UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A

or

For the transition period from __________ to __________

Commission File Number 0-24363

1682 Langley Avenue, Irvine, California 92606
(Address of principal executive offices)

(310) 432-1958
(Registrant's telephone number, including area code)

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

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

Common Stock, $0.001 par value

As of December 31, 2004, the aggregate market value of voting common stock held by non-affiliates was approximately $270,000 based upon the closing price of the Common Stock on that date.

As of May 19, 2005, 93,855,634 shares of Common Stock of the Registrant were issued and outstanding.

Note This amendment is being filed to correct inadvertent errors in item Part II Item 9A

INDEX TO FORM 10-K/A FOR THE YEAR ENDED DECEMBER 31, 2004

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]

PAGE

PART I

Item 1. Business 4

Item 2. Properties 9

Item 3. Legal Proceedings 9

Item 5. Market for Registrant's Common Equity and Related Stockholder

Matters 11

Item 6. Selected Financial Data 13

Item 7. Management's Discussion and Analysis of Financial Condition and

Results of Operations 14

Item 7A. Quantitative and Qualitative Disclosure about Market Risk 37

Item 8. Consolidated Financial Statements and Supplementary Data 37

Item 9. Changes in and Disagreements with Accountants on Accounting

and Financial Disclosure 38

Item 9A Controls and Procedures 38

Item 10. Directors and Executive Officers of the Registrant 38

Item 11. Executive Compensation 40

Item 12. Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters 45

Item 13. Certain Relationships and Related Transactions 46

Item 14. Principal Accountant Fees and Services 48

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49

Signatures 50

Exhibit Index 51

Item 1. BUSINESS

Interplay Entertainment Corp., which we refer to in this Report as "we," "us," or "our," is a developer, publisher and licensor of interactive entertainment software for both core gamers and the mass market. We were incorporated in the State of California in 1982 and were reincorporated in the State of Delaware in May 1998. We are most widely known for our titles in the action/arcade, adventure/role playing game (RPG), and strategy/puzzle categories. We have produced titles for many of the most popular interactive entertainment software platforms, and currently are focusing our publishing and distribution business by developing interactive entertainment software for the On Line Massively Multiplayer market.

We seek to publish or license out interactive entertainment software titles that are, or have the potential to become, franchise software titles that can be leveraged across several releases and/or platforms, and have published many such successful franchise titles to date.

Our business and industry has certain risks and uncertainties. During 2004 we continued to operate under limited cash flow from operations. We expect to operate under similar cash constraints during 2005. For a fuller discussion of the risk and uncertainties relating to our financial results, our business and our industry, please see the section titled "Risk Factors" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

The majority of our sales and distribution is handled by Vivendi Universal Games, Inc. ("Vivendi") in North America and selected rest-of-world countries and was handled by Avalon Interactive Group Ltd. ("Avalon") in Europe the Commonwealth of Independent States, Africa and the Middle East until the liquidation of Avalon in February of 2005, and through licensing strategies elsewhere. Subsequently Avalon ceased operations following its involuntary liquidation in February 2005. We will most likely not receive the amounts presently due us by Avalon.

Following the liquidation of Avalon, we appointed in March 2005 our wholly owned subsidiary, Interplay Productions Ltd, as our distributor in Europe and other selected territories.

In June 2004, we licensed to Bethesda Softworks LLC ("Bethesda") the rights to develop Fallout 3 on all platforms for a non refundable advance against royalties of $1.175 million. Bethesda also has an option to develop two sequels, Fallout 4 and Fallout 5 for $1.0 million minimum guaranteed advance against royalties per sequel. Interplay retained the right to develop massively multiplayer online games (MMOLG) using the Fallout trademark.

In July 2004, we sold the Redneck Rampage intellectual property rights to Vivendi for $300,000.

In December 2004, we licensed from Majorem the exclusive worldwide, outside of Taiwan, publishing and distribution rights to the MMOLG, Ballerium.

In January 2005, our majority shareholder, Titus Interactive SA, who holds approximately 58 million shares of our common stock, representing approximately 62% of our outstanding common stock, was placed into involuntary liquidation.

We publish and distribute interactive entertainment software titles that provide immersive game experiences by combining advanced technology with engaging content, vivid graphics and rich sound. We utilize the experience and judgment of the experienced gamers in our production group to select and produce the products we publish.

Our strategy is to invest in products for those platforms, whether PC or video game console, that have or will have sufficient installed bases or a large enough number of potential subscribers for the investment to be economically viable. We do not currently internally develop new products. As we anticipate continued substantial growth in the use of high-speed Internet access, which could provide significantly expanded market potential for online products, we are focusing our efforts to launching an online service, entitled GamesOnLine, allowing consumers to become part of a unique online community of gamers and access selected content. We currently have one online game in development, Ballerium.

We regard our software as proprietary and rely primarily on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. We own or license various copyrights and trademarks. We hold copyrights on our products, product literature and advertising and other materials, and hold trademark rights in our name and certain of our product names and publishing labels. We have licensed certain products to third parties for distribution in particular geographic markets or for particular platforms, and receive royalties on such licenses. We also outsource some of our product development activities to third party developers. We contractually retain all intellectual property rights related to such projects. We also license certain products developed by third parties and pay royalties on such products.

While we provide "shrink wrap" license agreements or limitations on use with our software, the enforceability of such agreements or limitations is uncertain. We are aware that unauthorized copying occurs, and if a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, our operating results could be materially adversely affected. We use copy protection on selected products and do not provide source code to third parties unless they have signed nondisclosure agreements.

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

As the number of software products in the interactive entertainment software industry increases and the features and content of these products further overlap, interactive entertainment software developers may increasingly become subject to infringement claims. Although we take reasonable efforts to ensure that our products do not violate the intellectual property rights of others, there can be no assurance that claims of infringement will not be made. Any such claims, with or without merit, can be time consuming and expensive to defend. From time to time, we have received communications from third parties asserting that features or content of certain of our products may infringe upon such party's intellectual property rights. In some instances, we may need to engage in litigation in the ordinary course of our business to defend against such claims. There can be no assurance that existing or future infringement claims against us will not result in costly litigation or require that we license the intellectual property rights of third parties, either of which could have a material adverse effect on our business, operating results and financial condition.

We develop or acquire our products from publishing relationships with leading independent developers.

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

Our products typically have short life cycles, and we therefore depend on the timely introduction of successful new products, including enhancements of or sequels to existing products and conversions of previously released products to additional platforms, to generate revenues to fund operations and to replace declining revenues from existing products. The development cycle of new products is difficult to predict, and involves a number of risks.

During the years ended December 31, 2004, 2003, and 2002, we spent $2.6 million, $13.7 million, and $16.2 million, respectively, on product research and development activities. Those amounts represented 20%, 38%, and 37% respectively, of net revenues in each of those periods.

In May 2004, we had to close down our internal development studio as a result of our inability to meet our payroll obligations on a timely basis. All internal projects were discontinued at that time and we currently do not have any product under development internally.

To expand our product offerings to include hit titles created by third party developers and to leverage our publishing capabilities, we enter into publishing arrangements with third party developers. In the years ended December 31, 2004, 2003, and 2002, approximately 0%, 0%, and 67%, respectively, of new products we released and which we believe are or will become franchise titles were developed by third party developers. We expect that the proportion of our new products which are developed externally may vary significantly from period to period as different products are released. In selecting external titles to publish, we seek titles that combine advanced technologies with creative game design. Our publishing agreements usually provide us with the exclusive right to distribute, or license another party to distribute, a product on a worldwide basis (although, in certain instances our rights are limited to a specified territory). We typically fund external development through the payment of advances upon the completion of milestones, which advances are credited against royalties based on sales of the products. Further, our publishing arrangements typically provide us with ownership of the trademarks relating to the product as well as exclusive rights to sequels to the product. We manage the production of external development projects by appointing a producer from our internal production team to oversee the development process and work with the third party developer to design, develop and test the game. At December 31, 2004, we had one title, Ballerium, being developed by a third party developer.

We believe this strategy of cultivating relationships with talented third party developers can be cost-effective and can provide an excellent source of quality products. A number of our commercially successful products have been developed under this strategy. However, our reliance on third party software developers for the development of a significant number of our interactive software entertainment products involves a number of risks. Our reliance on third party software developers subjects us to the risks that these developers will not supply us with high quality products in a timely manner or on acceptable terms.

We operate primarily in one industry segment, the development, publishing and distribution of interactive entertainment software. For information regarding the revenues and assets associated with our geographic segments, see Note 14 of the Notes to our Consolidated Financial Statements included elsewhere in this Report.

We had during 2004 two distributors as our two main customers: Vivendi and Avalon. Vivendi and Avalon accounted for 19.8% and 79.6% of our net revenues in 2004. Vivendi have and Avalon had exclusive rights to distribute our product in substantial parts of the world. Avalon was liquidated in February 2005 and as a result, we took over distribution of our products in Europe. If Vivendi fails to deliver the proceeds owed us from distribution or fails to effectively distribute our products or perform under their distribution agreements, our business and financial results could suffer material harm.

North America. In August 2002, we entered into a distribution arrangement with Vivendi, whereby Vivendi distributes substantially all of our products in North America for a period of three years as a whole and two years with respect to each product providing for a potential maximum term of five years. Under this distribution agreement, Vivendi pays us sales proceeds less amounts for distribution fees. Vivendi is responsible for all manufacturing, marketing and distribution expenditures, and bears all credit, price concessions and inventory risk, including product returns. Upon our delivery of a product gold master to Vivendi, Vivendi pays us, as a non-refundable minimum guarantee and which is a specified percent of the projected amount due to us based on projected initial shipment sales. Payments for sales that exceed the projected initial shipment sales are paid on a monthly basis as sales occur. Other than for products covered by the tri-party agreement with Atari, the Vivendi distribution agreement expires in August 2005.

Vivendi provides terms of sale comparable to competitors in our industry. In addition, we provide a 90-day limited warranty to end-users that our products will be free from manufacturing defects. While to date we have not experienced any material warranty claims, there can be no assurance that we will not experience material warranty claims in the future.

International. We were operating during 2004 under a distribution agreement with Avalon, pursuant to which Avalon distributed substantially all of our titles in Europe, the Commonwealth of Independent States, Africa and the Middle East for a seven-year period. Under this agreement, Avalon earned a distribution fee for its marketing and distribution of our products, and we reimbursed Avalon for certain direct costs and expenses.

Following the liquidation of Avalon, in March 2005 we appointed our wholly owned subsidiary, Interplay Productions Ltd, as our distributor in Europe and other selected territories.

In January 2003, we entered into an agreement with Vivendi to distribute substantially all of our products in select rest-of-world countries. This agreement expires in August 2005.

Interplay OEM. Our wholly owned subsidiary, Interplay OEM, distributes our interactive entertainment software titles, as well as those of other software publishers, to computer and peripheral device manufacturers for use in bundling arrangements. As a result of changes in market conditions for bundling arrangements and the limited amount of resources we have available, we no longer have any personnel applying their efforts towards bundling arrangements. In December 2002, we assigned our original equipment manufacturer, or OEM distribution rights to Vivendi and will utilize Vivendi's resources in our future OEM business. Under OEM arrangements, one or more software titles, which are either limited-feature versions or the retail version of a game, are bundled with computer or peripheral devices and are sold by an original equipment manufacturer so that the purchaser of the hardware device obtains the software as part of the hardware purchase. Although it is customary for OEM customers to pay a lower per unit price on sales through OEM bundling contracts, such arrangements involve a high unit volume commitment. Interplay OEM net revenues generally are incremental net revenues and do not have significant additional product development or sales and marketing costs. The OEM distribution agreement with Vivendi expires in August 2005.

We assist our distributors in the development and implementation of marketing programs and campaigns for each of our titles and product groups. Our distributors' marketing activities in preparation for a product launch include print advertising, game reviews in consumer and trade publications, retail in-store promotions, attendance at trade shows and public relations. Our distributors also send direct and electronic mail promotional materials to our database of gamers, and may selectively use radio and television advertisements in connection with the introduction of certain of our products. Our distributors budget a portion of each product's sales for cooperative advertising and market development funds with retailers. Every title and brand is to be launched with a multi-tiered marketing campaign that is developed on an individual basis to promote product awareness and customer pre-orders.

Our distributors engage in on-line marketing through Internet advertising. We maintained several Internet web sites and discontinued all web sites in June of 2004. These web sites provided news and information of interest to our customers through free demonstration versions of games, contests, games, tournaments and promotions. We expect to resume online activities as part of our upcoming GamesOnLine service. To generate interest in new product introductions, we will provide demonstration versions of upcoming titles through magazines and will provide game samples that consumers will be able to download from GamesOnline.com. In addition, we will host on-line events and maintain various message boards to keep customers informed on shipped and upcoming titles.

The interactive entertainment software industry is intensely competitive and is characterized by the frequent introduction of new hardware systems and software products. Our competitors vary in size from small companies to very large corporations with significantly greater financial, marketing and product development resources than ours. Due to these greater resources, certain of our competitors are able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors of desirable motion picture, television, sports and character properties and pay more to third party software developers than us. We believe that the principal competitive factors in the interactive entertainment software industry include product features, brand name recognition, access to distribution channels, quality, ease of use, price, marketing support and quality of customer service.

We compete primarily with other publishers of PC and video game console interactive entertainment software. Significant competitors include Activision, Atari, Capcom, Eidos, Electronic Arts, Konami, Lucas Arts, Midway, Namco, Sega, Take-Two Interactive, THQ, Ubi Soft. and Vivendi. In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Microsoft Corporation, and Nintendo compete directly with us in the development of software titles for their respective platforms. Large diversified entertainment companies, such as The Walt Disney Company, and Time Warner Inc., many of which own substantial libraries of available content and have substantially greater financial resources than us, may decide to compete directly with us or to enter into exclusive relationships with our competitors.

Retailers of our products typically have a limited amount of shelf space and promotional resources. Consequently, there is intense competition among consumer software producers, and in particular interactive entertainment software producers, for high quality retail shelf space and promotional support from retailers. If the number of consumer software products and computer platforms increase, competition for shelf space will intensify which may require us to increase our marketing expenditures. This increased demand for limited shelf space, places retailers and distributors in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. As our products constitute a relatively small percentage of any retailer's sales volume, there can be no assurance that retailers will continue to purchase our products or provide our products with adequate shelf space and promotional support. A prolonged failure by retailers to provide shelf space and promotional support would have a material adverse effect on our business, operating results and financial condition

The interactive entertainment software industry is highly seasonal as a whole, with the highest levels of consumer demand occurring during the year-end holiday buying season. As a result, our net revenues, gross profits and operating income have historically been highest during the second half of the year. Our business and financial results may therefore be affected by the timing of our introduction of new releases.

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

Sony Computer Entertainment, Microsoft Corporation and Nintendo manufacture and ship finished products that are compatible with their video game consoles to our distributors for distribution. PlayStation 2, Xbox and GameCube products consist of the game disks and include manuals and packaging and are typically delivered within a relatively short lead-time.

If we experience unanticipated delays in the delivery of manufactured software products by our third party manufacturers, our net sales and operating results could be materially adversely affected.

We typically do not carry large inventories because most of our sales and distribution efforts have been handled by Vivendi and International distributors under the terms of our respective distribution agreements with them. To the extent we ship items, we typically ship orders immediately upon receipt. To the extent we have any backlog orders, we do not believe they would have a material adverse effect on our business.

As of December 31, 2004, we had 12 employees, including 2 in product development, 1 in sales and marketing and 9 in finance, general and administrative. We also retain independent contractors to provide certain services, primarily in connection with our product development activities. Neither we nor our full time employees are subject to any collective bargaining agreements and we believe that our relations with our employees are good.

From time to time, we have retained actors and/or "voice over" talent to perform in certain of our products, and we may continue this practice in the future. These performers are typically members of the Screen Actors Guild or other performers' guilds, which guilds have established collective bargaining agreements governing their members' participation in interactive media projects. We may be required to become subject to one or more of these collective bargaining agreements in order to engage the services of these performers in connection with future development projects.

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission or SEC. You may obtain copies of these reports via the Internet at the SEC's homepage located at www.sec.gov. Our Website is currently unavailable and when available you may also go to our Internet address located at www.interplay.com and go to "Investor Relations" which will link you to the SEC's homepage for our filed reports. In addition, copies of the reports we file with the SEC may also be obtained at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by Calling the SEC at 1-800-SEC-0330.

Our headquarters are located in Irvine, California, where we leased approximately 81,000 square feet of office space. We were evicted from our building by our Landlord in early June 2004 and subsequently leased approximately 500 square feet of office space to relocate our operations. We also lease on a short term basis approximately 1,200 square feet in Beverly Hills, California, for GamesOnLine.

We are occasionally involved in various legal proceedings, claims and litigation arising in the ordinary course of business, including disputes arising over the ownership of intellectual property rights and collection matters. We do not believe the outcome of such routine claims will have a material adverse effect on the Company's business, financial condition or results of operations. From time to time, we may also be engaged in legal proceedings arising outside of the ordinary course of our business.

On September 16, 2002, Knight Bridging Korea Co., Ltd ("KBK") filed a $98.8 million complaint for damages against Atari Interactive, Inc. (formerly known as Infogrames Interactive, Inc.) and other Atari Interactive affiliates as well as our subsidiary GamesOnline.com, Inc., ("GOL") alleging, among other things, breach of contract, misappropriation of trade secrets, breach of fiduciary duties and breach of implied covenant of good faith in connection with an electronic distribution agreement dated November 2001 between KBK and GOL. KBK has alleged that GOL failed to timely deliver to KBK assets to a product, and that it improperly disclosed confidential information about KBK to Atari. KBK amended its complaint to add us as a separate defendant. GOL counterclaimed against KBK for breach of contract as KBK owes GOL $700,000 in guaranteed advanced fees under the term of the agreement. In addition, the Company filed an action against Atari Interactive for breach indemnity, among other claims. In October 2004, the California Superior court dismissed the legal action of KBK against the Company and its subsidiary GOL and granted a judgment to GOL in the cross complaint from GOL against KBK for $890,730. GOL dismissed its action against Atari Interactive in April 2005.

On October 24, 2002, Synnex Information Technologies Inc ("Synnex") initiated legal proceedings against the company for various claims. The Company's attorney's have filed and obtained a motion to be relieved as counsel on August 10, 2004. The company has not yet retained replacement counsel in this action.

On November 25, 2002, Special Situations Fund III, Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special Situations Technology Fund, L.P. (collectively, "Special Situations") initiated legal proceedings against us seeking damages of approximately $1.3 million, alleging, among other things, that we failed to secure a timely effective date for a Registration Statement for our shares purchased by Special Situations under a common stock subscription agreement dated March 29, 2002 and that we are therefore liable to pay Special Situations $1.3 million. This matter was settled and the case dismissed in December 2003. Special Situations had entered into a settlement agreement with us contemplating payments over time. We are currently in default of the settlement agreement.

On or about October 9, 2003, Warner Brothers Entertainment, Inc. ("Warner") filed suit against us in the Superior Court for the State of California, County of Orange, alleging default on an Amended and Restated Secured Convertible Promissory Note held by Warner dated April 30, 2002, with an original principal sum of $2.0 million. At the time the suit was filed, the current remaining principal sum due under the note was $1.4 million in principal including interest. Subsequently the company entered into a settlement agreement with Warner. The Company is currently in default of the settlement agreement.

In March 2004, we instituted litigation in the Superior Court for the State of California, Los Angeles County, against Battleborne Entertainment, Inc. ("Battleborne") Battleborne was developing a console product for us tentatively titled "Airborne: Liberation". Our complaint alleges that Battleborne repudiated the contract with us and subsequently renamed the product and entered into a development agreement with a different publisher. We seek a declaration from the court that we retain rights to the product, or damages.

In April 2004, Arden Realty Finance IV LLC ("Arden") filed an unlawful detainer action against the Company in the Superior Court for the State of California, County of Orange, alleging the Company's default under its corporate lease agreement. At the time the suit was filed, the alleged outstanding rent totaled $431,823. The Company was unable to pay the rent, and vacated the office space during the month of June 2004. On June 3, 2004, Arden obtained a judgment of approximately $588,000 exclusive of interest. In addition the Company is in the process of resolving a prior claim with the landlord in the approximate amount of $148,000, exclusive of interest. The Company has negotiated a forbearance agreement whereby Arden has agreed to accept payments commencing in January 2005 in the amount of $60,000 per month until the full amount is paid. The Company has not accrued any amount for any remaining lease obligation, should such obligation exist. We are currently in default of the forbearance agreement.

In April 2004, Bioware Corporation filed an action against the Company in the Superior Court for the State of California, County of Orange, alleging breach of contract for failure to pay royalties. At the time of filing, Bioware alleged that it was owed approximately $156,000 under various agreements for which it obtained a writ of attachment to secure payment of the alleged obligation if it is successful at trial. Bioware also sought and obtained a temporary restraining order prohibiting the Company from transferring assets up to the amount sought in the writ of attachment. We successfully opposed the preliminary injunction and vacated the temporary restraining order. Bioware subsequently dismissed their action.

Monte Cristo Multimedia, a French video game developer and publisher, filed a breach of contract complaint against the Company in the Superior Court for the State of California, County of Orange, on August 6, 2002, alleging damages in the amount of $886,406 plus interest, in connection with an exclusive distribution agreement. This claim was settled for $100,000, payable in twelve installments, however, the Company was unable to satisfy its payment obligations and consequently, Monte Cristo has filed a stipulated judgment against the Company in the amount of $100,000. If Monte Cristo executes the judgment, it will negatively affect the Company's cash flow, which could further restrict the Company's operations and cause material harm to our business.

Snowblind entered into a partial settlement agreement on June 23, 2004 following the suit filed by Snowblind on November 19, 2003. Snowblind filed a second amended complaint against the Company on or about July 12, 2004 claiming various causes of action including but not limited to, breach of contract, account stated, open book account, and recission. The action was settled in April 2005 and we granted Snowblind the exclusive license to develop games using the Dark Alliance Trademark under certain conditions. We retained the right to develop massively multiplayer online games using the Dark Alliance trademark.

In August 2003, Reflexive Entertainment, Inc. filed an action against the Company in the Orange County Superior Court that was settled in July 2004. The Company was unable to make the payments and Reflexive sought and obtained judgment against the company.

On March 27, 2003, KDG France SAS ("KDG") filed an action against Interplay OEM, Inc. and Herve Caen for various claims. On December 29, 2003 a settlement agreement was entered into whereby Herve Caen was dismissed from the action. Further the settlement was entered into with Interplay OEM only in the amount of $170,000, however KDG reserved its rights to proceed against the Company if the settlement payment was not made. As of this date the settlement payment was not made.

The Company received notice from the Internal Revenue Service ("IRS") that it owes approximately $117,000 in payroll tax penalties which it has accrued for at December 31, 2004.

The Company was unable to meet certain 2004 payroll obligations to its employees; as a result several employees filed claims with the State of California Labor Board ("Labor Board"). The Labor Board has fined the Company approximately $10,000 for failure to meet its payroll obligations and set trial dates for August 2005.

The Company's property, general liability, auto, fiduciary liability, workers compensation and employment practices liability, have been cancelled. The Company subsequently entered into a new workers compensation insurance plan. The Labor Board fined the Company approximately $79,000 for having lost workers compensation insurance for a period of time. The Company is appealing the Labor Board fines.

On December 29, 2004, Piper Rudnick LLP ("Piper Rudnick") filed an action against Interplay Entertainment Corp. for various claims for unpaid services. We are currently evaluating the merit of this lawsuit.

On May 16, 2002, the listing of our common stock was moved from the Nasdaq National Market System to the Nasdaq SmallCap Market System. On October 9, 2002, our common stock was delisted and began trading on the NASD-operated Over-the-Counter Bulletin Board. Our common stock is currently traded on the NASD-operated Over-the-Counter Bulletin Board under the symbol "IPLY" or while non-compliant "IPLYE". At May 27, 2005, there were 144 holders of record of our common stock.

The following table sets forth the range of high and low sales prices for our common stock for the periods indicated.

No new shares were issued during FY 2004

The following table sets forth certain information regarding our equity compensation plans as of December 31, 2004:

We have one stock option plan currently outstanding. Under the 1997 Stock Incentive Plan, as amended (the "1997 Plan"), we may grant options to our employees, consultants and directors, which generally vest from three to five years. At our 2002 annual stockholders' meeting, our stockholders voted to approve an amendment to the 1997 Plan to increase the number of authorized shares of common stock available for issuance under the 1997 Plan from four million to 10 million. Our Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan- 1991, as amended (the "1991 Plan"), and our Incentive Stock Option and Nonqualified Stock Option Plan-1994, as amended (the "1994 Plan"), have terminated. An aggregate of 9,050 stock options that remain outstanding under the 1991 Plan and 1994 Plan have been transferred to our 1997 Plan.

The selected consolidated statements of operations data for the years ended December 31, 2004, 2003 and 2002 and the selected consolidated balance sheets data as of December 31, 2004 and 2003 are derived from our audited consolidated financial statements included elsewhere in this Report. The selected consolidated statements of operations data for the years ended December 31, 2001 and 2000 and the selected consolidated balance sheets data as of December 31, 2002, 2001, and 2000 are derived from our audited consolidated financial statements not included in this Report. Our historical results are not necessarily indicative of the results that may be achieved for any other period. The following data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere in this Report.

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

Interplay Entertainment Corp. is a developer, publisher and licensor of interactive entertainment software for both core gamers and the mass market. We are most widely known for our titles in the action/arcade, adventure/role playing game (RPG), and strategy/puzzle categories. We have produced titles for many of the most popular interactive entertainment software platforms, and currently are focusing our publishing and distribution business by developing interactive entertainment software for the On Line Massively Multiplayer market.

During 2004 we continued to operate under limited cash flow from operations. We expect to operate under similar cash constraints during 2005.

On or about February 23, 2004, we received correspondence from Atari Interactive, Inc, the holder of the D&D license, alleging that we had failed to pay royalties due under the D&D license as of February 15, 2004. Our rights to distribute titles under the D&D license were terminated by Atari on April 23, 2004.

In June 2004 we licensed to Bethesda Softworks LLC, the rights to develop Fallout 3 on all platforms for $1.175 million minimum guaranteed advance against royalties. Bethesda also has an option to develop two sequels, Fallout 4, and Fallout 5 for $1.0 million minimum guaranteed advance against royalties per sequel. Interplay retained the rights to develop a massively multiplayer online game ("MMORPG") using the Fallout Trademark.

In July 2004, we granted an option to Vivendi to purchase the Redneck Rampage intellectual property rights for $300,000. Later that month, Vivendi exercised the option.

In July 2004, we entered into a tri-party agreement with Atari Interactive, Inc and Vivendi that allows Vivendi to resume North American and international distribution pursuant to their pre-existing agreements with us of certain Dungeons & Dragons games, including Baldur's Gate Dark Alliance II. The agreement provided for proceeds due us to be paid directly to Atari by Vivendi, up to an amount of $1.0 million of which approximately $.3 million was still oustanding as of December 31, 2004. As a result we did not receive any proceeds from Vivendi since July 2004 and will most likely not receive any proceeds during 2005.

In August 2004, we entered into a tri-party agreement with Atari Interactive, Inc and Avalon that allows Avalon to resume European distribution pursuant to their pre-existing agreements with us of certain Dungeons & Dragons games, including Baldur's Gate Dark Alliance II. The agreement provided for proceeds due us to be paid directly to Atari by Avalon, as a result we did not receive any proceeds from this agreement in 2004. This agreement was terminated following Avalon's liquidation in February 2005.

We also continued to significantly reduce our operational costs and personnel in 2004. We reduced our personnel by 101, from 113 in December 2003 to 12 in December 2004 by both involuntary termination and attrition. We also made reductions in expenditures in other areas. As a result of these cost-cutting measures, our ongoing cash needs to fund operations has been greatly reduced for 2005.

We continue to face difficulties in paying our vendors and have pending lawsuits as a result of our continuing cash flow difficulties. We expect to continue to operate under cash constraints during 2005.

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The Report of our Independent Auditors for the December 31, 2004 consolidated financial statements includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

We derived net revenues primarily from sales of software products to our two main distributors, Vivendi and Avalon. Vivendi distributes our products in North America and select rest-of-world countries. Vivendi also handles our OEM distribution. Our distribution agreement with Vivendi expires in August 2005 except for certain products subject to a tri-party agreement with Atari Interactive Inc which expires in December 2006. Upon expiration of the Vivendi distribution agreements we will need to either renew the distribution agreements, find new distribution partners, or resume distribution ourselves. Avalon distributed our products in Europe, the commonwealth of Independent States, Africa and the Middle East. Our distribution agreement with Avalon was terminated following Avalon's involuntary judicial liquidation in February 2005. In March 2005 we appointed our wholly owned subsidiary, Interplay Productions Ltd, as our distributor in Europe and other selected territories.

In addition, we derive royalty-based revenues from licensing arrangements of intellectual property and products to third parties for distribution in markets and through channels that are outside of our primary focus. We no longer distribute products through our Games Online subsidiary and this subsidiary will host our online gaming service.

Our products are either designed and created by our employees or by external software developers. When we use external developers, we typically advance development funds to the developers in installment payments based upon the completion of certain milestones. These advances are typically considered advances against future royalties, which are to be recouped against these advances. We currently have one product in development with external developers. We plan on creating additional products through external developers.

Our wholly owned subsidiary, Interplay OEM, distributed our interactive entertainment software titles, as well as those of other software publishers, to computer and peripheral device manufacturers for use in bundling arrangements. As a result of changes in the market conditions for bundling arrangements and the limited amount of resources we have available, we no longer have any personnel applying their efforts towards bundling arrangements. In December 2002, we licensed our OEM distribution rights to Vivendi and may utilize Vivendi's resources in our future OEM business. This agreement expires in August 2005.

Our operating results will continue to be impacted by economic, industry and business trends affecting the interactive entertainment industry. Our industry is highly seasonal, with the highest levels of consumer demand occurring during the year-end holiday buying season. We expect that with the upcoming release of new console systems by Sony, Nintendo and Microsoft, our industry has entered into a transition period that could affect marketability of new products.

Our operating results have fluctuated significantly in the past and likely will fluctuate significantly in the future, both on a quarterly and an annual basis. A number of factors may cause or contribute to such fluctuations, and many of such factors are beyond our control.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, prepaid licenses and royalties and software development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of 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 may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.

We record revenues when we deliver products to customers in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition." and SEC Staff Accounting Bulletin No. 104, Revenue Recognition.

Substantially all of our sales were made by two distributors, Vivendi Universal Games, Inc. and Avalon Interactive Group Ltd, an affiliate of our majority shareholder Titus Interactive S.A. We recognize revenue from sales by distributors, net of sales commissions, only as the distributor recognizes sales of our products to unaffiliated third parties. For those agreements that provide the customers the right to multiple copies of a product in exchange for guaranteed amounts, we recognize revenue at the delivery and acceptance of the product gold master. We recognize per copy royalties on sales that exceed the guarantee as copies are duplicated.

We generally are not contractually obligated to accept returns, except for defective, shelf-worn and damaged products. However, on a case-by-case negotiated basis, we permit customers to return or exchange products and may provide price concessions to our retail distribution customers on unsold or slow moving products. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition when Right of Return Exists," we record revenue net of a provision for estimated returns, exchanges, markdowns, price concessions, and warranty costs. We record such reserves based upon management's evaluation of historical experience, current industry trends and estimated costs. The amount of reserves ultimately required could differ materially in the near term from the amounts provided in the accompanying consolidated financial statements.

We provide customer support only via telephone and the Internet. Customer support costs are not significant and we charge such costs to expenses as we incur them.

We also engage in the sale of licensing rights on certain products. The terms of the licensing rights differ, but normally include the right to develop and distribute a product on a specific video game platform. We recognize revenue when the rights have been transferred and no other obligations exist.

Prepaid licenses and royalties consist of license fees paid to intellectual property rights holders for use of their trademarks or copyrights. Also included in prepaid royalties are prepayments made to independent software developers under developer arrangements that have alternative future uses. These payments are contingent upon the successful completion of milestones, which generally represent specific deliverables. Royalty advances are recoupable against future sales based upon the contractual royalty rate. We amortize the cost of licenses, prepaid royalties and other outside production costs to cost of goods sold over six months commencing with the initial shipment in each region of the related title. We amortize these amounts at a rate based upon the actual number of units shipped with a minimum amortization of 75% in the first month of release and a minimum of 5% for each of the next five months after release. This minimum amortization rate reflects our typical product life cycle. Our management relies on forecasted revenue to evaluate the future realization of prepaid royalties and charges to cost of goods sold any amounts they deem unlikely to be fully realized through future sales. Such costs are classified as current and non current assets based upon estimated product release date. If actual revenue, or revised sales forecasts, fall below the initial forecasted sales, the charge may be larger than anticipated in any given quarter. Once the charge has been taken, that amount will not be expensed in future quarters when the product has shipped.

Our internal research and development costs, which consist primarily of software development costs, are expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed", provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for development costs that have alternative future uses. Under our current practice of developing new products, the technological feasibility of the underlying software is not established until substantially all of the product development is complete. As a result, we have not capitalized any software development costs on internal development projects, as the eligible costs were determined to be insignificant.

Other significant accounting policies not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. The policies related to consolidation and loss contingencies require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standard setters appear likely to cause a material change in our accounting policies, outcomes cannot be predicted with confidence. Please see Note 2 of Notes to Consolidated Financial Statements, Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by management when there are acceptable alternatives.

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

Geographically, our net revenues for the years ended December 31, 2004 and 2003 breakdown as follows: (in thousands)

Geographically, our net revenues for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

North American net revenues for the year ended December 31, 2004 were $1.5 million as compared to $13.5 million for the year ended December 31, 2003. The decrease in North American net revenues in 2004 was mainly due to releasing zero product gold masters in 2004 as compared to delivering six product gold masters in 2003.

We expect that our North American publishing net revenues will decrease in 2005 compared to 2004, mainly due to decreased catalog sales.

The decrease in North American net revenues in 2003 was mainly due to lower total unit sales of both new release and catalog titles. Although we released six titles in each of 2003 and 2002, all six titles in 2003 were released by Vivendi, as compared to five in 2002, under the terms of the 2002 distribution agreement, whereby Vivendi pays us a lower per unit rate and in return assumes all credit, product return and price concession risks, as well as being responsible for all manufacturing, marketing and distribution expenditures. This resulted in a decrease in North American sales of $19.4 million in 2003, partially offset by a decrease in product returns and price concessions of $6.7 million as compared to the 2002 period. Our product returns were also lower in 2003 due primarily to the reduction in price concessions we made in connection with our decreased catalog sales under our prior North American Distribution Agreement we entered into with Vivendi in 2001.

International net revenues for the year ended December 31, 2004 were $9.9 million an increase of 3.4 million as compared to International net revenues for the year ended December 31, 2003. The increase in International net revenues compared to the year ended December 31, 2003 was mainly due to releasing Baldur's Gate Dark Alliance II and Fallout: Brotherhood of Steel during the twelve months ended December 31, 2004 and not having comparable titles during 2003.

We expect that our International publishing net revenues will decrease in 2005 as compared to 2004, mainly due to decreased unit sales.

International net revenues for the year ended December 31, 2003 were $6.5 million. The increase in International net revenues for the year ended December 31, 2002 was mainly due to a decrease in product returns and price concessions of $3.1 million compared to the 2002 period and the recognition of $0.6 million in revenues related to Avalon's CVA, offset by a decrease of both new release and catalog sales.

OEM, royalty and licensing net revenues for the year ended December 31, 2004 were $1.7 million, a decrease of $14.3 million as compared to the same period in 2003. The OEM business decreased $14.3 million as a consequence of our reorganization.

OEM, royalty and licensing net revenues for the year ended December 31, 2003 were $16.0 million, an increase of $3.9 million as compared to the same period in 2002. The OEM business decreased $2.8 million as a result of our efforts to focus on our core business of developing and publishing video game titles for distribution directly to the end users and our continued focus on video game console titles, which typically are not bundled with other products. The year ended December 31, 2003 also included $15.0 million in revenues for the sale of the Hunter: The Reckoning video game franchise in the first quarter of 2003 and $0.5 million in net revenues related to the sale of the Galleon video game in the fourth quarter of 2003.

Our platform net revenues for the years ended December 31, 2004 and 2003 breakdown as follows: (in thousands)

PC net revenues for the year ended December 31, 2004 were $1.8 million, a decrease of 76.3% compared to the same period in 2003. The decrease in PC net revenues in 2004 was primarily due to no new releases. We expect our PC net revenues to decrease in 2005 as compared to 2004 as we continue to reorganize the company.

Our video game console net revenues for the year ended December 31, 2004 were $9.6 million a decrease of 21.8% compared to the same period in 2003. The decrease in video game console net revenues was partially attributed to our releasing or delivering no gold masters to Vivendi. Our catalog sales also decreased in 2004 as compared to 2003. Since we anticipate releasing no new console titles in 2005, we expect our video game console net revenues to decrease in 2005.

Our platform net revenues for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

PC net revenues for the year ended December 31, 2003 were $7.7 million, a decrease of 52% compared to the same period in 2002. The decrease in PC net revenues in 2003 was primarily due to the lower sales of our title Lionheart in 2003 as compared to our 2002 release of Icewind Dale II. The decrease in PC net revenues were further affected by a decrease in catalog sales.

Our video game console net revenues decreased 23% for the year ended December 31, 2003 compared to the same period in 2002. The decrease in video game console net revenues was partially attributed to our releasing or delivering five gold masters to Vivendi, all under our 2002 distribution agreement with them, whereby, we received a lower per unit rate in return for Vivendi being responsible for all manufacturing, marketing, and distribution expenditures. These five titles were: RLH (Xbox), Baldur's Gate: Dark Alliance II (PlayStation 2), Baldur's Gate: Dark Alliance II (Xbox), Fallout: Brotherhood of Steel (PlayStation 2) and Fallout: Brotherhood of Steel (Xbox). We also released five titles in 2002 to Vivendi; however, only four were under the 2002 distribution agreement. Furthermore, our video game console net revenues were reduced in 2003 by not releasing Baldur's Gate: Dark Alliance II (PlayStation 2), Baldur's Gate: Dark Alliance II (Xbox), Fallout: Brotherhood of Steel (PlayStation 2) and Fallout: Brotherhood of Steel (Xbox) in Europe. Our catalog sales also decreased in 2003 as compared to 2002.

Cost of goods sold related to PC and video game console net revenues represents the manufacturing and related costs of interactive entertainment software products, including costs of media, manuals, duplication, packaging materials, assembly, freight and royalties paid to developers, licensors and hardware manufacturers. For sales of titles under the new distribution arrangement with Vivendi, our cost of goods consists of royalties paid to developers. Cost of goods sold related to royalty-based net revenues primarily represents third party licensing fees and royalties paid by us. Typically, cost of goods sold as a percentage of net revenues for video game console products are higher than cost of goods sold as a percentage of net revenues for PC based products due to the relatively higher manufacturing and royalty costs associated with video game console and affiliate label products. We also include in the cost of goods sold the amortization of prepaid royalty and license fees we pay to third party software developers. We expense prepaid royalties over a period of six months commencing with the initial shipment of the title at a rate based upon the numbers of units shipped. We evaluate the likelihood of future realization of prepaid royalties and license fees quarterly, on a product-by-product basis, and charge the cost of goods sold for any amounts that we deem unlikely to realize through future product sales.

Our net revenues, cost of goods sold and gross margin for the years ended December 31, 2004 and 2003 break down as follows: (in thousands)

Our cost of goods sold decreased 48% to $6.8 million in the year ended December 31, 2004 compared to $12.9 million in the same period in 2003. Furthermore, in 2003 we incurred $2.9 million in amortization of prepaid royalties associated with the sale of the Hunter: The Reckoning license and approximately $2.9 million in write-offs of development projects that were impaired because the titles were not expected to meet our desired profit requirements. In addition, the decrease was mainly a result of lower product cost of goods associated with lower overall product sales. We expect our cost of goods sold to decrease in 2005 as compared to 2004 because we anticipate lower overall product sales.

Our gross margin decreased to 48.3% for the twelve months ended December 31, 2004 from 63.9% in the comparable period in 2003. This was primarily due to the sale of the Hunter: The Reckoning license, which yielded approximately an 80% profit margin in 2003 partially offset by the sale of the rights to develop Fallout 3 and the sale of Redneck Rampage in 2004.

Our net revenues, cost of goods sold and gross margin for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

Our cost of goods sold decreased 52% to $12.9 million in the year ended December 31, 2003 compared to the same period in 2002. Furthermore, we incurred $2.9 million of non-recurring charges related to the write-off of prepaid royalties on titles that were cancelled or not expected to meet our desired profit requirements as compared to $4.1 million in the 2002 period. In addition, the decrease was mainly a result of lower product cost of goods associated with lower overall product sales.

Our gross margin increased to 64% in 2003 from 39% in 2002. This was due to a decrease in our royalty expense as a result of a decrease of $1.2 million in write-off of prepaid royalties, a decrease in our product cost of goods, a decrease in product returns and price concessions as compared to the 2002 period due to distributing all of our new releases in North America under the 2002 distribution agreement with Vivendi and the sale of the Hunter: The Reckoning franchise in February 2003.

Our marketing and sales expenses for the years ended December 31, 2004 and 2003 breakdown as follows: (in thousands)

Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses. Marketing and sales expenses for the twelve months ended December 31, 2004 were $1.7 million, a 20.4% increase as compared to the 2003 period. The increase in marketing and sales expenses is due primarily to increased advertising costs for Baldur's Gate Dark Alliance 2 on the PS2 and Xbox platforms in Europe. We expect our marketing and sales expenses to decrease in 2005 compared to 2004, as we expect to ship release fewer titles in 2005 as compared to 2004.

Our marketing and sales expenses for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

Marketing and sales expenses for the year ended December 31, 2003 were $1.4 million, a 76% decrease as compared to the 2002 period. The decrease in marketing and sales expenses is due to a $2.3 million reduction in advertising and retail marketing support expenditures and a decrease of $2.1 million in personnel costs and general expenses.

Our general and administrative expenses for the years ended December 31, 2004 and 2003 breakdown as follows: (in thousands)

General and administrative expenses primarily consist of administrative personnel expenses, facilities costs, professional fees, bad debt expenses and other related operating expenses. General and administrative expenses for the year ended December 31, 2004 were $4.5 million, a 32.6% decrease as compared to the same period in 2003. The decrease is mainly due to decreases in personnel costs and general expenses as a result of a reduction in administrative personnel during 2004. We expect our general and administrative expenses to decrease in 2005 compared to 2004.

Our general and administrative expenses for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

General and administrative expenses for the year ended December 31, 2003 were $6.7 million, a 13% decrease as compared to the same period in 2002. The decrease is due to a $1.0 million decrease in personnel costs and general expenses in 2003. In the 2002 period, we incurred significant charges of $0.4 million in loan termination fees associated with the termination of our line of credit and $0.5 million in consulting expenses payable to Europlay 1, LLC, ("Europlay") an outside consulting firm hired in 2002 to assist us with the restructuring of the company and the sale of Shiny Entertainment, Inc.

Our product development expenses for the years ended December 31, 2004 and 2003 breakdown as follows: (in thousands)

We charge internal product development expenses, which consist primarily of personnel and support costs, to operations in the period incurred. Product development expenses for the year ended December 31, 2004 were $2.6 million, a 80.7% decrease as compared to the same period in 2003. This decrease was mainly due to a $11 million decrease in personnel costs and general expenses as a result of a reduction in headcount and the closure of our internal development studio during the year. We expect our product development expenses to decrease in 2005 compared to 2004 as a result of reductions of development personnel during 2004.

Our product development expenses for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

Product development expenses for the year ended December 31, 2003 were $13.7 million, a 16% decrease as compared to the same period in 2002. This decrease was due to a $2.5 million decrease in personnel costs as a result of a reduction in headcount and the sale of Shiny Entertainment, Inc. in April 2002.

Our other expense for the years ended December 31, 2004 and 2003 breakdown as follows: (in thousands)

Other expense consists primarily of interest expense, bad debt expense, payroll tax penalties, write-off of fixed assets and foreign currency exchange transaction losses. Other expense for the year ended December 31, 2004 was $2.2 million, a 278% decrease as compared to the same period in 2003. This increase is due primarily to a write-off of fixed assets and a write down of the Avalon accounts receivable balance.

Our other expense for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

Other expense for the year ended December 31, 2003 was $0.1 million, a 95% decrease as compared to the same period in 2002. The 2002 period included higher interest expense related to higher net borrowings, a $1.8 million provision due to a delay in the effectiveness of a registration statement in connection with our private placement of 8,126,770 shares of Common Stock and a $0.9 million gain in the settlement and termination of a building lease in the United Kingdom.

Our provision/(benefit) for income taxes for the years ended December 31, 2004 and 2003 breakdown as follows: (in thousands)

We recorded no tax provision for the years ended December 31, 2004 and 2003.

Our provision/(benefit) for income taxes for the years ended December 31, 2003 and 2002 breakdown as follows: (in thousands)

We recorded no tax provision for the year ended December 31, 2003, compared with a tax benefit of $225,000 for the year ended December 31, 2002. In June 2002, the Internal Revenue Service ("IRS") concluded their examination of our consolidated federal income tax returns for the years ended April 30, 1992 through 1997. In fiscal 2001, we established a reserve of $500,000, representing management's best estimate of amounts to be paid in settlement of the IRS claims. With the executed settlement, the actual amount owed was only $275,000. Accordingly, we adjusted our reserve and, as a result, recognized an income tax benefit of $225,000. We have a deferred tax asset of approximately $54.3 million that has been fully reserved at December 31, 2003. This tax asset would reduce future provisions for income taxes and related tax liabilities when realized, subject to limitations.

As of December 31, 2004, we had a working capital deficit of approximately $18 million, and our cash balance was approximately $29,000. We currently have no cash reserves and are unable to pay current liabilities. The Company cannot continue in its current form without obtaining additional financing or income.

On April 16, 2004, Arden Realty, our landlord, filed an unlawful detainer action against us alleging unpaid rent of approximately $432,000. We were unable to pay our rent, and vacated the office space during the month of June 2004. On June 3, 2004, our Landlord obtained a judgment of approximately $588,000 exclusive of interest. We also owe an additional approximately $148,000 on a prior settlement with the Landlord. We negotiated a forbearance agreement whereby Arden has agreed to accept payments commencing in January 2005 in the amount of $60,000 per month until the full amount is paid. We are currently in default of this agreement.

We have received notice from the Internal Revenue Service ("IRS") that we owe approximately $117,000 in payroll tax penalties for late payment of payroll taxes in the 3^rd and 4^th quarters of 2003 and the 1^st and 2^nd quarters of 2004. Such amount has been accrued at December 31, 2004. We have received notice from the California Employment Development Department that we owe payroll taxes and penalties of approximately $101,000. We have received notice from the State Board of Equalization that we owe approximately $64,000 in State Use Tax. We have also received notice from the Orange County Treasurer that we owe approximately $28,000 in property taxes. Such amounts have been accrued at December 31, 2004.

We were unable to meet certain 2004 payroll obligations to our employees, as a result several employees filed claims with the State of California Labor Board ("Labor Board"). The Labor Board has fined us approximately $10,000 for failure to meet our payroll obligations and set trial dates for August 2005.

Since we were having difficulty meeting our payroll obligations on a timely basis to our employees a large number of our employees stopped reporting to work in late May and early June 2004. We were subsequently evicted from our building at 16815 Von Karman Avenue in Irvine, California in mid June 2004. We had a core group of approximately 12 employees on payroll on December 31, 2004, some of whom are actively working from the new company locations in Irvine and Beverly Hills, California and some have subsequently left the Company. Substantially all employees have not been paid for the period August through December 31, 2004. Since we have been unable to pay the employees we have continuing liability to them and there is a high probability that some or all of them will seek employment elsewhere. There may be some liability to us arising from employees, including those who have left.

Our property, general liability, auto, fiduciary liability, workers compensation, directors and officers, and employment practices liability insurance policies, have been cancelled. We obtained a new workers' compensation insurance policy. The Labor Board fined us approximately $79,000 for not having worker's compensation coverage for a period of time. Our health insurance was also cancelled but was subsequently reinstated. We are appealing the Labor Board fines.

On July 2, 2004,we granted an option to Vivendi to purchase the Redneck Rampage intellectual property rights for $300,000. On July 19, 2004, Vivendi exercised the option and paid the $300,000 on July 23, 2004.

We entered into tri-party agreements with Atari Interactive, Inc. and Vivendi and Avalon that allows Vivendi to resume North American distribution, and Avalon to resume International distribution pursuant to their pre-existing agreements with us of certain Dungeons & Dragons games, including Baldur's Gate: Dark Alliance II. In September 2004 Atari notified Vivendi that Vivendi is currently in breach of its obligations to remit royalties to Atari pursuant to the terms of the agreement. Atari Interactive notified Vivendi that if Vivendi did not cure the breach set forth in the letter by September 30, 2004 that the letter shall be deemed notice of termination of the agreement. According to reports we received from Vivendi we believe Atari was paid by Vivendi approximately $742,000 as of December 31, 2004. We will most likely not receive any proceeds from Vivendi during 2005.

Interplay licensed to Bethesda Softworks LLC, "Bethesda" the rights to develop Fallout 3 on all platforms for $1.175 million minimum guaranteed advance against royalties. Bethesda also has an option to develop two sequels, Fallout 4, and Fallout 5 for $1.0 million minimum guaranteed advance against royalties per sequel. Interplay retained the rights to develop a massively multiplayer online game using the Fallout Trademark.

We have substantially reduced our operating expenses. We need to reduce our continuing liabilities. We have to raise additional capital or financing. If we do not receive sufficient financing we may (i) liquidate assets, (ii) sell the company (iii) seek protection from our creditors including the filing of voluntary bankruptcy or being the subject of involuntary bankruptcy, and/or (iv) continue operations, but incur material harm to our business, operations or financial conditions. These conditions, combined with our historical operating losses and our deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern.

Additionally, we have reduced our fixed overhead commitments, and cancelled or suspended development on future titles which management believes do not meet sufficient projected profit margins, and scaled back certain marketing programs associated with the cancelled projects. Management will continue to pursue various alternatives to improve future operating results.

We continue to seek external sources of funding, including but not limited to, incurring debt, the sale of assets or stock, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve our long-term strategic objectives.

We have been operating without a credit facility since October 2001, which has adversely affected cash flow. We continue to face difficulties in paying our vendors, and employees, and have pending lawsuits as a result of our continuing cash flow difficulties. We expect these difficulties to continue during 2005.

Historically, we have funded our operations primarily through the use of lines of credit, cash flow from operations, including royalty and distribution fee advances, cash generated by the sale of securities, and the sale of assets.

Our primary capital needs have historically been working capital requirements necessary to fund our operations, the development and introduction of products and related technologies and the acquisition or lease of equipment and other assets used in the product development process. Our operating activities used cash of $2.9 million during the twelve months ended December 31, 2004, primarily attributable to fees incurred for lawsuits, and other liabilities, and recoupment of advances received by distributors.

Cash provided by investing activities of $28,000 for the twelve months ended December 31, 2004 consisted of normal capital expenditures and sales, primarily for office and computer equipment used in our operations. We do not currently have any material commitments with respect to any future capital expenditures. Net cash provided by financing activities of $738,000 for the twelve months ended December 31, 2004, consisted primarily of repayments of our notes payable.

Avalon distributed our products in Europe, the commonwealth of Independent States, Africa and the Middle East. Our distribution agreement with Avalon was terminated following Avalon's involuntary judicial liquidation in February 2005. In March 2005 we appointed our wholly owned subsidiary, Interplay Productions Ltd, as our distributor in Europe and other selected territories. As a result, we cannot guarantee our ability to collect fully the debts we believe are due and owed to us from Avalon. We subsequently fully reserved the Avalon receivable.

Currently there is no internal development of new titles going on.

If operating revenues from product releases are not sufficient to fund our operations, no assurance can be given that alternative sources of funding could be obtained on acceptable terms, or at all. These conditions, combined with our deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result from the outcome of this uncertainty. There can be no guarantee that we will be able to meet all contractual obligations or liabilities in the future, including payroll obligations.

We do not have any off-balance sheet arrangements under which we have obligations under a guaranteed contract that has any of the characteristics identified in paragraph 3 of FASB Interpretation 3 of FASB Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets. We also do not have any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument. We have no obligations, including a contingent obligation arising out of a variable interest (as referenced in FASB Interpretation No. 46, Consolidation of Variable Interest Entities (January 2003), as may be modified or supplemented) in an unconsolidated entity that is held by, and material to, the registrant, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the registrant.

The following table summarizes certain of our contractual obligations under non-cancelable contracts and other commitments at December 31, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. (in thousands)

(1) Developer/Licensee Commitments: The products produced by us are designed and created by our employee designers and artists and by non-employee software developers ("independent developers"). We typically advance development funds to the independent developers during development of our games, usually in installment payments made upon the completion of specified development milestones, which payments are considered advances against subsequent royalties based on the sales of the products. These terms are typically set forth-in written agreements entered into with the independent developers. In addition we have content license contracts that contain minimum guarantee payments and marketing commitments that are not dependent on any deliverables. These developer and content license commitments represent the sum of (1) minimum marketing commitments under royalty bearing licensing agreements, and (2) minimum payments and advances against royalties due under royalty-bearing licenses and developer agreements.

(2) Lease Commitments: The company's headquarters were located in Irvine, California where the Company leased approximately 81,000 square feet of office space. This lease would have expired in June 2006. On or about April 16, 2004, Arden Realty Finance IV LLC filed an unlawful detainer action against the Company in the Superior Court for the State of California, County of Orange, alleging the Company's default under its corporate lease agreement. At the time the suit was filed, the alleged outstanding rent totaled $431,823. The Company was unable to satisfy this obligation and reach an agreement with its landlord, the Company subsequently forfeited its lease and vacated the building. Arden Realty obtained a judgment for approximately $588,000 exclusive of interest. The Company also owes an additional approximately $149,000 making a total owed to Arden by the Company of approximately $737,000. The Company negotiated a forbearance agreement whereby Arden has agreed to accept payments commencing in January 2005 in the amount of $60,000 per month until the full amount is paid. The Company has been unable to make any of the $60,000 per month payments. We have monthly rental agreements in Irvine, CA and Beverly Hills, California for our operations.

(4) Other Commitments: Consist of payment plans entered into with various creditors.

It is our policy that related party transactions are to be reviewed and approved by a majority of our disinterested directors or our Independent Committee.

Our operations involve significant transactions with our majority stockholder Titus and its affiliates. We had a major distribution agreement with Avalon, an affiliate of Titus.

Titus presently owns approximately 58 million shares of common stock, which represents approximately 62% of our outstanding common stock, our only voting security.

We performed certain distribution services on behalf of Titus for a fee. In connection with such distribution services, we recognized fee income of $0 and $5,000 for the twelve months ended December 31, 2004, and 2003, respectively.

As of December 31, 2004 and December 31, 2003, Titus and its affiliates excluding Avalon owed us $370,000 and $362,000, respectively. We owed Titus and its affiliates excluding Avalon $30,000 and $0 as of December 31, 2004 and December 31, 2003 respectively.

We had an International Distribution Agreement with Avalon, a wholly owned subsidiary of Titus. Pursuant to this distribution agreement, Avalon provided for the exclusive distribution of substantially all of our products in Europe, Commonwealth of Independent States, Africa and the Middle East for a seven-year period ending February 2006, cancelable under certain conditions, subject to termination penalties and costs. Under this agreement, as amended, we paid Avalon a distribution fee based on net sales, and Avalon provides certain market preparation, warehousing, sales and fulfillment services on our behalf. In connection with the International Distribution Agreement with Avalon, we incurred distribution commission expense of $62,000 and $.9 million, for the twelve months ended December 31, 2004, and 2003 respectively. This agreement was terminated as a result of Avalon's liquidation in February 2005.

In March 2003, we entered into a note receivable with Titus Software Corp., ("TSC"), a subsidiary of Titus, and advanced TSC $226,000. The note earns interest at 8% per annum and was due in February 2004. In May 2003, our Board of Directors rescinded the note receivable and demanded repayment of the $226,000 from TSC. As of the date of this filing the balance on the note with accrued interest has not been paid. The balance on the note receivable, with accrued interest, at September 30, 2004 was approximately $254,000. The total receivable due from TSC is approximately $327,000 as of September 30, 2004. The majority of the additional approximately $73,000 was due to TSC subletting office space and miscellaneous other items.

In May 2003, we paid TSC $60,000 to cover legal fees in connection with a lawsuit against Titus. As a result of the payment, our CEO requested that we credit the $60,000 to amounts we owed to him arising from expenses incurred in connection with providing services to us. Our Board of Directors is in the process of investigating the details of the transaction, including independent counsel review as appropriate, in order to properly record the transaction.

In June 2003, we began operating under a representation agreement with Titus Japan K.K. ("Titus Japan"), a majority-controlled subsidiary of Titus, pursuant to which Titus Japan represents us as an agent in regards to certain sales transactions in Japan. This representation agreement has not yet been approved by our Board of Directors and is currently being reviewed by them. Our Board of Directors has approved the payments of certain amounts to Titus Japan in connection with certain services already performed by them on our behalf. As of December 31, 2004 we had a zero balance with Titus Japan. During the twelve months ending December 31, 2004 our Japanese subsidiary paid to Titus Japan approximately $209,000 in commissions, marketing and publishing staff services. Our Japanese subsidiary had approximately $369,000 in revenue in the twelve months ending December 31, 2004.

As of December 31, 2004, we have a receivable of $18,000 and $43,000 respectively for product development services that we provided. Titus SARL was placed into involuntary liquidation in January 2005.

In February 2004, we engaged the services of GIE Titus Interactive Group, a wholly owned subsidiary of Titus, for a three-month service agreement pursuant to which GIE Titus or its agents shall provide to us certain foreign administrative and legal services at a rate of $5,000 per month for three months. As of December 31, 2004, we had a zero balance with Titus GIE Interactive Group. Titus GIE was placed into involuntary liquidation in January 2005.

In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4." This new standard is the result of a broader effort by the FASB to improve financial reporting by eliminating differences between Generally Accepted Accounting Principles ("GAAP") in the United States and accounting principles developed by the International Accounting Standards Board ("IASB"). As part of this effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. SFAS No.

151 clarifies that abnormal amounts of idle facility expense, freight handling costs and spoilage costs should be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. Management does not expect the adoption of SFAS No. 151 to have a material impact on the Company's financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment," a revision to SFAS 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R established the accounting treatment for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS 123R requires the Company to value the share-based compensation based on the classification of the share-based award. If the share-based award is to be classified as a liability, the Company must re-measure the award at each balance sheet date until the award is settled. If the share-based award is to be classified as equity, the Company will measure the value of the share-based award on the date of grant but the award will not be re-measured at each balance sheet date. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." SFAS 123R is effective for public companies with calendar year ends no later than the beginning of the next fiscal year. All public companies must use either the modified prospective or modified retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity classified awards that were granted prior to the effective date should continue to be accounted for in accordance to SFAS 123 except that the amounts must be recognized in the statement of operations. Under the modified retrospective method, the previously reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect SFAS 123 amounts in the statement of operations. Management is in the process of determining the effect SFAS 123R will have upon the Company's financial position and statement of operations and the method of transition adoption.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Our future operating results depend upon many factors and are subject to various risks and uncertainties. These major risks and uncertainties are discussed below. There may be additional risks and uncertainties which we do not believe are currently material or are not yet known to us but which may become such in the future. Some of the risks and uncertainties which may cause our operating results to vary from anticipated results or which may materially and adversely affect our operating results are as follows:

As of December 31, 2004, our cash balance was approximately $29,000 and our outstanding accounts payable and current liabilities totaled approximately $13.2 million. In particular we have some significant creditors that comprise a substantial proportion of outstanding obligations that we might not be able to satisfy. If we do not receive sufficient financing or sufficient funds from our operations we may (i) liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii) continue operations, but incur material harm to our business, operations or financial condition. These measures could have a material adverse effect on our ability to continue as a going concern. Additionally, because of our financial condition, our Board of Directors has a duty to our creditors that may conflict with the interests of our stockholders. When a Delaware corporation is operating in the vicinity of insolvency, the Delaware courts have imposed upon the corporation's directors a fiduciary duty to the corporation's creditors. Our Board of Directors may be required to make decisions that favor the interests of creditors at the expense of our stockholders to fulfill its fiduciary duty. For instance, we may be required to preserve our assets to maximize the repayment of debts versus employing the assets to further grow our business and increase shareholder value. If we cannot generate enough income from our operations or are unable to locate additional funds through financing, we will not have sufficient resources to continue operations.

For the year ended December 31, 2004, our net loss from operations was $2.5 million and for the year ended December 31, 2003, our net loss from operations was $1.3 million. Since inception, we have incurred significant losses and negative cash flow, and as of December 31, 2004 we had an accumulated deficit of $139 million. Our ability to fund our capital requirements out of our available cash and cash generated from our operations depends on a number of factors. Some of these factors include the progress of our product development programs, the rate of growth of our business, and our products' commercial success. If we cannot generate positive cash flow from operations, we will have to continue to reduce our costs and raise working capital from other sources. These measures could include selling or consolidating certain operations or assets, and delaying, canceling or scaling back product development and marketing programs. These measures could materially and adversely affect our ability to publish successful titles, and may not be enough to permit us to operate profitability, or at all.

Our ability to effect a financing transaction to fund our operations could adversely affect the value of your stock.

If we are not acquired by or merge with another entity or if we are not able to raise additional capital by sale or license of certain of our assets, we may need to consummate a financing transaction to receive additional liquidity. This additional financing may take the form of raising additional capital through public or private equity offerings or debt financing. To the extent we raise additional capital by issuing equity securities, we cannot be certain that additional capital will be available to us on favorable terms and our stockholders will likely experience substantial dilution. Our certificate of incorporation provides for the issuance of preferred stock however we currently do not have any preferred stock issued and outstanding. Any new equity securities issued may have greater rights, preferences or privileges than our existing common stock. Material shortage of capital will require us to take drastic steps such as reducing our level of operations, disposing of selected assets, effecting financings on less than favorable terms or seeking protection under federal bankruptcy laws.

Titus owns approximately 58 million shares of common stock, which represents approximately 62% of our outstanding common stock, our only voting security. As a consequence, Titus can control substantially all matters requiring stockholder approval, including the election of directors, subject to our stockholders' cumulative voting rights, and the approval of mergers or other business combination transactions. At our 2003 and 2002 annual stockholders meetings, Titus exercised its voting power to elect a majority of our Board of Directors. Currently, our Chief Executive Officer and interim Chief Financial Officer Herve Caen is a director of various Titus affiliates. This concentration of voting power could discourage or prevent a change in control that otherwise could result in a premium in the price of our common stock. Further, Titus' bankruptcy could lead to a sale by its liquidator or other representative in bankruptcy, of shares Titus holds in us, thereby potentially reducing the value of our shares and market capitalization. Such a sale and dispersion of shares to multiple stockholders further could have the effect of making any business combination, or a sale of all of our shares as a whole, more difficult.

We are currently operating without a credit agreement or credit facility. The lack of a credit agreement or credit facility has significantly impeded our ability to fund our operations and has caused material harm to our business. There can be no assurance that we will be able to enter into a new credit agreement or that if we do enter into a new credit agreement, it will be on terms favorable to us.

Avalon was the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. Our agreement with Avalon was terminated following the liquidation of Avalon in February 2005. We subsequently appointed our wholly owned subsidiary Interplay Productions Ltd as our distributor for Europe.

Vivendi has exclusive rights to distribute our products in North America and selected International territories. Our agreement with Vivendi will expire in August 2005 for most of our products.

Our revenues and cash flows could fall significantly and our business and financial results could suffer material harm if:

• We fail to replace Vivendi as our distributor; or
• Interplay Productions Ltd fails to effectively distribute our products.

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

We are presently without a CFO, and Mr. Caen has assumed the position of interim-CFO and continues as CFO to date until a replacement can be found.

Our business and industry is both seasonal and cyclical. If we fail to deliver our products at the right times, our sales will suffer.

• demand for our products and our competitors' products;
• the size and rate of growth of the market for interactive entertainment software;
• changes in personal computer and video game console platforms;
• the timing of announcements of new products by us and our competitors and the number of new products and product enhancements released by us and our competitors;
• changes in our product mix;
• the number of our products that are returned; and
• the level of our international and original equipment manufacturer royalty and licensing net revenues.

Many factors make it difficult to accurately predict the quarter in which we will ship our products. Some of these factors include:

• the uncertainties associated with the interactive entertainment software development process;
• approvals required from content and technology licensors; and
• the timing of the release and market penetration of new game hardware platforms.

For the year ended December 31, 2004, our net loss from operations was $2.5 million. We have incurred significant net losses in previous years periods. Our losses in the past stemmed partly from the significant costs we incured to develop our entertainment software products, product returns and price concessions. Moreover, a significant portion of our operating expenses is relatively fixed, with planned expenditures based largely on sales forecasts. At the same time, most of our products have a relatively short life cycle and sell for a limited period of time after their initial release, usually less than one year.

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

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

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

Third party interactive entertainment software developers develop many of our software products. Since we depend on these developers in the aggregate, we remain subject to the following risks:

• limited financial resources may force developers out of business prior to their completion of projects for us or require us to fund additional costs; and
• the possibility that developers could demand that we renegotiate our arrangements with them to include new terms less favorable to us.

The greater resources of our competitors permit them to pay higher fees than we can to licensors of desirable motion picture, television, sports and character properties and to third party software developers.

We compete primarily with other publishers of personal computer and video game console interactive entertainment software. Significant competitors include Electronic Arts Inc. and Activision, Inc. Many of these competitors have substantially greater financial, technical resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do.

In addition, integrated video game console hardware/software companies such as Sony Computer Entertainment, Nintendo, and Microsoft Corporation compete directly with us in the development of software titles for their respective platforms and they have generally discretionary approval authority over the products we develop for their platforms. Large diversified entertainment companies, such as The Walt Disney Company, and Time Warner Inc. many of which own substantial libraries of available content and have substantially greater financial resources, may decide to compete directly with us or to enter into exclusive relationships with our competitors.

Our business requires extensive time and creative effort to produce and market. Our future success also will depend upon our ability to attract, motivate and retain qualified employees and contractors, particularly software design and development personnel. Competition for highly skilled employees is intense, and we may fail to attract and retain such personnel. Alternatively, we may incur increased costs in order to attract and retain skilled employees. Our executive management team currently consists of CEO and interim CFO Hervé Caen. Our failure to recruit or retain the services of key personnel, including competent executive management, or to attract and retain additional qualified employees could cause material harm to our business.

Our net revenues from international sales accounted for approximately 75% and 18% of our total net revenues for years ended December 31, 2004 and 2003, respectively. Most of these revenues came from our distribution relationship with Avalon, pursuant to which Avalon became the exclusive distributor for most of our products in Europe, the Commonwealth of Independent States, Africa and the Middle East. To the extent our resources allow, we intend to continue to expand our direct and indirect sales, marketing and product localization activities worldwide.

• recessions in foreign economies may reduce purchases of our products;
• translating and localizing products for international markets is time consuming and expensive;
• accounts receivable are more difficult to collect and when they are collectible, they may take longer to collect;
• regulatory requirements may change unexpectedly;
• it is difficult and costly to staff and manage foreign operations;
• fluctuations in foreign currency exchange rates;
• political and economic instability; and
• delays in market penetration of new platforms in foreign territories.

These factors may cause material declines in our future international net revenues and, consequently, could cause material harm to our business.

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

We are exposed to the risk of product returns and pricing concessions with respect to our distributors. Our distributors allow retailers to return defective, shelf-worn and damaged products in accordance with negotiated terms, and also offer a 90-day limited warranty to our end users that our products will be free from manufacturing defects. In addition, our distributors provide pricing concessions to our customers to manage our customers' inventory levels in the distribution channel. Our distributors could be forced to accept substantial product returns and provide pricing concessions to maintain our relationships with retailers and their access to distribution channels. We have mitigated this risk in North America under our current distribution arrangement with Vivendi, as sales will be guaranteed with no offset for product returns and price concessions.

Many of our current and planned products, are lines based on original ideas or intellectual properties licensed from other parties. From time to time we may not be in compliance with certain terms of these license agreements, and our ability to market products based on these licenses may be negatively impacted. Moreover, disputes regarding these license agreements may also negatively impact our ability to market products based on these licenses. Additionally, we may not be able to obtain new licenses, or maintain or renew existing licenses, on commercially reasonable terms, if at all. If we are unable to maintain current licenses or obtain new licenses for the underlying content that we believe offers the greatest consumer appeal, we would either have to seek alternative, potentially less appealing licenses, or release products without the desired underlying content, either of which could limit our commercial success and cause material harm to our business.

During calendar year 2004, we were involved in disputes with our key distributor Vivendi Universal Games. While we have since reached an amicable settlement with Vivendi, other distribution-related contract claims may be asserted against us in the future. Such claims can harm our business by consuming our limited human and financial resources, regardless of the merits of the claims. We incur substantial expenses in evaluating and defending against such claims. In the event that there is a determination against us on any these types of claims, we could incur significant monetary liability and there could be a negative impact on product release.

We are required to obtain a license to develop and distribute software for each of the video game console platforms for which we develop products, including a separate license for each of North America, Japan and Europe. We have obtained licenses to develop software for the Sony PlayStation and PlayStation 2, as well as video game platforms from Nintendo and Microsoft, who are also our competitors. Each of these companies has the right to approve the technical functionality and content of our products for their platforms prior to distribution. Typically, such license agreements give broad control to the licensor over the approval, manufacturing and shipment of products on their platform. Due to the competitive nature of the approval process, we typically must make significant product development expenditures on a particular product prior to the time we seek these approvals. Our inability to obtain these approvals or to obtain them on a timely basis could cause material harm to our business.

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

• we are required to submit and pay for minimum numbers of discs we want produced containing our software, regardless of whether these discs are sold, shifting onto us the financial risk associated with poor sales of the software developed by us; and
• reorders of discs are expensive, reducing the gross margin we receive from software releases that have stronger sales than initially anticipated and that require the production of additional discs.

As a result, video game console hardware licensors can shift onto us the risk that if actual retailer and consumer demand for our interactive entertainment software differs from our forecasts, we must either bear the loss from overproduction or the lower per-unit revenues associated with producing additional discs. Either situation could lead to material reductions in our net revenues and operating results.

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

Policing unauthorized use of our products is difficult, and software piracy can be a persistent problem, especially in some international markets. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States, or are weakly enforced. Legal protection of our rights may be ineffective in such countries, and as we leverage our software products using emerging technologies such as the Internet and online services, our ability to protect our intellectual property rights and to avoid infringing others' intellectual property rights may diminish. We cannot assure you that existing intellectual property laws will provide adequate protection for our products in connection with these emerging technologies.

As the number of interactive entertainment software products increases and the features and content of these products continue to overlap, software developers increasingly may become subject to infringement claims. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming and expensive to defend. Intellectual property litigation or claims could force us to do one or more of the following:

• cease selling, incorporating or using products or services that incorporate the challenged intellectual property;
• obtain a license from the holder of the infringed intellectual property, which license, if available at all, may not be available on commercially favorable terms; or
• redesign our interactive entertainment software products, possibly in a manner that reduces their commercial appeal.

Competition in our industry is intense. New videogame products are regularly introduced. Increasingly, profits and revenues in our industry are dominated by certain key product releases and are increasingly produced in conjunction with the latest consumer and media trends. Many of our competitors may have more finances and other resources for the development of product titles than we do. If our competitors develop more successful products, or if we do not continue to develop consistently high-quality products, our revenue will decline.

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

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

• operating systems such as Microsoft Windows Longhorn;
• new media formats
• releases of new video game consoles;
• new video game systems by Sony, Microsoft, Nintendo and others.

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

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

Due to the uncertainties regarding such rating systems, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such rating systems would have on our business. In addition to such regulations, certain retailers have in the past declined to stock some of our products because they believed that the content of the packaging artwork or the products would be offensive to the retailer's customer base. While to date these actions have not caused material harm to our business, we cannot assure you that similar actions by our distributors or retailers in the future would not cause material harm to our business.

Our Certificate of Incorporation, as amended, provides for 5,000,000 authorized shares of Preferred Stock. Our Board of Directors has the authority, without any action by the stockholders, to issue up to 4,280,576 shares of preferred stock and to fix the rights and preferences of such shares. 719,424 shares of Series A Preferred Stock was issued to Titus in the past, which amount has been fully converted into our common stock. In addition, our certificate of incorporation and bylaws contain provisions that:

• eliminate the ability of stockholders to act by written consent and to call a special meeting of stockholders; and
• require stockholders to give advance notice if they wish to nominate directors or submit proposals for stockholder approval.

These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock.

"Penny stocks" generally include equity securities with a price of less than $5.00 per share, which are not traded on a national stock exchange or on Nasdaq, and are issued by a company that has tangible net assets of less than $2,000,000 if the company has been operating for at least three years. The "penny stock" rules require, among other things, broker dealers to satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser's written consent prior to any transaction. In addition, additional disclosure in connection with trades in the common stock are required, including the delivery of a disclosure schedule prescribed by the SEC relating to the "penny stock" market. These additional burdens imposed on broker-dealers may discourage them from effecting transactions in our common stock, which may make it more difficult for an investor to sell their shares and adversely affect the market price of our common stock.

• general conditions in the computer, software, entertainment, media or electronics industries;
• changes in earnings estimates or buy/sell recommendations by analysts;
• investor perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers; and
• price and trading volume volatility of the broader public markets, particularly the high technology sections of the market.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have any derivative financial instruments as of December 31, 2004. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with foreign currency fluctuations. We do not hedge our risk associated with foreign currency fluctuations.

Our earnings are affected by fluctuations in the value of our foreign subsidiary's functional currency, and by fluctuations in the value of the functional currency of our foreign receivables, which primarily have been from Avalon.

We recognized a $33,000 loss, $58,000 gain and $104,000 loss during the years ended December 31, 2004, 2003 and 2002, respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable from Avalon.

Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements begin on page F-1 of this report.

The information required by this Item 9 has been previously furnished and is incorporated herein by reference to our forms 8-K filed on (i) February 25, 2003, and amendment to such form 8-K filed on February 27, 2003, and (ii) March 30, 2005.

Item 9A. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and interim Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective, at the reasonable assurance level, in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and in timely alerting him to material information required to be included in this report.

Due to the departure of numerous key employees during June 2004, there was significant change in our internal controls over financial reporting that occurred during the quarter ended September 30, 2004 and the quarter ended December 31, 2004 that have materially affected or are reasonably likely to materially affect these controls. On January 18, 2005 the Controller of the Company at that time resigned causing the auditors to note a material weakness. Management appointed a new Controller to take over the reporting duties from the previous Controller and hired additional accounting staff. The Company also took steps to remediate any material weakness by relocating to new offices, gathering archives and reinstalling all computer systems.

Our management, including the CEO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, our internal control systems can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and can provide only reasonable, not absolute assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding our directors and executive officers and their ages as of May 27, 2005:

Herve Caen and Eric Caen are brothers. There are no other family relationships between any director and/or any executive officer. The Board of Directors has determined that there are no other significant employees for purposes of this Item 10.

Hervé Caen joined us as President and as a director in November 1999. Mr. Caen was appointed interim Chief Executive Officer in January 2002 and currently serves as our Chief Executive Officer and interim Chief Financial Officer to date. Mr. Caen has served as Chairman of our Board of Directors since September 2001. Mr. Caen has served as Chairman of the Board of Directors of Titus Interactive S.A., an interactive entertainment software company since 1991. Mr. Caen was also Chief Executive Officer of Titus Interactive S.A. from 1991 through December 31, 2002. Mr. Caen also serves as Managing Director of Titus Interactive Studio, Titus SARL and Digital Integration Services, which positions he has held since 1985, 1991 and 1998, respectively. Mr. Caen also serves as Chief Executive Officer of Titus Software Corporation, Chairman of Titus Software UK Limited and Representative Director of Titus Japan K.K., which positions he has held since 1988, 1991 and 1998, respectively.

Eric Caen has served as a director since November 1999. Mr. Caen has served as a Director and as President of Titus Interactive S.A. since 1991. Mr. Caen is also currently the Chief Executive Officer of Titus Interactive S.A. Mr. Caen also serves as Vice President of Titus Software Corporation, Secretary and Director of Titus Software UK Limited and Director of Titus Japan K.K. and Digital Integration Limited, which positions he has held since 1988, 1991, 1998 and 1998, respectively. Mr. Caen has also served as Managing Director of Total Fun 2, a French record production company, since 1998. Mr. Caen served as Managing director of Titus SARL from 1988 to 1991.

Michel Welter joined our Board of Directors in September 2001. Mr. Welter, together with his company Weltertainment, is involved in the trading and exploitation of animated TV series. From 2000 to 2002 he served as President of CineGroupe International, a Canadian company, which develops, produces and distributes animated television series and movies. From 1990 to the end of 2000, Mr. Welter served as President of Saban Enterprises where he launched the international merchandising for the hit series "Power Rangers" and was in charge of international business development where he put together numerous co-productions with companies in Europe and Asia.

Audit Committee Independence and Audit Committee Financial Expert.

The Audit Committee currently consists of Michel Welter. The Board has determined that since October 2004 when Mr Stefanovich resigned from the board, who was until that time the "audit committee financial expert", as that term is defined in Section 407 of the Sarbanes-Oxley Act of 2002 and pursuant to the rules and regulations of the SEC, the Audit Committee no longer has such an expert. The Board determined that Mr Stefanovich was, and has also determined that Mr. Welter is, "independent", as that term is defined under the rules of the National Association of Securities Dealers, Inc.

We have adopted a Code of Ethics for all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and any person performing similar functions. The Code of Ethics was filed as an exhibit to the Amendment No. 1 to the 10K for the period ended December 31, 2003.

Item 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation earned during the last three fiscal years ended December 31, 2004, by our Chief Executive Officer and President whose total salary and bonus during the year ended December 31, 2004 exceeded $100,000 (collectively, the "Named Executive Officers"). No other executive officer serving at December 31, 2004, received total salary and bonus during 2004 in excess of $100,000.

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1. Mr. Caen joined us as President in November 1999. Mr. Caen was appointed Chief Executive Officer in January 2002 and currently serves as our Chief Executive Officer and interim Chief Financial Officer. Mr. Caen has served as Chairman of our Board of Directors since September 2001. In March 2003, our Compensation Committee approved an annual base salary of $360,000 as Chief Executive officer and $100,000 per year while serving as interim Chief Financial Officer.
2. Mr. Caen was only paid a portion of his salary during FY 2004 due to the limited cash available. We accrued the balance due Mr. Caen of $199,670 as of December 31, 2004.
3. Mr. Caen received 2,000 shares of our common stock pursuant to a non-discretionary grant made under the terms of our Employee Stock Purchase Program.
4. Mr. Adam was only paid a portion of his salary during FY 2004 due to the limited cash available. We accrued the balance due Mr. Adam of $75,391 as of December 31, 2004. Mr. Adam resigned on January 15^th, 2005.
5. Mr. Adam's other compensation consists of matching payments made under our 401(k) plan.

There were no stock options or stock appreciation rights granted to the Named Executive Officers during the year ended December 31, 2004.

There were no exercises of stock options or stock appreciation rights during the year ended December 31, 2004 for any of the Named Executive Officers.

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• $5,000 in cash compensation per quarter for attendance at Board of Directors meetings.
• $5,000 in cash compensation per annum for each Board committee a director is a member of and participates in.
• Upon election and appointment to the Board, or upon loss of employee status of an employee director, an option to purchase up to 25,000 shares of our common stock under the Third Amended and Restated 1997 Stock Incentive Plan. These director options are each for a term of ten years and vest over the first three years.
• An option to purchase 5,000 shares of our common stock under the Third Amended and Restated 1997 Stock Incentive Plan for each subsequent year of director service. These director options are each for a term of ten years and vest over the first three years.

Mr. Hervé Caen currently serves as our Chief Executive Officer and interim Chief Financial Officer. We previously entered into an employment agreement with Mr. Hervé Caen for a term of three years through November 2002, pursuant to which he currently serves as our Chairman of the Board of Directors and Chief Executive Officer. The employment agreement provided for an annual base salary of $250,000, with such annual raises as may be approved by the Board of Directors, plus annual bonuses at the discretion of the Board of Directors. Mr. Caen is also entitled to participate in the incentive compensation and other employee benefit plans established by us from time to time. In March 2003, our Compensation Committee approved an annual base salary increase for Mr. Caen from $250,000 to $360,000. The Compensation Committee is currently negotiating a new employment agreement with Mr. Caen.

Mr. Phillip Adam served as our President during 2004. In March 2003, our Compensation Committee approved a three-year employment agreement with Mr Adam as President for an annual base salary of $200,000. Mr Adam resigned from the company on January 15, 2005.

The Compensation Committee currently consists of Michel Welter. From January to August 2004, the Compensation Committee was comprised of Michel Welter, Jerry DeCiccio and Robert Stefanovich. Mr. DeCiccio resigned as a director in August 2004. From August 2004 to Ortober 2004, Mr Welter and Mr Stefanovich served on our Compensation Committee. Mr. Stefanovich resigned as a director in October 2004. During 2004, decisions regarding executive compensation were made by our Compensation Committee. None of the current 2004 members of our Compensation Committee nor any of our 2004 executive officers or directors had a relationship that would constitute an interlocking relationship with executive officers and directors of another entity.

The following is the Report of the Compensation Committee describing the compensation policies applicable to the Company's executive officers. This information shall not be deemed to be "soliciting material" or to be "filed" with the SEC nor shall this information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the company specifically incorporates it by reference into a filing.

Compensation Policies and Objectives

The Compensation Committee reviews and approves the annual salary, bonus and other benefits, including incentive compensation awards, of our executive officers, including the Chief Executive Officer. The Compensation Committee also reviews the employee benefit plans and recommends changes to the existing plans to the Board of Directors. The executive compensation policy is designed to attract and retain exceptional executives by offering compensation for superior performance that is competitive with other well-managed organizations. The Compensation Committee measures executive performance on an individual and corporate basis.

There are three components to the executive compensation program, as follows:

Base Salary. Base salaries for executives and other key employees are determined by individual financial and non-financial performance and general economic conditions of the company and of the industry. In recommending salaries for executive officers, the Compensation Committee (i) reviews the historical performance of the executives, and (ii) reviews specific information provided by its accountants and other consultants, as necessary, with respect to the competitiveness of salaries paid to the our executives.

Annual Bonus. Annual bonuses for executives and other key employees are tied directly to the company's financial performance as well as individual performance. The purpose of annual cash bonuses is to reward executives for achievements of corporate, financial and operational goals. Annual cash bonuses are intended to reward the achievement of outstanding performance. If certain objective and subjective performance goals are not met, annual bonuses are reduced or not paid.

Long-Term Incentives. The purpose of these plans is to create an opportunity for executives and other key employees to share in the enhancement of stockholder value through stock options. The overall goal of this component of pay is to create a strong link between the management of the company and its stockholders through management stock ownership and the achievement of specific corporate financial measures that result in the appreciation of our share price. Stock options are awarded in order to tie the executive officers' interests to the company's performance and align those interests closely with those of our stockholders. The Compensation Committee generally has followed the practice of granting options on terms that provide that the options become exercisable in installments over a two to five year period. The Compensation Committee believes that this feature not only provides an employee retention factor but also makes longer-term growth in share prices important for those receiving options.

No stock options were granted to our executive officers in 2004. The Compensation Committee continues to review the desirability of issuing stock options to its executive officers in any given fiscal year to provide incentives in connection with our corporate objectives.

Fiscal Year 2004 Chief Executive Officer Compensation

The salary, annual raises and annual bonus of Hervé Caen, our Chief Executive Officer and interim Chief Financial Officer, are determined in accordance with Mr. Caen's employment agreement with us. Mr. Caen's employment agreement provides for a base salary of $360,000 per year, with annual raises and bonuses as may be approved at the discretion of our Board of Directors and $100,000 per year while serving as interim Chief Financial Officer. The amounts of any annual raises or bonuses are determined in accordance with the policies and objectives set forth above. For the fiscal year ended December 31, 2004, Mr. Caen received $260,330 in compensation as Chief Executive Officer and interim Chief Financial Officer. The Compensation Committee did not award Mr. Caen any options during 2004. The Compensation Committee is currently negotiating a new employment agreement with Mr. Hervé Caen.

Tax Law Implications for Executive Compensation

Section 162(m) of the Internal Revenue Code limits us to a deduction for federal income tax purposes of no more than $1 million of compensation paid to certain Named Executive Officers in a taxable year. Compensation above $1 million may be deducted if it is "performance-based compensation" within the meaning of the Code. The Compensation Committee believes that at present the compensation paid to each Named Executive Officer in a taxable year will not exceed the deduction limit of $1 million under Section 162(m). However, the Compensation Committee has determined that stock awards granted under the long-term incentive plans with an exercise price at least equal to the fair market value of our common stock on the date of grant will be treated as "performance-based compensation."

Michel Welter

The following graph sets forth the percentage change in cumulative total stockholder return of our common stock during the period from December 31, 1999 to December 31, 2004, compared with the cumulative returns of the NASDAQ Stock Market (U.S. Companies) Index and the Media General Index 820*. The comparison assumes $100 was invested on December 31, 1999 in our common stock and in each of the foregoing indices. Information presented below is as of the end of the fiscal year ended December 31, 2004.

This performance graph and the data related thereto shall not be deemed to be "soliciting material" or "filed" with the SEC nor shall this information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into a filing.

The following table sets forth as of March 31, 2005, unless otherwise indicated, certain information relating to the ownership of our common stock by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (ii) each of our directors, (iii) each of the Named Executive Officers, and (iv) all of our executive officers and directors as a group. Except as may be indicated in the footnotes to the table and subject to applicable community property laws, each such person has the sole voting and investment power with respect to the shares owned. The address of each person listed is in care of us, 1682 Langley Avenue, Irvine, California 92606, unless otherwise set forth below such person's name.

* Less than one percent.

The following table sets forth certain information regarding our equity compensation plans as of December 31, 2004:

We have treated the difference, if any, between the exercise price and the estimated fair market value as compensation expense for financial reporting purposes, pursuant to APB 25. Compensation expense for the vested portion aggregated $0, $0 and $0 for the years ended December 31, 2004, 2003 and 2002, respectively.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

It is our policy that related party transactions are to be reviewed and approved by a majority of our disinterested directors or our Independent Committee.

Our operations involve significant transactions with our majority stockholder Titus and its affiliates. We had a major distribution agreement with Avalon, an affiliate of Titus.

Titus presently owns approximately 58 million shares of common stock, which represents approximately 62% of our outstanding common stock, our only voting security.

We performed certain distribution services on behalf of Titus for a fee. In connection with such distribution services, we recognized fee income of $0 and $5,000 for the twelve months ended December 31, 2004, and 2003, respectively.

As of December 31, 2004 and December 31, 2003, Titus and its affiliates excluding Avalon owed us $370,000 and $362,000, respectively. We owed Titus and its affiliates excluding Avalon $30,000 and $0 as of December 31, 2004 and December 31, 2003 respectively.

We had an International Distribution Agreement with Avalon, a wholly owned subsidiary of Titus. Pursuant to this distribution agreement, Avalon provided for the exclusive distribution of substantially all of our products in Europe, Commonwealth of Independent States, Africa and the Middle East for a seven-year period ending February 2006, cancelable under certain conditions, subject to termination penalties and costs. Under this agreement, as amended, we paid Avalon a distribution fee based on net sales, and Avalon provides certain market preparation, warehousing, sales and fulfillment services on our behalf. In connection with the International Distribution Agreement with Avalon, we incurred distribution commission expense of $62,000 and $.9 million, for the twelve months ended December 31, 2004, and 2003 respectively. This agreement was terminated as a result of Avalon's liquidation in February 2005.

In March 2003, we entered into a note receivable with Titus Software Corp., ("TSC"), a subsidiary of Titus, and advanced TSC $226,000. The note earns interest at 8% per annum and was due in February 2004. In May 2003, our Board of Directors rescinded the note receivable and demanded repayment of the $226,000 from TSC. As of the date of this filing the balance on the note with accrued interest has not been paid. The balance on the note receivable, with accrued interest, at September 30, 2004 was approximately $254,000. The total receivable due from TSC is approximately $327,000 as of September 30, 2004. The majority of the additional approximately $73,000 was due to TSC subletting office space and miscellaneous other items.

In May 2003, we paid TSC $60,000 to cover legal fees in connection with a lawsuit against Titus. As a result of the payment, our CEO requested that we credit the $60,000 to amounts we owed to him arising from expenses incurred in connection with providing services to us. Our Board of Directors is in the process of investigating the details of the transaction, including independent counsel review as appropriate, in order to properly record the transaction.

In June 2003, we began operating under a representation agreement with Titus Japan K.K. ("Titus Japan"), a majority-controlled subsidiary of Titus, pursuant to which Titus Japan represents us as an agent in regards to certain sales transactions in Japan. This representation agreement has not yet been approved by our Board of Directors and is currently being reviewed by them. Our Board of Directors has approved the payments of certain amounts to Titus Japan in connection with certain services already performed by them on our behalf. As of December 31, 2004 we had a zerobalance with Titus Japan. During the twelve months ending December 31, 2004 our Japanese subsidiary paid to Titus Japan approximately $209,000 in commissions, marketing and publishing staff services. Our Japanese subsidiary had approximately $369,000 in revenue in the twelve months ending December 31, 2004.

As of December 31, 2004, we have a receivable of $18,000 and $43,000 respectively for product development services that we provided. Titus SARL was placed into involuntary liquidation in January 2005.

In February 2004, we engaged the services of GIE Titus Interactive Group, a wholly owned subsidiary of Titus, for a three-month service agreement pursuant to which GIE Titus or its agents shall provide to us certain foreign administrative and legal services at a rate of $5,000 per month for three months. As of December 31, 2004, we had a zero balance with Titus GIE Interactive Group. Titus GIE was placed into involuntary liquidation in January 2005.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Rose, Snyder & Jacobs ("RSJ") served as our independent auditors for fiscal year 2004. For fiscal year 2003, Squar, Milner, Reehl & Williamson LLP ("SMRW") served as our independent auditors.

Aggregate fees billed by our independent auditors for professional services rendered for the audit of fiscal years 2004 and 2003 and for other professional services billed in fiscal years 2004 and 2003 are as follows:

Our Audit Committee has a policy that all audit and non-audit related services provided by our independent auditor is to be approved by our Audit Committee. Specifically, the Audit Committee requires that prior to the engagement of our independent auditor for any specified service, the approval of the Audit Committee must be received. All such matters are to be approved in a scheduled meeting of the Audit Committee consisting of a quorum of the Audit Committee. All of the above aggregate fees billed by our independent auditors have been approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(a) The following documents, except for exhibit 32.1 which is being furnished herewith, are filed as part of this report:

(1) Financial Statements

The list of financial statements contained in the accompanying Index to Consolidated Financial Statements covered by the Reports of Independent Auditors is herein incorporated by reference.

(2) Financial Statement Schedules

The list of financial statement schedules contained in the accompanying Index to Consolidated Financial Statements covered by the Reports of Independent Auditors is herein incorporated by reference.

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

(3) Exhibits

The list of exhibits on the accompanying Exhibit Index is herein incorporated by reference.

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, thereto duly authorized, at Irvine, California this 2nd day of June 2005.

The undersigned directors and officers of Interplay Entertainment Corp. do hereby constitute and appoint Hervé Caen with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto, and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report and Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

EXHIBIT

NO. DESCRIPTION

47. Mutual Release Settlement Agreement by and between Warner Bros. Entertainment, Inc. and the Company, dated October 13, 2003. 21.1 Subsidiaries of the Company; (incorporated herein by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003).

1. Subsidiaries of the Company

1. Consent of Squar, Milner LLP, Independent Registered Public Accounting Firm.
2. Consent of Rose, Snyder & Jacobs, Independent Registered Public Accounting Firm.

1. Power of Attorney (included on signature page to this Form 10-K)

1. Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
2. Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

1. Certification of Chief Executive Officer and interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Hervé Caen.

1. Press Release dated August 15, 2002; (incorporated herein by reference to Exhibit 99.2 to Form 10-Q filed August 19, 2002).

To the Board of Directors and Shareholders

Interplay Entertainment Corp.

We have audited the accompanying consolidated balance sheet of Interplay Entertainment Corp. (a majority-owned subsidiary of Titus Interactive S.A.), and subsidiaries (the "Company"), as of December 31, 2004, and the related consolidated statement of operations, shareholders' equity (deficit) and other comprehensive income (loss) and cash flows for the year then ended. Our audit also included the schedule of valuation and qualifying accounts for the year ended December 31, 2004. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.

We conducted our audit 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides 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 Interplay Entertainment Corp. and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2004, when considered in relation to the basic financial statements, taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has negative working capital of $17.8 million and a stockholders' deficit of $17.3 million at December 31, 2004. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Rose, Snyder & Jacobs, A Corporation of Public Accountants

Encino, California

May 31, 2005

To the Board of Directors and Shareholders

Interplay Entertainment Corp.

We have audited the accompanying consolidated balance sheet of Interplay Entertainment Corp. (a majority-owned subsidiary of Titus Interactive S.A.), and subsidiaries (the "Company"), as of December 31, 2003, and the related consolidated statements of operations, shareholders' equity (deficit) and other comprehensive income and cash flows for each of the years in the two year period then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a) (2) for the years ended December 31, 2003 and 2002. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audit 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interplay Entertainment Corp. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for each of the years in the two year period then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for the years ended December 31, 2003 and 2002, when considered in relation to the basic financial statements, taken as a whole, present fairly in all material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has negative working capital of $14.8 million and a stockholders' deficit of $12.7 million at December 31, 2003, losses from operations through December 31, 2003 and negative operating cash flow for the year then ended. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Squar Milner Reehl & Williamson, LLP

Newport Beach, California

March 25, 2004

See accompanying notes.

(In thousands, except per share amounts)