Interplay Entertainment Corp – IPO: ‘424B4’ on 6/22/98

As of:  Monday, 6/22/98   ·   Accession #:  1017062-98-1416   ·   File #:  333-48473

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Initial Public Offering (IPO):  Prospectus   —   Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Interplay Entertainment Final Prospectus              90    589K 

Document Table of Contents

424B4
1st Page of 90
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
PROSPECTUS                                      FILED PURSUANT TO RULE 424(b)(4)
dated June 19, 1998                                REGISTRATION NUMBER 333-48473

5,000,000 Shares  

[LOGO OF INTERPLAY APPEARS HERE]    

Common Stock  

All of the 5,000,000 shares of Common Stock offered hereby (the "Offering")     
are being issued and sold by Interplay Entertainment Corp. ("Interplay" or the  
"Company"). A non-management stockholder of the Company (the "Selling           
Stockholder") has granted the Underwriters a 30-day option to purchase up to    
an additional 750,000 shares of Common Stock. The Company will not receive any  
proceeds from the sale of stock by the Selling Stockholder.                     

Prior to the Offering, there has been no public market for the Common Stock of  
the Company. See "Underwriting" for a discussion of the factors considered in   
determining the initial public offering price. The Company's Common Stock has   
been approved for quotation on the Nasdaq National Market under the symbol      
"IPLY."                                                                         

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS      
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.                             

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND    
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES   
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE      
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS  
A CRIMINAL OFFENSE.                                                             

================================================================================

                                                                [Download Table]

                                           PRICE TO    UNDERWRITING PROCEEDS TO
                                            PUBLIC     DISCOUNT(1)  COMPANY(2) 
-------------------------------------------------------------------------------
                                                                               
Per Share..............................     $5.50         $0.385      $5.115   
-------------------------------------------------------------------------------
Total(3)...............................  $27,500,000    $1,886,500  $25,613,500

================================================================================
(1) The Company and the Selling Stockholder have agreed to indemnify the        
 Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."                 
(2) Before deducting offering expenses payable by the Company estimated at      
$1,038,500.                                                             
(3) The Underwriters will not receive any Underwriting Discount in connection   
  with the purchase of 100,000 shares of Common Stock in the Offering by the
  Company's Chief Executive Officer. The Selling Stockholder has granted the
Underwriters a 30-day option to purchase up to an additional 750,000    
shares of Common Stock solely to cover over-allotments, if any, at the  
Price to Public less the Underwriting Discount. If all such shares are  
purchased, the total Price to Public and Underwriting Discount will be  
  $31,625,000 and $2,175,250, respectively, and the Selling Stockholder will
receive proceeds of $3,836,250. See "Underwriting."                     

The shares of Common Stock are offered by the several Underwriters subject to   
prior sale, when, as and if delivered to and accepted by the Underwriters and   
subject to their right to reject orders in whole or in part. It is expected     
that delivery of the certificates representing shares of the Common Stock will  
be made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or    
about June 24, 1998.                                                            

Piper Jaffray inc.                                                              
Bear, Stearns & Co. Inc.        
                                                                UBS Securities

424B4
2nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 2nd
INTERPLAY                                                                       
PRODUCTIONS                                                                 

        [ANIMATED DEPICTIONS OF CHARACTERS AND ARTWORK
        FROM THE COMPANY'S STAR TREK, REDNECK RAMPAGE,
   EARTHWORM JIM, CLAY FIGHTER AND VR SPORTS
POWERBOAT RACING TITLES]              

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT  
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE    
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS  
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE   
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."            

2 

424B4
3rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 3rd
BY GAMERS.                                                                      

                                       [Title names interspersed with animated
FOR GAMERS.                             product artwork and pictures of product 
          packaging]

        STRATEGY
        --------

        FLAT CAT

ACTION                                  M.A.X.                                  
------                                                                          

TANTRUM                                 CONQUEST OF THE NEW WORLD               

DESCENT                                 CAESARS PALACE                          

DESCENT II                              BRIDGE DELUXE II WITH OMAR SHARIF       

STAR TREK: STARFLEET ACADEMY            BATTLE CHESS                            

CARMAGEDDON                             USCF CHESS                              

REDNECK RAMPAGE                         BEAT THE HOUSE                          

CLAY FIGHTER 63 1/3                                                             

            ROLE PLAYING
            ------------

                  BLACK ISLE STUDIOS

       FALLOUT

         STONEKEEP

424B4
4th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 4th
SHINY 
----- 

EARTHWORM JIM 

MDK 

ADVENTURE 
--------- 

TRIBAL DREAMS 

OF LIGHT AND DARKNESS -- THE PROPHECY 

SPORTS
------

VR SPORTS 

VIRTUAL POOL

VIRTUAL POOL 2

VR BASEBALL '97 

VR SPORTS POWERBOAT RACING

JIMMY JOHNSON'S VR FOOTBALL '98 

[Wording interspersed with animated product artwork and pictures of product 
packaging]

424B4
5th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 5th
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Consolidated Financial      
Statements and Notes thereto (the "Consolidated Financial Statements") included 
elsewhere in this Prospectus. Except as otherwise noted, all information in     
this Prospectus, including financial information, share and per share data,     
assumes no exercise of the Underwriters' over-allotment option. See             
"Underwriting." Investors should carefully consider the information set forth   
under the heading "Risk Factors."                                               

THE COMPANY 

Interplay Entertainment Corp. ("Interplay" or the "Company") is a leading   
developer, publisher and distributor of interactive entertainment software for  
both core gamers and the mass market. The Company, which commenced operations   
in 1983, is most widely known for its titles in the action/arcade,              
adventure/role-playing game ("RPG"), strategy/puzzle and sports categories, and 
has published such hit titles as Descent, Fallout, Stonekeep, Battle Chess and  
Virtual Pool. The Company has produced titles for many of the most popular      
interactive entertainment software platforms, and currently balances its        
development efforts by publishing interactive entertainment software for        
personal computers ("PCs") and current generation video game consoles, such as  
the PlayStation(R) manufactured by Sony Computer Entertainment ("PlayStation")  
and Nintendo 64. Interplay was named Publisher of the Year in 1996 by Computer  
& Net Player magazine.                                                          

The worldwide market for interactive entertainment software has grown       
significantly in recent years. According to the International Development Group 
("IDG"), a market research firm, the worldwide market for interactive           
entertainment software generated sales of more than 220 million retail units in 
1997 and is projected to generate more than 437 million retail units in 1999,   
representing a 41% compound annual growth rate. The interactive entertainment   
software market is composed primarily of software for PCs and current           
generation video game consoles.                                                 

The Company seeks to publish interactive entertainment software titles that 
are, or have the potential to become, franchise titles that can be leveraged    
across several releases and/or platforms, and has published many such           
successful franchise titles to date. In addition, the Company secures licenses  
to use popular intellectual properties, such as Star Trek, Caesars Palace and   
Major League Baseball, for incorporation into certain of its products. Of the   
more than 40 titles currently in development by the Company, more than half are 
sequels to successful titles or incorporate licensed intellectual properties.   

In addition to developing products through its internal product development 
group of approximately 290 employees worldwide, the Company seeks to publish    
titles from leading third party interactive entertainment software developers.  
Through relationships with such developers, the Company believes that it is     
able to supplement its internally developed product line with products          
developed by talented third party developers while reducing its exposure to     
certain of the financial risks associated with internal product development.    
The Company believes that one of its core strengths is its developer-friendly   
management culture, which the Company believes provides it with a competitive   
advantage in forging strategic relationships with successful third party        
interactive entertainment software developers. The Company's internal software  
producers manage external product development efforts to ensure that externally 
developed titles satisfy the Company's product development standards. The       
Company also seeks to leverage its investments in existing gameplay             
technologies into new titles, while internally and externally developing new    
technologies which can be used in multiple future title releases.               

The Company has developed a worldwide sales and distribution capability. In 
North America, Interplay sells and distributes its products primarily through   
its direct sales force and, to a lesser extent, through third party             
distribution arrangements. In certain international markets, the Company has    
established direct sales and distribution capabilities, while in the majority   
of international markets the Company utilizes third party distribution          
arrangements. The Company's wholly owned subsidiary, Interplay OEM, Inc.,       
distributes both Company-published and third party-published titles to computer 
hardware and peripheral device manufacturers for use in bundling arrangements.  
In addition, the Company sells its games directly through its web site and      
generates royalty-based revenues from use of its games by providers of on-line  
gameplay who distribute through popular on-line services, such as America       
Online.                                                                         

The Company was incorporated in the State of California in 1982 and was     
reincorporated in the State of Delaware in May 1998, and conducts business      
under the trade name "Interplay Productions." The principal executive offices   
of the Company are located at 16815 Von Karman Avenue, Irvine, California       
92606, and its telephone number at that location is (949) 553-6655.             

3 

424B4
6th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 6th
THE OFFERING

                                                                [Download Table]
                                                                              
Common Stock offered by                                                       
 the Company............  5,000,000 shares                                    
Common Stock to be                                                            
 outstanding after the                                                        
 Offering............... 18,225,446 shares(1)                                 
Use of Proceeds......... For repayment of indebtedness. See "Use of Proceeds."
Nasdaq National Market                                                        
 symbol................. IPLY                                                 

SUMMARY CONSOLIDATED FINANCIAL DATA 
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                       EIGHT MONTHS       THREE MONTHS   
                                   YEAR ENDED APRIL 30,             ENDED DECEMBER 31,   ENDED MARCH 31, 
                         -----------------------------------------  -------------------  ----------------
                          1993    1994    1995    1996      1997       1996      1997     1997     1998  
                         ------- ------- ------- -------  --------  ----------- -------  -------  -------
                                                                    (UNAUDITED)            (UNAUDITED)   
STATEMENTS OF OPERATIONS DATA(2):                                                                        
                                                                                                         
 Net revenues........... $25,355 $52,668 $79,546 $96,952  $ 83,262   $ 50,364   $85,961  $22,410  $40,996
 Gross profit...........  11,981  21,445  34,055  47,013    20,782     14,639    41,097    8,902   21,775
 Operating income                                                                                        
  (loss)................   3,917   5,296   6,047    (417)  (34,684)   (22,302)   (2,786)  (6,850)   4,512
 Net income (loss)......   2,623   3,203   4,249    (744)  (27,219)   (17,469)   (5,059)  (5,443)   2,849
Net income (loss) per share(3):                                                                          
 Basic.................. $  0.32 $  0.37 $  0.40 $ (0.07) $  (2.46)  $  (1.58)  $ (0.45) $ (0.49) $  0.26
 Diluted................ $  0.29 $  0.32 $  0.35 $ (0.07) $  (2.46)  $  (1.58)  $ (0.45) $ (0.49) $  0.23

                                                                [Download Table]

                                           THREE MONTHS ENDED                  
                             --------------------------------------------------
                             MARCH 31,  JUNE 30,  SEPT. 30,  DEC. 31, MARCH 31,
                               1997       1997      1997       1997     1998   
                             ---------  --------  ---------  -------- ---------
                                               (UNAUDITED)                     
                                                                               
QUARTERLY STATEMENTS OF OP-                                                    
 ERATIONS DATA:                                                                
 Net revenues..............  $ 22,410   $ 20,502  $ 23,833   $ 53,308 $ 40,996 
 Gross profit..............     8,902      6,561     9,680     26,557   21,775 
 Operating income (loss)...    (6,850)    (9,327)   (4,431)     8,045    4,512 
 Net income (loss).........    (5,443)    (9,990)   (5,481)     6,493    2,849 

                                                                [Download Table]

                                                             MARCH 31, 1998     
                                                         -----------------------
                                                          ACTUAL  AS ADJUSTED(4)
                                                         -------- --------------
                                                               (UNAUDITED)      
                                                                                
BALANCE SHEET DATA:                                                             
 Working capital........................................ $ 17,442    $ 33,903   
 Total assets...........................................   78,327      78,327   
 Total long-term debt (including current portion).......   38,680       7,250   
 Stockholders' equity...................................    1,669      34,905   

-------                                                                         
(1) Based on shares outstanding at March 31, 1998. Includes 2,272,418 shares of 
   Common Stock issuable upon the closing of the Offering upon the exercise of
Common Stock Warrants by the cancellation of Subordinated Secured       
Promissory Notes at an exercise price of $3.85 per share (based on the  
 initial public offering price of $5.50 per share). Excludes (i) 2,053,206
  shares of Common Stock issuable upon exercise of stock options outstanding
   at March 31, 1998, which had a weighted average exercise price of $4.80 per
share, (ii) 1,680,541 shares of Common Stock reserved for issuance under
  the Company's 1997 Stock Incentive Plan and (iii) 200,000 shares of Common
Stock reserved for issuance under the Company's Employee Stock Purchase 
Plan. See "Management--Employee Benefit Plans--Stock Incentive Plans,"  
   "Description of Capital Stock--Common Stock Warrants" and Notes 6 and 13 of
Notes to Consolidated Financial Statements.                             
(2) Effective May 1, 1997, the Company changed its fiscal year end from April   
30 to December 31.                                                      
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation 
of the number of shares used in computing net income per share.         
(4) As adjusted to reflect the sale by the Company of 5,000,000 shares of       
 Common Stock offered hereby at the initial public offering price of $5.50
  per share and the application of the estimated net proceeds therefrom, and
   the exercise of Common Stock Warrants having an aggregate purchase price of
   $87,488 by the cancellation of Subordinated Secured Promissory Notes in the
aggregate principal amount of $8,661,320. See "Use of Proceeds,"        
   "Description of Capital Stock--Common Stock Warrants" and Notes 6 and 13 of
Notes to Consolidated Financial Statements.                             

As used in this Prospectus, references to Interplay or the Company refer to 
Interplay Entertainment Corp., a Delaware corporation, its California           
predecessor, and its wholly and majority owned subsidiaries. Interplay(TM),     
Interplay Productions(R), the Interplay logo(R), By Gamers. For Gamers.(TM),    
and certain of the Company's product names and publishing labels referred to    
herein are trademarks of the Company. This Prospectus also includes trademarks  
of other companies.                                                             

4 

424B4
7th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 7th
RISK FACTORS  

An investment in the shares of Common Stock offered hereby involves a high  
degree of risk. In addition to the other information in this Prospectus, the    
following factors should be considered carefully in evaluating the Company and  
its business before purchasing shares of Common Stock offered by this           
Prospectus. This Prospectus contains, in addition to historical information,    
forward-looking statements that involve risks and uncertainties. The            
cautionary statements made in this Prospectus should be read as being           
applicable to all related forward-looking statements wherever they appear in    
this Prospectus. The Company's actual results may differ materially from the    
results discussed in the forward-looking statements. Factors that might cause   
such a difference include, but are not limited to, those discussed below, as    
well as those discussed elsewhere in this Prospectus.                           

FLUCTUATIONS IN OPERATING RESULTS; UNCERTAINTY OF FUTURE RESULTS; SEASONALITY   

The Company's operating results have fluctuated significantly in the past   
and will likely 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 the Company's control. Such   
factors include, but are not limited to, demand for the Company's and its       
competitors' products, the size and rate of growth of the market for            
interactive entertainment software, changes in computing platforms, the number  
of new products and product enhancements released by the Company and its        
competitors during the period, changes in product mix, product returns, the     
timing of orders placed by distributors and dealers, delays in shipment, the    
timing of development and marketing expenditures, price competition and the     
level of the Company's international and OEM, royalty and licensing net         
revenues. The uncertainties associated with the interactive entertainment       
software development process, lengthy manufacturing lead times for Nintendo-    
compatible products, possible production delays, and the approval process for   
products compatible with the Sony Computer Entertainment, Nintendo and Sega     
video game consoles, as well as approvals required from other licensors, make   
it difficult to accurately predict the quarter in which shipments will occur.   
Because of the limited number of products introduced by the Company in any      
particular quarter, a delay in the introduction of a product may materially     
adversely affect the Company's operating results for that quarter. A            
significant portion of the Company's operating expenses is relatively fixed,    
and planned expenditures are based primarily on sales forecasts. If net         
revenues do not meet the Company's expectations in any given quarter,           
operating results may be materially adversely affected. The interactive         
entertainment software industry is highly seasonal, with the highest levels of  
consumer demand occurring during the year-end holiday buying season, followed   
by demand during the first calendar quarter resulting both from demand for      
interactive entertainment software for PCs and video game consoles purchased    
during the holidays and from continuing demand for titles released in the       
preceding fourth calendar quarter. As a result, net revenues, gross profits     
and operating income for the Company have historically been highest during the  
fourth and the following first calendar quarters, and have declined from those  
levels in the subsequent second and third calendar quarters.                    

The failure or inability of the Company to introduce products on a timely   
basis to meet such seasonal increases in demand may have a material adverse     
effect on the Company's business, operating results and financial condition.    
The Company may over time become increasingly affected by the industry's        
seasonal patterns. Although the Company seeks to reduce the effect of such      
seasonal patterns on its business by distributing its product release dates     
more evenly throughout the year, there can be no assurance that such efforts    
will be successful. There can be no assurance that the Company will be          
profitable in any particular period given the uncertainties associated with     
software development, manufacturing, distribution and the impact of the         
industry's seasonal patterns on the Company's net revenues.                     

As a result of the foregoing factors and the other factors discussed in     
"Risk Factors," it is likely that the Company's operating results in one or     
more future periods will fail to meet or exceed the expectations of securities  
analysts or investors. In such event, the trading price of the Common Stock     
would likely be materially adversely affected. See "Management's Discussion     
and Analysis of Financial Condition and Results of Operations."                 

5 

424B4
8th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 8th
RECENT LOSSES                                                                   

The Company has experienced significant losses in recent periods, including 
losses of $5.1 million and $27.2 million, respectively, in the eight months     
ended December 31, 1997 and in the Company's former fiscal year ended April     
30, 1997. The losses resulted primarily from delays in the completion of        
certain products, which led the Company to release alternative titles           
developed by third parties which did not achieve broad market acceptance, and   
the sharp decline in the market for titles for the Macintosh and Sega Saturn    
platforms, both of which resulted in a high level of product returns and        
markdowns which reduced net revenues. Operating results for the year ended      
April 30, 1997, were also negatively affected by the Company's decision to      
write-off $5.9 million in prepayments to third party developers relating to     
titles or platform versions of titles which had been cancelled or which were    
expected to achieve lower unit sales than were originally forecast, an          
excessive reliance on development projects utilizing new technologies in the    
face of increasing development costs, slower than expected growth in sales in   
the Japanese market, and investments in new product lines in the sports and     
edutainment categories. There can be no assurance that the Company will not     
experience similar problems in current or future periods or that the Company    
will be able to generate sufficient net revenues to attain or sustain           
profitability in the future. See "Management's Discussion and Analysis of       
Financial Condition and Results of Operations."                                 

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; RISK OF PRODUCT DELAYS AND PRODUCT     
DEFECTS                                                                         

The Company's products typically have short life cycles, and the Company    
depends 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 net revenues to fund     
operations and to replace declining net revenues from older products. In the    
Company's former fiscal year ended April 30, 1997, the Company's results of     
operations were adversely affected by a number of factors, including delays in  
the completion of certain new products which led the Company to release         
alternative titles developed by third parties that did not achieve broad        
market acceptance. If in the future for any reason net revenues from new        
products were to fail to replace declining net revenues from existing           
products, the Company's business, operating results and financial condition     
could be materially adversely affected. The timing and success of new           
interactive entertainment software product releases remains unpredictable due   
to the complexity of product development, including the uncertainty associated  
with new technology. The development cycle of new products is difficult to      
predict but typically ranges from 12 to 24 months and another six to 12 months  
for the porting of a product to a different technology platform. In the past,   
the Company has repeatedly experienced significant delays in the introduction   
of certain new products, and the Company anticipates that it will experience    
delays in the introduction of new products, including certain products          
currently under development, in the future. Because net revenues associated     
with the initial shipments of a new product generally constitute a high         
percentage of the total net revenues associated with a product, any delay in    
the introduction of, or the presence of a defect in, one or more new products   
expected in a period could have a material adverse effect on the ultimate       
success of such products and on the Company's business, operating results and   
financial condition. The costs of developing and marketing new interactive      
entertainment software have increased in recent years due to such factors as    
the increasing complexity and content of interactive entertainment software,    
increasing sophistication of hardware technology and consumer tastes and        
increasing costs of obtaining licenses for intellectual properties, and the     
Company expects this trend to continue. There can be no assurance that new      
products will be introduced on schedule, if at all, or that, if introduced,     
they will achieve significant market acceptance or generate significant net     
revenues. In addition, software products as complex as those offered by the     
Company may contain undetected errors when first introduced or when new         
versions are released. There can be no assurance that, despite testing by the   
Company, errors will not be found in new products or releases after             
commencement of commercial shipments, resulting in loss of or delay in market   
acceptance, which could have a material adverse effect on the Company's         
business, operating results and financial condition. See "Management's          
Discussion and Analysis of Financial Condition and Results of Operations."      

UNCERTAINTY OF MARKET ACCEPTANCE; DEPENDENCE ON HIT TITLES                      

Consumer preferences for interactive entertainment software are continually 
changing and are extremely difficult to predict. Historically, few interactive  
entertainment software products have achieved sustained market acceptance.      
Rather, a limited number of releases have become "hits" and have accounted for  
a substantial                                                                   

6 

424B4
9th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 9th
portion of revenues in the industry. Further, publishers with a history of      
producing hit titles have enjoyed a significant marketing advantage because of  
their heightened brand recognition and customer loyalty. The Company expects    
the importance of introducing hit titles to increase in the future. There can   
be no assurance that new products introduced by the Company will achieve        
significant market acceptance, that such acceptance, if achieved, will be       
sustainable for any significant period, or that product life cycles will be     
sufficient to permit the Company to recover development and other associated    
costs. Most of the Company's products have a relatively short life cycle and    
sell for a limited period of time after their initial release, usually less     
than one year. The Company believes that these trends will continue and that    
the Company's future revenue will continue to be dependent on the successful    
production of hit titles on a continuous basis. Because the Company introduces  
a relatively limited number of new products in a given period, the failure of   
one or more of such products to achieve market acceptance could have a          
material adverse effect on the Company's business, operating results and        
financial condition. Further, if market acceptance is not achieved, the         
Company could be forced to accept substantial product returns or grant          
significant markdown allowances to maintain its relationship with retailers     
and its access to distribution channels. In the event that the Company is       
forced to accept significant product returns or grant significant markdown      
allowances, its business, operating results and financial condition could be    
materially adversely affected.                                                  

DEPENDENCE ON THIRD PARTY SOFTWARE DEVELOPERS                                   

The Company relies on third party interactive entertainment software        
developers for the development of a significant number of its interactive       
entertainment software products. As reputable and competent third party         
developers continue to be in high demand, there can be no assurance that third  
party software developers that have developed products for the Company in the   
past will continue to be available to develop products for the Company in the   
future. Many third party software developers have limited financial resources,  
which could expose the Company to the risk that such developers may go out of   
business prior to completing a project. In addition, due to the limited         
control that the Company exercises over third party software developers, there  
can be no assurance that such developers will complete products for the         
Company on a timely basis or within acceptable quality standards, if at all.    
Increased competition for skilled third party software developers has required  
the Company to enter into agreements with licensors of intellectual property    
and developers of games that involve advance payments by the Company of         
royalties and guaranteed minimum royalty payments, and the Company expects to   
continue to enter into such arrangements. If the sales volumes of products      
subject to such arrangements are not sufficient to recover such royalty         
advances and guarantees, the Company would be required to write-off             
unrecovered portions of such payments, which could have a material adverse      
effect on its business, operating results and financial condition. Further,     
there can be no assurance that third party developers will not demand           
renegotiation of their agreements with the Company. See "Management's           
Discussion and Analysis of Financial Condition and Results of Operations" and   
"Business--Product Development."                                                

RAPIDLY CHANGING TECHNOLOGY; PLATFORM RISKS                                     

The interactive entertainment software industry is subject to rapid         
technological change. The introduction of new technologies, including           
operating systems such as Microsoft Windows 95, technologies that support       
multi-player games, new media formats such as on-line delivery and digital      
video disks ("DVDs") and as yet unreleased video game platforms could render    
the Company's current products or products in development obsolete or           
unmarketable. The Company 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, the Company is required    
to make substantial product development and other investments in a particular   
platform well in advance of introduction of the platform. If the platforms for  
which the Company develops software are not released on a timely basis or do    
not attain significant market penetration, the Company's business, operating    
results and financial condition could be materially adversely affected.         
Alternatively, if the Company fails to develop products for a platform that     
does achieve significant market penetration, then the Company's business,       
operating results and financial condition could also be materially adversely    
affected.                                                                       

7 

424B4
10th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 10th
The emergence of new interactive entertainment software platforms and       
technologies and the increased popularity of new products and technologies may  
materially and adversely affect the demand for products based on older          
technologies. In this regard, the Company's results of operations in its        
former fiscal year ended April 30, 1997 were adversely affected by a sharp      
decline in the market for titles for the Macintosh and Sega Saturn platforms,   
which declines resulted in a high level of product returns and markdown         
allowances. The broad range of competing and incompatible emerging              
technologies may lead consumers to postpone buying decisions with respect to    
products until one or more of such technologies gain widespread acceptance.     
Such postponement could have a material adverse effect on the Company's         
business, operating results and financial condition. The Company is currently   
actively developing products for the Microsoft Windows 95, PlayStation and      
Nintendo 64 platforms. The Company's success will depend in part on its         
ability to anticipate technological changes and to adapt its products to        
emerging game platforms. There can be no assurance that the Company will be     
able to anticipate future technological changes, to obtain licenses to develop  
products for those platforms on terms favorable to the Company or to create     
software for those new platforms, and any failure to do so could have a         
material adverse effect on the Company's business, operating results and        
financial condition.                                                            

INDUSTRY COMPETITION; COMPETITION FOR SHELF SPACE                               

The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new interactive entertainment  
software platforms and software products. The Company's competitors vary in     
size from small companies to very large corporations with significantly         
greater financial, marketing and product development resources than those of    
the Company. Due to these greater resources, certain of the Company's           
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 the Company. The Company believes 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.                                                    

The Company competes primarily with other publishers of PC and video game   
console interactive entertainment software. Significant competitors include     
Electronic Arts, GT Interactive Software Corp., Cendant Corporation,            
Activision, Inc., Microsoft Corporation, LucasArts Entertainment Company,       
Midway Games Inc., Acclaim Entertainment Inc., Microprose (Spectrum Holobyte),  
Virgin Interactive Entertainment, Inc. and Hasbro Inc. In addition, integrated  
video game console hardware/software companies such as Sony Computer            
Entertainment, Nintendo and Sega compete directly with the Company in the       
development of software titles for their respective platforms. Large            
diversified entertainment companies, such as The Walt Disney Company, many of   
which own substantial libraries of available content and have substantially     
greater financial resources than the Company, may decide to compete directly    
with the Company or to enter into exclusive relationships with competitors of   
the Company. The Company also believes that the overall growth in the use of    
the Internet and on-line services by consumers may pose a competitive threat    
if customers and potential customers spend less of their available home PC      
time using interactive entertainment software and more on the Internet and on-  
line services.                                                                  

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

8 

424B4
11th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 11th
DEPENDENCE UPON THIRD PARTY LICENSES                                            

Many of the Company's products, such as its Star Trek, Major League Baseball
and Caesars Palace titles, are based on original ideas or intellectual          
properties licensed from third parties. There can be no assurance that the      
Company will be able to obtain new licenses, or renew existing licenses, on     
commercially reasonable terms, if at all. Should the Company be unable to       
obtain licenses for the underlying content that it believes offers the          
greatest consumer appeal, the Company would either have to seek alternative,    
potentially less appealing licenses, or release the products without the        
desired underlying content, either of which events could have a material        
adverse effect on the Company's business, operating results and financial       
condition. There can be no assurance that acquired properties will enhance the  
market acceptance of the Company's products based on such properties, that the  
Company's new product offerings will generate net revenues in excess of their   
costs of development and marketing or minimum royalty obligations, or that net  
revenues from new product sales will meet or exceed net revenues from existing  
product sales. See "Management's Discussion and Analysis of Financial           
Condition and Results of Operations" and "Business--Products."                  

DEPENDENCE ON DISTRIBUTION CHANNELS; RISK OF CUSTOMER BUSINESS FAILURES;        
PRODUCT RETURNS                                                                 

The Company currently sells its products directly through its own sales     
force to mass merchants, warehouse club stores, large computer and software     
specialty chains and through catalogs in the U.S. and Canada, as well as to     
certain distributors. Outside North America, the Company generally sells to     
third party distributors. The Company's sales are made primarily on a purchase  
order basis, without long-term agreements. The loss of, or significant          
reduction in sales to, any of the Company's principal retail customers or       
distributors could materially adversely affect the Company's business,          
operating results and financial condition.                                      

The distribution channels through which consumer software products are sold 
are characterized by continuous change, including consolidation, financial      
difficulties of certain distributors and retailers, and the emergence of new    
distributors and new retailers such as warehouse chains, mass merchants and     
computer superstores. As more consumers own PCs, the distribution channels for  
interactive entertainment software have changed and are expected to continue    
to change. Mass merchants have become the most important distribution channels  
for retail sales of interactive entertainment software. A number of these mass  
merchants, includingWal-Mart, have entered into exclusive buying arrangements   
with other software developers or distributors, which arrangements prevent the  
Company from selling certain of its products directly to that mass merchant.    
If the number of mass merchants entering into exclusive buying arrangements     
with software distributors other than the Company were to increase, the         
Company's ability to sell to such merchants would be restricted to selling      
through the exclusive distributor. Because sales to distributors typically      
have a lower gross margin than sales to retailers, this would have the effect   
of lowering the Company's gross margin. In addition, this trend could increase  
the Company's exposure to product returns and expose the Company to greater     
risks, any of which could have a material adverse impact on the Company's       
business, operating results and financial condition. In addition, emerging      
methods of distribution, such as the Internet and on-line services, may become  
important in the future, and it will be important for the Company to maintain   
access to these channels of distribution. There can be no assurance that the    
Company will maintain such access or that the Company's access will allow the   
Company to maintain its historical levels of sales volume.                      

Distributors and retailers in the computer industry have from time to time  
experienced significant fluctuations in their businesses, and there have been   
a number of business failures among these entities. The insolvency or business  
failure of any significant distributor or retailer of the Company's products    
could have a material adverse effect on the Company's business, operating       
results and financial condition. Sales are typically made on unsecured credit,  
with terms that vary depending upon the customer and the nature of the          
product. Although the Company has obtained insolvency risk insurance to         
protect against any bankruptcy, insolvency or liquidation that may occur        
involving its customers, such insurance contains a significant deductible and   
a co-payment obligation, and the policy does not cover all instances of non-    
payment. In addition, while the Company maintains a reserve for uncollectable   
receivables, the actual reserve may not be sufficient in every circumstance.    
As a result, a payment default by a significant customer could have a material  
adverse effect on the Company's business, operating results and financial       
condition.                                                                      

9 

424B4
12th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 12th
The Company is exposed to the risk of product returns and markdown          
allowances with respect to its distributors and retailers. The Company allows   
distributors and retailers to return defective, shelf-worn and damaged          
products in accordance with negotiated terms, and also offers a 90-day limited  
warranty to its end users that its products will be free from manufacturing     
defects. In addition, the Company provides markdown allowances to its           
customers to manage its customers' inventory levels in the distribution         
channel. Although the Company maintains a reserve for returns and markdown      
allowances, and although the Company's agreements with certain of its           
customers place certain limits on product returns and markdown allowances, the  
Company could be forced to accept substantial product returns and provide       
markdown allowances to maintain its relationships with retailers and its        
access to distribution channels. Product returns and markdown allowances that   
exceed the Company's reserves could have a material adverse effect on the       
Company's business, operating results and financial condition. In this regard,  
the Company's results of operations for the former fiscal year ended April 30,  
1997 were adversely affected by a sharp decline in the market for titles for    
the Macintosh and Sega Saturn platforms, which resulted in a higher than        
expected level of product returns and markdown allowances and consequently      
reduced net revenues. See "Management's Discussion and Analysis of Financial    
Condition and Results of Operations--General."                                  

DEPENDENCE ON LICENSES FROM AND MANUFACTURING BY HARDWARE COMPANIES             

The Company is required to obtain a license to develop and distribute       
software for each of the video game console platforms for which the Company     
develops products, including a separate license for each of North America,      
Japan and Europe. The Company has obtained licenses to develop software for     
the PlayStation in North America and Japan and is currently negotiating         
agreements covering additional territories. In addition, the Company has        
obtained a license to develop software for the Nintendo 64 in North America     
and is currently negotiating with Nintendo for licenses covering additional     
territories. There can be no assurance that the Company will be able to obtain  
licenses from hardware companies on acceptable terms or that any existing or    
future licenses will be renewed by the licensors. In addition, each of Sony     
Computer Entertainment, Nintendo and Sega have the right to approve the         
technical functionality and content of the Company's products for such          
platform prior to distribution. Due to the nature of the approval process, the  
Company must make significant product development expenditures on a particular  
product prior to the time it seeks such approvals. The inability of the         
Company to obtain such approvals could have a material adverse effect on the    
Company's business, operating results and financial condition.                  

Hardware companies such as Sony Computer Entertainment, Nintendo and Sega   
may impose upon their licensees a restrictive selection and product approval    
process, such that licensees are restricted in the number of titles that will   
be approved for distribution on the particular platform. While the Company has  
prepared its future product release plans taking this competitive approval      
process into consideration, if the Company has incorrectly predicted the        
impact of this restrictive approval process, and as a result the Company fails  
to obtain approvals for all products in the Company's development plans, such   
failure could have a material adverse effect on the Company's business,         
operating results and financial condition. The Company depends upon Sony        
Computer Entertainment and Nintendo for the manufacture of the Company's        
products that are compatible with their respective video game consoles. As a    
result, Sony and Nintendo have the ability to raise prices for supplying such   
products at any time and effectively control the timing of the Company's        
release of new titles for those platforms. PlayStation products consist of CD-  
ROMs and are typically delivered by Sony Computer Entertainment within a        
relatively short lead time. Manufacturers of Nintendo and other video game      
cartridges typically deliver software to the Company within 45 to 60 days       
after receipt of a purchase order. If the Company experiences unanticipated     
delays in the delivery of video game console products from Sony Computer        
Entertainment or Nintendo, or if actual retailer and consumer demand for its    
interactive entertainment software differs from that forecast by the Company,   
its business, operating results and financial condition could be materially     
adversely affected.                                                             

FUTURE CAPITAL REQUIREMENTS                                                     

The Company expects that its capital requirements will increase             
significantly in the future. The Company did not generate cash flow from        
operations in the three months ended March 31, 1998, the eight months ended     

10  

424B4
13th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 13th
December 31, 1997 and the former fiscal year ended April 30, 1997. There can    
be no assurance that the Company will ever generate cash flow from operations.  
The Company's ability to fund its capital requirements out of available cash,   
its bank line of credit and cash generated from operations will depend on       
numerous factors, including the progress of the Company's product development   
programs, the rate of growth of the Company's business, and the commercial      
success of the Company's products. The Company will likely be required to seek  
additional funds through debt or equity financing. The issuance of additional   
equity securities by the Company could result in substantial dilution to        
stockholders. If adequate funds are not available on acceptable terms, the      
Company would be required to delay or scale back its product development and    
marketing programs, which could have a material adverse effect on the           
Company's business, operating results and financial condition. See              
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations--Liquidity and Capital Resources."                                   

DEPENDENCE ON KEY PERSONNEL                                                     

The Company's success depends to a significant extent on the continued      
service of its key product design, development, sales, marketing and            
management personnel, and in particular on the leadership, strategic vision     
and industry reputation of its founder and Chief Executive Officer, Brian       
Fargo. The Company's future success will also depend upon the Company's         
ability to continue to attract, motivate and retain highly qualified employees  
and contractors, particularly key software design and development personnel.    
Competition for highly skilled employees is intense, and there can be no        
assurance that the Company will be successful in attracting and retaining such  
personnel. Specifically, the Company may experience increased costs in order    
to attract and retain skilled employees. The Company's failure to retain the    
services of Brian Fargo or its other key personnel or to attract and retain     
additional qualified employees could have a material adverse effect on the      
Company's business, operating results and financial condition.                  

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS           

International net revenues accounted for 27.4%, 28.7%, 38.4% and 25.4% of   
the Company's total net revenues in the three months ended March 31, 1998, the  
eight months ended December 31, 1997 and the former fiscal years ended April    
30, 1997 and 1996, respectively. The Company intends to continue to expand its  
direct and indirect sales, marketing and product localization activities        
worldwide. Such expansion will require significant management time and          
attention and financial resources in order to develop improved international    
sales and support channels. There can be no assurance, however, that the        
Company will be able to maintain or increase international market demand for    
its products. International sales and operations are subject to a number of     
inherent risks, including the impact of possible recessionary environments in   
economies outside the U.S., the time and financial costs associated with        
translating and localizing products for foreign markets, longer accounts        
receivable collection periods and greater difficulty in accounts receivable     
collection, unexpected changes in regulatory requirements, difficulties and     
costs of staffing and managing foreign operations, and political and economic   
instability. For example, the Company has recently experienced difficulties     
selling products in certain Asian countries as a result of economic             
instability in such countries, and there can be no assurance that such          
difficulties will not continue or occur in other countries in the future.       
There can be no assurance that the foregoing factors will not have a material   
adverse effect on the Company's future international net revenues and,          
consequently, on the Company's business, operating results and financial        
condition. The Company currently does not engage in currency hedging            
activities. Although exposure to currency fluctuations to date has been         
insignificant, there can be no assurance that fluctuations in currency          
exchange rates in the future will not have a material adverse effect on net     
revenues from international sales and licensing, and thus on the Company's      
business, operating results and financial condition. See "Management's          
Discussion and Analysis of Financial Condition and Results of Operations."      

MANAGEMENT OF GROWTH                                                            

The Company has recently undergone a period of rapid growth that has placed 
a significant strain on the Company's financial, management and other           
resources. The Company's ability to manage its growth effectively,              

11  

424B4
14th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 14th
should it continue, will require it to continue to improve its operational,     
financial and management information systems and to attract, train, motivate,   
manage and retain key employees. If the Company's executives are unable to      
manage growth effectively, the Company's business, operating results and        
financial condition could be materially adversely affected.                     

PROTECTION OF PROPRIETARY RIGHTS                                                

The Company regards its software as proprietary and relies primarily on a   
combination of copyright, trademark and trade secret laws, employee and third   
party nondisclosure agreements and other methods to protect its proprietary     
rights. The Company owns or licenses various copyrights and trademarks. While   
the Company provides "shrinkwrap" license agreements or limitations on use      
with its software, the enforceability of such agreements or limitations is      
uncertain. The Company is aware that unauthorized copying occurs within the     
computer software industry, and if a significantly greater amount of            
unauthorized copying of the Company's interactive entertainment software        
products were to occur, the Company's operating results could be materially     
adversely affected. While the Company does not copy protect its products, it    
does not provide source code to third parties unless they have signed           
nondisclosure agreements with respect thereto.                                  

The Company relies on existing copyright laws to prevent unauthorized       
distribution of its software. Existing copyright laws afford only limited       
protection. Policing unauthorized use of the Company's products is difficult,   
and software piracy can be expected to be a persistent problem, especially in   
certain international markets. Further, the laws of certain countries in which  
the Company's products are or may be distributed either do not protect the      
Company's products and intellectual property rights to the same extent as the   
laws of the U.S. or are weakly enforced. Legal protection of the Company's      
rights may be ineffective in such countries, and as the Company leverages its   
software products using emerging technologies, such as the Internet and on-     
line services, the ability of the Company to protect its 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 adequate protection to    
the Company's products in connection with such emerging technologies.           

As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,       
software developers may increasingly become subject to infringement claims.     
Although the Company makes reasonable efforts to ensure that its 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, the Company has received communication from third parties asserting that  
features or content of certain of its products may infringe upon the            
intellectual property rights of such parties. There can be no assurance that    
existing or future infringement claims against the Company will not result in   
costly litigation or require the Company to license the intellectual property   
rights of third parties, either of which could have a material adverse effect   
on the Company's business, operating results and financial condition. See       
"Business--Intellectual Property and Proprietary Rights."                       

ENTERTAINMENT SOFTWARE RATING SYSTEM; GOVERNMENTAL RESTRICTIONS                 

Legislation is periodically introduced at the state and federal levels in   
the U.S. 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. Such a       
system would include procedures with which interactive entertainment software   
publishers would be expected to comply by identifying particular products       
within defined rating categories and communicating such ratings to consumers    
through appropriate package labeling and through advertising and marketing      
presentations consistent with each product's rating. In addition, many foreign  
countries have laws which permit governmental entities to censor the content    
of certain works, including interactive entertainment software. In certain      
instances, the Company may be required to modify its products to comply with    
the requirements of such governmental entities, which could delay the release   
of those products in such countries. Such delays could have a material adverse  
effect on the Company's business, operating results and financial condition.    
While the Company currently voluntarily                                         

12  

424B4
15th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 15th
submits its products to industry-created review boards and publishes their      
ratings on its game packaging, the Company believes that mandatory government-  
run interactive entertainment software products rating systems eventually will  
be adopted in many countries which represent significant markets or potential   
markets for the Company. Due to the uncertainties inherent in the               
implementation of such a rating system, confusion in the marketplace may        
occur, and the Company is unable to predict what effect, if any, such a rating  
system would have on the Company's business. In addition to such regulations,   
certain retailers have in the past declined to stock certain of the Company's   
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  
such actions have not had a material adverse effect on the Company's business,  
operating results or financial condition, there can be no assurance that        
similar actions by the Company's distributors or retailers in the future would  
not have a material adverse effect on the Company's business, operating         
results or financial condition.                                                 

DEVELOPMENT OF INTERNET/ON-LINE SERVICES OR PRODUCTS                            

The Company seeks to establish an on-line presence by creating and          
supporting sites on the Internet. The Company's future plans envision           
conducting and supporting on-line product offerings through these sites or      
others. The ability of the Company to successfully establish an on-line         
presence and to offer on-line products will depend on several factors that are  
outside the Company's control, including the emergence of a robust on-line      
industry and infrastructure and the development and implementation of           
technological advancements to the Internet to increase bandwidth and the speed  
of responsiveness to the point that will allow the Company to conduct and       
support on-line product offerings. Because global commerce and the exchange of  
information on the Internet and other similar open, wide area networks are      
relatively new and evolving, there can be no assurance that a viable            
commercial marketplace on the Internet will emerge from the developing          
industry infrastructure, that the appropriate complementary products for        
providing and carrying Internet traffic and commerce will be developed, that    
the Company will be able to create or develop a sustainable or profitable on-   
line presence or that the Company will be able to generate any significant      
revenue from on-line product offerings in the near future, or at all. If the    
Internet does not become a viable commercial marketplace, or if such            
development occurs but is insufficient to meet the Company's needs or if such   
development is delayed beyond the point when the Company plans to have          
established an on-line service, the Company's business, operating results and   
financial condition could be materially adversely affected.                     

YEAR 2000 COMPLIANCE                                                            

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields    
will need to accept four digit entries to distinguish 21st century dates from   
20th century dates. As a result, in less than two years, computer systems and   
software used by many companies may need to be upgraded to comply with such     
Year 2000 requirements. The Company believes that its products, which are       
self-contained software programs that run independently of external             
chronology, will not be significantly affected by Year 2000 problems. The       
Company is currently in the process of investigating whether its internal       
accounting systems and other operational systems are Year 2000 compliant. The   
Company has been informed by the vendor of its internal accounting software     
that upgrades that will bring such software into Year 2000 compliance will be   
provided to the Company under its existing software maintenance agreement in    
the third quarter of 1998. The Company expects to effect the conversion of its  
internal accounting system to such upgraded software by the end of 1998. There  
can be no assurance that such upgrades will be provided on a timely basis or    
will be free of errors. In addition, there can be no assurance that certain of  
the Company's products or the Company's internal computer systems and networks  
or those of its key vendors, developers and distributors will not be adversely  
affected by Year 2000 issues, which could have a material adverse effect on     
the Company's business, operating results and financial condition.              

RISKS ASSOCIATED WITH ACQUISITIONS                                              

As part of its strategy to enhance distribution and product development     
capabilities, the Company intends to pursue acquisitions of complementary       
businesses, products and technologies. Some of these acquisitions could be      

13  

424B4
16th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 16th
material in size and scope. While the Company will continue to search for       
appropriate acquisition opportunities, there can be no assurance that the       
Company will be successful in identifying suitable acquisition opportunities.   
If any potential acquisition opportunity is identified, there can be no         
assurance that the Company will consummate such acquisition, and if such        
acquisition does occur, there can be no assurance that it will be successful    
in enhancing the Company's business or will be accretive to the Company's       
earnings. As the interactive entertainment software industry continues to       
consolidate, the Company may face increased competition for acquisition         
opportunities, which may inhibit its ability to complete suitable transactions  
or increase the cost thereof. Future acquisitions could also divert             
substantial management time, could result in short term reductions in earnings  
or special transaction or other charges and may be difficult to integrate with  
existing operations or assets.                                                  

The Company may, in the future, issue additional shares of Common Stock in  
connection with one or more acquisitions, which may dilute its stockholders,    
including investors in the Offering. Additionally, with respect to future       
acquisitions, the Company's stockholders may not have an opportunity to review  
the financial statements of the entity being acquired or to vote on such        
acquisitions.                                                                   

CONTROL BY DIRECTORS AND OFFICERS                                               

The Company's directors and officers and Universal Studios, Inc.            
("Universal"), which currently has two representatives on the Company's Board   
of Directors, will, in the aggregate, beneficially own approximately 62.2% of   
the Company's outstanding Common Stock following the completion of the          
Offering, assuming that the Underwriters' over-allotment option is not          
exercised. These stockholders, if acting together, would be able to control     
substantially all matters requiring approval by the stockholders of the         
Company, including the election of directors (subject to the cumulative voting  
rights of the Company's stockholders) and the approval of mergers or other      
business combination transactions. Such concentration of ownership could        
discourage or prevent a change in control of the Company. See "Principal        
Stockholders." Certain directors, officers and other affiliates of the Company  
will receive a material benefit as a result of the Offering. See "Use of        
Proceeds."                                                                      

SHARES ELIGIBLE FOR FUTURE SALE                                                 

Sales of Common Stock, including Common Stock issued upon the exercise of   
outstanding options, in the public market after the Offering could materially   
adversely affect the market price of the Common Stock. Such sales also might    
make it more difficult for the Company to sell equity or equity-related         
securities in the future at a time and price that the Company deems             
acceptable, or at all. Upon the completion of the Offering, the Company will    
have 18,225,446 shares of Common Stock outstanding. Of these shares, the        
5,000,000 shares sold in the Offering (5,750,000 shares if the Underwriters'    
over-allotment option is exercised in full) will be freely tradable without     
restriction under the Securities Act of 1933, as amended (the "Securities       
Act"), unless purchased by "affiliates" of the Company, as that term is         
defined in Rule 144 under the Securities Act ("Rule 144"). The remaining        
13,225,446 shares of Common Stock held by existing stockholders                 
(12,475,446 shares if the Underwriters' over-allotment option is exercised in   
full) are "restricted securities," as that term is defined in Rule 144 and      
were issued and sold by the Company in reliance on exemptions from the          
registration requirements of the Securities Act. These restricted shares may    
be sold in the public market only if registered or pursuant to an exemption     
from registration, such as Rule 144. Holders of an aggregate of 7,781,868       
shares of Common Stock following the Offering (7,031,868 shares if the          
Underwriters' over-allotment option is exercised in full) and holders of        
options to purchase an aggregate of 1,580,188 shares of Common Stock have       
agreed, pursuant to certain lock-up agreements with the Representatives (the    
"180-Day Lock-Up Agreements") that they will not offer, sell, contract to       
sell, grant any option to sell or otherwise dispose of, directly or             
indirectly, any shares of Common Stock owned by them or that could be           
purchased by them through the exercise of options to purchase Common Stock of   
the Company for a period of 180 days after the date of this Prospectus without  
prior written consent of Piper Jaffray Inc. Such lock-up agreements will not    
apply to the sale of Common Stock by the Selling Stockholder pursuant to the    
exercise of the Underwriters' over-allotment option. Upon expiration of the     
180-Day Lock-Up Agreements, 5,925,357 shares held by existing stockholders      
(5,175,357 shares if the Underwriters' over-allotment option is exercised in    
full) will be eligible for sale subject to the volume and other                 

14  

424B4
17th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 17th
restrictions of Rule 144, and 1,856,511 shares will be eligible for sale        
without restriction under Rule 144(k). In addition, Brian Fargo, the Company's  
Chairman and Chief Executive Officer, has agreed, pursuant to a lock-up         
agreement with the Representatives (the "Fargo Lock-Up"), that he will not      
offer, sell, contract to sell, grant any option to sell or otherwise dispose    
of, directly or indirectly, any shares of Common Stock owned by him or that     
could be purchased by him through the exercise of options for a period of one   
year following the date of this Prospectus without the prior written consent    
of Piper Jaffray Inc. Upon expiration of the Fargo Lock-Up, the 5,542,378       
shares owned by Mr. Fargo following the Offering will be eligible for sale      
subject to the volume and other restrictions of Rule 144. As of March 31,       
1998, 2,053,206 shares were subject to outstanding options to purchase Common   
Stock, of which 1,580,188 shares are subject to the 180-Day Lock-Up Agreements  
and 150,000 shares are subject to the Fargo Lock-Up. Following completion of    
the Offering, holders of 12,586,843 shares (11,836,843 shares if the            
Underwriters' over-allotment option is exercised in full) will be entitled to   
certain demand and piggyback registration rights upon termination of lock-up    
agreements. Any exercise of these registration rights could impair the          
Company's ability to raise capital through the sale of its equity securities    
and, if such registered shares are sold, could have a material adverse effect   
on the market price of the Common Stock. See "Description of Capital Stock--    
Registration Rights" and "Shares Eligible for Future Sale."                     

ANTI-TAKEOVER EFFECTS; DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS;   
PREFERRED STOCK                                                                 

The Company's Certificate of Incorporation and Bylaws, as well as Delaware  
corporate law, contain certain provisions that could have the effect of         
delaying, deferring or preventing a change in control of the Company and could  
materially adversely affect the prevailing market price of the Common Stock.    
Certain of such provisions impose various procedural and other requirements     
that could make it more difficult for stockholders to effect certain corporate  
actions. See "Description of Capital Stock."                                    

DILUTION                                                                        

The initial public offering price is substantially higher than the net      
tangible book value per share of Common Stock. Investors purchasing shares of   
Common Stock in the Offering will incur immediate and substantial net tangible  
book value dilution of $3.69 per share, based on the initial public offering    
price of $5.50 per share. To the extent that options to purchase the Company's  
Common Stock are exercised, there will be further dilution. In addition, the    
Company may issue additional shares in connection with compensation of          
employees, acquisitions of complementary products, technologies or businesses   
or strategic relationships. To the extent that such pool is increased or        
additional shares are issued, there will be additional dilution. See            
"Dilution," "Capitalization" and "Description of Capital Stock."                

15  

424B4
18th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 18th
USE OF PROCEEDS 

The net proceeds to the Company from the sale of the 5,000,000 shares of    
Common Stock offered by the Company hereby are estimated to be approximately    
$24,575,000 at the initial public offering price of $5.50 per share and after   
deducting the underwriting discount and estimated offering expenses. The        
Company expects to use approximately $16.8 million of the net proceeds to       
repay amounts outstanding under the Company's current bank line of credit,      
which terminates in May 1999 and which bears interest at a rate per annum       
equal to the London Interbank Offered Rate plus 4.87% (10.56% at March 31,      
1998). As of May 31, 1998, the outstanding balance on the line of credit was    
approximately $33.2 million. In addition, the Company expects to use            
approximately $6.3 million of the net proceeds to repay Subordinated Secured    
Promissory Notes, which bear interest at the rate of 12% per annum and are      
payable upon the closing of the Offering, and accrued interest thereon. See     
"Description of Capital Stock--Common Stock Warrants." The Company expects to   
use approximately $1.5 million of the net proceeds to pay certain amounts due   
to Universal Interactive Studios under the terms of an existing distribution    
agreement. See "Certain Transactions." Pending such uses, the Company intends   
to invest the net proceeds of the Offering in short-term, interest bearing,     
investment-grade securities.                                                    

DIVIDEND POLICY 

The Company anticipates that all future earnings will be retained to finance
future growth, and the Company does not anticipate paying any dividends on its  
Common Stock in the foreseeable future. The Company's bank line of credit       
agreement currently restricts the Company from paying cash dividends without    
the prior written consent of the bank. See "Management's Discussion and         
Analysis of Financial Condition and Results of Operations--Liquidity and        
Capital Resources."                                                             

16  

424B4
19th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 19th
DILUTION  

The net tangible book value (deficit) of the Company as of March 31, 1998   
was $(328,000) or $(0.03) per share. "Net tangible book value (deficit) per     
share" is determined by dividing the number of shares of Common Stock           
outstanding into the net tangible book value of the Company (tangible assets    
less liabilities). After giving effect to the Offering and use of net proceeds  
described herein, and the exercise of certain Common Stock Warrants by the      
cancellation of certain Subordinated Secured Promissory Notes, the pro forma    
net tangible book value of the Company at March 31, 1998 would have been        
approximately $32,908,000 or $1.81 per share based on the initial public        
offering price of $5.50 per share. This represents an immediate increase in     
the net tangible book value of approximately $1.84 to present stockholders and  
an immediate dilution of $3.69 per share to new investors purchasing shares of  
Common Stock at the initial public offering price. The following table sets     
forth this per share dilution:                                                  

                                                                [Download Table]
                                                                           
Initial public offering price per share:                              $5.50
  Net tangible book value (deficit) before the Offering...... $(0.03)      
  Increase resulting from the Offering.......................   1.84       
                                                              ------       
Pro forma net tangible book value per share after the Offer-               
 ing.........................................................          1.81
                                                                      -----
Dilution per share to new investors..........................         $3.69
                                                                      =====

The following table summarizes the difference between existing stockholders 
and new investors with respect to the number of shares of Common Stock          
purchased from the Company, the total cash consideration paid and the average   
price paid per share (before deducting the underwriting discount and estimated  
offering expenses):                                                             

                                                                [Download Table]

                                  SHARES OF COMMON                      AVERAGE
                                  STOCK PURCHASED   TOTAL CONSIDERATION  PRICE 
                                 ------------------ -------------------   PER  
                                   NUMBER   PERCENT   AMOUNT    PERCENT  SHARE 
                                 ---------- ------- ----------- ------- -------
                                                                               
Existing Stockholders(1)........ 13,225,446   72.6% $24,393,000   47.0%  $1.84 
New Investors...................  5,000,000   27.4   27,500,000   53.0    5.50 
                                 ----------  -----  -----------  -----         
  Total......................... 18,225,446  100.0% $51,893,000  100.0%        
                                 ==========  =====  ===========  =====         

--------                                                                        
(1) Based on shares outstanding at March 31, 1998. Includes 2,272,418 shares    
of Common Stock issuable upon the closing of the Offering upon the      
exercise of Common Stock Warrants by the cancellation of Subordinated   
  Secured Promissory Notes at an exercise price of $3.85 per share (based on
the initial public offering price of $5.50 per share). Excludes (i)     
2,053,206 shares of Common Stock issuable upon exercise of stock options
  outstanding at March 31, 1998, which had a weighted average exercise price
of $4.80 per share, (ii) 1,680,541 shares reserved for issuance pursuant
 to future option grants under the Company's 1997 Stock Incentive Plan and
(iii) 200,000 shares of Common Stock reserved for issuance under the    
 Company's Employee Stock Purchase Plan. See "Management--Employee Benefit
  Plans--Stock Incentive Plans," "Description of Capital Stock--Common Stock
Warrants" and Notes 6 and 13 of Notes to Consolidated Financial         
Statements.                                                             

17  

424B4
20th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 20th
CAPITALIZATION  

The following table sets forth the capitalization of the Company as of March
31, 1998, and as adjusted to give effect to (i) the sale of 5,000,000 shares    
of Common Stock offered by the Company hereby at the initial public offering    
price of $5.50 per share and the application of the net proceeds after          
deducting the underwriting discount and estimated offering expenses payable by  
the Company, and (ii) the issuance of 2,272,418 shares of Common Stock upon     
the closing of the Offering upon the exercise of Common Stock Warrants at an    
exercise price of $3.85 per share by the cancellation of Subordinated Secured   
Promissory Notes. This table should be read in conjunction with "Use of         
Proceeds," "Selected Consolidated Financial Information" and the Consolidated   
Financial Statements included elsewhere in this Prospectus.                     

                                                                [Download Table]

                                                              MARCH 31, 1998    
                                                           ---------------------
                                                            ACTUAL   AS ADJUSTED
                                                           --------  -----------
                                                              (IN THOUSANDS)    
                                                                                
Current Portion of Long-Term Debt......................... $ 14,825   $    170  
                                                           ========   ========  
Accrued Expenses.......................................... $ 22,231   $ 20,425  
                                                           ========   ========  
Long-Term Debt:                                                                 
  Bank line of credit..................................... $ 23,820   $  7,045  
  Other long-term debt....................................       35         35  
                                                           --------   --------  
    Total long-term debt, net of current portion..........   23,855      7,080  
                                                           --------   --------  
Stockholders' Equity:                                                           
  Preferred Stock, $.001 par value, 5,000,000 shares                            
   authorized; no shares issued and outstanding, actual                         
   and as adjusted........................................      --         --   
  Common Stock, $.001 par value, 50,000,000 shares autho-                       
   rized; 10,953,028 and 18,225,446 shares issued and out-                      
   standing, actual and as adjusted(1)....................       11         18  
  Paid-in capital.........................................   18,494     51,723  
  Accumulated deficit.....................................  (17,028)   (17,028) 
  Cumulative translation adjustment.......................      192        192  
                                                           --------   --------  
  Total stockholders' equity..............................    1,669     34,905  
                                                           --------   --------  
  Total capitalization (including long-term debt)......... $ 25,524   $ 41,985  
                                                           ========   ========  

--------                                                                        
(1) Based on shares outstanding at March 31, 1998. Includes 2,272,418 shares    
of Common Stock issuable upon the closing of the Offering upon the      
exercise of Common Stock Warrants by the cancellation of Subordinated   
  Secured Promissory Notes at an exercise price of $3.85 per share (based on
the initial public offering price of $5.50 per share). Excludes (i)     
2,053,206 shares of Common Stock issuable upon exercise of stock options
outstanding at such date, which had a weighted average exercise price of
$4.80 per share, (ii) 1,680,541 shares reserved for issuance pursuant to
future option grants under the Company's 1997 Stock Incentive Plan and  
(iii) 200,000 shares of Common Stock reserved for issuance under the    
 Company's Employee Stock Purchase Plan. See "Management--Employee Benefit
Plans--Stock Incentive Plans" and "Description of Capital Stock--Common 
Stock Warrants" and Notes 6 and 13 of Notes to Consolidated Financial   
Statements.                                                             

18  

424B4
21st Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 21st
SELECTED CONSOLIDATED FINANCIAL DATA  
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 

The selected consolidated statements of operations data for the former      
fiscal years ended April 30, 1995, 1996 and 1997 and the eight months ended     
December 31, 1997, and the selected consolidated balance sheets data as of      
April 30, 1996 and 1997 and as of December 31, 1997 are derived from the        
Company's audited consolidated financial statements included elsewhere in this  
Prospectus. The selected consolidated statements of operations data for the     
three months ended March 31, 1998 and 1997 and the consolidated balance sheets  
data as of March 31, 1998 are unaudited and are derived from the Company's      
consolidated financial statements included elsewhere in this Prospectus. The    
selected consolidated statements of operations data for the years ended         
April 30, 1993 and 1994, and the selected consolidated balance sheets data as   
of April 30, 1993, 1994, and 1995 are derived from the Company's audited        
consolidated financial statements not included in this Prospectus. The          
selected consolidated statements of operations data for the eight months ended  
December 31, 1996 is derived from the Company's unaudited consolidated          
financial statements. The unaudited pro forma income (loss) per share is        
derived from the unaudited pro forma data included elsewhere in this            
Prospectus. The Company's 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 "Management's Discussion and Analysis of     
Financial Condition and Results of Operations" and the Consolidated Financial   
Statements included elsewhere in this Prospectus.                               

                                                        [Enlarge/Download Table]

                                                                     EIGHT MONTHS ENDED   THREE MONTHS ENDED   
                                    YEAR ENDED APRIL 30,                DECEMBER 31,           MARCH 31,       
                          -----------------------------------------  -------------------- -------------------- 
                           1993    1994    1995    1996      1997      1996       1997      1997       1998    
                          ------- ------- ------- -------  --------  ---------  --------- ---------  --------- 
                                                                                                               
STATEMENTS OF OPERATIONS                                                                                       
 DATA(1):                                                                                                      
Net revenues............  $25,355 $52,668 $79,546 $96,952  $ 83,262  $  50,364  $ 85,961  $  22,410  $  40,996 
Cost of goods sold......   13,374  31,223  45,491  49,939    62,480     35,725    44,864     13,508     19,221 
                          ------- ------- ------- -------  --------  ---------  --------  ---------  --------- 
Gross profit............   11,981  21,445  34,055  47,013    20,782     14,639    41,097      8,902     21,775 
                          ------- ------- ------- -------  --------  ---------  --------  ---------  --------- 
Operating expenses:                                                                                            
 Marketing and sales....    4,421   7,698  14,280  23,285    24,627     15,747    20,603      7,280      8,589 
 General and administra-                                                                                       
  tive..................    1,589   4,805   5,528   9,025     9,408      8,730     8,989      3,088      2,855 
 Product development....    2,054   3,646   8,200  15,120    21,431     12,464    14,291      5,384      5,819 
                          ------- ------- ------- -------  --------  ---------  --------  ---------  --------- 
 Total operating ex-                                                                                           
  penses................    8,064  16,149  28,008  47,430    55,466     36,941    43,883     15,752     17,263 
                          ------- ------- ------- -------  --------  ---------  --------  ---------  --------- 
Operating income                                                                                               
 (loss).................    3,917   5,296   6,047    (417)  (34,684)   (22,302)   (2,786)    (6,850)     4,512 
Other income (expense)..      112      68   1,046    (807)   (1,600)    (1,085)   (2,273)      (375)    (1,418)
                          ------- ------- ------- -------  --------  ---------  --------  ---------  --------- 
Income (loss) before in-                                                                                       
 come taxes.............    4,029   5,364   7,093  (1,224)  (36,284)   (23,387)   (5,059)    (7,225)     3,094 
Provision (benefit) for                                                                                        
 income taxes...........    1,406   2,161   2,844    (480)   (9,065)    (5,918)      --      (1,782)       245 
                          ------- ------- ------- -------  --------  ---------  --------  ---------  --------- 
Net income (loss).......  $ 2,623 $ 3,203 $ 4,249 $  (744) $(27,219) $ (17,469) $ (5,059) $  (5,443) $   2,849 
                          ======= ======= ======= =======  ========  =========  ========  =========  ========= 
Net income (loss) per                                                                                          
 share(2):                                                                                                     
 Basic..................  $  0.32 $  0.37 $  0.40 $ (0.07) $  (2.46) $   (1.58) $  (0.45) $   (0.49) $    0.26 
                          ======= ======= ======= =======  ========  =========  ========  =========  ========= 
 Diluted................  $  0.29 $  0.32 $  0.35 $ (0.07) $  (2.46) $   (1.58) $  (0.45) $   (0.49) $    0.23 
                          ======= ======= ======= =======  ========  =========  ========  =========  ========= 
 Pro forma (unaudited)..                                   $  (1.55)            $  (0.15)            $    0.22 
                                                           ========             ========             ========= 
SELECTED OPERATING DATA:                                                                                       
Net revenues by segment:                                                                                       
 North America..........  $19,436 $40,094 $51,892 $54,702  $ 38,606  $  27,735  $ 51,833  $   9,562  $  23,516 
 International..........    2,919   2,227  13,829  24,579    32,006     13,955    24,642     10,333     11,223 
 OEM, royalty and                                                                                              
  licensing.............    3,000  10,347  13,825  17,671    12,650      8,674     9,486      2,515      6,257 
Net revenues by                                                                                                
 platform:                                                                                                     
 Personal computer......  $14,978 $20,314 $36,804 $60,254  $ 45,192  $  25,639  $ 42,520  $  14,623  $  21,191 
 Video game console.....    7,377  22,007  28,917  19,027    25,420     16,051    33,955      5,272     13,548 

                                         APRIL 30,                                                             
                          -----------------------------------------     DECEMBER 31,           MARCH 31,       
                           1993    1994    1995    1996      1997           1997                 1998          
                          ------- ------- ------- -------  --------  -------------------- -------------------- 
                                                                                                               
BALANCE SHEETS DATA:                                                                                           
Working capital.........  $ 5,546 $22,775 $25,227 $18,485  $  7,890       $13,616               $17,442        
Total assets............   10,073  35,450  44,226  68,511    69,005        77,821                78,327        
Total long-term debt                                                                                           
 (including current                                                                                            
 portion)...............      469     384     262     108    14,970        38,154                38,680        
Stockholders' equity                                                                                           
 (deficit)..............    5,953  25,053  30,069  30,195     3,401        (1,267)                1,669        

--------                                                                        
(1) Effective May 1, 1997, the Company changed its fiscal year end from April   
30 to December 31.                                                      
(2) See Note 2 of Notes to Consolidated Financial Statements for an             
explanation of the number of shares used in computing net income (loss) 
per share.                                                              

19  

424B4
22nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 22nd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

GENERAL                                                                         

The Company commenced operations in 1983, and operated as an independent    
development studio until 1988, creating interactive entertainment software      
games for publishers such as Electronic Arts and Activision. In 1988, the       
Company began publishing software through an affiliate label relationship with  
Activision, pursuant to which Activision distributed the Company's software in  
North America. The Company began publishing and distributing its own            
interactive entertainment software for both PCs and video game consoles in      
1992 and has continued to build its publishing and distribution infrastructure  
since that date. In addition to developing products through its internal        
product development group, the Company publishes titles developed by third      
party interactive entertainment software developers.                            

The Company derives net revenues primarily from direct sales of interactive 
entertainment software for PCs and video game consoles to retailers and mass    
merchants, from indirect sales to software distributors in North America and    
internationally, from the distribution by the Company on an affiliate label     
basis of titles published by third parties, and from direct sales to end-users  
through the Company's catalogs and the Internet. The Company also derives       
royalty-based revenues from licensing arrangements, from the sale of products   
by third party distributors in international markets, and from OEM bundling     
transactions.                                                                   

The Company recognizes net revenues from the sale of its products upon      
shipment. Subject to certain limitations, the Company permits customers to      
obtain exchanges within certain specified periods and provides price            
protection on certain unsold merchandise. Net revenues from product sales are   
reflected after deducting an allowance for returns and price protection. With   
respect to license agreements which provide customers the right to multiple     
copies in exchange for guaranteed amounts, net revenues are recognized upon     
delivery of the product master or the first copy. Per copy royalties on sales   
which exceed the guarantee are recognized as earned.                            

In order to expand the Company's distribution channels and engage in        
software development in overseas markets, in 1995 the Company established       
operations in the United Kingdom and in Japan. In July 1997, the Company        
initiated a licensing strategy in Japan and terminated its operations there.    
International net revenues accounted for approximately 27.4%, 28.7%, 38.4% and  
25.4% of the Company's net revenues during the three months ended March 31,     
1998, the eight months ended December 31, 1997 and the former fiscal years      
ended April 30, 1997 and April 30, 1996, respectively.                          

In January 1997, the Company formed a wholly owned subsidiary, Interplay    
OEM, Inc. ("Interplay OEM"), which had previously operated as a division of     
the Company. Interplay OEM distributes the Company's interactive entertainment  
software titles, as well as those of other software publishers, to computer     
hardware and peripheral device manufacturers for use in bundling arrangements.  
The Company also derives net revenues from the licensing of certain of its      
intellectual properties and certain of its products to third parties for        
distribution in markets and through channels which are outside the Company's    
primary focus. OEM, royalty and licensing net revenues accounted for 15.2%,     
11.0% and 15.2% of the Company's total net revenues for the three months ended  
March 31, 1998, the eight months ended December 31, 1997 and the former fiscal  
year ended April 30, 1997, respectively. OEM, royalty and licensing net         
revenues generally are incremental net revenues and do not have significant     
additional product development or sales and marketing costs, and accordingly    
have a more significant impact on the Company's operating results. The Company  
expects that OEM, royalty and licensing net revenues may decline, both in       
dollars and as a percentage of net revenues, as a larger proportion of OEM,     
royalty and licensing net revenues are generated from royalty-based licensing   
transactions, as opposed to the shipment of finished goods, and as the OEM      
channel of distribution becomes more competitive.                               

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. Cost                                                    

20  

424B4
23rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 23rd
of goods sold related to royalty-based net revenues primarily represents third  
party licensing fees and royalties paid by the Company. Typically, cost of      
goods sold as a percentage of net revenues for video game console products and  
affiliate label 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 these products. Also included in the cost of  
goods sold is the amortization of prepaid royalty and license fees paid to      
third party software developers. Prepaid royalties are expensed over a period   
of six months from initial shipment. The Company evaluates the likelihood of    
future realization of prepaid royalties quarterly, on a product by product      
basis, and charges cost of goods sold for any amounts that it deems unlikely    
to be realized through future product sales.                                    

The Company's net loss for the former fiscal year ended April 30, 1997      
increased to $27.2 million from $0.7 million in the comparable 1996 period.     
The Company's results of operations for the former fiscal year ended April 30,  
1997 were adversely affected by a number of factors, including delays in the    
completion of certain products, which led the Company to release alternative    
titles developed by third parties which did not achieve broad market            
acceptance, and a sharp decline in the market for titles for the Macintosh and  
Sega Saturn platforms, both of which resulted in a higher than expected level   
of product returns and markdown allowances. The Company increased its reserves  
by approximately $5.4 million during fiscal 1997 in response to these           
increased returns and markdown allowances. According to PC Data, a market       
research firm, from 1996 to 1997, the U.S. market for Macintosh titles          
declined approximately 66% and Sega Saturn's share of the U.S. market for       
interactive entertainment software declined from 14.9% to 9.3% during such      
period, according to The TRST Report, published by NPD Group, a market          
research firm. Operating results for the period were also negatively affected   
by (i) the Company's decision to write-off $5.9 million in prepayments to       
third party developers relating to titles or platform versions of titles which  
had been cancelled or which were expected to achieve lower unit sales than      
were originally forecast, (ii) an excessive reliance on development projects    
utilizing new technologies in the face of increasing development costs (total   
development costs were $21.4 million in fiscal 1997 as compared with $15.1      
million in fiscal 1996) , (iii) slower than expected growth in sales in the     
Japanese market, and (iv) investments in new product lines in the sports and    
edutainment categories. The Company has taken a number of steps to address      
these issues, both strategically and operationally. During the second half of   
1997, the Company restructured its internal development organization into five  
divisions, each of which is dedicated to the production and development of      
products for a particular product category. The Company believes that this      
divisional approach will enable the Company to better manage its internal and   
external development processes and to obtain greater efficiency and             
predictability in its product development process. The Company is also in the   
process of restructuring its product development pipeline such that a           
significant number of the products under development will be utilizing          
existing core technologies or other game content in order to reduce the         
development costs and development time for such products. In addition, in July  
1997 the Company closed its Japanese office, and initiated a licensing          
strategy in Japan in order to avoid the high costs of conducting operations     
there. The Company also discontinued and absorbed the cost of approximately 20  
Macintosh and Sega Saturn development projects, and, due to lower than          
expected sales growth and intense competition in the edutainment product        
category, the Company suspended its product development plans for its           
edutainment product line. In March 1998, the Company granted a third party      
exclusive distribution rights for certain titles in such product line.          

Effective May 1, 1997, the Company changed its fiscal year end from April 30
to December 31. Accordingly, the discussion of financial results set forth      
below compares the three months ended March 31, 1997 to the comparable 1996     
period, the eight months ending December 31, 1997 to the comparable 1996        
period, and compares the Company's previous fiscal years ended April 30, 1997,  
1996 and 1995.                                                                  

The Company's operating results have fluctuated significantly in the past   
and will likely 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 the Company's control. There  
can be no assurance that the Company will be profitable in any particular       
period. It is likely that the Company's operating results in one or more        
future periods will fail to meet or exceed the expectations of securities       
analysts or investors. See "Risk Factors--Fluctuations in Operating Results;    
Uncertainty of Future Results; Seasonality."                                    

21  

424B4
24th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 24th
RESULTS OF OPERATIONS                                                           

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:                                                     

                                                        [Enlarge/Download Table]

                                                    EIGHT MONTHS ENDED      THREE MONTHS ENDED    
                          YEAR ENDED APRIL 30,         DECEMBER 31,              MARCH 31,        
                          -----------------------   ---------------------   --------------------- 
                           1995    1996     1997      1996        1997        1997        1998    
                          ------  ------   ------   ---------   ---------   ---------   --------- 
                                                                                                  
STATEMENTS OF OPERATIONS                                                                          
 DATA:                                                                                            
Net revenues............   100.0%  100.0%   100.0%      100.0%      100.0%      100.0%      100.0%
Cost of goods sold......    57.2    51.5     75.0        70.9        52.2        60.3        46.9 
                          ------  ------   ------   ---------   ---------   ---------   --------- 
    Gross profit........    42.8    48.5     25.0        29.1        47.8        39.7        53.1 
                          ------  ------   ------   ---------   ---------   ---------   --------- 
Operating expenses:                                                                               
  Marketing and sales...    18.0    24.0     29.6        31.3        24.0        32.5        21.0 
  General and adminis-                                                                            
   trative..............     6.9     9.3     11.3        17.3        10.5        13.8         7.0 
  Product development...    10.3    15.6     25.7        24.8        16.6        24.0        14.2 
                          ------  ------   ------   ---------   ---------   ---------   --------- 
    Total operating                                                                               
     expenses...........    35.2    48.9     66.6        73.4        51.1        70.3        42.2 
                          ------  ------   ------   ---------   ---------   ---------   --------- 
Operating income                                                                                  
 (loss).................     7.6    (0.4)   (41.6)      (44.3)       (3.3)      (30.6)       10.9 
Other income (expense)..     1.3    (0.9)    (1.9)       (2.2)       (2.6)       (1.7)       (3.4)
                          ------  ------   ------   ---------   ---------   ---------   --------- 
Income (loss) before                                                                              
 income taxes...........     8.9    (1.3)   (43.5)      (46.5)       (5.9)      (32.3)        7.5 
Provision (benefit) for                                                                           
 income taxes...........     3.6    (0.5)   (10.9)      (11.8)        --         (8.0)        0.6 
                          ------  ------   ------   ---------   ---------   ---------   --------- 
    Net income (loss)...     5.3%   (0.8)%  (32.6)%     (34.7)%      (5.9)%     (24.3)%       6.9%
                          ======  ======   ======   =========   =========   =========   ========= 
SELECTED OPERATING DATA:                                                                          
Net revenues by segment:                                                                          
  North America.........    65.2%   56.4%    46.4%       55.1%       60.3%       42.7%       57.4%
  International.........    17.4    25.4     38.4        27.7        28.7        46.1        27.4 
  OEM, royalty and                                                                                
   licensing............    17.4    18.2     15.2        17.2        11.0        11.2        15.2 
                          ------  ------   ------   ---------   ---------   ---------   --------- 
                           100.0%  100.0%   100.0%      100.0%      100.0%      100.0%      100.0%
                          ======  ======   ======   =========   =========   =========   ========= 
Net revenues by                                                                                   
 platform:                                                                                        
  Personal computer.....    46.3%   62.2%    54.3%       50.9%       49.5%       65.3%       51.7%
  Video game console....    36.3    19.6     30.5        31.9        39.5        23.5        33.1 
  OEM, royalty and li-                                                                            
   censing..............    17.4    18.2     15.2        17.2        11.0        11.2        15.2 
                          ------  ------   ------   ---------   ---------   ---------   --------- 
                           100.0%  100.0%   100.0%      100.0%      100.0%      100.0%      100.0%
                          ======  ======   ======   =========   =========   =========   ========= 

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

Net Revenues                                                                  

Net revenues for the three months ended March 31, 1998 increased 82.9% to   
$41.0 million from $22.4 million in the comparable 1997 period. North American  
net revenues increased to $23.5 million from $9.6 million in the 1997 period,   
and international net revenues increased to $11.2 million from $10.3 million    
in the 1997 period. The increase in net revenues in the 1998 period was         
primarily due to increased title releases and unit sales volumes, including     
significant new title releases, such as VR Sports Powerboat Racing and Die By   
The Sword and a higher than expected level of product returns and markdowns     
recorded during the 1997 period. OEM, royalty and licensing net revenues        
increased to $6.3 million, or 15.2% of net revenues, in the 1998 period from    
$2.5 million, or 11.2% of net revenues, in the 1997 period, primarily           
attributable to increased OEM bundling transactions and licensing revenues on   
edutainment products. The Company expects that OEM, royalty and licensing       
revenues may decline, both in dollars and as a percentage of net revenues, on   
a comparative quarterly basis during the remainder of 1998 as a larger          
proportion of OEM, royalty and licensing net revenues are generated from        
royalty-based licensing transactions, as opposed to the shipment of finished    
goods, and as such distribution channels become more competitive.               

22  

424B4
25th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 25th
Cost of Goods Sold; Gross Margin                                              

Cost of goods sold increased 42.3% in the three months ended March 31, 1998 
to $19.2 million, or 46.9% of net revenues, from $13.5 million, or 60.3% of     
net revenues in the comparable 1997 period. Gross margin increased to 53.1% of  
net revenues from 39.7% of net revenues in the 1997 period. The increase in     
gross margin was primarily attributable to lower costs of PC product sales      
offset in part by greater manufacturing costs attributable to an increased      
number of video game console products sold during the 1998 period. The          
improvement in gross margin was also attributable to changes in the product     
mix of internally and externally developed products, reductions in costs of     
increased affiliate product revenues and increased OEM, royalty and licensing   
net revenues. The 1997 period also included the effects of additional write-    
offs of prepaid royalties relating to titles or platform versions of titles     
which had been cancelled or which were expected to achieve lower unit sales     
than were originally anticipated.                                               

Operating Expenses                                                            

Total operating expenses increased 9.6% to $17.3 million, or 42.2% of net   
revenues, in the three months ended March 31, 1998 from $15.8 million, or       
70.3% of net revenues, for the comparable 1997 period.                          

Marketing and Sales. Marketing and sales expenses primarily include         
advertising and retail marketing support, sales commissions, marketing and      
sales personnel, customer support services, fulfillment and other costs.        
Marketing and sales expenses increased 18.0% to $8.6 million, or 21.0% of net   
revenues, for the three months ended March 31, 1998 from $7.3 million, or       
32.5% of net revenues for the comparable 1997 period. The increase in absolute  
dollars was primarily attributable to increased advertising and other           
marketing costs associated with the increase in titles launched and products    
sold during the 1998 period. The decrease as a percentage of net revenues was   
primarily attributable to operating efficiencies achieved as a result of the    
increased net revenues base. The Company expects that marketing and sales       
expense in future periods may increase both in absolute dollars and as a        
percentage of net revenues from the levels experienced in the three months      
ended March 31, 1998 as the Company increases its marketing and sales           
operations.                                                                     

General and Administrative. General and administrative expenses primarily   
include administrative personnel expenses, facilities costs, professional       
expenses and other overhead charges. General and administrative expenses        
decreased 7.5% to $2.9 million, or 7.0% of net revenues, in the three months    
ended March 31, 1998 from $3.1 million, or 13.8% of net revenues in the         
comparable 1997 period. The decrease in absolute dollars was primarily          
attributable to lower overhead costs offset in part by increased personnel and  
operations costs and facilities charges in North America and Europe in support  
of increased net revenues. The decrease as a percentage of net revenues was     
primarily attributable to operating efficiencies gained as a result of an       
increased net revenue base. The Company expects that in future periods general  
and administrative expenses will increase in absolute dollars, but may vary as  
a percentage of net revenues.                                                   

Product Development. Product development expenses, which primarily include  
personnel and support costs, are charged to operations in the period incurred.  
Product development expenses increased 8.1% to $5.8 million, or 14.2% of net    
revenues, in the three month period ended March 31, 1998 from $5.4 million or   
24.0% of net revenues in the comparable 1997 period. The increase in absolute   
dollars was primarily due to the increase in the number of products under       
development, offset in part by cost efficiencies achieved as a result of the    
reorganization of the development process. The decrease as a percentage of net  
revenues primarily reflected cost savings and operating efficiencies gained as  
a result of increased net revenues. The Company expects that in future periods  
product development expenses will increase in absolute dollars, but may vary    
as a percentage of net revenues.                                                

Other Income (Expense)                                                        

Other income (expense) primarily includes interest expense on the Company's 
bank line of credit and Subordinated Secured Promissory Notes. Other expense    
increased to $1.4 million in the three months ended                             

23  

424B4
26th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 26th
March 31, 1998 from $0.4 million in the comparable 1997 period. This increase   
was primarily due to increased borrowings under the Company's line of credit    
to support increased working capital requirements in the 1998 period and        
interest on the Subordinated Secured Promissory Notes, which were issued from   
October 1996 through February 1997 and were outstanding throughout the 1998     
period.                                                                         

Provision (Benefit) for Income Taxes                                          

The Company recorded a tax provision of $0.2 million in the three months    
ended March 31, 1998 compared to a tax benefit of $1.8 million for the          
comparable 1997 period. No tax benefit was recorded in the 1998 period due to   
the uncertainty of realization in future periods.                               

EIGHT MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE EIGHT MONTHS ENDED         
DECEMBER 31, 1996                                                               

Net Revenues                                                                  

Net revenues for the eight months ended December 31, 1997 increased 70.7% to
$86.0 million from $50.4 million in the comparable 1996 period. North American  
net revenues increased to $51.8 million from $27.7 million in the 1996 period,  
and international net revenues increased to $24.6 million from $14.0 million    
in the 1996 period. The increase in net revenues in the 1997 period was         
primarily due to increased title releases across multiple platforms in the      
eight months ended December 31, 1997 as compared with the eight months ended    
December 31, 1996, including significant title releases, such as Clay Fighter   
63 1/3 and Star Trek: Starfleet Academy, in the calendar fourth quarter of      
1997, and a higher than expected level of product returns and markdowns         
recorded during the 1996 period. OEM, royalty and licensing net revenues        
decreased to 11.0% of net revenues in the 1997 period from 17.2% in the 1996    
period.                                                                         

Cost of Goods Sold; Gross Margin                                              

Cost of goods sold increased 25.6% in the eight months ended December 31,   
1997 to $44.9 million, or 52.2% of net revenues, from $35.7 million, or 70.9%   
of net revenues, in the comparable 1996 period. Gross margin increased to       
47.8% in the 1997 period from 29.1% in the 1996 period. The increase in gross   
margin was primarily due to reductions in sales by the Company on an affiliate  
label basis of titles published by third parties, reductions in OEM royalty     
expenses as a percentage of net revenues, and changes in the product mix of     
externally developed products released during the periods, offset in part by    
greater manufacturing costs attributable to an increased number of video game   
console products released during the 1997 period. The 1996 period also          
included the effects of additional write-offs of prepaid royalties relating to  
titles or platform versions of titles which had been cancelled or which were    
expected to achieve lower unit sales than were originally forecast.             

Operating Expenses                                                            

Total operating expenses increased 18.8% to $43.9 million, or 51.1% of net  
revenues, in the eight months ended December 31, 1997 from $36.9 million, or    
73.4% of net revenues, for the comparable 1996 period.                          

Marketing and Sales. Marketing and sales expenses increased 30.8% to $20.6  
million, or 24.0% of net revenues, for the eight months ended December 31,      
1997 from $15.7 million, or 31.3% of net revenues, for the comparable 1996      
period. The increase in absolute dollars was primarily due to advertising and   
other marketing costs associated with the increase in products launched during  
the period. The decrease as a percentage of net revenues was primarily          
attributable to operating efficiencies gained as a result of an increased net   
revenues base.                                                                  

General and Administrative. General and administrative expenses increased   
3.0% to $9.0 million, or 10.5% of net revenues, in the eight months ended       
December 31, 1997 from $8.7 million, or 17.3% of net revenues, in the           
comparable 1996 period. The increase in absolute dollars was primarily          
attributable to increased personnel and operations and facilities costs both    
in North America and Europe in support of increased net revenues. The decrease  
as a percentage of net revenues was primarily attributable to operating         
efficiencies gained as a result of an increased net revenues base.              

24  

424B4
27th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 27th
Product Development. Product development expenses increased 14.7% to        
$14.3 million, or 16.6% of net revenues, in the eight months ended December     
31, 1997 from $12.5 million, or 24.8% of net revenues, in the comparable 1996   
period. The increase in absolute dollars was primarily due to the addition of   
personnel in the Company's product development group, an increase in the        
number of products under development and the initiation of European and OEM     
product development in the 1997 period. The decrease as a percentage of net     
revenues primarily reflected operating efficiencies gained as a result of       
increased net revenues.                                                         

Other Income (Expense)                                                        

Other expense increased to $2.3 million in the eight months ended December  
31, 1997 from $1.1 million in the comparable 1996 period. This increase was     
primarily due to increased borrowings under the Company's line of credit to     
support increased working capital requirements in the 1997 period and interest  
on the Subordinated Secured Promissory Notes, which were issued from October    
1996 through February 1997 and were outstanding throughout the 1997 period.     

Provision (Benefit) for Income Taxes                                          

The Company recorded no tax provision in the eight months ended December 31,
1997, compared to a tax benefit of $5.9 million in the comparable 1996 period.  
No tax benefit was recorded in the 1997 period due to the uncertainty of        
realization in future periods.                                                  

YEAR ENDED APRIL 30, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996             

Net Revenues                                                                  

Net revenues in the year ended April 30, 1997 decreased 14.1% to $83.3      
million from $97.0 million in the comparable 1996 period. North American net    
revenues decreased to $38.6 million in the 1997 period from $54.7 million in    
the 1996 period and international net revenues increased to $32.0 million in    
the 1997 period from $24.6 million in the 1996 period. OEM, royalty and         
licensing net revenues accounted for 15.2% of total net revenues for the 1997   
period, compared to 18.2% for the 1996 period. The decrease in net revenues     
for the 1997 period was primarily due to a decreased number of title releases   
resulting from certain product delays across multiple platforms, lower unit     
sales of the titles released during the period and a higher than expected       
level of product returns and markdowns recorded during the period.              

Cost of Goods Sold; Gross Margin                                              

Cost of goods sold increased 25.1% to $62.5 million, or 75.0% of net        
revenues, in the year ended April 30, 1997 from $49.9 million, or 51.5% of net  
revenues, in the comparable 1996 period. Gross margin decreased to 25.0% in     
the 1997 period from 48.5% in the 1996 period. The decrease in gross margin in  
the 1997 period was primarily due to an increase in royalty expenses            
attributable to the write-off of $5.9 million in prepaid royalties relating to  
titles or platform versions of titles which had been cancelled or which were    
expected to achieve lower unit sales than originally forecast, increased sales  
of video game console titles and affiliate label products and disproportionate  
returns and markdowns in the 1997 period, offset in part by increased OEM       
volumes.                                                                        

Operating Expenses                                                            

Total operating expenses increased 16.9% to $55.5 million, or 66.6% of net  
revenues, in the year ended April 30, 1997 from $47.4 million, or 48.9% of net  
revenues, in the comparable 1996 period.                                        

Marketing and Sales. Marketing and sales expenses increased 5.8% to $24.6   
million, or 29.6% of net revenues, in the 1997 period from $23.3 million, or    
24.0% of net revenues, in the 1996 period. The increase in absolute dollars     
was primarily due to increased commissions expense on European sales offset in  
part by lower marketing and advertising expenses due to a decrease in titles    
released during the period.                                                     

25  

424B4
28th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 28th
General and Administrative. General and administrative expenses increased   
4.2% to $9.4 million, or 11.3% of net revenues, in the 1997 period from $9.0    
million, or 9.3% of net revenues, in the 1996 period. The increase in absolute  
dollars was primarily attributable to increased personnel and facilities costs  
in North America, Europe and Japan.                                             

Product Development. Product development expenses increased 41.7% to $21.4  
million, or 25.7% of net revenues, in the 1997 period from $15.1 million, or    
15.6% of net revenues, in the 1996 period. The increase in absolute dollars     
was primarily attributable to an increase in the number of products under       
development, the inclusion of a full year of operations of Shiny, an            
interactive entertainment software developer in which the Company acquired a    
91% interest in 1995, localization and development costs in Japan, initiation   
of European and OEM product development and increased product development       
personnel and facilities costs.                                                 

Other Income (Expense)                                                        

Other expense increased to $1.6 million in the 1997 period from $0.8 million
in the 1996 period. The increase was primarily due to interest expense related  
to borrowings under the Company's bank line of credit to support increased      
working capital requirements and interest on the Subordinated Secured           
Promissory Notes which were issued from October 1996 through February 1997.     

Provision (Benefit) for Income Taxes                                          

The Company's income tax benefit in the 1997 period was $9.1 million,       
compared to an income tax benefit of $0.5 million in the 1996 period. The       
benefit for income taxes as a percentage of pre-tax income declined from 39.2%  
to 25.0% due to the recording of a valuation allowance of $2.9 million in the   
1997 period.                                                                    

YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995             

Net Revenues                                                                  

Net revenues in the year ended April 30, 1996 increased 21.9% to $97.0      
million from $79.5 million in the comparable 1995 period. North American net    
revenues increased to $54.7 million and international net revenues increased    
to $24.6 million in the 1996 period from $51.9 million and $13.8 million,       
respectively, in the 1995 period. OEM, royalty and licensing net revenues were  
18.2% of net revenues for the 1996 period, compared to 17.4% for the 1995       
period. The increase in net revenues in the 1996 period was primarily due to    
an increase in the number of title releases across multiple platforms with      
increased individual title successes, including Stonekeep and Descent II,       
which resulted in increased international net revenues, particularly in         
Europe, and increased net revenues from retailers and resellers. The increase   
was also due to increases in OEM, royalty and licensing net revenues. These     
increases were offset in part by reduced affiliate label sales and increased    
product returns and markdowns.                                                  

Cost of Goods Sold; Gross Margin                                              

Cost of goods sold increased 9.8% to $49.9 million, or 51.5% of net         
revenues, in the year ended April 30, 1996 from $45.5 million, or 57.2% of net  
revenues, in the comparable 1995 period. Gross margin was 48.5% in the 1996     
period, as compared to 42.8% in the 1995 period. The increase in gross margin   
was primarily attributable to the increase in overall product sales, a product  
mix emphasizing higher margin PC titles and reductions in affiliate label net   
revenues.                                                                       

Operating Expenses                                                            

Total operating expenses increased 69.3% to $47.4 million, or 48.9% of net  
revenues, in the year ended April 30, 1996 from $28.0 million, or 35.2% of net  
revenues, in the comparable 1995 period.                                        

Marketing and Sales. Marketing and sales expenses increased 63.1% to $23.3  
million, or 24.0% of net revenues, in the 1996 period from $14.3 million, or    
18.0% of net revenues, in the comparable 1995 period. The                       

26  

424B4
29th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 29th
increase for the 1996 period both in absolute dollars and as a percentage of    
net revenues was primarily attributable to increased advertising and marketing  
costs in support of increased product releases, promotional programs,           
commissions on international sales and personnel and overhead.                  

General and Administrative. General and administrative expenses increased   
63.3% to $9.0 million, or 9.3% of net revenues, in the 1996 period from $5.5    
million, or 6.9% of net revenues in the 1995 period. The increase in both       
absolute dollars and as a percentage of net revenues was primarily              
attributable to increased personnel and operating and facilities costs in       
North America, Europe and Japan.                                                

Product Development. Product development expenses increased 84.4% to $15.1  
million, or 15.6% of net revenues, in the 1996 period from $8.2 million, or     
10.3% of net revenues, in the 1995 period. The increase in product development  
expenses in both absolute dollars and as a percentage of net revenues was       
primarily attributable to an increase in the number and complexity of products  
in development, the expansion of the Company's internal development             
capabilities (including the acquisition of Shiny), the initiation of            
localization and development in Japan and increased facilities costs and        
overhead requirements.                                                          

Other Income (Expense)                                                        

Other expense increased $1.8 million to $0.8 million in the year ended April
30, 1996, compared to other income of $1.0 million in the comparable 1995       
period. The increase was primarily due to interest expense in the 1996 period   
related to borrowings under the Company's bank line of credit to support        
operations, while the Company earned income on cash balances during the 1995    
period.                                                                         

Provision (Benefit) for Income Taxes                                          

The Company's income tax benefit in the year ended April 30, 1996 was $0.5  
million, compared to an income tax provision of $2.8 million in the comparable  
1995 period.                                                                    

27  

424B4
30th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 30th
QUARTERLY RESULTS OF OPERATIONS                                                 

The following tables set forth certain unaudited consolidated statements of 
operations data for each of the eight calendar quarters in the period ended     
March 31, 1998, as well as the percentage of the Company's net revenues         
represented by each item. This information was derived from the Company's       
unaudited consolidated financial statements that include, in the opinion of     
the Company, all adjustments (consisting of normal recurring adjustments)       
necessary for a fair presentation when read in conjunction with the             
Consolidated Financial Statements included elsewhere in this Prospectus.        

                                                        [Enlarge/Download Table]

                                                      THREE MONTHS ENDED                                 
                          -------------------------------------------------------------------------------
                          JUNE 30,  SEPT. 30, DEC. 31,  MARCH 31, JUNE 30,  SEPT. 30, DEC. 31,  MARCH 31,
                            1996      1996      1996      1997      1997      1997      1997      1998   
                          --------  --------- --------  --------- --------  --------- --------  ---------
                                         (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)                   
                                                                                                         
STATEMENTS OF OPERATIONS                                                                                 
 DATA:                                                                                                   
Net revenues............  $18,574    $13,669  $29,038    $22,410  $20,502    $23,833  $53,308    $40,996 
Cost of goods sold......   10,210     10,459   20,952     13,508   13,941     14,153   26,751     19,221 
                          -------    -------  -------    -------  -------    -------  -------    ------- 
Gross profit............    8,364      3,210    8,086      8,902    6,561      9,680   26,557     21,775 
                          -------    -------  -------    -------  -------    -------  -------    ------- 
Operating expenses:                                                                                      
 Marketing and sales....    4,898      4,744    8,052      7,280    5,954      5,851    9,358      8,589 
 General and administra-                                                                                 
  tive..................    3,311      2,766    3,395      3,088    4,014      2,948    3,453      2,855 
 Product development....    4,353      4,648    4,851      5,384    5,920      5,312    5,701      5,819 
                          -------    -------  -------    -------  -------    -------  -------    ------- 
 Total operating ex-                                                                                     
  penses................   12,562     12,158   16,298     15,752   15,888     14,111   18,512     17,263 
                          -------    -------  -------    -------  -------    -------  -------    ------- 
Operating income                                                                                         
 (loss).................   (4,198)    (8,948)  (8,212)    (6,850)  (9,327)    (4,431)   8,045      4,512 
Other income (expense)..     (260)      (294)    (875)      (375)    (663)    (1,050)  (1,552)    (1,418)
                          -------    -------  -------    -------  -------    -------  -------    ------- 
Income (loss) before in-                                                                                 
 come taxes.............   (4,458)    (9,242)  (9,087)    (7,225)  (9,990)    (5,481)   6,493      3,094 
Provision (benefit) for                                                                                  
 income taxes...........   (1,739)    (2,311)  (2,272)    (1,782)       0          0        0        245 
                          -------    -------  -------    -------  -------    -------  -------    ------- 
Net income (loss).......  $(2,719)   $(6,931) $(6,815)   $(5,443) $(9,990)   $(5,481) $ 6,493    $ 2,849 
                          =======    =======  =======    =======  =======    =======  =======    ======= 
Net income (loss) per                                                                                    
 share:                                                                                                  
 Basic..................  $ (0.25)   $ (0.62) $ (0.61)   $ (0.49) $ (0.90)   $ (0.49) $  0.65    $  0.26 
                          =======    =======  =======    =======  =======    =======  =======    ======= 
 Diluted................  $ (0.25)   $ (0.62) $ (0.61)   $ (0.49) $ (0.90)   $ (0.49) $  0.54    $  0.23 
                          =======    =======  =======    =======  =======    =======  =======    ======= 

                                                        [Enlarge/Download Table]

                                                      THREE MONTHS ENDED                                
                          ------------------------------------------------------------------------------
                          JUNE 30,  SEPT. 30, DEC. 31,  MARCH 31, JUNE 30,  SEPT. 30, DEC. 31, MARCH 31,
                            1996      1996      1996      1997      1997      1997      1997     1998   
                          --------  --------- --------  --------- --------  --------- -------- ---------
                                                                                                        
PERCENTAGE OF NET REVE-                                                                                 
 NUES:                                                                                                  
Net revenues............   100.0%     100.0%   100.0%     100.0%   100.0%     100.0%   100.0%    100.0% 
Cost of goods sold......    55.0       76.5     72.2       60.3     68.0       59.4     50.2      46.9  
                           -----      -----    -----      -----    -----      -----    -----     -----  
Gross profit............    45.0       23.5     27.8       39.7     32.0       40.6     49.8      53.1  
Operating expenses:                                                                                     
 Marketing and sales....    26.4       34.7     27.7       32.5     29.0       24.5     17.6      21.0  
 General and administra-                                                                                
  tive..................    17.8       20.2     11.7       13.8     19.6       12.4      6.5       7.0  
 Product development....    23.4       34.0     16.7       24.0     28.9       22.3     10.7      14.2  
                           -----      -----    -----      -----    -----      -----    -----     -----  
 Total operating ex-                                                                                    
  penses................    67.6       88.9     56.1       70.3     77.5       59.2     34.8      42.2  
                           -----      -----    -----      -----    -----      -----    -----     -----  
Operating income                                                                                        
 (loss).................   (22.6)     (65.4)   (28.3)     (30.6)   (45.5)     (18.6)    15.0      10.9  
Other income (expense)..    (1.4)      (2.2)    (3.0)      (1.7)    (3.2)      (4.4)    (2.9)     (3.4) 
                           -----      -----    -----      -----    -----      -----    -----     -----  
Income (loss) before in-                                                                                
 come taxes.............   (24.0)     (67.6)   (31.3)     (32.3)   (48.7)     (23.0)    12.1       7.5  
Provision (benefit) for                                                                                 
 income taxes...........    (9.4)     (16.9)    (7.8)      (8.0)     0.0        0.0      0.0       0.6  
                           -----      -----    -----      -----    -----      -----    -----     -----  
Net income (loss).......   (14.6)%    (50.7)%  (23.5)%    (24.3)%  (48.7)%    (23.0)%   12.1%      6.9% 
                           =====      =====    =====      =====    =====      =====    =====     =====  

Net revenues for the three months ended December 31, 1997 and March 31, 1998
were $53.3 million and $41.0 million, respectively. The increase for such       
three month periods reflected the market's seasonality, together with the       
Company's successful introduction of a number of new product titles. Net        
revenues of $18.6 million, $13.7 million and $29.0 million for the three        
months ended June 30, 1996, September 30, 1996 and December 31, 1996,           
respectively, reflected lower net revenues arising from product delays during   
those periods and the resulting introduction of fewer titles than in other      
periods and a higher than expected level of product returns and markdown        
allowances.                                                                     

28  

424B4
31st Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 31st
Cost of goods sold for the three month periods ended September 30, 1996,    
December 31, 1996, March 31, 1997 and June 30, 1997 included the effects of     
additional write-offs of prepaid royalties relating to titles or platform       
versions of titles which had been cancelled or which were expected to achieve   
lower unit sales than were originally forecast, which, combined with the lower  
net revenues, resulted in lower gross margin during such periods.               

Interest expense has increased on a comparative basis over the periods      
presented, reflecting debt service on the Company's $14.7 million in            
Subordinated Secured Promissory Notes issued from October 1996 through          
February 1997 together with increased borrowings on the Company's bank line of  
credit.                                                                         

The Company's operating results have fluctuated significantly in the past   
and will likely 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 the Company's control. Such   
factors include, but are not limited to, demand for the Company's and its       
competitors' products, the size and rate of growth of the market for            
interactive entertainment software, changes in computing platforms, the number  
of new products and product enhancements released by the Company and its        
competitors during the period, changes in product mix, product returns, the     
timing of orders placed by distributors and dealers, delays in shipment, the    
timing of development and marketing expenditures, price competition and the     
level of the Company's international net revenues. The uncertainties            
associated with the interactive entertainment software development process,     
lengthy manufacturing lead times for Nintendo-compatible products, possible     
production delays, and the approval process for products compatible with the    
Sony Computer Entertainment, Nintendo and Sega video game consoles, as well as  
approvals required from other licensors, make it difficult to accurately        
predict the quarter in which shipments will occur. Because of the limited       
number of products introduced by the Company in any particular quarter, a       
delay in the introduction of a product may materially adversely affect the      
Company's operating results for that quarter. A significant portion of the      
Company's operating expenses is relatively fixed, and planned expenditures are  
based primarily on sales forecasts. If net revenues do not meet the Company's   
expectations in any given quarter, operating results may be materially          
adversely affected.                                                             

The interactive entertainment software industry is generally highly         
seasonal, with the highest levels of consumer demand occurring during the       
year-end holiday buying season, followed by demand during the calendar first    
quarter resulting both from demand for interactive entertainment software for   
PC's and video game consoles acquired during the holidays and from continuing   
demand for titles released in the preceding fourth quarter. As a result, net    
revenues, gross profits and operating income for the Company have historically  
been highest during the fourth and the following first calendar quarters, and   
have declined from these levels in the subsequent second and third calendar     
quarters. The failure or inability of the Company to introduce products on a    
timely basis to meet such seasonal increases in demand may have a material      
adverse effect on the Company's business, operating results and financial       
condition. The Company may over time become increasingly affected by the        
industry's seasonal patterns. Although the Company seeks to reduce the effect   
of such seasonal patterns on its business by distributing its product release   
dates throughout the year, particularly during the quarters ending June 30 and  
September 30, there can be no assurance that such efforts will be successful.   
There can be no assurance that the Company will be profitable in any            
particular period given the uncertainties associated with software              
development, manufacturing, distribution and the impact of the industry's       
seasonal patterns on the Company's net revenues. As a result of the foregoing   
factors and the other factors discussed in "Risk Factors," it is likely that    
the Company's operating results in one or more future periods will fail to      
meet or exceed the expectations of securities analysts or investors. In such    
event, the trading price of the Common Stock would likely be materially         
adversely affected. See "Risk Factors--Fluctuations in Operating Results;       
Uncertainty of Future Results; Seasonality."                                    

LIQUIDITY AND CAPITAL RESOURCES                                                 

The Company has funded its operations to date primarily through the use of  
bank lines of credit and equipment leases, and through cash generated by the    
sale of securities. As of March 31, 1998, the Company's principal sources of    
liquidity included cash and short term investments of approximately $1.9        
million and the                                                                 

29  

424B4
32nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 32nd
Company's bank line of credit bearing interest at the London Interbank Offered  
Rate plus 4.87% (10.56% at March 31, 1998), expiring May 31, 1999. The          
Company's bank line of credit balance was $33.2 million at May 31, 1998. The    
Company expects to use approximately $16.8 million of the net proceeds of the   
Offering to repay certain amounts outstanding under the bank line of credit.    
Under the terms of the bank line of credit, the Company has available           
borrowings up to $35.0 million through August 30, 1998, $30.0 million through   
December 30, 1998 and $25.0 million through May 31, 1999, based in part on      
qualifying receivables and inventory. Within the overall credit limit of        
$35.0 million is the Company's ability to draw down up to $10.0 million in      
excess of its borrowing base through August 30, 1998, and up to $5.0 million    
in excess of its borrowing base through December 30, 1998. The Company is       
currently in compliance with all terms of its credit agreement.                 

The Company's primary capital needs have historically been to fund working  
capital requirements necessitated by its sales growth, 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. The      
Company's operating activities used cash of $0.2 million during the three       
months ended March 31, 1998, used cash of $15.3 million during the eight        
months ended December 31, 1997, used cash of $17.0 million during the year      
ended April 30, 1997, provided cash of $2.5 million in the year ended April     
30, 1996 and used cash of $8.7 million in the year ended April 30, 1995. The    
cash used by operating activities in the three months ended March 31, 1998 was  
primarily attributable to increased trade receivables, offset in part by net    
income during the period and increased accounts payable and accrued expenses.   
The cash used by operating activities in the eight months ended December 31,    
1997 was primarily attributable to increased trade receivables, particularly    
in the year-end holiday selling season, together with a net loss of $5.1        
million. The increase in cash used by operating activities in the year ended    
April 30, 1997 was primarily due to a net loss of $27.2 million, offset in      
part by increased liabilities and accrued expenses. Cash provided by            
operations in the year ended April 30, 1996 primarily resulted from increases   
in liabilities, and the use of operating cash in the year ended April 30, 1995  
primarily resulted from increased royalty advances and receivables, offset by   
net income during the period.                                                   

Cash provided by financing activities of $0.9 million in the three months   
ended March 31, 1998 and $12.2 million in the eight months ended December 31,   
1997, resulted primarily from borrowings under the Company's bank line of       
credit. Cash provided by financing activities of $20.7 million in the year      
ended April 30, 1997, resulted primarily from the issuance of Subordinated      
Secured Promissory Notes and borrowings under the Company's bank line of        
credit. Cash provided by financing activities of $5.5 million in the year       
ended April 30, 1996, resulted primarily from borrowings under the Company's    
bank line of credit, and cash provided by financing activities of $0.6 million  
in the year ended April 30, 1995 resulted primarily from a tax benefit due to   
the exercise of stock options.                                                  

Cash used in investing activities was $0.3 million, $0.8 million and $3.5   
million in the three months ended March 31, 1998, the eight months ended        
December 31, 1997 and the year ended April 30, 1997, respectively, which        
consisted of capital expenditures, primarily for office and computer equipment  
used in Company operations. Cash used in investing activities of $7.5 million   
in the year ended April 30, 1996 resulted primarily from $4.6 million in        
capital expenditures and $3.2 million used in the acquisition of Shiny          
Entertainment. Cash provided by investing activities of $11.7 million in the    
year ended April 30, 1995 resulted primarily from $15.0 million in proceeds     
from the sale of marketable securities, offset in part by $3.3 million in       
capital expenditures. The Company does not currently have any material          
commitments with respect to any capital expenditures.                           

The Company expects that its capital requirements will increase             
significantly in the future as it increases its product development and sales   
and marketing programs, primarily due to increased headcount in these areas,    
increased advance royalty payments to third party developers and increased      
sales and marketing expenses. The Company has not yet definitively determined   
such capital uses. The Company believes that funds available under its bank     
line of credit and anticipated funds from operations will be sufficient to      
satisfy the Company's projected working capital, capital expenditure            
requirements and debt obligations in the normal course of business for at       

30  

424B4
33rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 33rd
least the next twelve months. See "Use of Proceeds." There can be no            
assurances, however, that the Company will not be required to raise additional  
debt or equity financing during such period, nor that if the Company is         
required to raise additional financing during such period it will be able to    
do so on commercially reasonable terms. See "Risk Factors--Future Capital       
Requirements."                                                                  

RECENT ACCOUNTING PRONOUNCEMENTS                                                

In June 1997, the Financial Accounting Standards Board ("FASB") issued      
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting        
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an       
Enterprise and Related Information." In addition, the American Institute of     
Certified Public Accountants issued Statement of Position ("SOP") 97-2,         
"Software Revenue Recognition" and SOP 98-1, "Accounting for the Costs of       
Computer Software Developed or Obtained for Internal Use." SFAS Nos. 130 and    
131 and SOP 97-2 are effective for fiscal years beginning after December 15,    
1997. SOP 98-1 is effective for fiscal years beginning after December 15,       
1998. The Company does not believe that adoption of these standards will have   
a material impact on the Company's results of operations.                       

YEAR 2000 ISSUE                                                                 

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields    
will need to accept four digit entries to distinguish 21st century dates from   
20th century dates. This inability to recognize or properly treat the Year      
2000 may cause the Company's systems and applications to process critical       
financial and operational information incorrectly. The Company continues to     
assess the impact of the Year 2000 issue on its reporting systems and           
operations.                                                                     

The Company is currently in the process of investigating whether its        
internal accounting systems and other operational systems are Year 2000         
compliant. The Company has been informed by the vendor of its internal          
accounting software that upgrades that will bring such software into Year 2000  
compliance will be provided to the Company under its existing software          
maintenance agreement in the third quarter of 1998. The Company expects to      
effect the conversion of its internal accounting system to such upgraded        
software by the end of 1998. The Company believes that necessary conversions    
of other operational systems can also be accomplished through vendor upgrades   
and enhancements as provided under its system maintenance agreements currently  
in effect. The Company does not anticipate significant costs associated with    
any necessary conversions. However, there can be no assurance that certain of   
the Company's internal computer systems or networks or those of its key         
vendors and distributors will not be adversely affected by such Year 2000       
issues, which could have a material adverse effect on the Company's business,   
operating results or financial condition. See "Risk Factors--Year 2000          
Compliance."                                                                    

31  

424B4
34th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 34th
BUSINESS  

Interplay is a leading developer, publisher and distributor of interactive  
entertainment software for both core gamers and the mass market. The Company,   
which commenced operations in 1983, is most widely known for its titles in the  
action/arcade, adventure/RPG, strategy/puzzle and sports categories, and has    
published such hit titles as Descent, Fallout, Stonekeep, Battle Chess and      
Virtual Pool. The Company has produced titles for many of the most popular      
interactive entertainment software platforms, and currently balances its        
development efforts by publishing interactive entertainment software for PCs    
and current generation video game consoles, such as the PlayStation and         
Nintendo 64. Interplay was named Publisher of the Year in 1996 by Computer &    
Net Player magazine.                                                            

The Company seeks to publish 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 has published many      
such successful franchise titles to date. In addition, the Company secures      
licenses to use popular intellectual properties, such as Star Trek, Caesars     
Palace and Major League Baseball, for incorporation into certain of its         
products. Of the more than 40 titles currently in development by the Company,   
more than half are sequels to successful titles or incorporate licensed         
intellectual properties.                                                        

INDUSTRY BACKGROUND                                                             

The worldwide market for interactive entertainment software has grown       
significantly in recent years. According to IDG, the worldwide market for       
interactive entertainment software generated sales of more than 220 million     
retail units in 1997, and is projected to generate more than 437 million        
retail units in 1999, representing a 41% compound annual growth rate. The       
interactive entertainment software market is composed primarily of software     
for PC platforms and video game consoles.                                       

This market growth has been driven by the significant growth in the         
worldwide installed base of PCs and video game consoles, the emergence of a     
strong international market for interactive entertainment software,             
particularly in Western Europe, and the emergence of powerful software          
distribution channels capable of reaching a broad consumer base.                

According to IDG, U.S. retail sales of PC interactive entertainment software
exceeded 45 million units in 1997 and are projected to grow 27% annually to     
more than 73 million units in 1999. Also, according to IDG, approximately 43    
million units of interactive entertainment software for PlayStation and         
Nintendo 64 video game consoles were sold in the U.S. in 1997, and these unit   
sales are expected to grow 56% annually to approximately 106 million in 1999.   

The international market for PC interactive entertainment software is       
growing rapidly as well. According to IDG, international sales of interactive   
entertainment software for PCs were 53 million units in 1997 and are projected  
to grow 27% annually to 85 million units in 1999. Similarly, growth in the      
video game console installed base outside of the U.S. has driven an increase    
in international sales of interactive entertainment software for video game     
consoles, with 77 million units sold outside of the U.S. in 1997 and 171        
million units projected to be sold in 1999, representing a compound annual      
growth rate of 48%, according to IDG.                                           

The distribution channels for interactive entertainment software have       
changed significantly in recent years and have become increasingly              
competitive. During the 1980s, consumer software was typically sold through     
specialty stores. Today, mass merchants and consumer electronics stores such    
as Wal-Mart, Best Buy, Price-Costco, Kmart, CompUSA and Target are the most     
important distribution channels for retail sales of consumer software.          
Competition for shelf space has intensified due to the fact that these high     
volume retailers generally only stock a limited number of titles which are      
expected to sell large numbers of units. This trend has increased the           
importance of developing well-known brands and publishing labels with a         
history of successful sales.                                                    

32  

424B4
35th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 35th
Today, a limited number of titles capture a majority of the sales in the    
interactive entertainment software market. According to PC Data, in 1997 the    
top 100 PC titles released (approximately nine percent of the titles released)  
generated 67% of the industry's overall revenues. This hit-driven market has    
led to higher production budgets for titles as well as more complex             
development and production processes and longer development cycles. Publishers  
with a history of producing hit titles have enjoyed a significant marketing     
advantage because of their heightened brand recognition and customer loyalty.   
The importance of the timely release of hit titles, as well as the increased    
scope and complexity of the product development and production process, have    
increased the need for disciplined product development processes that limit     
cost and schedule overruns. This in turn has increased the importance of        
leveraging the technologies, characters or storylines of such hit titles into   
additional interactive entertainment software products in order to spread       
development costs among multiple products.                                      

The Internet and on-line services represent an emerging segment of the      
interactive entertainment software market. While competing with interactive     
entertainment software as an alternative use of the home PC, the Internet and   
on-line services also present a new platform on which publishers and            
distributors can market, advertise and distribute their products, whether       
through direct sales from web sites or through sponsoring multi-player on-line  
tournaments featuring their games. The ability for users to compete on-line     
provides an additional product feature which may increase demand for            
interactive entertainment software products.                                    

As interactive entertainment software continues to gain mass market         
acceptance, it will become increasingly important for publishers of such        
software (i) to achieve brand name recognition for their products among both    
core gamers and the mass market by offering innovative products with            
captivating gameplay across multiple platforms, (ii) to secure relationships    
with third party interactive entertainment software developers with proven      
track records of developing hit titles, (iii) to identify and address the       
technical, creative and marketing risks before committing significant           
development resources to a title, (iv) to aggressively market and sell these    
products through traditional and emerging distribution channels and (v) to      
leverage their existing software technology, and the brand recognition          
associated with it, by producing sequel and add-on titles.                      

BUSINESS STRATEGY                                                               

The Company's objective is to enhance its position as a leading developer,  
publisher and distributor of interactive entertainment software for both core   
gamers and the mass market. The key elements of the Company's business          
strategy are as follows:                                                        

Maximize Franchise and Brand Value. The Company seeks to publish hit titles 
whose strong consumer appeal and resulting consumer loyalty create franchise    
titles for the Company. Further, the Company seeks to leverage its franchise    
titles into recurring sources of revenue by publishing sequels and add-ons and  
by pursuing merchandising opportunities as they arise. To date, the Company     
has published many successful franchise titles, including Descent, Virtual      
Pool, Clay Fighter and Stonekeep, and believes that many of its products        
slated for release in 1998 may become additional franchise titles. In           
addition, the Company has developed or is developing products based on popular  
intellectual properties licensed to the Company, such as Star Trek, Caesars     
Palace and Major League Baseball. The Company believes that the exposure and    
name recognition of these properties, combined with well-designed gameplay,     
may create franchise titles for the Company. The Company currently publishes    
titles under the Interplay, Shiny, VR Sports and Signature Series labels. To    
create franchise value within specific product genres, the Company plans to     
introduce genre-specific labels over time, including its Tantrum, Tribal        
Dreams, Flat Cat and Black Isle Studios labels.                                 

Secure Relationships with Proven Hit Developers. In order to maintain its   
competitive position in its hit-driven industry, the Company devotes            
significant resources to securing relationships with third party interactive    
entertainment software developers with proven track records of developing hit   
titles. The Company believes that its developer-friendly culture, distribution  
capability and success as a publisher of well-known titles has enabled it to    
attract and retain proven hit developers. Relationships such as these have led  
to the release of such franchise titles as the Descent series, Virtual Pool     
and Redneck Rampage. In furtherance of this strategy, in 1995 the Company       
acquired a 91% interest in Shiny Entertainment, Inc. ("Shiny"), the developer   
of the hit Earthworm Jim title.                                                 

33  

424B4
36th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 36th
Manage Product Development Process. In order to limit cost and schedule     
overruns while maintaining a creative and entrepreneurial environment for its   
development group, the Company has implemented a divisional product             
development and production process, based on product genres. The Company        
believes that breaking down the development function into divisions enables it  
to improve its software design capabilities, to better manage its internal and  
external development processes and to enhance its software development tools    
and techniques, thereby allowing for greater efficiency and improved            
predictability in the software development process.                             

Leverage and Expand Distribution Channels. The Company seeks to leverage and
expand its channels of distribution in order to reach a larger number of        
consumers in the retail, direct, budget and on-line markets, both domestically  
and internationally. The Company has also established Interplay OEM, which      
distributes the Company's interactive entertainment software titles, as well    
as those of other software publishers, to computer hardware and peripheral      
device manufacturers for use in bundling arrangements. In 1995, the Company     
established a European subsidiary ("Interplay Europe") to focus on              
distribution to the European markets, both directly and through third-party     
distributors and joint ventures. The Company also plans to increase its         
presence in other international markets by licensing its titles to publishers   
in such markets, by entering into distribution arrangements and by              
establishing direct distribution capabilities. Finally, the Company seeks to    
leverage and expand its capabilities to distribute its products over the        
Internet both through direct on-line marketing and sales efforts and through    
the use of certain of its games by providers of on-line gameplay who            
distribute through popular on-line services, such as America Online.            

Develop and Leverage Advanced Technology. The Company seeks to leverage its 
investments in existing game technologies while internally and externally       
developing new technologies which can be used in multiple future titles. The    
Company develops proprietary engines, development tools and related technology  
which enable it to develop advanced 3D games on a timely and cost-effective     
basis and with reduced technology risk. For example, the Company is             
incorporating the advanced proprietary human motion and depth perception        
technology developed by Shiny into certain of the Company's sports titles.      

PRODUCTS                                                                        

The Company develops, publishes and distributes interactive entertainment   
software titles that provide immersive game experiences by combining advanced   
technology with engaging content, vivid graphics and rich sound. The Company    
utilizes the experience and judgment of the avid gamers in its product          
development group to select and produce the products it publishes. This has     
resulted in the publication of a wide variety of games that have received       
numerous awards, including the Academy of Interactive Arts & Sciences' Best     
Title, Computer Game Review's Gold and Platinum Triads and PC Entertainment's   
Editor's Choice Awards.                                                         

The Company's strategy is to develop products for those platforms, whether  
PC or video game console, that have or will have sufficient installed bases     
for such development to be economically viable. The Company currently           
publishes products for multiple PC platforms, including Windows 95, and for     
the current generation of video game consoles, including the PlayStation and    
Nintendo 64. The Company assesses the potential acceptance and success of       
emerging platforms and the anticipated continued viability of existing          
platforms based on many factors, including the number of competing titles, the  
ratio of software sales to hardware sales with respect to such platform, the    
installed base of the platform, the change in the rate of sales of the          
platform and the cost and timing of development for the platform. The Company   
has entered into license agreements with Sony Computer Entertainment and        
Nintendo pursuant to which the Company is granted the right to develop,         
sublicense and distribute products for such platforms in specified              
territories, which products are manufactured by the licensor for the Company.   
The Company pays the licensor a royalty and/or manufacturing fee in exchange    
for such license and manufacturing services. Such agreements grant the          
licensor certain approval rights over the products developed for such           
platforms, as well as over the packaging and marketing materials for such       
products. There can be no assurance that the Company will be able to obtain     
future licenses from hardware companies on acceptable terms or that any         
existing or future licenses will be renewed by the licensors. The inability of  
the Company to obtain such approvals could have a material adverse effect on    
the Company's business, operating results and financial condition. See "Risk    
Factors--Dependence on Licenses from and Manufacturing by Hardware Companies."  

34  

424B4
37th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 37th
The interactive entertainment software market can generally be divided into 
five major categories or product genres: action/arcade, adventure/RPG,          
strategy/puzzle, sports and simulation. From January 1, 1995 to March 31,       
1998, the Company released 65 titles, and currently has more than 40 titles in  
various stages of development. Below are two tables, the first highlighting     
selected Company releases since 1995 which the Company believes are, or will    
become, franchise titles, and the second listing selected titles currently      
scheduled for release in the next twelve months which are either sequels to     
franchise titles or which the Company believes present franchise title          
opportunities.                                                                  

SELECTED TITLES RELEASED SINCE 1995 

                                                                [Download Table]


------------------------------------------------------------------------------- 
             TITLE                  GENRE            PLATFORM        DEVELOPER  
------------------------------------------------------------------------------- 
                                                                                
 Carmageddon                    Action/Arcade           PC          Third party 
------------------------------------------------------------------------------- 
 Clay Fighter 63 1/3            Action/Arcade          N64           Interplay  
------------------------------------------------------------------------------- 
 Descent                        Action/Arcade  PC, PlayStation, Mac Third party 
------------------------------------------------------------------------------- 
 Descent II                     Action/Arcade  PC, PlayStation, Mac Third party 
------------------------------------------------------------------------------- 
 Descent: Freespace The Great                                                   
 War                            Action/Arcade           PC          Third party 
------------------------------------------------------------------------------- 
 Die By the Sword               Action/Arcade           PC          Third party 
------------------------------------------------------------------------------- 
 MDK                            Action/Arcade    PC, PlayStation       Shiny    
------------------------------------------------------------------------------- 
 Redneck Rampage                Action/Arcade           PC          Third party 
------------------------------------------------------------------------------- 
 Star Trek: Starfleet Academy   Action/Arcade        PC, Mac         Interplay  
------------------------------------------------------------------------------- 
 Fallout                        Adventure/RPG        PC, Mac         Interplay  
------------------------------------------------------------------------------- 
 Stonekeep                      Adventure/RPG           PC           Interplay  
------------------------------------------------------------------------------- 
 Caesars Palace                Strategy/Puzzle   PC, PlayStation    Third party 
------------------------------------------------------------------------------- 
 M.A.X.                        Strategy/Puzzle          PC           Interplay  
------------------------------------------------------------------------------- 
 Jimmy Johnson's VR Football                                                    
 '98                               Sports          PlayStation      Third party 
------------------------------------------------------------------------------- 
 Virtual Pool                      Sports      PC, PlayStation, Mac Third party 
------------------------------------------------------------------------------- 
 Virtual Pool 2                    Sports               PC          Third party 
------------------------------------------------------------------------------- 
 VR Baseball '97                   Sports        PC, PlayStation     Interplay  
------------------------------------------------------------------------------- 
 VR Sports Powerboat Racing        Sports        PC, PlayStation    Third party 



      SELECTED TITLES SCHEDULED TO BE RELEASED IN THE NEXT TWELVE MONTHS        

--------------------------------------------------------------------------------
             TITLE                  GENRE            PLATFORM        DEVELOPER  
--------------------------------------------------------------------------------
                                                                                
 Crime Killer                   Action/Arcade      PlayStation      Third party 
------------------------------------------------------------------------------- 
 Descent III                    Action/Arcade           PC          Third party 
------------------------------------------------------------------------------- 
 Earthworm Jim 3D               Action/Arcade  PC, PlayStation, N64 Third party 
------------------------------------------------------------------------------- 
 Messiah                        Action/Arcade    PC, PlayStation       Shiny    
------------------------------------------------------------------------------- 
 Wild 9                         Action/Arcade      PlayStation         Shiny    
------------------------------------------------------------------------------- 
 Baldur's Gate                  Adventure/RPG           PC          Third party 
------------------------------------------------------------------------------- 
 Fallout 2                      Adventure/RPG           PC           Interplay  
------------------------------------------------------------------------------- 
 Star Trek: Secret of Vulcan                                                    
 Fury                           Adventure/RPG           PC           Interplay  
------------------------------------------------------------------------------- 
 Caesars Palace VIP Series     Strategy/Puzzle          PC          Third party 
------------------------------------------------------------------------------- 
 M.A.X. 2                      Strategy/Puzzle          PC           Interplay  
------------------------------------------------------------------------------- 
 VR Football '99                   Sports          PlayStation      Third party 
------------------------------------------------------------------------------- 
 VR Baseball '99                   Sports        PC, PlayStation     Interplay  

35  

424B4
38th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 38th
Although the Company anticipates that it will release the titles listed in  
the table immediately above in the next twelve months, the timing and success   
of new interactive entertainment software product releases remains              
unpredictable due to the complexity of product development, including the       
uncertainty associated with new technology. The development cycle of new        
products is difficult to predict but can typically range from 12 to 24 months,  
and there can be no assurance that such titles will be released in the next     
twelve months or at all. There also can be no assurance that, if introduced,    
such new titles will become franchise titles, achieve market acceptance or      
generate any significant revenues. While the level of sales required for a      
title to be profitable varies depending on the costs associated with such       
title, in general, the Company considers titles to be hit titles if they sell   
more than 100,000 units. A significant delay in the introduction of, or the     
presence of a defect in, one or more of such titles or other new products, or   
the failure of one or more of such titles to generate significant net           
revenues, could have a material adverse effect on the success of such products  
and on the Company's business, operating results and financial condition. See   
"Risk Factors--Dependence on New Product Introductions; Risk of Product Delays  
and Product Defects" and "--Uncertainty of Market Acceptance; Dependence on     
Hit Titles."                                                                    

The Company has the right to distribute certain of the titles listed in the 
above tables only in specified territories. For example, the Company only has   
the right to distribute Carmageddon in North America. In addition, the          
Company's right to distribute certain of its sports titles, such as VR          
Baseball '99, in a given international territory varies depending upon the      
relevant sports league's approvals obtained by the Company.                     

As part of its strategy to develop franchises, the Company has recently     
adopted a separate publishing label for each of its five major product          
categories: Tantrum, for the action/arcade division; Tribal Dreams, for the     
adventure division; Black Isle Studios, for the RPG division; Flat Cat, for     
the strategy/puzzle division, and VR Sports, for the sports division. The       
Company also releases titles under the Shiny label. The length of time          
required to attract consumer awareness of each of these product labels will     
vary based on a number of factors, including the number of commercially         
successful titles released by the particular development group. Below is a      
partial summary of the Company's internally and externally developed titles     
that have been released previously or are being developed for release in the    
next twelve months in the various product categories. The only titles that      
have individually contributed more than 10% of the Company's net revenues in    
any fiscal year since the Company's former 1995 fiscal year have been           
Stonekeep, which was developed internally by the Company, and Descent II,       
which was developed by a third party developer, and each of which accounted     
for more than 10% of the Company's net revenues in the Company's former fiscal  
year ended April 30, 1996, and Clay Fighter 63 1/3 and Star Trek: Starfleet     
Academy, both of which were developed internally by the Company, and each of    
which accounted for more than 10% of the Company's net revenues in the eight    
month period ended December 31, 1997. See "Management's Discussion and          
Analysis of Financial Condition and Results of Operations." The fact that       
these titles accounted for more than 10% of the Company's net revenues in a     
particular period is not an indication that these or any other titles will do   
so in future periods. See "Risk Factors--Uncertainty of Market Acceptance;      
Dependence on Hit Titles."                                                      

TANTRUM--ACTION/ARCADE TITLES                                                 

The Descent Series. Developed by Parallax and originally published in       
February 1995, Descent and its sequel have sold more than 1.1 million retail    
units worldwide. Descent has also earned critical acclaim, winning Best         
Computer Game of 1995 and Best Title of 1995 from the Academy of Interactive    
Arts and Sciences and Golden Triad honors from Computer Game Review. Descent:   
FreeSpace The Great War, developed by Parallax and released in June 1998, is a  
3D space simulator featuring large-scale dog-fights and huge capital ships as   
"landscapes" for the environments, and includes an on-line, multi-player        
option which allows up to 12 users to join a game. Parallax is also currently   
developing Descent III, which incorporates a new advanced proprietary engine,   
for release by the Company in the next twelve months.                           

Star Trek: Starfleet Academy. Developed internally by the Company and based 
on Paramount's original Star Trek television and motion picture series, Star    
Trek: Starfleet Academy combines real-time 3D action with strategic game play.  
The game includes full motion video of actors, including three members of the   
original cast, William Shatner as Captain Kirk, Walter Koenig as Ensign Chekov  
and George Takei as Lieutenant Sulu. Released in September 1997, the game has   
sold in excess of 350,000 retail units worldwide.                               

36  

424B4
39th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 39th
Die By The Sword. Developed for the Company by Treyarch Invention, Die By   
The Sword includes advanced technology that allows full motion control of the   
game's characters, which engage in hand-to-hand combat. The proprietary         
graphics engine includes a four person multi-player mode and allows players to  
attack and defend themselves in a 360(degrees) environment featuring realistic  
combat graphics and gameplay.                                                   

TRIBAL DREAMS--ADVENTURE TITLES                                               

Star Trek: Secret of Vulcan Fury (under development). Star Trek: Secret of  
Vulcan Fury is the third in a series of original Star Trek adventure games      
developed internally by the Company. The game is expected to combine            
proprietary motion-capture animation technology with original Star Trek         
episodes written by one of the original Star Trek television writers. The game  
will feature the voices of certain members of the original cast, challenging    
story-based puzzles and the opportunity for players to assume the roles of six  
Star Trek characters: Captain Kirk, Mr. Spock, Doctor McCoy, Lieutenant Sulu,   
Ensign Chekov and Chief Engineer Scott.                                         

BLACK ISLE STUDIOS--RPG TITLES                                                

Stonekeep. The Company internally developed Stonekeep, an RPG that takes    
place in a subterranean labyrinth and features 3D rendered dungeons and         
creatures, a rich soundtrack and vivid special effects. Stonekeep has sold in   
excess of 300,000 retail units worldwide since its release in November 1995.    
Stonekeep was named Best RPG of 1995 by Computer Player and Editor's Choice     
for Best RPG by PC Entertainment. The Company is currently developing a sequel  
to Stonekeep.                                                                   

Fallout 2 (under development). The Company is currently developing Fallout 2
as the sequel to Fallout: A Post Nuclear Role Playing Game, an RPG set in the   
aftermath of a catastrophic nuclear war, which has sold in excess of 100,000    
retail units worldwide since its release in October 1997. The original Fallout  
won numerous industry awards including the Editor's Choice Award and RPG of     
the Year 1997 by PC Gamer and the CG Choice Award and RPG of the Year 1997 by   
Computer Gaming World. Fallout 2 will combine the original Fallout's gameplay   
with new scenarios and characters.                                              

FLAT CAT--STRATEGY/PUZZLE TITLES                                              

M.A.X. Mechanized Assault & Exploration ("M.A.X."). Developed internally by 
the Company, M.A.X., which allows players to lead a modern military unit into   
various combat scenarios, has sold in excess of 150,000 retail units worldwide  
since its release in January 1997. M.A.X. includes both real-time and turn-     
based strategy elements. The Company is currently developing M.A.X. 2, which    
will include three gameplay modes including real-time gameplay, simultaneous    
turn-based gameplay and classic turn-based gameplay.                            

The Caesars Palace VIP Series. The Company is internally developing a series
of simulated gambling products based on its license to use the Caesars Palace   
brand. The Company is releasing Caesars Palace VIP Series, which includes       
individual products for blackjack, craps and video poker and will include a     
slot machine product currently under development, each of which include casino  
sound effects, official tutorials and authenticated odds. In 1997 the Company   
released Caesars Palace for the PC and PlayStation.                             

VR SPORTS--SPORTS TITLES                                                      

VR Baseball. Developed internally by the Company, VR Baseball '97 is        
licensed by the Major League Baseball Players Association and Major League      
Baseball Properties, Inc. and delivers real-time, 360(degrees), 3D              
professional baseball that allows players to view and play from any angle or    
position. VR Baseball '97 has sold more than 100,000 retail units worldwide     
since its release in March 1997. The Company recently released the PlayStation  
version of VR Baseball '99, and is currently developing the PC version of such  
title, which incorporates the advanced proprietary human motion and depth       
perception technology developed by Shiny.                                       

Virtual Pool. Developed by Celeris, Virtual Pool, the Company's first sports
title, is a realistic billiards simulation that has sold more than 250,000      
retail units worldwide and has won a number of awards, including                

37  

424B4
40th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 40th
Best Simulation of 1995 from the Academy of Interactive Arts & Sciences, Best   
Sports Game of 1995 from PC Gamer magazine and Best VR Game of 1995 from        
Computer Player magazine. The Company has also published Celeris' Virtual       
Snooker and Virtual Pool 2 titles.                                              

VR Sports Powerboat Racing. Developed by East Point for the PC and          
PlayStation, VR Sports Powerboat Racing allows the user to race powerboats on   
up to eight different watertracks against computer opponents or up to eight     
Internet or networked players. The player's perspective can be either from the  
driver's seat or from behind the boat, and races can take place during the day  
or at night.                                                                    

SHINY                                                                         

Shiny development teams have created games in the action/arcade and         
adventure categories. Shiny titles include the following:                       

MDK. MDK, a futuristic 3D fighting game released in March 1997, was the     
first title released by Shiny after its acquisition by Interplay in 1995 and    
has sold in excess of 400,000 retail units worldwide. The game was published    
by Shiny and Interplay internationally and by Playmates Interactive             
Entertainment, Inc. in North America. The Company is currently developing a     
sequel to MDK for which it will have worldwide distribution rights.             

Messiah (under development). Messiah will be a surrealistic 3D action game  
centered on the player's ability to invade the bodies of game characters and    
take possession of their actions. The game includes advanced proprietary human  
motion and depth perception technology that creates realistic skin texture and  
movement. Though still under development, the game has received significant     
market exposure, including an appearance on the cover of Next Generation        
magazine.                                                                       

PRODUCT DEVELOPMENT                                                             

The Company develops or acquires its products from a variety of sources,    
including its five internal development divisions, Shiny, Interplay Europe and  
publishing relationships with leading independent developers.                   

The Development Process. The Company develops original products both        
internally, using its in-house development staff, and externally, using third   
party software developers working under contract with the Company. Producers    
on the Company's internal staff monitor the work of both inside and third       
party development teams through design review, progress evaluation, milestone   
review and quality assurance. In particular, each milestone submission is       
thoroughly evaluated by the Company's product development staff to ensure       
compliance with the product's design specifications. The Company enters into    
consulting or development agreements with third party developers which are      
generally on a flat-fee, work-for-hire basis or on a royalty basis, whereby     
advances are paid based on the achievement of milestones. In royalty            
arrangements, the Company ultimately pays continuation royalties to developers  
once the Company's advances have been recouped. In addition, in certain cases,  
the Company will utilize third party developers to port products to new         
platforms.                                                                      

The Company's products typically have short life cycles, and the Company    
depends 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 net revenues to fund     
operations and to replace declining net revenues from existing products. The    
development cycle of new products is difficult to predict, and involves a       
number of risks. See "Risk Factors--Dependence on New Product Introductions;    
Risk of Product Delays and Product Defects."                                    

INTERNAL PRODUCT DEVELOPMENT                                                  

U.S. Product Development. The Company's U.S. internal product development   
group (excluding Shiny's development group) presently consists of               
approximately 250 people. Once a design is selected by the Company,             

38  

424B4
41st Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 41st
a production team, development schedule and budget are established. The         
Company's internal development process includes initial design and concept      
layout, computer graphic design, 2D and 3D artwork, programming, prototype      
testing, sound engineering and quality control. The development process for an  
original, internally developed product typically takes from 12 to 24 months,    
and another six to 12 months for the porting of a product to a different        
technology platform. The Company utilizes a variety of advanced hardware and    
software development tools, including animation, sound compression utilities,   
clay modeling and video compression for the production and development of its   
interactive entertainment software titles. The Company recently restructured    
its internal development organization into five divisions, each dedicated to    
the production and development of products for a particular product category.   
Within each division, development teams are assigned to a particular project.   
These teams are generally led by a producer or associate producer and include   
game designers, software programmers, artists, product managers and sound       
technicians. The Company believes that this divisional approach promotes the    
creative and entrepreneurial environment necessary to develop innovative and    
successful titles. In addition, the Company believes that breaking down the     
development function into divisions enables it to improve its software design   
capabilities, to better manage its internal and external development processes  
and to create and enhance its software development tools and techniques,        
thereby enabling the Company to obtain greater efficiency and improved          
predictability in the software development process.                             

Shiny. In 1995, in order to supplement its development capabilities and to  
obtain innovative software development talent, particularly in the development  
of software for video game consoles, the Company acquired a 91% interest in     
Shiny. Prior to the acquisition, David Perry, Shiny's President and founder,    
produced a number of highly successful interactive entertainment software       
titles, including CoolSpot, Aladdin, Earthworm Jim and Earthworm Jim II. Shiny  
recently completed MDK and currently has three original titles under            
development including Wild 9 and Messiah, which will be distributed worldwide   
by the Company under the Shiny label. Shiny's development group presently       
consists of approximately 25 people.                                            

International Development. The Company is building international development
resources through Interplay Europe, whose software producers manage the         
efforts of local third party developers in European countries. Historically,    
the Company's international product development efforts have consisted          
primarily of the localization of existing Company products. The Company         
currently has several original products, including Earthworm Jim 3D and Crime   
Killer, under development through Interplay Europe. Interplay Europe's          
development group presently consists of approximately 20 people.                

EXTERNAL PRODUCT DEVELOPMENT                                                  

In order to expand its product offerings to include hit titles created by   
third party developers, and to leverage its sales and distribution              
capabilities, the Company enters into publishing arrangements with third party  
developers, including foreign developers and publishers who wish to utilize     
the Company's sales and distribution network in North America. In the eight     
months ended December 31, 1997, and the former fiscal years ended April 30,     
1997 and 1996, approximately 50%, 33% and 67%, respectively, of new products    
released by the Company which the Company believes are or will become           
franchise titles were developed by third party developers. In the three months  
ended March 31, 1998, six of the Company's seven new products released were     
developed by third party developers. The Company expects that the proportion    
of its new products which are developed externally may vary significantly from  
period to period as different products are released. The Company's focus in     
obtaining publishing products is to select titles that combine advanced         
technologies with creative game design. The publishing agreements usually       
provide the Company with the exclusive right to distribute a product on a       
worldwide basis (however, in certain instances the agreement provides for a     
specified territory). The Company typically funds 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, the         
Company's publishing arrangements typically provide the Company with ownership  
of the trademarks relating to the product as well as exclusive rights to        
sequels to the product. The Company manages the production of external          
development projects by appointing a producer from one of its internal product  
development divisions to oversee the product's development and work with the    
third party developer to design, develop and test the game.                     

39  

424B4
42nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 42nd
The Company believes this strategy of cultivating relationships with talented   
third party developers, such as the developers of Descent and TombRaider,       
provides an excellent source of quality products, and a number of the           
Company's commercially successful products have been developed under this       
strategy. However, the Company's reliance on third party software developers    
for the development of a significant number of its interactive software         
entertainment products involves a number of risks. See "Risk Factors--          
Dependence on Third Party Software Developers."                                 

SALES AND DISTRIBUTION                                                          

The Company's sales and distribution efforts are designed to broaden product
distribution and to increase the penetration of the Company's products in       
domestic and international markets. The Company supplements its direct          
distribution efforts in North America with third party distributors and         
affiliate label relationships. Over the past several years, the Company has     
increased its sales and distribution efforts in international markets through   
the formation of Interplay Europe and through licensing and third party         
distribution strategies elsewhere. The Company also distributes its software    
products through Interplay OEM in bundling transactions with hardware and       
peripheral companies and through on-line services.                              

North America. In North America, the Company sells its products primarily to
mass merchants, warehouse club stores, large computer and software specialty    
retail chains and through catalogs. A majority of the Company's North American  
retail sales are to direct accounts, and a lesser percentage are to third       
party distributors. The Company's principal direct retail accounts include      
CompUSA, Best Buy, Electronics Boutique, Toys "R" Us, Wal-Mart and Kmart. The   
Company's principal distributors in North America include GT Interactive,       
Ingram Micro, Beam Scope and Merisel. The Company also distributes product      
catalogs and related promotional material to end-users who can order products   
by direct mail, by using a toll-free number, or by accessing the Company's web  
site. See "Risk Factors--Dependence on Distribution Channels; Risk of Customer  
Business Failures; Product Returns."                                            

The Company sells to retailers and distributors through its North American  
sales organization. The Company's North American sales force is largely         
responsible for generating retail demand for the Company's products by          
presenting new products to the Company's retail customers in advance of the     
products' scheduled release dates, by providing technical advice with respect   
to the Company's products and by working closely with retailers and             
distributors to sell the Company's products. The Company typically ships its    
products within a short period of time after acceptance of purchase orders      
from distributors and other customers. Accordingly, the Company typically does  
not have a material backlog of unfilled orders, and net sales in any quarter    
are substantially dependent on orders booked in that quarter. Any significant   
weakening in customer demand would therefore have a material adverse impact on  
the Company's operating results and on the Company's ability to maintain        
profitability. See "Risk Factors--Fluctuations in Operating Results;            
Uncertainty of Future Results; Seasonality."                                    

The Company seeks to extend the life cycle and financial return of many of  
its products by marketing those products differently along the product's sales  
life. Although the product life cycle for each title varies based on a number   
of factors, including the quality of the title, the number and quality of       
competing titles, and in certain instances seasonality, the Company typically   
considers a title as "back catalog" six months after its initial release. The   
Company utilizes marketing programs appropriate for the particular title,       
which generally include progressive price reductions over time to increase the  
product's longevity in the retail channel as the Company shifts its             
advertising support to newer releases. The Company introduced its Signature     
Series product line in 1996 to market its older titles in the under $15.00      
price category.                                                                 

The Company has acquired the right to distribute certain products on an     
affiliate label basis whereby it distributes products that are produced and     
published by a third party and are marketed under the third party's name with   
the package bearing a notation that the product is being distributed by the     
Company. The Company's focus in obtaining affiliate label products is to        
select titles that complement the Company's product families. Products that     
are distributed through the Company's affiliate label program are generally     
purchased directly from the third party and sold based on a distribution mark-  
up. These products generally have a lower gross margin than internally and      
externally developed products.                                                  

40  

424B4
43rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 43rd
The Company provides terms of sale comparable to competitors in its         
industry. In addition, the Company provides technical support in North America  
for its products through its customer support department and a 90-day limited   
warranty to end-users that its products will be free from manufacturing         
defects. While to date the Company has not experienced any material warranty    
claims, there can be no assurance that the Company will not experience          
material warranty claims in the future. See "Risk Factors--Dependence on        
Distribution Channels; Risk of Customer Business Failures; Product Returns."    

International. The Company, through Interplay Europe, employs approximately 
15 persons dedicated to sales to the European market. Interplay Europe          
maintains relationships with distributors and retailers throughout the          
continent. For example, Interplay Europe has entered into an agreement with     
Infogrames U.K. and Virgin Interactive Entertainment Limited to pool resources  
in order to distribute PC and video game console software to independent        
software retailers in the United Kingdom, and has entered into distribution     
agreements with Acclaim Entertainment pursuant to which Acclaim Entertainment   
distributes certain of the Company's titles in selected European countries.     
Net revenues from such distribution agreements with Acclaim Entertainment       
represented 6.5%, 7.4%, 14.9% and 7.0% of the Company's net revenues in the     
three months ended March 31, 1998, the eight months ended December 31, 1997     
and the Company's former fiscal years ended April 30, 1997 and 1996,            
respectively. In addition, Interplay Europe manages sales and distribution      
efforts in Central and Eastern Europe, the Near East, the Middle East, and      
Africa. The Company seeks to localize its products for the various              
international markets and intends to release localized versions of many of its  
products simultaneously with the commercial release of these titles in North    
America.                                                                        

The Company has built a distribution capability in certain of the developed 
markets in Asia and the Americas utilizing third party distribution             
arrangements for specified products and platforms. In 1995 the Company          
established operations in Japan in order to expand its Japanese sales. In July  
1997, the Company initiated a licensing strategy in Japan and terminated its    
operations there. For example, the Company recently licensed a number of its    
titles to Sony Computer Entertainment to publish in Japan on the PlayStation.   
The Company has recently entered into an agreement with Electronic Arts Pty.    
Ltd. pursuant to which Electronic Arts has the exclusive right to market and    
distribute the Company's PC products in Australia and New Zealand, and an       
agreement with Roadshow Entertainment Pty. Ltd., pursuant to which Roadshow     
Entertainment Pty. Ltd. has the exclusive right to market and distribute the    
Company's video game console products in those countries.                       

OEM. Interplay OEM employs approximately 20 people focused on the           
distribution of interactive entertainment software in bundling transactions to  
hardware and peripheral companies. Under these arrangements, one or more        
software titles, which are typically limited feature versions of the retail     
version of a game, are bundled with hardware or peripheral devices and are      
sold by the OEM so that the purchaser of the hardware device obtains the        
software on a discounted basis as part of the hardware purchase. In addition,   
Interplay OEM has established a development capability in order to create       
modified versions of titles which support its customers' technologies.          
Although it is customary for OEM customers to pay the Company a lower per unit  
price on sales through OEM bundling arrangements, such arrangements typically   
involve a high unit volume commitment to the Company. OEM net revenues          
generally are incremental net revenues and do not have significant additional   
product development or sales and marketing costs, and accordingly have a more   
significant impact on the Company's operating results. There can be no          
assurance, however, that OEM sales will continue to generate consistent         
profits for the Company, and a decrease in OEM sales or margins could have a    
material adverse effect on the Company's business, operating results and        
financial condition. In addition to distributing the Company's titles,          
Interplay OEM serves as the exclusive OEM distributor for a number of           
interactive entertainment software publishers, including LucasArts              
Entertainment Company, Microprose (Spectrum Holobyte) and Sales Curve           
Interactive Ltd. Interplay OEM's hardware customers include many of the         
industry's largest computer and peripheral manufacturers including IBM,         
Hewlett-Packard, Compaq, Apple Computer, NEC, Diamond Multimedia, Packard       
Bell, Creative Labs and Rockwell. The Company currently devotes seven           
employees to modifying existing Company products into suitable OEM products.    

On-Line Services. The Company has entered into an agreement with Games On-  
Line, Inc., doing business as Engage Games Online ("Engage"), an Internet/on-   
line games and entertainment company, pursuant to which                         

41  

424B4
44th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 44th
Engage modifies the Company's games to enable them to be offered as multi-      
player games on on-line services, such as America Online, and through a number  
of Internet access providers. Engage performs certain services which include    
modifying the Company's games, managing the on-line game site and chat areas    
and organizing activities and tournaments to promote the games. The agreement   
obligates Engage to pay the Company royalty fees based upon the revenue         
generated by the Company's games through subscriber fees, player use fees,      
advertising revenue, bounty fees and transaction fees. See "Certain             
Transactions--Engage Transactions."                                             

The Company's North American and international distribution channels are    
characterized by continuous change, including consolidation, financial          
difficulties of certain distributors and retailers, and the emergence of new    
distributors and new retailers such as warehouse chains, mass merchants and     
computer superstores. The Company is exposed to the risk of product returns     
and markdown allowances with respect to its distributors and retailers. The     
Company allows distributors and retailers to return defective, shelf-worn and   
damaged products in accordance with negotiated terms. The Company considers     
return requests on a case-by-case basis, taking into consideration factors      
such as the products involved, the customer's historical sales volume and the   
customer's credit status. The Company also offers a 90-day limited warranty to  
its end users that its products will be free from manufacturing defects. In     
addition, the Company provides markdown allowances, which consist of credits    
given to customers to lower the sales price of certain products in an effort    
to increase sales to its customers to help manage its customers' inventory      
levels in the distribution channel. Although the Company maintains a reserve    
for returns and markdown allowances, and although the Company manages its       
returns and markdown allowances through its authorization procedure, the        
Company could be forced to accept substantial product returns and provide       
markdown allowances to maintain its relationships with retailers and its        
access to distribution channels. The Company's reserve for returns and          
doubtful accounts was $14.5 million, $14.9 million and $9.1 million for the     
eight months ended December 31, 1997 and the Company's former fiscal years      
ended April 30, 1997 and 1996, respectively. Product returns and markdown       
allowances that exceed the Company's reserves could have a material adverse     
effect on the Company's business, operating results and financial condition.    
See "Risk Factors--Dependence on Distribution Channels; Risk of Customer        
Business Failures; Product Returns."                                            

MARKETING                                                                       

The Company's marketing department is organized into five product groups,   
mirroring the Company's five product development groups, to promote a focused   
marketing strategy and brand image for each product group. In addition, the     
marketing department has three functional groups (public relations, creative    
services and direct sales) that support the five product groups.                

The Company's marketing department develops and implements marketing        
programs and campaigns for each of the Company's titles and product groups.     
The Company's 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. The Company   
sends direct and electronic mail promotional materials to its large database    
of gamers. The Company has also selectively used radio advertisements in        
connection with the introduction of certain of its products. The Company        
budgets a portion of each product's sales for cooperative advertising and       
market development funds with retailers. Every title and brand is launched      
with a multi-tiered marketing campaign that is developed on an individual       
basis to promote product awareness and customer pre-orders. The Company         
anticipates that over time, as the market for its products matures and          
competition becomes more intense, it will become necessary to devote more       
resources to marketing its products and the marketing costs for its products    
will increase accordingly.                                                      

The Company uses on-line marketing primarily through the maintenance of     
several web sites. These sites provide news and information of interest to its  
customers through free demonstration versions, contests, games, tournaments     
and promotions. Also, to generate interest in new product introductions, the    
Company provides free demonstration versions of upcoming titles both through    
magazine cover mounts and through game samples that consumers can download      
from the Company's web site.                                                    

42  

424B4
45th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 45th
COMPETITION                                                                     

The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new hardware systems and       
software products. The Company's competitors vary in size from small companies  
to very large corporations with significantly greater financial, marketing and  
product development resources than those of the Company. Due to these greater   
resources, certain of the Company's 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 the   
Company. The Company believes 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.                       

The Company competes primarily with other publishers of PC and video game   
console interactive entertainment software. Significant competitors include     
Electronic Arts, GT Interactive Software Corp., Cendant Corporation,            
Activision, Inc., Microsoft Corporation, LucasArts Entertainment Company,       
Midway Games Inc., Acclaim Entertainment Inc., Microprose (Spectrum Holobyte),  
Virgin Interactive Entertainment, Inc. and Hasbro Inc. In addition, integrated  
video game console hardware/software companies such as Sony Computer            
Entertainment, Nintendo and Sega compete directly with the Company in the       
development of software titles for their respective platforms. Large            
diversified entertainment companies, such as The Walt Disney Company, many of   
which own substantial libraries of available content and have substantially     
greater financial resources than the Company, may decide to compete directly    
with the Company or to enter into exclusive relationships with competitors of   
the Company. The Company also believes that the overall growth in the use of    
the Internet and on-line services by consumers may pose a competitive threat    
if customers and potential customers spend less of their available home PC      
time using interactive entertainment software and more on the Internet and on-  
line services.                                                                  

Retailers of the Company's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among         
consumer software producers, and in particular interactive entertainment        
software products, for high quality retail shelf space and promotional support  
from retailers. To the extent that the number of consumer software products     
and computer platforms increases, competition for shelf space may intensify     
and may require the Company to increase its marketing expenditures. Due to      
increased competition for limited shelf space, retailers and distributors are   
in an increasingly better position to negotiate favorable terms of sale,        
including price discounts, price protection, marketing and display fees and     
product return policies. The Company's products constitute a relatively small   
percentage of any retailer's sales volume, and there can be no assurance that   
retailers will continue to purchase the Company's products or to provide the    
Company's products with adequate levels of shelf space and promotional          
support, and a prolonged failure in this regard may have a material adverse     
effect on the Company's business, operating results and financial condition.    
See "Risk Factors--Industry Competition; Competition for Shelf Space."          

MANUFACTURING                                                                   

The Company's PC-based products consist primarily of CD-ROMs, user manuals  
and packaging. Substantially all of the Company's CD-ROM duplication is         
performed by unaffiliated third parties. Printing of the user manual and        
packaging, manufacturing of related materials and assembly of completed         
packages are performed to the Company's specifications by unaffiliated third    
parties. To date, the Company has not experienced any material difficulties or  
delays in the manufacture and assembly of its CD-ROM-based products, and has    
not experienced significant returns due to manufacturing defects.               

Sony Computer Entertainment and Nintendo manufacture the Company's products 
that are compatible with their respective video game consoles, as well as the   
manuals and packaging for such products, and ship finished products to the      
Company for distribution. PlayStation products consist of CD-ROMs and are       
typically delivered by Sony Computer Entertainment within a relatively short    
lead time. Manufacturers of Nintendo and other video game cartridges typically  
deliver software to the Company within 45 to 60 days after receipt of a         
purchase order. If the Company experiences unanticipated delays in the          
delivery of manufactured software products, its net sales and operating         
results could be materially adversely affected. Furthermore, the long           
manufacturing cycle                                                             

43  

424B4
46th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 46th
associated with video game cartridges requires that the Company forecast        
retailer and consumer demands for its manufactured titles further in advance    
of shipment than for PC-based products or PlayStation CD-ROMs. See "Risk        
Factors--Dependence on Licenses from and Manufacturing by Hardware Companies."  

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS                                    

The Company holds copyrights on its products, product literature and        
advertising and other materials, and holds trademark rights in the Company's    
name, the Interplay logo, its "By Gamers. For Gamers.(TM)" slogan and certain   
of its product names and publishing labels. The Company does not currently      
hold any patents. The Company has licensed certain products to third parties    
for distribution in particular geographic markets or for particular platforms,  
and receives royalties on such licenses. The Company also outsources some of    
its product development to third party developers, contractually retaining all  
intellectual property rights related to such projects. The Company also         
licenses certain products developed by third parties and pays royalties on      
such products. See "--Product Development."                                     

The Company regards its software as proprietary and relies primarily on a   
combination of copyright, trademark and trade secret laws, employee and third   
party nondisclosure agreements and other methods to protect its proprietary     
rights. The Company owns or licenses various copyrights and trademarks. While   
the Company provides "shrinkwrap" license agreements or limitations on use      
with its software, the enforceability of such agreements or limitations is      
uncertain. The Company is aware that unauthorized copying occurs within the     
computer software industry, and if a significantly greater amount of            
unauthorized copying of the Company's interactive entertainment software        
products were to occur, the Company's operating results could be materially     
adversely affected. While the Company does not copy protect its products, it    
does not provide source code to third parties, unless they have signed          
nondisclosure agreements with respect thereto.                                  

The Company relies on existing copyright laws to prevent unauthorized       
distribution of its software. Existing copyright laws afford only limited       
protection. Policing unauthorized use of the Company's products is difficult,   
and software piracy can be expected to be a persistent problem, especially in   
certain international markets. Further, the laws of certain countries in which  
the Company's products are or may be distributed either do not protect the      
Company's products and intellectual property rights to the same extent as the   
laws of the U.S. or are weakly enforced. Legal protection of the Company's      
rights may be ineffective in such countries, and as the Company leverages its   
software products using emerging technologies, such as the Internet and on-     
line services, the ability of the Company to protect its 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 adequate protection to    
the Company's products 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 the Company makes reasonable efforts   
to ensure that its 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, the Company has received communication  
from third parties asserting that features or content of certain of its         
products may infringe upon the intellectual property rights of such parties.    
There can be no assurance that existing or future infringement claims against   
the Company will not result in costly litigation or require the Company to      
license the intellectual property rights of third parties, either of which      
could have a material adverse effect on the Company's business, operating       
results and financial condition. See "Risk Factors--Protection of Proprietary   
Rights."                                                                        

EMPLOYEES                                                                       

As of March 31, 1998, the Company had 501 full time employees, including 296
in product development, 120 in sales and marketing and 85 in finance, general   
and administrative. This includes 33 full time employees                        

44  

424B4
47th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 47th
of Shiny, 20 full time employees of Interplay OEM and 47 full time employees    
of Interplay Europe. The Company also retains independent contractors to        
provide certain services, primarily in connection with its product development  
activities. The Company and its full time employees are not subject to any      
collective bargaining agreements and the Company believes that its relations    
with its employees are good.                                                    

From time to time the Company has retained actors and/or "voice over" talent
to perform in certain of the Company's products, and the Company expects to     
continue this practice in the future. These performers are typically members    
of the Screen Actors Guild ("SAG") or other performers' guilds, which guilds    
have established collective bargaining agreements governing their members'      
participation in interactive media projects. The Company or an affiliated       
entity may be required to become subject to the jurisdiction of SAG's           
collective bargaining agreement, or some other applicable performers guild,     
with respect to the Company's development projects in the future in order to    
engage the services of performers in the development of the Company's           
products.                                                                       

FACILITIES                                                                      

The Company's headquarters are located in Irvine, California, where the     
Company leases approximately 101,325 square feet of office space. This lease    
expires in June 2006 and provides the Company with one five year option to      
extend the term of the lease and expansion rights, on an "as available basis,"  
to approximately double the size of the office space. Interplay Europe leases   
approximately 10,000 square feet of space in Buckinghamshire, England. This     
lease expires, at Interplay Europe's option, either in November 2000 or in      
November 2005. Shiny leases approximately 4,100 square feet of space in Laguna  
Beach, California, which lease expires in October 1998 and which provides       
Shiny with an option to extend the term for an additional five years. The       
Company believes that its facilities are adequate for its current needs and     
that suitable additional or substitute space will be available in the future    
to accommodate expansion of the Company's operations.                           

LEGAL PROCEEDINGS                                                               

From time to time, the Company is involved in litigation relating to claims 
arising out of its operations in the normal course of business. As of the date  
of this Prospectus, the Company is not a party to any legal proceedings, the    
final outcome of which, in management's opinion, individually or in aggregate,  
would have a material adverse effect on the Company's business, operating       
results or financial condition.                                                 

45  

424B4
48th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 48th
MANAGEMENT  

DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES                 

The following table sets forth certain information regarding the Company's  
directors and executive officers and certain significant employees, and their   
ages as of March 31, 1998:                                                      

                                                        [Enlarge/Download Table]

NAME                     AGE POSITION WITH THE COMPANY                                     
----                     --- -------------------------                                     
                                                                                           
Brian Fargo.............  35 Chairman of the Board of Directors and Chief Executive Officer
Christopher J. Kilpa-                                                                      
 trick..................  41 President and Director                                        
Richard S.F. Lehrberg...  50 Executive Vice President and Director                         
James C. Wilson.........  48 Chief Financial Officer                                       
Steven "Chuck" Camps....  38 Chief Operating Officer and Assistant Secretary               
Phillip G. Adam.........  44 Vice President of Business Development                        
Kim Motika..............  37 Vice President of Sales                                       
Patricia J. Wright......  37 Vice President of Development                                 
Keven F. Baxter.........  38 Vice President of Corporate Affairs and General Counsel       
Peter A. Bilotta........  43 President of Interplay Productions Limited                    
Jill S. Goldworn........  34 President of Interplay OEM, Inc.                              
David Perry.............  30 President of Shiny Entertainment, Inc.                        
David R. Dukes(1)(2)....  54 Director                                                      
Charles S. Paul(2)......  48 Director                                                      
Mark Pinkerton(1).......  37 Director                                                      
Paul A. Rioux(1)(2).....  52 Director                                                      

--------                                                                        
(1) Member of the Audit Committee of the Board of Directors.                    
(2) Member of the Compensation Committee of the Board of Directors.             

Brian Fargo, Chairman of the Company's Board of Directors, founded the      
Company in 1983 and has served as the Company's chief executive officer since   
that time. Prior to June 1995, Mr. Fargo also served as the Company's           
President. Mr. Fargo also currently serves as a member of the Board of          
Directors of the Interactive Digital Software Association.                      

Christopher J. Kilpatrick has served as President of the Company since June 
1995, and served as Vice President and General Counsel of the Company from May  
1994 to May 1995. From June 1990 to May 1994 Mr. Kilpatrick was a shareholder   
and member of Stradling Yocca Carlson & Rauth, counsel to the Company, and was  
a shareholder of such firm until September 1997. Mr. Kilpatrick currently       
serves as a director of several privately-held companies, including Masimo      
Corporation, a manufacturer of medical devices.                                 

Richard S.F. Lehrberg joined the Company as Vice President in November 1991 
and has served as Executive Vice President of the Company since October 1994.   
Mr. Lehrberg served as a director of the Company since April 1989. Prior to     
joining the Company, from December 1988 to November 1991, Mr. Lehrberg served   
as President of Lehrberg Associates, an international licensing company. From   
August 1982 to November 1988, Mr. Lehrberg was employed by Activision, Inc.,    
an interactive entertainment software publisher, in various positions,          
including Vice President and General Manager of the Entertainment Division.     

James C. Wilson joined the Company in August 1997 and has served as Chief   
Financial Officer of the Company since October 1997. Prior to joining the       
Company, from January 1996 to August 1997, Mr. Wilson served as Chief           
Financial Officer, Treasurer and Vice President of Administration of Cloud 9    
Interactive Inc., a publisher and developer of educational and entertainment    
multi-media products. Between October 1993 and December 1995, Mr. Wilson        
served as Vice President--Finance and Chief Financial Officer of Applause       
Enterprises Inc., a worldwide distributor of gifts and toys. Between February   
1992 and October 1993, Mr. Wilson served as a Finance Executive for Sega of     
America, a video game system manufacturer.                                      

46  

424B4
49th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 49th
Steven "Chuck" Camps joined the Company in February 1993 and has served as  
Chief Operating Officer of the Company since June 1995 and as Assistant         
Secretary since October 1994. Mr. Camps served as Chief Financial Officer of    
the Company from February 1993 through October 1997. Mr. Camps served as a      
consultant to the Company from October 1992 to February 1993. Prior to          
consulting for the Company, Mr. Camps served as Chief Financial Officer of      
Pratt Industries (USA), Inc., a manufacturing and finance company. Prior to     
July 1987, Mr. Camps served as a Manager at Arthur Andersen & Co., a worldwide  
accounting firm.                                                                

Phillip G. Adam joined the Company as Vice President of Sales and Marketing 
in December 1990 and has served as Vice President of Business Development of    
the Company since October 1994. Prior to joining the Company, from January      
1984 to December 1990, Mr. Adam served as President of Spectrum Holobyte, an    
interactive entertainment software publisher, where he was a co-founder. From   
May 1990 to May 1996, Mr. Adam served as the Chairman or a member of the Board  
of Directors of the Software Publishers Association and, during part of such    
period, as President of the Software Publishers Association. From March 1997    
to March 1998 Mr. Adam served as the Chairman of the Public Policy Committee    
of the Interactive Digital Software Association.                                

Kim Motika joined the Company as National Sales Manager in November 1991,   
and was promoted to Vice President of Sales of the Company in October 1994.     
Prior to joining the Company, from May 1989 to October 1991, Ms. Motika served  
as a Sales Manager for Ashton-Tate, a software publisher, and served as         
Western Regional Vice President of Ingram Micro, a worldwide distributor of     
information technology products, from 1983 to 1988.                             

Patricia J. Wright joined the Company as Vice President of Marketing of the 
Company in October 1995 and has served as Vice President of Development since   
June 1997. Prior to joining the Company, from April 1993 to October 1995, Ms.   
Wright served as Vice President of Marketing for Activision, Inc. and as        
Director of Marketing for the Barbie Products division of Mattel, Inc., a toy   
manufacturer, from January 1990 to April 1993.                                  

Keven F. Baxter joined the Company as Corporate Counsel in June 1995, was   
promoted to General Counsel in June 1996 and has served as Vice President of    
Corporate Affairs of the Company since October 1997. Prior to joining the       
Company, from 1988 to 1994, Mr. Baxter practiced corporate law in the Business  
and Technology Group of the law firm Brobeck, Phleger & Harrison.               

Peter A. Bilotta has served as President of Interplay Europe since August   
1994. Prior to joining the Company, from January 1992 to July 1994, Mr.         
Bilotta served as Managing Director--Distributed Territories of Acclaim         
Entertainment Ltd., an entertainment software publisher. Mr. Bilotta also       
served as Managing Director and Chief Executive Officer of Arena Entertainment  
Inc., an interactive entertainment software publisher, from March 1991 to       
December 1991. Mr. Bilotta serves as a director of Interactive Media, Ltd., a   
privately-held interactive entertainment software developer, and Bizarre Love   
Triangle, a privately-held interactive entertainment software distributor.      

Jill S. Goldworn has served as President of Interplay OEM, Inc., the        
Company's OEM subsidiary, since December 1996. Prior to that, Ms. Goldworn      
served as Vice President, OEM and Merchandising of the Company since June       
1995. Prior to that, Ms. Goldworn served as Director of the OEM division of     
the Company from September 1992 to June 1995. Prior to joining the Company,     
from November 1991 to August 1992, Ms. Goldworn served as Director of Contract  
Sales of PC Globe, Inc., a publisher of desktop geography software.             

David Perry has served as President of Shiny Entertainment, Inc. since      
October 1993. Mr. Perry founded Shiny, developer of Earthworm Jim, in October   
1993. Prior to founding Shiny, from January 1991 to September 1993, Mr. Perry   
served as a consulting engineer for Virgin Interactive Entertainment Inc., an   
interactive entertainment software publisher.                                   

David R. Dukes was elected to serve as a director of the Company in March   
1998. From September 1989 until his retirement in May 1998, Mr. Dukes was       
employed by Ingram Micro in various executive capacities,                       

47  

424B4
50th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 50th
including Acting President of Ingram Micro Asia-Pacific from May 1997 to May    
1998, Chief Executive Officer of Ingram Alliance from January 1994 to May       
1998, President of Ingram Micro from September 1989 to December 1991 and Chief  
Operating Officer of Ingram Micro from September 1989 to December 1993.         
Mr. Dukes currently serves as Vice Chairman of the Board of Directors of        
Ingram Micro.                                                                   

Charles S. Paul has served as a director of the Company since October 1994. 
Mr. Paul served as a member of the Compensation Committee from October 1994 to  
December 1995. Since March 1995, Mr. Paul has been employed by Sega GameWorks,  
a location-based entertainment company, and has served as the Chairman and      
Chief Executive Officer of Sega GameWorks L.L.C., a location-based              
entertainment software company, since March 1996. Mr. Paul previously served    
as Executive Vice President of Universal from December 1986 to March 1995.      
Mr. Paul is a director of National Golf Properties, Inc. and Entertainment      
Properties Trust, both real estate investment trusts.                           

Mark Pinkerton has served as a director of the Company since March 1998. Mr.
Pinkerton has served as a Senior Manager of Corporate Development and           
Strategic Planning for Universal since July 1996. From February 1995 to June    
1996, Mr. Pinkerton was an independent consultant. Mr. Pinkerton was a Vice     
President in the Mergers and Acquisitions Department of the Investment Banking  
Division of Lehman Brothers Inc., an investment banking and stock brokerage     
firm, from August 1991 to January 1995.                                         

Paul A. Rioux has served as a director of the Company since July 1996. Mr.  
Rioux has served as President of Universal Studios New Media, Inc., a           
subsidiary of Universal, since April 1996. Previously, from November 1989 to    
April 1996, Mr. Rioux served as Executive Vice President of Sega of America.    

All members of the Board of Directors hold office until the next annual     
meeting of stockholders or until their successors are elected and qualified.    
The Bylaws do not permit removal of directors except for cause, unless          
approved by a two-thirds vote of the Company's stockholders. Officers serve at  
the discretion of the Board of Directors. Messrs. Pinkerton and Rioux were      
appointed as directors by Universal pursuant to its rights under the            
Shareholders' Agreement. See "Certain Transactions--Transactions With Fargo     
and Universal."                                                                 

BOARD COMMITTEES                                                                

The Company has two standing committees of the Board of Directors: an Audit 
Committee and a Compensation Committee. The Audit Committee reviews the         
functions of the Company's management and independent auditors pertaining to    
the Company's financial statements and performs such other related duties and   
functions as are deemed appropriate by the Audit Committee and the Board of     
Directors. The Compensation Committee determines officer and director           
compensation and administers the Company's benefit plans.                       

DIRECTOR COMPENSATION                                                           

The Company's directors currently do not receive cash or equity compensation
for attendance at Board of Directors or committee meetings. However, in the     
future, non-employee directors may receive compensation for attendance and may  
be reimbursed for certain expenses in connection with attendance at board and   
committee meetings.                                                             

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.                    

The Compensation Committee currently consists of Messrs. Dukes, Paul and    
Rioux. No member of the Compensation Committee or executive officer of the      
Company has a relationship that would constitute an interlocking relationship   
with executive officers and directors of another entity. During 1997,           
decisions regarding executive compensation were made by the Compensation        
Committee of the Board of Directors, which then consisted of Messrs. Fargo,     
Kilpatrick and Rioux. Messrs. Fargo and Kilpatrick are directors, officers and  
employees of the Company. Mr. Rioux is an officer of Universal Studios New      
Media, Inc., a subsidiary of Universal, which has entered into various          
transactions with the Company. See "Certain Transactions--Transactions with     
Fargo and Universal."                                                           

48  

424B4
51st Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 51st
EXECUTIVE COMPENSATION                                                          

The following table sets forth certain information concerning compensation  
earned during the twelve months ended December 31, 1997 by the Company's Chief  
Executive Officer, each of the two other most highly compensated executive      
officers of the Company whose total salary and bonus during such year exceeded  
$100,000 (collectively, the "Named Executive Officers") and a selected          
executive officer.                                                              

SUMMARY COMPENSATION TABLE  

                                                                [Download Table]

                                                                 LONG-TERM      
                                     ANNUAL COMPENSATION    COMPENSATION AWARDS 
                                   ----------------------- ---------------------
                                                                SECURITIES      
NAME AND PRINCIPAL POSITION         SALARY  BONUS OTHER(1) UNDERLYING OPTIONS(#)
---------------------------        -------- ----- -------- ---------------------
                                                                                
Brian Fargo....................... $237,500 $ --   $  --             --         
 Chief Executive Officer                                                        
Christopher J. Kilpatrick.........  200,000   --    4,750         20,000        
 President                                                                      
Richard S.F. Lehrberg.............  200,000   --    4,792            --         
 Executive Vice President                                                       
James C. Wilson...................   (2)     (2)    (2)           50,000        
 Chief Financial Officer                                                        

--------                                                                        
(1) Consists of matching payments made under the Company's 401(k) plan. See     
"Employee Benefit Plans--401(k) Plan."                                  
(2) Mr. Wilson joined the Company in August 1997 at an annual base salary of    
$135,000. Although not a Named Executive Officer for the year ended     
December 31, 1997, the Company anticipates that he will so qualify in   
future years.                                                           

OPTION MATTERS                                                                  

Option Grants. The following table sets forth certain information concerning
stock options granted to the Named Executive Officers and a selected executive  
officer during the twelve months ended December 31, 1997.                       

STOCK OPTION GRANTS DURING TWELVE MONTHS ENDED DECEMBER 31, 1997  

                                                        [Enlarge/Download Table]

                                                                          POTENTIAL REALIZABLE 
                                                                            VALUE AT ASSUMED   
                                                                             ANNUAL RATES OF   
                         NUMBER OF  PERCENT OF TOTAL                           STOCK PRICE     
                         SECURITIES     OPTIONS                             APPRECIATION FOR   
                         UNDERLYING    GRANTED TO    EXERCISE              OPTION TERM ($)(4)  
                          OPTIONS     EMPLOYEES IN     PRICE   EXPIRATION ---------------------
NAME                     GRANTED(1)   FISCAL YEAR    ($/SH)(2)  DATE(3)       5%        10%    
----                     ---------- ---------------- --------- ---------- ---------- ----------
                                                                                               
Christopher J.                                                                                 
 Kilpatrick(5)..........   20,000          5.7%        $8.00    07/17/07    $100,623   $254,999
James C. Wilson.........   50,000         14.3          8.00    07/17/07     251,558    637,497

--------                                                                        
(1) Represents options granted pursuant to the Company's 1997 Plan. All such    
options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant. All such options vest at the  
rate of 20% per year.                                                   
(2) Subsequent to December 31, 1997, the Compensation Committee repriced all    
  options granted at an exercise price of greater than $8.00 which were held
by current employees of the Company or its wholly owned subsidiaries,   
including the options listed above, to an exercise price of $8.00.      
(3) Options granted to such individuals pursuant to the 1997 Plan expire 10     
years from the date of grant.                                           

49  

424B4
52nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 52nd
(4) Represents amounts that may be realized upon exercise of the options        
  immediately prior to expiration of their terms assuming appreciation of 5%
 and 10% over the option term. The 5% and 10% numbers are calculated based
on rules required by the Securities and Exchange Commission (the "      
Commission") and do not reflect the Company's estimate of future stock  
price growth. The actual value realized may be greater or less than the 
potential realizable value set forth.                                   
(5) Pursuant to the terms of his employment contract, Mr. Kilpatrick's options  
 granted prior to December 31, 1997 will be fully vested as of the closing
of the Offering. See "Management--Employment Agreements."               

Recent Option Grants. In February 1998, the Company granted options to      
purchase an aggregate of 240,100 shares of Common Stock to certain officers     
and other employees of the Company, including Brian Fargo (150,000 shares) and  
Christopher J. Kilpatrick (20,000 shares). The options granted to Messrs.       
Fargo and Kilpatrick have an exercise price of $8.00 per share and vest over a  
period of five years from the date of grant.                                    

Option Exercises and Year-End Option Values. Shown below is information     
relating to the exercise of stock options during the twelve months ended        
December 31, 1997 for each of the Named Executive Officers and a selected       
executive officer, and the year-end value of unexercised options.               

AGGREGATE OPTION EXERCISES AND 1997 YEAR-END OPTION VALUES  

                                                        [Enlarge/Download Table]

                                                        NUMBER OF SECURITIES      VALUE OF      
                                                             UNDERLYING      UNEXERCISED IN-THE-
                                                        UNEXERCISED OPTIONS   MONEY OPTIONS AT  
                                                            AT YEAR-END          YEAR-END(1)    
                         SHARES ACQUIRED                   (EXERCISABLE/        (EXERCISABLE/   
NAME                       ON EXERCISE   VALUE REALIZED    UNEXERCISABLE)      UNEXERCISABLE)   
----                     --------------- -------------- -------------------- -------------------
                                                                                                
Brian Fargo.............       --             --                0/      0                   --  
Richard S.F. Lehrberg...       --             --          572,874/      0    $3,063,157/ $    0 
Christopher J.                                                                                  
 Kilpatrick.............       --             --          251,528/      0       496,299/      0 
James C. Wilson.........       --             --                0/ 50,000             0/      0 

--------                                                                        
(1) Represents an amount equal to the difference between the assumed initial    
public offering price of $5.50 per share and the option exercise price, 
multiplied by the number of unexercised in-the-money options.           

EMPLOYEE BENEFIT PLANS                                                          

Stock Incentive Plans. The Company has granted options under three stock    
option plans. The Interplay Productions Incentive Stock Option, Nonqualified    
Stock Option and Restricted Stock Purchase Plan--1991 (the "1991 Plan") was     
adopted by the Board of Directors and stockholders of the Company in March      
1992, the Interplay Productions 1994 Incentive Stock Option and Nonqualified    
Stock Option Plan (the "1994 Plan") was adopted by the Board of Directors and   
stockholders of the Company in March 1994 and the Interplay Productions 1997    
Stock Incentive Plan (the "1997 Plan" and, together with the 1991 Plan and the  
1994 Plan, the "Plans") was adopted by the Board of Directors and stockholders  
of the Company in January 1997. The Plans have been amended from time to time.  
The 1991 Plan and the 1994 Plan were terminated by the Board of Directors for   
purposes of future grants in March 1998.                                        

The Company believes that its equity compensation program is an important   
element of the overall compensation package which it can offer to attract and   
retain employees and that it represents a competitive advantage over certain    
competitors. The Company anticipates that it will be necessary in the future    
to grant options to attract key personnel, to retain its existing employees     
and, where appropriate, as part of strategic acquisition opportunities. See     
"Risk Factors--Dilution."                                                       

The Plans are administered by the Board of Directors, unless the Board of   
Directors delegates such authority to a committee composed of members of the    
Board of Directors (hereinafter referred to collectively as the "Board").       
Subject to certain limitations set forth in the Plans, the Board has the        
authority (i) to select the persons to whom rights under the Plans (the         
"Awards") will be granted, (ii) to determine whether an Award will be an        

50  

424B4
53rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 53rd
incentive stock option within the meaning of Section 422 of the Internal        
Revenue Code (an "ISO"), an option that does not qualify as an ISO (a           
"Nonqualified Stock Option," and together with ISOs, the "Options"), a right    
to purchase restricted stock (a "Right to Purchase") under either the 1991      
Plan or the 1997 Plan, or a combination of the foregoing, and (iii) to specify  
the type of consideration to be paid to the Company upon the exercise of an     
Award. All employees, directors, consultants, advisors or other independent     
contractors of the Company or of any present or future parent or subsidiary     
corporation of the Company are eligible to participate in the Plans. Any        
eligible person may be granted a Nonqualified Stock Option or a Right to        
Purchase under either the 1991 Plan or the 1997 Plan, but only employees may    
be granted ISOs under the Plans.                                                

As of March 31, 1998, an aggregate of 898,425, 639,984 and 2,219,891 shares 
of the Company's Common Stock were authorized pursuant to the 1991 Plan, 1994   
Plan and the 1997 Plan, respectively, of which, 302,198, 638,784, and 539,350   
shares, respectively, were subject to currently outstanding Options. The 1991   
Plan and 1994 Plan were terminated for purposes of future grants in March       
1998. As of March 31, 1998, an aggregate of 1,680,541 shares of Common Stock    
were available for grant under the 1997 Plan. No shares of the Company's        
Common Stock have been issued pursuant to Rights to Purchase under any of the   
Plans. In addition, 572,874 shares are subject to non-statutory options         
granted outside the Company's stock option plans. To the extent any             
outstanding Award expires or terminates prior to exercise in full or if shares  
issued upon exercise of an Award are repurchased by the Company, the            
unexercised portion of such Award or the repurchased shares are returned to     
the pool of shares reserved under the 1997 Plan and will thereafter be          
available for grant or offer under the 1997 Plan.                               

The exercise price per share of an ISO under the 1997 Plan must equal at    
least the fair market value of a share of the Company's Common Stock on the     
date of grant. However, the exercise price per share of any ISO granted to a    
person who at the time of grant owns stock possessing more than ten percent of  
the total combined voting power of all classes of stock of the Company or any   
parent or subsidiary corporation of the Company must be at least 110% of the    
fair market value of a share of the Company's Common Stock on the date of       
grant. The exercise price per share of Nonqualified Stock Options granted       
under the 1997 Plan must be at least 85% of the fair market value of a share    
of the Company's Common Stock on the date of grant. In no event shall any       
person receive options or Rights to Purchase under the 1997 Plan in any one     
calendar year pursuant to which the aggregate number of shares of Common Stock  
that may be acquired thereunder exceeds 500,000 shares.                         

Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan    
(the "Purchase Plan"), covering an aggregate of 200,000 shares of Common        
Stock, was adopted by the Board of Directors and approved by the Company's      
stockholders in March 1998. The Purchase Plan, which is intended to qualify as  
an "employee stock purchase plan" under Section 423 of the Internal Revenue     
Code of 1986, as amended (the "Code"), will be implemented by twelve-month      
offerings with purchases occurring at six-month intervals commencing on the     
date of this Prospectus. The Purchase Plan will be administered by the Board    
of Directors. The Purchase Plan permits eligible employees to purchase Common   
Stock through payroll deductions, which may not exceed 15% of an employee's     
compensation. The price of stock purchased under the Purchase Plan will be 85%  
of the lower of the fair market value of the Common Stock at the beginning of   
the offering period or on the applicable purchase date.                         

401(k) Plan. The Company maintains a defined contribution retirement plan   
with a cash or deferred arrangement as described in Section 401(k) of the Code  
(the "401(k) Plan"). The 401(k) Plan is intended to be qualified under Section  
401(a) of the Code. All employees of the Company are eligible to participate    
in the 401(k) Plan on the first day of the plan year or the first day of the    
seventh month of the plan year, whichever first occurs, following completion    
of one year of service with the Company. The 401(k) Plan provides that each     
participant may make elective contributions up to 15% of his or her             
compensation, subject to statutory limits. The Company also provides a 50%      
matching contribution, up to six percent of an employee's compensation,         
subject to statutory limits. Under the terms of the 401(k) Plan, allocation of  
the matching contribution is integrated with Social Security, in accordance     
with applicable non-discrimination rules under the Code.                        

51  

424B4
54th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 54th
EMPLOYMENT AGREEMENTS                                                           

The Company has entered into an employment agreement with Brian Fargo for a 
term of five years commencing March 1994, pursuant to which he currently        
serves as Chairman of the Board of Directors and Chief Executive Officer of     
the Company. The employment agreement provides for a base salary of $250,000    
per year, with such annual raises as may be approved by the Board of            
Directors, plus annual bonuses at the discretion of the Board of Directors. In  
the event that Mr. Fargo is terminated without cause or resigns for good        
reason as set forth in the agreement, the Company is required to pay Mr. Fargo  
150% of his base salary and 75% of his imputed annual bonuses for the           
remainder of the term of the agreement, which payments are contingent upon Mr.  
Fargo's non-competition with the Company, as defined in the agreement. Mr.      
Fargo is also entitled to participate in the incentive compensation and other   
employee benefit plans established by the Company from time to time.            

The Company has entered into an employment agreement with Christopher J.    
Kilpatrick for a term of five years commencing May 1994, pursuant to which he   
currently serves as President of the Company. The employment agreement          
provides for a base salary of $157,200 per year, with annual raises determined  
by the Board of Directors of not less than ten percent per year, plus annual    
bonuses at the discretion of the Board of Directors. In the event Mr.           
Kilpatrick is terminated by the Company at any time for any reason, or in the   
event Mr. Kilpatrick terminates his employment on or before November 14, 1998   
for good reason as defined in the agreement, or after November 14, 1998 for     
any reason, the Company is required to pay Mr. Kilpatrick 150% of his base      
salary and 75% of his imputed annual bonuses for 12 months following such       
termination, which payments are contingent upon Mr. Kilpatrick's non-           
competition with the Company, as set forth in the agreement. In addition, in    
the event Mr. Kilpatrick is terminated without cause or resigns for good        
reason as defined in the agreement, all stock options held by Mr. Kilpatrick    
will vest to the extent they would have vested through the end of the term of   
the agreement. In June 1995, following a change in control of the Company as    
defined in the agreement, all of the stock options then held by Mr. Kilpatrick  
automatically vested. Upon the closing of the Offering, the options granted     
Mr. Kilpatrick in 1997 will automatically vest. Mr. Kilpatrick is also          
entitled to participate in the incentive compensation and other employee        
benefit plans established by the Company from time to time.                     

The Company has entered into an employment agreement with Richard S.F.      
Lehrberg for a term of five years commencing March 1994, pursuant to which he   
currently serves as Executive Vice President of the Company. The employment     
agreement provides for a base salary of $200,000 per year, with annual raises   
as approved by the Board of Directors. Mr. Lehrberg is also entitled to an      
annual bonus based on the achievement of goals and objectives agreed upon by    
the Board of Directors and Mr. Lehrberg, up to a maximum of $134,000 per year.  
In 1994 and 1995, Mr. Lehrberg agreed to defer the receipt of bonuses in the    
amounts of $120,000 and $34,000, respectively, payable under the agreement,     
and such accrued bonuses will be paid following the closing of the Offering.    
In the event Mr. Lehrberg is terminated without cause or resigns for good       
reason as set forth in the agreement, the Company is required to pay Mr.        
Lehrberg 150% of his base salary and 75% of his imputed annual bonuses for the  
remainder of the term of the agreement, which payments are contingent upon      
Mr. Lehrberg's non-competition with the Company, as defined in the agreement.   
Mr. Lehrberg is also entitled to participate in the incentive compensation and  
other employee plans established by the Company from time to time.              

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS                             

The Company's Bylaws provide that the Company will indemnify its directors  
and officers and may indemnify its employees and other agents to the fullest    
extent permitted by the General Corporation Law of the State of Delaware (the   
"DGCL"). The Company believes that indemnification under its Bylaws covers at   
least negligence and gross negligence by indemnified parties, and permits the   
Company to advance litigation expenses in the case of stockholder derivative    
actions or other actions, against an undertaking by the indemnified party to    
repay such advances if it is ultimately determined that the indemnified party   
is not entitled to indemnification. Prior to the closing of the Offering, the   
Company expects to have in place liability insurance for its officers and       
directors.                                                                      

52  

424B4
55th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 55th
In addition, the Company's Certificate of Incorporation provides that,      
pursuant to the DGCL, its directors shall not be liable for monetary damages    
for breach of the directors' fiduciary duty to the Company and its              
stockholders. This provision in the Certificate of Incorporation does not       
eliminate the directors' fiduciary duty, and in appropriate circumstances       
equitable remedies such as injunctive or other forms of non-monetary relief     
will remain available under the DGCL. In addition, each director will continue  
to be subject to liability for breach of the director's duty of loyalty to the  
Company, for acts or omissions not in good faith or involving intentional       
misconduct, for knowing violations of law, for actions leading to improper      
personal benefit to the director and for payment of dividends or approval of    
stock repurchases or redemptions that are unlawful under the DGCL. The          
provision also does not affect a director's responsibilities under any other    
law, such as the federal securities laws or state or federal environmental      
laws.                                                                           

The Company has entered into separate indemnification agreements with its   
directors and officers. These agreements require the Company, among other       
things, to indemnify them against liabilities that may arise by reason of       
their status or service as directors or officers (other than liabilities        
arising from actions not taken in good faith or in a manner the indemnitee      
believed to be opposed to the best interests of the Company), and to advance    
their expenses incurred as a result of any proceeding against them as to which  
they could be indemnified. Insofar as indemnification for liabilities arising   
under the Securities Act may be permitted to directors, officers or persons     
controlling the Company pursuant to the foregoing provisions, the Company has   
been informed that in the opinion of the Commission, such indemnification is    
against public policy as expressed in the Securities Act and is therefore       
unenforceable. The Company believes that its Certificate of Incorporation and   
Bylaw provisions and indemnification agreements are necessary to attract and    
retain qualified persons as directors and officers.                             

53  

424B4
56th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 56th
PRINCIPAL STOCKHOLDERS  

The following sets forth certain information concerning the beneficial      
ownership of the Company's outstanding Common Stock as of June 1, 1998 for (i)  
each person (or group of affiliated persons) who is known by the Company to     
own beneficially five percent or more of the Company's Common Stock, (ii) each  
director of the Company, (iii) each of the Named Executive Officers, and (iv)   
all directors and executive officers of the Company as a group.                 

                                                                [Download Table]

                                                   PERCENTAGE OF OUTSTANDING       
                                                          SHARES OWNED             
                                                   ------------------------------  
                                         SHARES                                    
                                      BENEFICIALLY   BEFORE            AFTER       
NAME AND ADDRESS OF BENEFICIAL OWNER  OWNED(1)(2)   OFFERING        OFFERING(3)    
------------------------------------  ------------ ------------    --------------  
                                                                                   
Universal Studios, Inc.(4).......       5,408,216            49.4%            29.7%
Mark Pinkerton(5)                                                                  
Paul A. Rioux(5)                                                                   
 100 Universal City Plaza                                                          
 Universal City, CA 91608                                                          
Brian Fargo(6)...................       4,922,897            44.9             30.4 
 16815 Von Karman Avenue                                                           
 Irvine, CA 92606                                                                  
Christopher J. Kilpatrick(7).....         251,628             2.2              1.5 
Richard S. F. Lehrberg(8)........         512,057             4.5              3.1 
James C. Wilson..................             --              --               --  
Charles S. Paul..................             --              --               --  
David R. Dukes...................             --              --               --  
All Directors and Executive Offi-                                                  
 cers as a Group                                                                   
 (7 persons)(9)..................      11,094,798            94.7%            62.2%

--------                                                                        
(1) Beneficial ownership is determined in accordance with the rules of the      
 Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options currently      
exercisable, or exercisable within 60 days of June 1, 1998, are deemed  
outstanding for computing the percentage of the person holding such     
  options but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote and subject to community  
property laws where applicable, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock  
shown as beneficially owned by them.                                    
(2) Excludes shares which will be issued to such persons upon the closing of    
  the Offering pursuant to the conversion of Subordinated Secured Promissory
 Notes and Common Stock Warrants held by such persons at an exercise price
of $3.85 per share (based on the initial public offering price of $5.50 
per share), as follows: Brian Fargo (519,481 shares), Christopher J.    
 Kilpatrick (25,974 shares) and Richard S.F. Lehrberg (77,922 shares). See
"Description of Capital Stock--Common Stock Warrants." Also excludes    
100,000 shares which Mr. Fargo has agreed to purchase in the Offering at
the initial public offering price.                                      
(3) The percentages indicated reflect the issuance of 2,272,418 shares upon     
the closing of the Offering pursuant to the exercise of Common Stock    
Warrants by the cancellation of Subordinated Secured Promissory Notes at
 an exercise price based on the initial public offering price of $5.50 per
share. See "Description of Capital Stock--Common Stock Warrants." The   
  percentage with respect to Mr. Fargo also reflects his purchase of 100,000
shares in the Offering.                                                 
(4) Universal has granted the Underwriters' 30-day option to purchase up to     
750,000 shares to cover over-allotments, if any. If such option is      
  exercised in full, following the completion of the offering Universal will
beneficially own 4,658,216 shares, or 25.6%, of the Company's Common    
Stock.                                                                  
(5) Messrs. Pinkerton and Rioux, who are employees of Universal or its          
subsidiaries and have been appointed as directors by Universal, disclaim
beneficial ownership of the shares held by Universal.                   
(6) Does not include 5,408,216 shares held by Universal, as to which Mr. Fargo  
may be deemed to have beneficial ownership due to certain contractual   
  rights held by Mr. Fargo, as such rights terminate upon the closing of the
Offering. See "Certain Transactions--Transactions with Fargo and        
Universal."                                                             
(7) Includes 251,528 shares subject to options exercisable within 60 days of    
June 1, 1998.                                                           
(8) Includes 510,374 shares subject to options exercisable within 60 days of    
June 1, 1998.                                                           
(9) Includes 761,902 shares subject to options exercisable within 60 days of    
June 1, 1998.                                                           

54  

424B4
57th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 57th
CERTAIN TRANSACTIONS  

TRANSACTIONS WITH FARGO                                                         

In April 1991, Brian Fargo, the Chief Executive Officer and Chairman of the 
Board of Directors of the Company, loaned $536,375 to the Company, evidenced    
by a promissory note due April 30, 1996, which note was subsequently converted  
into a demand note. The note provides that interest accrues at a rate of nine   
percent per year with accrued interest paid on a semi-annual basis. As of       
December 31, 1997, the loan balance was $16,107.                                

Prior to moving to its current business location in August 1996, the Company
occupied premises owned by Mr. Fargo consisting of approximately 22,792 square  
feet located at 17922 Fitch Avenue, Irvine, California, pursuant to a Lease     
Agreement, dated March 1, 1994, between the Company and Mr. Fargo, which had a  
term extending through December 31, 2002 and provided for monthly rent of       
$19,125, subject to increase in accordance with the Consumer Price Index. The   
Company entered into a restated Lease Agreement with Mr. Fargo in October       
1996. When the Company relocated to its present location in August 1996,        
Interplay subleased such premises to Engage pursuant to a Sublease Agreement    
dated October 1, 1996, and the Company concurrently executed an agreement with  
Engage pursuant to which the Company subleased 5,000 square feet of             
specialized audio facilities from Engage, on the same terms, until December     
1997. In December 1997, Engage entered into a direct lease with the owner of    
such property and all leases and subleases involving the Company were           
terminated.                                                                     

TRANSACTIONS WITH FARGO AND UNIVERSAL                                           

The Company, Mr. Fargo and Universal entered into a Stock Purchase          
Agreement, dated January 25, 1994, for the purchase of Common Stock. On March   
30, 1994, pursuant to the Stock Purchase Agreement, Universal purchased         
1,824,897 shares of Common Stock from the Company for a purchase price of $15   
million and 1,216,598 shares of Common Stock from Mr. Fargo for a purchase      
price of $10 million. Pursuant to the Stock Purchase Agreement, the Company,    
Mr. Fargo and Universal entered into an Option Agreement, dated March 30,       
1994, pursuant to which Mr. Fargo granted Universal an option to purchase       
additional shares of Common Stock held by Mr. Fargo. Pursuant to such           
Agreement, Universal purchased 1,216,598 additional shares of Common Stock      
from Mr. Fargo at a price of $9.10 per share on April 25, 1995 and 1,150,123    
additional shares of Common Stock at a price of $14.62 per share on April 26,   
1996, such that Universal became a 35% owner of the Company as of April 25,     
1995 and a 45% owner of the Company as of April 26, 1996. In order to acquire   
sufficient shares of Common Stock for sale to Universal on each of the three    
sale dates, Mr. Fargo acquired such number of shares as was required for sale   
to Universal from existing shareholders of the Company in simultaneous          
transactions. Pursuant to the Stock Purchase Agreement, the Company, Mr. Fargo  
and Universal entered into a Shareholders' Agreement dated March 30, 1994, as   
amended October 8, 1996 and in March 1998, which contains certain restrictions  
on transfer of shares, rights of first refusal, voting provisions,              
registration rights and certain restrictions on corporate actions. Only the     
mutual rights of first refusal as between Universal and Mr. Fargo and the       
registration rights of Universal and Mr. Fargo will survive the closing of the  
Offering. See "Description of Capital Stock--Registration Rights." For his      
services in connection with such transaction, Mr. Fargo was awarded a bonus of  
$1.0 million by the Board of Directors on March 28, 1994. Mr. Fargo has agreed  
to defer the payment of such bonus to a future date.                            

The Company has entered into three Merchandising License Agreements with    
MCA/Universal Merchandising Inc., a subsidiary of Universal. Pursuant to an     
agreement dated May 23, 1994, the Company has the exclusive right to use the    
theme and characters of the Waterworld motion picture in software products for  
specified platforms until July 31, 1998. Pursuant to an agreement dated May     
23, 1994, the Company has the non-exclusive right to use the theme and          
characters of the Casper motion picture in software products for specified      
platforms for a period of three years following the release of such motion      
picture. Pursuant to an agreement dated April 16, 1996, the Company has the     
exclusive right to the theme and characters of the Flipper motion picture for   
an interactive story book product on specified platforms until June 1, 2001.    
Each of the agreements provide for the Company to pay specified advances        
against royalties and for specified royalty                                     

55  

424B4
58th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 58th
guarantees. To date, the Company has paid a total of $0.5 million, $0.3         
million and $30,000, respectively, in advances and royalty payments under such  
agreements. In addition, pursuant to a letter agreement dated September 27,     
1996, with Universal Interactive Studios, a subsidiary of Universal ("UIS"),    
the Company has the exclusive distribution rights in North America for          
PlayStation versions of Disruptor (the "Disruptor Agreement"), plus the         
exclusive rights to manufacture, publish and distribute Disruptor on any video  
game platform outside of North America. Currently, approximately $1.9 million   
is due UIS pursuant to the Disruptor Agreement, of which $1.5 million will be   
paid to UIS upon the closing of the Offering. On August 16, 1995, the Company   
and UIS entered into an exclusive distribution agreement pursuant to which UIS  
agreed to distribute the Company's interactive software products in Europe      
through UIS's affiliate, MCA Home Video, Inc., which in turn distributes        
through Cinema International Corporation ("CIC"). The distribution agreement    
was subsequently terminated, and the Company and UIS/CIC are currently          
negotiating a final accounting reconciliation to determine the amounts owed to  
the Company. In December 1996 UIS, on behalf of CIC, paid $300,000 to the       
Company as an interim payment pending the resolution of the final accounting    
reconciliation. The Company issued a promissory note to UIS dated December 20,  
1996 in the principal amount of $300,000 (the "Advance Note") evidencing the    
interim payment made to the Company. The Advance Note is guaranteed by          
Interplay Europe, does not bear interest and was payable on March 31, 1997. In  
March 1998, the Company entered into an agreement with UIS whereby the Company  
agreed to pay to UIS all net amounts owed to UIS under the Disruptor Agreement  
and the Company and UIS agreed to work together to determine the final amount,  
if any, due to Interplay to resolve such accounting dispute and to pay any      
amounts found to be owing to the other party in connection therewith.           

Mark Pinkerton and Paul A. Rioux, directors of the Company, are employees of
Universal or its subsidiaries.                                                  

ENGAGE TRANSACTIONS                                                             

In June 1995, the Company formed a subsidiary to divest Engage, which       
formerly operated as a division of the Company. Pursuant to a Stock Purchase    
Agreement dated June 30, 1995, the Company sold 10,000,000 shares of common     
stock of Engage to Mr. Fargo for $237,000. In connection with such sale, the    
Company and Mr. Fargo entered into an Option Agreement dated June 30, 1995,     
granting the Company an option to repurchase all of such shares at an           
aggregate exercise price of $337,000 at any time prior to June 30, 2005 (the    
"Termination Date"). In conjunction with a financing agreement between Engage   
and Mr. Fargo, the Option Agreement was amended in March 1998 to reduce the     
shares subject to such option to 19% of the shares held by Mr. Fargo and to     
reduce the exercise price to $250,000. In the event the Company elects not to   
exercise its option to repurchase the shares, upon certain events Universal     
has an option to purchase the shares at the same exercise price. If Universal   
exercises its option to purchase the shares, the Company has an option to       
purchase such shares from Universal at the $250,000 exercise price until the    
Termination Date.                                                               

Prior to March 1996, the Company loaned Engage approximately $1.8 million to
fund the operations of Engage, which debt was evidenced by a convertible        
demand promissory note dated March 29, 1996, bearing interest at the prime      
rate plus two percent per annum. Approximately, $0.8 million of the principal   
amount was repaid to the Company in a number of installments during 1996 and    
1997. In connection with a secured debt financing in August 1997, the           
remaining outstanding principal of approximately $1.0 million was converted     
into a secured convertible promissory note due in August 1998, bearing          
interest at a rate of eight percent per annum. As part of the August 1997       
transaction, the Company loaned an additional $100,000 to Engage on the same    
terms.                                                                          

In March 1996, the Company entered into an agreement with Engage which,     
among other things, provides that the Company will provide certain              
administrative services to Engage, and grants Engage the exclusive right to     
use certain of the Company's products in Internet-based on-line services.       
Engage currently owes the Company approximately $300,000 in connection with     
such agreement.                                                                 

FINANCING TRANSACTIONS                                                          

In October 1996, the Company sold an aggregate of $2,400,000 in Subordinated
Secured Promissory Notes and Common Stock Warrants to Brian Fargo               
($2,000,000), Richard S.F. Lehrberg ($300,000) and                              

56  

424B4
59th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 59th
Christopher J. Kilpatrick ($100,000). The Secured Subordinated Promissory       
Notes bear interest at a rate of 12% per annum. Messrs. Fargo, Lehrberg and     
Kilpatrick elected to receive 11,688, 1,683 and 100 shares of Common Stock,     
respectively, in lieu of the May 1997 interest payment due under the Secured    
Subordinated Promissory Notes, at a price of $11.25 per share. In February      
1998, the Company offered to amend the terms of such Notes and Warrants to      
permit the exercise of the Warrants or the repayment of the Notes upon the      
closing of this Offering whether or not this Offering constitutes a Qualified   
Event (as defined in the Notes and Warrants). Messrs. Fargo, Lehrberg and       
Kilpatrick have elected to exercise such Warrants for 519,481, 77,922 and       
25,974 shares of Common Stock, respectively, by canceling such Notes effective  
upon the closing of the Offering at an exercise price of $3.85 per share        
(based upon the initial public offering price of $5.50 per share). See          
"Description of Capital Stock--Common Stock Warrants."                          

OTHER TRANSACTIONS                                                              

In March 1998, the Company entered into Indemnification Agreements with all 
of its directors and executive officers providing for indemnification of such   
persons by the Company in certain circumstances. See "Management--Limitation    
of Liability and Indemnification Matters."                                      

David R. Dukes, a director of the Company, is an officer and director of  
Ingram Micro, a customer of the Company. During the eight months ended          
December 31, 1997 and the three months ended March 31, 1998, the Company        
derived net revenues of $2.4 million and $1.3 million, respectively, from       
sales to Ingram Micro. See "Business--Sales and Distribution."                  

Until September 1997, Christopher J. Kilpatrick, an officer and director of 
the Company, was a shareholder of Stradling Yocca Carlson & Rauth, counsel to   
the Company.                                                                    

The Company has entered into Employment Agreements with certain executive   
officers. See "Management--Employment Agreements."                              

57  

424B4
60th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 60th
DESCRIPTION OF CAPITAL STOCK  

Upon the completion of the Offering, the authorized capital stock of the    
Company will consist of 50,000,000 shares of Common Stock, $.001 par value,     
and 5,000,000 shares of Preferred Stock, $.001 par value.                       

COMMON STOCK                                                                    

As of March 31, 1998, there were 10,953,028 shares of Common Stock issued   
and outstanding and held by 17 stockholders of record and 2,053,206 shares of   
Common Stock reserved for issuance upon the exercise of stock options           
outstanding under the Company's 1991 Plan, 1994 Plan, 1997 Plan and non-        
statutory stock options granted outside the Company's plans. The outstanding    
shares of Common Stock are fully paid and nonassessable. The Company's          
Certificate of Incorporation provides that holders of Common Stock are          
entitled to one vote for each share on all matters submitted to a vote of       
stockholders, provided that, with respect to the election of directors,         
stockholders shall be entitled to cumulate their votes whereby each             
stockholder will have a number of votes equal to the number of shares held      
multiplied by the number of directors to be elected. In addition, with respect  
to the election of directors, certain preferential voting rights will exist     
until the closing of the Offering. See "Certain Transactions--Transactions      
with Fargo and Universal." The Certificate of Incorporation of the Company      
provides that the authorized number of directors shall be between seven and     
nine, with the exact number fixed at seven until changed by unanimous vote of   
the Board of Directors.                                                         

Subject to the preference in dividend rights of any series of Preferred     
Stock which the Company may issue in the future, the holders of Common Stock    
are entitled to receive such cash dividends, if any, as may be declared by the  
Board of Directors out of legally available funds. Upon liquidation,            
dissolution or winding up of the Company, after payment of all debts and        
liabilities and after payment of the liquidation preferences of any shares of   
Preferred Stock then outstanding, the holders of the Common Stock will be       
entitled to all assets that are legally available for distribution.             

Other than the rights described above, the holders of Common Stock have no  
preemptive subscription, redemption, sinking fund or conversion rights and      
have equal rights and preferences. The rights and preferences of holders of     
Common Stock will be subject to the rights of any series of Preferred Stock     
which the Company may issue in the future.                                      

PREFERRED STOCK                                                                 

The Board of Directors has the authority, without further action by the     
stockholders, to issue up to 5,000,000 shares of Preferred Stock, $.001 par     
value, in one or more series and to fix the rights, preferences and privileges  
thereof, including voting rights, terms of redemption, redemption prices,       
liquidation preference and number of shares constituting any series or the      
designation of such series. The rights of the holders of the Common Stock will  
be subject to, and may be adversely affected by, the rights of the holders of   
any Preferred Stock that may be issued in the future. The issuance of           
Preferred Stock could have the effect of making it more difficult for a third   
party to acquire a majority of the outstanding voting stock of the Company,     
thereby delaying, deferring or preventing a change in control of the Company.   
Furthermore, such Preferred Stock may have other rights, including economic     
rights senior to the Common Stock, and, as a result, the issuance thereof       
could have a material adverse effect on the market value of the Common Stock.   
The Company has no present plans to issue shares of Preferred Stock.            

COMMON STOCK WARRANTS                                                           

In connection with its subordinated debt financing in October 1996 through  
February 1997, the Company issued and sold certain Common Stock Warrants (the   
"Warrants") to purchasers of its Subordinated Secured Promissory Notes (the     
"Notes"), at a price equal to one percent of the purchaser's total investment   
in the Notes and Warrants. The Company sold an aggregate of $14,803,000 of      
such Notes and Warrants. The Warrants entitle the Warrant holder to purchase,   
by surrender of such holder's Note, up to that number of shares of Common       
Stock equal to the quotient determined by dividing the purchaser's aggregate    
investment in the Notes and Warrants by the Exercise Price (as defined below),  
rounded to the nearest whole number of shares. The                              

58  

424B4
61st Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 61st
"Exercise Price" per share of Common Stock under the Warrants is the product    
of 0.70 multiplied by either of the following amounts, as applicable: (i) in    
the event of a Qualified IPO (as defined in the Warrants), the initial public   
offering price of Common Stock; or (ii) in the event of a Sales Transaction     
(as defined in the Warrants), the fair market value per share of the Company's  
Common Stock as established in such Sales Transaction or, if no such price is   
established, as determined in good faith by the Board of Directors. In          
February 1998, the Company offered to amend the terms of each holder's Note     
and Warrant to permit such holder to exercise its Warrant upon the closing of   
the Offering whether or not the Offering constitutes a Qualified IPO, and       
offered each holder the option to either exercise its Warrant effective upon    
the closing of the Offering or to have its Note repaid following the closing    
of the Offering. Holders of an aggregate amount of $8,748,808 of the Notes and  
Warrants elected to exercise their Warrants, and 2,272,418 shares of Common     
Stock will be issued to such holders upon the closing of the Offering at an     
exercise price of $3.85 per share (based on the initial public offering price   
of $5.50). Holders of $5,993,650 in principal amount of the Notes elected to    
have their Notes repaid out of the proceeds of the Offering. See "Use of        
Proceeds."                                                                      

REGISTRATION RIGHTS                                                             

The Shareholders' Agreement provides each of Universal and Brian Fargo with 
certain registration rights with respect to their respective shares of the      
Common Stock of the Company. Pursuant to the terms of the Shareholders'         
Agreement, each of Universal and Mr. Fargo have four demand registrations,      
whereby such party may require the Company to register not less than 1,000,000  
shares of the Common Stock owned by such party, subject to certain conditions   
and restrictions contained therein. Each of Universal and Mr. Fargo also have   
unlimited piggyback registrations whereby they are entitled to be notified of   
and participate in registrations of the Company's Common Stock initiated by     
the Company or a third party, subject to certain conditions and restrictions.   
The Company has also agreed to indemnify and hold harmless the stockholders     
who are a party to the Shareholders' Agreement and the officers and directors   
of Universal from any loss, claim or damage arising from such registrations     
unless, and to the extent that, such loss, claim or damage arises out of or is  
based upon an untrue statement, alleged untrue statement or omission or         
alleged omission made in reliance upon and in conformity with written           
information furnished by or on behalf of such party for use in the preparation  
of the documents related to the registration.                                   

The Company and the holders of the Warrants have entered into an Investors  
Rights Agreement, as amended ("Investors Rights Agreement") which provides      
such holders with certain registration rights with respect to the shares of     
Common Stock issuable upon exercise of the Warrants. Pursuant to the terms of   
the Investors Rights Agreement, the Warrant holders have one demand             
registration, whereby the holders of a majority of the shares of Common Stock   
issuable upon exercise of the Warrants may require the Company to register the  
shares of Common Stock owned by such parties, subject to certain conditions     
and restrictions. In addition, the Investors Rights Agreement provides the      
Warrant holders certain piggyback registration and S-3 registration rights,     
subject to certain conditions and restrictions. The Company has also agreed to  
indemnify and hold harmless the stockholders who are a party to the Investors   
Rights Agreement from any loss, claim or damage arising from such               
registrations unless, and to the extent that, such loss, claim or damage        
arises out of or is based upon an untrue statement, alleged untrue statement    
or omission or alleged omission made in reliance upon and in conformity with    
written information furnished by or on behalf of such party for use in the      
preparation of the documents related to the registration.                       

DELAWARE ANTI-TAKEOVER LAW                                                      

The Company is subject to the provisions of Section 203 of the Delaware     
General Corporation Law (the "DGCL"). Section 203 provides, with certain        
exceptions, that a Delaware corporation may not engage in certain business      
combinations with a person or affiliate or associate of such person who is an   
"interested stockholder" for a period of three years from the date such person  
became an interested stockholder, unless: (i) the transaction resulting in the  
acquiring person's becoming an interested stockholder, or the business          
combination, is approved by the board of directors of the corporation before    
the person becomes an interested stockholder, (ii) the interested stockholder   
acquires 85% or more of the outstanding voting stock of the corporation in the  
same                                                                            

59  

424B4
62nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 62nd
transaction that makes it an interested stockholder, excluding (a) shares held  
by directors who are also officers, or (b) shares held in certain employee      
stock plans in which employee participants do not have the right to determine   
confidentially whether shares held subject to the plan will be tendered in a    
tender or exchange offer, or (iii) on or after the date the person becomes an   
interested stockholder, the business combination is approved by the             
corporation's board of directors and by the holders of at least two-thirds of   
the corporation's outstanding voting stock, at an annual or special meeting     
(excluding shares held by the interested stockholder). Except as otherwise      
specified in Section 203, an "interested stockholder" is defined as: (a) any    
person that is the owner of 15% or more of the outstanding voting stock of the  
corporation, (b) any person that is an affiliate or associate of the            
corporation and was the owner of 15% or more of the outstanding voting stock    
of the corporation at any time within the three-year period immediately prior   
to the date on which it is sought to be determined whether such person is the   
interested stockholder, or (c) the affiliates and associates of any such        
person. By restricting the ability of the Company to engage in business         
combinations with an interested person, the application of Section 203 to the   
Company may provide a barrier to hostile or unwanted takeovers.                 

A "business combination" includes a merger, asset sale or other transaction 
resulting in a financial benefit to such interested stockholder. For purposes   
of Section 203, an "interested" stockholder is a person who, together with      
affiliates and associates, owns (or within three years prior, did own) 15% or   
more of the corporation's voting stock.                                         

CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS     

The Company's Certificate of Incorporation also provides that stockholder   
action can be taken only at an annual or special meeting of stockholders and    
may not be taken by written consent. The Bylaws provide that special meetings   
of stockholders can be called only by the Chairman of the Board, the President  
or the Board of Directors. Stockholders are not permitted to call a special     
meeting or to require that the Board of Directors call a special meeting of     
stockholders. Moreover, the business permitted to be conducted at any special   
meeting of stockholders is limited to the business set forth in the notice for  
the meeting. The Bylaws set forth an advance notice procedure with regard to    
the nomination, other than by or at the direction of the Board of Directors,    
of candidates for election as directors at any special meeting of stockholders  
and with regard to business to be brought before an annual meeting of           
stockholders of the Company, other than the election of directors. The Bylaws   
do not permit removal of directors except for cause, unless approved by a two-  
thirds vote of the Company's stockholders. See "Management--Directors,          
Executive Officers and Certain Significant Employees."                          

The Company's Certificate of Incorporation limits the liability of directors
to the Company and its stockholders to the fullest extent permitted by the      
DGCL. Specifically, under the DGCL, a director will not be personally liable    
for monetary damages for breach of the director's fiduciary duty as a           
director, except liability (i) for a breach of the director's duty of loyalty   
to the Company or its stockholders, (ii) for acts or omissions by a director    
not in good faith or which involve intentional misconduct or a knowing          
violation of the law, (iii) for liability arising under Section 174 of the      
DGCL (relating to the declaration of dividends and purchase or redemption of    
shares in violation of the DGCL), or (iv) for any transaction from which the    
director derived an improper personal benefit. The inclusion of this provision  
in the Company's Certificate of Incorporation may have the effect of reducing   
the likelihood of derivative litigation against Directors and may discourage    
or deter stockholders or management from bringing a lawsuit against directors   
for breach of their duty of care. This limitation on monetary liability does    
not alter the duties of Directors, affect the availability of equitable         
relief, or affect the availability of monetary relief predicated on claims      
based on federal law, including the federal securities laws.                    

TRANSFER AGENT AND REGISTRAR                                                    

The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation, Glendale, California.                                              

60  

424B4
63rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 63rd
SHARES ELIGIBLE FOR FUTURE SALE 

Prior to the Offering, there has been no public market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could  
adversely affect prevailing market prices and adversely affect the Company's    
ability to raise additional capital in the capital markets at a time and price  
favorable to the Company.                                                       

Upon completion of the Offering, the Company will have 18,225,446 shares of 
Common Stock outstanding, assuming no exercise of outstanding options. Of       
these shares, the 5,000,000 shares sold in the Offering (5,750,000 shares       
assuming the Underwriters' over-allotment option is exercised in full) will be  
freely transferable without restriction or further registration under the       
Securities Act, unless they are purchased by "affiliates" of the Company as     
that term is used under the Securities Act. The remaining 13,225,446 shares     
held by existing stockholders (12,475,446 shares assuming the Underwriters'     
over-allotment option is exercised in full) will be "restricted securities" as  
defined in Rule 144 ("Restricted Shares"). Restricted Shares may be sold in     
the public market only if registered or if they qualify for an exemption from   
registration under Rule 144, which is summarized below. Sales of Restricted     
Shares in the public market, or the availability of such shares for sale,       
could adversely affect the market price of the Common Stock.                    

All officers, directors, certain stockholders and certain option holders    
have agreed with the Underwriters that they will not sell any Common Stock      
owned by them for a period of 180 days after the effective date of the          
Offering without the prior written consent of Piper Jaffray Inc. (the "180-Day  
Lock-Up"). An aggregate of 7,781,868 shares of Common Stock (7,031,868 shares   
assuming the Underwriters' over-allotment option is exercised in full) are      
subject to the 180-Day Lock-Up. In addition, Brian Fargo, the Company's         
Chairman and Chief Executive Officer, has agreed with the Underwriters that he  
will not sell any of the 5,542,378 shares of Common Stock owned by him for a    
period of one year after the effective date of the Offering without the prior   
written consent of Piper Jaffray Inc. (the "Fargo Lock-Up"). Upon the           
expiration of the 180-Day Lock-Up (or earlier upon the consent of Piper         
Jaffray Inc.), 5,925,357 Restricted Shares (5,175,357 Restricted Shares         
assuming the Underwriters' over-allotment option is exercised in full) will     
become eligible for sale subject to the volume and other restrictions of Rule   
144, and 1,856,511 Restricted Shares will be eligible for sale without          
restriction under Rule 144(k). Upon the expiration of the Fargo Lock-Up, the    
5,542,378 shares subject thereto will become eligible for sale subject to the   
volume and other restrictions of Rule 144.                                      

In general, under Rule 144, beginning 90 days after the effective date of   
the Offering, any person (or persons whose shares are aggregated) who has       
beneficially owned Restricted Shares for at least one year is entitled to       
sell, within any three-month period, a number of shares that does not exceed    
the greater of one percent of the then outstanding shares of the Company's      
Common Stock (approximately 182,254 shares immediately after the Offering) or   
the average weekly trading volume during the four calendar weeks preceding      
such sale. Sales under Rule 144 are also subject to certain requirements as to  
the manner of sale, notice and availability of current public information       
about the Company. In addition, Restricted Shares which have been beneficially  
owned for at least two years and which are held by non-affiliates may, under    
Rule 144(k) be sold free of any restrictions under Rule 144.                    

The Company intends to file a registration statement on Form S-8 under the  
Act to register shares of Common Stock reserved for issuance under its Plans,   
thus permitting the resale by non-affiliates of shares issued under the plan    
in the public market without restriction under the Securities Act. Such         
registration statement will become effective immediately upon filing, which is  
expected on or shortly after the closing of the Offering. As of March 31,       
1998, options or rights to purchase 2,053,206 shares of Common Stock were       
outstanding under the Company's Plans, of which 1,580,188 shares are subject    
to the 180-Day Lock-Up and 150,000 shares are subject to the Fargo Lock-Up.     

61  

424B4
64th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 64th
UNDERWRITING  

The Company and the Selling Stockholder have entered into a Purchase        
Agreement (the "Purchase Agreement") with the underwriters listed in the table  
below (the "Underwriters"), for whom Piper Jaffray Inc., Bear, Stearns & Co.    
Inc., and UBS Securities LLC are acting as representatives (the                 
"Representatives"). Subject to the terms and conditions contained in the        
Purchase Agreement, the Company has agreed to sell to the Underwriters, and     
each of the Underwriters has severally agreed to purchase from the Company,     
the aggregate number of shares of Common Stock set forth opposite their         
respective names below:                                                         

                                                                [Download Table]

NAME OF UNDERWRITER                                          NUMBER OF SHARES
-------------------                                          ----------------
                                                                             
Piper Jaffray Inc. .........................................    1,280,000    
Bear, Stearns & Co. Inc. ...................................      960,000    
UBS Securities LLC..........................................      960,000    
BancAmerica Robertson Stephens..............................      250,000    
BT Alex. Brown Incorporated.................................      250,000    
Cowen & Company.............................................      250,000    
Deutsche Bank Securities Inc. ..............................      250,000    
Hambrecht & Quist LLC.......................................      250,000    
NationsBanc Montgomery Securities LLC.......................      250,000    
J.C. Bradford & Co. ........................................      100,000    
Crowell, Weedon & Co. ......................................      100,000    
Wedbush Morgan Securities Inc. .............................      100,000    
                                                                ---------    
  Total.....................................................    5,000,000    
                                                                =========    

Subject to the terms and conditions of the Purchase Agreement, the          
Underwriters have agreed to purchase all of the Common Stock being sold         
pursuant to the Purchase Agreement, if any is purchased (excluding Common       
Stock covered by the over-allotment option granted by the Selling Stockholder   
to the Underwriters). In the event of a default by any Underwriter, the         
Purchase Agreement provides that, in certain circumstances, purchase            
commitments of nondefaulting Underwriters may be increased or the Purchase      
Agreement may be terminated.                                                    

The Underwriters propose initially to offer the shares to the public at the 
public offering price set forth on the cover page of this Prospectus. Brian     
Fargo, the Company's Chairman and Chief Executive Officer, has agreed to        
purchase 100,000 of the shares from the Underwriters at such price. The         
Underwriters will not receive any underwriting discount with respect to the     
purchase of such shares by Mr. Fargo. The Underwriters may allow a selling      
concession not in excess of $0.20 per share to certain dealers. The             
Underwriters may allow, and such dealers may reallow, a concession not in       
excess of $0.10 per share to other dealers. After the Offering, the public      
offering price and other selling terms may be changed by the Underwriters.      

The Selling Stockholder has granted the Underwriters an option, exercisable 
by the Representatives within 30 days after the date of the Purchase            
Agreement, to purchase up to an additional 750,000 shares of Common Stock at    
the same price per share to be paid by the Underwriters for the shares offered  
hereby. The Underwriters may exercise such option solely for the purpose of     
covering over-allotments incurred in the sale of shares of Common Stock         
offered hereby. To the extent such option to purchase is exercised, each        
Underwriter will become committed to purchase such additional shares of Common  
Stock in the same proportion as set forth in the above table.                   

The Company and its directors, officers and certain stockholders (holding in
the aggregate 13,224,246 shares of Common Stock upon completion of the          
Offering, or 12,474,246 shares if the Underwriters' over-allotment option is    
exercised in full) have agreed to deliver to the Representatives prior to the   
date of this Prospectus lock-up agreements under which they agree not to,       
directly or indirectly, offer, pledge, sell, contract to sell, sell any option  
or contract to purchase, purchase any option or contract to sell, grant any     
option, right or warrant for the sale of, or otherwise dispose of or transfer   
any shares of Common Stock or any securities exchangeable or exercisable for    
or convertible into its Common Stock, whether now owned or hereafter acquired   
or with respect                                                                 

62  

424B4
65th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 65th
to which the Company and any such director, officer or stockholder has or       
hereafter acquires the power of disposition, or participate in any              
registration statement under the Securities Act with respect to any of the      
foregoing or enter into any swap or any other agreement or any transaction      
that transfers, in whole or in part, directly or indirectly, the economic       
consequence of ownership of the Common Stock for a period of 180 days after     
the date of this Prospectus (one year in the case of Brian Fargo, the           
Company's Chairman and Chief Executive Officer), without the prior written      
consent of Piper Jaffray Inc. on behalf of the Underwriters. Piper Jaffray      
Inc. may, at its sole discretion and at any time without notice, release all    
or any portion of the shares subject to such lock-up agreements. See "Shares    
Eligible for Future Sale."                                                      

In the Purchase Agreement, the Company, the Selling Stockholder and the     
Underwriters have agreed to indemnify each other against certain liabilities,   
including liabilities under the Securities Act, and to contribute to payments   
the Underwriters may be required to make in respect thereof. The Company has    
agreed to reimburse the Underwriters for their reasonable out of pocket         
expenses incurred in connection with the Offering. The Company and Piper        
Jaffray Inc. are parties to an agreement pursuant to which Piper Jaffray Inc.   
has in the past performed and may in the future perform certain financial       
advisory services to the Company, including advice with respect to mergers and  
acquisitions.                                                                   

The Representatives have informed the Company and the Selling Stockholder   
that they do not intend to confirm sales to accounts over which they exercise   
discretionary authority without the prior written approval of the customer.     

Prior to the Offering there has been no public market for the Common Stock. 
The initial public offering price was determined by negotiation between the     
Company, the Selling Stockholder and the Representatives. Among the factors     
considered in determining such public offering price were the nature of the     
Company's business, its history and present state of development, recent        
financial operating information, prospects and management abilities, the        
general conditions of the securities markets at the time of the Offering and    
other factors deemed relevant.                                                  

During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include overallotment,         
stabilizing transactions and purchases to cover syndicate short positions       
created in connection with the Offering. The Underwriters also may impose a     
penalty bid, whereby selling concessions allowed to syndicate members or other  
broker-dealers in respect of the Common Stock sold in the Offering for their    
account may be reclaimed by the syndicate if such securities are repurchased    
by the syndicate in stabilizing or covering transactions. These activities may  
stabilize, maintain or otherwise affect the market price of the Common Stock,   
which may be higher than the price that might otherwise prevail in the open     
market. These transactions may be effected on the Nasdaq National Market, in    
the over-the-counter market or otherwise, and these activities, if commenced,   
may be discontinued at any time.                                                

63  

424B4
66th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 66th
LEGAL MATTERS 

The validity of the Common Stock offered hereby will be passed upon for the 
Company by Stradling Yocca Carlson & Rauth, a Professional Corporation,         
Newport Beach, California. An investment partnership in which certain           
shareholders of Stradling Yocca Carlson & Rauth are partners holds an           
aggregate of $100,000 of the Company's Subordinated Secured Promissory Notes    
and Common Stock Warrants, which will be converted into 25,974 shares of        
Common Stock upon the closing of the Offering at an exercise price of $3.85     
per share (based on an assumed initial public offering price of $5.50 per       
share), and holds 523 shares of the Company's Common Stock. Certain legal       
matters in connection with the Offering will be passed upon for the             
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,     
Palo Alto, California.                                                          

EXPERTS 

The Consolidated Financial Statements and schedule of the Company as of     
April 30, 1996 and 1997, and as of December 31, 1997, and for each of the       
three years in the period ended April 30, 1997 and the eight months ended       
December 31, 1997 included in this Prospectus and elsewhere in the              
Registration Statement have been audited by Arthur Andersen LLP, independent    
public accountants, as indicated in their reports with respect thereto, and     
are included herein in reliance upon the authority of said firm as experts in   
giving said reports.                                                            

AVAILABLE INFORMATION 

The Company has filed with the Commission a Registration Statement on Form  
S-1 under the Securities Act with respect to the shares of Common Stock         
offered hereby. This Prospectus, which constitutes a part of the Registration   
Statement, does not contain all the information set forth in the Registration   
Statement and the exhibits and schedules thereto. For further information with  
respect to the Company and the Common Stock offered hereby, reference is made   
to the Registration Statement and to the exhibits and schedules filed           
therewith. A copy of the Registration Statement may be inspected without        
charge at the public reference facilities of the Commission located at 450      
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the  
Commission located at 7 World Trade Center, Suite 1300, New York, New York      
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.        
Copies of all or any part of the Registration Statement may be obtained at the  
prescribed rates from the Public Reference Section of the Commission at 450     
Fifth Street, N.W., Washington, D.C. 20549 and its public reference facilities  
in New York, New York and Chicago, Illinois, upon the payment of the fees       
prescribed by the Commission. The Registration Statement is also available      
through the Commission's website on the world wide web at http://www.sec.gov.   

Statements made in this Prospectus as to the contents of any contract,      
agreement or other document referred to are not necessarily complete. With      
respect to each such contract, agreement or other document filed as an exhibit  
to the Registration Statement, reference is made to the exhibit for a more      
complete description of the matter involved, and each such statement shall be   
deemed qualified by such reference.                                             

64  

424B4
67th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 67th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                [Download Table]

                                                                            PAGE
                                                                            ----
                                                                                
Report of Independent Public Accountants................................... F-2 
Consolidated Balance Sheets................................................ F-3 
Consolidated Statements of Operations...................................... F-4 
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5 
Consolidated Statements of Cash Flows...................................... F-6 
Notes to Consolidated Financial Statements................................. F-7 

F-1 

424B4
68th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 68th
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS  

To Interplay Entertainment Corp.:                                               

We have audited the accompanying consolidated balance sheets of INTERPLAY   
ENTERTAINMENT CORP. (a Delaware corporation) and subsidiaries as of April 30,   
1996 and 1997 and December 31, 1997, and the related consolidated statements    
of operations, stockholders' equity (deficit) and cash flows for each of the    
three years in the period ended April 30, 1997 and the eight months ended       
December 31, 1997. These financial statements are the responsibility of the     
Company's management. Our responsibility is to express an opinion on these      
financial statements based on our audits.                                       

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

The Subordinated Secured Promissory Notes mature on November 30, 1998 and   
give the holders the option, 30 days thereafter, to notify the Company in       
writing that the Notes are due and payable. In addition, the Company's line of  
credit matures in May 1999. For further discussion about the terms of these     
borrowings and management's plan in connection with their repayment, see Notes  
6 and 13.                                                                       

In our opinion, the financial statements referred to above present fairly,  
in all material respects, the financial position of Interplay Entertainment     
Corp. and subsidiaries as of April 30, 1996 and 1997 and December 31, 1997,     
and the related consolidated statements of operations, stockholders' equity     
(deficit) and cash flows for each of the three years in the period ended April  
30, 1997 and the eight months ended December 31, 1997 in conformity with        
generally accepted accounting principles.                                       

                       Arthur Andersen LLP

Orange County, California                                                       
March 20, 1998 (except for the first                                            
paragraph of Note 8--Litigation and Note 13--                                 
Reincorporation, for which the date is May 29,                                
1998)                                                                         

F-2 

424B4
69th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 69th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                   APRIL 30,                              
                                                ----------------  DECEMBER 31,  MARCH 31, 
                                                 1996     1997        1997        1998    
                                                ------- --------  ------------ -----------
                                                                               (UNAUDITED)
                                                                                          
                    ASSETS                                                                
                    ------                                                                
Current Assets:                                                                           
  Cash and cash equivalents...................  $ 4,923 $  5,410    $  1,536    $  1,937  
  Trade receivables, net of allowances of                                                 
   $9,100, $14,894, $14,461 and $11,394, re-                                              
   spectively.................................   22,983   22,346      34,684      38,233  
  Inventories.................................    5,896    7,404       6,338       6,065  
  Prepaid licenses and royalties..............   14,483   10,914      12,628      12,382  
  Income taxes receivable.....................    1,425    1,601       1,427         --   
  Deferred income taxes.......................      323    7,889       7,792       7,522  
  Other.......................................    6,053    2,354       4,218       3,365  
                                                ------- --------    --------    --------  
  Total current assets........................   56,086   57,918      68,623      69,504  
                                                ------- --------    --------    --------  
Property and Equipment, net...................    7,838    8,117       7,026       6,746  
                                                ------- --------    --------    --------  
Other Assets..................................    4,587    2,970       2,172       2,077  
                                                ------- --------    --------    --------  
                                                $68,511 $ 69,005    $ 77,821    $ 78,327  
                                                ======= ========    ========    ========  
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                            
----------------------------------------------                                            
Current Liabilities:                                                                      
  Accounts payable............................  $16,945 $ 16,975    $ 17,121    $ 14,193  
  Accrued expenses............................   15,549   21,100      22,549      22,231  
  Short term borrowings.......................    5,050   10,950         --          --   
  Current portion of long-term debt...........       57      123      14,767      14,825  
  Income taxes payable........................      --       880         570         813  
                                                ------- --------    --------    --------  
    Total current liabilities.................   37,601   50,028      55,007      52,062  
                                                ------- --------    --------    --------  
Long-Term Debt, net of current portion........       51   14,847      23,387      23,855  
                                                ------- --------    --------    --------  
Deferred Income Taxes.........................      366      403         434         434  
                                                ------- --------    --------    --------  
Minority Interest.............................      298      326         260         307  
                                                ------- --------    --------    --------  
Commitments and Contingencies                                                             
Stockholders' Equity (Deficit):                                                           
  Preferred stock, no par value--                                                         
   Authorized--5,000,000 shares                                                           
   Issued and outstanding--none...............      --       --          --          --   
  Common stock, $.001 par value--                                                         
   Authorized 50,000,000 shares                                                           
   Issued and outstanding--10,829,781,                                                    
   11,114,060, 10,951,828 and 10,953,028                                                  
   shares, respectively.......................       11       11          11          11  
  Paid-in capital.............................   17,783   18,020      18,408      18,494  
  Retained earnings (accumulated deficit).....   12,401  (14,818)    (19,877)    (17,028) 
  Cumulative translation adjustment...........      --       188         191         192  
                                                ------- --------    --------    --------  
    Total stockholders' equity (deficit)......   30,195    3,401      (1,267)      1,669  
                                                ------- --------    --------    --------  
                                                $68,511 $ 69,005    $ 77,821    $ 78,327  
                                                ======= ========    ========    ========  

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

F-3 

424B4
70th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 70th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS 
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                EIGHT MONTHS ENDED       THREE MONTHS ENDED    
                               YEARS ENDED APRIL 30,               DECEMBER 31,               MARCH 31,        
                          ----------------------------------  -----------------------  ------------------------
                             1995        1996        1997        1996         1997        1997         1998    
                          ----------  ----------  ----------  -----------  ----------  -----------  -----------
                                                              (UNAUDITED)              (UNAUDITED)  (UNAUDITED)
                                                                                                               
Net revenues............  $   79,546  $   96,952  $   83,262  $   50,364   $   85,961  $   22,410   $   40,996 
Cost of goods sold......      45,491      49,939      62,480      35,725       44,864      13,508       19,221 
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Gross profit............      34,055      47,013      20,782      14,639       41,097       8,902       21,775 
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Operating expenses:                                                                                            
Marketing and sales.....      14,280      23,285      24,627      15,747       20,603       7,280        8,589 
General and                                                                                                    
 administrative.........       5,528       9,025       9,408       8,730        8,989       3,088        2,855 
Product development.....       8,200      15,120      21,431      12,464       14,291       5,384        5,819 
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Total operating ex-                                                                                            
 penses.................      28,008      47,430      55,466      36,941       43,883      15,752       17,263 
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Operating income                                                                                               
 (loss).................       6,047        (417)    (34,684)    (22,302)      (2,786)     (6,850)       4,512 
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Other income (expense):                                                                                        
Interest income.........         244         102         190          48           92         324            6 
Interest expense........         (38)       (531)     (1,907)     (1,088)      (3,009)       (663)      (1,346)
Other...................         840        (378)        117         (45)         644         (36)         (78)
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Total other income (ex-                                                                                        
 pense).................       1,046        (807)     (1,600)     (1,085)      (2,273)       (375)      (1,418)
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Income (loss) before                                                                                           
 provision (benefit) for                                                                                       
 income taxes...........       7,093      (1,224)    (36,284)    (23,387)      (5,059)     (7,225)       3,094 
Provision (benefit) for                                                                                        
 income taxes...........       2,844        (480)     (9,065)     (5,918)         --       (1,782)         245 
                          ----------  ----------  ----------  ----------   ----------  ----------   ---------- 
Net income (loss).......  $    4,249  $     (744) $  (27,219) $  (17,469)  $   (5,059) $   (5,443)  $    2,849 
                          ==========  ==========  ==========  ==========   ==========  ==========   ========== 
Net income (loss) per                                                                                          
 share:                                                                                                        
Basic...................  $     0.40  $    (0.07) $    (2.46) $    (1.58)  $    (0.45) $    (0.49)  $     0.26 
                          ==========  ==========  ==========  ==========   ==========  ==========   ========== 
Diluted.................  $     0.35  $    (0.07) $    (2.46) $    (1.58)  $    (0.45) $    (0.49)  $     0.23 
                          ==========  ==========  ==========  ==========   ==========  ==========   ========== 
Weighted average number                                                                                        
 of common shares                                                                                              
 outstanding:                                                                                                  
Basic...................  10,568,042  10,661,944  11,085,632  11,066,487   11,123,327  11,114,060   10,952,375 
                          ==========  ==========  ==========  ==========   ==========  ==========   ========== 
Diluted.................  12,045,687  10,661,944  11,085,632  11,066,487   11,123,327  11,114,060   14,144,627 
                          ==========  ==========  ==========  ==========   ==========  ==========   ========== 

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

F-4 

424B4
71st Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 71st
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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

                                                        [Enlarge/Download Table]

                           COMMON STOCK              RETAINED   CUMULATIVE           
                         ------------------ PAID-IN  EARNINGS   TRANSLATION          
                           SHARES    AMOUNT CAPITAL  (DEFICIT)  ADJUSTMENT   TOTAL   
                         ----------  ------ -------  ---------  ----------- -------- 
                                                                                     
Balance, April 30,                                                                   
 1994................... 10,565,136   $11   $16,146  $  8,896      $--      $ 25,053 
  Exercise of stock op-                                                              
   tions................    176,763   --         54       --        --            54 
  Tax benefit from exer-                                                             
   cise of stock op-                                                                 
   tions................        --    --        620       --        --           620 
  Compensation of stock                                                              
   options granted......        --    --         93       --        --            93 
  Net income............        --    --        --      4,249       --         4,249 
                         ----------   ---   -------  --------      ----     -------- 
Balance, April 30,                                                                   
 1995................... 10,741,899    11    16,913    13,145       --        30,069 
  Exercise of stock op-                                                              
   tions................    177,104   --        140       --        --           140 
  Repurchase of common                                                               
   stock................    (89,222)  --        --        --        --           --  
  Tax benefit from exer-                                                             
   cise of stock op-                                                                 
   tions................        --    --        424       --        --           424 
  Compensation for stock                                                             
   options granted......        --    --        306       --        --           306 
  Net loss..............        --    --        --       (744)      --          (744)
                         ----------   ---   -------  --------      ----     -------- 
Balance, April 30,                                                                   
 1996................... 10,829,781    11    17,783    12,401       --        30,195 
  Exercise of stock op-                                                              
   tions................    313,403   --         58       --        --            58 
  Repurchase of common                                                               
   stock................    (29,124)  --       (275)      --        --          (275)
  Proceeds from war-                                                                 
   rants................        --    --        148       --        --           148 
  Compensation for stock                                                             
   options granted......        --    --        306       --        --           306 
  Net loss..............        --    --        --    (27,219)      --       (27,219)
  Translation adjust-                                                                
   ment.................        --    --        --        --        188          188 
                         ----------   ---   -------  --------      ----     -------- 
Balance, April 30,                                                                   
 1997................... 11,114,060    11    18,020   (14,818)      188        3,401 
  Issuance of common                                                                 
   stock................     16,362   --        184       --        --           184 
  Repurchase of common                                                               
   stock................   (178,594)  --        --        --        --           --  
  Compensation for stock                                                             
   options granted......        --    --        204       --        --           204 
  Net loss..............        --    --        --     (5,059)      --        (5,059)
  Translation adjust-                                                                
   ment.................        --    --        --        --          3            3 
                         ----------   ---   -------  --------      ----     -------- 
Balance, December 31,                                                                
 1997................... 10,951,828    11    18,408   (19,877)      191       (1,267)
  Issuance of common                                                                 
   stock................      1,200   --         10       --        --            10 
  Compensation for stock                                                             
   options granted......        --    --         76       --        --            76 
  Net income............        --    --        --      2,849       --         2,849 
  Translation adjust-                                                                
   ment.................        --    --        --        --          1            1 
                         ----------   ---   -------  --------      ----     -------- 
Balance, March 31, 1998                                                              
 (unaudited)............ 10,953,028   $11   $18,494  $(17,028)     $192     $  1,669 
                         ==========   ===   =======  ========      ====     ======== 

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

F-5 

424B4
72nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 72nd
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(AMOUNTS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                      EIGHT MONTHS ENDED     THREE MONTHS ENDED   
                          YEARS ENDED APRIL 30,          DECEMBER 31,             MARCH 31,       
                         --------------------------  --------------------  -----------------------
                          1995     1996      1997       1996       1997       1997        1998    
                         -------  -------  --------  ----------- --------  ----------- -----------
                                                     (UNAUDITED)           (UNAUDITED) (UNAUDITED)
                                                                                                  
Cash flows from                                                                                   
 operating activities:                                                                            
 Net income (loss).....  $ 4,249  $  (744) $(27,219)  $(17,469)  $ (5,059)   $(5,443)    $ 2,849  
 Adjustments to                                                                                   
  reconcile net income                                                                            
  (loss) to the cash                                                                              
  provided by (used in)                                                                           
  operating                                                                                       
  activities--                                                                                    
 Depreciation and                                                                                 
  amortization.........      756    1,985     3,172      1,817      2,138        741         840  
 Gain on sale of                                                                                  
  property and                                                                                    
  equipment............      --       (21)      --         --         --         --          --   
 Noncash expense for                                                                              
  stock options........       93      306       306        204        204         76          76  
 Noncash interest                                                                                 
  expense..............      --       --        --         --         184        --          --   
 Write-off of non-                                                                                
  current assets.......      --       388       250        --         --         --          --   
 Deferred income                                                                                  
  taxes................    1,360     (335)   (6,649)       --         128        --          653  
 Minority interest in                                                                             
  earnings (loss) of                                                                              
  subsidiary...........      --        25        28         (4)       (66)        23          44  
 Changes in assets and                                                                            
  liabilities:                                                                                    
  Trade receivables....   (7,824)  (3,229)    3,926     (1,823)   (12,338)     3,641      (9,708) 
  Inventories..........   (1,343)  (2,193)   (1,508)      (824)     1,066       (805)        273  
  Income taxes                                                                                    
   receivable..........      --    (1,403)     (176)       --         174        --        1,427  
  Other current                                                                                   
   assets..............   (1,364)  (2,232)    5,732      2,713     (1,864)      (258)     (2,837) 
  Other assets.........   (1,098)    (467)    5,610        --         543        --          --   
  Prepaid licenses and                                                                            
   royalties...........   (6,897)  (5,966)   (4,102)    (3,922)    (1,714)        90         245  
  Accounts payable.....     (328)   7,589    (1,999)      (272)       146     (3,059)     (2,927) 
  Accrued expenses.....    4,027    9,223     5,618      7,047      1,449      5,061       8,968  
  Income taxes                                                                                    
   payable.............     (347)    (467)      --      (5,919)      (310)    (1,807)       (140) 
                         -------  -------  --------   --------   --------    -------     -------  
   Net cash provided by                                                                           
    (used in) operating                                                                           
    activities.........   (8,716)   2,459   (17,011)   (18,452)   (15,319)    (1,740)       (237) 
                         -------  -------  --------   --------   --------    -------     -------  
Cash flows from                                                                                   
 investing activities:                                                                            
 Purchase of property                                                                             
  and equipment........   (3,323)  (4,585)   (3,451)    (1,981)      (792)      (617)       (296) 
 Proceeds from sales of                                                                           
  property and                                                                                    
  equipment............      --        14       --         --         --         --          --   
 Acquisition of                                                                                   
  subsidiary, net of                                                                              
  cash acquired of                                                                                
  $119.................      --    (3,196)      --         --         --         --          --   
 Proceeds from sale of                                                                            
  investment in                                                                                   
  affiliate............      --       200       --         --         --         --          --   
 Proceeds from sale of                                                                            
  marketable                                                                                      
  securities...........   15,012       69       --         --         --         --          --   
                         -------  -------  --------   --------   --------    -------     -------  
   Net cash provided by                                                                           
    (used in) investing                                                                           
    activities.........   11,689   (7,498)   (3,451)    (1,981)      (792)      (617)       (296) 
                         -------  -------  --------   --------   --------    -------     -------  
Cash flows from                                                                                   
 financing activities:                                                                            
 Net borrowings on line                                                                           
  of credit............      --     5,050     5,900      5,392     12,296        466         971  
 Issuances of                                                                                     
  Subordinated Secured                                                                            
  Promissory Notes and                                                                            
  Warrants.............      --       --     14,803     13,230        --       1,961         --   
 Borrowings (repay-                                                                               
  ments) on notes pay-                                                                            
  able.................     (122)    (117)      (75)       (34)       (62)        31         (48) 
 Proceeds from exercise                                                                           
  of stock options.....       54      140        58         57        --         --           10  
 Tax benefit from stock                                                                           
  option exercise......      620      424       --         --         --         --          --   
 Other financing activ-                                                                           
  ities................      --       (11)      --         --         --         --          --   
                         -------  -------  --------   --------   --------    -------     -------  
   Net cash provided by                                                                           
    financing                                                                                     
    activities.........      552    5,486    20,686     18,645     12,234      2,458         933  
                         -------  -------  --------   --------   --------    -------     -------  
Effect of exchange rate                                                                           
 changes on cash and                                                                              
 cash equivalents......      --       (58)      263        --           3        --            1  
                         -------  -------  --------   --------   --------    -------     -------  
Net increase (decrease)                                                                           
 in cash and cash                                                                                 
 equivalents...........    3,525      389       487     (1,788)    (3,874)       101         401  
Cash and cash                                                                                     
 equivalents, beginning                                                                           
 of year...............    1,009    4,534     4,923      4,923      5,410      3,135       1,536  
                         -------  -------  --------   --------   --------    -------     -------  
Cash and cash                                                                                     
 equivalents, end of                                                                              
 year..................  $ 4,534  $ 4,923  $  5,410   $  3,135   $  1,536    $ 3,236     $ 1,937  
                         =======  =======  ========   ========   ========    =======     =======  
Supplemental cash flow                                                                            
 information:                                                                                     
 Cash paid during the                                                                             
  year for:                                                                                       
 Interest..............  $    22  $   480  $  1,638   $    822   $  2,936    $   563     $ 1,372  
                         =======  =======  ========   ========   ========    =======     =======  
 Income taxes..........  $ 1,318  $   526  $    --    $    --    $    --     $   --      $   --   
                         =======  =======  ========   ========   ========    =======     =======  

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

F-6 

424B4
73rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 73rd
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS 
ENDED MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

1. LINE OF BUSINESS                                                             

Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries 
(collectively with Interplay Productions, a California corporation, the         
"Company"), develop, publish, and distribute interactive entertainment          
software. In addition, the Company distributes certain titles to hardware or    
peripheral device manufacturers for use in bundling arrangements. The           
Company's software is developed for use on various interactive entertainment    
software platforms, including personal computers and current generation video   
game consoles, such as the PlayStation and Nintendo 64.                         

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

Consolidation                                                                 

The accompanying consolidated financial statements include the accounts of  
Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay      
Productions Limited (U.K.), Interplay OEM, Inc., Interplay Productions Pty Ltd  
(Australia), Interplay Co., Ltd., (Japan) and its 91 percent-owned subsidiary   
Shiny Entertainment, Inc. All significant intercompany accounts and             
transactions have been eliminated.                                              

Change of Fiscal Year End                                                     

Effective May 1, 1997, the Company changed its fiscal year end from April 30
to December 31.                                                                 

Use of Estimates                                                              

The preparation of financial statements in conformity with generally        
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amounts of assets and liabilities and      
disclosure of contingent assets and liabilities at the date of the financial    
statements and the reported amounts of revenues and expenses during the         
reporting period. Actual results could differ from those estimates.             

Cash and Cash Equivalents and Noncash Activities                              

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.                                 

During the fiscal year ended April 30, 1997, in a noncash financing         
transaction, the Company acquired 29,124 shares of common stock in exchange     
for a $275 note payable.                                                        

Inventories                                                                   

Inventories consist of CD-ROMs, video game console cartridges (cartridges), 
manuals, packaging materials, supplies and packaged software ready for          
shipment and are valued at the lower of cost (first-in, first-out) or market.   

Prepaid Licenses and Royalties                                                

Prepaid licenses and royalties consist of payments for intellectual property
rights, payments to celebrities and sports leagues and advanced royalty         
payments to outside developers. In addition such costs include certain other    
outside production costs generally consisting of film cost and amounts paid     
for digitized motion data with alternative future uses. Payments to developers  
represent contractual advanced payments made for future royalties. 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. The Company       
amortizes the cost of licenses, prepaid royalties and other outside production  
costs to cost of sales over six months commencing with the initial shipment of  
the title at a rate based upon the number                                       

F-7 

424B4
74th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 74th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

of units shipped. Management evaluates the future realization of such costs     
quarterly and charges to cost of goods sold any amounts that management deems   
unlikely to be fully realized through future sales. Such costs are classified   
as current and noncurrent assets based upon estimated net product sales.        

Property and Equipment                                                        

Property and equipment are stated at cost. Depreciation of computers,       
equipment and furniture and fixtures is provided using the straight-line        
method over a five year period. Leasehold improvements are amortized on a       
straight line basis over the lesser of the estimated useful life or the         
remaining lease term.                                                           

Other Non-current Assets                                                      

Other non-current assets consist primarily of goodwill which the Company is 
amortizing on a straight-line basis over seven years (see Note 3). Accumulated  
amortization as of April 30, 1995, 1996 and 1997 and December 31, 1997 was $0,  
$327, $710 and $965, respectively.                                              

Long-lived Assets                                                             

As prescribed by Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets   
to be Disposed of," the Company assesses the recoverability of its long-lived   
assets (including goodwill) by determining whether the asset balance can be     
recovered over the remaining depreciation or amortization period through        
projected undiscounted future cash flows. Cash flow projections, although       
subject to a degree of uncertainty, are based on trends of historical           
performance and management's estimate of future performance, giving             
consideration to existing and anticipated competitive and economic conditions.  

Fair Value of Financial Instruments                                           

The carrying value of cash and cash equivalents, accounts receivable,       
accounts payable and notes payable approximates the fair value. In addition,    
the carrying value of all borrowings approximate fair value based on interest   
rates currently available to the Company.                                       

Revenue Recognition                                                           

Revenues are recorded when products are delivered to customers in accordance
with Statement of Position (SOP) 91-1, Software Revenue Recognition. For those  
agreements that provide the customers the right to multiple copies in exchange  
for guaranteed amounts, revenue is recognized at the delivery of the product    
master or the first copy. Per copy royalties on sales that exceed the           
guarantee are recognized as earned. The Company is generally not contractually  
obligated to accept returns, except for defective product. However, the         
Company permits customers to return or exchange product and may provide price   
protection on products unsold by a customer. In accordance with SFAS No. 48,    
revenue is recorded net of an allowance for estimated returns, exchanges,       
markdowns, price concessions, and warranty costs. Such reserves are 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 included in the accompanying       
consolidated financial statements. Postcontract customer support provided by    
the Company is limited to telephone support. These costs are not material and   
are charged to expenses as incurred.                                            

Product Development                                                           

Product development expenses are charged to operations in the period        
incurred and consist primarily of payroll and payroll related costs.            

F-8 

424B4
75th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 75th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

Income Taxes                                                                  

The Company accounts for income taxes using the liability method as         
prescribed by the SFAS No. 109, "Accounting for Income Taxes." The statement    
requires an asset and liability approach for financial accounting and           
reporting of income taxes. Deferred income taxes are provided for temporary     
differences in the recognition of certain income and expense items for          
financial reporting and tax purposes given the provisions of the enacted tax    
laws.                                                                           

Foreign Currency Translation                                                  

The Company follows the principles of SFAS No. 52, "Foreign Currency        
Translation," using the local currency of its operating subsidiaries as the     
functional currency. Accordingly, all assets and liabilities outside the        
United States are translated into U.S. dollars at the rate of exchange in       
effect at the balance sheet date. Income and expense items are translated at    
the weighted average exchange rate prevailing during the period. Gains or       
losses arising from the translation of the foreign subsidiaries' financial      
statements are included in the accompanying consolidated balance sheets as a    
separate component of stockholders' equity (deficit). Gains (losses) resulting  
from foreign currency transactions amounted to $(7), $325, $364 and $246        
during the years ended April 30, 1995, 1996 and 1997 and the eight months       
ended December 31, 1997, respectively, and are included in other income         
(expense) in the consolidated statements of operations.                         

Net Income (Loss) Per Share                                                   

The Company accounts for net income per share in accordance with SFAS No.   
128 "Earnings Per Share" and SFAS No. 129, "Disclosure of Information about     
Capital Structure." Basic net income (loss) per share is computed by dividing   
income (loss) available to common stockholders by the weighted average number   
of common shares outstanding. Diluted net income (loss) per share is computed   
by dividing income (loss) available to common stockholders by the weighted      
average number of common shares outstanding plus the effect of any dilutive     
stock options and common stock warrants issued in connection with Subordinated  
Secured Promissory Notes.                                                       

For the year ended April 30, 1995 and the three months ended March 31, 1998,
1,477,645 and 3,192,252 dilutive stock options and warrants, respectively,      
were included in the diluted net income per share calculation. For years ended  
April 30, 1996 and 1997 and the eight months ended December 31, 1997, all       
options and warrants to purchase common stock were excluded from the diluted    
loss per share calculation as the effect of such inclusion would be             
antidilutive (see Note 10).                                                     

F-9 

424B4
76th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 76th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

Pro Forma Data (unaudited)                                                    

Pro forma net income (loss) represents the reduction of interest expense    
assuming (i) the conversion or repayment of the Subordinated Secured            
Promissory Notes (Notes) as of the beginning of the period, and (ii) the        
application of proceeds of the Offering to repay outstanding borrowings on the  
line of credit. Pro forma net income (loss) per share was computed by dividing  
pro forma net income (loss) by the pro forma weighted average shares            
outstanding. Pro forma weighted average shares includes the shares of common    
stock from the exercise of common stock warrants, and the number of shares of   
common stock issued in the Offering sufficient to repay approximately $16.8     
million of the outstanding borrowings on the line of credit and the Notes that  
are not expected to convert to common stock.                                    

                                                                [Download Table]

                                                   EIGHT MONTHS THREE MONTHS
                                       YEAR ENDED     ENDED        ENDED    
                                       APRIL 30,   DECEMBER 31,  MARCH 31,  
                                          1997         1997         1998    
                                       ----------  ------------ ------------
                                                                            
Pro forma net income (loss):                                                
 Historical income (loss) before pro-                                       
  vision (benefit) for income taxes..  $  (36,284)  $   (5,059)  $    3,094 
 Adjust interest expense.............       1,616        2,379        1,062 
 Less provision (benefit) for income                                        
  taxes..............................      (9,065)         --           245 
                                       ----------   ----------   ---------- 
 Pro forma net income (loss).........  $  (25,603)  $   (2,680)  $    3,911 
                                       ==========   ==========   ========== 
Pro forma net income (loss) per                                             
 share:                                $    (1.55)  $    (0.15)  $     0.22 
                                       ==========   ==========   ========== 
Pro forma weighted average number of                                        
 common shares outstanding:            16,494,414   17,591,200   17,420,248 
                                       ==========   ==========   ========== 

Stock-Based Compensation                                                      

As permitted under generally accepted accounting principles, the Company    
accounts for employee stock options in accordance with the Accounting           
Principles Board Opinion No. 25 and makes the necessary pro forma disclosures   
mandated by SFAS No. 123 (see Note 10).                                         

Pending Accounting Pronouncements                                             

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS   
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about  
Segments of an Enterprise and Related Information." In addition, the American   
Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue    
Recognition" and SOP 98-1, "Accounting for the Costs of Computer Software       
Developed or Obtained for Internal Use." SFAS No. 130, SFAS No. 131 and SOP     
97-2 are effective for fiscal years beginning after December 15, 1997 and SOP   
98-1 is effective for fiscal years beginning after December 15, 1998. The       
Company does not believe that adoption of these standards will have a material  
impact on the Company's results of operations.                                  

Unaudited Quarterly Information                                               

The accompanying financial information as of March 31, 1998 and for the     
three months ended March 31, 1997 and 1998 is unaudited and has been prepared   
on substantially the same basis as the annual financial                         

F-10  

424B4
77th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 77th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

statements. In the opinion of management, the unaudited information contains    
all adjustments (consisting of normal recurring accruals) necessary to present  
fairly the financial position and results of operations as of such date and     
for such periods.                                                               

3. ACQUISITION                                                                  

Effective June 24, 1995, the Company acquired a 91 percent interest in Shiny
Entertainment, Inc. (Shiny) for $3,624 in cash and stock. The acquisition was   
accounted for using the purchase method. The allocation of purchase price is    
summarized as follows:                                                          

                                                                [Download Table]
                                                                             
Cash and cash equivalents............................................ $  119 
Receivables..........................................................    107 
Other current assets.................................................      6 
Property and equipment...............................................    417 
Goodwill.............................................................  3,057 
Accounts payable and accrued expenses................................    (82)
                                                                      ------ 
  Total purchase price............................................... $3,624 
                                                                      ====== 

The purchase agreement requires the Company to pay the former owner of Shiny
additional cash payments of up to $5,325 upon the delivery and acceptance of    
five future Shiny interactive entertainment software titles, as defined.        
Future payments, if any, will be expensed in the six-month period following     
the initial shipment of such products. As of December 31, 1997, the Company     
had not been required to make any additional payments.                          

4. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS                                    

Inventories                                                                   

Inventories consist of the following:                                       

                                                                [Download Table]

                                         APRIL 30,                         
                                       ------------- DECEMBER 31, MARCH 31,
                                        1996   1997      1997       1998   
                                       ------ ------ ------------ ---------
                                                                           
Packaged software..................... $4,211 $5,309    $4,171     $3,852  
CD-ROMs, cartridges, manuals, packag-                                      
 ing and supplies.....................  1,685  2,095     2,167      2,213  
                                       ------ ------    ------     ------  
                                       $5,896 $7,404    $6,338     $6,065  
                                       ====== ======    ======     ======  

Other Current Assets                                                          

Other current assets consist of the following:                              

                                                                [Download Table]

                                          APRIL 30,                         
                                        ------------- DECEMBER 31, MARCH 31,
                                         1996   1997      1997       1998   
                                        ------ ------ ------------ ---------
                                                                            
Prepaid expenses....................... $2,960 $  977    $1,640     $1,301  
Royalties receivables..................  1,331    581     1,644        --   
Deposits...............................    553    560       162        214  
Other receivables......................    236    236       772      1,850  
Stockholder receivable.................    973    --        --         --   
                                        ------ ------    ------     ------  
                                        $6,053 $2,354    $4,218     $3,365  
                                        ====== ======    ======     ======  

F-11  

424B4
78th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 78th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

Property and Equipment                                                        

Property and equipment consists of the following:                           

                                                                [Download Table]

                                       APRIL 30,                            
                                    ----------------  DECEMBER 31, MARCH 31,
                                     1996     1997        1997       1998   
                                    -------  -------  ------------ ---------
                                                                            
Computers and equipment...........  $ 9,179  $11,325    $12,383     $12,793 
Furniture and fixtures............      336      702        474         511 
Leasehold improvements............    1,249    1,514      1,125       1,144 
                                    -------  -------    -------     ------- 
                                     10,764   13,541     13,982      14,448 
Less--accumulated depreciation and                                          
 amortization.....................   (2,926)  (5,424)    (6,956)     (7,702)
                                    -------  -------    -------     ------- 
                                    $ 7,838  $ 8,117    $ 7,026     $ 6,746 
                                    =======  =======    =======     ======= 

Accrued Expenses                                                              

Accrued expenses consist of the following:                                  

                                                                [Download Table]

                                          APRIL 30,                          
                                       --------------- DECEMBER 31, MARCH 31,
                                        1996    1997       1997       1998   
                                       ------- ------- ------------ ---------
                                                                             
Royalties payable..................... $ 5,463 $ 8,178   $ 6,901     $ 5,051 
Accrued payroll.......................   2,621   2,261     2,707       3,027 
Payable to distributor................   2,806   1,715     4,240         554 
Accrued bundle and affiliate..........   2,115   4,149     2,923       2,981 
Deferred income.......................     --    2,464     3,442       4,845 
Other.................................   2,544   2,333     2,336       5,773 
                                       ------- -------   -------     ------- 
                                       $15,549 $21,100   $22,549     $22,231 
                                       ======= =======   =======     ======= 

5. SHORT-TERM BORROWINGS                                                        

In May 1993, the Company entered into a trade finance agreement with a bank,
bearing interest at prime (8.25 percent at April 30, 1996) plus one-half        
percent. Amounts outstanding under this agreement were $5,050 at April 30,      
1996. This agreement expired in October 1996. In April 1996, the Company        
entered into a line of credit agreement with the same bank, bearing interest    
at prime plus one-half percent. No amounts were outstanding under this line of  
credit at April 30, 1996, and the line of credit expired in June 1996. In       
October 1996, the Company entered into a trade finance agreement with two       
banks, bearing interest at prime (8.5 percent at April 30, 1997) plus one-half  
percent. Amounts outstanding under this agreement were $10,950 at April 30,     
1997. In June 1997, the Company retired this trade finance agreement and        
entered into a Loan and Security Agreement with a financial institution (see    
Note 6).                                                                        

F-12  

424B4
79th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 79th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

6. LONG-TERM DEBT                                                               

Long-term debt consists of the following:                                   

                                                                [Download Table]

                                       APRIL 30,                           
                                      -------------  DECEMBER 31, MARCH 31,
                                      1996   1997        1997       1998   
                                      ----  -------  ------------ ---------
                                                                           
  Subordinated Secured Promissory                                          
   Notes............................. $--   $14,655    $ 14,655   $ 14,655 
  Loan Agreement.....................  --       --       23,246     23,820 
  Other..............................  108      315         253        205 
                                      ----  -------    --------   -------- 
                                       108   14,970      38,154     38,680 
  Less--current portion..............  (57)    (123)    (14,767)   (14,825)
                                      ----  -------    --------   -------- 
                                      $ 51  $14,847    $ 23,387   $ 23,855 
                                      ====  =======    ========   ======== 

Subordinated Secured Promissory Notes                                         

From October 1996 through February 1997, the Company issued $14,803 in      
Subordinated Secured Promissory Notes (Notes) and nondetachable Warrants to     
purchase common stock (Warrants). Employees, officers, and directors of the     
Company hold $2,600 of the total Notes outstanding. Of the total proceeds       
received, $14,655 represents the principal amount of the Notes and $148         
represents the purchase price of the Warrants. The amount paid for the          
Warrants approximates management's estimate of the fair market value of the     
Warrants at the date of issuance and is included in paid-in capital in the      
accompanying consolidated balance sheets.                                       

The Notes bear interest at a rate of 12.0 percent per year. Interest is     
payable quarterly, with the first payment due May 1, 1997. The principal        
amount and all accrued but unpaid interest will be payable upon the             
consummation of a qualified initial public offering (IPO), as defined or the    
sale of substantially all of the Company's assets or a merger where the         
Company is not the surviving entity (Sales Transaction). If neither of these    
events occur prior to November 30, 1998, the Note holders may elect to extend   
the Notes one additional year or may notify the Company in writing of their     
desire to full payment in cash. Interest expense related to the notes was $856  
for the year ended April 30, 1997 and $1,172 for the eight months ended         
December 31, 1997.                                                              

Each Warrant holder has the right to purchase from the Company the number of
shares of common stock equal to the investor's aggregate investment (including  
Notes and Warrants) divided by the product of .70 multiplied by (a) the IPO     
price per share or (b) in the event of a Sales Transaction, the fair market     
value per share as determined in the Sales Transaction. The term of the         
Warrants commenced on the date of issuance and expire upon the redemption of    
the Notes, as described above (see Note 13).                                    

Total interest due on the Notes at May 1, 1997 was $856. The Company offered
to pay the interest in cash or offered to issue one share of common stock for   
each $11.25 of interest due (management's estimate of fair value of the         
Company's common stock at the time). Interest of $672 was paid in cash and      
$184 of interest was paid with 16,362 shares of common stock.                   

Loan Agreement                                                                

In June 1997, the Company entered into a Loan and Security Agreement (Loan  
Agreement) with a financial institution which was amended in February 1998.     
Borrowings under the Loan Agreement bear interest at LIBOR (5.72 percent at     
December 31, 1997) plus 4.87 percent (10.59 percent at December 31, 1997). The  
agreement                                                                       

F-13  

424B4
80th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 80th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

provides for a line of credit and letters of credit to be issued, based in      
part on qualified receivables and inventory. Combined borrowings under this     
Loan Agreement may be up to a maximum of $35,000 through August 30, 1998;       
$30,000 from August 31 to December 30, 1998; and $25,000 thereafter. Within     
the total credit limits, the Company may borrow up to $10,000 in excess of its  
borrowing base through August 1998 and up to $5,000 in excess of its borrowing  
base thereafter through December 30, 1998. The line of credit is secured by     
cash, accounts receivable and inventory and expires in May 1999.                

7. INCOME TAXES                                                                 

The Company files a consolidated U.S. Federal income tax return which       
includes substantially all of its domestic operations. The Company files        
separate tax returns for each of its foreign subsidiaries in the countries in   
which they reside.                                                              

Income (loss) before provision (benefit) for income taxes consists of the   
following:                                                                      

                                                                [Download Table]

                                                                  EIGHT MONTHS
                                         YEARS ENDED APRIL 30,       ENDED    
                                        ------------------------  DECEMBER 31,
                                         1995   1996      1997        1997    
                                        ------ -------  --------  ------------
                                                                              
 Domestic.............................. $5,689 $(1,890) $(32,888)   $(2,784)  
 Foreign...............................  1,404     666    (3,396)    (2,275)  
                                        ------ -------  --------    -------   
   Total............................... $7,093 $(1,224) $(36,284)   $(5,059)  
                                        ====== =======  ========    =======   

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


                                                                  EIGHT MONTHS
                                         YEARS ENDED APRIL 30,        ENDED   
                                        ------------------------  DECEMBER 31,
                                         1995   1996      1997        1997    
                                        ------ -------  --------  ------------
                                                                              
 Current:                                                                     
   Federal............................. $  915 $  (275) $ (1,689)   $  (179)  
   State...............................    125      10       --         --    
   Foreign.............................    --      456       153         51   
                                        ------ -------  --------    -------   
                                         1,040     191    (1,536)      (128)  
 Deferred:                                                                    
   Federal.............................  1,591    (653)   (7,303)       128   
   State...............................    213     (18)     (226)       --    
                                        ------ -------  --------    -------   
                                         1,804    (671)   (7,529)       128   
                                        ------ -------  --------    -------   
                                        $2,844 $  (480) $ (9,065)   $   --    
                                        ====== =======  ========    =======   

The Company's available net operating loss (NOL) carryforward for federal   
tax reporting purposes approximates $17,300 and may be subject to certain       
limitations as defined under Section 382 of the Internal Revenue Code. The      
federal NOL carryforwards expire through the year 2012. The Company's NOL's     
for state tax reporting purposes approximate $13,000 and expire through the     
year 2002.                                                                      

F-14  

424B4
81st Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 81st
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

A reconciliation of the statutory federal income tax rate and the effective 
tax rate as a percentage of pretax income is as follows:                        

                                                                [Download Table]

                                          YEARS ENDED          EIGHT MONTHS 
                                           APRIL 30,               ENDED    
                                        --------------------   DECEMBER 31, 
                                        1995   1996    1997        1997     
                                        ----   -----   -----   -------------
                                                                            
Statutory income tax rate.............. 34.0 % (34.0)% (34.0)%     (34.0)%  
State and local income taxes, net of                                        
 federal income tax benefit............  6.6    (3.0)   (3.0)       (3.0)   
Valuation allowance....................  --      --      8.0        39.7    
Other.................................. (0.5)   (2.2)    4.0        (2.7)   
                                        ----   -----   -----       -----    
Effective income tax rate.............. 40.1 % (39.2)% (25.0)%       --  %  
                                        ====   =====   =====       =====    

The components of the Company's net deferred income tax asset (liability)   
are as follows:                                                                 

                                                                [Download Table]

                                                APRIL 30,                  
                                             ----------------  DECEMBER 31,
                                              1996     1997        1997    
                                             -------  -------  ------------
                                                                           
Current deferred tax asset (liability):                                    
  Prepaid royalties......................... $(4,681) $(3,060)   $(2,760)  
  Nondeductible reserves....................   3,655    5,532      5,603   
  Accrued expenses..........................     675      769      1,015   
  Foreign loss and credit carryforward......     568      207      1,008   
  Federal and state net operating losses....     --     6,264      6,668   
  Research and development credit                                          
   carryforward.............................     --       831        831   
  Other.....................................     106      241        330   
                                             -------  -------    -------   
                                                 323   10,784     12,695   
  Valuation allowance.......................     --    (2,895)    (4,903)  
                                             -------  -------    -------   
                                             $   323  $ 7,889    $ 7,792   
                                             =======  =======    =======   
Non-current deferred tax asset (liability):                                
  Depreciation expense...................... $  (591) $  (585)   $  (625)  
  Nondeductible reserves....................     155      127        191   
  Other.....................................      70       55        --    
                                             -------  -------    -------   
                                             $  (366) $  (403)   $  (434)  
                                             =======  =======    =======   

F-15  

424B4
82nd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 82nd
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

8. COMMITMENTS AND CONTINGENCIES                                                

Leases                                                                        

The Company leases office space in Irvine, California for its corporate     
offices. The lease expires in June 2006 with one five-year option to extend     
the term of the lease. The Company has also entered into various computer       
equipment operating leases. Future minimum lease payments under noncancelable   
operating leases are as follows:                                                

                                                                [Download Table]
                                                                             
Year ending December 31:                                                     
  1998............................................................... $ 2,036
  1999...............................................................   1,710
  2000...............................................................   1,414
  2001...............................................................   1,522
  2002...............................................................   1,669
  Thereafter.........................................................   6,133
                                                                      -------
                                                                      $14,484
                                                                      =======

Total rent expense was $362, $697 and $2,089 for the years ended April 30,  
1995, 1996 and 1997, respectively, and $1,292 for the eight months ended        
December 31, 1997.                                                              

Pending Internal Revenue Service Examination                                  

The Internal Revenue Service (the IRS) is currently examining the Company's 
consolidated federal income tax returns for the years ended April 30, 1994,     
1995 and 1996. The consolidated federal income tax return for the year ended    
April 30, 1997 remains open. The IRS has preliminarily challenged the timing    
of certain tax deductions taken by the Company. The Company is currently        
contesting such challenges. However, if the IRS is successful in its position,  
the effect on the consolidated financial statements would be to reduce amounts  
currently shown as deferred income taxes and net operating loss carryforwards   
and the recording of interest expense of approximately $700. In conjunction     
with this matter, the Company has recorded certain reserves and, in the         
opinion of management, settlement of this matter will not have a material       
adverse effect on the consolidated financial position or operating results of   
the Company.                                                                    

Litigation                                                                    

In July 1997, S3 Incorporated (S3), an original equipment manufacturer (OEM)
customer, filed a complaint against the Company claiming, among other things,   
that the Company breached its obligations to S3 under a license agreement. In   
September 1997, the Company filed a cross-complaint against S3 claiming, among  
other things, that S3 breached the license agreement by failing to make         
guaranteed payments. Both parties are seeking in excess of $1,000 in the        
lawsuit. On April 28, 1998, the Company entered into a Settlement and Release   
Agreement pursuant to which S3 has agreed to pay the Company certain amounts    
in full settlement of all claims.                                               

The Company is also involved in other litigation arising from the normal    
course of business. Management believes that the final outcome of all legal     
matters will not have a material adverse effect on the Company's financial      
position or results of operations.                                              

Employment Agreements                                                         

The Company has entered into employment agreements with three of its        
officers providing for, among other things, salary, bonuses and the right to    
participate in certain incentive compensation and other employee benefit plans  
established by the Company. Under these agreements, upon termination without    
cause or resignation for                                                        

F-16  

424B4
83rd Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 83rd
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

good reason, as defined, the employees are entitled to 150 percent of their     
annual salary and 75 percent of the imputed bonus, as defined. These            
agreements expire in 1999.                                                      

9. COMMON STOCK                                                                 

During 1994, the Company issued 1,824,897 shares of common stock for cash to
a corporate stockholder. In addition, the corporate stockholder purchased       
1,216,598 shares of common stock for cash from the founder of the Company (the  
Founder). In connection with this transaction, the corporate stockholder was    
granted options to purchase additional shares from the Founder, which were      
exercisable in 1995 and 1996. The corporate stockholder exercised these         
options and purchased 1,150,123 and 1,216,598 shares from the Founder during    
1996 and 1995, respectively.                                                    

On May 26, 1995, the Company entered into an Agreement of Settlement and    
Mutual Release with a former employee whereby 89,222 shares of common stock     
were cancelled and the former employee's remaining shares of 45,000 shares      
were retained by the former employee.                                           

On February 1, 1997, the Company repurchased 29,124 shares of common stock  
from an employee in exchange for a $275 note payable. The note bears interest   
at 7 percent and is payable over 36 months.                                     

On September 12, 1997, the Company entered into a Separation and Release    
Agreement with a former employee whereby 178,594 shares of common stock were    
cancelled and the former employee's remaining shares of 149,500 shares were     
retained by the former employee.                                                

10. EMPLOYEE BENEFIT PLANS                                                      

Stock Option Plans                                                            

The Company has three stock option plans. Under the Incentive Stock Option, 
Nonqualified Stock Option and Restricted Stock Purchase Plan--1991 (1991        
Plan), the Company may grant options to its employees to purchase up to         
2,250,000 shares of common stock. Under the Incentive Stock Option and          
Nonqualified Stock Option Plan--1994 (1994 Plan), the Company may grant         
options to its employees to purchase up to 808,300 shares of common stock.      
Under the 1997 Stock Incentive Plan, adopted in 1997, the Company may grant     
options to its employees, consultants and directors to purchase up to 700,000   
shares of common stock (See Note 13).                                           

Options under all three plans generally vest over five years. Holders of    
options under the 1991 Plan and the 1994 Plan shall be deemed 100 percent       
vested in the event of a merger in which the Company is not the surviving       
entity, a sale of substantially all of the assets of the Company, or a sale of  
all shares of common stock of the Company. The Company has treated the          
difference, if any, between the exercise price and the estimated fair market    
value, as determined by the board of directors on the date of grant, as         
compensation expense for financial reporting purposes. Compensation expense     
for the vested portion aggregated $306 for each of the years ended April 30,    
1996 and 1997 and $204 for the eight months ended December 31, 1997.            

F-17  

424B4
84th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 84th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

 The following is a summary of option activity pursuant to the Company's stock
option plans:                                                                   

                                                                [Download Table]

                           APRIL 30, 1996      APRIL 30, 1997    DECEMBER 31, 1997  
                         ------------------- ------------------- -------------------
                                    WEIGHTED            WEIGHTED            WEIGHTED
                                    AVERAGE             AVERAGE             AVERAGE 
                                    EXERCISE            EXERCISE            EXERCISE
                          SHARES     PRICE    SHARES     PRICE    SHARES     PRICE  
                         ---------  -------- ---------  -------- ---------  --------
                                                                                    
Options outstanding at                                                              
 beginning of year...... 1,665,479   $1.69   1,824,025   $ 3.16  1,630,022   $ 4.59 
Granted.................   418,050    8.79     136,800    14.08    263,750    11.25 
Exercised...............  (177,104)   0.79    (313,403)    0.18        --       --  
Cancelled...............   (82,400)   7.16     (17,400)    8.50    (54,800)   12.50 
                         ---------   -----   ---------   ------  ---------   ------ 
Options outstanding at                                                              
 end of year............ 1,824,025   $3.16   1,630,022   $ 4.59  1,838,972   $ 5.31 
                         =========   =====   =========   ======  =========   ====== 
Options exercisable..... 1,434,775           1,218,102           1,324,132          
                         =========           =========           =========          

 The following outlines the significant assumptions used to calculate the fair
value information presented utilizing the Black Scholes Single Option approach  
with ratable amortization:                                                      

                                                                [Download Table]

                                               APRIL 30,                   
                                         --------------------- DECEMBER 31,
                                            1996       1997        1997    
                                         ---------- ---------- ------------
                                                                           
Risk free rate..........................       6.1%       6.1%        6.1% 
Expected life........................... 7.12 years 7.13 years  8.02 years 
Expected volatility.....................        --         --          --  
Expected dividends......................        --         --          --  
Weighted-average grant-date fair value                                     
 of options granted.....................      $2.34      $3.68       $3.61 

A detail of the options outstanding and exercisable as of December 31, 1997 
is as follows:                                                                  

                                                                [Download Table]

              OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE 
------------------------------------------------- --------------------
                               WEIGHTED                               
                               AVERAGE   WEIGHTED             WEIGHTED
                              REMAINING  AVERAGE              AVERAGE 
   RANGE OF         NUMBER     CONTRACT  EXERCISE   NUMBER    EXERCISE
EXERCISE PRICES   OUTSTANDING    LIFE     PRICE   OUTSTANDING  PRICE  
---------------   ----------- ---------- -------- ----------- --------
                                                                      
 $ 0.15-$ 0.47       676,659  4.31 years  $ 0.21     676,659   $ 0.21 
   2.00-  4.44       274,913  6.15 years    3.48     274,913     3.48 
   4.50-  8.50       446,350  7.26 years    7.91     278,360     7.84 
  10.00- 14.62       441,050  8.49 years   11.65      94,200    11.62 
 -------------     ---------  ----------  ------   ---------   ------ 
 $ 0.15-$14.62     1,838,972  6.30 years  $ 5.31   1,324,132   $ 3.30 
 =============     =========  ==========  ======   =========   ====== 

F-18

424B4
85th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 85th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

The following table shows pro forma net loss as if the fair value based     
accounting method prescribed by SFAS No. 123 had been used to account for       
stock based compensation cost:                                                  

                                                                [Download Table]

                                                                EIGHT MONTHS
                                        YEARS ENDED APRIL 30,      ENDED    
                                        ----------------------  DECEMBER 31,
                                          1996        1997         1997     
                                        ---------- -----------  ------------
                                                                            
Net loss as reported..................  $    (744) $   (27,219)   $(5,059)  
Pro forma compensation expense........       (121)        (348)      (276)  
                                        ---------  -----------    -------   
Pro forma net loss....................  $    (865) $   (27,567)   $(5,335)  
                                        =========  ===========    =======   
Basic and diluted net loss as report-                                       
 ed...................................  $   (0.07) $     (2.46)   $ (0.45)  
Basic and diluted pro forma net loss..  $   (0.08) $     (2.49)   $ (0.48)  

Profit Sharing 401(k) Plan                                                    

The Company sponsors a 401(k) plan (the Plan) for full-time employees over  
18 years of age. Eligible employees may participate in the Plan in each year    
in which the employee has greater than 1,000 hours of service with the          
Company. The Company matches 50 percent of the participant's contributions up   
to the first six percent of the participant's salary deferral. The profit       
sharing contribution amount is at the sole discretion of the Company's board    
of directors. Participants vest at a rate of 20 percent per year after the      
first year of service for profit sharing contributions and 20 percent per year  
after the first three years of service for matching contributions.              

Participants become 100 percent vested upon death, permanent disability or  
termination of the Plan. Benefit expense for the years ended April 30, 1995,    
1996 and 1997 was $53, $160, and $229, respectively, and $178 for the eight     
months ended December 31, 1997.                                                 

11. RELATED PARTIES                                                             

The Company has amounts due from a business controlled by the Chairman and  
CEO of the Company. Net amounts due, prior to reserves, at April 30, 1996, and  
1997 and December 31, 1997 were $1,607, $783 and $1,515, respectively. Such     
amounts at April 30 and December 31, 1997 are fully reserved. Through December  
1997, the Company rented office space from the Chairman and CEO of the          
Company. Rent expense paid to the Chairman and CEO was $236, $248 and $191 for  
the years ended April 30, 1995, 1996 and 1997, respectively and $160 for the    
eight months ended December 31, 1997.                                           

12. SIGNIFICANT CUSTOMERS                                                       

For the year ended April 30, 1997 one customer accounted for approximately  
15 percent of net revenues. No single customer accounted for ten percent or     
more of net revenues in the years ended April 30, 1995 and 1996 and the eight   
months ended December 31, 1997.                                                 

13. SUBSEQUENT EVENTS                                                           

Reincorporation                                                               

On March 2, 1998, the Board of Directors of Interplay Productions approved a
reincorporation plan. Under the reincorporation plan Interplay Productions      
formed a new subsidiary in Delaware into which Interplay                        

F-19  

424B4
86th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 86th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

Productions has been merged. The new Delaware Corporation has 50,000,000        
shares of Common Stock and 5,000,000 shares of Preferred Stock authorized for   
issuance. The reincorporation plan became effective on May 29, 1998.            

Initial Public Offering                                                       

On March 2, 1998, the Company's Board of Directors authorized management to 
pursue an initial public offering of the Company's common stock (IPO). The      
Company plans to file an S-1 Registration Statement with the Securities and     
Exchange Commission to sell common stock to the public. The proceeds of the     
offering will be used, in part, to repay debt.                                  

Subordinated Secured Promissory Notes                                         

As discussed in Note 6, the Note holders may elect to convert their Notes to
common stock upon the closing of a qualified IPO, as defined. In accordance     
with the terms of the Notes, the Company has requested that each holder elect   
to either convert the outstanding principal amount to common stock upon the     
closing of the IPO or receive full payment in cash from the proceeds of the     
IPO. In the event this IPO is completed, the holders of approximately $8,700    
of Notes and Warrants have elected to exercise their Warrants by cancellation   
of their Notes to common stock and the balance of approximately $6,100 have     
requested payment in cash.                                                      

If the Company does not complete the IPO prior to November 30, 1998, the    
holders have the option, 30 days thereafter, to notify the Company in writing,  
that they declare the Notes due and payable or may unilaterally elect to        
extend the Notes one year. Management's current projections indicate that       
there will be sufficient cash flow from operations to fund that obligation      
should the Note holders elect cash payment. However, if the Company is not      
able to achieve the operating plan and therefore cash flows from operations     
are insufficient to repay the Notes, management would be prepared to implement  
certain cost-cutting measures. Such measures would include deferrals of         
advertising expenditures, capital additions and product development projects.   

Stock Options (unaudited)                                                     

Effective February 9, 1998, the Company repriced substantially all          
outstanding options with exercise prices greater than $8 per share and          
subsequently reissued these options with exercise prices equal to $8 per        
share, management's estimate of the fair value of the Company's common stock    
as of the date of reissuance. The effect of this has not been reflected in the  
information in Note 10. These options were accounted for as new grants.         
Effective March 2, 1998, the number of shares authorized under the 1991 Plan    
and the 1994 Plan were reduced to 898,425 and 639,984, respectively, and such   
plans were terminated for purposes of future grants. The aggregate reduction    
of 1,519,891 shares were contributed to the 1997 Plan resulting in 2,219,891    
authorized shares under the 1997 Plan, of which 1,680,541 remain available for  
grant. Also, on February 23, 1998, the Company granted 240,100 stock options    
with an exercise price equal to the estimated fair market value of $8 per       
share.                                                                          

F-20  

424B4
87th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 87th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

A schedule of the options outstanding as of February 28, 1998 giving effect 
for the repricing discussed above is as follows:                                

                                                                [Download Table]

              OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE 
------------------------------------------------- --------------------
                               WEIGHTED                               
                               AVERAGE   WEIGHTED             WEIGHTED
                              REMAINING  AVERAGE              AVERAGE 
   RANGE OF         NUMBER     CONTRACT  EXERCISE   NUMBER    EXERCISE
EXERCISE PRICES   OUTSTANDING    LIFE     PRICE   OUTSTANDING  PRICE  
---------------   ----------- ---------- -------- ----------- --------
                                                                      
 $0.15-$ 0.47        676,659  4.15 years  $0.20      676,659   $0.20  
  2.00-  4.44        274,913  5.99 years   3.48      274,913    3.48  
  4.50-  6.66         81,500  6.37 years   5.33       61,500    5.61  
  7.00- 10.00      1,021,634  8.36 years   8.15      320,260    8.19  
 ------------      ---------  ----------  -----    ---------   -----  
 $0.15-$10.00      2,054,706  6.58 years  $4.80    1,333,332   $3.05  
 ============      =========  ==========  =====    =========   =====  

14. OPERATIONS BY GEOGRAPHICAL AREA                                             

The Company operates in one industry segment. Information about the         
Company's operations in the United States and foreign areas for the fiscal      
years ended April 30, 1995, 1996 and 1997 and for the eight months ended        
December 31, 1997 and the three months ended March 31, 1998 is presented        
below:                                                                          

                                                                [Download Table]

                          APRIL 30, APRIL 30, APRIL 30,  DECEMBER 31, MARCH 31,
                            1995      1996      1997         1997       1998   
                          --------- --------- ---------  ------------ ---------
                                                                               
Net revenues:                                                                  
  United States.........   $68,021   $78,823  $ 54,469     $65,199     $31,245 
  United Kingdom........    11,525    18,127    27,867      20,689       9,751 
  Other.................       --          2       926          73         --  
                           -------   -------  --------     -------     ------- 
    Consolidated net                                                           
     revenues...........   $79,546   $96,952  $ 83,262     $85,961     $40,996 
                           =======   =======  ========     =======     ======= 
Income (loss) from                                                             
 operations:                                                                   
  United States.........   $ 5,090   $(1,410) $(30,764)    $   298     $ 1,478 
  United Kingdom........       957     1,853    (3,871)     (2,666)      3,034 
  Other.................       --       (860)      (49)       (418)        --  
                           -------   -------  --------     -------     ------- 
    Consolidated income                                                        
     (loss) from                                                               
     operations.........   $ 6,047   $  (417) $(34,684)    $(2,786)    $ 4,512 
                           =======   =======  ========     =======     ======= 
Identifiable assets:                                                           
  United States.........   $39,211   $57,550  $ 53,722     $65,535     $69,650 
  United Kingdom........     5,015    10,234    13,836      12,033       9,070 
  Other.................       --        727     1,447         253        (393)
                           -------   -------  --------     -------     ------- 
    Consolidated                                                               
     identifiable                                                              
     assets.............   $44,226   $68,511  $ 69,005     $77,821     $78,327 
                           =======   =======  ========     =======     ======= 

F-21  

424B4
88th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 88th
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED 
MARCH 31, 1997 AND 1998 ARE UNAUDITED 

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

Net revenues for the years ended April 30, 1995, 1996 and 1997 and the eight
months ended December 31, 1997 and the three months ended March 31, 1998 were   
made to geographic regions as follows:                                          

                                                        [Enlarge/Download Table]

                         APRIL 30, 1995  APRIL 30, 1996  APRIL 30, 1997  DECEMBER 31, 1997   MARCH 31, 1998 
                         --------------- --------------- --------------- ------------------- ---------------
                         AMOUNT  PERCENT AMOUNT  PERCENT AMOUNT  PERCENT  AMOUNT   PERCENT   AMOUNT  PERCENT
                         ------- ------- ------- ------- ------- ------- --------- --------- ------- -------
                                                                                                            
North America........... $51,892   65.2% $54,702   56.4% $38,606   46.4% $  51,833     60.3% $23,516   57.4%
Europe..................  12,911   16.2   17,683   18.3   26,752   32.1     19,941     23.2    8,265   20.2 
Rest of world...........     918    1.2    6,896    7.1    5,254    6.3      4,701      5.5    2,958    7.2 
OEM, royalty and                                                                                            
 licensing..............  13,825   17.4   17,671   18.2   12,650   15.2      9,486     11.0    6,257   15.2 
                         -------  -----  -------  -----  -------  -----  ---------  -------  -------  ----- 
                         $79,546  100.0% $96,952  100.0% $83,262  100.0% $  85,961    100.0% $40,996  100.0%
                         =======  =====  =======  =====  =======  =====  =========  =======  =======  ===== 

F-22

424B4
89th Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 89th
FUTURE                                                                          
RELEASES                                                                    

                                         BALDUR'S GATE

                                         CAESARS PALACE VIP SERIES

                                          CRIME KILLER

                                          DESCENT:
[ANIMATED DEPICTIONS OF CHARACTERS          FREESPACE THE GREAT WAR   
AND ARTWORK FROM CERTAIN OF THE                                       
LISTED FUTURE RELEASES ARE ARRANGED                                   
VERTICALLY TO THE LEFT OF THE                    EARTHWORM JIM 3D     
RIGHT COLUMN]                                                         
                                             FALLOUT 2

                                              M.A.X. 2

                                             MESSIAH

                                                 REDNECK RAMPAGE RIDES AGAIN

                                                STAR TREK:
                                               SECRET OF VULCAN FURY

                                                 VR BASEBALL '99

                                                 VR FOOTBALL '99

                                                  WILD 9

                                                   THERE CAN BE NO ASSURANCE
                                                 THAT THE ANTICIPATED FUTURE
                                                TITLES WILL BE RELEASED IN
                                                 A TIMELY MANNER, IF AT ALL.
                                        SEE "RISK FACTORS"
                                              COMMENCING ON PAGE FIVE.

                                           STAR TREK AND RELATED
                                             ELEMENTS(TM) & (C) 1998
                                             PARAMOUNT PICTURES. ALL
                                      RIGHTS RESERVED.

424B4
Last Page of 90
TOC
1st
Previous
Next
↓Bottom
Just 90th
------------------------------------------------------------------------------- 
------------------------------------------------------------------------------- 

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- 
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-  
NECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH IN-  
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED  
BY THE COMPANY OR UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER   
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED      
HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR    
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-  
LICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO     
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR    
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION  
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE      
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-  
SEQUENT TO THE DATE OF THE PROSPECTUS.                                          

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

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                          PAGE
                                                                          ----
                                                                              
Prospectus Summary.......................................................   3 
Summary Consolidated Financial Data......................................   4 
Risk Factors.............................................................   5 
Use of Proceeds..........................................................  16 
Dividend Policy..........................................................  16 
Dilution.................................................................  17 
Capitalization...........................................................  18 
Selected Consolidated Financial Data.....................................  19 
Management's Discussion and Analysis of Financial Condition and Results       
 of Operations...........................................................  20 
Business.................................................................  32 
Management...............................................................  46 
Principal Stockholders...................................................  54 
Certain Transactions.....................................................  55 
Description of Capital Stock.............................................  58 
Shares Eligible for Future Sale..........................................  61 
Underwriting.............................................................  62 
Legal Matters............................................................  64 
Experts..................................................................  64 
Available Information....................................................  64 
Index to Consolidated Financial Statements............................... F-1 

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

UNTIL JULY 14, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS  
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT             
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.    
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN   
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR           
SUBSCRIPTIONS.                                                                  

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

5,000,000 Shares  

[LOGO OF INTERPLAY APPEARS HERE]  

Common Stock  

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

PROSPECTUS  

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

Piper Jaffray inc.  

Bear, Stearns & Co. Inc.  

UBS Securities  

June 19, 1998 

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

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘424B4’ Filing		Date		First		Last			Other Filings
		6/30/05		58					10-Q,  10-Q/A,  NT 10-Q
		12/31/02		57					10-K,  10-K/A,  NT 10-K
		6/1/01		57
		5/31/99		32
		12/30/98		32		80
		12/15/98		33		76
		11/30/98		68		86
		11/14/98		54
		8/30/98		32		80
		7/31/98		57
		7/14/98		90
		6/24/98		1
Filed on:		6/22/98
		6/19/98		1		90
		6/1/98		56					8-A12G,  S-1/A
		5/31/98		18		32
		5/29/98		68		86
		4/28/98		82
		3/31/98		6		88
		3/20/98		68
		3/2/98		85		86
		2/28/98		87
		2/23/98		86
		2/9/98		86
		12/31/97		8		88
		12/15/97		33		76
		9/12/97		83
		6/30/97		31
		5/1/97		6		79
		4/30/97		8		88
		3/31/97		21		88
		2/1/97		83
		12/31/96		21		31
		12/20/96		58
		10/8/96		57
		10/1/96		57
		9/30/96		30		31
		9/27/96		58
		6/30/96		30
		4/30/96		13		88
		4/26/96		57
		4/16/96		57
		3/29/96		58
		8/16/95		58
		6/30/95		58
		6/24/95		77
		5/26/95		83
		4/30/95		21		88
		4/25/95		57
		1/1/95		37
		5/23/94		57
		4/30/94		21		82
		3/30/94		57
		3/28/94		57
		3/1/94		57
		1/25/94		57
		4/30/93		21
									List all Filings