, or 11%, from $39.9 million (21% of net
revenue) for fiscal 2001. The increase was primarily due to a:



| |  |  | $16.8 million increase in internal and external development costs, the internal costs associated with a greater number of personnel to develop a greater number of titles, and a
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $2.5 million write-off of software development costs previously capitalized as we ceased developing the related game titles because they were no longer considered economically
viable.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These expense increases were partially
offset by a



| |  |  | $15.2 million increase in the amount of software development costs capitalized because of the greater number of software titles under development that met the test of technological
feasibility (please see discussion of Capitalized Software Development Costs under Critical Accounting Policies).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Stock-based Compensation



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March 31, 2003



Stock-based compensation amounted to $1.1 million for the twelve months
ended March 31, 2004 representing the $0.76 per share market value of the 1.5 million shares of our common stock issued to an executive officer, for his appointment as CEO. The associated expense fluctuated with the market value of our common stock
until January 20, 2004, when our stockholders approved the issuance of the 1.5 million shares.



Restructuring



Restructuring charges consist of severance and other termination benefits, lease commitment costs, net of estimated sublease rental income, asset write-offs and other incremental costs associated with restructuring activities.



In December 2002 and January 2003, we restructured our operations in order
to lower our operating expenses and improve our operating cash flows. Under the plan, we closed our software development studio located in Salt Lake City, Utah, and reduced global administrative headcount. The studio closing was designed to achieve
financial efficiencies through consolidation of all our domestic internal product development. The closure of the development studio and reduction of our global administrative headcount reduced our overall headcount by approximately 100 employees
and resulted in initial restructuring charges of $4.8 million during fiscal 2003. The restructuring charges included accruals for employee termination costs, the write-off of certain fixed assets and leasehold improvements and the accrual of the
development studio lease commitment, which was net of estimated sub-lease rental income. During the fiscal year ended March 31, 2004, we recorded restructuring charges of $0.5 million due to the change in net present value of accrued restructuring
costs as well as an adjustment to our forecast of sub-lease rental income and interest. The development studio lease commitment expires in May 2007 and the employee severance agreements expired over various periods through April 2004.



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The following table presents the components of restructuring charges incurred for the fiscal year ended
March 31, 2004 and the seven months ended March 31, 2003 and the change in accrued restructuring charges from August 31, 2002 to March 31, 2003 and from March 31, 2003 to March 31, 2004.



(in thousands)



|                                                           |  |                                 |        |   |                                  |   |        |  
|---------------------------------------------------------- |  | ------------------------------- | ------ | - | -------------------------------- | - | ------ | -
|                                                           |  | Fiscal Year Ended March 31,2004 |        |   | Seven Months Ended March 31,2003 |  
|Accrued restructuring costs, beginning of period           |  | $                               | 2,299  |   |                                  | $ |       |  
|Charges                                                    |  |                                 |        |   |                                  |   |        |  
|Severance and other employee termination benefits          |  |                                 |       |   |                                  |   | 3,783  |  
|Lease commitment, net of estimated sub-lease rental income |  |                                 |       |   |                                  |   | 567    |  
|Asset write-offs                                           |  |                                 |       |   |                                  |   | 436    |  
|Other costs                                                |  |                                 |       |   |                                  |   | 38     |  
|                                                           |  |                                 |        |   |                                  |   |        |  
|Restructuring charges incurred and expensed                |  |                                 |       |   |                                  |   | 4,824  |  
|Adjustments to employee termination costs, lease costs     |  |                                 |        |   |                                  |   |        |  
|and estimated sub-lease rental income                      |  |                                 | 514    |   |                                  |   |       |  
|Less: costs paid                                           |  |                                 | (1,766 | ) |                                  |   | (2,525 | )
|                                                           |  |                                 |        |   |                                  |   |        |  
|Accrued restructuring costs, end of period                 |  | $                               | 1,047  |   |                                  | $ | 2,299  |  
|                                                           |  |                                 |        |   |                                  |   |        |  



Impairment on
Building Held for Sale



In February 2003, we recorded
an impairment charge of $2.1 million for a building which is being held for sale in the United Kingdom, to adjust its net carrying value to its fair value of $5.4 million, net of expected selling costs. On November 28, 2003, we entered into an
agreement for the sale and leaseback of the building. Under the terms of the agreement, the buyer purchased the building for $8.8 million (£4.9 million) and we contracted to lease the building for 15.5 years at an annual rent of $0.8 million
(£0.5 million), subject to adjustment.



Other Income and Expense



Interest Expense, Net



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March
31, 2003



Interest expense, net, was $5.4 million for the
twelve months ended March 31, 2004 (4% of net revenue) as compared to $5.0 million for the twelve months ended March 31, 2003 (2% of net revenue). The increase in interest expense, net, for the twelve months ended March 31, 2004 as compared to the
comparative prior year period is primarily due to $1.1 million of charges associated with our 9% and 16% convertible subordinated notes, (see Liquidity and Capital Resources), partially offset by a reduction of $0.7 million in charges
associated with lower borrowing from our primary lender and UK bank due to the decrease in revenue in the current year as compared to the prior year.



Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31, 2002



For the seven months ended March 31, 2003, interest expense, net, of $3.3 million (3% of net revenue) decreased by $0.8
million, or 20%, from $4.1 million (3% of net revenue) for the seven months ended March 31, 2002. The decrease was primarily due to reduced interest expense relating to our 10% convertible subordinated notes, which were repaid in March 2002.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, interest expense, net of $5.8 million (2% of net revenue)
decreased by $4.4 million, or 43%, from $10.2 million (5% of net revenue) for fiscal 2001. The decrease was primarily due to reduced interest



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expense relating to our 10% convertible subordinated notes, which were repaid in March 2002. Please see discussion under Liquidity and Capital
Resources.



Non-cash Financing Expense



Non-cash financing expense principally consists of
equity-based costs associated with debt financings which are generally amortized on a straight-line basis over the term of the related financing agreements.



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, non-cash financing expense amounted to $3.3 million (2% of net revenue) as
compared to $1.1 million (1% of net revenue) for the twelve months ended March 31, 2003. The increase relates primarily to costs of $2.5 million associated with the issuance of warrants to purchase 1.0 million shares of our common stock and the
4.0 million shares of common stock proposed to be issued to two of Acclaims major shareholders, who are also co-chairmen, as consideration for their deposit of $2.0 million with our primary lender (see Related Party Transactions)
as well as costs of $0.4 million associated with our 9% and 16% convertible subordinated notes (see 9% Notes and 16% Notes below under Liquidity and Capital Resources).



The cash deposit given to our primary lender by each of our co-chairmen was provided as a limited guarantee of our
obligations. The 4.0 million shares of common stock proposed to be issued are being revalued on a quarterly basis, pending stockholder approval of the share issuance. The $2.5 million expense during the twelve months ended March 31, 2004 is
comprised of the $0.9 million increase in market value of the shares as of March 31, 2004 as compared to their market value as of March 31, 2003 as well as amortization of the original $1.6 million market value. We will continue to revalue the
shares at each quarter-end, pending stockholder approval of the share issuance. Please see Note 15C (Debt: North American Credit Agreement) of the Notes to the Consolidated Financial Statements included herein.



Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31,
2002



For the seven months ended March 31, 2003, non-cash
financing expense of $0.8 million decreased by $0.4 million, or 36%, from $1.2 million for the seven months ended March 31, 2002. The decrease was due to a reduction of amortization associated with the fair value of warrants granted to our
co-chairmen in connection with providing our primary lender collateral for a supplemental discretionary loan our primary lender provided to us in fiscal 2002. Please see Note 15 (Debt) of the Notes to the Consolidated Financial Statements included
herein.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, non-cash financing expense of $1.5 million increased by
$1.2 million, or 330%, from $0.4 million for fiscal 2001. The increase was due to amortization associated with the fair value of warrants granted to our co-chairmen in connection with providing our primary lender collateral for a supplemental
discretionary loan our primary lender provided to us in October 2001 as well as amortization associated with the fair value of warrants granted to investors in connection with a junior participation financing in March 2001.



(Loss) Gain on Early Retirement of Debt



During the second quarter of fiscal 2002 we recorded a loss of $1.2 million
relating to the early retirement of $12.7 million in principal amount of our 10% convertible subordinated notes and the repayment of $0.6 million in accrued interest when we issued a total of 4.2 million shares of our common stock with a fair value
of $14.5 million.



During the third and fourth quarters of
fiscal 2001, we recorded a gain of $2.8 million related to the early retirement of $20.5 million in principal amount of the 10% convertible subordinated notes.



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Other Income (Expense)



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, other income (expense) amounted
to expense of $2.4 million as compared to expense of $0.6 million for the twelve months ended March 31, 2003. The change for the current year period relative to the comparable prior year period relates primarily to charges totaling $0.6 million from
net foreign currency transaction losses associated with the change in the purchase power of the British Pound Sterling versus the Euro, penalties of $0.7 million paid to the purchasers of our 16% convertible subordinated notes incurred because of
the late registration and effectiveness of the related registration statement as well as $0.9 million from the increase in fair value of the derivatives associated with our 16% convertible subordinated notes as of March 31, 2004.



Seven Months Ended March 31, 2003 Compared to Seven Months Ended March 31,
2002



For the seven months ended March 31, 2003, other
income (expense) amounted to income of $0.2 million as compared to expense of $0.8 million (0.5% of net revenue) for the seven months ended March 31, 2002. The $1.0 million expense decrease resulted primarily from a $1.0 million penalty we paid to
investors in the seven months ended March 31, 2002 relating to the July 2001 private placement because of a delay in the effectiveness of the registration statement we filed to register the issued common stock.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, other income (expense) amounted to an expense of $1.7
million (0.6% of net revenue) as compared to income of $1.7 million (0.9% of net revenue) for fiscal 2001. The larger components of the $3.4 million expense increase are:



| |  |  | $0.1 million of net foreign currency transaction losses associated with our international operations and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | $1.0 million paid to investors in the July 2001 private placement because of a delay in the effectiveness of the registration statement we filed to register the issued common stock.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Income Taxes



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March
31, 2003



Income tax provision decreased to $19,000 for
the twelve months ended March 31, 2004 as compared to a provision of $33,000 for the twelve months ended March 31, 2003. Although as of March 31, 2004 we had a significant U.S. tax net operating loss carryforward, we were not able to recognize a
benefit during the twelve months ended March 31, 2004 because of the underlying uncertainty as to whether we will be able to utilize the loss carryforward in the future.



As of March 31, 2004, we had a U.S. tax net operating loss carryforward of approximately $309.0 million, which expires in
fiscal years 2011 through 2024.



Seven Months Ended March
31, 2003 Compared to Seven Months Ended March 31, 2002



For the seven months ended March 31, 2003, income tax benefit of $0.2 million (0.1% of net revenue) decreased by $0.7 million, or 80%, from $0.9 million (1% of net revenue) for the seven months ended March 31, 2002. The higher income tax
benefit for the seven months ended March 31, 2002 resulted from a one-time foreign tax credit we received in connection with prior years.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, the income tax benefit was $0.7 million as compared to $0.1 million for fiscal 2001. The $0.6 increased benefit was due to a $0.8 million
foreign tax credit relating to previous years, partially offset by state and foreign taxes.



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Net Loss



Twelve Months Ended March 31, 2004 Compared to Twelve months Ended March 31, 2003



For the twelve months ended March 31, 2004, we reported a net loss of $56.4 million, or $0.53 per diluted share (based on
weighted average diluted shares outstanding of 106.3 million), as compared to a net loss of $84.8 million, or $0.92 per diluted share (based on weighted average diluted shares outstanding of 92.4 million) for the twelve months ended March 31, 2003.



Seven Months Ended March 31, 2003 Compared to Seven Months
Ended March 31, 2002



For the seven months ended March 31,
2003, we reported a net loss of $67.8 million, or $0.73 per diluted share (based on weighted average diluted shares outstanding of 92.6 million), as compared to net income of $12.4 million, or $0.14 per diluted share (based on weighted average
diluted shares outstanding of 86.0 million) for the seven months ended March 31, 2002.



Fiscal 2002 Compared to Fiscal 2001



For fiscal 2002, we reported a net loss of $4.5 million, or $0.05 per diluted share (based on weighted average diluted shares outstanding of 85.7 million), as compared to net earnings of $8.4 million (restated), or
$0.13 per diluted share (based on weighted average diluted shares outstanding of 66.6 million) for fiscal 2001.



Seasonality



Our business is highly seasonal. We typically experience our highest revenue and profits in the calendar year end holiday season, our third fiscal quarter
and a seasonal low in revenue and profits in our first fiscal quarter. The timing of when we deliver software titles and release new products can cause material fluctuations in quarterly revenue and earnings, which can cause operating results to
vary from the seasonal patterns of the industry as a whole. Please see Risk Factors: Revenue Varies Due to the Seasonal Nature of Video and Computer Game Software Purchases.



Liquidity and Capital Resources (In thousands, except per share data)



As of March 31, 2004, cash and cash equivalents were $1,148. During the
twelve months ended March 31, 2004, cash and cash equivalents decreased by $3,347 compared to a net decrease of $13,613 for the twelve months ended March 31, 2003. As of March 31, 2004, the working capital deficit of $110,941 increased by $38,515
from the $72,426 (restated) working capital deficit as of March 31, 2003. The increase in the working capital deficit during the twelve months ended March 31, 2004 resulted primarily from the $56,408 net loss in the period partially offset by
repayments of $7,820 for notes receivable and related accrued interest due from our Co-chairmen and net proceeds of $8,314 from our June 2003 private placement.



For the fiscal year ended March 31, 2004, we had a net loss of $56,408 and used $26,045 of cash in operating activities. As of March 31, 2004, we had a
stockholders deficit of $97,983, a working capital deficit of $110,941 and cash and cash equivalents of $1,148. Our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. Our
working capital and stockholders deficits as of March 31, 2004 and the recurring use of cash in operating activities raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.



Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with GMAC, our primary lender. As of March 31, 2004, GMAC had advanced to us a supplemental discretionary loan of
$2,000, which we repaid as of April 8, 2004.



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On May 4, 2004, GMAC and we amended our North American credit agreement to allow for a supplemental
discretionary loan of $3,000 and the termination of the North American and International credit agreements on June 20, 2004. On June 18, 2004, we entered into an Extension Agreement with GMAC which amended the Waiver and Amendment agreement signed
by us and GMAC on May 4, 2004. Under the Extension Agreement, GMAC has agreed to extend the date upon which our banking agreement with GMAC will terminate, from June 20, 2004 to August 4, 2004. Additionally, on May 4, 2004, we entered into a letter
of intent with a proposed new lender, for a $30,000 asset-based credit facility, with an equity component, to replace the credit agreement with GMAC. We are currently working with the proposed new lender in order to implement timely the new credit
facility which is subject to the execution of definitive documentation by both parties; however, there is no assurance that the new credit facility or any other facility will be consummated. Failure to obtain a new facility would materially
adversely affect our operations and liquidity and we could be forced to cease operations or seek bankruptcy protection.



During fiscal 2003, to enhance our short-term liquidity, we implemented targeted expense reductions through a business restructuring. In connection with
the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff
related expenses and lowered our overall marketing expenditures.



In February 2004, we completed the sale of our 9% senior convertible subordinated notes from which we raised gross proceeds of $15,000. In September and October 2003, we completed the sale of our 16% convertible subordinated notes,
resulting in gross proceeds of $11,863. As of June 22, 2004, subsequent to March 31, 2004 investors holding $5,463 of the 16% convertible subordinated notes had converted their notes into 9,584 shares of our common stock. As of June 29, 2004, we
were in default on our 16% convertible notes with respect to interest payments and late registration payments due under the notes. We are in continued discussions with the holders of the convertible notes and believe that we will be successful in
obtaining a waiver of those defaults; however, there can be no assurance that we will be successful in obtaining these waivers.



In June 2003, we completed a private placement of 16,383 shares of our common stock to a limited group of private investors, resulting in net proceeds to
us of $8,314.



Our future liquidity will significantly depend
in whole or in part on our ability to (1) timely replace by August 4, 2004 the current credit agreement with a new lender, (2) timely develop and market new software products that meet or exceed our operating plans, (3) continue to realize long-term
benefits from our implemented expense reductions, (4) resolve or obtain waivers for any defaults under our convertible note agreements and (5) continue to receive the support of certain key suppliers and vendors. If we do not timely implement the
new credit facility, substantially achieve our overall projected revenue levels as reflected in our business operating plan, continue to realize additional benefits from the expense reductions we have already implemented and continue to receive the
support of key suppliers and vendors, we will either need to make further significant expense reductions, including, without limitation, the sale of assets or the consolidation or closing of certain operations, additional staff reductions, and/or
the delay, cancellation or reduction of certain product development and marketing programs. Additionally, some of these measures may require third party consents or approvals from our primary lender and others, and there can be no assurance those
consents or approvals will be obtained.



If these measures are
not attained, we cannot assure our stockholders that our future operating cash flows will be sufficient to meet our operating requirements and debt service requirements. If any of the preceding events were to occur, our operations and liquidity
would be materially and adversely affected and we could be forced to cease operations or seek bankruptcy protection.



At various times we may depend on obtaining dividends, advances and transfers of funds from our subsidiaries. State and foreign laws regulate the payment
of dividends by these subsidiaries, which is also subject to the terms of our North American credit agreement. A significant portion of our assets, operations, trade



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payables and indebtedness is located among our foreign subsidiaries. The creditors of the subsidiaries would generally recover from these assets on the
obligations owed to them by the subsidiaries before any recovery by our creditors and before any assets are distributed to our stockholders.



Private Placements



9% Convertible Subordinated Notes



On February 17, 2004, (the Initial Closing Date) we raised gross proceeds of $15,000 (net proceeds of $14,250) in connection with the sale of
a 9% Senior Subordinated Convertible Notes (the 9% Notes), due in February 2007, to an investor. The 9% Notes are convertible into shares of our common stock, at a conversion price of $0.65 per share. Additionally, the investor received
warrants to purchase 4,615 shares of our common stock with an exercise price equal to $0.65 per share. The warrants are exercisable for five years from the Initial Closing Date.



Interest due on the 9% Notes is payable semi-annually commencing October 1, 2004. Upon conversion of the 9% Note the related
accrued and unpaid interest, if any, shall be paid in cash to the investor. The 9% Notes are collateralized by a second mortgage on our headquarters building, subject to our primary lenders (GMAC Commercial Finance LLP) consent and an
inter-creditor agreement to be entered into post-closing. We were required to deliver documentation of the security agreement and mortgage securing the 9% Notes by March 15, 2004. We delivered forms of such documentation prior to such date, after
which the holder of the 9% Notes agreed to waive the requirement to execute and file such documentation by March 15, 2004. The terms of the 9% Notes limit our incurrence of additional indebtedness and preclude the payment of cash dividends.



Commencing August 18, 2004, if the market value of our common
stock equals at least $1.625, which is periodically reduced to $0.975 by February 19, 2006, and other specific criteria are met, we have the right to redeem all or a portion of the 9% Notes at the outstanding principal balance of the 9% Notes plus
any related accrued interest. The investor has the right to require us to repurchase the 9% Notes in the event of a change in control of the Company, as defined in the agreement or if the 9% Note holder is unable to sell the shares underlying the 9%
Notes and related warrants for 135 nonconsecutive days out of 365 consecutive days after the effectiveness of the registration statement. The 9% Notes are subordinate to all our bank debt with our primary lender.



We have a first option, for a nine month period from February 17, 2004 (the
First Option Period), to require the investor to purchase $5,000 of additional 9% Notes (the First Additional 9% Notes) at a conversion price of $0.65 per share, if during that period the closing bid price of our common stock
exceeds $0.8125 per share for twenty consecutive trading days and our common stock continues to be listed on a qualified securities exchange. The investor also has the option, during the First Option Period, to purchase the First Additional 9% Notes
from us for $5,000.



We have a second option, for a six month
period commencing one year following the Initial Closing Date (the Second Option Period), to require the investor to purchase $5,000 of additional 9% Notes (the Second Additional 9% Notes) at a conversion price of $0.65 per
share, if during the three month period commencing February 17, 2005, the closing bid price of our common stock exceeds $1.30 per share for twenty consecutive trading days or if during the three month period commencing May 17, 2005, the closing bid
price of our common stock exceeds $0.975 per share for twenty consecutive trading days and our common stock continues to be listed on a qualified securities exchange. The investor also has the option, for an 18 month period commencing February 17,
2004, to purchase the Second Additional 9% Notes from us for $5,000.



In connection with any purchase of First Additional 9% Notes or Second Additional 9% Notes, the investor would receive additional warrants to purchase a number of shares of our common stock equal to 20% of the number of shares underlying
those additional notes, with an exercise price equal to $0.65 per share.



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Had we not registered the 9% Notes and all the common shares underlying the securities by August 17,
2004, the conversion price of the 9% Notes would have been reset to $0.60 per share. As a result, at issuance, the 9% Notes did not have a fixed conversion rate and are therefore not considered conventional convertible debt. The Form S-1
registration statement related to the 9% Notes and the common shares underlying the 9% Notes and the related warrants was declared effective on April 8, 2004 at which time the conversion rate was fixed at $0.65 per share. The 9% Notes agreement
requires us to use our commercially reasonable efforts to keep the registration statement effective until February 17, 2006. If, after the registration statement is effective, sales of securities cannot be made pursuant to the registration statement
for a period of 30 consecutive trading days for any reason, we must pay the investor liquidated damages of 1% per month of the purchase price of the 9% Notes.



16% Convertible Subordinated Notes



During September and October 2003, we raised gross proceeds of $11,863 (net proceeds of $11,329) in connection with the sale, to a limited group of
private investors, of our convertible subordinated notes (the 16% Notes), due in 2010. On November 12, 2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaqs opinion, the structure of our
September/October 2003 private offering of the 16% Notes was not in compliance with NASD Marketplace Rule 4350(i)(1)(d). The Note offering was structured in a manner we believe complied with Nasdaqs published rules. However, based upon
discussions and agreement with Nasdaq and the holders of the 16% Notes, in December 2003, we amended the terms of the 16% Notes to secure Nasdaqs agreement that the structure of the 16% Notes complied with their rules.



The amended 16% Notes were initially convertible into 13,262 shares of our
common stock, based upon a conversion price of $0.8945 per share. The conversion price is based upon the closing price of our common stock that Nasdaq advised us complied with its interpretation of market price as of the time of the 16%
Note offering. The terms of the Note agreements provided for an adjustment to the conversion rate, subject to stockholder approval. On January 20, 2004, our stockholders voted to authorize an adjustment of the conversion price to $0.57 per share, a
36% discount from the $0.8945 conversion price. Accordingly, the 16% Notes are convertible into 20,812 shares of our common stock. The interest rate on the 16% Notes is 16% per annum, due semi-annually on each of April 15 and October 15, commencing
April 15, 2004. The purchasers of the 16% Notes have also received warrants to purchase approximately 8,193 shares of our common stock, at an exercise price of $0.8945 per share, which exercise price was adjusted to $0.57 when stockholder approval
was obtained on January 20, 2004.



Subject to the consent of
the holders of any senior indebtedness and our common stock price closing at an average of $1.14 per share during a specified period, as defined in the agreement, we may, at our option, redeem the 16% Notes in whole but not in part on any date on or
after April 5, 2005, at a redemption price, payable in cash, equal to the outstanding principal amount of the 16% Notes plus accrued and unpaid interest thereon to the applicable redemption date if the requirements as documented in the agreement are
satisfied. In addition, subject to the consent of the holders of any senior indebtedness, the purchasers of the 16% Notes have a put option to require us to repurchase the 16% Notes at a redemption amount equal to the greater of the principal amount
of the 16% Notes plus accrued interest thereon, or the market value of the underlying stock, if we experience a change in control.



In the event our common stock price closes at $1.14 per share for 10 consecutive trading days, we have the right to require the holders of the warrants to
exercise the warrants in full, within 10 business days following notification of the forced exercise.



We agreed to file a registration statement to register the shares of our common stock underlying the 16% Notes and warrants by December 19, 2003 and that
the shares would be registered by January 26, 2004. The registration statement we filed became effective on April 8, 2004. Because the registration statement was not filed by December 19, 2003 nor effective by January 26, 2004, we incurred penalties
to the purchasers of $712, which amount was included in other expense for the fiscal year ended March 31, 2004. The $356 unpaid balance of those penalties was included in accrued expenses as of March 31, 2004.



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As of June 29, 2004, we were in default on our 16% convertible notes with respect to interest payments
and late registration payments due under the notes. We are in continued discussions with the holders of the convertible notes and believe that we will be successful in obtaining a waiver of those defaults; however, there can be no assurance that we
will be successful in obtaining these waivers. Due to our default under the 16% Notes, for which we are seeking waivers, we have classified the 16% Notes as short-term debt as of March 31, 2004.



June 2003 Equity Offering



In June 2003, we received net proceeds of $8,314 from a private placement of
16,383 shares of our common stock at prices ranging from $0.50 to $0.60 per share. The per share price represented an approximate 20% discount to the then recent public trading price of our common stock. In August 2003, our registration statement
covering the shares of common stock issued in the offering became effective. Based on the purchase agreement, we were obligated to pay each investor an amount equal to 1% of the purchase price paid for the shares for every 30-day period which passed
commencing August 3, 2003 that the registration statement was not declared effective. Because the registration statement was declared effective subsequent to August 3, 2003, we recorded a charge of $90 which is included in other income (expense) for
the twelve months ended March 31, 2004 and accrued expenses as of March 31, 2004.



On January 24, 2003, we received a letter from The Nasdaq Stock Market, Inc. stating that, because our common stock had not closed at or above the minimum $1.00 per share bid price requirement for 30 consecutive
trading days, we had not met the minimum bid price requirements for continued listing as set forth in Marketplace Rule 4310(c)(4), and we had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in
accordance with Marketplace Rule 4310(c)(8)(D) we were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the minimum bid requirement.



On January 21, 2004, we received a letter from Nasdaq indicating that the Company had been granted an extension, until
January 24, 2005, within which to regain compliance with the minimum $1.00 bid price per share requirement of The Nasdaq SmallCap Market. In the notice, the Nasdaq staff noted that since the Company meets the initial inclusion criteria for The
Nasdaq SmallCap Market under Marketplace Rule 4310(c), it is eligible for this additional compliance period. However, if prior to January 24, 2005, the bid price of the Companys common stock does not close at $1.00 per share or more for a
minimum of 10 consecutive trading days, then the Company is required to (1) seek shareholder approval for a reverse stock split at or before its next shareholder meeting and (2) promptly thereafter effectuate the reverse stock split. The Company has
committed in writing to Nasdaq to effectuate those measures in the event compliance is not achieved prior to January 24, 2005. If at any time before January 24, 2005, the bid price of the Companys common stock closes at $1.00 per share or more
for a minimum of 10 consecutive trading days, the Nasdaq staff will provide notification that the Company complies with Marketplace Rule 4310(c)(8)(D). The Company cannot provide any assurance that it will receive an affirmative vote of its
stockholders authorizing a reverse stock split, if required, nor that the Company will regain compliance with the minimum bid price requirement.



Please see discussion regarding our North American credit agreement below as well as in Note 15 (Debt) of the notes to the audited consolidated financial
statements for the twelve months ended March 31, 2004 included herein. Please also see Risk Factors: Our Ability to Meet Cash Requirements and Maintain Necessary Liquidity Rests in Part on the Cooperation of our Primary Lender and Vendors
and Our Ability to Achieve Our Projected Revenue Levels and Reduce Operating Expenses.



Credit Agreements



We and GMAC, our primary lender, are parties to North American credit and factoring agreements. Pursuant to a May 4, 2004 amendment and a June 18, 2004
extension of those agreements, they will terminate on August 4, 2004.



On May 4, 2004, we entered into a letter of intent with a proposed new lender for a $30,000 asset-based credit facility, with an equity component, to replace the current credit agreement. We are working



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with the proposed new lenders in order to implement a new facility which is subject to the execution of definitive documentation by both parties. However, we
cannot provide any assurance that the agreement will be executed. If we are unable to replace the North American credit and factoring agreements (please see Factoring Agreement and North American Credit
Agreement below) with a new facility provided by a proposed new lender, we will need to secure financing from another lender. We cannot assure investors that we would be able to secure such an arrangement in a timely and cost effective
manner, if at all. If we failed to secure financing with another financial institution, we could become insolvent, liquidated or reorganized, after payment of the outstanding balances due first to our primary lender and then to our other creditors,
leaving insufficient assets remaining for distribution to stockholders.



Pursuant to the terms of the current North American credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other financial covenants. As of March 31, 2004, while we were not in
compliance with those financial covenants, we received waivers from our primary lender regarding our non-compliance.



Factoring Agreement



Under the current factoring agreement, which will terminate on August 4, 2004, we assign to our primary lender and our primary lender purchases from us,
our U.S. accounts receivable. Our primary lender remits payments to us for the assigned U.S. accounts receivable that are within the financial parameters set forth in our factoring agreement. Those financial parameters include requirements that
invoice amounts meet approved credit limits and that the customer does not dispute the invoices. The purchase price of our accounts receivable that we assign to our factor equals the invoiced amount, which is adjusted for any returns, discounts and
other customer credits or allowances. Please see Note 4 (Accounts Receivable) of the Notes to the Consolidated Financial Statements included herein.



Before our primary lender purchases our U.S. accounts receivable and remits payment to us for the purchase price, it may, in its discretion, provide us
cash advances under our North American credit agreement (please see discussion below) taking into account the assigned receivables due from our customers which it expects to purchase, among other factors. As of March 31, 2004, our primary lender was
advancing us 60% of the eligible receivables due from our retail customers. The factoring charge of 0.25% of assigned accounts receivable, with invoice payment terms of up to 60 days and an additional 0.125% for each additional 30 days or portion
thereof, is recorded in interest expense. Additionally, our factor, utilizing an asset based borrowing formula, advances us cash equal to 50% of our inventory that is not in excess of 60 days old.



North American Credit Agreement



Advances to us under the current North American credit agreement, which will
terminate on August 4, 2004, bear interest at 1.50% per annum above our primary lenders prime rate (5.50% as of March 31, 2004).



Borrowings that our primary lender may provide us in excess of an availability formula bear interest at 2.00% above our primary lenders prime rate.
Under the North American credit agreement, we may not borrow more than $12,500 or the amount calculated using the availability formula plus a $3,000 supplemental discretionary loan, whichever is less. Our primary lender has secured all of our
obligations under the North American credit agreement with substantially all of our assets.



There were advances outstanding within the standard borrowing formula under the North American credit agreement of $5,006 as of March 31, 2004, and $13,654 (restated) as of March 31, 2003.



Supplemental Bank Loans



Pursuant to the May 4, 2004 amendment to our credit agreement as amended on
June 18, 2004 our primary lender agreed to provide an additional supplemental discretionary loan of $3,000 that, if advanced to us, would be required to be repaid on August 4, 2004, upon the termination of the credit agreement.



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In December 2003, our North American credit agreement was amended to allow for a supplemental
discretionary loan of up to $4,000 from December 16, 2003 thru December 31, 2003, up to $5,000 from January 1, 2004 through January 31, 2004, up to $3,000 from February 1, 2004 through February 29, 2004, up to $2,000 from March 1, 2004 through
March 31, 2004, and up to $1,000 from April 1, 2004 through April 30, 2004. As of March 31, 2004, a supplemental discretionary loan of $2,000 was outstanding. As of April 8, 2004, the supplemental discretionary loan was repaid.



On March 31, 2003, our North American credit agreement was amended which
allowed us to borrow supplemental discretionary loans of $11,000 through May 31, 2003, which thereafter was reduced to $5,000 through September 29, 2003 above the standard formula for short-term funding. In accordance with the terms of the amended
credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6,000 of the supplemental discretionary loan and as of September 26, 2003, we repaid the remaining $5,000. As a condition precedent to our primary
lender entering into the amendment, two of our major shareholders, who are also executive officers, otherwise referred to as the Affiliates, pledged an aggregate cash deposit of $2,000 with our primary lender in order to provide a limited guarantee
of our obligations. Our primary lender returned the cash deposit to the Affiliates on September 26, 2003 concurrently with our repayment of the supplemental discretionary loan. As consideration to the Affiliates for making the deposit, and based
upon the advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit Committee approved and the Board of Directors authorized the issuance to each Affiliate 2,000 shares of our common stock with a
then aggregate market value of $1,560 ($2,480 as of March 31, 2004) and a warrant to purchase 500 shares of our common stock at an exercise price of $0.50 per share with an aggregate fair value of $305.



A supplemental discretionary loan of $2,000 was outstanding as of March 31,
2004 and $11,000 was outstanding as of March 31, 2003.



If we
do not implement the new credit facility, substantially achieve our overall projected revenue levels as reflected in our business operating plan, continue to realize additional benefits from the expense reductions we have already implemented and
continue to receive the support of key suppliers and vendors, we will either need to make further significant expense reductions, including, without limitation, the sale of assets or the consolidation or closing of certain operations, additional
staff reductions, and/or the delay, cancellation or reduction of certain product development and marketing programs. Additionally, some of these measures may require third party consents or approvals from our primary lender and others, and there can
be no assurance those consents or approvals will be obtained.



If these measures are not attained, we cannot assure our stockholders that our future operating cash flows will be sufficient to meet our operating requirements and debt service requirements. If any of the preceding events were to occur,
our operations and liquidity would be materially and adversely affected and we could be forced to cease operations.



International Lease Commitment, Credit Facility and Factoring Agreements



We, through Acclaim Entertainment, Ltd., our U.K. subsidiary, and GMAC Commercial Credit Limited, our U.K. bank and an
Affiliate of our primary lender, were parties to a seven-year term secured credit facility we entered into in March 2000, related to our purchase of a building in the U. K. On November 28, 2003, we entered into an agreement for the sale and
leaseback of the building. Under the terms of the agreement, the buyer purchased the building for $8,849 (£4,888) and we contracted to lease the building for 15.5 years at an annual rent of $832 (£460), subject to adjustment. As of March
31, 2004, we classified the cash we received from the buyer of $6,964 (£3,848) as a deposit payable in accrued expenses. Of the deposit received, $4,719 (£2,783) was used to repay the outstanding balance of the mortgage payable and
related interest associated with the building. As of March 31, 2004, the net carrying value of the building was $6,336 (£3,448). Please see Note 8 (Building Held for Sale) of the Notes to the Consolidated Financial Statements included herein.



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Several of our international subsidiaries are parties to international receivable factoring facilities
with our U.K. bank. On June 18, 2004, the receivables facility with our U.K. bank was amended to terminate on August 4, 2004. We are actively pursuing an alternative facility with another bank. Under the current facilities, our international
subsidiaries assign the majority of their accounts receivable to the U.K. bank, on a full recourse basis. Under the facilities, upon receipt by the U.K. bank of confirmation that our subsidiary has delivered product to our customers and remitted the
appropriate documentation to the U.K. bank, the U.K. bank remits payments to our subsidiary, net of discounts and administrative charges.



Under the current international receivable facilities, we can obtain financing of up to the lesser of approximately $17,250 (£9,750) or 60% of the
aggregate amount of eligible receivables from our international operations. The amounts we borrow under the international facility bear interest at 2.00% per annum above LIBOR (5.06% as of March 31, 2004). Our U.K. bank has secured the international
facility with the accounts receivable and assets of our international subsidiaries that participate in the facility. We had an outstanding balance under the international facility of $653 as of March 31, 2004.



In September 2003, a French bank advanced our local subsidiary $1,009 based
on the outstanding balances of selected accounts receivable invoices. Customer payments of those invoices made directly to the French bank have been and will be applied to repay the outstanding loan. As of March 31, 2004, the full amount of the
advances had been repaid. Our French subsidiary retains the credit risk for the invoices and therefore will cover any customer collection shortfall. The borrowed funds bore interest at 1.30% per annum above the one month EURIBOR rate.



In February 2004, a French bank advanced our local subsidiary $972 based on
the outstanding balances of selected accounts receivable invoices. Customer payments of those invoices made directly to the French bank will be applied to repay the outstanding loan. As of March 31, 2004, the full amount borrowed was outstanding.
Our French subsidiary retains the credit risk for the invoices and therefore will cover any customer collection shortfall. The borrowed funds bore interest at 1.30% per annum above the one month EURIBOR rate (3.34% as of March 31, 2004).



Bank Participation Advance



In March 2001, our primary lender entered into junior participation
agreements with some investors. As a result of the participation agreements, our primary lender advanced us $9,500 for working capital purposes. We are required to repay the $9,500 bank participation advance to our primary lender upon the earlier to
occur of the termination of the North American credit agreement, currently August 4, 2004, or March 12, 2005. Our primary lender is required to purchase the participation agreements from the investors on the earlier to occur of March 12, 2005, or
the date we repay all amounts outstanding under the North American credit agreement and the agreement is terminated. If we were not able to repay the bank participation advance, the junior participants would have subordinated rights assigned to them
under the North American credit agreement for the unpaid balance.



Commitments (in thousands)



We
generally purchase our inventory of Nintendo software by opening letters of credit when placing the purchase order. As of March 31, 2004, we had $6,526 outstanding under letters of credit. Approximately $185 as of March 31, 2004 of our trade
accounts payable balances were collateralized under outstanding letters of credit.



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As of March 31, 2004, our future contractual cash obligations were as follows:



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|---------------------------------- |  | ------------------- | ------ | ------ | - | --------- |  | -------- | ------ | ------------ | - | ----- |  | - | -----
|                                   |  | Payments Due Within
|Contractual Obligations            |  | Total               |        | 1 year |   | 2-3 years |  | 4-5years |        | Over 5 years
|Debt                               |  | $                   | 40,581 |        | $ | 40,581    |  | $        |       |              | $ |      |  | $ |     
|Capital lease obligations          |  |                     | 778    |        |   | 538       |  |          | 240    |              |   |      |  |   |     
|Operating lease obligations        |  |                     | 19,435 |        |   | 3,894     |  |          | 5,013  |              |   | 1,798 |  |   | 8,730
|Developer/Licensor commitments(1)  |  |                     | 38,250 |        |   | 30,878    |  |          | 7,372  |              |   |      |  |   |     
|                                   |  |                     |        |        |   |           |  |          |        |              |   |       |  |   |      
|Total contractual cash obligations |  | $                   | 99,044 |        | $ | 75,891    |  | $        | 12,625 |              | $ | 1,798 |  | $ | 8,730
|                                   |  |                     |        |        |   |           |  |          |        |              |   |       |  |   |      

---

|(1) |  | Of total developer/licensor commitments, $ 14,352 was included in current liabilities as of March 31, 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------



New Accounting Pronouncements



In April 2003, the Financial Accounting Standards Board (FASB) determined
that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB plans to issue an accounting standard that would become effective in
2005. We will continue to monitor communications on this subject from the FASB in order to determine the impact on our consolidated financial statements.



In December 2003, the FASB issued a revised version of FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FIN 46, Consolidation of
Variable Interest Entities, which was issued in January 2003. We were required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For our variable interests in VIEs created before January 1, 2004, the
Interpretation was effective beginning on March 31, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at
their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. We do not currently have any variable interest entities and thus the implementation of FIN 46 had no
impact on our consolidated financial statements.



In May 2003,
the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability, or as an asset in some
circumstances. This Statement applies to three types of freestanding financial instruments, other than outstanding shares. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or assets;
a second type includes put options and forward purchase contracts that require or may require the issuer to buy back some of its shares in exchange for cash or other assets; the third type is obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers shares. SFAS No. 150 does not apply to features embedded in a financial instrument that are not a
derivative in their entirety.



SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 with one exception, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement during the second quarter of
fiscal 2004 did not have an impact on our consolidated financial statements.



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Related Party Transactions



(Amounts in thousands, except per share data)



Fees for services



We pay sales commissions to a firm, which is owned and controlled by one of our executive officers, who is also a director and a principal stockholder.
The firm earns these sales commissions based on the amount of our software sales the firm generates. Commissions earned by the firm amounted to $(3) for the fiscal year ended March 31, 2004, $279 for the seven months ended March 31, 2003, $315 for
the seven months ended March 31, 2002, $535 for fiscal 2002 and $330 for fiscal 2001. We owed the firm $255 as of March 31, 2004 and $498 as of March 31, 2003.



During previous fiscal years, we received legal services from two law firms of which two members of our Board of Directors are partners. We incurred
fees from one of those firms of $640 for the fiscal year ended March 31, 2004 and $528 for the seven months ended March 31, 2003. We incurred fees from both firms of $318 for the seven months ended March 31, 2002, $644 for fiscal 2002 and $665 for
fiscal 2001. We owed fees of $419 as of March 31, 2004 and $353 as of March 31, 2003 to one of the firms.



We incurred investment-banking fees totaling $284 for fiscal 2001 from a broker-dealer of which an individual on our Board of Directors is a member. We
owed the broker-dealer $104 as of August 31, 2001 which we paid during fiscal 2002.



Notes receivable



In October 2002, we loaned a senior executive in the UK $300 under a promissory note for the purpose of purchasing a new residence. Our Compensation Committee of the Board of Directors approved the terms and provisions of the loan in April
2002. The promissory note bears interest at a rate of 6.00% per annum. Security for the repayment of the promissory note is a mortgage on the executives principal residence. The maturity date of the note is November 1, 2005. In May 2003, in
accordance with the notes original terms, 50% of the loan was forgiven. An additional 25% will be forgiven in each of October 2004 and October 2005 so long as the executive remains employed with Acclaim. If the executive voluntarily leaves the
employment of Acclaim or is terminated for cause, at any time prior to the maturity date of the note, the executive must repay a pro-rata portion of the unpaid principal balance of the loan plus accrued and unpaid interest thereon. We are recording
compensation expense for the principal balance of the loan over the periods that each portion will be forgiven. Accordingly, we expensed $145 during the fiscal year ended March 31, 2004 and $133 during the seven months ended March 31, 2003. The
portion of the principal balance under the loan not expensed was $22 as of March 31, 2004 and $167 as of March 31, 2003, which was included in other receivables.



In February 2002, relating to an officers employment agreement, we loaned one of our executive officers $300 under a
promissory note for the purpose of purchasing a new residence. The promissory note bore interest at a rate of 6.00% per annum, which was due by December 31st of each year the promissory note remained outstanding. In January 2003, in connection with
terminating the officers employment and in accordance with the officers employment agreement, we forgave and expensed as compensation the unpaid principal balance and related accrued interest of $302.



In October 2001, we issued a total of 1,125 shares of our common stock to two
of our executive officers when they exercised their warrants with an exercise price of $3.00 per share. For the shares we issued, we received cash of $23 for their par value and two promissory notes totaling $3,352 for the unpaid portion of the
exercise price of the warrants. The principal amount and accrued interest were due and payable on August 31, 2003. The notes provided us full recourse against the officers assets. The notes bore interest at our primary lenders prime rate
plus 1.50% per annum. As of September 26, 2003, the two executive officers had fully repaid



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the principal balance and related accrued interest under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,352,
classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on the notes amounted to $324, included in other receivables.



In July 2001, we issued a total of 1,500 shares of our common stock to two of our executive officers when they exercised
their warrants with an exercise price of $2.42 per share. For the shares issued, we received cash of $30 for their par value and two promissory notes totaling $3,595 for the unpaid portion of the exercise price of the warrants. The principal amount
and accrued interest were due and payable on August 31, 2003 and bore interest at our primary lenders prime rate plus 1.50%. In June 2003, the two executive officers repaid in full the principal amount of the notes of $3,595 and all related
accrued interest of $464 then outstanding under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,595, classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on
the notes amounted to $426, included in other receivables.



In
August 2000, relating to an officers employment agreement, we loaned one of our officers $200 under a promissory note. The note bears no interest and must be repaid on the earlier to occur of the sale of the officers personal residence
or August 24, 2004. Based on the officers employment agreement, we were to forgive the loan at a rate of $25 for each year the officer remained employed with us up to a maximum of $100. Accordingly, in fiscal 2001, we expensed $25 and reduced
the officers outstanding loan balance. In May 2002, relating to a separation agreement with the officer, we forgave and expensed another $75. In May 2003, the former officer repaid the balance of $100 outstanding under the loan. As of March
31, 2003, the balance outstanding under the loan, included in other assets, was $100.



In August 1998, relating to an officers employment agreement, we loaned one of our officers $500 under a promissory note. We reduced the note balance by $50 in August 1999, relating to the officers
employment agreement, and by $200 in January 2000 relating to the employees termination. The note bore no interest and was required to be repaid on the earlier to occur of the sale or transfer of the former officers personal residence or
August 11, 2003. In December 2003, we collected $150 of the outstanding note and, as a result of our forgiving repayment of the balance, expensed the remaining $100. As of March 31, 2003, $250 was outstanding under the note and was included in other
receivables.



In April 1998, relating to an officers
employment agreement, we loaned one of our executive officers $200 under a promissory note. The note bore interest at our primary lenders prime rate plus 1.00% per annum. The balance outstanding under the loan, included in other receivables,
was $302 as of March 31, 2003 (including accrued interest of $102) and was repaid in April 2003.



Consideration for Collateral and Borrowings



Two of our major shareholders, who are also executive officers, otherwise referred to as the Affiliates, pledged an aggregate cash deposit of $2,000 with
our primary lender in order to provide a limited guarantee of our obligations. Our primary lender returned the cash deposit to the Affiliates on September 26, 2003 concurrently with our repayment of the supplemental discretionary loan. As
consideration to the Affiliates for making the deposit, and based upon the advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit Committee approved and the Board of Directors authorized the
issuance to each Affiliate 2,000 shares of our common stock with a then aggregate market value of $1,560 ($2,480 as of March 31, 2004) and a warrant to purchase 500 shares of our common stock at an exercise price of $0.50 per share with an aggregate
fair value of $305. Also, in January or February 2004, each of the Affiliates advanced us $125, which was repaid without interest in February, 2004.



Warrant Grants and Other Equity Transactions



In June 2004, the Affiliates purchased a total of 2,412 shares of our common stock at $0.35 per share, the prior day closing price per share of our common
stock as reported by Nasdaq.



55



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##### Table of Contents

In October 2001, we issued to the Affiliates warrants to purchase a total of 1,250 shares of our common
stock at an exercise price of $2.88 per share, the fair market value of our common stock on the grant date. We issued the warrants to the Affiliates in consideration for their services and personal pledge of 1,250 shares of our common stock to our
primary lender, as additional security for our supplemental discretionary loans.



In March 2001, relating to a loan participation between our primary lender and junior participants, we issued investors in the junior participation five-year warrants to purchase an aggregate of 2,375 shares of our
common stock exercisable at a price of $1.25 per share, which included a total of 1,375 warrants we issued to some of our executive officers and to one of the directors of our Board. For information regarding the junior participation, please see
Note 15 (Debt) of the Notes to the Consolidated Financial Statements included herein. The fair value of the warrants of $1,751, based on the Black-Scholes option pricing model, was recorded as a deferred financing cost. We amortized the balance as a
non-cash financing expense evenly over two and one-half years through August 31, 2003, the date on which the North American credit agreement was to terminate.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk.



We have not entered into any financial instruments for trading or hedging purposes.



Our results of operations are affected by fluctuations in the value of our subsidiaries functional currency as
compared to the currencies of our foreign denominated sales and purchases. Our subsidiaries results of operations, as reported in U.S. dollars, may be significantly affected by fluctuations in the value of the local currencies in which they
transact business. We record the effect of foreign currency transactions when we translate the foreign subsidiaries financial statements into U.S. dollars and when foreign subsidiaries record those transactions in their local books of record.
The effect on our results of operations of fluctuations in foreign currency exchange rates depends on the various foreign currency exchange rates and the magnitude of the foreign currency transactions.



We had a cumulative foreign currency translation loss of $2,201 as of March
31, 2004 and $1,795 as of March 31, 2003, which is included in accumulated other comprehensive loss in our statements of stockholders equity (deficit). We recorded net foreign currency transaction losses of $628 for the twelve months ended
March 31, 2004, $135 for the twelve months ended March 31, 2003, $127 for the seven months ended March 31, 2002, $337 for fiscal 2002, and $249 for fiscal 2001. We recorded net foreign currency transaction gains of $75 for the seven months
ended March 31, 2003.



In addition to the direct effects of
changes in exchange rates, which are a changed dollar value of the resulting sales and related expenses, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors products become more or less
attractive.



We have interest rate risk related to our variable
interest rate debt outstanding under our North American and International credit agreements. Please see Note 15 (Debt) of the Notes to the Consolidated Financial Statements included herein.



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##### Table of Contents

|Item |  | 8.Financial Statements and Supplementary Data.
|---- |  | ----------------------------------------------



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Acclaim Entertainment, Inc.



We have audited the accompanying consolidated balance sheets of Acclaim
Entertainment, Inc. and Subsidiaries (the Company) as of March 31, 2004 and March 31, 2003, and the related consolidated statements of operations, stockholders (deficit) equity and cash flows for the year ended March 31, 2004, the
seven months ended March 31, 2003 and each of the years in the two-year period ended August 31, 2002. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for the year ended
March 31, 2004, the seven months ended March 31, 2003 and each of the years in the two-year period ended August 31, 2002. These consolidated financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Acclaim Entertainment, Inc. and Subsidiaries as of March 31, 2004 and March 31, 2003 and the results of their operations and their cash flows for the
year ended March 31, 2004, the seven months ended March 31, 2003 and each of the years in the two-year period ended August 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion,
the related 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.



The accompanying financial statements and financial statement schedule have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 1A to the consolidated financial statements, the Companys working capital and stockholders deficits as of March 31, 2004 and recurring use of
cash in operating activities raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1A. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



As discussed in Note 2 to the accompanying consolidated financial statements, the consolidated balance sheet as of March 31, 2003 and the consolidated statements of stockholders (deficit) equity for the seven months ended March 31,
2003 and each of the years in the two-year period ended August 31, 2002, the consolidated statement of cash flows for each of the years in the two-year period ended August 31, 2002 and consolidated statement of operations for the year ended August
31, 2001 have been restated.



|                                 |  |         
|-------------------------------- |  | --------
|New York, New York June 29, 2004 |  | KPMG LLP



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                           |  |                |          |   |                |   |          |  
|---------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | -
|                                                                                                           |  | March 31, 2004 |          |   | March 31, 2003 |  
|                                                                                                           |  |               
|                                                                                                           |  |                |          |   | (Restated)     |  
|ASSETS                                                                                                     |  |                |          |   |                |   |          |  
|Current Assets                                                                                             |  |                |          |   |                |   |          |  
|Cash and cash equivalents                                                                                  |  | $              | 1,148    |   |                | $ | 4,495    |  
|Accounts receivable, net                                                                                   |  |                | 12,156   |   |                |   | 24,303   |  
|Other receivables                                                                                          |  |                | 802      |   |                |   | 3,360    |  
|Inventories                                                                                                |  |                | 5,739    |   |                |   | 7,711    |  
|Prepaid expenses and other current assets                                                                  |  |                | 5,785    |   |                |   | 7,076    |  
|Capitalized software development costs, net                                                                |  |                | 119      |   |                |   | 6,944    |  
|Building held for sale                                                                                     |  |                | 6,336    |   |                |   | 5,424    |  
|                                                                                                           |  |                |          |   |                |   |          |  
|Total Current Assets                                                                                       |  |                | 32,085   |   |                |   | 59,313   |  
|Fixed assets, net                                                                                          |  |                | 14,845   |   |                |   | 19,731   |  
|Other assets                                                                                               |  |                | 408      |   |                |   | 893      |  
|                                                                                                           |  |                |          |   |                |   |          |  
|Total Assets                                                                                               |  | $              | 47,338   |   |                | $ | 79,937   |  
|                                                                                                           |  |                |          |   |                |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                      |  |                |          |   |                |   |          |  
|Current Liabilities                                                                                        |  |                |          |   |                |   |          |  
|Convertible notes                                                                                          |  | $              | 20,327   |   |                | $ |         |  
|Short-term borrowings                                                                                      |  |                | 20,792   |   |                |   | 40,299   |  
|Trade accounts payable                                                                                     |  |                | 33,469   |   |                |   | 28,477   |  
|Accrued expenses                                                                                           |  |                | 47,264   |   |                |   | 28,181   |  
|Accrued selling expenses                                                                                   |  |                | 15,087   |   |                |   | 26,649   |  
|Accrued stock-based expenses                                                                               |  |                | 3,620    |   |                |   |         |  
|Accrued restructuring costs                                                                                |  |                | 1,047    |   |                |   | 2,299    |  
|Mortgage payable                                                                                           |  |                |         |   |                |   | 4,600    |  
|Income taxes payable                                                                                       |  |                | 1,420    |   |                |   | 1,234    |  
|                                                                                                           |  |                |          |   |                |   |          |  
|Total Current Liabilities                                                                                  |  |                | 143,026  |   |                |   | 131,739  |  
|Long-Term Liabilities                                                                                      |  |                |          |   |                |   |          |  
|Obligations under capital leases                                                                           |  |                | 240      |   |                |   | 632      |  
|Other long-term liabilities                                                                                |  |                | 2,055    |   |                |   | 2,654    |  
|                                                                                                           |  |                |          |   |                |   |          |  
|Total Liabilities                                                                                          |  |                | 145,321  |   |                |   | 135,025  |  
|                                                                                                           |  |                |          |   |                |   |          |  
|Stockholders Deficit                                                                                      |  |                |          |   |                |   |          |  
|Preferred stock, $0.01 par value; 1,000 shares authorized; none issued                                     |  |                |         |   |                |   |         |  
|Common stock, $0.02 par value; 300,000 shares authorized; 109,419 and 96,621 shares issued and outstanding |  |                | 2,188    |   |                |   | 1,932    |  
|Additional paid-in capital                                                                                 |  |                | 327,279  |   |                |   | 313,616  |  
|Accumulated deficit                                                                                        |  |                | (425,249 | ) |                |   | (368,841 | )
|Accumulated other comprehensive loss                                                                       |  |                | (2,201   | ) |                |   | (1,795   | )
|                                                                                                           |  |                |          |   |                |   |          |  
|Total Stockholders Deficit                                                                                |  |                | (97,983  | ) |                |   | (55,088  | )
|                                                                                                           |  |                |          |   |                |   |          |  
|Total Liabilities and Stockholders Deficit                                                                |  | $              | 47,338   |   |                | $ | 79,937   |  
|                                                                                                           |  |                |          |   |                |   |          |  



See notes to
consolidated financial statements.



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##### Table of Contents

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|--------------------------------------- |  | ------------------------------ | -------------- | - | ------------------ | -------------- | ------- | ------------------ | --------------- | - | ------- | --------------- |  | ---------- | ------- | - |  | - | ------- | -
|                                        |  | Fiscal Year EndedMarch 31,2004 |                |   | Seven Months Ended |                |         | Fiscal Years Ended |                
|                                        |  |                                | March 31, 2003 |   |                    | March 31, 2002 |         |                    | August 31, 2002 |   |         | August 31, 2001 | 
|                                        |  |                                |                |   |                    |                |         | (Unaudited)        |                 |   |         |                 |  | (Restated) |        
|                                        |  |                                |                |   |                   
|Net revenue                             |  | $                              | 142,679        |   |                    | $              | 101,589 |                    |                 | $ | 160,188 |                 |  | $          | 268,688 |   |  | $ | 188,068 |  
|Cost of revenue                         |  |                                | 78,598         |   |                    |                | 76,507  |                    |                 |   | 62,891  |                 |  |            | 118,386 |   |  |   | 62,023  |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|Gross profit                            |  |                                | 64,081         |   |                    |                | 25,082  |                    |                 |   | 97,297  |                 |  |            | 150,302 |   |  |   | 126,045 |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|Operating expenses                      |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|Marketing and selling                   |  |                                | 32,183         |   |                    |                | 32,295  |                    |                 |   | 30,132  |                 |  |            | 57,892  |   |  |   | 31,631  |  
|General and administrative              |  |                                | 37,308         |   |                    |                | 24,470  |                    |                 |   | 25,165  |                 |  |            | 43,374  |   |  |   | 40,269  |  
|Research and development                |  |                                | 38,129         |   |                    |                | 25,392  |                    |                 |   | 23,133  |                 |  |            | 44,139  |   |  |   | 39,860  |  
|Stock-based compensation                |  |                                | 1,140          |   |                    |                | 79      |                    |                 |   |        |                 |  |            |        |   |  |   |        |  
|Restructuring charges                   |  |                                | 514            |   |                    |                | 4,824   |                    |                 |   |        |                 |  |            |        |   |  |   |        |  
|Impairment on building held for sale    |  |                                |               |   |                    |                | 2,146   |                    |                 |   |        |                 |  |            |        |   |  |   |        |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|Total operating expenses                |  |                                | 109,274        |   |                    |                | 89,206  |                    |                 |   | 78,430  |                 |  |            | 145,405 |   |  |   | 111,760 |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|(Loss) earnings from operations         |  |                                | (45,193        | ) |                    |                | (64,124 | )                  |                 |   | 18,867  |                 |  |            | 4,897   |   |  |   | 14,285  |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|Other income (expense)                  |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|Interest expense, net                   |  |                                | (5,420         | ) |                    |                | (3,317  | )                  |                 |   | (4,119  | )               |  |            | (5,765  | ) |  |   | (10,172 | )
|Non-cash financing expense              |  |                                | (3,330         | ) |                    |                | (756    | )                  |                 |   | (1,182  | )               |  |            | (1,504  | ) |  |   | (350    | )
|(Loss) gain on early retirement of debt |  |                                |               |   |                    |                |        |                    |                 |   | (1,221  | )               |  |            | (1,221  | ) |  |   | 2,795   |  
|Other (expense) income                  |  |                                | (2,446         | ) |                    |                | 201     |                    |                 |   | (843    | )               |  |            | (1,660  | ) |  |   | 1,699   |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|Total other expense                     |  |                                | (11,196        | ) |                    |                | (3,872  | )                  |                 |   | (7,365  | )               |  |            | (10,150 | ) |  |   | (6,028  | )
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|(Loss) earnings before income taxes     |  |                                | (56,389        | ) |                    |                | (67,996 | )                  |                 |   | 11,502  |                 |  |            | (5,253  | ) |  |   | 8,257   |  
|                                        |  |                                |                |   |                   
|Income tax provision (benefit)          |  |                                | 19             |   |                    |                | (191    | )                  |                 |   | (944    | )               |  |            | (720    | ) |  |   | (106    | )
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|Net (loss) earnings                     |  | $                              | (56,408        | ) |                    | $              | (67,805 | )                  |                 | $ | 12,446  |                 |  | $          | (4,533  | ) |  | $ | 8,363   |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|Net (loss) earnings per share data:     |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|                                        |  |                                |                |   |                   
|Basic                                   |  | $                              | (0.53          | ) |                    | $              | (0.73   | )                  |                 | $ | 0.15    |                 |  | $          | (0.05   | ) |  | $ | 0.14    |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  
|Diluted                                 |  | $                              | (0.53          | ) |                    | $              | (0.73   | )                  |                 | $ | 0.14    |                 |  | $          | (0.05   | ) |  | $ | 0.13    |  
|                                        |  |                                |                |   |                    |                |         |                    |                 |   |         |                 |  |            |         |   |  |   |         |  



See notes to
consolidated financial statements.



59



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##### Table of Contents

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT) EQUITY

(In thousands)



|                                                                                             |  |                      |   |                    |         |   |                           |   |       |                 |  |   |                      |   |  |   |        |   |  |   |      |  
|-------------------------------------------------------------------------------------------- |  | -------------------- | - | ------------------ | ------- | - | ------------------------- | - | ----- | --------------- |  | - | -------------------- | - |  | - | ------ | - |  | - | ---- | -
|                                                                                             |  | PreferredStockIssued |   | Common StockIssued |         |   | Additional Paid-InCapital |   |       | NotesReceivable |  |   | DeferredCompensation |  
|                                                                                             |  |                      |   |                   
|                                                                                             |  | Shares               |   |                    | Amount  |   |                           |   |      
|Balance at August 31, 2000                                                                   |  | $                    |  |                    | 56,625  |   |                           | $ | 1,133 |                 |  | $ | 214,253              |   |  | $ |       |   |  | $ | (313 | )
|Net earnings (restated)                                                                      |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|Issuances of common stock in private placement                                               |  |                      |  |                    | 9,335   |   |                           |   | 187   |                 |  |   | 28,009               |   |  |   |       |   |  |   |     |  
|Issuances of common stock to executive officers                                              |  |                      |  |                    | 720     |   |                           |   | 14    |                 |  |   | 886                  |   |  |   |       |   |  |   |     |  
|Issuances of common stock for payment of services                                            |  |                      |  |                    | 914     |   |                           |   | 18    |                 |  |   | 2,857                |   |  |   |       |   |  |   |     |  
|Issuances of common stock in connection with note retirements                                |  |                      |  |                    | 6,169   |   |                           |   | 123   |                 |  |   | 15,737               |   |  |   |       |   |  |   |     |  
|Escrowed shares received                                                                     |  |                      |  |                    | (72     | ) |                           |   | (1    | )               |  |   | 1                    |   |  |   |       |   |  |   |     |  
|Deferred compensation expense                                                                |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   | 313  |  
|Issuance of common stock for litigation settlements                                          |  |                      |  |                    | 204     |   |                           |   | 4     |                 |  |   | 544                  |   |  |   |       |   |  |   |     |  
|Exercise of stock options and warrants                                                       |  |                      |  |                    | 3,151   |   |                           |   | 63    |                 |  |   | 6,777                |   |  |   | (3,595 | ) |  |   |     |  
|Warrants issued in connection with bank participation advance                                |  |                      |  |                    |        |   |                           |   |      |                 |  |   | 1,751                |   |  |   |       |   |  |   |     |  
|Issuance of common stock under employee stock purchase plan                                  |  |                      |  |                    | 233     |   |                           |   | 5     |                 |  |   | 216                  |   |  |   |       |   |  |   |     |  
|Foreign currency translation loss                                                            |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|                                                                                             |  |                      |   |                    |         |   |                           |   |       |                 |  |   |                      |   |  |   |        |   |  |   |      |  
|Balance at August 31, 2001 (restated)                                                        |  |                      |  |                    | 77,279  |   |                           |   | 1,546 |                 |  |   | 271,031              |   |  |   | (3,595 | ) |  |   |     |  
|Net loss                                                                                     |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|Issuances of common stock in private placement                                               |  |                      |  |                    | 7,167   |   |                           |   | 143   |                 |  |   | 19,642               |   |  |   |       |   |  |   |     |  
|Issuances of common stock for exercises of warrants by executive officers                    |  |                      |  |                    | 1,125   |   |                           |   | 23    |                 |  |   | 3,352                |   |  |   | (3,352 | ) |  |   |     |  
|Issuances of common stock in connection with note retirements and conversions                |  |                      |  |                    | 5,039   |   |                           |   | 101   |                 |  |   | 18,729               |   |  |   |       |   |  |   |     |  
|Exercise of stock options and warrants                                                       |  |                      |  |                    | 2,071   |   |                           |   | 41    |                 |  |   | 4,662                |   |  |   |       |   |  |   |     |  
|Cancellations of common stock                                                                |  |                      |  |                    | (551    | ) |                           |   | (11   | )               |  |   | 11                   |   |  |   |       |   |  |   |     |  
|Warrants issued and other non-cash charges in connection with supplemental bank loan         |  |                      |  |                    |        |   |                           |   |      |                 |  |   | 732                  |   |  |   |       |   |  |   |     |  
|Expenses incurred in connection with issuances of common stock                               |  |                      |  |                    |        |   |                           |   |      |                 |  |   | (287                 | ) |  |   |       |   |  |   |     |  
|Issuance of common stock under employee stock purchase plan                                  |  |                      |  |                    | 341     |   |                           |   | 6     |                 |  |   | 533                  |   |  |   |       |   |  |   |     |  
|Foreign currency translation loss                                                            |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|                                                                                             |  |                      |   |                    |         |   |                           |   |       |                 |  |   |                      |   |  |   |        |   |  |   |      |  
|Balance at August 31, 2002 (restated)                                                        |  |                      |  |                    | 92,471  |   |                           |   | 1,849 |                 |  |   | 318,405              |   |  |   | (6,947 | ) |  |   |     |  
|Net loss                                                                                     |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|Exercise of stock options and warrants                                                       |  |                      |  |                    | 10      |   |                           |   |      |                 |  |   | 11                   |   |  |   |       |   |  |   |     |  
|Issuance of common stock under employee stock purchase plan                                  |  |                      |  |                    | 140     |   |                           |   | 3     |                 |  |   | 118                  |   |  |   |       |   |  |   |     |  
|Issuance of common stock to executive officers for providing collateral for credit agreement |  |                      |  |                    | 4,000   |   |                           |   | 80    |                 |  |   | 1,480                |   |  |   |       |   |  |   |     |  
|Warrants issued to executive officers for providing collateral for credit agreement          |  |                      |  |                    |        |   |                           |   |      |                 |  |   | 305                  |   |  |   |       |   |  |   |     |  
|Warrant modification charges in connection with common stock issuance to executive officers  |  |                      |  |                    |        |   |                           |   |      |                 |  |   | 165                  |   |  |   |       |   |  |   |     |  
|Stock option compensation                                                                    |  |                      |  |                    |        |   |                           |   |      |                 |  |   | 79                   |   |  |   |       |   |  |   |     |  
|Foreign currency translation gain                                                            |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|                                                                                             |  |                      |   |                    |         |   |                           |   |       |                 |  |   |                      |   |  |   |        |   |  |   |      |  
|Balance at March 31, 2003 (restated)                                                         |  |                      |  |                    | 96,621  |   |                           |   | 1,932 |                 |  |   | 320,563              |   |  |   | (6,947 | ) |  |   |     |  
|Net loss                                                                                     |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|Exercise of stock options and warrants                                                       |  |                      |  |                    | 260     |   |                           |   | 5     |                 |  |   | 113                  |   |  |   |       |   |  |   |     |  
|Issuance of common stock under employee stock purchase plan                                  |  |                      |  |                    | 155     |   |                           |   | 3     |                 |  |   | 97                   |   |  |   |       |   |  |   |     |  
|Issuance of common stock in private placement, net                                           |  |                      |  |                    | 16,383  |   |                           |   | 328   |                 |  |   | 7,986                |   |  |   |       |   |  |   |     |  
|Reclassification of common stock issuance to accrued stock-based expenses                    |  |                      |  |                    | (4,000  | ) |                           |   | (80   | )               |  |   | (1,480               | ) |  |   |       |   |  |   |     |  
|Payment of notes receivable due from executive officers                                      |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   | 6,947  |   |  |   |     |  
|Foreign currency translation loss                                                            |  |                      |  |                    |        |   |                           |   |      |                 |  |   |                     |   |  |   |       |   |  |   |     |  
|                                                                                             |  |                      |   |                    |         |   |                           |   |       |                 |  |   |                      |   |  |   |        |   |  |   |      |  
|Balance at March 31, 2004                                                                    |  | $                    |  |                    | 109,419 |   |                           | $ | 2,188 |                 |  | $ | 327,279              |   |  | $ |       |   |  | $ |     |  
|                                                                                             |  |                      |   |                    |         |   |                           |   |       |                 |  |   |                      |   |  |   |        |   |  |   |      |  



See notes to
consolidated financial statements.



60



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##### Table of Contents

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT) EQUITY (Continued)

(In thousands)



|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | ------------------- | -------- | - | -------------- | ------ | - | ----------------------------------- | - | ------ | ----- |  | - | --------------------------- | - |  | - | ------- | -
|                                                                                             |  | Accumulated Deficit |          |   | Treasury Stock |        |   | AccumulatedOther Comprehensive Loss |   |        | Total |  |   | Comprehensive Income (loss) |  
|                                                                                             |  |                     |          |  
|                                                                                             |  |                     |          |  
|                                                                                             |  |                     |          |  
|Balance at August 31, 2000                                                                   |  |                     | (304,866 | ) |                | (3,338 | ) |                                     |   | (849   | )     |  |   | (93,980                     | ) |  |   |        |  
|Net earnings (restated)                                                                      |  |                     | 8,363    |   |                |       |   |                                     |   |       |       |  |   | 8,363                       |   |  |   | 8,363   |  
|Issuances of common stock in private placement                                               |  |                     |         |   |                | 3,338  |   |                                     |   |       |       |  |   | 31,534                      |   |  |   |        |  
|Issuances of common stock to executive officers                                              |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 900                         |   |  |   |        |  
|Issuances of common stock for payment of services                                            |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 2,875                       |   |  |   |        |  
|Issuances of common stock in connection with note retirements                                |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 15,860                      |   |  |   |        |  
|Escrowed shares received                                                                     |  |                     |         |   |                |       |   |                                     |   |        |       |  |   |                            |   |  |   |        |  
|Deferred compensation expense                                                                |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 313                         |   |  |   |        |  
|Issuance of common stock for litigation settlements                                          |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 548                         |   |  |   |        |  
|Exercise of stock options and warrants                                                       |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 3,245                       |   |  |   |        |  
|Warrants issued in connection with bank participation advance                                |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 1,751                       |   |  |   |        |  
|Issuance of common stock under employee stock purchase plan                                  |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 221                         |   |  |   |        |  
|Foreign currency translation loss                                                            |  |                     |         |   |                |       |   |                                     |   | (915   | )     |  |   | (915                        | ) |  |   | (915    | )
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|Balance at August 31, 2001 (restated)                                                        |  |                     | (296,503 | ) |                |       |   |                                     |   | (1,764 | )     |  |   | (29,285                     | ) |  |   | 7,448   |  
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|Net loss                                                                                     |  |                     | (4,533   | ) |                |       |   |                                     |   |       |       |  |   | (4,533                      | ) |  |   | (4,533  | )
|Issuances of common stock in private placement                                               |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 19,785                      |   |  |   |        |  
|Issuances of common stock for exercises of warrants by executive officers                    |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 23                          |   |  |   |        |  
|Issuances of common stock in connection with note retirements and conversions                |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 18,830                      |   |  |   |        |  
|Exercise of stock options and warrants                                                       |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 4,703                       |   |  |   |        |  
|Cancellations of common stock                                                                |  |                     |         |   |                |       |   |                                     |   |       |       |  |   |                            |   |  |   |        |  
|Warrants issued and other non-cash charges in connection with supplemental bank loan         |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 732                         |   |  |   |        |  
|Expenses incurred in connection with issuances of common stock                               |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | (287                        | ) |  |   |        |  
|Issuance of common stock under employee stock purchase plan                                  |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 539                         |   |  |   |        |  
|Foreign currency translation loss                                                            |  |                     |         |   |                |       |   |                                     |   | (82    | )     |  |   | (82                         | ) |  |   | (82     | )
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|Balance at August 31, 2002 (restated)                                                        |  |                     | (301,036 | ) |                |       |   |                                     |   | (1,846 | )     |  |   | 10,425                      |   |  | $ | (4,615  | )
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|Net loss                                                                                     |  |                     | (67,805  | ) |                |       |   |                                     |   |       |       |  |   | (67,805                     | ) |  |   | (67,805 | )
|Exercise of stock options and warrants                                                       |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 11                          |   |  |   |        |  
|Issuance of common stock under employee stock purchase plan                                  |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 121                         |   |  |   |        |  
|Issuance of common stock to executive officers for providing collateral for credit agreement |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 1,560                       |   |  |   |        |  
|Warrants issued to executive officers for providing collateral for credit agreement          |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 305                         |   |  |   |        |  
|Warrant modification charges in connection with common stock issuance to executive officers  |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 165                         |   |  |   |        |  
|Stock option compensation                                                                    |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 79                          |   |  |   |        |  
|Foreign currency translation gain                                                            |  |                     |         |   |                |       |   |                                     |   | 51     |       |  |   | 51                          |   |  |   | 51      |  
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|Balance at March 31, 2003 (restated)                                                         |  |                     | (368,841 | ) |                |       |   |                                     |   | (1,795 | )     |  |   | (55,088                     | ) |  | $ | (67,754 | )
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|Net loss                                                                                     |  |                     | (56,408  | ) |                |       |   |                                     |   |       |       |  |   | (56,408                     | ) |  |   | (56,408 | )
|Exercise of stock options and warrants                                                       |  |                     |         |   |                |        |   |                                     |   |       |       |  |   | 118                         |   |  |   |         |  
|Issuance of common stock under employee stock purchase plan                                  |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 100                         |   |  |   |        |  
|Issuance of common stock in private placement, net.                                          |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 8,314                       |   |  |   |        |  
|Reclassification of common stock issuance to accrued stock-based expenses                    |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | (1,560                      | ) |  |   |        |  
|Payment of notes receivable due from executive officers                                      |  |                     |         |   |                |       |   |                                     |   |       |       |  |   | 6,947                       |   |  |   |        |  
|Foreign currency translation loss                                                            |  |                     |         |   |                |       |   |                                     |   | (406   | )     |  |   | (406                        | ) |  |   | (406    | )
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  
|Balance at March 31, 2004.                                                                   |  | $                   | (425,249 | ) |                |       |   |                                     | $ | (2,201 | )     |  | $ | (97,983                     | ) |  | $ | (56,814 | )
|                                                                                             |  |                     |          |   |                |        |   |                                     |   |        |       |  |   |                             |   |  |   |         |  



See notes to
consolidated financial statements.



61



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##### Table of Contents

ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                       |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------------- | ------------- | - | ------------------ | ------------- | ------- | --------------------- | -------------- | - | ---------- | -------------- |  | ---------- | -------- | - |  | - | ------- | -
|                                                                                       |  | Fiscal Year Ended March 31,2004 |               |   | Seven Months Ended |               |         | Fiscal Year Ended     |               
|                                                                                       |  |                                 | March 31,2003 |   |                    | March 31,2002 |         |                       | August 31,2002 |   |            | August 31,2001 | 
|                                                                                       |  |                                 |               |   |                    |               |         | (Restated)(Unaudited) |                |   | (Restated) |                |  | (Restated) |         
|Cash flows from operating activities:                                                  |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|Net (loss) earnings                                                                    |  | $                               | (56,408       | ) |                    | $             | (67,805 | )                     |                | $ | 12,446     |                |  | $          | (4,533   | ) |  | $ | 8,363   |  
|Adjustments to reconcile net (loss) earnings to net cash used in operating activities: |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|Depreciation and amortization                                                          |  |                                 | 5,511         |   |                    |               | 4,124   |                       |                |   | 4,868      |                |  |            | 8,467    |   |  |   | 8,862   |  
|Non-cash financing expense                                                             |  |                                 | 3,330         |   |                    |               | 756     |                       |                |   | 895        |                |  |            | 1,504    |   |  |   | 386     |  
|Loss (gain) on early retirement of debt                                                |  |                                 |              |   |                    |               |        |                       |                |   | 1,221      |                |  |            | 1,221    |   |  |   | (2,795  | )
|Provision for price concessions and returns, net                                       |  |                                 | 29,774        |   |                    |               | 55,938  |                       |                |   | 21,138     |                |  |            | 67,024   |   |  |   | 15,899  |  
|Deferred compensation expense                                                          |  |                                 |              |   |                    |               |        |                       |                |   |           |                |  |            |         |   |  |   | 313     |  
|Non-cash royalty charges                                                               |  |                                 |              |   |                    |               |        |                       |                |   |           |                |  |            |         |   |  |   | 1,168   |  
|Amortization of capitalized software development costs                                 |  |                                 | 7,515         |   |                    |               | 17,063  |                       |                |   | 6,597      |                |  |            | 10,725   |   |  |   | 1,796   |  
|Write-off of capitalized software development costs                                    |  |                                 | 300           |   |                    |               | 2,045   |                       |                |   |           |                |  |            | 2,478    |   |  |   |        |  
|Impairment charge on building held for sale                                            |  |                                 |              |   |                    |               | 2,146   |                       |                |   |           |                |  |            |         |   |  |   |        |  
|Non-cash compensation expense                                                          |  |                                 | 1,140         |   |                    |               | 79      |                       |                |   |           |                |  |            |         |   |  |   |        |  
|Loss on fixed asset disposals                                                          |  |                                 | 220           |   |                    |               | 231     |                       |                |   |           |                |  |            |         |   |  |   |        |  
|Other non-cash items                                                                   |  |                                 | 30            |   |                    |               | 14      |                       |                |   | (63        | )              |  |            | 142      |   |  |   | 381     |  
|Change in operating assets and liabilities:                                            |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|Accounts receivable                                                                    |  |                                 | (25,378       | ) |                    |               | 8,125   |                       |                |   | (42,526    | )              |  |            | (102,461 | ) |  |   | (21,311 | )
|Other receivables                                                                      |  |                                 | 3,592         |   |                    |               | (1,532  | )                     |                |   | (2,262     | )              |  |            | 446      |   |  |   | 745     |  
|Other assets                                                                           |  |                                 | 100           |   |                    |               | 300     |                       |                |   | (300       | )              |  |            | (225     | ) |  |   | 25      |  
|Inventories                                                                            |  |                                 | 2,567         |   |                    |               | 2,367   |                       |                |   | (4,514     | )              |  |            | (5,843   | ) |  |   | 660     |  
|Prepaid expenses                                                                       |  |                                 | (212          | ) |                    |               | 891     |                       |                |   | (1,612     | )              |  |            | (1,199   | ) |  |   | 2,065   |  
|Capitalized software development costs                                                 |  |                                 | (1,004        | ) |                    |               | (10,872 | )                     |                |   | (11,054    | )              |  |            | (22,608  | ) |  |   | (7,410  | )
|Accounts payable                                                                       |  |                                 | 3,456         |   |                    |               | (11,382 | )                     |                |   | (7,869     | )              |  |            | 6,040    |   |  |   | 2,554   |  
|Accrued expenses                                                                       |  |                                 | 115           |   |                    |               | (22,635 | )                     |                |   | (6,128     | )              |  |            | 27,257   |   |  |   | (29,153 | )
|Income taxes payable                                                                   |  |                                 | (73           | ) |                    |               | (345    | )                     |                |   | 217        |                |  |            | 891      |   |  |   | 1,419   |  
|Other long-term liabilities                                                            |  |                                 | (620          | ) |                    |               | (202    | )                     |                |   | (705       | )              |  |            | (845     | ) |  |   | (48     | )
|                                                                                       |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|Net cash used in operating activities                                                  |  |                                 | (26,045       | ) |                    |               | (20,694 | )                     |                |   | (29,651    | )              |  |            | (11,519  | ) |  |   | (16,081 | )
|                                                                                       |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|Cash flows from investing activities:                                                  |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|Acquisition of fixed assets                                                            |  |                                 | (597          | ) |                    |               | (733    | )                     |                |   | (2,122     | )              |  |            | (5,082   | ) |  |   | (1,033  | )
|Proceeds from disposal of fixed assets                                                 |  |                                 | 394           |   |                    |               | 79      |                       |                |   | 7          |                |  |            | 7        |   |  |   | 1,237   |  
|Deposit on building held for sale                                                      |  |                                 | 6,247         |   |                    |               |        |                       |                |   |           |                |  |            |         |   |  |   |        |  
|Other assets                                                                           |  |                                 | 75            |   |                    |               | 31      |                       |                |   | (184       | )              |  |            | (184     | ) |  |   | (289    | )
|                                                                                       |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  
|Net cash provided by (used in) investing activities                                    |  |                                 | 6,119         |   |                    |               | (623    | )                     |                |   | (2,299     | )              |  |            | (5,259   | ) |  |   | (85     | )
|                                                                                       |  |                                 |               |   |                    |               |         |                       |                |   |            |                |  |            |          |   |  |   |         |  



See notes to
consolidated financial statements.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)



|                                                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | -------------------------------- | ------------- | - | ------------------ | ------------- | ------- | --------------------- | -------------- | - | ---------- | -------------- |  | ---------- | ------- | - |  | - | ------ | -
|                                                                                       |  | Fiscal Year Ended March 31, 2004 |               |   | Seven Months Ended |               |         | Fiscal Year Ended     |               
|                                                                                       |  |                                  | March 31,2003 |   |                    | March 31,2002 |         |                       | August 31,2002 |   |            | August 31,2001 | 
|                                                                                       |  |                                  |               |   |                    |               |         | (Restated)(Unaudited) |                |   | (Restated) |                |  | (Restated) |        
|Cash flows from financing activities:                                                  |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Proceeds from bank participation advance                                               |  |                                  |              |   |                    |               |        |                       |                |   |           |                |  |            |        |   |  |   | 9,500  |  
|Repayment of convertible notes                                                         |  |                                  |              |   |                    |               |        |                       |                |   | (12,190    | )              |  |            | (12,190 | ) |  |   | (5,997 | )
|Proceeds from issuance of convertible notes, net of expenses                           |  |                                  | 25,579        |   |                    |               |        |                       |                |   |           |                |  |            |        |   |  |   |       |  
|Payment of mortgages                                                                   |  |                                  | (4,889        | ) |                    |               | (483    | )                     |                |   | (884       | )              |  |            | (1,027  | ) |  |   | (1,176 | )
|Proceeds from repayment of notes receivable due from officers                          |  |                                  | 6,947         |   |                    |               |        |                       |                |   |           |                |  |            |        |   |  |   |       |  
|Repayment of promissory notes                                                          |  |                                  | (603          | ) |                    |               |        |                       |                |   |           |                |  |            |        |   |  |   |       |  
|(Payment of) proceeds from short-term bank loans, net                                  |  |                                  | (19,302       | ) |                    |               | (23,401 | )                     |                |   | 11,757     |                |  |            | 29,368  |   |  |   | (4,951 | )
|Proceeds from exercises of stock options and warrants                                  |  |                                  | 118           |   |                    |               | 11      |                       |                |   | 3,278      |                |  |            | 4,726   |   |  |   | 3,245  |  
|Payment of obligations under capital leases                                            |  |                                  | (853          | ) |                    |               | (662    | )                     |                |   | (263       | )              |  |            | (564    | ) |  |   | (222   | )
|Net proceeds from issuances of common stock                                            |  |                                  | 8,314         |   |                    |               |        |                       |                |   | 21,523     |                |  |            | 19,498  |   |  |   | 36,368 |  
|Net proceeds from issuances of common stock under employee stock purchase plan         |  |                                  | 100           |   |                    |               | 121     |                       |                |   | 245        |                |  |            | 539     |   |  |   | 221    |  
|                                                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Net cash provided by (used in) financing activities                                    |  |                                  | 15,411        |   |                    |               | (24,414 | )                     |                |   | 23,466     |                |  |            | 40,350  |   |  |   | 36,988 |  
|                                                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Effect of exchange rate changes on cash                                                |  |                                  | 1,168         |   |                    |               | (778    | )                     |                |   | (205       | )              |  |            | 635     |   |  |   | (763   | )
|                                                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Net (decrease) increase in cash and cash equivalents                                   |  |                                  | (3,347        | ) |                    |               | (46,509 | )                     |                |   | (8,689     | )              |  |            | 24,207  |   |  |   | 20,059 |  
|                                                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Cash and cash equivalents: beginning of period                                         |  |                                  | 4,495         |   |                    |               | 51,004  |                       |                |   | 26,797     |                |  |            | 26,797  |   |  |   | 6,738  |  
|                                                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Cash and cash equivalents: end of period                                               |  | $                                | 1,148         |   |                    | $             | 4,495   |                       |                | $ | 18,108     |                |  | $          | 51,004  |   |  | $ | 26,797 |  
|                                                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|                                                                                       |  |                                  |               |   |                   
|Supplemental schedule of non-cash investing and financing activities:                  |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Issuance of common stock for payment of accrued royalties payable                      |  | $                                |              |   |                    | $             |        |                       |                | $ |           |                |  | $          |        |   |  | $ | 2,719  |  
|Issuance of common stock for payment of convertible notes and related accrued interest |  | $                                |              |   |                    | $             |        |                       |                | $ | 13,309     |                |  | $          | 13,309  |   |  | $ | 7,597  |  
|Issuance of common stock for bank loan collateral                                      |  | $                                |              |   |                    | $             | 1,560   |                       |                | $ |           |                |  | $          |        |   |  | $ |       |  
|Issuance of stock warrants for bank loan collateral                                    |  | $                                |              |   |                    | $             | 305     |                       |                | $ |           |                |  | $          |        |   |  | $ |       |  
|Acquisition of equipment under capital leases                                          |  | $                                | 194           |   |                    | $             | 262     |                       |                | $ | 280        |                |  | $          | 1,252   |   |  | $ |       |  
|Conversion of notes to common stock                                                    |  | $                                |              |   |                    | $             |        |                       |                | $ | 4,300      |                |  | $          | 4,300   |   |  | $ |       |  
|                                                                                       |  |                                  |               |   |                   
|Cash paid during the period for:                                                       |  |                                  |               |   |                    |               |         |                       |                |   |            |                |  |            |         |   |  |   |        |  
|Interest                                                                               |  | $                                | 4,296         |   |                    | $             | 3,727   |                       |                | $ | 7,163      |                |  | $          | 9,814   |   |  | $ | 10,993 |  
|Income taxes                                                                           |  | $                                | 242           |   |                    | $             | 77      |                       |                | $ | 609        |                |  | $          |        |   |  | $ | 410    |  



See notes to
consolidated financial statements.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



|1.BUSINESS |  | AND SIGNIFICANT ACCOUNTING POLICIES
|---------- |  | -----------------------------------



A.  Business and Liquidity



We develop, publish, distribute and market video and computer game software for interactive entertainment consoles and, to a lesser extent, personal
computers. We internally develop our software products through our five software development studios located in the United States and the United Kingdom. Additionally, we contract with independent software developers to create software products for
us.



Through our subsidiaries in North America, the United
Kingdom, Germany, France, Spain and Australia, we distribute our software products directly to retailers and other outlets, and we also utilize regional distributors in those areas and in the Pacific Rim to distribute software within those
geographic areas. As an additional aspect of our business, we distribute software products which have been developed by third parties. A less significant aspect of our business is the development and publication of strategy guides relating to our
software products and the issuance of certain special edition comic magazines to support some of our brands.



For the fiscal year ended March 31, 2004, we had a net loss of $56,408 and used $26,045 of cash in operating activities. As of March 31, 2004, we had a
stockholders deficit of $97,983, a working capital deficit of $110,941 and cash and cash equivalents of $1,148. Our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. Our
working capital and stockholders deficits as of March 31, 2004 and the recurring use of cash in operating activities raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.



Our short-term liquidity has been supplemented with borrowings under our North American and International credit facilities with GMAC, our primary lender. As of March 31, 2004, our primary lender had advanced to us a supplemental
discretionary loan of $2,000 which we repaid as of April 8, 2004.



On May 4, 2004, our primary lender and we amended our North American credit agreement to allow for a supplemental discretionary loan of $3,000 and the termination of the North American and International credit agreements on June 20, 2004.
On June 18, 2004, we entered into an Extension Agreement with GMAC, which amended the Waiver and Amendment agreement signed by us and GMAC on May 4, 2004. Under the Extension Agreement, GMAC has agreed to extend the date upon which our banking
agreement with GMAC will terminate, from June 20, 2004 to August 4, 2004. Additionally, on May 4, 2004, we entered into a letter of intent with a proposed new lender, for a $30,000 asset-based credit facility, with an equity component, to replace
the credit agreement with GMAC. We are currently working with the proposed new lender in order to implement timely the new credit facility which is subject to the execution of definitive documentation by both parties. However, there is no assurance
that the new credit facility or any other facility will be consummated.



During fiscal 2003, to enhance our short-term liquidity, we implemented targeted expense reductions through a business restructuring. In connection with the restructuring, we reduced our fixed and variable expenses, closed our Salt Lake
City, Utah software development studio, redeployed various company assets, eliminated certain marginal software titles under development, reduced our staff and staff related expenses and lowered our overall marketing expenditures.



In February 2004, we completed the sale of our 9% senior convertible
subordinated notes from which we raised gross proceeds of $15,000. In September and October 2003, we completed the sale of our 16% convertible



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



subordinated notes, resulting in gross proceeds of $11,863. As of June 22, 2004, subsequent to March 31, 2004 investors holding $5,463 of the 16% convertible
subordinated notes had converted their notes into 9,584 shares of our common stock. As of June 29, 2004, we were in default on our 16% convertible notes with respect to interest payments and late registration payments due under the notes. We are in
continued discussions with the holders of the convertible notes and believe that we will be successful in obtaining a waiver of those defaults; however, there can be no assurance that we will be successful in obtaining these waivers. Due to our
default under the 16% convertible subordinated notes, for which we are seeking waivers, the note holders may declare the principal and accrued interest balances outstanding immediately due and therefore we have classified the 16% convertible
subordinated notes as short-term debt as of March 31, 2004.



In
June 2003, we completed a private placement of 16,383 shares of our common stock to a limited group of private investors, resulting in net proceeds to us of $8,314.



Our future liquidity will significantly depend in whole or in part on our ability to (1) replace by August 4, 2004 the
credit agreement with our current primary lender with a new lender, (2) timely develop and market new software products that meet or exceed our operating plans, (3) continue to realize long-term benefits from our implemented expense reductions (4)
resolve or obtain waivers for any defaults under our convertible note agreements and (5) continue to receive the support of certain key suppliers and vendors. If we do not implement the new credit facility, substantially achieve our overall
projected revenue levels as reflected in our business operating plan, continue to realize additional benefits from the expense reductions we have already implemented and continue to receive the support of key suppliers and vendors, we will either
need to make further significant expense reductions, including, without limitation, the sale of assets or the consolidation or closing of certain operations, additional staff reductions, and/or the delay, cancellation or reduction of certain product
development and marketing programs. Additionally, some of these measures may require third party consents or approvals from our primary lender and others, and there can be no assurance those consents or approvals will be obtained.



If these measures are not attained, we cannot assure our stockholders that
our future operating cash flows will be sufficient to meet our operating requirements and debt service requirements. If any of the preceding events were to occur, our operations and liquidity would be materially and adversely affected and we could
be forced to cease operations.



On January 24, 2003, we
received a letter from The Nasdaq Stock Market, Inc. stating that, because our common stock had not closed at or above the minimum $1.00 per share bid price requirement for 30 consecutive trading days, we had not met the minimum bid price
requirements for continued listing as set forth in Marketplace Rule 4310(c)(4), and we had until July 23, 2003 in which to regain compliance. On July 25, 2003, we received notice from Nasdaq that in accordance with Marketplace Rule 4310(c)(8)(D) we
were granted a 180 day extension of time, or until January 20, 2004 with which to regain compliance with the minimum bid requirement.



On January 21, 2004, we received a letter from Nasdaq indicating that the Company had been granted an extension, until January 24, 2005, within which to
regain compliance with the minimum $1.00 bid price per share requirement of The Nasdaq SmallCap Market. In the notice, the Nasdaq staff noted that since the Company meets the initial inclusion criteria for The Nasdaq SmallCap Market under
Marketplace Rule 4310(c), it is eligible for this additional compliance period. However, if prior to January 24, 2005, the bid price of the Companys common stock does not close at $1.00 per share or more for a minimum of 10 consecutive trading
days, then the Company is required to (1) seek shareholder approval for a reverse stock split at or before its next shareholder meeting and (2) promptly thereafter effectuate the reverse stock split. The Company has committed to Nasdaq to



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



effectuate those measures in the event compliance is not achieved prior to January 24, 2005. If at any time before January 24, 2005, the bid price of the
Companys common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Nasdaq staff will provide notification that the Company complies with Marketplace Rule 4310(c)(8)(D). The Company cannot provide any
assurance that it will receive an affirmative vote of its stockholders authorizing a reverse stock split, if required, nor that the Company will regain compliance with the minimum bid price requirement.



B.  Change in Fiscal Year



In January 2003, our Board of Directors approved a plan to change our fiscal
year end from August 31 to March 31. The accompanying consolidated financial statements include our results of operations for the audited fiscal year ended March 31, 2004, the seven-month transition fiscal year ended March 31, 2003, the comparative
unaudited results of operations for the seven months ended March 31, 2002 and the audited results of operations for the fiscal years ended August 31, 2002 and 2001 (restated). Our quarterly closing dates occur on the Sunday closest to the last day
of the calendar quarter, which encompasses the following quarter ending dates for fiscal 2005.



|        |  |                   
|------- |  | ------------------
|Quarter |  | Quarter End Date  
|First   |  | June 27, 2004     
|Second  |  | September 26, 2004
|Third   |  | December 26, 2004 
|Fourth  |  | March 31, 2005    



C.  Principles of Consolidation



The
consolidated financial statements include the financial results of Acclaim Entertainment, Inc. and Acclaims wholly-owned subsidiaries. Our consolidated financial statements exclude all intercompany balances and transactions.



D.  Cash Equivalents



We consider all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents, consisting of taxable municipal securities and money market funds, amounted to $240 as of March 31, 2004. We had no cash equivalents as of March 31, 2003.



E.  Financial Instruments



The March 31, 2004 and March 31, 2003 values of receivables, trade accounts
payable and accrued expenses approximated their fair values due to their short maturities. The March 31, 2004 and March 31, 2003 carrying values of bank borrowings and mortgage notes payable approximated their fair values because these instruments
bear interest at rates that are adjusted for market rate fluctuations. The fair value of the 9% and 16% Convertible Subordinated Notes as of March 31, 2004 was $12,571 and $10,098, respectively.



F.  Net Revenue



We apply the provisions of Statement of Position 97-2, Software
Revenue Recognition, in conjunction with the applicable provisions of Staff Accounting Bulletin No. 104, Revenue Recognition. Accordingly, we



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



recognize revenue for software when there is (1) persuasive evidence that an arrangement exists, which is generally a customer purchase order, (2) the
software is delivered, (3) the selling price is fixed and determinable and (4) collectibility of the customer receivable is deemed probable. We do not customize our software or provide postcontract support to our customers.



The timing of when we recognize revenue generally differs for our retail
customers and distributor customers. For retail customers, we recognize software product revenue when the products are shipped to the retail customers. Because we do not provide extended payment terms and our revenue arrangements with retail
customers do not include multiple deliverables such as upgrades, postcontract customer support or other elements, our selling price for software products is fixed and determinable when titles are shipped to retail customers. We generally deem
collectibility probable when we ship titles to retail customers as the majority of these sales are to major retailers that possess significant economic substance, the arrangements consist of payment terms of 60 days, and the customers
obligation to pay is not contingent on the resale of product in the retail channel. For distributor customers, collectibility is deemed probable and we recognize revenue on the earlier to occur of when the distributor pays the invoice or when the
distributor provides persuasive evidence that the product has been resold, assuming all other revenue recognition criteria have been met. For product shipped on consignment, we recognize revenue when the customer provides persuasive evidence that
the product has been resold.



We are generally not
contractually obligated and generally do not accept returns, except for defective product. However, we grant price concessions to our customers who primarily are major retailers that control the market access to the consumer when those concessions
are necessary to maintain our relationship with the retailers and gain access to their retail channel customers. If the consumers demand for a specific title falls below expectations or significantly declines below previous rates of
sell-through, then, we generally will provide a price concession or credit to spur further sales by the retailer to maintain the customer relationship. In circumstances when a price concession cannot be agreed upon, we generally will accept a
product return. We record revenue net of an allowance for estimated price concessions and returns. We must make significant estimates and judgments when determining the appropriate allowance for price concessions and returns in any accounting
period. In order to derive and evaluate those estimates, we analyze historical price concessions and returns, current sell-through of product and retailer inventory, current economic trends, changes in consumer demand and acceptance of our products
in the marketplace, among other factors.



Allowances for price
concessions and returns are reflected as a reduction of accounts receivable when we have agreed to grant credits to our customers; otherwise, they are reflected as an accrued liability. Our allowance for price concessions and returns, including both
the accounts receivable and accrued liability components, is summarized below:



|                                                                |  |                |        |                |   |       
|--------------------------------------------------------------- |  | -------------- | ------ | -------------- | - | ------
|                                                                |  | March 31, 2004 |        | March 31, 2003
|Gross accounts receivable (please see note 4)                   |  | $              | 20,470 |                | $ | 50,980
|                                                                |  |                |        |                |   |       
|Allowances:                                                     |  |                |        |                |   |       
|Allowance for price concessions and returns (please see note 4) |  | $              | 8,314  |                | $ | 26,677
|Accrued price concessions (please see note 12)                  |  |                | 10,740 |                |   | 19,623
|Accrued rebates (please see note 12)                            |  |                | 1,192  |                |   | 2,010 
|                                                                |  |                |        |                |   |       
|Total allowances                                                |  | $              | 20,246 |                | $ | 48,310
|                                                                |  |                |        |                |   |       



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



G.  Inventories



Inventories are stated at the lower of FIFO (first-in, first-out) cost or market and consist principally of finished goods.



H.  Prepaid Royalties



We pay non-refundable royalty advances to licensors of intellectual
properties and classify those payments as prepaid royalties. All royalty advance payments are recoupable against future royalties due for software or intellectual properties we licensed under the terms of our license agreements. We expense prepaid
royalties at contractual royalty rates based on actual product sales. We also charge to expense the portion of prepaid royalties that we expect will not be recovered through future product sales. Material differences between actual future sales and
those we projected may result in the amount and timing of royalty expense to vary. We classify royalty advances as current or noncurrent assets based on the portion of estimated future net product sales that we expect will occur within the next
fiscal year.



I.  Software Development Costs



We account for our software development costs in
accordance with Statement of Financial Accounting Standard No. 86, Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed. Under SFAS No. 86, we expense software development costs as incurred until
we determine that the software is technologically feasible. Generally, to establish whether the software is technologically feasible, we require the product to be a sequel and possess a proven game engine that has been successfully utilized in a
previous product. We assess its detailed program designs to verify that the working model of the game engine has been tested against the product design. Once we determine that the entertainment software is technologically feasible and we have a
basis for estimating the recoverability of the development costs from future cash flows, we capitalize the remaining software development costs until the software product is released.



Once we release a software title, we commence amortizing the related capitalized software development costs. We record
amortization expense as a component of cost of revenue. We calculate the amortization of a software titles capitalized software development costs using two different methods, and then amortize the greater of the two amounts. Under the first
method, we divide the current period gross revenue for the released title by the total of current period gross revenue and anticipated future gross revenue for the title and then multiply the result by the titles total capitalized software
development costs. Under the second method, we divide the titles total capitalized costs by the number of periods in the titles estimated economic life up to a maximum of three months. Material differences between our actual gross
revenue and those we project may result in the amount and timing of amortization to vary. If we deem a titles capitalized software development costs unrecoverable based on our expected future gross revenue and corresponding cash flows, we
write off the costs and record the charge to development expense or cost of revenue, as appropriate.



J.  Long-Lived Assets



We review long-lived assets for impairment whenever events or changes in circumstances indicate that we may not recover the carrying amount of an asset.
Our long-lived assets are primarily composed of fixed assets. If the sum of the cash flows we expect to generate from long-lived assets are less than their carrying amounts, we record an impairment loss equal to the amount by which the carrying
amount of the asset exceeds its fair value.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



K.  Fixed Assets



We record property and equipment at cost. We include the asset values of capitalized leases in fixed assets and reflect the
associated liabilities as obligations under capital leases. We depreciate our assets in equal amounts over their estimated useful lives as summarized below:



|                                   |  |              
|---------------------------------- |  | -------------
|Buildings and improvements         |  | 1 to 20 years
|Furniture, fixtures, and equipment |  | 1 to 7 years 
|Automotive equipment               |  | 3 to 5 years 



L.  Interest Expense, Net



Interest
expense, net is comprised of:



|                 |  |                                 |               |   |                    |               |        |                   |                |   |        |                |  |   |        |   |  |   |         |  
|---------------- |  | ------------------------------- | ------------- | - | ------------------ | ------------- | ------ | ----------------- | -------------- | - | ------ | -------------- |  | - | ------ | - |  | - | ------- | -
|                 |  | Fiscal Year Ended March 31,2004 |               |   | Seven Months Ended |               |        | Fiscal Year Ended |               
|                 |  |                                 | March 31,2003 |   |                    | March 31,2002 |        |                   | August 31,2002 |   |        | August 31,2001 | 
|                 |  |                                 |               |   |                    |               |        | (Unaudited)       |                |   |        |                |  |   |       
|Interest income  |  | $                               | 230           |   |                    | $             | 465    |                   |                | $ | 480    |                |  | $ | 1,455  |   |  | $ | 471     |  
|Interest expense |  |                                 | (5,650        | ) |                    |               | (3,782 | )                 |                |   | (4,599 | )              |  |   | (7,220 | ) |  |   | (10,643 | )
|                 |  |                                 |               |   |                    |               |        |                   |                |   |        |                |  |   |        |   |  |   |         |  
|                 |  | $                               | (5,420        | ) |                    | $             | (3,317 | )                 |                | $ | (4,119 | )              |  | $ | (5,765 | ) |  | $ | (10,172 | )
|                 |  |                                 |               |   |                    |               |        |                   |                |   |        |                |  |   |        |   |  |   |         |  



M.  Income Taxes



We recognize
deferred tax assets and liabilities related to the future tax consequences attributable to temporary differences between the financial statement and tax basis carrying amounts of existing assets and liabilities. We calculate the value of our
deferred tax assets and liabilities by multiplying the value of temporary differences by the future enacted tax rates we expect will apply to taxable income in the years in which we expect those temporary differences will reverse. If our expectation
of future tax rates changes, we recognize the effect on deferred tax assets and liabilities in income in the period that includes the enactment date. We have recorded a valuation allowance as of March 31, 2004 and March 31, 2003 due to the
uncertainty of our ability to recover our deferred tax assets in future periods.



N.  Foreign Currency



We translate assets and liabilities of our foreign operations using rates of exchange at the end of each reporting period. Operating results of our foreign operations are translated using average rates of exchange in effect for each
reporting period. The exchange rate differential creates unrealized foreign currency translation gains and losses, which we classify in accumulated other comprehensive income or loss, a separate component of stockholders (deficit) equity.



Generally, we realize foreign currency transaction gains and
losses in connection with sales to our customers in foreign countries, which we effect through our foreign subsidiaries, as well as in connection with intercompany transactions with our foreign subsidiaries. We classify realized foreign currency
transaction gains (losses) in other income (expense), which amounted to $(628) for the fiscal year ended March 31, 2004, $75 for the seven months ended March 31, 2003, $(127) for the seven months ended March 31, 2002, $(337) for fiscal 2002 and
$(249) for fiscal 2001.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



O.  Shipping and Handling Costs



We record shipping and handling costs as a component of general and
administrative expenses. We do not invoice our customers for and have no revenue related to shipping and handling costs. These costs amounted to $4,158 for the fiscal year ended March 31, 2004, $2,755 for the seven months ended March 31, 2003,
$2,680 for the seven months ended March 31, 2002, $5,057 for fiscal 2002 and $3,994 for fiscal 2001.



P.  Stock-based Compensation



In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, (SFAS 148) Accounting for
Stock-Based CompensationTransition and Disclosure, amending FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. SFAS 148 provides alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123. The FASB recently indicated that they will require stock-based employee compensation to be recorded as a charge to earnings beginning
in calendar 2005. We will continue to monitor their progress on the issuance of this standard as well as evaluate our position with respect to current guidelines.



The per share weighted average fair value of stock options granted was $0.47 for the fiscal year ended March 31, 2004, $0.68
for the seven months ended March 31, 2003, $1.66 for the seven months ended March 31, 2002, $1.57 for the fiscal year ended August 31, 2002 and $1.70 for the fiscal year ended August 31, 2001, on the dates of grant. We used the Black Scholes
option-pricing model to calculate the fair values of the stock options we granted with the following weighted-average assumptions:



|                          |  |                                  |                |                    |                |                    |                 |       |                 |      
|------------------------- |  | -------------------------------- | -------------- | ------------------ | -------------- | ------------------ | --------------- | ----- | --------------- | -----
|                          |  | Fiscal Year Ended March 31, 2004 |                | Seven Months Ended |                | Fiscal Years Ended
|                          |  |                                  | March 31, 2003 |                    | March 31, 2002 |                    | August 31, 2002 |       | August 31, 2001
|                          |  |                                  |                |                    |                | (Unaudited)        |                 |       |                 |      
|Expected dividend yield   |  | 0%                               |                | 0%                 |                | 0%                 |                 | 0%    |                 | 0%   
|Risk free interest rate   |  | 2.1%                             |                | 2.2%               |                | 3.5%               |                 | 3.5%  |                 | 3.1% 
|Expected stock volatility |  | 123%                             |                | 125%               |                | 52%                |                 | 52%   |                 | 142% 
|Expected option life      |  | 3 yrs                            |                | 3 yrs              |                | 3 yrs              |                 | 3 yrs |                 | 3 yrs



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



We account for our stock option grants to employees under APB Opinion No. 25 using the intrinsic
value method and, accordingly, have recognized no compensation cost for those stock option grants we made which had an exercise price equal to or greater than the fair market value of our common stock on the dates of grant. Had we applied the fair
value method under SFAS No. 123, our net earnings (loss) and net earnings (loss) per share on a pro forma basis would have been:



|                                                                                |  |                                  |         |   |                    |   |         |                    |  |   |                |   |  |            |        |   |  |   |        |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------ | - | ------- | ------------------ |  | - | -------------- | - |  | ---------- | ------ | - |  | - | ------ | -
|                                                                                |  | Fiscal Year Ended March 31, 2004 |         |   | Seven Months Ended |   |         | Fiscal Years Ended | 
|                                                                                |  | March 31,2003                    |         |   | March 31,2002      |   |         | August 31,2002     |  |   | August 31,2001 |  
|                                                                                |  |                                  |         |   |                    |   |         | (Unaudited)        |  |   |                |   |  | (Restated) |       
|Net earnings (loss):                                                            |  |                                  |         |   |                    |   |         |                    |  |   |                |   |  |            |        |   |  |   |        |  
|As reported                                                                     |  | $                                | (56,408 | ) |                    | $ | (67,805 | )                  |  | $ | 12,446         |   |  | $          | (4,533 | ) |  | $ | 8,363  |  
|Add: Stock-based compensation expense included in net loss (please see note 13) |  |                                  | 1,140   |   |                    |   | 79      |                    |  |   |               |   |  |            |       |   |  |   |       |  
|Deduct: Total stock-based employee compensation expense using fair value method |  |                                  | (4,132  | ) |                    |   | (3,425  | )                  |  |   | (5,436         | ) |  |            | (5,058 | ) |  |   | (1,405 | )
|                                                                                |  |                                  |         |   |                    |   |         |                    |  |   |                |   |  |            |        |   |  |   |        |  
|Pro forma                                                                       |  | $                                | (59,400 | ) |                    | $ | (71,151 | )                  |  | $ | 7,010          |   |  | $          | (9,591 | ) |  | $ | 6,958  |  
|                                                                                |  |                                  |         |   |                    |   |         |                    |  |   |                |   |  |            |        |   |  |   |        |  
|                                                                                |  |                                  |         |   |                   
|Diluted net earnings (loss) per share:                                          |  |                                  |         |   |                    |   |         |                    |  |   |                |   |  |            |        |   |  |   |        |  
|As reported                                                                     |  | $                                | (0.53   | ) |                    | $ | (0.73   | )                  |  | $ | 0.14           |   |  | $          | (0.05  | ) |  | $ | 0.13   |  
|                                                                                |  |                                  |         |   |                    |   |         |                    |  |   |                |   |  |            |        |   |  |   |        |  
|Pro forma                                                                       |  | $                                | (0.56   | ) |                    | $ | (0.77   | )                  |  | $ | 0.08           |   |  | $          | (0.11  | ) |  | $ | 0.10   |  
|                                                                                |  |                                  |         |   |                    |   |         |                    |  |   |                |   |  |            |        |   |  |   |        |  



Q.  Comprehensive Income (Loss)



We
present comprehensive income (loss) within our consolidated statements of stockholders (deficit) equity. Comprehensive income (loss) reflects net earnings (loss) adjusted for foreign currency translation gains (losses).



R.  Earnings (Loss) Per Share



We calculate basic earnings (loss) per share by dividing net earnings (loss)
by the weighted average number of shares of common stock outstanding. We calculate diluted earnings (loss) per share by dividing net earnings (loss) by the total of (1) the weighted average number of shares of common stock outstanding (2) the
equivalent weighted average number of shares of our common stock that dilutive common stock options and warrants outstanding represent and (3) the equivalent weighted average number of shares of our common stock that dilutive convertible notes
outstanding represent. Please see note 18.



S.  Estimates



To prepare our
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make estimates and assumptions that affect the amounts of reported assets and liabilities, the disclosures
for contingent assets and liabilities on the date of the financial statements and the amounts of revenue and expenses during the reporting period. Actual results could differ from our estimates. Among the more significant estimates we included in
these consolidated financial statements is our allowance for price concessions and returns, valuation allowances for inventory and valuation



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



allowances for the recoverability of prepaid royalties and deferred income taxes. During the seven months ended March 31, 2003, net revenue decreased by
$14,438 when we increased our August 31, 2002 allowance for price concessions and returns because actual product sell-through in the retail channel during the subsequent 2002 holiday season and through the end of March 2003, particularly for the
Turok: Evolution software title released in the fourth quarter of fiscal 2002, demonstrated that additional allowances were required.



T.  Reclassifications



Certain prior period amounts have been reclassified to conform to the current period presentation.



|2. |  | RESTATEMENT
|-- |  | -----------



We have restated our previously issued consolidated financial statements for the quarters ended June 2, 2001 and August 31, 2001 and the fiscal year ended
August 31, 2001, balance sheets as of each quarter and fiscal year end from December 2, 2001 through December 28, 2003, statement of operations for the quarters ended June 2, 2002 and August 31, 2002 and statement of cash flows for the fiscal year
ended August 31, 2002 and all the quarters within fiscal 2002. The restatement resulted from an accounting error in March 2001, when we entered into a $9,500 bank participation agreement with our primary lender (please see note 15F), and recorded
the advance balance incorrectly. The error resulted in an understatement of debt and an overstatement of net earnings in fiscal 2001 by $9,500. The correction of the error resulted in a reduction of bonuses for fiscal 2001 that were based on pre-tax
income by $570, which were repaid to us in June 2004. The restatement also resulted from the correction of adjustments for reconciling items related to bank advances aggregating $380 that were recorded in the fourth quarter of fiscal 2002 that
should have been recorded in the third quarter of fiscal 2002.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



The restatement had the following impact on the consolidated financial statements:



|                                                      |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|----------------------------------------------------- |  | --------------------- | -------- | - | --------------- | - | -------- | --------------------- |  | - | ----------- | - |  | - | -------- | -
|                                                      |  | Fiscal 2001           |         
|                                                      |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|                                                      |  | June 2, 2001          |          |   | August 31, 2001 |  
|                                                      |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|                                                      |  | AsPreviously Reported |          |   | As Restated     |   |          | AsPreviously Reported |  |   | As Restated |  
|                                                      |  |                       |          |  
|                                                      |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|                                                      |  | (Unaudited)           |          |   |                 |   |          |                       | 
|Consolidated balance sheet:                           |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|Accounts receivable, net                              |  | $                     | 29,163   |   |                 | $ | 29,163   |                       |  | $ | 46,704      |   |  | $ | 36,704   |  
|Total current assets.                                 |  |                       | 38,722   |   |                 |   | 38,722   |                       |  |   | 88,430      |   |  |   | 78,430   |  
|Total assets.                                         |  |                       | 77,876   |   |                 |   | 77,876   |                       |  |   | 125,630     |   |  |   | 115,630  |  
|Short-term borrowings                                 |  |                       | 10,587   |   |                 |   | 14,877   |                       |  |   | 25,428      |   |  |   | 24,928   |  
|Accrued expenses                                      |  |                       | 40,399   |   |                 |   | 40,399   |                       |  |   | 31,582      |   |  |   | 31,012   |  
|Total current liabilities                             |  |                       | 125,821  |   |                 |   | 130,111  |                       |  |   | 127,843     |   |  |   | 126,773  |  
|Total liabilities                                     |  |                       | 144,499  |   |                 |   | 148,789  |                       |  |   | 145,985     |   |  |   | 144,915  |  
|Accumulated deficit                                   |  |                       | (286,151 | ) |                 |   | (290,441 | )                     |  |   | (287,573    | ) |  |   | (296,503 | )
|Total stockholders deficit.                          |  |                       | (66,623  | ) |                 |   | (70,913  | )                     |  |   | (20,355     | ) |  |   | (29,285  | )
|Total liabilities and stockholders deficit           |  |                       | 77,876   |   |                 |   | 77,876   |                       |  |   | 125,630     |   |  |   | 115,630  |  
|                                                      |  |                       |          |  
|Consolidated statement of operations:                 |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|Quarter                                               |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|Net revenues                                          |  | $                     | 38,642   |   |                 | $ | 34,352   |                       |  | $ | 46,529      |   |  | $ | 41,319   |  
|Gross profit.                                         |  |                       | 27,378   |   |                 |   | 23,088   |                       |  |   | 33,424      |   |  |   | 28,214   |  
|General and administrative expenses                   |  |                       | 9,530    |   |                 |   | 9,530    |                       |  |   | 10,939      |   |  |   | 10,369   |  
|Total operating expenses.                             |  |                       | 24,949   |   |                 |   | 24,949   |                       |  |   | 28,164      |   |  |   | 27,594   |  
|Earnings (loss) from operations                       |  |                       | 2,429    |   |                 |   | (1,861   | )                     |  |   | 5,260       |   |  |   | 620      |  
|Earnings (loss) before income taxes                   |  |                       | 7,377    |   |                 |   | 3,087    |                       |  |   | (1,736      | ) |  |   | (6,376   | )
|Net earnings (loss)                                   |  |                       | 7,367    |   |                 |   | 3,077    |                       |  |   | (1,422      | ) |  |   | (6,062   | )
|Year-to-date                                          |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|Net revenues.                                         |  | $                     | 151,039  |   |                 | $ | 146,749  |                       |  | $ | 197,568     |   |  | $ | 188,068  |  
|Gross profit.                                         |  |                       | 102,121  |   |                 |   | 97,831   |                       |  |   | 135,545     |   |  |   | 126,045  |  
|General and administrative expense.                   |  |                       | 29,900   |   |                 |   | 29,900   |                       |  |   | 40,839      |   |  |   | 40,269   |  
|Total operating expenses.                             |  |                       | 84,166   |   |                 |   | 84,166   |                       |  |   | 112,330     |   |  |   | 111,760  |  
|Earnings from operations                              |  |                       | 17,955   |   |                 |   | 13,665   |                       |  |   | 23,215      |   |  |   | 14,285   |  
|Earnings before income taxes                          |  |                       | 18,923   |   |                 |   | 14,633   |                       |  |   | 17,187      |   |  |   | 8,257    |  
|Net earnings.                                         |  |                       | 18,715   |   |                 |   | 14,425   |                       |  |   | 17,293      |   |  |   | 8,363    |  
|                                                      |  |                       |          |  
|Consolidated statement of cash flows:                 |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|Operating activities:                                 |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|Net earnings                                          |  | $                     | 18,715   |   |                 | $ | 14,425   |                       |  | $ | 17,293      |   |  | $ | 8,363    |  
|Provision for price concessions and returns, net      |  |                       | 7,856    |   |                 |   | 12,146   |                       |  |   | 6,399       |   |  |   | 15,899   |  
|Change in operating assets and liabilities:           |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|Accounts receivable.                                  |  |                       | (22,692  | ) |                 |   | (26,982  | )                     |  |   | (21,811     | ) |  |   | (21,311  | )
|Accrued expenses                                      |  |                       |         |   |                 |   |         |                       |  |   | (28,583     | ) |  |   | (29,153  | )
|Net cash used in operating activities                 |  |                       | (9,318   | ) |                 |   | (13,608  | )                     |  |   | (16,581     | ) |  |   | (16,081  | )
|Financing activities:                                 |  |                       |          |   |                 |   |          |                       |  |   |             |   |  |   |          |  
|(Payment of) proceeds from short-term bank loans, net |  |                       | (2,814   | ) |                 |   | 1,476    |                       |  |   | (4,451      | ) |  |   | (4,951   | )
|Net cash provided by financing activities             |  |                       | 4,820    |   |                 |   | 9,110    |                       |  |   | 37,488      |   |  |   | 36,988   |  



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



|                                                 |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|------------------------------------------------ |  | -------------------- | -------- | - | ------------- | - | -------- | -------------------- |  | - | --------------- | - |  | -------------------- | -------- | - | ---------- | - | -------- | -------------------- |  | - | ---------- | - |  | - | -------- | - |  | - | -------- | -
|                                                 |  | Fiscal 2002          |         
|                                                 |  | December 2, 2001     |          |   | March 3, 2002 |   |          | June 2, 2002         |  |   | August 31, 2002 |  
|                                                 |  | AsPreviouslyReported |          |   | AsRestated    |   |          | AsPreviouslyReported |  |   | AsRestated      |   |  | AsPreviouslyReported |          |   | AsRestated |   |          | AsPreviouslyReported |  |   | AsRestated |  
|                                                 |  | (Unaudited)          |          |   | (Unaudited)   |   |          | (Unaudited)          |  |   |                 |   |  |                      |         
|Consolidated balance sheet:                      |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Short-term borrowings                            |  | $                    | 35,230   |   |               | $ | 44,730   |                      |  | $ | 34,756          |   |  | $                    | 44,256   |   |            | $ | 37,629   |                      |  | $ | 46,749     |   |  | $ | 54,508   |   |  | $ | 64,008   |  
|Accrued expenses                                 |  |                      | 34,180   |   |               |   | 33,610   |                      |  |   | 37,153          |   |  |                      | 36,583   |   |            |   | 31,670   |                      |  |   | 31,100     |   |  |   | 44,828   |   |  |   | 44,258   |  
|Total current liabilities                        |  |                      | 142,114  |   |               |   | 151,044  |                      |  |   | 113,063         |   |  |                      | 121,993  |   |            |   | 110,167  |                      |  |   | 118,717    |   |  |   | 155,947  |   |  |   | 164,877  |  
|Total liabilities                                |  |                      | 159,986  |   |               |   | 168,916  |                      |  |   | 130,026         |   |  |                      | 138,956  |   |            |   | 127,110  |                      |  |   | 135,660    |   |  |   | 163,540  |   |  |   | 172,470  |  
|Accumulated deficit                              |  |                      | (270,212 | ) |               |   | (279,142 | )                    |  |   | (266,411        | ) |  |                      | (275,341 | ) |            |   | (263,876 | )                    |  |   | (272,426   | ) |  |   | (292,106 | ) |  |   | (301,036 | )
|Total stockholders (deficit) equity             |  |                      | (1,240   | ) |               |   | (10,170  | )                    |  |   | 43,438          |   |  |                      | 34,508   |   |            |   | 47,185   |                      |  |   | 38,635     |   |  |   | 19,355   |   |  |   | 10,425   |  
|Consolidated statement of
operations:            |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Quarter                                          |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Net revenues                                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            | $ | 62,863   |                      |  | $ | 63,851     |   |  | $ | 54,055   |   |  | $ | 53,067   |  
|Gross profit                                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 36,172   |                      |  |   | 37,160     |   |  |   | 20,833   |   |  |   | 19,845   |  
|Earnings (loss) from operations                  |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 3,324    |                      |  |   | 4,312      |   |  |   | (25,132  | ) |  |   | (26,120  | )
|Interest expense, net                            |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | (1,167   | )                    |  |   | (1,775     | ) |  |   | (1,362   | ) |  |   | (754     | )
|Total other income (expense)                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | (764     | )                    |  |   | (1,372     | ) |  |   | (2,874   | ) |  |   | (2,266   | )
|Earnings (loss) before income taxes              |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 2,560    |                      |  |   | 2,940      |   |  |   | (28,006  | ) |  |   | (28,386  | )
|Net earnings (loss)                              |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 2,535    |                      |  |   | 2,915      |   |  |   | (28,230  | ) |  |   | (28,610  | )
|Year-to-date                                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Net revenues                                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            | $ | 214,633  |                      |  | $ | 215,621    |   |  |   |          |   |  |   |          |  
|Gross profit                                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 129,469  |                      |  |   | 130,457    |   |  |   |          |   |  |   |          |  
|Earnings (loss) from operations                  |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 30,029   |                      |  |   | 31,017     |   |  |   |          |   |  |   |          |  
|Interest expense, net                            |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | (5,907   | )                    |  |   | (6,515     | ) |  |   |          |   |  |   |          |  
|Total other income (expense)                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | (7,276   | )                    |  |   | (7,884     | ) |  |   |          |   |  |   |          |  
|Earnings (loss) before income taxes              |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 22,753   |                      |  |   | 23,133     |   |  |   |          |   |  |   |          |  
|Net earnings (loss)                              |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 23,697   |                      |  |   | 24,077     |   |  |   |          |   |  |   |          |  
|Consolidated statement of
cash flows:            |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Operating activities:                            |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Net earnings                                     |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            | $ | 23,697   |                      |  | $ | 24,077     |   |  |   |          |   |  |   |          |  
|Provision for price concessions and returns, net |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   | 21,626   |                      |  |   | 20,638     |   |  |   |          |   |  |   |          |  
|Change in operating assets and liabilities:      |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Accounts receivable.                             |  | $                    | (33,011  | ) |               | $ | (43,011  | )                    |  | $ | (35,419         | ) |  | $                    | (45,419  | ) |            | $ | (41,926  | )                    |  | $ | (50,938    | ) |  | $ | (92,461  | ) |  | $ | (102,461 | )
|Net cash used in operating activities.           |  |                      | (15,826  | ) |               |   | (25,826  | )                    |  |   | (2,323          | ) |  |                      | (12,323  | ) |            |   | (6,106   | )                    |  |   | (15,726    | ) |  |   | (1,519   | ) |  |   | (11,519  | )
|Financing activities:                            |  |                      |          |   |               |   |          |                      |  |   |                 |   |  |                      |          |   |            |   |          |                      |  |   |            |   |  |   |          |   |  |   |          |  
|Proceeds from short-term bank loans, net         |  |                      | 10,015   |   |               |   | 20,015   |                      |  |   | 9,650           |   |  |                      | 19,650   |   |            |   | 12,659   |                      |  |   | 22,279     |   |  |   | 19,368   |   |  |   | 29,368   |  
|Net cash provided by financing activities.       |  |                      | 11,502   |   |               |   | 21,502   |                      |  |   | 21,663          |   |  |                      | 31,663   |   |            |   | 24,038   |                      |  |   | 33,658     |   |  |   | 30,350   |   |  |   | 40,350   |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



|                                            |  |                                   |          |   |                    |   |          |                      |  |   |             |   |  |                      |          |   |            |   |          |   |  |   |          |  
|------------------------------------------- |  | --------------------------------- | -------- | - | ------------------ | - | -------- | -------------------- |  | - | ----------- | - |  | -------------------- | -------- | - | ---------- | - | -------- | - |  | - | -------- | -
|                                            |  | Seven Months Ended March 31, 2003 |         
|                                            |  | December 1, 2002                  |          |   | December 29, 2002  |   |          | March 31, 2003       | 
|                                            |  | AsPreviouslyReported              |          |   | AsRestated         |   |          | AsPreviouslyReported |  |   | As Restated |   |  | AsPreviouslyReported |          |   | AsRestated |  
|                                            |  | (Unaudited)                       |          |   | (Unaudited)        |   |          |                      |  |   |             |  
|Consolidated balance sheet:                 |  |                                   |          |   |                    |   |          |                      |  |   |             |   |  |                      |          |   |            |   |          |   |  |   |          |  
|Short-term borrowings                       |  | $                                 | 19,398   |   |                    | $ | 28,898   |                      |  | $ | 26,403      |   |  | $                    | 35,903   |   |            | $ | 30,799   |   |  | $ | 40,299   |  
|Accrued expenses                            |  |                                   | 34,908   |   |                    |   | 34,338   |                      |  |   | 27,469      |   |  |                      | 26,899   |   |            |   | 28,751   |   |  |   | 28,181   |  
|Total current liabilities                   |  |                                   | 114,648  |   |                    |   | 123,578  |                      |  |   | 112,735     |   |  |                      | 121,665  |   |            |   | 122,809  |   |  |   | 131,739  |  
|Total liabilities                           |  |                                   | 121,919  |   |                    |   | 130,849  |                      |  |   | 120,034     |   |  |                      | 128,964  |   |            |   | 126,095  |   |  |   | 135,025  |  
|Accumulated deficit                         |  |                                   | (305,977 | ) |                    |   | (314,907 | )                    |  |   | (314,931    | ) |  |                      | (323,861 | ) |            |   | (359,911 | ) |  |   | (368,841 | )
|Total stockholders (deficit) equity        |  |                                   | 5,682    |   |                    |   | (3,248   | )                    |  |   | (3,021      | ) |  |                      | (11,951  | ) |            |   | (46,158  | ) |  |   | (55,088  | )
|                                            | 
|                                            |  | Fiscal 2004                       |         
|                                            |  |                                   |          |   |                    |   |          |                      |  |   |             |   |  |                      |          |   |            |   |          |   |  |   |          |  
|                                            |  | June 29, 2003                     |          |   | September 28, 2003 |   |          | December 28, 2003    | 
|                                            |  |                                   |          |   |                    |   |          |                      |  |   |             |   |  |                      |          |   |            |   |          |   |  |   |          |  
|                                            |  | AsPreviouslyReported              |          |   | AsRestated         |   |          | AsPreviouslyReported |  |   | AsRestated  |   |  | AsPreviouslyReported |          |   | AsRestated |  
|                                            |  | (Unaudited)                       |          |   | (Unaudited)        |   |          | (Unaudited)          | 
|Consolidated balance sheet:                 |  |                                   |          |   |                    |   |          |                      |  |   |             |   |  |                      |          |   |            |   |          |   |  |   |          |  
|Other receivables                           |  | $                                 | 2,745    |   |                    | $ | 3,315    |                      |  | $ | 598         |   |  | $                    | 1,168    |   |            | $ | 386      |   |  | $ | 956      |  
|Total current assets.                       |  |                                   | 37,333   |   |                    |   | 37,903   |                      |  |   | 43,105      |   |  |                      | 43,675   |   |            |   | 40,977   |   |  |   | 41,547   |  
|Total assets                                |  |                                   | 56,439   |   |                    |   | 57,009   |                      |  |   | 61,348      |   |  |                      | 61,918   |   |            |   | 58,181   |   |  |   | 58,751   |  
|Short-term borrowings                       |  |                                   | 16,465   |   |                    |   | 25,965   |                      |  |   | 14,567      |   |  |                      | 24,067   |   |            |   | 20,690   |   |  |   | 30,190   |  
|Total current liabilities                   |  |                                   | 106,733  |   |                    |   | 116,233  |                      |  |   | 110,314     |   |  |                      | 119,814  |   |            |   | 109,880  |   |  |   | 119,380  |  
|Total liabilities                           |  |                                   | 110,053  |   |                    |   | 119,553  |                      |  |   | 116,370     |   |  |                      | 125,870  |   |            |   | 122,073  |   |  |   | 131,573  |  
|Accumulated deficit                         |  |                                   | (377,960 | ) |                    |   | (386,890 | )                    |  |   | (381,965    | ) |  |                      | (390,895 | ) |            |   | (390,959 | ) |  |   | (399,889 | )
|Total stockholders deficit                 |  |                                   | (53,614  | ) |                    |   | (62,544  | )                    |  |   | (55,022     | ) |  |                      | (63,952  | ) |            |   | (63,892  | ) |  |   | (72,822  | )
|Total liabilities and stockholders deficit |  |                                   | 56,439   |   |                    |   | 57,009   |                      |  |   | 61,348      |   |  |                      | 61,918   |   |            |   | 58,181   |   |  |   | 58,751   |  



|3. |  | LICENSE AGREEMENTS
|-- |  | ------------------



We and various Sony computer entertainment companies (collectively, Sony) have entered into agreements pursuant to which we maintain a
non-exclusive, non-transferable license to utilize the Sony name and its proprietary information and technology in order to develop and distribute software for PlayStation and PlayStation 2 in various territories throughout the world,
including North America, Australia, Europe and Asia. We pay Sony a royalty fee, plus the manufacturing cost, for each unit Sony manufactures for us. This payment is made upon the manufacture of the units. In March 2004, our agreements with Sony for
PlayStation platforms renewed automatically and expire in March 2005.



We and various Nintendo entertainment companies (collectively, Nintendo) have entered into agreements pursuant to which we maintain a non-exclusive, non-transferable license to utilize the Nintendo name and its
proprietary information and technology in order to develop and distribute software for GameCube in North America, for Game Boy Advance in Australia, Europe, New Zealand and North America and for Game Boy and Game Boy Color in various territories,
including North America, Australia, Europe and New Zealand. We pay Nintendo a fixed amount per unit, based in part, on memory capacity and chip configuration. This amount includes the cost of manufacturing, printing and packaging of the unit, as
well as a royalty for the use of Nintendos name, proprietary information and technology. These fees and charges are subject to adjustment by Nintendo in its discretion. Our agreements with Nintendo expire at various times in 2004 and, although
there are no assurances, we do not expect any difficulties in renewing those licenses.



We and Microsoft have entered into an agreement pursuant to which we have a non-exclusive, non-transferable license to design, develop and distribute software for the Xbox system. Territories where Xbox



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



software may be distributed by us are determined on a title-by-title basis by Microsoft when the concept of the applicable software title is approved by
Microsoft. We pay Microsoft a royalty fee for each unit of finished products manufactured on our behalf by third-party manufacturers approved by Microsoft. Our agreement with Microsoft expires in 2004 and renews automatically for 1 year terms.



We do not have the right to directly manufacture any CDs or
DVDs or cartridges that contain our software for Sonys PlayStation or PlayStation 2, or Nintendos GameCube, Game Boy Color or Game Boy Advance systems. We do have the right to manufacture CDs or DVDs for the Xbox system through
subcontractors pre-approved by Microsoft. Please see note 22A. The cost of manufacturing our software products, and the royalties due Nintendo, Sony and Microsoft, are included in cost of revenue.



Pursuant to the agreements with the hardware manufacturers, Sony, Microsoft
and Nintendo have the right to review and evaluate, under standards which vary for each hardware manufacturer, the content and playability of each title and the right to inspect and evaluate all art work, packaging and promotional materials used by
us in connection with the software. We are responsible for resolving, at our own expense, any warranty or repair claims brought with respect to the software. To date, we have not experienced any material warranty claims.



Under each of our platform license agreements, we bear the risk that the
information and technology licensed from Sony, Microsoft and Nintendo, and incorporated in the software may infringe the rights of third parties. Further, we must indemnify Sony, Microsoft and Nintendo with respect to, among other things, any claims
for copyright or trademark infringement brought against them, as applicable, and arising from the development and distribution of the game programs incorporated in the software by us. To date, we have not received any material claims of
infringement.



|4. |  | ACCOUNTS RECEIVABLE
|-- |  | -------------------



Accounts receivable are comprised of:



|                                            |  |                |        |   |                |   |         |  
|------------------------------------------- |  | -------------- | ------ | - | -------------- | - | ------- | -
|                                            |  | March 31, 2004 |        |   | March 31, 2003 |  
|Assigned receivables due from factor        |  | $              | 16,931 |   |                | $ | 42,704  |  
|Unfactored accounts receivable              |  |                | 3,539  |   |                |   | 8,276   |  
|                                            |  |                |        |   |                |   |         |  
|                                            |  |                | 20,470 |   |                |   | 50,980  |  
|Allowance for price concessions and returns |  |                | (8,314 | ) |                |   | (26,677 | )
|                                            |  |                |        |   |                |   |         |  
|                                            |  | $              | 12,156 |   |                | $ | 24,303  |  
|                                            |  |                |        |   |                |   |         |  



We and our primary
lender are parties to a factoring agreement. Pursuant to an amendment to the factoring agreement in June 2004, the factoring agreement will terminate in August 4, 2004. On May 4, 2004, we entered into a letter of intent with a proposed new lender.
Please see note 15C.



Under the current factoring agreement, we
assign to our primary lender and our primary lender purchases from us, our U.S. accounts receivable on the approximate dates that our accounts receivable are due from our customers. Our primary lender remits payments to us for the assigned U.S.
accounts receivable that are within the financial parameters set forth in the factoring agreement. Those financial parameters include requirements that invoice amounts meet approved credit limits and that the customer does not dispute the invoices.
The purchase price of our accounts receivable that we assign to the factor equals the invoiced amount, which is adjusted for any returns, discounts and other customer credits or allowances.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)

Before our primary lender purchases our U.S. accounts receivable and remits payment to us for the
purchase price, it may, in its discretion, provide us cash advances under our North American credit agreement (please see note 15C) taking into account the assigned receivables due from our customers, among other factors. As of March 31, 2004, our
primary lender was advancing us 60% of the eligible receivables due from our retail customers. The factoring charge equal to 0.25% of assigned accounts receivable, with invoice payment terms of up to 60 days and an additional 0.125% for each
additional 30 days or portion thereof, is recorded in interest expense. Additionally, our factor, utilizing an asset based borrowing formula, advances us cash equal to 50% of our inventory that is not in excess of 60 days old.



|5. |  | OTHER RECEIVABLES
|-- |  | -----------------



Other receivables are comprised of:



|                                                                                    |  |                |     |                |   |      
|----------------------------------------------------------------------------------- |  | -------------- | --- | -------------- | - | -----
|                                                                                    |  | March 31, 2004 |     | March 31, 2003
|                                                                                    |  |               
|Notes receivable and accrued interest due from officers (please see note 2 and 22B) |  | $              | 645 |                | $ | 1,469
|Licensing fee recovery                                                              |  |                |    |                |   | 1,415
|Other                                                                               |  |                | 157 |                |   | 476  
|                                                                                    |  |                |     |                |   |      
|                                                                                    |  | $              | 802 |                | $ | 3,360
|                                                                                    |  |                |     |                |   |      



|6. |  | INVENTORIES
|-- |  | -----------



|                                 |  |               |       |               |   |      
|-------------------------------- |  | ------------- | ----- | ------------- | - | -----
|                                 |  | March 31,2004 |       | March 31,2003
|Raw material and work-in-process |  | $             | 485   |               | $ | 131  
|Finished goods                   |  |               | 5,254 |               |   | 7,580
|                                 |  |               |       |               |   |      
|                                 |  | $             | 5,739 |               | $ | 7,711
|                                 |  |               |       |               |   |      



|7. |  | PREPAID EXPENSES AND OTHER CURRENT ASSETS
|-- |  | -----------------------------------------



Prepaid expenses and other current assets are comprised of:



|                                                             |  |               |       |               |   |      
|------------------------------------------------------------ |  | ------------- | ----- | ------------- | - | -----
|                                                             |  | March 31,2004 |       | March 31,2003
|Prepaid advertising                                          |  | $             | 344   |               | $ | 414  
|Prepaid product                                              |  |               | 379   |               |   | 28   
|Prepaid insurance                                            |  |               | 1,344 |               |   | 3,122
|Prepaid taxes                                                |  |               | 37    |               |   | 353  
|Royalty advances                                             |  |               | 935   |               |   | 754  
|Deferred financing costs (please see notes 15A, 15B and 20C) |  |               | 1,666 |               |   | 1,724
|Fair value of derivative (please see note 15A)               |  |               | 270   |               |   |     
|Other prepaid expenses                                       |  |               | 810   |               |   | 681  
|                                                             |  |               |       |               |   |      
|                                                             |  | $             | 5,785 |               | $ | 7,076
|                                                             |  |               |       |               |   |      



Prepaid advertising
costs consist principally of advance payments for television and other media advertising. We expense our advertising costs when the advertising takes place.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



|8. |  | BUILDING HELD FOR SALE
|-- |  | ----------------------



In March 2003, we committed ourselves to a plan to sell our building located in the United Kingdom. Since then the building has not been in use. On
November 28, 2003, we entered into an agreement for the sale and leaseback of the building. Under the terms of the agreement, the buyer purchased the building for $8,849 (£4,888) and we contracted to lease the building for 15.5 years at an
annual rent of $832 (£460), subject to adjustment. According to the guidance in Statement of Financial Accounting Standard No. 66 Accounting for Sales of Real Estate, due to our continuing requirement to complete
improvements to the building at our cost, which are necessary in order to make the building suitable for occupancy, and the buyers right under the terms of the agreement to defer the remaining payments due until the work is completed, the
conditions required for sale recognition had not been met as of March 31, 2004. As of March 31, 2004, we classified the cash we received from the buyer of $6,964 (£3,848) as a deposit payable in accrued expenses. Of the deposit received,
$4,719 (£2,783) was used to repay the outstanding balance of the mortgage payable and related interest associated with the building. All criteria for sale recognition are expected to be met and we will record the sale when we have fulfilled
our obligation to complete improvements to the building. Upon recognition of the sale, we will record a deferred gain of approximately $2,475 (£1,367), net of related transaction costs, which will be recognized on a straight line basis over
the 15.5 year life of our lease as a reduction to rent expense. As of March 31, 2004, the net carrying value of the building was $6,336 (£3,448). Rent expense associated with the lease is being recorded on a straight-line basis, which
resulted in deferred rent of $269 as of March 31, 2004 included in other long-term liabilities in the accompanying balance sheet.



|9. |  | FIXED ASSETS
|-- |  | ------------



Fixed assets are comprised of:



|                                  |  |                |         |   |                |   |         |  
|--------------------------------- |  | -------------- | ------- | - | -------------- | - | ------- | -
|                                  |  | March 31, 2004 |         |   | March 31, 2003 |  
|                                  |  |               
|Buildings and improvements        |  | $              | 19,557  |   |                | $ | 20,155  |  
|Furniture, fixtures and equipment |  |                | 19,257  |   |                |   | 43,405  |  
|Automotive equipment              |  |                | 320     |   |                |   | 394     |  
|                                  |  |                |         |   |                |   |         |  
|                                  |  |                | 39,134  |   |                |   | 63,954  |  
|Accumulated depreciation          |  |                | (24,289 | ) |                |   | (44,223 | )
|                                  |  |                |         |   |                |   |         |  
|                                  |  | $              | 14,845  |   |                | $ | 19,731  |  
|                                  |  |                |         |   |                |   |         |  



During fiscal 2001, we
sold one of our buildings for $1,200, which approximated its net book value.



|10. |  | OTHER ASSETS
|--- |  | ------------



Other assets are comprised of:



|                                                         |  |                |     |                |   |    
|-------------------------------------------------------- |  | -------------- | --- | -------------- | - | ---
|                                                         |  | March 31, 2004 |     | March 31, 2003
|                                                         |  |               
|Deferred financing costs, net                            |  | $              |    |                | $ | 320
|Deposits                                                 |  |                | 408 |                |   | 473
|Notes receivable due from officers (please see note 22B) |  |                |    |                |   | 100
|                                                         |  |                |     |                |   |    
|                                                         |  | $              | 408 |                | $ | 893
|                                                         |  |                |     |                |   |    



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



|11. |  | ACCRUED EXPENSES
|--- |  | ----------------



Accrued expenses are comprised of:



|                                                                  |  |               |        |               |   |       
|----------------------------------------------------------------- |  | ------------- | ------ | ------------- | - | ------
|                                                                  |  | March 31,2004 |        | March 31,2003
|                                                                  |  |               |        | (Restated)   
|Accrued advertising and marketing                                 |  | $             | 303    |               | $ | 300   
|Accrued consulting and professional fees                          |  |               | 2,864  |               |   | 1,201 
|Accrued excise and other taxes                                    |  |               | 2,469  |               |   | 1,197 
|Deposit payable on building held for sale (please see note 8)     |  |               | 6,964  |               |   |      
|Accrued liabilities for derivatives (please see note 15A and 15B) |  |               | 8,107  |               |   |      
|Accrued fair value of convertible note placement agent warrants   |  |               | 416    |               |   |      
|Accrued duty and freight                                          |  |               | 989    |               |   | 887   
|Accrued litigation                                                |  |               | 1,378  |               |   | 1,535 
|Accrued payroll                                                   |  |               | 3,294  |               |   | 3,432 
|Accrued purchases                                                 |  |               | 7,814  |               |   | 4,893 
|Accrued royalties payable and licensing obligations               |  |               | 7,742  |               |   | 12,188
|Accrued interest                                                  |  |               | 1,354  |               |   | 104   
|Deferred revenue                                                  |  |               | 1,698  |               |   | 61    
|Other accrued expenses                                            |  |               | 1,872  |               |   | 2,383 
|                                                                  |  |               |        |               |   |       
|                                                                  |  | $             | 47,264 |               | $ | 28,181
|                                                                  |  |               |        |               |   |       



|12. |  | ACCRUED SELLING EXPENSES
|--- |  | ------------------------



Accrued selling expenses are comprised of:



|                                |  |               |        |               |   |       
|------------------------------- |  | ------------- | ------ | ------------- | - | ------
|                                |  | March 31,2004 |        | March 31,2003
|Accrued cooperative advertising |  | $             | 1,477  |               | $ | 3,187 
|Accrued price concessions       |  |               | 10,740 |               |   | 19,623
|Accrued sales commissions       |  |               | 1,678  |               |   | 1,829 
|Accrued rebates                 |  |               | 1,192  |               |   | 2,010 
|                                |  |               |        |               |   |       
|                                |  | $             | 15,087 |               | $ | 26,649
|                                |  |               |        |               |   |       



Accrued sales
commissions of $1,094 were settled by the issuance of 2,420 shares of common stock in April or June 2004.



|13. |  | ACCRUED STOCK-BASED EXPENSES
|--- |  | ----------------------------



Accrued stock-based expenses is comprised of liabilities that are expected to be settled through the issuance of 5,500 shares of our common stock (4,000
shares, in the aggregate, to two executive officers and 1,500 shares to another executive for his appointment as CEO), but which require stockholder approval prior to such issuances under NASD Rules. The Compensation Committee and the Board of
Directors approved the issuance of the 1,500 common shares to an executive officer for his promotion to CEO in May 2003 and the 4,000 common shares to two other executive officers in March 2003 (please see note 15D). Until our stockholders vote on
whether to approve the issuance of the 4,000 shares, the liabilities associated with those shares will fluctuate with



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



the market value of the related common stock, which was $0.62 per share on March 31, 2004. On January 20, 2004, our stockholders approved the issuance of the
1,500 shares to our CEO at which time the associated compensation expense was fixed at $1,140, based on the market value of our common stock on that date. The fair value of the 4,000 shares was $2,480 as of March 31, 2004, based on the market
value of our common stock on that date. The fair values of the 4,000 shares and 1,500 shares were reflected as accrued stock-based expenses as of March 31, 2004. Although the issuance of the 1,500 shares was approved by our stockholders, the
obligation is included in accrued liabilities and not equity, since the common shares were not issued to our CEO as of March 31, 2004. Non-cash financing expense for the fiscal year ended March 31, 2004 related to the 4,000 shares was $2,211 or
the excess of the market value of such shares as of March 31, 2004 over the portion of such market value that had been amortized in fiscal 2003 ($269). Stock-based compensation for the fiscal year ended March 31, 2004 included $1,140 for the
issuance of the 1,500 shares.



|14. |  | ACCRUED RESTRUCTURING CHARGES
|--- |  | -----------------------------



In December 2002 and January 2003, we restructured our operations in order to lower our operating expenses and improve our operating cash flows. Under the
plan, we closed our software development studio located in Salt Lake City, Utah, and reduced global administrative headcount. The studio closing was designed to achieve financial efficiencies through consolidation of all our domestic internal
product development. The closure of the development studio and reduction of our global administrative headcount reduced our overall headcount by approximately 100 employees and resulted in initial restructuring charges of $4,824 during fiscal 2003.
The restructuring charges included accruals for employee termination costs, the write-off of certain fixed assets and leasehold improvements and the accrual of the development studio lease commitment, which was net of estimated sub-lease rental
income. During the fiscal year ended March 31, 2004, we recorded restructuring charges of $514 due to the change in net present value of accrued restructuring costs as well as an adjustment to our forecast of sub-lease rental income and interest.
The development studio lease commitment expires in May 2007 and the employee severance agreements expired over various periods through April 2004.



The following table presents the components of restructuring charges incurred for the fiscal year ended March 31, 2004 and the seven months ended March
31, 2003 and the change in accrued restructuring charges from August 31, 2002 to March 31, 2003 and from March 31, 2003 to March 31, 2004.



|                                                                                             |  |                                  |        |   |                                   |   |        |  
|-------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|                                                                                             |  | Fiscal Year Ended March 31, 2004 |        |   | Seven Months Ended March 31, 2003 |  
|                                                                                             |  |                                 
|                                                                                             |  |                                 
|                                                                                             |  |                                 
|Accrued restructuring costs, beginning of period                                             |  | $                                | 2,299  |   |                                   | $ |       |  
|Charges                                                                                      |  |                                  |        |   |                                   |   |        |  
|Severance and other employee termination benefits                                            |  |                                  |       |   |                                   |   | 3,783  |  
|Lease commitment, net of estimated sub-lease rental income                                   |  |                                  |       |   |                                   |   | 567    |  
|Asset write-offs                                                                             |  |                                  |       |   |                                   |   | 436    |  
|Other costs                                                                                  |  |                                  |       |   |                                   |   | 38     |  
|                                                                                             |  |                                  |        |   |                                   |   |        |  
|Restructuring charges incurred and expensed                                                  |  |                                  |       |   |                                   |   | 4,824  |  
|Adjustments to employee termination costs, lease costs and estimated sub-lease rental income |  |                                  | 514    |   |                                   |   |       |  
|Less: costs paid                                                                             |  |                                  | (1,766 | ) |                                   |   | (2,525 | )
|                                                                                             |  |                                  |        |   |                                   |   |        |  
|Accrued restructuring costs, end of period                                                   |  | $                                | 1,047  |   |                                   | $ | 2,299  |  
|                                                                                             |  |                                  |        |   |                                   |   |        |  



Accrued restructuring
costs as of March 31, 2004 consist of $29 of accrued severance and $1,018 related to a lease commitment.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



|15. |  | DEBT
|--- |  | ----



Debt is comprised of:



|                                                            |  |               |        |               |   |       
|----------------------------------------------------------- |  | ------------- | ------ | ------------- | - | ------
|                                                            |  | March 31,2004 |        | March 31,2003
|                                                            |  |               |        | (Restated)   
|Short term debt:                                            |  |               |        |               |   |       
|9% convertible subordinated notes (A)                       |  | $             | 11,056 |               | $ |      
|16% convertible subordinated notes (B)                      |  |               | 9,271  |               |   |      
|Obligations under capital leases                            |  |               | 538    |               |   | 736   
|Supplemental bank loan (D)                                  |  |               | 2,000  |               |   | 11,000
|Advances from International factors (E)                     |  |               | 1,625  |               |   | 4,110 
|Advances from North American factor (C) (please see note 4) |  |               | 5,006  |               |   | 13,654
|Bank participation advance (F)                              |  |               | 9,500  |               |   | 9,500 
|Promissory note (G)                                         |  |               | 134    |               |   | 737   
|Bank overdraft                                              |  |               | 1,989  |               |   | 562   
|                                                            |  |               |        |               |   |       
|                                                            |  |               | 41,119 |               |   | 40,299
|                                                            |  |               |        |               |   |       
|Long term debt:                                             |  |               |        |               |   |       
|Obligations under capital leases                            |  |               | 240    |               |   | 632   
|                                                            |  |               |        |               |   |       
|                                                            |  |               | 240    |               |   | 632   
|                                                            |  |               |        |               |   |       
|                                                            |  | $             | 41,359 |               | $ | 40,931
|                                                            |  |               |        |               |   |       



A.  9%
Convertible Subordinated Notes



On February 17, 2004, (the
Initial Closing Date) we raised gross proceeds of $15,000 (net proceeds of $14,250) in connection with the sale of a 9% Senior Subordinated Convertible Notes (the 9% Notes), due in February 2007, to an investor. The 9% Notes
are convertible into shares of our common stock, at a conversion price of $0.65 per share. Additionally, the investor received warrants to purchase 4,615 shares of our common stock with an exercise price equal to $0.65 per share. The warrants are
exercisable for five years from the Initial Closing Date.



Interest due on the 9% Notes is payable semi-annually commencing October 1, 2004. Upon conversion of the 9% Note the related accrued and unpaid interest, if any, shall be paid in cash to the investor. The 9% Notes are collateralized by a
second mortgage on our headquarters building, subject to our primary lenders (GMAC Commercial Credit LLP) consent and an inter-creditor agreement to be entered into post-closing. We were required to deliver documentation of the security
agreement and mortgage securing the 9% Notes by March 15, 2004. We delivered forms of such documentation prior to such date, after which the holder of the 9% Notes agreed to waive the requirement to execute and file such documentation by March 15,
2004. The terms of the 9% Notes limit our incurrence of additional indebtedness and preclude the payment of cash dividends.



Commencing August 18, 2004, if the market value of our common stock equals at least $1.625, which is periodically reduced to $0.975 by February 19, 2006,
and other specific criteria are met, we have the right to redeem all or a portion of the 9% Notes at the outstanding principal balance of the 9% Notes plus any related accrued interest. The investor has the right to require us to repurchase the 9%
Notes in the event of a change in control of the Company, as defined in the agreement or if the 9% Note holder is unable to sell the shares underlying the 9% Notes and related warrants for 135 nonconsecutive days out of 365 consecutive days after
the effectiveness of the registration statement. The 9% Notes are subordinate to all our bank debt with our primary lender.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



We have a first option, for a nine month period from February 17, 2004 (the First Option
Period), to require the investor to purchase $5,000 of additional 9% Notes (the First Additional 9% Notes) at a conversion price of $0.65 per share, if during that period the closing bid price of our common stock exceeds $0.8125
per share for twenty consecutive trading days and our common stock continues to be listed on a qualified securities exchange. The investor also has the option, during the First Option Period, to purchase the First Additional 9% Notes from us for
$5,000.



We have a second option, for a six month period
commencing one year following the Initial Closing Date (the Second Option Period), to require the investor to purchase $5,000 of additional 9% Notes (the Second Additional 9% Notes) at a conversion price of $0.65 per share,
if during the three month period commencing February 17, 2005, the closing bid price of our common stock exceeds $1.30 per share for twenty consecutive trading days or if during the three month period commencing May 17, 2005, the closing bid price
of our common stock exceeds $0.975 per share for twenty consecutive trading days and our common stock continues to be listed on a qualified securities exchange. The investor also has the option, for an 18 month period commencing February 17, 2004,
to purchase the Second Additional 9% Notes from us for $5,000.



In connection with any purchase of First Additional 9% Notes or Second Additional 9% Notes, the investor would receive additional warrants to purchase a number of shares of our common stock equal to 20% of the number of shares underlying
those additional notes, with an exercise price equal to $0.65 per share.



Had we not registered the 9% Notes and all the common shares underlying the securities by August 17, 2004, the conversion price of the 9% Notes would have been reset to $0.60 per share. As a result, at issuance, the
9% Notes did not have a fixed conversion rate and are therefore not considered conventional convertible debt. The Form S-1 registration statement related to the 9% Notes and the common shares underlying the 9% Notes and the related warrants was
declared effective on April 8, 2004 at which time the conversion rate was fixed at $0.65 per share. The 9% Notes agreement requires us to use our commercially reasonable efforts to keep the registration statement effective until February 17, 2006.
If, after the registration statement is effective, sales of securities cannot be made pursuant to the registration statement for a period of 30 consecutive trading days for any reason, we must pay the investor liquidated damages of 1% per month of
the purchase price of the 9% Notes.



Based on the accounting
guidance in SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, and EITF Issue No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock, (1) the conversion option of the 9% Notes, (2) the warrants issued with the 9% Notes (3) our option to redeem the 9% Notes, (4) the investors right to receive warrants at a $0.65 per share exercise price with an option to
purchase First or Second Additional 9% Notes and (5) the put option held by the purchaser of the 9% Notes are derivative instruments because we have contractually agreed to register the common shares underlying them and at issuance the conversion
option was not at a fixed rate. We have recorded these derivative instruments as liabilities, included in accrued expenses, or assets, included in other current assets, in the accompanying balance sheet, at their fair values as determined by an
independent valuation. Until the underlying shares are registered and the registration period ends on February 17, 2006 (unless the 9% Notes or related warrants are converted or exercised prior to that date) and, additionally for the redemption
option, conversion option and put option, until the 9% Notes are converted to common stock or repaid, the instruments are considered derivatives and therefore the related liabilities or asset each reporting period will be adjusted to their fair
value. We will record adjustments to the liabilities or asset each reporting period as non-cash financing expense or income in the statement of operations until the instruments are no longer considered derivatives and the then fair value of the
instruments will be reclassified from a liability or asset to additional paid-in capital.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



We have allocated the proceeds from the sale of the 9% Notes first to the fair values of the
derivative instruments related to the 9% Notes with the balance allocated to the 9% Notes. Based on the fair values as of February 17, 2004, the proceeds allocated to the conversion feature of the 9% Notes was $2,975, to the warrants was $1,019, to
the right to receive warrants with additional 9% Note purchases held by the purchasers of the 9% Notes was $382, to our redemption option was an asset of $270 and to the 9% Notes was $10,894. The put option had no value as of February 17, 2004. The
fair value of the derivative instruments as of March 31, 2004 approximated the fair values as of February 17, 2004 and was included in accrued expenses or other current assets as of March 31, 2004. The fair values of the derivative instruments at
issuance represent debt discounts and will be amortized to expense over the term of the 9% Notes or, if earlier, upon their conversion to common stock. As of March 31, 2004, the unamortized debt discount was $3,944. Amortization of the debt discount
amounted to $162 for the fiscal year ended March 31, 2004, is included in non-cash financing expense in the statement of operations and increased the balance of the 9% Notes. As of March 31, 2004 we were in default of certain provisions of the 9%
Notes and therefore have classified them as short-term debt.



We incurred fees of $1,039 in connection with the 9% Notes transaction for placement agent and investment advisory services, comprised of warrants to purchase 554 shares of our common stock at an exercise price of $0.65 per share with a
fair value of $289, and cash payments totaling $750. We are amortizing these fees on a straight-line basis over the term of the 9% Notes or, upon their conversion to common stock. Amortization expense related to the 9% Notes amounted to $38 for the
fiscal year ended March 31, 2004, of which $10 is included in non-cash financing expenses in the statement of operations. The unamortized fees of $1,001 as of March 31, 2004 is included in other current assets. Similar to the warrants issued to the
private investor, because the shares underlying the warrants are not registered, they are considered derivative instruments under EITF Issue No. 00-19 and therefore until the date the shares are registered and the registration period expires, we are
required to revalue the warrants on a quarterly basis and classify them in accrued expenses. The fair value of the placement agent warrants as of March 31, 2004 was $273.



B.  16% Convertible Subordinated Notes



During September and October 2003, we raised gross proceeds of $11,863 (net proceeds of $11,329) in connection with the
sale, to a limited group of private investors, of our convertible subordinated notes (the 16% Notes), due in 2010. On November 12, 2003, we received notification from The Nasdaq Stock Market, Inc. that, in Nasdaqs opinion, the
structure of our September/October 2003 private offering of the 16% Notes was not in compliance with NASD Marketplace Rule 4350(i)(1)(d). The Note offering was structured in a manner we believe complied with Nasdaqs published rules. However,
based upon discussions and agreement with Nasdaq and the holders of the 16% Notes, in December 2003, we amended the terms of the 16% Notes to secure Nasdaqs agreement that the structure of the 16% Notes complied with their rules.



The amended 16% Notes were initially convertible into 13,262 shares of our
common stock, based upon a conversion price of $0.8945 per share. The conversion price is based upon the closing price of our common stock that Nasdaq advised us complied with its interpretation of market price as of the time of the 16%
Note offering. The terms of the Note agreements provided for an adjustment to the conversion rate, subject to stockholder approval. On January 20, 2004, our stockholders voted to authorize an adjustment of the conversion price to $0.57 per share, a
36% discount from the $0.8945 conversion price. Accordingly, the 16% Notes are convertible into 20,812 shares of our common stock. The interest rate on the 16% Notes is 16% per annum, due semi-annually on each of April 15 and October 15, commencing
April 15, 2004. The purchasers of the 16% Notes have also received warrants to purchase approximately 8,193 shares of our common stock, at an exercise price of $0.8945 per share, which exercise price was adjusted to $0.57 when stockholder approval
was obtained on January 20, 2004.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



Subject to the consent of the holders of any senior indebtedness and our common stock price closing
at an average of $1.14 per share during a specified period, as defined in the agreement, we may, at our option, redeem the 16% Notes in whole but not in part on any date on or after April 5, 2005, at a redemption price, payable in cash, equal to the
outstanding principal amount of the 16% Notes plus accrued and unpaid interest thereon to the applicable redemption date if the requirements as documented in the agreement are satisfied. In addition, subject to the consent of the holders of any
senior indebtedness, the purchasers of the 16% Notes have a put option to require us to repurchase the 16% Notes at a redemption amount equal to the greater of the principal amount of the 16% Notes plus accrued interest thereon, or the market value
of the underlying stock, if we experience a change in control.



In the event our common stock price closes at $1.14 per share for 10 consecutive trading days, we have the right to require the holders of the warrants to exercise the warrants in full, within 10 business days following notification of the
forced exercise.



We agreed to file a registration statement to
register the shares of our common stock underlying the 16% Notes and warrants by December 19, 2003 and that the shares would be registered by January 26, 2004. The registration statement we filed became effective on April 8, 2004. Because the
registration statement was not filed by December 19, 2003 nor effective by January 26, 2004, we incurred penalties to the purchasers of $712, which amount was included in other expense for the fiscal year ended March 31, 2004. The $356 unpaid
balance of those penalties was included in accrued expenses as of March 31, 2004.



Based on the accounting guidance in SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, and EITF Issue No. 00-19 Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Companys Own Stock, (1) the conversion option of the 16% Notes, (2) the warrants issued with the 16% Notes and (3) the put option held by the purchasers of the 16% Notes are derivative
instruments because we have contractually agreed to register the common shares underlying them and at issuance the conversion option was not at a fixed rate. We have recorded these derivative instruments as liabilities, included in accrued expenses
in the accompanying balance sheet, at their fair values as determined by an independent valuation. Until the underlying shares are registered and the required registration period expires, and, additionally for the conversion option and put option,
until the 16% Notes are converted to common stock or repaid, the instruments are considered derivatives and therefore the related liabilities each reporting period will be adjusted to their fair value. We will record adjustments to the liabilities
each reporting period as non-cash financing expense or income in the statement of operations until the instruments are no longer considered derivatives and the then fair value of the instruments will be reclassified from a liability to additional
paid-in capital.



We have allocated the proceeds from the sale
of the 16% Notes first to the fair values of the derivative instruments related to the 16% Notes with the balance allocated to the 16% Notes. Based on the fair values at the time of issuance, the proceeds allocated to the conversion feature of the
16% Notes was $305, to the warrants was $2,495 and to the 16% Notes was $9,063. The put option held by the purchasers of the 16% Notes had no value at the time of issuance or as of March 31, 2004. The fair values of the conversion feature of the 16%
Notes and the warrants was included in accrued liabilities for derivatives as of March 31, 2004. The fair value of the conversion option and warrants as of March 31, 2004 was $1,513 and $2,218, respectively, which resulted in a $931 charge included
in other expense in the statement of operations for the fiscal year ended March 31, 2004. The fair values of the derivative instruments at the time of issuance represent debt discounts that are being amortized to expense over the term of the 16%
Notes or, if earlier, upon their conversion to common stock. Such expense amounted to $208 for the fiscal year ended March 31, 2004, is included in non-cash financing expenses



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



and increased the balance of the 16% Notes. On April 8, 2004, the date the registration statement for the shares underlying the 16% Notes became effective,
the 16% Notes were to have automatically converted to common stock at $0.57 per share, in accordance with the terms of the 16% Notes. However, because we have not timely paid interest and penalties associated with the 16% Notes, among other reasons,
and therefore we are in default under the agreement, as of June 14, 2004 only $5,463 of the total face value of the 16% Notes converted to common stock. Based on the 16% Notes converted to our common stock through June 14, 2004, non-cash financing
expense for the first quarter of fiscal 2005 will include a non-cash financing charge of approximately $1,500, equal to the unamortized balance of debt discounts and deferred financing costs related to the converted 16% Notes. The remaining
unamortized balance of debt discounts related to the 16% Notes that have not yet converted to our common stock, will be recorded as non-cash financing expense upon their conversion, if it were to occur.



We incurred placement agent fees of $713 in connection with the 16% Notes
transaction, comprised of warrants to purchase 267 shares of our common stock at an adjusted exercise price of $0.57 per share with a fair value of $180, and a cash payment of $534. We are amortizing these fees on a straight-line basis over the term
of the 16% Notes or, upon their conversion to common stock. Amortization of these placement agent fees amounted to $48 for the fiscal year ended March 31, 2004. The unamortized portion of these fees of $665 is included in other current assets as of
March 31, 2004. Similar to the warrants issued to the private investors, because the shares underlying the warrants are not registered, they are considered derivative instruments under EITF Issue No. 00-19 and therefore until the date the shares are
registered and the registration period expires, we are required to revalue the warrants on a quarterly basis and classify them in accrued expenses. The fair value of the placement agent warrants as of March 31, 2004 was $143.



As of June 29, 2004, we were in default on our 16% convertible notes with
respect to interest payments and late registration payments due under the notes. We are in continued discussions with the holders of the convertible notes and believe that we will be successful in obtaining a waiver of those defaults; however, there
can be no assurance that we will be successful in obtaining these waivers. Due to our default under the 16% Notes, for which we are seeking waivers, the note holders may declare the principal and accrued interest balances outstanding immediately due
and therefore we have classified the 16% Notes as short-term debt as of March 31, 2004.



C. North American Credit Agreement



We and our primary lender are parties to a North American credit agreement. Pursuant to a June 18, 2004 amendment to the credit agreement, the credit agreement will terminate on August 4, 2004. Under the current
credit agreement, our primary lender generally advances cash to us based on a borrowing formula that primarily takes into account the balance of our eligible U.S. receivables that the primary lender expects to purchase in the future, and to a lesser
extent our finished goods inventory balances. Advances to us under the North American credit agreement bear interest at 1.50% per annum above our primary lenders prime rate (5.50% as of March 31, 2004; 5.75% as of March 31, 2003). Borrowings
that our primary lender may provide us in excess of an availability formula bear interest at 2.00% above our primary lenders prime rate. Under the North American credit agreement, we may not borrow more than $12,500 or the amount calculated
using the availability formula plus a $3,000 supplemental discretionary loan, whichever is less. Our primary lender has secured all of our obligations under the North American credit agreement with substantially all of our assets. Under the terms of
the North American credit agreement, we are required to maintain specified levels of working capital and tangible net worth, among other financial covenants. As of March 31, 2004 and March 31, 2003, while we were not in compliance with respect to
some of the financial covenants contained in the agreement, we received waivers from our primary lender.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



D.  Supplemental Bank Loans



Pursuant to the May 4, 2004 amendment to our credit agreement, our primary
lender agreed to provide an additional supplemental discretionary loan of $3,000 that, if advanced to us, would be required to be repaid on August 4, 2004, upon the termination of the credit agreement.



In December 2003, our North American credit agreement was amended to allow
for a supplemental discretionary loan of up to $4,000 from December 16, 2003 thru December 31, 2003, up to $5,000 from January 1, 2004 through January 31, 2004, up to $3,000 from February 1, 2004 through February 29, 2004, up to $2,000 from March 1,
2004 through March 31, 2004, and up to $1,000 from April 1, 2004 through April 30, 2004. As of March 31, 2004, a supplemental discretionary loan of $2,000 was outstanding. As of April 8, 2004, the supplemental discretionary loan was repaid.



On March 31, 2003, our North American credit agreement was
amended which allowed us to borrow supplemental discretionary loans of $11,000 through May 31, 2003, which thereafter was reduced to $5,000 through September 29, 2003 above the standard formula for short-term funding. In accordance with the terms of
the amended credit agreement that afforded us the supplemental discretionary loan, as of May 31, 2003, we repaid $6,000 of the supplemental discretionary loan and as of September 26, 2003, we repaid the remaining $5,000. As a condition precedent to
our primary lender entering into the amendment, two of our major shareholders, who are also executive officers, otherwise referred to as the Affiliates, pledged an aggregate cash deposit of $2,000 with our primary lender in order to provide a
limited guarantee of our obligations. Our primary lender returned the cash deposit to the Affiliates on September 26, 2003 concurrently with our repayment of the supplemental discretionary loan. As consideration to the Affiliates for making the
deposit, and based upon the advice of, and a fairness opinion obtained from an independent financial advisor, on March 31, 2003, the Audit Committee approved and the Board of Directors authorized the issuance to each Affiliate 2,000 shares of our
common stock with a then aggregate market value of $1,560 ($2,480 as of March 31, 2004) and a warrant to purchase 500 shares of our common stock at an exercise price of $0.50 per share with an aggregate fair value of $305.



In June 2003, Nasdaq advised us that their then unpublished internal
interpretation of NASD Marketplace Rule 4350(i)(1)(a) requires us to obtain stockholder ratification of the issuance of the shares to the Affiliates. Therefore, the issuance of the 4,000 common shares are subject to stockholder approval. As a result
of the required stockholder approval, variable accounting is being applied to the issuance. Nasdaq has subsequently published a proposed amendment to Marketplace Rule 4350(i)(1)(a) which addresses this issue. Since the common shares became
forfeitable, as of June 29, 2003, we reclassified the $1,560 aggregate market value of the shares at issuance from stockholders equity to accrued stock-based expenses. We are required to revalue the common shares at each quarter-end, until the
market value is fixed if and when the stockholders approve the share issuance. Accordingly, during the fiscal year ended March 31, 2004 we increased accrued stock-based expenses by $920 to the market value of the common shares of $2,480 as of March
31, 2004.



We have expensed the fair value of the stock-based
and warrant-based consideration provided to the Affiliates as a non-cash financing expense over the period between the date the initial supplemental loans were advanced in February 2003 and the date they were fully repaid, September 26, 2003.
Non-cash financing expense was $2,479 for the fiscal year ended March 31, 2004 and $306 for the seven months ended March 31, 2003.



There were advances outstanding within the standard borrowing formula under the North American credit agreement of $5,006 as of March 31, 2004, and
$13,654 (restated) as of March 31, 2003. A supplemental discretionary loan of $2,000 was outstanding as of March 31, 2004 and $11,000 was outstanding as of March 31, 2003.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



During fiscal 2002 and fiscal 2001, our primary lender advanced to us and we repaid supplemental
discretionary loans above the standard formula for short-term funding under our North American credit agreement. As additional security for the supplemental loans, two of our executive officers personally pledged as collateral an aggregate of 1,568
shares of our common stock. Our primary lender will release the 1,568 shares of common stock the affiliates pledged following a 30-day period in which we are not in an overformula position exceeding $1,000 and are not otherwise in default under the
North American credit agreement. The fair value of our officers providing collateral relating to the supplemental loan, or $200, was recorded as a non-cash financing expense over the term of the original related supplemental loan, which ended
on January 7, 2002.



In connection with the original
supplemental loan, on October 31, 2001, we issued to our primary lender a five-year warrant to purchase 100 shares of our common stock at an exercise price of $4.70 per share, the market price per share of our common stock on the date we issued the
warrant. In February 2002, we reduced the exercise price to $3.00 per share and increased the number of common shares issuable under the warrant to 136 relating to a private placement of our common stock and the anti-dilution provisions of the
warrant. On March 31, 2003, we further reduced the exercise price to $0.39 per share and increased the number of common shares issuable under the warrant to 255 relating to the issuance of common shares to Affiliates and the anti-dilution
provisions of the warrant. We amortized the $419 fair value of the warrant as a non-cash financing expense over the term of the original supplemental loan, which ended on January 7, 2002.



E.  Advances from International Factors



In fiscal 2001, several of our international subsidiaries entered into a receivables facility with our U.K. bank, an
affiliate of our primary lender. On June 18, 2004, the receivables facility with our U.K. bank was amended to terminate on August 4, 2004. We are actively pursuing an alternative facility with another bank. Under the current international facility,
we can obtain financing of up to the lesser of approximately $17,650 (£9,750) or 60% of the aggregate amount of eligible receivables from our international operations. The amounts we borrow under the international facility bear interest at
2.00% per annum above LIBOR (5.06% as of March 31, 2004; 5.17% as of March 31, 2003). Our U.K. bank has secured the international facility with the accounts receivable and assets of our international subsidiaries that participate in the facility. We
had an outstanding balance under the international facility of $653 as of March 31, 2004 and $4,110 as of March 31, 2003.



In September 2003, a French bank advanced our local subsidiary $1,009 based on the outstanding balances of selected accounts receivable invoices. Customer
payments of those invoices made directly to the French bank have been and will be applied to repay the outstanding loan. As of March 31, 2004, the full amount of the advances had been repaid. Our French subsidiary retains the credit risk for the
invoices and therefore will cover any customer collection shortfall. The borrowed funds bore interest at 1.30% per annum above the one month EURIBOR rate.



In February 2004, a French bank advanced our local subsidiary $972 based on the outstanding balances of selected accounts receivable invoices. Customer
payments of those invoices made directly to the French bank will be applied to repay the outstanding loan. As of March 31, 2004, the full amount borrowed was outstanding. Our French subsidiary retains the credit risk for the invoices and therefore
will cover any customer collection shortfall. The borrowed funds bore interest at 1.30% per annum above the one month EURIBOR rate (3.34% as of March 31, 2004). On April 9, 2004, the French bank sent us a letter requesting all outstanding balances
be repaid by June 30, 2004.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



F.  Bank Participation Advance



In March 2001, our primary lender entered into junior participation
agreements with some investors. As a result of the participation agreements, our primary lender advanced us $9,500 for working capital purposes. The investors associated with $5,500 of the advances were our executive officers and one of our
directors of our Board. We are required to repay the $9,500 bank participation advance to our primary lender upon the earlier to occur of the termination of the North American credit agreement, currently August 4, 2004, or March 12, 2005. Our
primary lender is required to purchase the participation agreements from the investors on the earlier to occur of March 12, 2005, or the date we repay all amounts outstanding under the North American credit agreement and the agreement is terminated.
If we were not able to repay the bank participation advance, the junior participants would have subordinated rights assigned to them under the North American credit agreement for the unpaid balance.



G.  Promissory Note



In March 2003, we provided a promissory note to an independent software
developer in the amount of $804. The balance of the note was $134 as of March 31, 2004 and $737 as of March 31, 2003. The note bears interest at a rate of 8% per annum and was due to be fully paid in February 2004.



H. Our debt matures as follows:



|                              |  |   |       
|----------------------------- |  | - | ------
|Fiscal years ending March 31, |  |   |       
|2005                          |  |   | 41,119
|2006                          |  |   | 213   
|2007                          |  |   | 27    
|                              |  |   |       
|                              |  | $ | 41,359
|                              |  |   |       



|16. |  | OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
|--- |  | ----------------------------------------------



We have entered into various equipment capital leases that expire at various dates through fiscal 2007. Future minimum payments under the leases are as
follows:



|                                            |  |   |      |  
|------------------------------------------- |  | - | ---- | -
|Fiscal years ending March 31,               |  |   |      |  
|2005                                        |  |   | 594  |  
|2006                                        |  |   | 228  |  
|2007                                        |  |   | 36   |  
|                                            |  |   |      |  
|Total minimum lease payments                |  |   | 858  |  
|Amount representing interest                |  |   | (80  | )
|                                            |  |   |      |  
|Present value of net minimum lease payments |  |   | 778  |  
|Less: current portion                       |  |   | (538 | )
|                                            |  |   |      |  
|                                            |  | $ | 240  |  
|                                            |  |   |      |  



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



We have entered into operating leases for rental space and equipment that expire on various dates
through fiscal 2020. Some of the leases contain payment escalation clauses based on inflation. Future minimum rental payments under the operating leases are as follows:



|                                       |  |   |       
|-------------------------------------- |  | - | ------
|Fiscal years ending March 31,          |  |   |       
|2005                                   |  |   | 3,894 
|2006                                   |  |   | 2,931 
|2007                                   |  |   | 2,082 
|2008                                   |  |   | 936   
|2009                                   |  |   | 862   
|Thereafter                             |  |   | 8,730 
|                                       |  |   |       
|Total minimum operating lease payments |  | $ | 19,435
|                                       |  |   |       



Rent expense under
operating leases was $3,265 for the fiscal year ended March 31, 2004, $1,663 for the seven months ended March 31, 2003, $1,662 for the seven months ended March 31, 2002, $2,973 for fiscal 2002 and $2,543 for fiscal 2001.



|17. |  | PROVISION FOR INCOME TAXES
|--- |  | --------------------------



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



|                                     |  |                                 |    |                                  |   |      |                   |  |   |        |   |  |   |      |  
|------------------------------------ |  | ------------------------------- | -- | -------------------------------- | - | ---- | ----------------- |  | - | ------ | - |  | - | ---- | -
|                                     |  | Fiscal Year Ended March 31,2004 |    | Seven Months Ended March 31,2003 |   |      | Fiscal Year Ended | 
|                                     |  |                                 |    | August 31, 2002                  |   |      | August 31, 2001   | 
|Federal                              |  | $                               |   |                                  | $ | (125 | )                 |  | $ | (1,193 | ) |  | $ | (798 | )
|Foreign                              |  |                                 | 19 |                                  |   | (191 | )                 |  |   | 332    |   |  |   | 594  |  
|State                                |  |                                 |   |                                  |   | 125  |                   |  |   | 141    |   |  |   | 98   |  
|                                     |  |                                 |    |                                  |   |      |                   |  |   |        |   |  |   |      |  
|Total income tax provision (benefit) |  | $                               | 19 |                                  | $ | (191 | )                 |  | $ | (720   | ) |  | $ | (106 | )
|                                     |  |                                 |    |                                  |   |      |                   |  |   |        |   |  |   |      |  



In each of the years
presented, we recorded no deferred tax provision, as we had no net deferred tax assets or liabilities.



We have provided a reconciliation of the Federal statutory income tax rate to our effective income tax rate below:



|                                                |  |                                  |    |                 |                                   |    |                 |                   |    |  |       |   
|----------------------------------------------- |  | -------------------------------- | -- | --------------- | --------------------------------- | -- | --------------- | ----------------- | -- |  | ----- | --
|                                                |  | Fiscal Year Ended March 31, 2004 |    |                 | Seven Months Ended March 31, 2003 |    |                 | Fiscal Year Ended |   
|                                                |  |                                  |    | August 31, 2002 |                                   |    | August 31, 2001 |                  
|Statutory tax rate                              |  | (35.0                            | )% |                 | (35.0                             | )% |                 | (35.0             | )% |  | 35.0  | % 
|State income taxes, net of Federal income taxes |  |                                 |    |                 | 0.1                               | %  |                 | 1.8               | %  |  | 0.4   | % 
|Increase in valuation allowance                 |  | 34.8                             | %  |                 | 34.5                              | %  |                 | 18.3              | %  |  |      |   
|Utilization of net operating loss carryforward  |  |                                 |    |                 |                                  |    |                 |                  |    |  | (36.3 | )%
|Nondeductible expenses                          |  | 0.2                              | %  |                 | 0.1                               | %  |                 | 1.2               | %  |  | 0.2   | % 
|                                                |  |                                  |    |                 |                                   |    |                 |                   |    |  |       |   
|Effective income tax rate                       |  | 0.0                              | %  |                 | (0.3                              | )% |                 | (13.7             | )% |  | (0.7  | )%
|                                                |  |                                  |    |                 |                                   |    |                 |                   |    |  |       |   



As of March 31, 2004,
we had a U.S. tax net operating loss carryforward of approximately $309,000 which expires in fiscal years 2011 through 2024. Our net operating loss carryforwards and other temporary differences



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



between the financial statement and tax basis carrying amounts of existing assets and liabilities generated net deferred tax assets of $122,670 as of March
31, 2004 and $111,061 as of March 31, 2003. We have provided a valuation allowance against our net deferred tax assets as of March 31, 2004 and March 31, 2003 because of the uncertainty of whether we will be able to realize the deferred tax assets
in the future. If we realized all of the March 31, 2004 net deferred tax assets, we would allocate $5,394 to paid-in capital and use the remainder to reduce our income tax expense.



The tax effects of temporary differences that produced our net deferred tax assets as of March 31, 2004 and March 31, 2003
are as follows:





|                                         |  |               |          |   |               |   |          |  
|---------------------------------------- |  | ------------- | -------- | - | ------------- | - | -------- | -
|                                         |  | March 31,2004 |          |   | March 31,2003 |  
|                                         |  |               |          |   | (Restated)    |  
|Asset reserves and allowances            |  | $             | 6,805    |   |               | $ | 17,232   |  
|Accrued expenses                         |  |               | 599      |   |               |   | 170      |  
|Federal net operating loss carryforwards |  |               | 108,150  |   |               |   | 86,100   |  
|Foreign net operating loss carryforwards |  |               | 4,934    |   |               |   | 6,454    |  
|Other                                    |  |               | 2,182    |   |               |   | 1,105    |  
|                                         |  |               |          |   |               |   |          |  
|                                         |  |               | 122,670  |   |               |   | 111,061  |  
|Valuation allowance                      |  |               | (122,670 | ) |               |   | (111,061 | )
|                                         |  |               |          |   |               |   |          |  
|                                         |  | $             |         |   |               | $ |         |  
|                                         |  |               |          |   |               |   |          |  



We have not provided
for additional taxes on income, which would become payable if we repatriated earnings from our foreign subsidiaries because we would be able to substantially offset the tax consequences of the distributions with our available foreign tax credits.



|18. |  | EARNINGS (LOSS) PER SHARE
|--- |  | -------------------------



|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|------------------------------------------ |  | ------------------------------- | ------------- | - | ------------------ | ------------- | ------------------ | --------------- |  | - | -------------- |  | ---------- | ------ | - |  | - | ------
|                                           |  | Fiscal Year Ended March 31,2004 |               |   | Seven Months Ended |               | Fiscal Years Ended
|                                           |  |                                 | March 31,2003 |   |                    | March 31,2002 |                    | August 31, 2002 |  |   | August 31,2001
|                                           |  |                                 |               |   |                    |               |                    | (Unaudited)     |  |   |                |  | (Restated)
|Basic EPS Computation:                     |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Net (loss) earnings                        |  | $                               | (56,408       | ) |                    | $             | (67,805            | )               |  | $ | 12,446         |  | $          | (4,533 | ) |  | $ | 8,363 
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Weighted average common shares outstanding |  |                                 | 106,252       |   |                    |               | 92,568             |                 |  |   | 81,113         |  |            | 85,732 |   |  |   | 60,143
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Basic net (loss) earnings per share        |  | $                               | (0.53         | ) |                    | $             | (0.73              | )               |  | $ | 0.15           |  | $          | (0.05  | ) |  | $ | 0.14  
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Diluted EPS Computation:                   |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Net (loss) earnings                        |  | $                               | (56,408       | ) |                    | $             | (67,805            | )               |  | $ | 12,446         |  | $          | (4,533 | ) |  | $ | 8,363 
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Weighted average common shares outstanding |  |                                 | 106,252       |   |                    |               | 92,568             |                 |  |   | 81,113         |  |            | 85,732 |   |  |   | 60,143
|Dilutive potential common shares:          |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Stock options and warrants                 |  |                                 |              |   |                    |               |                   |                 |  |   | 4,898          |  |            |       |   |  |   | 6,491 
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Diluted common shares outstanding          |  |                                 | 106,252       |   |                    |               | 92,568             |                 |  |   | 86,011         |  |            | 85,732 |   |  |   | 66,634
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       
|Diluted net (loss) earnings per share      |  | $                               | (0.53         | ) |                    | $             | (0.73              | )               |  | $ | 0.14           |  | $          | (0.05  | ) |  | $ | 0.13  
|                                           |  |                                 |               |   |                    |               |                    |                 |  |   |                |  |            |        |   |  |   |       



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



We have excluded the effect of convertible notes in our calculation of diluted earnings per share for
the fiscal year ended March 31, 2004 and additionally stock options and warrants in our calculation of diluted earnings per share for the fiscal year ended March 31, 2004, the seven months ended March 31, 2003 and the fiscal year ended 2002 because
their impact would have been antidilutive. Common stock equivalents excluded from loss per share were 12,693 options, 20,539 warrants and 43,889 shares underlying the 9% and 16% Notes as of March 31, 2004, 14,978 options and 4,787 warrants as of
March 31, 2003; and 12,930 options and 3,945 warrants as of August 31, 2002.



|19. |  | STOCK OPTION AND PURCHASE PLANS
|--- |  | -------------------------------



A.  Stock Option Plan



Our 1988 stock option plan provided for the grant of up to 25,000 shares of our common stock to employees, directors and consultants. That plan expired in
May 1998. On October 1, 1998, our stockholders authorized the adoption of the 1998 stock incentive plan. Based on our stockholders authorization on January 20, 2004, under the 1998 stock option plan we are permitted to grant up to 25,442
shares of our common stock to our employees, directors and consultants through the grant of incentive stock options, non-incentive stock options, stock appreciation rights and other stock awards.



For the incentive stock options we granted to employees under the plans, the
exercise price per share was equal to the market price of our common stock on the dates of grant, or 110% of the market price for certain employees. For non-incentive stock options granted to employees under the plans, the exercise price per share
was not less than 85% of the market price of our common stock on the dates of grant. Generally, outstanding options become exercisable equally over a three-year period starting on the date of grant (although this may be accelerated due to
retirement, disability or death). Normally, employees, directors and consultants must exercise their outstanding options within ten years from the date they were granted. Some employees who were granted incentive options must exercise their
outstanding options within five years from the date they were granted. As of March 31, 2004, option holders were able to purchase approximately 9,553 shares of our common stock from exercisable options at a weighted-average exercise price of $3.54
per share and we had available for future grant 15,213 options to purchase shares of our common stock. Other than 100 shares of our common stock we issued to an employee, through March 31, 2004, we have not issued any stock appreciation rights or
shares of common stock under our 1998 stock incentive plan. In April and June 2004, we issued an aggregate of 4,483 shares of our common stock with a market value of $0.35 to $0.58 per share under our 1998 stock incentive plan to settle liabilities,
including accrued sales commissions owed to various vendors.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



Option transactions under the 1988 and 1998 stock option plans for the fiscal year ended March 31,
2004, the seven months ended March 31, 2003, fiscal 2002 and 2001 are summarized below:



|                             |  |                   |   |  |                              |     
|---------------------------- |  | ----------------- | - |  | ---------------------------- | ----
|                             |  | SharesUnderOption |   |  | WeightedAverageExercisePrice
|Outstanding, August 31, 2000 |  | 11,617            |   |  | $                            | 4.30
|                             |  |                  
|Granted                      |  | 2,528             |   |  | $                            | 1.76
|Exercised                    |  | (1,347            | ) |  | $                            | 2.01
|Canceled                     |  | (2,597            | ) |  | $                            | 4.17
|                             |  |                   |   |  |                              |     
|Outstanding, August 31, 2001 |  | 10,201            |   |  | $                            | 4.01
|                             |  |                  
|Granted                      |  | 5,373             |   |  | $                            | 4.08
|Exercised                    |  | (1,112            | ) |  | $                            | 2.94
|Canceled                     |  | (1,532            | ) |  | $                            | 3.96
|                             |  |                   |   |  |                              |     
|Outstanding, August 31, 2002 |  | 12,930            |   |  | $                            | 4.14
|                             |  |                  
|Granted                      |  | 4,348             |   |  | $                            | 0.92
|Exercised                    |  | (10               | ) |  | $                            | 1.03
|Canceled                     |  | (2,290            | ) |  | $                            | 3.35
|                             |  |                   |   |  |                              |     
|Outstanding, March 31, 2003  |  | 14,978            |   |  | $                            | 3.32
|                             |  |                  
|Granted                      |  | 556               |   |  | $                            | 0.71
|Exercised                    |  | (110              | ) |  | $                            | 0.40
|Canceled                     |  | (2,731            | ) |  | $                            | 3.43
|                             |  |                   |   |  |                              |     
|                             |  |                  
|Outstanding, March 31, 2004  |  | 12,693            |   |  | $                            | 3.21
|                             |  |                   |   |  |                              |     



Included in the
options granted for the seven months ended March 31, 2003, were 1,375 options granted at a weighted average exercise price of $0.43 per share, a price 15% below the market price of our common stock on the grant date. As the options vested
immediately, the aggregate excess of the market value over the exercise prices of $79 was recorded as compensation expense for the seven months ended March 31, 2003.



During fiscal 2002, we issued 63 shares of our common stock when holders of options we granted outside the 1988 and 1998
stock option plans exercised their options with an exercise price of $3.375. Additionally, during fiscal 2002, the balance of 110 unexercised options that were granted outside the 1988 and 1998 stock option plans expired.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



Options outstanding under the 1988 and 1998 stock option plans as of March 31, 2004 are summarized in
ranges as follows:



|                        |  |                              |       |                              |        |                              |          
|----------------------- |  | ---------------------------- | ----- | ---------------------------- | ------ | ---------------------------- | ---------
|Range of Exercise Price |  | WeightedAverageExercisePrice |       | Number of OptionsOutstanding |        | WeightedAverageRemainingLife
|$  0.39  -  $ 0.58      |  | $                            | 0.43  |                              | 1,409  |                              | 9.0 years
|0.59  -     0.88        |  |                              | 0.71  |                              | 536    |                              | 9.4 years
|0.91  -     1.34        |  |                              | 1.17  |                              | 2,177  |                              | 8.2 years
|1.41  -     2.09        |  |                              | 1.77  |                              | 755    |                              | 6.7 years
|2.15  -     3.18        |  |                              | 2.66  |                              | 1,148  |                              | 7.0 years
|3.23  -     4.84        |  |                              | 4.04  |                              | 5,422  |                              | 5.4 years
|4.86  -     7.25        |  |                              | 5.68  |                              | 455    |                              | 4.1 years
|7.50  -   10.88         |  |                              | 8.17  |                              | 626    |                              | 2.7 years
|12.13  -   16.38        |  |                              | 15.67 |                              | 90     |                              | 0.6 years
|24.00  -   24.00        |  |                              | 24.00 |                              | 75     |                              | 1.3 years
|                        |  |                              |       |                              |        |                              |          
|                        |  |                              |       |                              | 12,693 |                              |          
|                        |  |                              |       |                              |        |                              |          



B.  Employee Stock Purchase Plan



Effective May 4, 1998, we adopted an employee stock purchase plan to provide employees who meet eligibility requirements an opportunity to purchase shares of our common stock through payroll deductions of up to 10% of eligible compensation.
Bi-annually, we use participant account balances to purchase shares of our common stock at a per share price of 85% of the lesser of the fair market value per share on the exercise date or the price on the offering date. The plan will remain in
effect for a term of 20 years, unless terminated sooner by our Board of Directors. A total of 3,000 shares of our common stock are available for employees to purchase under the plan. Employees purchased 155 shares of our common stock in fiscal 2004,
140 shares of our common stock in the seven months ended March 31, 2003, 341 shares of our common stock in fiscal 2002 and 233 shares of our common stock in fiscal 2001 under the plan.



20.    EQUITY



A.  Private Placements



In July 2001, we issued 9,335 shares of our common stock in a private placement of our common stock at a purchase price of $3.60 per share, raising net
proceeds of $31,534. In connection with the private placement, we issued 233 warrants with an exercise price of $3.60 per share to the placement agent.



Commencing in September 2001, we were required to make a $336 monthly payment to some investors in the July 2001 private placement until the date the
shares we issued to them were registered with the SEC. On December 12, 2001, the SEC declared the related registration statement effective. During fiscal 2002, we paid an aggregate of $1,008 to the investors, which is included in other expense in
the statement of operations. During fiscal 2002, we incurred $287 of costs relating to the July 2001 private placement and recorded these costs as a reduction of additional paid-in capital.



In February 2002, we issued 7,167 shares of our common stock in a private
placement of our common stock at a purchase price of $3.00 per share, and raised net proceeds of $19,785. The purchase price per share



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



represented a 10% discount from the then-recent public trading price of our common stock. We filed a registration statement with the SEC covering the resale
of all the shares issued to investors in the private placement, which registration statement became effective in May 2002.



In June 2003, we received net proceeds of $8,314 from a private placement of 16,383 shares of our common stock at prices ranging from $0.50 to $0.60 per
share. The per share price represented an approximate 20% discount to the then recent public trading price of our common stock. In August 2003, our registration statement covering the shares of common stock issued in the offering became effective.
Based on the purchase agreement, we were obligated to pay each investor an amount equal to 1% of the purchase price paid for the shares for every 30-day period which passed commencing August 3, 2003 that the registration statement was not declared
effective. Because the registration statement was declared effective subsequent to August 3, 2003, we recorded a charge of $90, which is included in other income (expense) for the fiscal year ended March 31, 2004. In connection with the private
placement, we issued warrants to purchase 478 shares of our common stock with an exercise price of $0.50 per share to certain of the private placement investors and the placement agent. Of such warrants, 150 were exercised in October 2003. In
addition, as a result of the private placement and anti-dilution provisions included in certain warrants then outstanding, the number of shares issuable under the warrants increased and the exercise price of the warrants decreased to $0.50 per
share. The following table summarizes the warrant modifications:



|                     |  |          |  |                |      |                 |       |               |   |      |  |            
|-------------------- |  | -------- |  | -------------- | ---- | --------------- | ----- | ------------- | - | ---- |  | -----------
|                     |  | Modified |  | Original       |      | Expiration Date
|Issuance Purpose     |  | Number   |  | Exercise Price |      | Number          |       | ExercisePrice |  
|Junior Participation |  | 2,032    |  | $              | 0.50 |                 | 1,270 |               | $ | 1.25 |  | March, 2006
|2002 Officer         |  | 2,283    |  |                | 0.50 |                 | 1,250 |               |   | 2.88 |  | April, 2012
|                     |  |          |  |                |      |                 |       |               |   |      |  |            
|                     |  | 4,315    |  |                | 0.50 |                 | 2,520 |               |   | 2.06 |  |            
|                     |  |          |  |                |      |                 |       |               |   |      |  |            



B. Early Retirement
and Conversion of 10% Convertible Subordinated Notes



In
February 1997, we issued $50,000 of unsecured 10% convertible subordinated notes. On March 1, 2002, we repaid the remaining $12,190 principal balance outstanding on the notes plus the related accrued interest due. The notes were convertible into
shares of our common stock prior to maturity at a conversion price of $5.18 per share.



In February 2002, we retired a total of $12,735 in principal amount of the 10% convertible subordinated notes and paid the related accrued interest of $574 by issuing 4,209 shares of common stock with a fair value of
$14,530. In connection with the note retirements, we recorded a loss on early retirement of debt of $1,221, which is the amount by which the aggregate $14,530 fair value of our issued shares exceeded the principal amount of the notes we retired and
the related accrued interest.



During the second quarter of
fiscal 2002, pursuant to the indenture governing our notes, we converted an aggregate of $4,300 in principal amount of our notes into 830 shares of common stock, at a conversion price of $5.18 per share.



In March and April 2001, we retired a total of $13,875 in principal amount of
the notes for an aggregate purchase price of $6,751. Of the $6,751 purchase price, $3,934 was raised through a concurrent sale of 3,147 shares of our common stock to the same note holders, based on a purchase price of $1.25 per share. The purchase



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



price of $1.25 per share was approximately $0.24 below the fair value of our common stock on the date the shares were issued, which equated to a total
discount of $754. The $6,751 purchase price we paid for the notes included cash of $5,997 and the discount of $754. As a result of the note retirement, we recorded a gain on early retirement of debt of $7,124 in the third quarter of fiscal 2001. In
the fourth quarter of fiscal 2001, we reduced the gain by $2,798 in connection with the delayed effectiveness of our registration statement filed with the SEC covering the resale of the common stock purchased by the former note holders. The charge
equates to the fair value of 750 shares of our common stock we issued to the note holders due to the delayed effectiveness. On December 12, 2001, the SEC declared our registration statement effective.



In June 2001, we retired $6,650 in principal amount of our notes and paid the
related accrued interest of $193 by issuing 2,022 shares of our common stock with a fair value of $7,198. Relating to the note retirement, we recorded a loss on early retirement of debt of $355, which is the amount by which the fair value of our
issued shares exceeded the principal amount of the notes we retired and the related accrued interest.



In August 2001, we issued 250 shares of our common stock with a fair value of $1,176 to one former note holder relating to the delayed effectiveness of
our registration statement that we filed with the SEC, which covered the resale of the common stock issued in connection with the early retirement of our notes. Accordingly, we recorded the $1,176 fair value of the issued shares of our common stock
as a loss on early retirement of debt in the fourth quarter of fiscal 2001.



We recognized a loss on early retirement of debt of $1,221 for fiscal 2002 and a net gain on early retirement of debt of $2,795 for fiscal 2001 related to the transactions in which we retired the notes.



C. Warrants



In March 2001, we issued to investors in the junior participation (please
see note 15F) five-year warrants to purchase an aggregate of 2,375 shares of our common stock exercisable at a price of $1.25 per share, which included a total of 1,375 warrants we issued to some of our executive officers and to one of the directors
of our Board, who joined in the junior participation. The fair value of the warrants of $1,751, based on the Black-Scholes option pricing model, was recorded as a deferred financing cost. We amortized the balance as a non-cash financing expense
evenly over two and one-half years through August 31, 2003, the date on which the related North American credit agreement was then due to terminate. In fiscal 2002, we issued 750 shares of our common stock to unrelated investors and 105 shares of
our common stock to one of our directors relating to the exercise of these warrants. In fiscal 2001, we issued 250 shares of our common stock to unrelated investors relating to the exercise of these warrants.



In October 2001, we issued to two of our executive officers warrants to
purchase a total of 1,250 shares of our common stock at an exercise price of $2.88 per share, the market value of our common stock on the grant date. We issued the warrants to the officers in consideration for their services and personal pledge of
1,250 shares of our common stock to our primary lender, as additional security for our supplemental discretionary loans (please see note 15D).



In February 2002, as a result of the private placement and the anti-dilution provisions included in some of our outstanding warrants on the date we
consummated the private placement, we modified the terms of two warrants we had previously issued. For one warrant that we originally issued to our primary lender in October 2001, we increased the number of common shares purchasable under the
warrant from 100 to 136 and decreased the exercise price from $4.70 per common share to $3.00 per common share. For the second warrant that we



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



originally issued in August 2001, we decreased the exercise price from $3.60 per share to $3.56 per share. Due to these modifications, we recorded an
additional non-cash financing charge of $113, which we included in interest expense for fiscal 2002.



On March 31, 2003, as a result of the 4,000 common shares authorized to be issued to the Affiliates in connection with the amendment to the North American
credit agreement with our primary lender (please see note 15D) and the anti-dilution provisions associated with certain warrants outstanding on the date of our authorization to issue the shares unrelated to the Affiliates, the number of shares
issuable under the warrants increased and the exercise price decreased to $0.39 per share. We have amortized the excess of the fair value of the total modified warrants over the fair value of the original warrants of $165, as calculated using the
Black-Scholes option pricing model, as a non-cash financing expense on a straight-line basis over the period between March 31, 2003 through September 26, 2003, the date on which we fully repaid the supplemental discretionary loan. The related
non-cash financing expense amounted to $165 for the fiscal year ended March 31, 2004.



In March 2003, warrants to issue 594 shares of our common stock with an exercise price of $3.61 per share expired unexercised.



As of March 31, 2004 and March 31, 2003, we had common shares reserved for issuance for the following warrants:



|                                             |  |                |  |                |      |                 |       |                |   |      |  |                
|-------------------------------------------- |  | -------------- |  | -------------- | ---- | --------------- | ----- | -------------- | - | ---- |  | ---------------
|                                             |  | March 31, 2004 |  | March 31, 2003 |      | Expiration Date
|Issuance Purpose                             |  | Number         |  | Exercise Price |      | Number          |       | Exercise Price |  
|Junior participation                         |  | 2,032          |  | $              | 0.50 |                 | 1,270 |                | $ | 1.25 |  | March, 2006    
|2002 officer                                 |  | 2,283          |  |                | 0.50 |                 | 1,250 |                |   | 2.88 |  | April, 2012    
|2003 officer                                 |  | 1,000          |  |                | 0.50 |                 | 1,000 |                |   | 0.50 |  | March, 2008    
|1997 financing                               |  | 569            |  |                | 0.39 |                 | 569   |                |   | 0.39 |  | February, 2006 
|2000 financing                               |  | 210            |  |                | 0.39 |                 | 210   |                |   | 0.39 |  | July, 2005     
|2002 financing                               |  | 255            |  |                | 0.39 |                 | 255   |                |   | 0.39 |  | October, 2006  
|2001 private placement                       |  | 233            |  |                | 3.46 |                 | 233   |                |   | 3.46 |  | July, 2004     
|2003 private placementJune 2003             |  | 328            |  |                | 0.50 |                 |      |                |   |     |  | June, 2008     
|2003 private placement16% convertible notes |  | 8,460          |  |                | 0.57 |                 |      |                |   |     |  | September, 2010
|2004 private placement9% convertible notes  |  | 5,169          |  |                | 0.65 |                 |      |                |   |     |  | February, 2009 
|                                             |  |                |  |                |      |                 |       |                |   |      |  |                
|                                             |  | 20,539         |  |                | 0.59 |                 | 4,787 |                |   | 1.44 |  |                
|                                             |  |                |  |                |      |                 |       |                |   |      |  |                



D. Other Equity
Transactions



In fiscal 1999, we awarded 400 restricted
shares of our common stock. We expensed the $3,169 fair value of our common stock as the restrictions lapsed. Our deferred compensation balance related to these grants was $313 as of August 31, 2000, which we expensed in fiscal 2001.



In October 2000, we released from escrow 150 shares of our common stock
relating to a litigation settlement we accrued in a prior period. The fair value of the common shares was $263 and was included in accrued litigation settlements until we issued the common stock.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



In November 2000, we sold 720 shares of our common stock for $900 to two of our executive officers at
a purchase price of $1.25 per share, the fair value of our common stock on the date of the sale.



In February 2001, we issued 204 shares of our common stock relating to a litigation settlement, which was accrued in a prior period. The fair value of the
common shares issued was $285.



In April, June and July 2001,
we issued a total of 914 shares of our common stock to two independent software developers for services they previously rendered to us under software development agreements. The fair value of the common shares at issuance was $2,875, which satisfied
$2,719 of accrued royalties. The excess was recorded as a non-cash royalty expense.



Please see note 15D regarding 4,000 shares issued to our Co-Chairmen as consideration for their depositing a total of $2,000 with our primary lender in order to provide a limited guarantee on our obligations.



On June 14, 2004, two executive officers purchased an
aggregate of 2,412 shares of common stock for $844, the market value of the common stock. The common stock was issued under the 1998 Stock Incentive Plan.



|21. |  | STOCKHOLDERS RIGHTS
|--- |  | --------------------



In the fourth quarter of fiscal 2000, our Board of Directors declared a dividend distribution of one right for each outstanding share of our common stock
to stockholders of record at the close of business on June 21, 2000. Each right entitles the registered holder to purchase from us a unit consisting of one one-thousandth of a share of Series B junior participating preferred stock, $0.01 par value,
at a purchase price of $30 per unit, subject to adjustment. The description and terms of the rights are set forth in a rights agreement, dated as of June 5, 2000, between us and Computershare Trust Co., as Rights Agent.



Subject to certain exceptions specified in the rights agreement, the rights
will be distributed upon the earliest to occur of:



| |  |  | the tenth business day following the date that we first publicly announce that any person or group unrelated to us has become the beneficial owner of 10% or more of our common stock
then outstanding;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the tenth business day following the commencement of a tender or exchange offer if the offeror would become the beneficial owner of 10% or more of our common stock then outstanding
after it was consummated; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a merger or other business combination transaction involving us.
| | - |  | ----------------------------------------------------------------



The rights are not exercisable until a distribution date occurs as described above and will expire on June 7, 2010, unless earlier redeemed, exchanged,
extended or terminated by us. At no time will the rights have any voting power.



|22. |  | MAJOR SUPPLIERS AND CUSTOMERS AND RELATED PARTY TRANSACTIONS
|--- |  | ------------------------------------------------------------



A. Major Suppliers and Customers



We are substantially dependent on Nintendo, Sony and Microsoft as they are the sole manufacturers of the software we develop for their game consoles and
they are the owners of the proprietary information and technology we need to develop software for their game consoles. Please see note 23 in which we present a table, which indicates the percentages of our gross revenue we derived from software
titles we developed for each of the game consoles.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



Our major customers represented the following percentages of our gross revenues:



|           |  |                               |               |                    |               |                    |                 |     |                 |    
|---------- |  | ----------------------------- | ------------- | ------------------ | ------------- | ------------------ | --------------- | --- | --------------- | ---
|           |  | Fiscal YearEndedMarch 31,2004 |               | Seven Months Ended |               | Fiscal Years Ended
|           |  |                               | March 31,2003 |                    | March 31,2002 |                    | August 31, 2002 |     | August 31, 2001
|           |  |                               |               |                    |               | (Unaudited)        |                 |     |                 |    
|Customer 1 |  | 7%                            |               | 6%                 |               | 9%                 |                 | 10% |                 | 12%
|Customer 2 |  | 4%                            |               | 8%                 |               | 9%                 |                 | 9%  |                 | 11%



B.  Related Party Transactions



Fees for services



We pay sales
commissions to a firm, which is owned and controlled by one of our executive officers, who is also a director and a principal stockholder. The firm earns these sales commissions based on the amount of our software sales the firm generates.
Commissions earned by the firm amounted to $(3) for the fiscal year ended March 31, 2004, $279 for the seven months ended March 31, 2003, $315 for the seven months ended March 31, 2002, $535 for fiscal 2002 and $330 for fiscal 2001. We owed the firm
$255 as of March 31, 2004 and $498 as of March 31, 2003.



During previous fiscal years, we received legal services from two law firms of which two members of our Board of Directors are partners. We incurred fees from one of those firms of $640 for the fiscal year ended March 31, 2004 and $528 for
the seven months ended March 31, 2003. We incurred fees from both firms of $318 for the seven months ended March 31, 2002, $644 for fiscal 2002 and $665 for fiscal 2001. We owed fees of $419 as of March 31, 2004 and $353 as of March 31, 2003 to one
of the firms.



We incurred investment-banking fees totaling
$284 for fiscal 2001 from a broker-dealer of which an individual on our Board of Directors is a member. We owed the broker-dealer $104 as of August 31, 2001 which we paid during fiscal 2002.



Notes receivable



In October 2002, we loaned a senior executive in the UK $300 under a
promissory note for the purpose of purchasing a new residence. Our Compensation Committee of the Board of Directors approved the terms and provisions of the loan in April 2002. The promissory note bears interest at a rate of 6.00% per annum.
Security for the repayment of the promissory note is a mortgage on the executives principal residence. The maturity date of the note is November 1, 2005. In May 2003, in accordance with the notes original terms, 50% of the loan was
forgiven. An additional 25% will be forgiven in each of October 2004 and October 2005 so long as the executive remains employed with Acclaim. If the executive voluntarily leaves the employment of Acclaim or is terminated for cause, at any time prior
to the maturity date of the note, the executive must repay a pro-rata portion of the unpaid principal balance of the loan plus accrued and unpaid interest thereon. We are recording compensation expense for the principal balance of the loan over the
periods that each portion will be forgiven. Accordingly, we expensed $145 during the fiscal year ended March 31, 2004 and $133 during the seven months ended March 31, 2003. The portion of the principal balance under the loan not expensed was $22 as
of March 31, 2004 and $167 as of March 31, 2003, which was included in other receivables.



In February 2002, relating to an officers employment agreement, we loaned one of our executive officers $300 under a promissory note for the purpose of purchasing a new residence. The promissory note bore
interest



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



at a rate of 6.00% per annum, which was due by December 31st of each year the promissory note remained outstanding. In January 2003, in connection with
terminating the officers employment and in accordance with the officers employment agreement, we forgave and expensed as compensation the unpaid principal balance and related accrued interest of $302.



In October 2001, we issued a total of 1,125 shares of our common stock to two
of our executive officers when they exercised their warrants with an exercise price of $3.00 per share. For the shares we issued, we received cash of $23 for their par value and two promissory notes totaling $3,352 for the unpaid portion of the
exercise price of the warrants. The principal amount and accrued interest were due and payable on August 31, 2003. The notes provided us full recourse against the officers assets. The notes bore interest at our primary lenders prime rate
plus 1.50% per annum. As of September 26, 2003, the two executive officers had fully repaid the principal balance and related accrued interest under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,352,
classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on the notes amounted to $324, included in other receivables.



In July 2001, we issued a total of 1,500 shares of our common stock to two of our executive officers when they exercised
their warrants with an exercise price of $2.42 per share. For the shares issued, we received cash of $30 for their par value and two promissory notes totaling $3,595 for the unpaid portion of the exercise price of the warrants. The principal amount
and accrued interest were due and payable on August 31, 2003 and bore interest at our primary lenders prime rate plus 1.50%. In June 2003, the two executive officers repaid in full the principal amount of the notes of $3,595 and all related
accrued interest of $464 then outstanding under the notes. As of March 31, 2003, the principal balance outstanding under the notes was $3,595, classified as a contra-equity balance in additional paid-in-capital, and accrued interest receivable on
the notes amounted to $426, included in other receivables.



In
August 2000, relating to an officers employment agreement, we loaned one of our officers $200 under a promissory note. The note bears no interest and must be repaid on the earlier to occur of the sale of the officers personal residence
or August 24, 2004. Based on the officers employment agreement, we were to forgive the loan at a rate of $25 for each year the officer remained employed with us up to a maximum of $100. Accordingly, in fiscal 2001, we expensed $25 and reduced
the officers outstanding loan balance. In May 2002, relating to a separation agreement with the officer, we forgave and expensed another $75. In May 2003, the former officer repaid the balance of $100 outstanding under the loan. As of March
31, 2003, the balance outstanding under the loan, included in other assets, was $100.



In August 1998, relating to an officers employment agreement, we loaned one of our officers $500 under a promissory note. We reduced the note balance by $50 in August 1999, relating to the officers
employment agreement, and by $200 in January 2000 relating to the employees termination. The note bore no interest and was required to be repaid on the earlier to occur of the sale or transfer of the former officers personal residence or
August 11, 2003. In December 2003, we collected $150 of the outstanding note and, as a result of our forgiving repayment of the balance, expensed the remaining $100. As of March 31, 2003, $250 was outstanding under the note and was included in other
receivables.



In April 1998, relating to an officers
employment agreement, we loaned one of our executive officers $200 under a promissory note. The note bore interest at our primary lenders prime rate plus 1.00% per annum. The balance outstanding under the loan, included in other receivables,
was $302 as of March 31, 2003 (including accrued interest of $102) and was repaid in April 2003.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



Warrants



In October 2001, we issued to two of our executive officers warrants to purchase a total of 1,250 shares of our common stock at an exercise price of $2.88
per share, the market value of our common stock on the grant date. We issued the warrants to the officers in consideration for their services and personal pledge of 1,250 shares of our common stock to our primary lender, as additional security for
our supplemental discretionary loans.



Please also see Notes
15D (Supplemental Bank Loans), 15F (Bank Participation Advance), 20C (Warrants) and 20D (Other Equity Transactions).



|23. |  | SEGMENT INFORMATION
|--- |  | -------------------



Our chief operating decision-maker is our Chief Executive Officer. We have two reportable segments, North America and Europe and Pacific Rim, which we
organize, manage and analyze geographically and which operate in one industry segment: the development, marketing and distribution of entertainment software. We have presented information about our operations for the fiscal year ended March 31,
2004, seven months ended March 31, 2003, and 2002, and the fiscal years ended August 31, 2002 and 2001:



|                                         |  |              |         |   |                       |   |        |              |  |   |       |   |  |   |         |  
|---------------------------------------- |  | ------------ | ------- | - | --------------------- | - | ------ | ------------ |  | - | ----- | - |  | - | ------- | -
|                                         |  | NorthAmerica |         |   | Europe andPacific Rim |   |        | Eliminations |  |   | Total |  
|Fiscal Year Ended March 31, 2004         |  |              |         |   |                       |   |        |              |  |   |       |   |  |   |         |  
|Net revenue from external customers      |  | $            | 68,665  |   |                       | $ | 74,014 |              |  | $ |      |   |  | $ | 142,679 |  
|Intersegment revenue                     |  |              | 6       |   |                       |   |       |              |  |   | (6    | ) |  |   |        |  
|                                         |  |              |         |   |                       |   |        |              |  |   |       |   |  |   |         |  
|Total net revenue                        |  | $            | 68,671  |   |                       | $ | 74,014 |              |  | $ | (6    | ) |  | $ | 142,679 |  
|                                         |  |              |         |   |                       |   |        |              |  |   |       |   |  |   |         |  
|Interest income                          |  | $            | 175     |   |                       | $ | 55     |              |  | $ |      |   |  | $ | 230     |  
|Interest expense                         |  |              | 4,876   |   |                       |   | 774    |              |  |   |      |   |  |   | 5,650   |  
|Depreciation and amortization            |  |              | 4,524   |   |                       |   | 987    |              |  |   |      |   |  |   | 5,511   |  
|Operating loss                           |  |              | (40,438 | ) |                       |   | (4,755 | )            |  |   |      |   |  |   | (45,193 | )
|Identifiable assets as of March 31, 2004 |  |              | 24,492  |   |                       |   | 22,846 |              |  |   |      |   |  |   | 47,338  |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|--------------------------------------------- |  | ------------ | ------- | - | --------------------- | - | ------ | ------------ |  | - | ------- | - |  | - | ------- | -
|                                              |  | NorthAmerica |         |   | Europe andPacific Rim |   |        | Eliminations |  |   | Total   |  
|Seven Months Ended March 31, 2003             |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Net revenue from external customers           |  | $            | 43,347  |   |                       | $ | 58,242 |              |  | $ |        |   |  | $ | 101,589 |  
|Intersegment sales                            |  |              | 17      |   |                       |   | 7,875  |              |  |   | (7,892  | ) |  |   |        |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Total net revenue                             |  | $            | 43,364  |   |                       | $ | 66,117 |              |  | $ | (7,892  | ) |  | $ | 101,589 |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Interest income                               |  | $            | 415     |   |                       | $ | 50     |              |  | $ |        |   |  | $ | 465     |  
|Interest expense                              |  |              | 3,065   |   |                       |   | 717    |              |  |   |        |   |  |   | 3,782   |  
|Depreciation and amortization                 |  |              | 3,329   |   |                       |   | 795    |              |  |   |        |   |  |   | 4,124   |  
|Operating loss                                |  |              | (61,059 | ) |                       |   | (3,065 | )            |  |   |        |   |  |   | (64,124 | )
|Identifiable assets as of March 31, 2003      |  |              | 49,474  |   |                       |   | 30,463 |              |  |   |        |   |  |   | 79,937  |  
|                                              |  |              |         |  
|Seven Months Ended March 31, 2002 (Unaudited) |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Net revenue from external customers           |  | $            | 116,827 |   |                       | $ | 43,361 |              |  | $ |        |   |  | $ | 160,188 |  
|Intersegment sales                            |  |              | 39      |   |                       |   | 5,632  |              |  |   | (5,671  | ) |  |   |        |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Total net revenue                             |  | $            | 116,866 |   |                       | $ | 48,993 |              |  | $ | (5,671  | ) |  | $ | 160,188 |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Interest income                               |  | $            | 386     |   |                       | $ | 94     |              |  | $ |        |   |  | $ | 480     |  
|Interest expense                              |  |              | 4,068   |   |                       |   | 531    |              |  |   |        |   |  |   | 4,599   |  
|Depreciation and amortization                 |  |              | 4,073   |   |                       |   | 795    |              |  |   |        |   |  |   | 4,868   |  
|Operating profit                              |  |              | 16,723  |   |                       |   | 2,144  |              |  |   |        |   |  |   | 18,867  |  
|Identifiable assets as of March 31, 2002      |  |              | 112,573 |   |                       |   | 34,147 |              |  |   |        |   |  |   | 146,720 |  
|                                              |  |              |         |  
|Fiscal 2002                                   |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Net revenue from external customers           |  | $            | 184,478 |   |                       | $ | 84,210 |              |  | $ |        |   |  | $ | 268,688 |  
|Intersegment sales                            |  |              | 99      |   |                       |   | 11,603 |              |  |   | (11,702 | ) |  |   |        |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Total net revenue                             |  | $            | 184,577 |   |                       | $ | 95,813 |              |  | $ | (11,702 | ) |  | $ | 268,688 |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Interest income                               |  | $            | 1,331   |   |                       | $ | 124    |              |  | $ |        |   |  | $ | 1,455   |  
|Interest expense                              |  |              | 6,291   |   |                       |   | 929    |              |  |   |        |   |  |   | 7,220   |  
|Depreciation and amortization                 |  |              | 6,960   |   |                       |   | 1,507  |              |  |   |        |   |  |   | 8,467   |  
|Operating profit                              |  |              | 3,461   |   |                       |   | 1,436  |              |  |   |        |   |  |   | 4,897   |  
|Identifiable assets as of August 31, 2002     |  |              | 139,543 |   |                       |   | 43,352 |              |  |   |        |   |  |   | 182,895 |  
|                                              |  |              |         |  
|Fiscal 2001 (Restated)                        |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Net revenue from external customers           |  | $            | 136,685 |   |                       | $ | 51,383 |              |  | $ |        |   |  | $ | 188,068 |  
|Intersegment sales                            |  |              | 317     |   |                       |   | 8,588  |              |  |   | (8,905  | ) |  |   |        |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Total net revenue                             |  | $            | 137,002 |   |                       | $ | 59,971 |              |  | $ | (8,905  | ) |  | $ | 188,068 |  
|                                              |  |              |         |   |                       |   |        |              |  |   |         |   |  |   |         |  
|Interest income                               |  | $            | 377     |   |                       | $ | 94     |              |  | $ |        |   |  | $ | 471     |  
|Interest expense                              |  |              | 9,393   |   |                       |   | 1,250  |              |  |   |        |   |  |   | 10,643  |  
|Depreciation and amortization                 |  |              | 7,104   |   |                       |   | 1,758  |              |  |   |        |   |  |   | 8,862   |  
|Operating profit                              |  |              | 11,125  |   |                       |   | 3,160  |              |  |   |        |   |  |   | 14,285  |  
|Identifiable assets as of August 31, 2001     |  |              | 86,508  |   |                       |   | 29,122 |              |  |   |        |   |  |   | 115,630 |  



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



Our gross revenue was derived from the following product categories:



|                                      |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|------------------------------------- |  | ------------------------------ | - |  | ------------------ | - |  | ------------------ | - |  | -------------- | - |  | --- | -
|                                      |  | Fiscal Year EndedMarch 31,2004 |   |  | Seven Months Ended |   |  | Fiscal Years Ended |  
|                                      |  | March 31,2003                  |   |  | March 31,2002      |   |  | August 31,2002     |   |  | August 31,2001 |  
|                                      |  |                                |   |  |                    |   |  | (Unaudited)        |   |  |                |   |  |     |  
|Cartridge-based software:             |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|Nintendo Game Boy                     |  | 2                              | % |  | 4                  | % |  | 8                  | % |  | 7              | % |  | 11  | %
|Nintendo 64                           |  |                               |   |  |                   |   |  |                   |   |  |               |   |  | 2   | %
|                                      |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|Subtotal for cartridge-based software |  | 2                              | % |  | 4                  | % |  | 8                  | % |  | 7              | % |  | 13  | %
|                                      |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|Disc-based software:                  |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|Sony PlayStation 2: 128-bit           |  | 55                             | % |  | 64                 | % |  | 57                 | % |  | 52             | % |  | 33  | %
|Sony PlayStation 1: 32-bit            |  | 3                              | % |  | 3                  | % |  | 7                  | % |  | 4              | % |  | 41  | %
|Microsoft Xbox: 128-bit               |  | 24                             | % |  | 15                 | % |  | 8                  | % |  | 13             | % |  |    |  
|Nintendo GameCube: 128-bit            |  | 13                             | % |  | 13                 | % |  | 19                 | % |  | 22             | % |  |    |  
|Sega Dreamcast: 128-bit               |  |                               |   |  |                   |   |  |                   |   |  |               |   |  | 9   | %
|                                      |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|Subtotal for disc-based software      |  | 95                             | % |  | 95                 | % |  | 91                 | % |  | 91             | % |  | 83  | %
|                                      |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|PC software                           |  | 3                              | % |  | 1                  | % |  | 1                  | % |  | 2              | % |  | 4   | %
|                                      |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  
|Total                                 |  | 100                            | % |  | 100                | % |  | 100                | % |  | 100            | % |  | 100 | %
|                                      |  |                                |   |  |                    |   |  |                    |   |  |                |   |  |     |  



|24. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------



A.  Legal Proceedings



Various claims and actions have been asserted or threatened against us, including numerous litigations regarding the failure to make payments when due,
including licensor or royalty payments in the ordinary course of business. Management expects that the outcome of these asserted or threatened claims or actions individually would not have a materially adverse effect on our consolidated financial
position and results of operations taken as a whole however, if a significant number of these matters were not resolved in our favor, they could have a material adverse effect on our consolidated financial position or results of operations. If
matters relating to the failure to pay licensor royalties when due are not ultimately determined in our favor or settled, then we may lose the use of those licenses.



In the first quarter of fiscal 2001, as a result of Comedy Partners (South Park) repeatedly refusing to approve our
proposed projects and designs, we refused to make royalty payments under our license agreement, which resulted in Comedy Partners purportedly terminating our license and suing us. On March 9, 2001, the suit was settled for $900, which amount was
included in accrued royalties payable as of August 31, 2000 and was paid in fiscal 2001.



On July 11, 2003, we were notified by the Securities and Exchange Commission (the Commission) that we have been included in a formal, non-public inquiry entitled In the Matter of Certain Videogame
Manufacturers that the Commission is conducting. In connection with that inquiry we were required to provide to the Commission certain information. The Commission has advised us that this request for information should not be construed
as an indication from the SEC or its staff that any violation of the law has occurred, nor should it reflect negatively on any person, entity or security. We have and are continuing to fully cooperate with the inquiry.



In 2003, fourteen class action complaints asserting violations of federal
securities laws were filed against the Company and certain of its officers and/or directors. By order dated July 3, 2003, the Court consolidated all



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



fourteen actions into one action entitled In re Acclaim Entertainment, Inc. Securities Litigation, Master File No 2, 03-CV-1270 (EDNY) (JS) (ETB), and
appointed class members Penn Capital Management, Robert L. Mannard and Steve Russo as lead plaintiffs, and also approved lead plaintiffs selection of counsel. Plaintiffs served a Consolidated Amended Complaint (the Consolidated
Complaint) on or about September 1, 2003. The defendants in the consolidated action are the Company, Gregory Fischbach, Edmond Sanctis, James Scoroposki and Gerard F. Agoglia. The Consolidated Complaint alleges a class period from October 14,
1999 through January 13, 2003. The Consolidated Complaint alleges that the Company engaged in a variety of wrongful practices which rendered statements made by the Company and its financial statements to be false and misleading. Among other
purported wrongful practices, the Consolidated Complaint alleges that Acclaim engaged in channel stuffing, a practice by which Acclaim allegedly delivered excess inventory to its distributors to meet or exceed analysts earnings
expectations and inflate its sales results; entered into conditional sales agreements whereby Acclaims customers allegedly were induced to accept delivery of Acclaim products prior to a quarter-end reporting period on the condition
that Acclaim would accept the return of any unsold product after the quarter-end, and that Acclaim falsified sales reports and manipulated the timing and recognition of price concessions and discounts granted to its retail customers. The
Consolidated Complaint further alleges that Acclaim engaged in improper accounting practices, including the improper recognition of sales revenue; manipulation of reserves associated with concessions, chargebacks and/or sales discounts granted to
customers; and the improper reporting of software development costs. The Consolidated Complaint alleges that as a result of these practices defendants violated § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and that the
individual defendants violated § 20(a) of the 1934 Act. The Consolidated Complaint seeks compensatory damages in an unspecified amount. On December 3, 2003 the Company moved to dismiss the Consolidated Complaint. Plaintiffs opposed the motion
to dismiss on January 20, 2004, and the Company submitted its reply papers on February 20, 2004. The court denied the motion. A scheduling conference has been scheduled for August 9, 2004. We are defending this action vigorously and are not in a
position to determine the impact on the financial statements, if any, or the ultimate resolution of this matter.



In April and May 2004, we received notification from Battleborne Entertainment, Inc. (Battleborne) that due to various contractual disputes
between us and Battleborne regarding our development agreement with Battleborne relating to the development of the videogame entitledCombat Elite: WWII Paratroopers, they were terminating the development agreement. We disagree with their
interpretations of the development agreement and demanded that Battleborne fulfill its contractual obligations under the development agreement. In June 2004, Battleborne brought an action in New York state Supreme Court, Nassau County, seeking a
temporary restraining order enjoining the release of the title until the contractual disputes have been resolved. The temporary restraining order was granted and the matter was scheduled by the court for expedited discovery by both sides. We are
also in continued discussions with Battleborne in an effort to resolve this matter amicably.



In June 2004, we received notification from Classic Media, Inc. (Classic), the licensor of the intellectual property Turok, that due to failure to make certain royalty payments relating to the
videogame title Turok: Evolution that our license agreement with Classic was terminated. We are in discussions with Classic in an effort to resolve this matter amicably.



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



B. Letters of Credit



As of March 31, 2004, we had outstanding letters of credit aggregating $6,526 for the purchase of merchandise. Approximately
$185 as of March 31, 2004 and $396 as of March 31, 2003 of our trade accounts payable balance was collateralized under outstanding letters of credit.



C. Indemnification



Under the terms of substantially all of our software revenue sharing agreements with customers that, among other things, rent our software to consumers,
we have agreed to indemnify our customers for all costs and damages arising from claims against such customers based on, among other things, allegations that the Companys software infringes the intellectual property rights of a third party.
Such indemnification provisions are accounted for in accordance with SFAS No. 5. Through March 31, 2004, there have not been any claims under such indemnification provisions.



D. Employee Benefits



Effective January 1, 1995, we established 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 $12 for calendar year 2003). All contributed amounts vest immediately. Generally, we will distribute the plan assets in a participants account to a participant or his or her beneficiaries upon
termination of employment, retirement, disability or death. We pay all plan administrative fees.



We do not provide our employees any other post retirement or post employment benefits, except discretionary severance payments upon termination of
employment.



E. License Agreement Contingency



In May 2004, we received notification from The Major
League Baseball Players Association (MLBPA) that we were late in making certain royalty payments and our license was terminated and that if we did not make the payments in a timely fashion, as well as certain other remedies, that our license
would not be reinstated. As of June 14, 2004, we have made all required payments to the MLBPA and are current with our payment obligations with certain MLB players, however we have not reached agreement with the MLBPA regarding the other requested
remedies and MLBPA is considering the license terminated. We disagree with MLBPAs interpretation of the license agreement provisions and have advised them as such. We are in continued discussions with MLBPA, but can not determine the ultimate
outcome of this matter or the impact, if any, on our consolidated financial statements.



25. QUARTERLY FINANCIAL DATA (UNAUDITED)



The
following financial information is presented for each of the quarters in the twelve months ended March 31, 2004 and 2003.



Fiscal Year Ended March 31, 2004



|                           |  |                |         |   |                    |   |        |                   |  |   |                |   |  |       |         |   |  |   |         |  
|-------------------------- |  | -------------- | ------- | - | ------------------ | - | ------ | ----------------- |  | - | -------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                           |  | Quarters Ended |        
|                           |  | June 29, 2003  |         |   | September 28, 2003 |   |        | December 28, 2003 |  |   | March 31, 2004 |   |  | Total |        
|                           |  |                |         |   |                   
|Net revenue                |  | $              | 33,070  |   |                    | $ | 41,345 |                   |  | $ | 39,273         |   |  | $     | 28,991  |   |  | $ | 142,679 |  
|Cost of revenue            |  |                | 19,905  |   |                    |   | 20,472 |                   |  |   | 19,943         |   |  |       | 18,278  |   |  |   | 78,598  |  
|Net loss                   |  |                | (18,049 | ) |                    |   | (4,005 | )                 |  |   | (8,994         | ) |  |       | (25,360 | ) |  |   | (56,408 | )
|Diluted net loss per share |  |                | (0.19   | ) |                    |   | (0.04  | )                 |  |   | (0.08          | ) |  |       | (0.23   | ) |  |   | (0.53   | )



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ACCLAIM ENTERTAINMENT, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands, except per share data)

(Amounts for the seven months ended March 31, 2002 are unaudited)



Twelve Months Ended March 31, 2003



|                           |  |                |        |   |                    |   |         |                   |  |   |                |   |  |       |         |   |  |   |         |  
|-------------------------- |  | -------------- | ------ | - | ------------------ | - | ------- | ----------------- |  | - | -------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                           |  | Quarters Ended |       
|                           |  | June 30, 2002  |        |   | September 29, 2002 |   |         | December 29, 2002 |  |   | March 31, 2003 |   |  | Total |        
|                           |  |                |        |   |                   
|Net revenue                |  | $              | 58,305 |   |                    | $ | 59,877  |                   |  | $ | 63,947         |   |  | $     | 27,960  |   |  | $ | 210,089 |  
|Cost of revenue            |  |                | 26,109 |   |                    |   | 34,196  |                   |  |   | 34,174         |   |  |       | 37,522  |   |  |   | 132,001 |  
|Net loss                   |  |                | (754   | ) |                    |   | (22,816 | )                 |  |   | (16,234        | ) |  |       | (44,980 | ) |  |   | (84,784 | )
|Diluted net loss per share |  |                | (0.01  | ) |                    |   | (0.25   | )                 |  |   | (0.18          | ) |  |       | (0.49   | ) |  |   | (0.92   | )



The sum of the
unaudited quarterly net loss per share amounts do not always equal the annual amount reported, because we compute per share amounts independently for each quarter and for the twelve months based on our weighted average common and common equivalent
shares outstanding in each such period.



We have restated
previously filed quarterly information. Please see note 2.



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|Item |  | 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
|---- |  | ---------------------------------------------------------------------------------------



None.



|Item |  | 9A.Controls and Procedures.
|---- |  | ---------------------------



The Companys senior management is responsible for establishing and maintaining a system of disclosure controls and
procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the Exchange Act)) designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.



In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, with the participation of
the Chief Executive Officer and Chief Financial Officer, as well as other key members of the Companys management, of the effectiveness of the Companys disclosure and procedures as of the end of the period covered by this report. Based on
that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable
assurance that information required to be disclosed in the Companys reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, except for the matters disclosed below with respect to internal controls.



No change occurred in the Companys internal controls concerning financial reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting, except the following:



At the end of April 2004, while closing the books for the year ended March 31, 2004, we determined that our bank advances reflected in our financial
records as of March 31, 2004 were understated by $9.5 million, which resulted from an accounting error in fiscal 2001 when we incorrectly recorded a bank participation advance. In fiscal 2001, we did not independently track our bank advance
transactions and reconcile them to the bank statement, but adjusted our financial records to the balance on the bank statement. This was a material weakness in internal control. In fiscal 2002 we implemented procedures to independently track all our
bank advance transactions and reconcile those transactions to the bank statement; however, the error was not detected until April 2004 because it was carried forward in a beginning balance in the reconciliations. This deficiency was eliminated when
the opening balance of the monthly bank advance reconciliation, in which the error was embedded and carried forward from period to period, was properly reconciled by us in April 2004. We now independently track and reconcile all transactional
elements of our daily activity with the bank between the bank statement and our books and records ensuring that all transactions are properly recorded.



PART III



|Item |  | 10.Directors and Executive Officers of the Registrant.
|---- |  | ------------------------------------------------------



Information called for by Item 10 of Form 10-K is set forth under the heading Election of Directors in the Companys Proxy Statement for
its annual meeting of Stockholders relating to fiscal 2004 (the Proxy Statement), which is incorporated herein by reference, and under the heading Executive Officers of the Company in the Business section included herein.



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|Item |  | 11.Executive Compensation.
|---- |  | --------------------------



Information called for by Item 11 of Form 10-K is set forth under the heading Executive Compensation in the Proxy Statement, which is incorporated herein by reference.



|Item |  | 12.Security Ownership of Certain Beneficial Owners and Management.
|---- |  | ------------------------------------------------------------------



Information called for by Item 12 of Form 10-K is set forth under the heading Security Ownership of Certain Beneficial Owners and Management
in the Proxy Statement, which is incorporated herein by reference.



|Item |  | 13.Certain Relationships and Related Transactions.
|---- |  | --------------------------------------------------



Information called for by Item 13 of Form 10-K is set forth under the heading Certain Relationships and Related Transactions in the Proxy
Statement, which is incorporated herein by reference.





|Item |  | 14.    Principal Accountant Fees and Services
|---- |  | ---------------------------------------------



Information called for by Item 14 of Form 10-K is set forth under the heading Principal Accountant Fees and
Services in the proxy statement, which is incorporated herein by reference.



PART IV



|Item |  | 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K.
|---- |  | -------------------------------------------------------------------



|1. |  | FINANCIAL STATEMENTS
|-- |  | --------------------



The following financial statements of the Company are included in Part II Item 8:



Report of Independent Registered Public Accounting Firm.

Consolidated Balance SheetsMarch 31, 2004 and March 31, 2003 (Restated).

Consolidated Statements of OperationsFiscal Year Ended March 31, 2004, Seven Months Ended

March 31, 2003 and 2002 (Unaudited) and Fiscal Years Ended August 31, 2002 and 2001 (Restated).

Consolidated Statements of Stockholders (Deficit) EquityFiscal Year Ended March 31, 2004, Seven

Months Ended March 31, 2003 (Restated) and Fiscal Years Ended August 31, 2002 (Restated) and 2001 (Restated).

Consolidated Statements of Cash FlowsFiscal Year Ended March 31, 2004, Seven Months Ended

March 31, 2003 and 2002 (Unaudited) (Restated) and Fiscal Years Ended August 31, 2002 (Restated) and 2001 (Restated).

Notes to Consolidated Financial Statements.



|2. |  | FINANCIAL STATEMENT SCHEDULE:
|-- |  | -----------------------------



(a)    Financial statements:



All financial statements are filed in Part II of this report under Item 8Financial Statements and Supplementary Data.



Schedule IIAllowance for Price Concessions and Returns



All other schedules have been omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated Financial Statements or notes thereto.



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(b)    Current Reports on Form 8-K filed:



January 22, 2004

January 23, 2004



(c)Exhibits:



The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC. We will furnish copies of the
exhibits for a reasonable fee (covering the expense of furnishing copies) upon request:



|            |  |                                                                                                                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                              
|            | 
|3.1         |  | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form
S-1, filed on April 21, 1989, as amended (Commission File No. 33-28274))                                                                                                           
|            | 
|3.2         |  | Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to the Companys Registration
Statement on Form S-1, filed on April 21, 1989, as amended (Commission File No. 33-28274))                                                                                          
|            | 
|3.3         |  | Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4(d) to the Companys Registration
Statement on Form S-8, filed on May 19, 1995 (Commission File No. 33-59483))                                                                                                       
|            | 
|3.4         |  | Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.4 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended March 3, 2002)                                                                                                                      
|            | 
|3.5         |  | Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3 to the Companys Current Report on Form 8-K, filed
on June 12, 2000)                                                                                                                                                                  
|            | 
|4.1         |  | Specimen form of the Companys common stock certificate (incorporated by reference to Exhibit 4 to the Companys Annual Report on
Form 10-K for the year ended August 31, 1989, as amended)                                                                                                                              
|            | 
|4.2         |  | Rights Agreement dated as of June 5, 2000, between the Company and American Securities Transfer & Trust, Inc. (incorporated by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed on June 12, 2000)                                                                                               
|            | 
|4.3         |  | Form of Warrant Agreement between the Company and American Securities Transfer & Trust, Inc. as warrant agent, relating to Class D
Warrants (incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3, filed on August 23, 1999 (Commission File No. 333-72503))                     
|            | 
|4.4         |  | Form of Warrant Certificate relating to Class D Warrants (incorporated by reference to Exhibit 4.3 to the Companys Registration
Statement on Form S-3, filed on August 23, 1999 (Commission File No. 333-72503))                                                                                                        
|            | 
|+10.1       |  | Employee Stock Purchase Plan (incorporated by reference to the Companys definitive proxy statement relating to fiscal 1997 filed on
August 31, 1998)                                                                                                                                                                    
|            | 
|+10.2       |  | 1998 Stock Incentive Plan (incorporated by reference to the Companys definitive proxy statement relating to fiscal 1997 filed on
August 31, 1998)                                                                                                                                                                       
|            | 
|+10.3       |  | Employment Agreement dated as of September 1, 1994 between the Company and Gregory E. Fischbach; and Amendment No. 1 dated as of December
8, 1996 between the Company and Gregory E. Fischbach (incorporated by reference to Exhibit 10.1 to the Companys Annual Report on Form 10-K for the year ended August 31, 1996)



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 
|+10.4       |  | Employment Agreement dated as of September 1, 1994 between the Company and James Scoroposki; and Amendment No. 1 dated as of December 8,
1996 between the Company and James Scoroposki (incorporated by reference to Exhibit 10.1 to the Companys Annual Report on Form 10-K for the year ended August 31, 1996)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|+10.5       |  | Service Agreement effective January 1, 1998 between Acclaim Entertainment Limited and Rodney Cousens (incorporated by reference to Exhibit
10.3 to the Companys Annual Report on Form 10-K for the year ended August 31, 1996)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 
|+10.6       |  | Employment Agreement dated as of August 11, 2000 between the Company and Gerard F. Agoglia (incorporated by reference to Exhibit 10.11 to
the Companys Annual Report on Form 10-K for the year ended August 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 
|+10.7       |  | Employment Agreement dated as of October 2, 2000 between the Company and John Ma (incorporated by reference to Exhibit 10.7 to the
Companys Annual Report on Form 10-K for the year ended August 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 
|+10.8       |  | Amendment No. 3, dated August 1, 2000, to the Employment Agreement between the Company and Gregory E. Fischbach, dated as of September 1,
1994 (incorporated by reference to Exhibit 10.12 to the Companys Quarterly Report on Form 10-Q for the period ended December 2, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | 
|+10.9       |  | Amendment No. 3, dated August 1, 2000, to the Employment Agreement between the Company and James Scoroposki, dated as of September 1, 1994
(incorporated by reference to Exhibit 10.12 to the Companys Quarterly Report on Form 10-Q for the period ended December 2, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|10.10       |  | Employment Agreement, dated as of December 20, 2001 between the Company and Edmond Sanctis (incorporated by reference to Exhibit 10.26 to
the Companys Quarterly Report on Form 10-Q for the period ended December 2, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 
|10.11       |  | Revolving Credit and Security Agreement dated as of January 1, 1993 between the Company, Acclaim Distribution Inc., LJN Toys, Ltd., Acclaim
Entertainment Canada, Ltd. and Arena Entertainment Inc., as borrowers, and GMAC Commercial Credit LLC as successor by merger to BNY Financial Corporation (GMAC), as lender, as amended and restated on February 28, 1995 (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form10-Q for the period ended February 28, 1995), as further amended and modified by (i) the Amendment and Waiver dated November 8, 1996, (ii) the Amendment dated November 15, 1998,
(iii) the Blocked Account Agreement dated November 14, 1996, (iv) Letter Agreement dated December 13, 1986, and (v) Letter Agreement dated February 24, 1997 (each incorporated by reference to Exhibit 10.4 to the Companys Report on Form 8-K
filed on March 14, 1997)
|            | 
|10.12       |  | Restated and Amended Factoring Agreement dated as of February 28, 1995 between the Company and GMAC (incorporated by reference to Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q for the period ended February 28, 1995), as further amended and modified by the Amendment to Factoring Agreements dated February 24, 1997 between the Company and GMAC (incorporated by
reference to Exhibit 10.5 to the Companys Report on Form 8-K filed on March 14, 1997)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|10.13       |  | Amendment to Revolving Credit and Security Agreement and Restated and Amended Factoring Agreement, dated March 14, 2002 (incorporated by
reference to Exhibit 10.12 to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 3, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|10.14       |  | Form of Participation Agreement between GMAC and certain junior participants (incorporated by reference to Exhibit 1 to the Companys
Quarterly Report on Form 10-Q for the period ended February 28, 1998)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



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|            |  |                                                                                                                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                
|            | 
|10.15       |  | Note and Common Stock Purchase Agreement dated March 30, 2001 between the Company and Triton Capital Management, Ltd. (incorporated by
reference to exhibit 10.1 to the Companys Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))                              
|            | 
|10.16       |  | Note and Common Stock Purchase Agreement dated March 31, 2001 between the Company and JMG Convertible Investments, L.P. (incorporated by
reference to Exhibit 10.2 to the Companys Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))                            
|            | 
|10.17       |  | Note and Common Stock Purchase Agreement dated April 10, 2001 between the Company and Alexandra Global Investment Fund I, Ltd.
(incorporated by reference to Exhibit 10.3 to the Companys Registration Statement on Form S-3 filed on April 16, 2001 (Commission File No. 333-59048))                     
|            | 
|10.18       |  | Note Purchase Agreement dated June 14, 2001 between the Company and Alexandra Global Investment Fund, Ltd. (incorporated by reference to
Exhibit 10.4 to Amendment No. 2 to the Companys Registration Statement on Form S-3 filed on August 8, 2001 (Commission File No. 333-59048))                      
|            | 
|10.19       |  | Form of Share Purchase Agreement between the Company and certain purchasers relating to the 2001 Private Placement (incorporated by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 filed on September 26, 2001 (Commission File No. 333-70226))                              
|            | 
|10.20       |  | Form of Registration Rights Agreement between the Company and certain purchasers relating to the 2001 Private Placement (incorporated by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 filed on September 26, 2001 (Commission File No. 333-70226))                         
|            | 
|*10.21      |  | License Agreement dated as of December 14, 1994 between the Company and Sony Computer Entertainment of America (incorporated by reference
to Exhibit 10.4 to the Companys Annual Report on Form 10-K filed on December 17, 1996)                                                                          
|            | 
|*10.22      |  | Licensed Publisher Agreement dated as of April 1, 2000 between the Company and Sony Computer Entertainment America (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on August 14, 2001)                                                                        
|            | 
|*10.23      |  | Licensed Publisher Agreement dated as of November 14, 2000 by and between the Company and Sony Computer Entertainment (Europe) Limited
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K/A filed on November 28, 2001)                                                
|            | 
|*10.24      |  | Confidential License Agreement for Nintendos N64 Video Game System (Western Hemisphere) between Nintendo of America Inc. and the
Company, effective as of February 20, 1997 (incorporated by reference to Exhibit 1 to the Companys Quarterly Report on Form 10-Q for the period ended February 28, 1998)
|            | 
|*10.25      |  | Confidential License Agreement for Game Boy Advance (Western Hemisphere) between Nintendo of America Inc. and the Company, effective July
11, 2001 (incorporated by reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K for the period ended August 31, 2001).                          
|            | 
|*10.26      |  | Xbox Publisher License Agreement dated as of October 10, 2000 between the Company and Microsoft Corporation (incorporated by reference to
Exhibit 10.24 to the Companys Annual Report on Form 10-K for the period ended August 31, 2001).                                                                 
|            | 
|*10.27      |  | Confidential License Agreement for Nintendo GameCube by and between the Company and Nintendo of America Inc., dated as of the 15th day of
November, 2001 (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed December 4, 2001)                                    



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|            |  |                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                            
|            | 
|10.28       |  | Form of Share Purchase Agreement between the Company and certain purchasers relating to the February 2002 Private Placement (incorporated
by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 filed on March 15, 2002 (Commission File No. 333-84368))     
|            | 
|10.29       |  | Form of Registration Rights Agreement between the Company and certain purchasers relating to the February 2002 Private Placement
(incorporated by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-3 filed on March 15, 2002 (Commission File No. 333-84368))
|            | 
|10.30       |  | Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated July 2, 2001 (incorporated by reference to
Exhibit 10.30 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).                                            
|            | 
|10.31       |  | Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated July 2, 2001 (incorporated by reference to
Exhibit 10.31 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).                                             
|            | 
|10.32       |  | Promissory Note executed by Gregory E. Fischbach in favor of Acclaim Entertainment, Inc., dated October 1, 2001 (incorporated by reference
to Exhibit 10.32 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).                                         
|            | 
|10.33       |  | Promissory Note executed by James R. Scoroposki in favor of Acclaim Entertainment, Inc., dated October 1, 2001 (incorporated by reference
to Exhibit 10.33 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).                                          
|            | 
|10.34       |  | Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by Gregory E. Fischbach in favor of Acclaim Entertainment,
Inc. (incorporated by reference to Exhibit 10.34 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).        
|            | 
|10.35       |  | Amendment, dated June 25, 2002, to Promissory Note, dated July 2, 2001, executed by James R. Scoroposki in favor of Acclaim Entertainment,
Inc. (incorporated by reference to Exhibit 10.35 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).         
|            | 
|10.36       |  | Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by Gregory E. Fischbach in favor of Acclaim
Entertainment, Inc. (incorporated by reference to Exhibit 10.36 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).     
|            | 
|10.37       |  | Amendment, dated June 25, 2002, to Promissory Note, dated October 1, 2001, executed by James R. Scoroposki in favor of Acclaim
Entertainment, Inc. (incorporated by reference to Exhibit 10.37 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).      
|            | 
|10.38       |  | Promissory Note executed by Simon Hosken in favor of Acclaim Entertainment, Inc., dated October 31, 2002 (incorporated by reference to
Exhibit 10.38 to the Companys Annual Report on Form 10-K for the period ended August 31, 2002).                                                
|            | 
|10.39       |  | Amendment and Modification to Revolving Credit and Security Agreement dated March 31, 2003 (incorporated by reference to Exhibit 10.39 to
the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003).                                                            
|            | 
|10.40       |  | Amended and Restated Cash Deposit Agreement between Gregory E. Fischbach and GMAC Commercial Finance, LLC, dated March 31, 2003
(incorporated by reference to Exhibit 10.40 to the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003).                       
|            | 
|10.41       |  | Amended and Restated Cash Deposit Agreement between James Scoroposki and GMAC Commercial Finance, LLC, dated March 31, 2003 (incorporated
by reference to Exhibit 10.41 to the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003).                           



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|            |  |                                                                                                                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                  
|            | 
|10.42       |  | Amended and Restated Limited Guaranty by Gregory E. Fischbach in favor of GMAC Commercial Finance, LLC, dated March 31, 2003 (incorporated
by reference to Exhibit 10.42 to the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003).
|            | 
|10.43       |  | Amended and Restated Limited Guaranty by James Scoroposki in favor of GMAC Commercial Finance, LLC, dated March 31, 2003 (incorporated by
reference to Exhibit 10.43 to the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003).    
|            | 
|10.44       |  | Letter Agreement, dated March 31, 2003, between the Companys Audit Committee and Gregory E. Fischbach and James Scoroposki
(incorporated by reference to Exhibit 10.44 to the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003). 
|            | 
|10.45       |  | Form of Warrant Agreement between the Company and Gregory E. Fischbach, dated as of March 31, 2003 (incorporated by reference to
Exhibit 10.45 to the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003).                          
|            | 
|10.46       |  | Form of Warrant Agreement between the Company and James Scoroposki, dated as of March 31, 2003 (incorporated by reference to Exhibit 10.46
to the Companys Quarterly Report on Form 10-Q for the period ended March 31, 2003).                              
|            | 
|10.47       |  | Agreement between the Company and GMAC Commercial Finance LLC regarding waiver of certain covenant defaults and termination of credit
agreement.                                                                                                             
|            | 
|10.48       |  | Waiver and Amendment Agreement between the Company and GMAC Commercial Finance LLC dated May 4, 2004.                                                                                                                                                        
|            | 
|10.49       |  | Extension Agreement between the Company and GMAC Commercial Finance LLC dated as of June 18, 2004.                                                                                                                                                           
|            | 
|23.1       |  | Consent of KPMG LLP.                                                                                                                                                                                                                                         
|            | 
|31.1       |  | Certification of CEO pursuant to Rule13a-146(a)/15d-14(b).                                                                                                                                                                                                   
|            | 
|31.2       |  | Certification of CFO pursuant to Rule13a-146(a)/15d-14(b).                                                                                                                                                                                                   
|            | 
|32.1       |  | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                       
|            | 
|32.2       |  | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                       

---

|* |  | Confidential treatment has been granted with respect to certain portions of this exhibit, which have been omitted therefrom and have been separately filed with the Commission.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|+ |  | Management contract or compensatory plan or arrangement.
|- |  | --------------------------------------------------------

| |  | Filed herewith.
|- |  | ---------------



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



ACCLAIM ENTERTAINMENT, INC.By:

/s/    RODNEY P.
COUSENSRodney P. Cousens Chief Executive Officer and President




June 29, 2004



By:

/s/    GERARD F.
AGOGLIAGerard F. Agoglia Executive Vice President and Chief Financial Officer (principal financial and accounting
officer)




June 29, 2004



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



|                                                |  |                                                                                               |  |              
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | -------------
|Name                                            |  | Title                                                                                         |  | Date         
|                                                |  |                                                                                              
|/s/    GREGORY E. FISCHBACHGregory E. Fischbach |  | Co-Chairman of the Board and Director                                                         |  | June 29, 2004
|                                                |  |                                                                                              
|/s/    JAMES SCOROPOSKIJames Scoroposki         |  | Co-Chairman of the Board; Senior Executive Vice President; Treasurer; Secretary; and Director |  | June 29, 2004
|                                                |  |                                                                                              
|/S/    BERNARD J. FISCHBACHBernard J. Fischbach |  | Director                                                                                      |  | June 29, 2004
|                                                |  |                                                                                              
|/S/    MICHAEL TANNENMichael Tannen             |  | Director                                                                                      |  | June 29, 2004
|                                                |  |                                                                                              
|/s/    ROBERT GROMANRobert Groman               |  | Director                                                                                      |  | June 29, 2004
|                                                |  |                                                                                              
|/s/    JAMES SCIBELLIJames Scibelli             |  | Director                                                                                      |  | June 29, 2004
|                                                |  |                                                                                              
|/S/    KENNETH L. COLEMANKenneth L. Coleman     |  | Director                                                                                      |  | June 29, 2004



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SCHEDULE II



ACCLAIM ENTERTAINMENT, INC.

AND SUBSIDIARIES



ALLOWANCE FOR PRICE CONCESSIONS AND RETURNS

(In thousands of dollars)



|                                             |  |                              |        |                                           |   |                            |  |                        |        |  |   |        |  
|-------------------------------------------- |  | ---------------------------- | ------ | ----------------------------------------- | - | -------------------------- |  | ---------------------- | ------ |  | - | ------ | -
|Period                                       |  | Balance atBeginningof Period |        | Provisions forPriceConcessionsand Returns |   | PriceConcessionsandReturns |  | Balance atEnd ofPeriod |       
|Fiscal year ended March 31, 2004             |  | $                            | 48,310 |                                           | $ | 29,774                     |  | $                      | 57,838 |  | $ | 20,246 | *
|Seven months ended March 31, 2003            |  |                              | 42,175 |                                           |   | 55,938                     |  |                        | 49,803 |  |   | 48,310 | *
|Fiscal year ended August 31, 2002            |  |                              | 22,734 |                                           |   | 67,024                     |  |                        | 47,583 |  |   | 42,175 | *
|Fiscal year ended August 31, 2001 (restated) |  |                              | 67,317 |                                           |   | 15,899                     |  |                        | 60,482 |  |   | 22,734 | *

---

|* |  | Includes accrued price concessions of $10,740 as of March 31, 2004, $19,623 as of March 31, 2003, $10,001 as of August 31, 2002 and $5,887 as of August 31, 2001 as well as accrued
rebates of $1,192 as of March 31, 2004, $2,010 as of March 31, 2003 and $1,957 as of August 31, 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



114