10-K 1 fm10k-2005.htm

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

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

For the transition period from __________ to __________

Commission File Number 0-24363

INTERPLAY ENTERTAINMENT CORP.
(Exact name of the registrant as specified in its charter)

DELAWARE 33-0102707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

100 N. CRESCENT DRIVE , BEVERLY HILLS, CALIFORNIA 90210
(Address of principal executive offices)

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

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

Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.001 PAR VALUE

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non- accelerated filer [X]

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

As of June 30, 2005, the aggregate market value of voting common stock held by
non-affiliates was approximately $270,000 based upon the closing price of the
Common Stock on that date.

As of April 19, 2006, 93,855,634 shares of Common Stock of the Registrant were
issued and outstanding. This includes 4,658,216 shares of Treasury Stock.

INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005

PAGE
----
PART I

Item 1. Business 4

Item 1A. Risk Factors 8

Item 2. Properties 16

Item 3. Legal Proceedings 16

Item 4. Submission of Matters to a Vote of Security Holders 17

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 18

Item 6. Selected Financial Data 19

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20

Item 7A. Quantitative and Qualitative Disclosure about
Market Risk 31

Item 8. Consolidated Financial Statements and Supplementary
Data 31

Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31

Item 9A Controls and Procedures 31

PART III

Item 10. Directors and Executive Officers of the Registrant 32

Item 11. Executive Compensation 33

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 37

Item 13. Certain Relationships and Related Transactions 38

Item 14. Principal Accounting Fees and Services 40

PART IV

Item 15. Exhibits, Financial Statement Schedules 40

Signatures 41

Exhibit Index 42

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THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES AND
EXCHANGE ACT OF 1934 AND SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO THE SAFE
HARBORS CREATED THEREBY. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS
REPORT EXCEPT FOR HISTORICAL INFORMATION MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, OUR USE OF WORDS
SUCH AS "PLAN," "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND,"
"COULD," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO HELP IDENTIFY FORWARD-LOOKING STATEMENTS.
IN ADDITION, ANY STATEMENTS THAT REFER TO EXPECTATIONS, PROJECTIONS OR OTHER
CHARACTERIZATIONS OF FUTURE EVENTS OR CIRCUMSTANCES ARE FORWARD-LOOKING
STATEMENTS.

THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON CURRENT
EXPECTATIONS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AS WELL AS
CERTAIN ASSUMPTIONS. FOR EXAMPLE, ANY STATEMENTS REGARDING FUTURE CASH FLOW,
CASH CONSTRAINTS, FINANCING ACTIVITIES, COST REDUCTION MEASURES, REPLACEMENT OF
OUR LINE OF CREDIT AND MERGERS, SALES OR ACQUISITIONS ARE FORWARD-LOOKING
STATEMENTS AND THERE CAN BE NO ASSURANCE THAT WE WILL AFFECT ANY OR ALL OF THESE
OBJECTIVES IN THE FUTURE. ADDITIONAL RISKS AND UNCERTAINTIES THAT MAY AFFECT OUR
FUTURE RESULTS ARE DISCUSSED IN MORE DETAIL IN THE SECTION TITLED "RISK FACTORS"
IN "ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."

ASSUMPTIONS RELATING TO OUR FORWARD-LOOKING STATEMENTS INVOLVE JUDGMENTS
WITH RESPECT TO, AMONG OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET
CONDITIONS, AND FUTURE BUSINESS DECISIONS, ALL OF WHICH ARE DIFFICULT OR
IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE BEYOND OUR CONTROL.
ALTHOUGH WE BELIEVE THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, OUR INDUSTRY, BUSINESS AND OPERATIONS ARE SUBJECT TO
SUBSTANTIAL RISKS, AND THE INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED
AS A REPRESENTATION BY MANAGEMENT THAT ANY PARTICULAR OBJECTIVE OR PLANS WILL BE
ACHIEVED. IN ADDITION, RISKS, UNCERTAINTIES AND ASSUMPTIONS CHANGE AS EVENTS OR
CIRCUMSTANCES CHANGE. WE DISCLAIM ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO
REFLECT EVENTS OR CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE FILING OF THIS
REPORT WITH THE SEC OR OTHERWISE TO REVISE OR UPDATE ANY ORAL OR WRITTEN
FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY US OR ON OUR
BEHALF.

INTERPLAY (R), INTERPLAY PRODUCTIONS(R), GAMES ON LINE (R) AND CERTAIN OF
OUR OTHER PRODUCT NAMES AND PUBLISHING LABELS REFERRED TO IN THIS REPORT ARE THE
COMPANY'S TRADEMARKS. THIS REPORT ALSO CONTAINS TRADEMARKS BELONGING TO OTHERS.

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PART I

ITEM 1. BUSINESS

OVERVIEW AND RECENT DEVELOPMENTS

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

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

Our business and industry has certain risks and uncertainties. During 2005
we continued to operate under limited cash flow from operations. We expect to
operate under similar cash constraints during 2006. During 2005, because of
limited resources, we have been primarily engaged in exploiting existing titles.
We have had no new development of software titles. For a fuller discussion of
the risk and uncertainties relating to our financial results, our business and
our industry, please see the section titled "Risk Factors" in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The majority of our sales and distribution were handled by Vivendi
Universal Games, Inc. ("Vivendi") in North America and selected territories
until August, 2005, when most of our distribution agreements with Vivendi
reached the end of their term., and by Avalon Interactive Group Ltd. ("Avalon"),
a subsidiary of Titus Interactive SA ("Titus") in Europe, the Commonwealth of
Independent States, Africa and the Middle East, and through licensing strategies
elsewhere. The Company resumed responsibility for distribution and licensing in
North America and other selected territories after August, 2005. Avalon ceased
operations following its involuntary liquidation in February, 2005. Following
the liquidation of Avalon, we utilized from March, 2005 our wholly owned
subsidiary, Interplay Productions Ltd, as our distributor in Europe and other
selected territories.

In December, 2005 NBC Universal returned its shares of common stock to us
at no cost to us and these shares are included as Company treasury stock.

In January 2005, our majority shareholder, Titus, who holds approximately
58 million shares of our common stock, was placed into involuntary liquidation.

PRODUCTS

We publish and distribute interactive entertainment software titles that
provide immersive game experiences by combining advanced technology with
engaging content, vivid graphics and rich sound.

Our strategy was to invest in products for those platforms, whether PC or
video game console, that have or will have sufficient installed bases or a large
enough number of potential subscribers for the investment to be economically
viable, but because of our limited resources we have had to significantly
curtail this approach.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

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

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

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

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

PRODUCT DEVELOPMENT

We currently do not have any new products under development internally.

During the years ended December 31, 2005, 2004 and 2003, we spent $300,000,
$2.6 million and $13.7 million, respectively, on product research and
development activities. Those amounts represented 3%, 20% and 38%, respectively,
of net revenues in each of those periods.

SEGMENT INFORMATION

We operate primarily in one industry segment, the development, publishing
and distribution of interactive entertainment software. For information
regarding the revenues and assets associated with our geographic segments, see
Note 13 of the Notes to our Consolidated Financial Statements included elsewhere
in this Report.

We had during 2005 two distributors as our two main customers: Vivendi and
Avalon. Vivendi and Avalon accounted for 6.76% and 02% of our net revenues in
2005. Vivendi and Avalon had exclusive rights to distribute our product in
substantial parts of the world. Avalon was liquidated in February 2005 and as a
result, we took over distribution of our products in Europe. Most of our
agreements with Vivendi reached the end of their term in August, 2005 We resumed
responsibility for distribution and licensing in North America and other
selected territories after August,2005.

SALES AND DISTRIBUTION

NORTH AMERICA. In August 2002, we entered into a distribution arrangement
with Vivendi, whereby Vivendi distributed substantially all of our products in
North America for a period of three years as a whole and two years with respect
to each product providing for a potential maximum term of five years. Under this
distribution agreement, Vivendi paid us sales proceeds less amounts for
distribution fees. Vivendi was responsible for all manufacturing, marketing and
distribution expenditures, and bears all credit, price concessions and inventory
risk, including product returns. Upon our delivery of a product gold master to
Vivendi, Vivendi paid us, as a non-refundable minimum guarantee and which is a
specified percent of the projected amount due to us based on projected initial
shipment sales. Payments for sales that exceed the projected initial shipment
sales was to be paid on a monthly basis as sales occur. Other than for products
covered by the tri-party agreement with Atari which was not covered by the
minimum guarantee, the Vivendi distribution agreements expired in August, 2005.

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All deferred revenue under the non-refundable minimum guarantee was recognized
as revenue during 2005. We resumed responsibility for distribution and licensing
in North America and other selected territories after August, 2005.

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

INTERNATIONAL. We were operating during 2004 and into early 2005 under a
distribution agreement with Avalon, pursuant to which Avalon distributed
substantially all of our titles in Europe, the Commonwealth of Independent
States, Africa and the Middle East for a seven-year period. Under this
agreement, Avalon earned a distribution fee for its marketing and distribution
of our products, and we reimbursed Avalon for certain direct costs and expenses.

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

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

LICENSING

We entered into various licensing agreements during 2005 under which we
licensed others to exploit games that we have intellectual property rights to.
This included entering into an agreements with Turner Games Network and Vivendi
and resulted in one time payments from each of these licensees. These license
agreements are generally for a 2 year term.

In addition, a tri-party agreement with Atari Interactive, Inc. ("Atari")
and Vivendi was entered into that provided for all royalties that would
otherwise be payable to Atari by Vivendi from September, 2005 be paid to us with
respect to Vivendi distribution of Dungeons and Dragons titles owned by Atari.

MARKETING

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

Our distributors engage in on-line marketing through Internet advertising.

COMPETITION

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

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

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substantially greater financial resources than us, also compete directly with us
or or have exclusive relationships with our competitors.

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

SEASONALITY

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

MANUFACTURING

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

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

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

BACKLOG

We do not carry inventories because all of our sales and distribution
efforts are handled by our licensees under the terms of our respective
distribution agreements with them. We do not have any backlog orders

EMPLOYEES

As of December 31, 2005, we had 5 employees, including 1 in software
engineering, 2 in sales and marketing and 2 in finance, general and
administrative.

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

ADDITIONAL INFORMATION

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

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ITEM 1A. RISK FACTORS

RISK FACTORS

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

RISKS RELATED TO OUR FINANCIAL RESULTS

WE CURRENTLY HAVE A NUMBER OF OBLIGATIONS THAT WE ARE UNABLE TO MEET WITHOUT
GENERATING ADDITIONAL INCOME OR RAISING ADDITIONAL CAPITAL. IF WE CANNOT
GENERATE ADDITIONAL INCOME OR RAISE ADDITIONAL CAPITAL IN THE NEAR FUTURE, WE
MAY BECOME INSOLVENT AND/OR BE MADE BANKRUPT AND/OR OUR MAY BECOME ILLIQUID OR
WORTHLESS.

As of December 31, 2005, our cash balance was approximately $122,000 and
our outstanding accounts payable and current liabilities totaled approximately
$12.2 million. In particular, we have some significant creditors that comprise a
substantial proportion of outstanding obligations, including many that have
obtained judgments against us, that we might not be able to satisfy. If we do
not receive sufficient financing or sufficient funds from our operations we may
(i) liquidate assets, (ii) seek or be forced into bankruptcy and/or (iii)
continue operations, but incur material harm to our business, operations or
financial condition. These measures could have a material adverse effect on our
ability to continue as a going concern. Additionally, because of our financial
condition, our Board of Directors has a duty to our creditors that may conflict
with the interests of our stockholders. When a Delaware corporation is operating
in the vicinity of insolvency, the Delaware courts have imposed upon the
corporation's directors a fiduciary duty to the corporation's creditors. Our
Board of Directors may be required to make decisions that favor the interests of
creditors at the expense of our stockholders to fulfill its fiduciary duty. For
instance, we may be required to preserve our assets to maximize the repayment of
debts versus employing the assets to further grow our business and increase
shareholder value. If we cannot generate enough income from our operations or
are unable to locate additional funds through financing, we will not have
sufficient resources to continue operations.

WE HAVE A HISTORY OF LOSSES, AND MAY HAVE TO FURTHER REDUCE OUR COSTS BY
CURTAILING FUTURE OPERATIONS TO CONTINUE AS A BUSINESS.

Although for the year ended December 31, 2005, our net income from
operations was $5.9 million, $7 million of our revenue was recognized from the
expiration of distribution contracts and other income, and we have incurred
significant net losses in previous years. For the year ended December 31, 2004,
our net loss from operations was $2.5 million and since inception, we have
incurred significant losses and negative cash flow. As of December 31, 2005 we
had an accumulated deficit of $133 million. Our ability to fund our capital
requirements out of our available cash and cash generated from our operations
depends on a number of factors. Some of these factors include the progress of
our product distributions and licensing, the rate of growth of our business, and
our products' commercial success. If we cannot generate positive cash flow from
operations, we will have to continue to reduce our costs and raise working
capital from other sources. These measures could include selling or
consolidating certain operations or assets, and delaying, canceling or scaling
back product development and marketing programs. These measures could materially
and adversely affect our ability to publish successful titles, and may not be
enough to permit us to operate profitability, or at all.

OUR ABILITY TO EFFECT A FINANCING TRANSACTION TO FUND OUR OPERATIONS COULD
ADVERSELY AFFECT THE VALUE OF YOUR STOCK.

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

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RISKS RELATED TO OUR BUSINESS

TITUS INTERACTIVE SA (PLACED IN INVOLUNTARY BANKRUPTCY IN JANUARY, 2005)
CONTROLS A MAJORITY OF OUR VOTING STOCK AND CAN ELECT A MAJORITY OF OUR BOARD OF
DIRECTORS AND PREVENT AN ACQUISITION OF US THAT IS FAVORABLE TO OUR OTHER
STOCKHOLDERS. ALTERNATIVELY, TITUS CAN ALSO CAUSE A SALE OF CONTROL OF OUR
COMPANY THAT MAY NOT BE FAVORABLE TO OUR OTHER STOCKHOLDERS.

Titus owns approximately 58 million shares of common stock. As a
consequence, Titus can control substantially all matters requiring stockholder
approval, including the election of directors, subject to our stockholders'
cumulative voting rights, and the approval of mergers or other business
combination transactions. At our 2003 and 2002 annual stockholders meetings,
Titus exercised its voting power to elect a majority of our Board of Directors.
Currently, our Chief Executive Officer and interim Chief Financial Officer Herve
Caen is a director of various Titus affiliates. This concentration of voting
power could discourage or prevent a change in control that otherwise could
result in a premium in the price of our common stock. Further, Titus' bankruptcy
could lead to a sale by its liquidator or other representative in bankruptcy, of
shares Titus holds in us, and/or a sale of Titus itself which would result in a
sale of control of our Company and such a sale may not be favorable to our other
stockholders . Such a sale, including if it involves a dispersion of shares to
multiple stockholders, further could have the effect of making any business
combination, or a sale of all of our shares as a whole, more difficult.

THE LACK OF ANY CREDIT AGREEMENT HAS RESULTED IN A SUBSTANTIAL REDUCTION IN THE
CASH AVAILABLE TO FINANCE OUR OPERATIONS.

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

A SIGNIFICANT PERCENTAGE OF OUR REVENUES HISTORICALLY DEPENDED ON OUR
DISTRIBUTORS' DILIGENT SALES EFFORTS.

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

Vivendi had exclusive rights to distribute our products in North America
and selected International territories. Our agreement with Vivendi expired in
August 2005 and December 2005 for most of our products.

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

o We fail to replace Vivendi as our distributor; or

o Interplay Productions Ltd fails to effectively distribute our
products.

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

WE CONTINUE TO OPERATE WITHOUT A CHIEF FINANCIAL OFFICER, WHICH MAY AFFECT OUR
ABILITY TO MANAGE OUR FINANCIAL OPERATIONS.

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

- 9 -

OUR BUSINESS AND INDUSTRY IS BOTH SEASONAL AND CYCLICAL. IF WE FAIL TO DELIVER
OUR PRODUCTS AT THE RIGHT TIMES, OUR SALES WILL SUFFER.

Our business is highly seasonal, with the highest levels of consumer demand
occurring in the fourth quarter. Our industry is also cyclical. The timing of
hardware platform introduction is often tied to the year-end season and is not
within our control. As new platforms are being introduced into our industry,
consumers often choose to defer game software purchases until such new platforms
are available, which would cause sales of our products on current platforms to
decline. This decline may not be offset by increased sales of products for the
new platform.

THE UNPREDICTABILITY OF FUTURE RESULTS MAY CAUSE OUR STOCK PRICE TO REMAIN
DEPRESSED OR TO DECLINE FURTHER.

Our operating results have fluctuated in the past and may fluctuate in the
future due to several factors, some of which are beyond our control. These
factors include:

o demand for our products and our competitors' products;

o the size and rate of growth of the market for interactive
entertainment software;

o changes in personal computer and video game console platforms;

o the timing of announcements of new products by us and our competitors
and the number of new products and product enhancements released by us
and our competitors;

o changes in our product mix;

o the number of our products that are returned; and

o the level of our international and original equipment manufacturer
royalty and licensing net revenues.

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

o the uncertainties associated with the interactive entertainment
software development process;

o approvals required from content and technology licensors; and

o the timing of the release and market penetration of new game hardware
platforms.

THERE ARE HIGH FIXED COSTS TO DEVELOPING OUR PRODUCTS. IF OUR REVENUES DECLINE
BECAUSE OF DELAYS IN THE INTRODUCTION OF OUR PRODUCTS, OR IF THERE ARE
SIGNIFICANT DEFECTS OR DISSATISFACTION WITH OUR PRODUCTS, OUR BUSINESS COULD BE
HARMED.

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

IF OUR PRODUCTS DO NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR BUSINESS COULD BE
HARMED SIGNIFICANTLY.

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

- 10 -

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

OUR RELIANCE ON THIRD PARTY SOFTWARE DEVELOPERS SUBJECTS US TO THE RISKS THAT
THESE DEVELOPERS WILL NOT SUPPLY US WITH HIGH QUALITY PRODUCTS IN A TIMELY
MANNER OR ON ACCEPTABLE TERMS.

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

o limited financial resources may force developers out of business prior
to their completion of projects for us or require us to fund
additional costs; and

o the possibility that developers could demand that we renegotiate our
arrangements with them to include new terms less favorable to us.

INCREASED COMPETITION FOR SKILLED THIRD PARTY SOFTWARE DEVELOPERS ALSO HAS
COMPELLED US TO AGREE TO MAKE ADVANCE PAYMENTS ON ROYALTIES AND TO GUARANTEE
MINIMUM ROYALTY PAYMENTS TO INTELLECTUAL PROPERTY LICENSORS AND GAME DEVELOPERS.
MOREOVER, IF THE PRODUCTS SUBJECT TO THESE ARRANGEMENTS, ARE NOT DELIVERED
TIMELY, OR WITH ACCEPTABLE QUALITY, OR DO NOT GENERATE SUFFICIENT SALES VOLUMES
TO RECOVER THESE ROYALTY ADVANCES AND GUARANTEED PAYMENTS, WE WOULD HAVE TO
WRITE-OFF UNRECOVERED PORTIONS OF THESE PAYMENTS, WHICH COULD CAUSE MATERIAL
HARM TO OUR BUSINESS AND FINANCIAL RESULTS. WE COMPETE WITH A NUMBER OF
COMPANIES THAT HAVE SUBSTANTIALLY GREATER FINANCIAL, MARKETING AND PRODUCT
DEVELOPMENT RESOURCES THAN WE DO.

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

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

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

WE HAVE A LIMITED NUMBER OF KEY MANAGEMENT AND OTHER PERSONNEL. THE LOSS OF ANY
SINGLE MEMBER OF MANAGEMENT OR KEY PERSON OR THE FAILURE TO HIRE AND INTEGRATE
CAPABLE NEW KEY PERSONNEL COULD HARM OUR BUSINESS.

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

- 11 -

OUR INTERNATIONAL SALES EXPOSE US TO RISKS OF UNSTABLE FOREIGN ECONOMIES,
DIFFICULTIES IN COLLECTION OF REVENUES, INCREASED COSTS OF ADMINISTERING
INTERNATIONAL BUSINESS TRANSACTIONS AND FLUCTUATIONS IN EXCHANGE RATES.

Our net revenues from international sales accounted for approximately 57%
and 75% of our total net revenues for years ended December 31, 2005 and 2004,
respectively. Most of these revenues came from our distribution relationship
with Vivendi , pursuant to which Vivendi became the exclusive distributor for
most of our products in Europe, the Commonwealth of Independent States, Africa
and the Middle East and a recognition of revenue from international expiration
of contracts during 2005. To the extent our resources allow, we intend to
continue to expand our direct and indirect sales, marketing and product
localization activities worldwide.

Our international sales are subject to a number of inherent risks,
including the following:

o recessions in foreign economies may reduce purchases of our products;

o translating and localizing products for international markets is time
consuming and expensive;

o accounts receivable are more difficult to collect and when they are
collectible, they may take longer to collect;

o regulatory requirements may change unexpectedly;

o it is difficult and costly to staff and manage foreign operations;

o fluctuations in foreign currency exchange rates;

o political and economic instability; and

o delays in market penetration of new platforms in foreign territories.

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

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

OUR CUSTOMERS HAVE THE ABILITY TO RETURN OUR PRODUCTS OR TO RECEIVE PRICING
CONCESSIONS AND SUCH RETURNS AND CONCESSIONS COULD REDUCE OUR NET REVENUES AND
RESULTS OF OPERATIONS.

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

WE DEPEND UPON THIRD PARTY LICENSES OF CONTENT FOR MANY OF OUR PRODUCTS.

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

- 12 -

OUR LICENSORS ARE ALSO OFTEN OUR COMPETITORS. WE MAY FAIL TO MAINTAIN EXISTING
LICENSES, OR OBTAIN NEW LICENSES FROM PLATFORM COMPANIES ON ACCEPTABLE TERMS OR
TO OBTAIN RENEWALS OF EXISTING OR FUTURE LICENSES FROM LICENSORS.

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

OUR SALES VOLUME AND THE SUCCESS OF OUR PRODUCTS DEPEND IN PART UPON THE NUMBER
OF PRODUCT TITLES DISTRIBUTED BY HARDWARE COMPANIES FOR USE WITH THEIR VIDEO
GAME PLATFORMS.

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

o we are required to submit and pay for minimum numbers of discs we want
produced containing our software, regardless of whether these discs
are sold, shifting onto us the financial risk associated with poor
sales of the software developed by us; and

o reorders of discs are expensive, reducing the gross margin we receive
from software releases that have stronger sales than initially
anticipated and that require the production of additional discs.

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

RISKS RELATED TO OUR INDUSTRY

INADEQUATE INTELLECTUAL PROPERTY PROTECTIONS COULD PREVENT US FROM ENFORCING OR
DEFENDING OUR PROPRIETARY TECHNOLOGY.

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

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

WE MAY UNINTENTIONALLY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH COULD EXPOSE US TO SUBSTANTIAL DAMAGES OR RESTRICT OUR OPERATIONS.

As the number of interactive entertainment software products increases and
the features and content of these products continue to overlap, software
developers increasingly may become subject to infringement claims. Although we

- 13 -

believe that we make reasonable efforts to ensure that our products do not
violate the intellectual property rights of others, it is possible that third
parties still may claim infringement. From time to time, we receive
communications from third parties regarding such claims. Existing or future
infringement claims against us, whether valid or not, may be time consuming and
expensive to defend. Intellectual property litigation or claims could force us
to do one or more of the following:

o cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;

o obtain a license from the holder of the infringed intellectual
property, which license, if available at all, may not be available on
commercially favorable terms; or

o redesign our interactive entertainment software products, possibly in
a manner that reduces their commercial appeal.

Any of these actions may cause material harm to our business and financial
results.

OUR BUSINESS IS INTENSELY COMPETITIVE AND PROFITABILITY IS INCREASINGLY DRIVEN
BY A FEW KEY TITLE RELEASES. IF WE ARE UNABLE TO DELIVER KEY TITLES, OUR
BUSINESS MAY BE HARMED.

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

IF WE FAIL TO ANTICIPATE CHANGES IN VIDEO GAME PLATFORMS AND TECHNOLOGY, OUR
BUSINESS MAY BE HARMED.

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

o operating systems such as Microsoft Windows Longhorn;

o new media formats

o releases of new video game consoles;

o new video game systems by Sony, Microsoft, Nintendo and others.

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

New interactive entertainment software platforms and technologies also may
undermine demand for products based on older technologies. Our success will
depend in part on our ability to adapt our products to those emerging game
platforms that gain widespread consumer acceptance. Our business and financial
results may suffer material harm if we fail to:

o anticipate future technologies and platforms and the rate of market
penetration of those technologies and platforms;

o obtain licenses to develop products for those platforms on favorable
terms; or

o create software for those new platforms on a timely basis.

OUR SOFTWARE MAY BE SUBJECT TO GOVERNMENTAL RESTRICTIONS OR RATING SYSTEMS.

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

- 14 -

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

RISKS RELATED TO OUR STOCK

SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT OUR ABILITY TO RECEIVE A
PREMIUM PRICE FOR YOUR SHARES.

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

o eliminate the ability of stockholders to act by written consent and to
call a special meeting of stockholders; and

o require stockholders to give advance notice if they wish to
nominate directors or submit proposals for stockholder
approval.

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

OUR COMMON STOCK MAY BE SUBJECT TO THE "PENNY STOCK" RULES WHICH COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

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

OUR STOCK IS VOLATILE

The trading price of our common stock has previously fluctuated and could
continue to fluctuate in response to factors that are largely beyond our
control, and which may not be directly related to the actual operating
performance of our business, including:

o general conditions in the computer, software, entertainment, media or
electronics industries;

o changes in earnings estimates or buy/sell recommendations by analysts;

o investor perceptions and expectations regarding our products, plans
and strategic position and those of our competitors and customers; and

o price and trading volume volatility of the broader public markets,
particularly the high technology sections of the market.

- 15 -

ITEM 2. PROPERTIES

The Company's headquarters are located in Beverly Hills, California, where
we leased approximately 3,100 square feet of office space . The facility is
leased through April 2008 . We are currently subleasing approximately 1,100
square feet of our facility to an independent third party. We have an additional
satellite office in Irvine, California.

ITEM 3. LEGAL PROCEEDINGS

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

On November 25, 2002, Special Situations Fund III, Special Situations
Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and Special
Situations Technology Fund, L.P. (collectively, "Special Situations") initiated
legal proceedings against us seeking damages of approximately $1.3 million,
alleging, among other things, that we failed to secure a timely effective date
for a Registration Statement for our shares purchased by Special Situations
under a common stock subscription agreement dated March 29, 2001 and that we
were therefore liable to pay Special Situations $1.3 million. Special Situations
entered into a settlement agreement with us in December,2003 contemplating
payments over time, which we later defaulted on. In August,2004 we entered into
a stipulation of settlement to which we later defaulted. On January 12,2005 a
judgment of approximately $776,00 was entered in the State of New York and on
February 4,2005 a judgment reflecting the January 12,2005 judgment was entered
in the State of California. On May 3,2006 the Company entered into a Stipulation
of Settlement. Under this Stipulation of Settlement the Company agreed to issue
a total of 10,000,000 shares of its unregistered common stock and made a payment
in the amount of approximately $239,000.Following the issuance of such shares,
and in consideration of such issuance and such payment, satisfaction of
judgments in the amount of approximately $776,000 recorded against the Company
will be filed. Such shares will be issued in a private placement pursuant to
section 4(2) of the Securities Act of 1933 and will be issued prior to the
satisfaction of judgments which must occur within 10 business days following the
Company's having made payment of approximately $239,000 and the issuance of such
shares.

On October 24, 2002, Synnex Information Technologies Inc ("Synnex")
initiated legal proceedings against the Company for various claims related to a
breach of a distributorship agreement. Synnex obtained a $172,000 judgment
against the Company.

On or about October 9, 2003, Warner Brothers Entertainment, Inc. ("Warner")
filed suit against us in the Superior Court for the State of California, County
of Orange, alleging default on an Amended and Restated Secured Convertible
Promissory Note held by Warner dated April 30, 2002, with an original principal
sum of $2.0 million. At the time the suit was filed, the current remaining
principal sum due under the note was $1.4 million in principal including
interest. We owe a remaining balance of approximately $360,000 payable in one
remaining installment. The Company is currently in default of the settlement
agreement.

In April 2004, Arden Realty Finance IV LLC ("Arden") filed an unlawful
detainer action against the Company in the Superior Court for the State of
California, County of Orange, alleging the Company's default under its corporate
lease agreement. At the time the suit was filed, the alleged outstanding rent
totaled $432,000. The Company was unable to pay the rent, and vacated the office
space during the month of June 2004. On June 3, 2004, Arden obtained a judgment
of approximately $588,000 exclusive of interest. In addition the Company is in
the process of resolving a prior claim with the landlord in the approximate
amount of $148,000, exclusive of interest. The Company has negotiated a
forbearance agreement whereby Arden agreed to accept payments commencing in
January 2005 in the amount of $60,000 per month until the full amount is paid.
The Company has not accrued any amount for any remaining lease obligation,
should such obligation exist. We are currently in default of the forbearance
agreement.

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

- 16 -

In August 2003, Reflexive Entertainment, Inc. filed an action against the
Company for failure to pay development fees in the Orange County Superior Court
that was settled in July 2004. The Company was unable to make the payments and
Reflexive sought and obtained judgment against the company for approximately
$110,000.

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

The Company received notice from the Internal Revenue Service ("IRS") that
it owes approximately $110,000 pursuant to section 166 and section 186 of the
Internal Revenue Code in payroll tax penalties, and interest for late filing and
late payment of payroll taxes. Approximately $110,000 has been accrued as of
December 31, 2005 but remains unpaid. The Company received notice from the
Employment Development Department (EDD) that it owes approximately $103,000 in
payroll taxes owed for the period ending 2003 and 2004 which has been accrued
for December 31,2005.

The Company was unable to meet certain 2004 payroll obligations to its
employees, as a result several employees filed claims with the State of
California Labor Board ("Labor Board") . The Labor Board has fined the Company
approximately $10,000 for failure to meet its payroll obligations and obtained
in August 2005 judgments totaling $118,000 in favor of former employees of the
Company , since this time $44,000 of the claims have been settled leaving, a
balance of $74,000.

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

The Company received notice from the California State Board of Equalization
of a balance due in the amount of $73,000 for a prior year audit . The Company
is in the process of appealing the prior year audit calculations.

On September 14, 2005, Network Commercial Service, Inc. ("NCS") filed an
action against the Company alleging breach of contract relating to the provision
of copying equipment and that the balance due is $140,000 to NCS. The Company is
evaluating the merit of the lawsuit.

On April 22, 2005, Mark Strecker filed a judgment to be entered against the
Company for various claims alleging unpaid services in the amount of $35,000.
The Company is evaluating the merit of the lawsuit.

On May 19, 2005 DZN, The Design Corporation filed an action against the
Company for various advertising services in the amount of $38,000. The Company
is evaluating the merit of the lawsuit.

On February 2, 2006 Michael Sigel filed an action against the Company for
unauthorized use of image. The Company is evaluating the merit of the lawsuit.

On March 7, 2006, Parallax Software Corp. entered a judgment against the
Company for a material breach of a settlement agreement related to royalties
owed in the amount of $219,000. The Company is evaluating the merit of the
lawsuit.

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

None

- 17 -

PART II

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

The Company trades on the NASD-operated Over-the-Counter Bulletin Board.
Our common stock is currently traded on the NASD-operated Over-the-Counter
Bulletin Board under the symbol "IPLY" or while non-compliant "IPLYE". At April
28 , 2006, there were 145 holders of record of our common stock.

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

FOR THE YEAR ENDED DECEMBER 31, 2005 HIGH LOW
------------------------------------ ---- ---

First Quarter...................... $.02 $.01
Second Quarter..................... .01 .01
Third Quarter...................... .01 .01
Fourth Quarter..................... .01 .01

FOR THE YEAR ENDED DECEMBER 31, 2004
------------------------------------

First Quarter...................... $.14 $.10
Second Quarter..................... .14 .03
Third Quarter...................... .05 .02
Fourth Quarter..................... .03 .01

DIVIDEND POLICY

It is not currently our policy to pay dividends.

SECURITIES ISSUANCES

No new shares were issued during the period ending December 31, 2005.

EQUITY COMPENSATION PLANS INFORMATION

The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2005:

Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under equity
warrants and rights warrants and rights compensation plans
(excluding securities
reflected in column (a))
-------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans
approved by security 70,000 0.30 10,014,877
holders
Equity compensation plans
not approved by security - -
holders
----------------------------------------------------------------------------
Total 70,000 0.30 10,014,877
============================================================================

We have one stock option plan currently outstanding. Under the 1997
Stock Incentive Plan, as amended (the "1997 Plan"), we may grant up to 10
million options to our employees, consultants and directors, which generally
vest from three to five years. 84,877 shares remain available for issuance under
the Company's Employee Stock Purchase Plan.

- 18 -

There were no differences, if any, between the exercise price and the
estimated fair market value as compensation expense for financial reporting
purposes, pursuant to APB 25 during 2005,2004 and 2003.There was no compensation
expense for any vested portion for the years 2005, 2004 and 2003 respectively.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended
December 31, 2005, 2004, 2003, 2002 and 2001 and the selected consolidated
balance sheets data as of December 31, 2005 and 2004 are derived from our
audited consolidated financial statements included elsewhere in this Report. Our
historical results are not necessarily indicative of the results that may be
achieved for any other period. The following data should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements included
elsewhere in this Report.

YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2005 2004 2003 2002 2001
(Unaudited)
--------- --------- --------- --------- ---------
(Dollars in thousands, except share and per share amounts)
STATEMENTS OF OPERATIONS DATA:
Net revenues ....................................... $ 7,158 $ 13,197 $ 36,301 $ 43,999 $ 56,448
Cost of goods sold ................................. 478 6,826 13,120 26,706 45,816
--------- --------- --------- --------- ---------
Gross profit ....................................... 6,680 6,371 23,181 17,293 10,632
Operating expenses ................................. 3,197 8,853 21,787 29,653 51,922
--------- --------- --------- --------- ---------
Operating income (loss) ............................ 3,483 (2,482) 1,394 (12,360) (41,290)
Sale of subsidiary ................................. -- -- -- 28,813 --
Other income (expense)
2,446 (2,094) (82) (1,531) (4,526)
--------- --------- --------- --------- ---------
Income (loss) before income taxes .................. 5,929 (4,576) 1,312 14,922 (45,816)
Provision (benefit) for income taxes ............... 2 154 -- (225) 500
--------- --------- --------- --------- ---------
Net income (loss) .................................. $ 5,927 $ (4,730) $ 1,312 $ 15,147 $ (46,316)
========= ========= ========= ========= =========

Cumulative dividend on participating preferred stock $ -- $ -- $ -- $ 133 $ 966
Accretion of warrant ............................... -- -- -- -- 266
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders . $ 5,927 $ (4,730) $ 1,312 $ 15,014 $ (47,548)
========= ========= ========= ========= =========
Net income (loss) per common share:
Basic ......................................... $ 0.066 $ (0.05) $ 0.01 $ 0.18 $ (1.23)
Diluted ....................................... $ 0.066 $ (0.05) $ 0.01 $ 0.16 $ (1.23)
Shares used in calculating net income (loss) per
common share - basic ............................... 89,198 93,856 93,852 83,585 38,670
Shares used in calculating net income (loss) per
common share - diluted ............................. 89,198 93,856 104,314 96,070 38,670

SELECTED OPERATING DATA:
Net revenues by geographic region:
North America ................................. $ 2,885 $ 1,544 $ 13,541 $ 26,184 $ 34,998
International ................................. 4,056 9,934 6,484 5,674 15,451
OEM, royalty and licensing .................... 217 1,720 16,276 12,141 5,999

Net revenues by platform:
Personal computer ............................. $ 631 $ 1,817 $ 7,671 $ 15,802 $ 34,912
Video game console ............................ 971 9,660 12,354 16,056 15,537
OEM, royalty and licensing .................... 217 1,720 16,276 12,141 5,999
Recognition of Revenue from expired contracts . 4,571 -- -- -- --
Licensing ...................................... 768 -- -- -- --

DECEMBER 31,
-------------------------------------------------------------

2005 2004 2003 2002 2001
(Unaudited)
--------- --------- --------- --------- ---------
BALANCE SHEETS DATA: (Dollars in thousands)
Working capital (deficiency) ....................... $ (11,497) $ (17,852) $ (14,750) $ (17,060) $ (34,169)
Total assets ....................................... 673 834 5,486 14,298 31,106
Total debt ......................................... 1,549 1,575 837 2,082 4,794
Stockholders' equity (deficit) ..................... (11,490) (17,362) (12,636) (13,930) (28,150)

- 19 -

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

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

EXECUTIVE OVERVIEW AND SUMMARY

Interplay Entertainment Corp. is a publisher and licensor of interactive
entertainment software for both core gamers and the mass market. We are most
widely known for our titles in the action/arcade, adventure/role playing game
(RPG), and strategy/puzzle categories. We have produced and licensed titles for
many of the most popular interactive entertainment software platforms.

During 2005 we continued to operate under limited cash flow from
operations. We expect to operate under similar cash constraints during 2006.

We also continued to significantly reduce our operational costs and
personnel in 2005. We reduced our personnel by 7, from 12 in December 2004 to 5
in December 2005 We also made reductions in expenditures in other areas. As a
result of these cost-cutting measures, our ongoing cash needs to fund operations
has been reduced for 2006.

We continue to face difficulties in paying our vendors incurred judgments
and have pending lawsuits as a result of our continuing cash flow difficulties.
We expect to continue to operate under cash constraints during 2006.

The Company had approximately $4.6 million in revenue from deferred income
recognition and approximately $2.4 million in revenue from other income in the
year ended December 31, 2005. However, the Company does not expect material
income from the recognition of deferred income or other income in 2006.

The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. The Report of our Independent Auditors for the December 31, 2005
consolidated financial statements includes an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern.

We derived net revenues from sales of software products to our two main
distributors, Vivendi and Avalon. Vivendi distributed our products in North
America and selected territories. Most of our distribution agreements with
Vivendi expired in August 2005 except for certain products subject to a
tri-party agreement with Atari Interactive Inc which expires in December 2006.
Upon expiration of most of the Vivendi distribution agreements, we resumed
responsibility for distribution and licensing in North America and other
territories and we entered into licensing agreements with new distributors for
certain of our products. Avalon distributed our products in Europe, the
commonwealth of Independent States, Africa and the Middle East. Our distribution
agreement with Avalon was terminated following Avalon's involuntary judicial
liquidation in February 2005. In March 2005 we appointed our wholly owned
subsidiary, Interplay Productions Ltd, as our distributor in Europe and other
selected territories.

We entered into various licensing agreements during 2005 under which we
licensed others to exploit games that we have intellectual property rights to.
This included entering into agreements with Turner Games Network and Vivendi and
resulted in one time payments from each of these licensees. These license
agreements are generally for a 2 year term. We expect in 2006 to enter into
similar license arrangements to generate cash for the Company's operations.

Our products were either designed and created by our employees or by
external software developers. When we used external developers, we typically
advanced development funds to the developers in installment payments based upon
the completion of certain milestones. These advances were typically considered
advances against future royalties, which we to be recouped against these
advances. We currently have no product in development with external developers.
We plan on creating additional products through external developers but no
assurance can be made that it will be successful.

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

- 20 -

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

MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, prepaid licenses and royalties and software
development costs. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
affect our more significant judgments and estimates used in preparation of our
consolidated financial statements.

REVENUE RECOGNITION

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

Sales were made by two distributors, Vivendi and Avalon, an affiliate of
our majority shareholder Titus Interactive S.A.until we ended our relationship
with them during 2005. We recognize revenue from sales by distributors, net of
sales commissions, only as the distributor recognizes sales of our products to
unaffiliated third parties. For those agreements that provide the customers the
right to multiple copies of a product in exchange for guaranteed amounts, we
recognize revenue at the delivery and acceptance of the product gold master. We
recognize per copy royalties on sales that exceed the guarantee as copies are
duplicated.

The Company recognizes revenue from sales by distributors, net of sales
commissions, only as the distributor recognizes sales of the Company's products
to unaffiliated third parties. For those agreements that provide the customers
the right to multiple copies of a product in exchange for guaranteed amounts,
revenue is recognized as earned. guaranteed minimum royalties on sales, where
the guarantee is not recognized upon delivery, are recognized as the minimum
payments come due. The Company recognizes revenue on expired contracts when the
termination date of the contract is reached because guaranteed minimum royalties
are not reimbursable and are recorded as revenue..

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

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

PREPAID LICENSES AND ROYALTIES

Prepaid licenses and royalties consist of license fees paid to intellectual
property rights holders for use of their trademarks or copyrights. Also included
in prepaid royalties are prepayments made to independent software developers
under developer arrangements that have alternative future uses. These payments
are contingent upon the successful completion of milestones, which generally
represent specific deliverables. Royalty advances are recoupable against future
sales based upon the contractual royalty rate. We amortize the cost of licenses,
prepaid royalties and other outside production costs to cost of goods sold over
six months commencing with the initial shipment in each region of the related
title. We amortize these amounts at a rate based upon the actual number of units
shipped with a minimum amortization of 75% in the first month of

- 21 -

release and a minimum of 5% for each of the next five months after release. This
minimum amortization rate reflects our typical product life cycle. Our
management relies on forecasted revenue to evaluate the future realization of
prepaid royalties and charges to cost of goods sold any amounts they deem
unlikely to be fully realized through future sales. Such costs are classified as
current and non current assets based upon estimated product release date. If
actual revenue, or revised sales forecasts, fall below the initial forecasted
sales, the charge may be larger than anticipated in any given quarter. Once the
charge has been taken, that amount will not be expensed in future quarters when
the product has shipped.

SOFTWARE DEVELOPMENT COSTS

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

OTHER SIGNIFICANT ACCOUNTING POLICIES

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

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:
YEARS ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
-------- -------- --------
STATEMENTS OF OPERATIONS DATA:
Net revenues .................................. 100% 100% 100%
Cost of goods sold ............................ 7 52 36
-------- -------- --------
Gross margin .................................. 93 48 64
Operating expenses:
Marketing and sales ...................... 4 13 4
General and administrative ............... 37 34 18
Product development ...................... 4 20 38
Other .................................... -- --
-------- -------- --------
Total operating expenses ................. 45 67 60
-------- -------- --------
Operating income (loss) ....................... 48 (19) 4
Other income (expense) ........................ 34 (16) --
-------- -------- --------
Income (loss) before provision for income taxes 82 (35) 4
Provision for income taxes .................... -- 1 --
-------- -------- --------
Net income (loss) ............................. 82% (36)% 4%
======== ======== ========

SELECTED OPERATING DATA:
Net revenues by segment:
North America ............................ 41% 12% 38%
International ............................ 56 75 18
OEM, royalty and licensing ............... 3 13 44
-------- -------- --------
100% 100% 100%
======== ======== ========
Net revenues by platform:
Personal computer ........................ 9% 14% 21%
Video game console ....................... 14 73 35
OEM, royalty and licensing ............... 3 13 44
Recognition of revenue on expired contracts 63 N/A N/A
Licensing deals ........................... 11 N/A N/A
-------- -------- --------
100% 100% 100%
======== ======== ========

- 22 -

Geographically, our net revenues for the years ended December 31, 2005 and
2004 breakdown as follows: (in thousands)

2005 2004 Change % Change
------ ------ ------ -------
North America ........................... 2,885 1,544 1,341 86.9%
International ........................... 4,056 9,934 (5,878) (59.2%)
OEM, Royalty & Licensing ................ 217 1,720 (1,503) (87.3%)
Net Revenues ............................ 7,158 13,197 (6,039) (45.7%)

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

2004 2003 Change % Change
------- ------- ------- -------
North America ....................... 1,544 13,541 (11,997) (88.6%)
International ....................... 9,934 6,484 3,450 53.2%
OEM, Royalty & Licensing ............ 1,720 16,276 (14,306) (89.2%)
Net Revenues ........................ 13,197 36,301 (22,854) (63.9%)

NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES

Net revenues for the year ended December 31, 2005 were $7.1 million, a
decrease of 45.7% compared to the same period in 2004. This decrease resulted
from a 59.2% decrease in International net revenues and a 87.3% decrease in OEM,
royalties and licensing revenues, offset by a 86.9% increase in North American
net revenues. Net revenues for the year ended December 31, 2004 were $13.1
million, a decrease of 63.9% compared to the same period in 2003. This decrease
resulted from a 88% decrease in North American net revenues and a 89% decrease
in OEM, royalties and licensing revenues, offset by a 53% increase in
International net revenues.

North American net revenues for the year ended December 31, 2005 were $2.9
million as compared to $1.5 million for the year ended December 31, 2004. The
increase in North American net revenues in 2005 was mainly due to the
recognition of deferred revenue in the amount of $2.1 million on contracts
expiring and the balance attributable to licensing , royalties and catalog
sales.

We expect that our North American publishing net revenues will decrease in
2006 compared to 2005, mainly due to decreased catalog sales.

The decrease in North American net revenues in 2004 was mainly due to
releasing zero product gold masters in 2004 as compared to delivering six
product gold masters in 2003.

International net revenues for the year ended December 31, 2005 were $4.0
million, a decrease of $5.8 million as compared to International net revenues
for the year ended December 31, 2004. Included in the $4.0 million are $2.5
million of recognition of deferred revenues on contracts expiring. The decrease
in International net revenues compared to the year ended December 31, 2004 was
mainly due to releasing no new product during the twelve months ended December
31, 2005 compared to releasing BALDUR'S GATE DARK ALLIANCE II and FALLOUT:
BROTHERHOOD OF STEEL during 2004.

- 23 -

We expect that our International publishing net revenues will decrease in
2006 as compared to 2005, mainly due to decreased unit sales.

International net revenues for the year ended December 31, 2004 were $9.9
million. The increase in International net revenues for the year ended December
31, 2004 was mainly due releasing BALDUR'S GATE DARK ALLIANCE II and FALLOUT:
BROTHERHOOD OF STEEL during 2004 with no comparable titles released during 2003.

OEM, royalty and licensing net revenues for the year ended December 31,
2005 were $.2 million, a decrease of $1.5 million as compared to the same period
in 2004. The OEM business decreased $1.5 million as a. consequence of our
reorganization.

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

PLATFORM, EXPIRED CONTRACTS AND LICENSING DEALS NET REVENUES

Our platform, expired contracts and licensing deals net revenues for the
years ended December 31, 2005 and 2004 breakdown as follows: (in thousands)

2005 2004 Change % Change
------ ------ ------ ------
Personal Computer ................ 631 1,817 (1,186) (65.3%)
Video Game Console ............... 971 9,660 (8,689) (89.9%)
OEM, Royalty & Licensing ......... 217 1,720 (1,503) (87.4%)

Recognition of revenue on
expired contracts ............. 4,571 0 4,571 N/A
Licensing ........................ 768 0 768 N/A
Net Revenues ..................... 7,158 13,197 (6,039) (45.8%)

PC net revenues for the year ended December 31, 2005 were $.6 million, a
decrease of 65.3 % compared to the same period in 2004. The decrease in PC net
revenues in 2005 was primarily due to no new releases. We expect our PC net
revenues to decrease in 2006 as compared to 2005 as we continue to reorganize
the Company.

Our video game console net revenues for the year ended December 31, 2005
were $1 million a decrease of 89.9% compared to the same period in 2004. Revenue
recognition from deferred revenue of expired contracts for the year ended
December 31,2005 were $4.6 million. Licensing for the year ended December
31,2005 were $1 million. The decrease in video game console net revenues was
primarily due to no new releases. Our catalog sales also decreased in 2005 as
compared to 2004. Since we anticipate releasing no new console titles in 2006,
we expect our video game console net revenues to decrease in 2006.

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

2004 2003 Change % Change
------- ------- ------- -------
Personal Computer ................... 1,817 7,671 (5,854) (76.3%)
Video Game Console .................. 9,660 12,354 (2,694) (21.8%)
OEM, Royalty & Licensing ............ 1,720 16,276 (14,306) (89.2%)
Net Revenues ........................ 13,197 36,301 (22,854) (63.4%)

PC net revenues for the year ended December 31, 2004 were $1.8 million, a
decrease of 76.3% compared to the same period in 2003. The decrease in PC net
revenues in 2004 was primarily due to no new releases.

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

- 24 -

COST OF GOODS SOLD; GROSS MARGIN

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

Our net revenues, cost of goods sold and gross margin for the years ended
December 31, 2005 and 2004 breakdown as follows: (in thousands)

2005 2004 Change % Change
------ ------ ------ ------
Net Revenues ........................ 7,158 13,197 (6,039) (45.8%)
Cost of Goods Sold .................. 478 6,826 (6,348) (93%)
Gross Margin ........................ 6,680 6,371 309 4.8%

Our cost of goods sold decreased 93% to $.5 million in the year ended
December 31, 2005 compared to $6.8 million in the same period in 2004. We expect
our cost of goods sold to decrease in 2006 as compared to 2005 because we
anticipate lower overall product sales.

Our gross margin increased to 93.3% for the twelve months ended December
31, 2005 from 48.2% in the comparable period in 2004.

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

2004 2003 Change % Change
------- ------- ------- -------
Net Revenues ........................ 13,197 36,301 (23,104) (63.6%)
Cost of Goods Sold .................. 6,826 13,120 (6,294) (48%)
Gross Margin ........................ 6,371 23,181 (16,810) (72.5%)

Our cost of goods sold decreased 48% to $6.8 million in the year ended
December 31, 2004 compared to $13.1 million in the same period in 2003.
Furthermore, in 2003 we incurred $2.9 million in amortization of prepaid
royalties associated with the sale of the HUNTER: THE RECKONING license and
approximately $2.9 million in write-offs of development projects that were
impaired because the titles were not expected to meet our desired profit
requirements. In addition, the decrease was mainly a result of lower product
cost of goods associated with lower overall product sales.

Our gross margin decreased to 48.3% for the twelve months ended December
31, 2004 from 63.9% in the comparable period in 2003. This was primarily due to
the sale of the HUNTER: THE RECKONING license, which yielded approximately an
80% profit margin in 2003 partially offset by the sale of the rights to develop
FALLOUT 3 and the sale of REDNECK RAMPAGE in 2004.

MARKETING AND SALES

Our marketing and sales expenses for the years ended December 31, 2005 and
2004 breakdown as follows: (in thousands)

2005 2004 Change % Change
------ ------ ------ ------
Marketing and Sales ................. 312 1,703 (1,391) (81.7%)

- 25 -

Marketing and sales expenses primarily consist of advertising and retail
marketing support, sales commissions, marketing and sales personnel, customer
support services and other related operating expenses. Marketing and sales
expenses for the twelve months ended December 31, 2005 were $.3 million, a 81.7%
decrease as compared to the 2004 period. The decrease in marketing and sales
expenses is due primarily to no new releases. We expect our marketing and sales
expenses to decrease in 2006 compared to 2005, as we expect to ship no new
releases in 2006 as compared to 2005.

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

2004 2003 Change % Change
----- ----- ----- ------
Marketing and Sales ...................... 1,703 1,415 288 20.4%

Marketing and sales expenses for the year ended December 31, 2004 were $1.7
million, a 20.4% increase as compared to the 2003 period. The increase in
marketing and sales expenses was due primarily to increased advertising costs
for Baldur's Gate Dark Alliance 2 on the PS2 and X-Box platforms in Europe.
GENERAL AND ADMINISTRATIVE

Our general and administrative expenses for the years ended December 31,
2005 and 2004 breakdown as follows: (in thousands)

2005 2004 Change % Change
------ ------ ------ ------
General and Administrative ...... 2,617 4,514 (1,897) (42%)

General and administrative expenses primarily consist of administrative
personnel expenses, facilities costs, professional fees, bad debt expenses and
other related operating expenses. General and administrative expenses for the
year ended December 31, 2005 were $2.6 million, a 42% decrease as compared to
the same period in 2004. The decrease is mainly due to decreases in personnel
costs and general expenses as a result of a reduction in administrative
personnel during 2005.

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

2004 2003 Change % Change
------ ------ ------ ------
General and Administrative .............. 4,514 6,692 (2,178) (32.6%)

General and administrative expenses for the year ended December 31, 2004
were $4.5 million, a 32.6% decrease as compared to the same period in 2003. The
decrease is mainly due to decrease in personnel costs and general expenses as a
result of a reduction in administrative personnel during 2004.

PRODUCT DEVELOPMENT

Our product development expenses for the years ended December 31, 2005 and
2004 breakdown as follows: (in thousands)

2005 2004 Change % Change
------ ------ ------ ------
Product Development ................. 268 2,636 (2,368) (89.8%)
------ ------ ------ ------

We charge internal product development expenses, which consist primarily of
personnel and support costs, to operations in the period incurred. Product
development expenses for the year ended December 31, 2005 were $.3 million, a
89.8% decrease as compared to the same period in 2004. This decrease was mainly
due to a $2.4 million decrease in personnel costs and general expenses as a
result of a reduction in headcount and the closure of our internal development
studio during the year.

- 26 -

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

2004 2003 Change % Change
------- ------- ------- -------
Product Development ................. 2,636 13,680 (11,044) (80.7%)

Product development expenses for the year ended December 31, 2004 were $2.6
million, a 80.7% decrease as compared to the same period in 2003. This decrease
was due to a $11 million decrease in personnel costs as a result of a reduction
in headcount.

OTHER EXPENSE (INCOME), NET

Our other expense for the years ended December 31, 2005 and 2004 breakdown
as follows: (in thousands)

2005 2004 Change % Change
------ ------ ------ ------
Other Expense (Income) .......... (2,445) 2,248 (4,693) 208%

Other income consists primarily of a legal settlement which was a reduction
of accrued royalties, accrued expenses and accounts payable in the amount of $1
million, an additional adjustment to accrued royalties in the amount of $1.6
million, an immaterial impairment of assets of $.3 million, recovery of bad debt
in the amount of $.06 million, an additional write down of Titus Software in the
amount of $.2 million , and immaterial foreign currency exchange transactions
gains and losses.

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

2004 2003 Change % Change
------ ------ ------ ------
Other Expense ........... 2,248 82 (2,166) (278%)

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

PROVISION (BENEFIT) FOR INCOME TAXES

We recorded no tax provision for the years ended December 31, 2005 and
2004.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2005, we had a working capital deficit of approximately
$11 million, and our cash balance was approximately $122,000. We currently have
no cash reserves and are unable to pay current liabilities. We cannot continue
in our current form without obtaining additional financing or income or reducing
expenditures.

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

Additionally, we have reduced our fixed overhead commitments, and cancelled
or suspended development on future titles. and scaled back certain marketing
programs associated with the cancelled projects. Management will continue to
pursue various alternatives to improve future operating results.

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

- 27 -

We have been operating without a credit facility since October 2001, which
has adversely affected cash flow. We continue to face difficulties in paying our
vendors, and employees, and have pending lawsuits as a result of our continuing
cash flow difficulties. We expect these difficulties to continue during 2006.

Historically, we have funded our operations primarily through cash flow
from operations, including royalty and distribution fee advances.

Our primary capital needs have historically been working capital
requirements necessary to fund our operations.. Our operating activities
provided cash of $93,000 during the twelve months ended December 31, 2005,
primarily attributable to licensing and distribution net of expenditures.

Net cash provided by operating activities of $93,000 for the twelve months
ended December 31, 2005 consisted of normal capital expenditures and sales,
primarily for office and computer equipment used in our operations. We do not
currently have any material commitments with respect to any future capital
expenditures.

We entered into various licensing agreements during 2005 under which we
licensed others to exploit games that we have intellectual property rights to.
This included entering into agreements with Turner Games Network and Vivendi and
resulted in one time payments from each of these licensees. These license
agreements are generally for a 2 year term. We expect in 2006 to enter into
similar license arrangements to generate cash for the Company's operations.

Currently the Company has no internal development of new titles.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS

The following table summarizes certain of our contractual obligations under
non-cancelable contracts and other commitments at December 31, 2005, and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods. (in thousands)

--------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 - 3 3 - 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS
--------------------------------------------------------------------------------
Lease Commitments (1) 153 -- 114 39 --
--------------------------------------------------------------------------------

Total 153 -- 114 39 --
--------------------------------------------------------------------------------

- 28 -

Our current cash reserves plus our expected cash from existing operations
will only be sufficient to fund our anticipated expenditures to June 30, 2006.
We will need to substantially reduce our working capital needs, continue to
consummate certain sales of assets and/or raise additional financing to meet our
contractual obligations..

(1) We have a lease commitment at the Beverly Hills office through April 2008.
We have a monthly rental agreement in Irvine.

ACTIVITIES WITH RELATED PARTIES

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

TRANSACTIONS WITH TITUS

Titus (placed in involuntary bankruptcy in January 2005) presently owns
approximately 58 million shares of our common stock

As of December 31, 2005 and December 31, 2004, Titus and its affiliates
excluding Avalon owed us $105,000 and $370,000, respectively. We owed Titus and
its affiliates excluding Avalon $0 and $30,000 as of December 31, 2005 and
December 31, 2004 respectively.

TRANSACTIONS WITH TITUS AFFILIATES

TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS

We had an International Distribution Agreement with Avalon, a wholly owned
subsidiary of Titus. Pursuant to this distribution agreement, Avalon provided
for the exclusive distribution of substantially all of our products in Europe,
Commonwealth of Independent States, Africa and the Middle East for a seven-year
period ending February 2006, cancelable under certain conditions, subject to
termination penalties and costs. Under this agreement, as amended, we paid
Avalon a distribution fee based on net sales, and Avalon provides certain market
preparation, warehousing, sales and fulfillment services on our behalf. In
connection with the International Distribution Agreement with Avalon, we
incurred distribution commission expense of $0 and $62,000, for the twelve
months ended December 31, 2005, and 2004 respectively. This agreement was
terminated as a result of Avalon's liquidation in February 2005.

TRANSACTIONS WITH TITUS SOFTWARE

In March 2003, we entered into a note receivable with Titus Software Corp.,
("TSC"), a subsidiary of Titus, and advanced TSC $226,000. The note earns
interest at 8% per annum and was due in February 2004. In May 2003, our Board of
Directors rescinded the note receivable and demanded repayment of the $226,000
from TSC. As of the date of this filing the balance on the note with accrued
interest has not been paid. The balance on the note receivable, with accrued
interest, at September 30, 2004 was approximately $254,000. The total receivable
due from TSC is approximately $327,000 as of September 30, 2004. The majority of
the additional approximately $71,000 was due to TSC subletting office space and
miscellaneous other items. As of October 31,2005 the outstanding balance owed
from TSC was approximately $71,000 the outstanding balance was reduced from a
payment of a note owed by Phil Adam to TSC and offset against the balance due
Interplay.

In May 2003, we paid TSC $60,000 to cover legal fees in connection with a
lawsuit against Titus. As a result of the payment, our CEO requested that we
credit the $60,000 to amounts we owed to him arising from expenses incurred in
connection with providing services to the Company.

TRANSACTIONS WITH TITUS JAPAN

In June 2003, we began operating under a representation agreement with
Titus Japan K.K. ("Titus Japan"), a majority-controlled subsidiary of Titus,
pursuant to which Titus Japan represents us as an agent in regards to certain
sales transactions in Japan. As of December 31, 2005 the Company had a balance
due from Titus Japan of $192,000. During the twelve months ending December 31,
2005 our Japanese subsidiary incurred to Titus Japan approximately $221,000 in
commissions, publishing and staff services.

- 29 -

TRANSACTIONS WITH TITUS SARL

As of December 31, 2005 and 2004 the Company has a receivable of
approximately $18,000 and $18,000 respectively for product development services
that the Company provided of which reserve have been allocated accordingly.
Titus SARL was placed into involuntary liquidation in January 2005.

TRANSACTIONS WITH TITUS GIE

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

TRANSACTIONS WITH VIE ACQUISITION GROUP

Approximately $0 and $42,000 was paid to VIE Acquisition Group for
management services provided during the twelve months ended December 31, 2005
and 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs -
An Amendment of ARB No. 43, Chapter 4." This new standard is the result of a
broader effort by the FASB to improve financial reporting by eliminating
differences between Generally Accepted Accounting Principles ("GAAP") in the

United States and accounting principles developed by the International
Accounting Standards Board ("IASB"). As part of this effort, the FASB and the
IASB identified opportunities to improve financial reporting by eliminating
certain narrow differences between their existing accounting standards. SFAS No.
151 clarifies that abnormal amounts of idle facility expense, freight handling
costs and spoilage costs should be expensed as incurred and not included in
overhead. Further, SFAS No. 151 requires that allocation of fixed production
overheads to conversion costs should be based on normal capacity of the
production facilities. The provisions in SFAS No. 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Companies must apply the standard prospectively. Management does not expect the
adoption of SFAS No. 151 to have a material impact on the Company's financial
position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment," a
revision to SFAS 123, "Accounting for Stock-Based Compensation," and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. SFAS No. 123R establishes standards for the accounting
for transactions in which an entity exchanges instruments for goods or services.
It also addresses transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R established the accounting treatment for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS 123R
requires companies to recognize in the statement of operations the grant-date
fair value of stock options and other equity-based compensation issued to
employees. SFAS 123R requires the Company to value the share-based compensation
based on the classification of the share-based award. If the share-based award
is to be classified as a liability, the Company must re-measure the award at
each balance sheet date until the award is settled. If the share-based award is
to be classified as equity, the Company will measure the value of the
share-based award on the date of grant but the award will not be re-measured at
each balance sheet date. SFAS 123R does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
SFAS 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." SFAS 123R is effective for public
companies with calendar year ends no later than the beginning of 2006. All
public companies must use either the modified prospective or modified
retrospective transition method. Under the modified prospective method, awards
that are granted, modified, or settled after the date of adoption should be
measured and accounted for in accordance with SFAS 123R. Unvested equity
classified awards that were granted prior to the effective date should continue
to be accounted for in accordance to SFAS 123 except that the amounts must be
recognized in the statement of operations. Under the modified retrospective
method, the previously reported amounts are restated (either to the beginning of
the year of adoption or for all periods presented) to reflect SFAS 123 amounts
in the statement of operations. Management is in the process of determining the
effect SFAS 123R will have upon the Company's financial position and statement
of operations and the method of transition adoption.

- 30 -

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have any derivative financial instruments as of December 31,
2005. However, we are exposed to certain market risks arising from transactions
in the normal course of business, principally the risk associated with foreign
currency fluctuations. We do not hedge our risk associated with foreign currency
fluctuations.

FOREIGN CURRENCY RISK

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

We recognized a $10,000 loss, $33,000 loss and $58,000 gain during the
years ended December 31, 2005, 2004 and 2003, respectively, primarily in
connection with foreign exchange fluctuations in the timing of payments received
on accounts receivable from Avalon.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

The information required by this Item 9 has been previously furnished and
is incorporated herein by reference to our forms 8-K filed on (i) March 15,2005,
and amendment to such form 8-K filed on March 16, 2005, (ii) February 16,2006
and amendment to such form 8-K filed on March 20,2006

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and interim Chief Financial Officer of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
this evaluation, our Chief Executive Officer and interim Chief Financial Officer
concluded that our disclosure controls and procedures are effective, at the
reasonable assurance level, in ensuring that information required to be
disclosed is recorded, processed, summarized and reported within the time
periods specified by the SEC rules and forms.

There were no changes made in our internal controls over financial
reporting that occurred during the quarter ended December 31, 2005 that have
materially affected or reasonably likely to materially affect these controls.

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

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

- 31 -

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

SUMMARY INFORMATION CONCERNING DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN
SIGNIFICANT EMPLOYEES

The following table sets forth certain information regarding our directors
and executive officers and their ages as of May 10, 2006:

DIRECTORS AGE PRESENT POSITION

Herve Caen 44 Chairman of the Board of Directors,
Chief Executive Officer and Interim
Chief Financial Officer
Eric Caen 40 Director
Michel Welter (1)(2)(3) 47 Director

(1) Member of the Audit Committee of the Board of Directors.

(2) Member of the Compensation Committee of the Board of Directors.

(3) Member of the Independent Committee of the Board of Directors.

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

BACKGROUND INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS

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

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

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers, directors, and persons who own more than 10% of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than 10% stockholders are required by SEC rules and regulations to furnish us
with all Section 16(a) forms they file. Based solely on our review of the copies
of the forms received by us and

- 32 -

representations from certain reporting persons that they have complied with the
relevant filing requirements, we believe that, during the year ended December
31, 2005, all our executive officers, directors and greater than 10%
stockholders complied with all Section 16(a) filing requirements.

AUDIT COMMITTEE INDEPENDENCE AND AUDIT COMMITTEE FINANCIAL EXPERT.

The Audit Committee currently consists of Michel Welter. The Board has
determined that there is no "audit committee financial expert", as that term is
defined in Section 407 of the Sarbanes-Oxley Act of 2002 and pursuant to the
rules and regulations of the SEC. The Board determined that Mr. Welter is,
"independent", as that term is defined under the rules of the National
Association of Securities Dealers, Inc.

CODE OF ETHICS

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

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation
earned during the last three fiscal years ended December 31, 2005, by our Chief
Executive Officer whose total salary and bonus during the year ended December
31, 2005 exceeded $100,000 (collectively, the "Named Executive Officer"). No
other executive officer serving at December 31, 2005, received total salary and
bonus during 2005 in excess of $100,000.

SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
-------------------------------- ---- ----------- ----- ------------ ------------
Herve Caen (1).................. 2005 $ 76,667 (2) -- -- --
Chairman of the Board of 2004 260,330 -- -- --
Directors, Chief Executive 2003 487,330 (3) -- -- (4)
Officer and Interim Chief
Financial Officer

----------
(1) Mr. Caen joined us as President in November 1999. Mr. Caen was appointed
Chief Executive Officer in January 2002 and currently serves as our Chief
Executive Officer and interim Chief Financial Officer. Mr. Caen has served
as Chairman of our Board of Directors since September 2001. In March 2003,
our Compensation Committee approved an annual base salary of $360,000 as
Chief Executive officer and $100,000 per year while serving as interim
Chief Financial Officer.

(2) Mr. Caen was only paid a portion of his salary during the period ended
December 31, 2005 due to limited cash available. We accrued the balance due
Mr. Caen of $383,333 as of December 31,2005.

(3) Mr. Caen was only paid a portion of his salary during the period ended
December 31, 2004 due to the limited cash available. We accrued the balance
due Mr. Caen of $199,670 as of December 31, 2004.

(4) Mr. Caen received 2,000 shares of our common stock pursuant to a
non-discretionary grant made under the terms of our Employee Stock Purchase
Program.

- 33 -

STOCK OPTION GRANTS IN FISCAL 2005

There were no stock options or stock appreciation rights granted to the
Named Executive Officer during the year ended December 31, 2005.

AGGREGATE OPTION/ SAR EXERCISES
AND 2005 YEAR-END OPTION VALUES

There were no exercises of stock options or stock appreciation rights
during the year ended December 31, 2005 for any of the Named Executive Officer.

NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED OPTIONS MONEY OPTIONS AT
AT YEAR-END YEAR-END
(EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE) UNEXERCISABLE) (1)
----------------- ----------- -------------- -------------- ------------------
Herve Caen ...... -- -- -- --

----------
(1) Represents an amount equal to the difference between the closing sale
price for our common stock ($0.01) on the Over-The-Counter Bulletin
Board on December 31, 2005, and the option exercise price, multiplied
by the number of unexercised in-the-money options. None of the options
held by the Named Executive Officers were in-the-money at year-end.

DIRECTOR COMPENSATION

Currently, we accrue for payment to each of our non-employee director's
compensation as follows:

o $5,000 in cash compensation per quarter for attendance at Board of
Directors meetings.

o $5,000 in cash compensation per annum for each Board committee a
director is a member of and participates in.

o Upon election and appointment to the Board, or upon loss of employee
status of an employee director, an option to purchase up to 25,000
shares of our common stock under the Third Amended and Restated 1997
Stock Incentive Plan. These director options are each for a term of
ten years and vest over the first three years.

o An option to purchase 5,000 shares of our common stock under the Third
Amended and Restated 1997 Stock Incentive Plan for each subsequent
year of director service. These director options are each for a term
of ten years and vest over the first three years.

EMPLOYMENT AGREEMENTS

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee currently consists of Michel Welter. During
2005, decisions regarding executive compensation were made by our Compensation
Committee. Neither of the current 2005 member of our Compensation Committee nor
any of our 2005 executive officer or directors had a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The following is the Report of the Compensation Committee describing the
compensation policies applicable to the Company's executive officers. This
information shall not be deemed to be "soliciting material" or to be "filed"
with the SEC

- 34 -

nor shall this information be incorporated by reference into any future filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, except to the extent that the company specifically
incorporates it by reference into a filing.

Compensation Policies and Objectives

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

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

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

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

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

No stock options were granted to our executive officers in 2005. The
Compensation Committee continues to review the desirability of issuing stock
options to its executive officers in any given fiscal year to provide incentives
in connection with our corporate objectives.

Fiscal Year 2005 Chief Executive Officer Compensation

The salary, annual raises and annual bonus of Herve Caen, our Chief
Executive Officer and interim Chief Financial Officer, are determined in
accordance with Mr. Caen's employment agreement with us. Mr. Caen's employment
agreement provides for a base salary of $360,000 per year, with annual raises
and bonuses as may be approved at the discretion of our Board of Directors and
$100,000 per year while serving as interim Chief Financial Officer. The amounts
of any annual raises or bonuses are determined in accordance with the policies
and objectives set forth above. For the fiscal year ended December 31, 2005, Mr.
Caen received $76,667 in compensation as Chief Executive Officer and interim
Chief Financial Officer and the remainder of his salary was accrued. The
Compensation Committee did not award Mr. Caen any options during 2005. The
Compensation Committee is currently negotiating a new employment agreement with
Mr. Herve Caen.

Tax Law Implications for Executive Compensation

Section 162(m) of the Internal Revenue Code limits us to a deduction for
federal income tax purposes of no more than $1 million of compensation paid to
certain Named Executive Officers in a taxable year. Compensation above $1
million may be deducted if it is "performance-based compensation" within the
meaning of the Code. The Compensation Committee believes that at present the
compensation paid to each Named Executive Officer in a taxable year will not
exceed the deduction limit of $1 million under Section 162(m). However, the
Compensation Committee has determined that stock awards granted under

- 35 -

the long-term incentive plans with an exercise price at least equal to the fair
market value of our common stock on the date of grant will be treated as
"performance-based compensation."

The Compensation Committee

Michel Welter

PERFORMANCE GRAPH

The following graph sets forth the percentage change in cumulative
total stockholder return of our common stock during the period from December 31,
2000 to December 31, 2005, compared with the cumulative returns of the NASDAQ
Stock Market (U.S. Companies) Index and the Media General Index 820*. The
comparison assumes $100 was invested on December 31, 2000 in our common stock
and in each of the foregoing indices. Information presented below is as of the
end of the fiscal year ended December 31st 2005.

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


                                     - 36 -



ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets forth as of May 8,  2006,  unless  otherwise
indicated,  certain information relating to the ownership of our common stock by
(i) each person  known by us to be the  beneficial  owner of more than 5% of the
outstanding  shares of our common stock, (ii) each of our directors,  (iii) each
of the Named  Executive  Officers,  and (iv) all of our  executive  officers and
directors as a group.  Except as may be indicated in the  footnotes to the table
and subject to applicable community property laws, each such person has the sole
voting and  investment  power with respect to the shares  owned.  The address of
each person listed is in care of us, 100 N. Crescent  Drive,  Beverly Hills , CA
90210 unless otherwise set forth below such person's name.

                                            NUMBER OF SHARES
                                            OF COMMON STOCK
NAME AND ADDRESS                         BENEFICIALLY OWNED (1)     PERCENT (2)
----------------                         ----------------------     -----------

DIRECTORS AND NAMED EXECUTIVE OFFICER:
Herve Caen.............................         8,681,306  (4)          9.2%
Eric Caen..............................            30,001  (5)           *
Michel Welter..........................            60,001  (6)           *

5% HOLDERS:
Titus Interactive SA...................        58,426,293  (3)         62.3%
    Parc de l'Esplanade
    12, rue Enrico Fermi
    St-Thibault-des-Vignes
    77462 Lagny-sur-Marne Cedex
    France

Directors and Executive Officers
   as a Group (3 persons)..............         8,721,308               9.2%

     * Less than one percent.

(1)  Beneficial  ownership is determined h the rules and  regulations of the SEC
     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 May  8,2006  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. The information as to shares beneficially owned
     has  been  individually  furnished  by  the  respective  directors,   Named
     Executive Officers,  and other stockholders,  or taken from documents filed
     with the SEC.

(2)  Based on 93,855,634  shares of common stock  outstanding  as of May 8,2006.
     This includes  4,658,216 shares of Treasury Stock.  Percentages are rounded
     to the nearest tenth of a percent.

(3)  Includes 460,298 shares subject to warrants  exercisable  within 60 days of
     May 8,2006.

(4)  Includes  8,681,306  shares of our common stock held by Mrs.  Solange Caen,
     Herve Caen's spouse.

(5)  Includes 30,001 shares subject to stock options  exercisable within 60 days
     of May 8,2006. (

6)   Includes 20,001 shares subject to stock options  exercisable within 60 days
     of May 8 2006.


                                     - 37 -



EQUITY COMPENSATION PLANS INFORMATION

     The  following  table sets forth certain  information  regarding our equity
compensation plans as of December 31, 2005:

      Plan Category         Number of securities to     Weighted-average        Number of securities
                            be issued upon exercise    exercise price of       remaining available for
                            of outstanding options,   outstanding options,  future issuance under equity
                              warrants and rights     warrants and rights        compensation plans
                                                                                (excluding securities
                                                                              reflected in column (a))
------------------------------------------------------------------------------------------------------
                                      (a)                     (b)                       (c)
Equity compensation plans
approved by security                      70,000                   0.30                    10,014,877
holders
Equity compensation
plans not approved by                                                                               -
security holders
                           ---------------------------------------------------------------------------
Total                                     70,000                   0.30                    10,014,877
                           ===========================================================================


     We have one stock option plan currently  outstanding.  Under the 1997 Stock
Incentive  Plan,  as amended  (the  "1997  Plan"),  we may grant  options to our
employees,  consultants  and directors,  which generally vest from three to five
years.  At our 2002 annual  stockholders'  meeting,  our  stockholders  voted to
approve an  amendment  to the 1997 Plan to  increase  the  number of  authorized
shares of common  stock  available  for  issuance  under the 1997 Plan from four
million to 10 million. Our Incentive Stock Option, Nonqualified Stock Option and
Restricted  Stock  Purchase  Plan- 1991, as amended (the "1991  Plan"),  and our
Incentive Stock Option and Nonqualified Stock Option Plan-1994,  as amended (the
"1994 Plan"),  have terminated.  An aggregate of 9,050 stock options that remain
outstanding  under the 1991 Plan and 1994 Plan have been transferred to our 1997
Plan. . 84,877 shares remain available for issuance under the Company's Employee
Stock Purchase Plan.

     We have treated the difference,  if any, between the exercise price and the
estimated  fair market value as  compensation  expense for  financial  reporting
purposes,  pursuant  to APB 25.  Compensation  expense  for the  vested  portion
aggregated $0, $0 and $0 for the years ended  December 31, 2005,  2004 and 2003,
respectively.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

TRANSACTIONS WITH TITUS

     Titus (placed in  involuntary  bankruptcy in January 2005)  presently  owns
approximately 58 million shares of our common stock.

     We performed certain distribution services on behalf of Titus for a fee. In
connection with such distribution  services,  we recognized fee income of $0 and
$0 for the twelve months ended December 31, 2005, and 2004, respectively.

     As of December 31, 2005 and December  31,  2004,  Titus and its  affiliates
excluding Avalon owed us $105,000 and $370,000,  respectively. We owed Titus and
its  affiliates  excluding  Avalon $0 and  $30,000 as of  December  31, 2005 and
December 31, 2004 respectively.


                                     - 38 -



TRANSACTIONS WITH TITUS AFFILIATES

TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS

     We had an International  Distribution Agreement with Avalon, a wholly owned
subsidiary of Titus.  Pursuant to this distribution  agreement,  Avalon provided
for the exclusive  distribution of substantially  all of our products in Europe,
Commonwealth of Independent States,  Africa and the Middle East for a seven-year
period ending February 2006,  cancelable  under certain  conditions,  subject to
termination  penalties  and costs.  Under this  agreement,  as amended,  we paid
Avalon a distribution fee based on net sales, and Avalon provides certain market
preparation,  warehousing,  sales and  fulfillment  services on our  behalf.  In
connection  with  the  International  Distribution  Agreement  with  Avalon,  we
incurred  distribution  commission  expense  of $0 and  $62,000,  for the twelve
months ended  December 31,  2005,  and 2004  respectively.  This  agreement  was
terminated as a result of Avalon's liquidation in February 2005.

TRANSACTIONS WITH TITUS SOFTWARE

     In March 2003, we entered into a note receivable with Titus Software Corp.,
("TSC"),  a  subsidiary  of Titus,  and advanced  TSC  $226,000.  The note earns
interest at 8% per annum and was due in February 2004. In May 2003, our Board of
Directors  rescinded the note receivable and demanded  repayment of the $226,000
from TSC.  As of the date of this  filing the  balance on the note with  accrued
interest  has not been paid.  The balance on the note  receivable,  with accrued
interest, at September 30, 2004 was approximately $254,000. The total receivable
due from TSC is approximately $327,000 as of September 30, 2004. The majority of
the additional  approximately $73,000 was due to TSC subletting office space and
miscellaneous  other items. As of October  31,2005 the outstanding  balance owed
from TSC was  approximately  $71,000.  The  outstanding  balance  was reduced by
offsetting a note receivable the Company had with Phil Adam, the Company's prior
President, with a balance he had due TSC.

     In May 2003, we paid TSC $60,000 to cover legal fees in  connection  with a
lawsuit  against  Titus.  As a result of the payment,  our CEO requested that we
credit the $60,000 to amounts we owed to him arising from  expenses  incurred in
connection with providing services to the Company.

TRANSACTIONS WITH TITUS JAPAN

     In June 2003, we began  operating  under a  representation  agreement  with
Titus Japan K.K. ("Titus  Japan"),  a  majority-controlled  subsidiary of Titus,
pursuant to which Titus  Japan  represents  us as an agent in regards to certain
sales  transactions  in Japan.  This  representation  agreement has not yet been
approved by our Board of Directors and is currently  being reviewed by them. Our
Board of Directors  has approved the payments of certain  amounts to Titus Japan
in connection with certain services already  performed by them on our behalf. As
of  December  31,  2005,  the  Company  had a balnce due from Titus Japan in the
amount of  $192,000.  During the twelve  months  ending  December  31,  2005 our
Japanese subsidiary paid to Titus Japan  approximately  $221,000 in commissions,
marketing  and  publishing   staff   services.   Our  Japanese   subsidiary  had
approximately $404,000 in revenue in the twelve months ending December 31, 2005.

TRANSACTIONS WITH TITUS SARL

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

TRANSACTIONS WITH TITUS GIE

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


                                     - 39 -



ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

     Rose, Snyder & Jacobs ("RSJ") served as our independent auditors for fiscal
year ended December 31, 2004 . On February 15, 2006, the Company engaged Jeffrey
S. Gilbert Certified Public accountant ("New Accountant") to audit the Company's
financial statements for the fiscal year ended December 31, 2005.

     Aggregate fees billed by our independent auditors for professional services
rendered for the audit of fiscal years 2005 and 2004 and for other  professional
services billed in fiscal years 2005 and 2004 are as follows:

                                                   YEAR ENDED
DESCRIPTION OF FEES                DECEMBER 31,2005          DECEMBER 31, 2004
-------------------                ----------------          -----------------
Audit Fees ..................          $25,000 (2)               $45,000 (1)
Audit-Related Fees ..........            5,000 (2)                $5,000 (2)
Tax Fees ....................                                        --
All Other Fees ..............      ----------------          -----------------
        TOTAL: ..............          $30,000                   $50,000
                                   ================          =================

(1)      This entire amount was paid to ("RSJ").
(2)      We expect to incur fees in of  approximately  this amount in connection
         with the review of this form 10-K for the year ended  December 31, 2005
         and December 31, 2004.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

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


                                     PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

     (1) Financial Statements

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

     (2) Financial Statement Schedules

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

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

     (3) Exhibits

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


                                     - 40 -



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned,  thereto duly authorized,  at Irvine,  California
this 18th day of May, 2006.

                             INTERPLAY ENTERTAINMENT CORP.


                                      /s/ Herve Caen
                             By:___________________________________
                                   Herve Caen
                                   Its:  Chief Executive Officer and
                                   Interim Chief Financial Officer
                                   (Principal Executive and
                                   Financial and Accounting Officer)

                                POWER OF ATTORNEY

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

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

SIGNATURE                    TITLE                                 DATE


   /s/ Herve Caen
_______________________      Chief Executive Officer, Interim      May 18, 2006
Herve Caen                   Chief Financial Officer and
                             Director (Principal Executive
                             and Financial and Accounting
                             Officer)



   /s/ Eric Caen
_______________________      Director                              May 18, 2006
Eric Caen




   /s/ Michel Welter
_______________________      Director                              May 18, 2006
Michel Welter


                                     - 41 -



                                  EXHIBIT INDEX


EXHIBIT
NO.             DESCRIPTION

3.1         Amended and Restated  Certificate of  Incorporation  of the Company;
            (incorporated  herein by reference  to Exhibit 3.1 to the  Company's
            Annual Report on Form 10-K for the year ended December 31, 2003).

3.2         Certificate  of  Designation  of  Preferences  of Series A Preferred
            Stock,  as filed with the  Delaware  Secretary of State on April 14,
            2000;  (incorporated  herein by  reference  to Exhibit  10.32 to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            1999).

3.3         Certificate  of Amendment of  Certificate  of Designation of Rights,
            Preferences,  Privileges  and  Restrictions  of  Series A  Preferred
            Stock, as filed with the Delaware  Secretary of State on October 30,
            2000;  (incorporated  herein  by  reference  to  Exhibit  3.3 to the
            Company's Annual Report on Form 10-K for the year ended December 31,
            2003).

3.4         Certificate  of  Amendment of Amended and  Restated  Certificate  of
            Incorporation of the Company,  as filed with the Delaware  Secretary
            of State on November 2, 2000;  (incorporated  herein by reference to
            Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year
            ended December 31, 2003).

3.5         Certificate  of  Amendment of Amended and  Restated  Certificate  of
            Incorporation of the Company,  as filed with the Delaware  Secretary
            of State on January 21, 2004;  (incorporated  herein by reference to
            Exhibit 3.5 to the Company's Annual Report on Form 10-K for the year
            ended December 31, 2003).

3.6         Amended and Restated Bylaws of the Company;  (incorporated herein by
            reference to Exhibit 3.6 to the Company's Annual Report on Form 10-K
            for the year ended December 31, 2003).

3.7         Amendment  to the Amended and Restated  Bylaws of the Company  dated
            March 9, 2004;  (incorporated  herein by reference to Exhibit 3.7 to
            the Company's Annual Report on Form 10-K for the year ended December
            31, 2003).

4.1         Specimen form of stock  certificate for Common Stock;  (incorporated
            herein by reference to Exhibit 4.1 to the Form S-1)

10.01       Third  Amended and  Restated  1997 Stock  Incentive  Plan (the "1997
            Plan");  (incorporated  herein by  reference  to  Appendix  A of the
            Definitive Proxy Statement filed on August 20, 2002).

10.02       Form  of  Stock  Option  Agreement  pertaining  to  the  1997  Plan;
            (incorporated herein by reference to Exhibit 10.2 to the Form S-1).

10.03       Form of Restricted Stock Purchase  Agreement  pertaining to the 1997
            Plan;  (incorporated herein by reference to Exhibit 10.3 to the Form
            S-1).

10.04       Form of Indemnification  Agreement for Officers and Directors of the
            Company;  (incorporated  herein by reference to Exhibit 10.11 to the
            Form S-1).

10.05       Stock Purchase  Agreement  between the Company and Titus Interactive
            SA,  dated March 18,  1999;  (incorporated  herein by  reference  to
            Exhibit  10.24 to The  Company's  Annual Report on Form 10-K for the
            year ended December 31, 1998).

10.06       Stock  Purchase  Agreement  dated  July 20,  1999,  by and among the
            Company,  Titus  Interactive  S.A.,  and Brian Fargo;  (incorporated
            herein by  reference  to  Exhibit  10.1 to the  Company's  Quarterly
            Report on Form 10-Q for the quarter ended June 30, 1999).

10.07       Exchange   Agreement  dated  July  20,  1999,  by  and  among  Titus
            Interactive   S.A.,   Brian   Fargo,   Herve  Caen  and  Eric  Caen;
            (incorporated  herein by reference to Exhibit 10.2 to the  Company's
            Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).


                                     - 42 -



10.08       Employment  Agreement  between  the  Company  and Herve  Caen  dated
            November 9, 1999;  (incorporated herein by reference to Exhibit 10.3
            to the Company's Quarterly Report on Form 10-Q for the quarter ended
            September 30, 1999).

10.09       Warrant  (350,000  shares) for Common Stock  between the Company and
            Titus Interactive S.A., dated April 14, 2000;  (incorporated  herein
            by reference to Exhibit 10.33 to the Company's Annual Report on Form
            10-K for the year ended December 31, 1999).

10.10       Warrant  (50,000  shares) for Common  Stock  between the Company and
            Titus Interactive S.A., dated April 14, 2000;  (incorporated  herein
            by reference to Exhibit 10.34 to the Company's Annual Report on Form
            10-K for the year ended December 31, 1999).

10.11       Warrant  (100,000  shares) for Common Stock  between the Company and
            Titus Interactive S.A., dated April 14, 2000;  (incorporated  herein
            by reference to Exhibit 10.35 to the Company's Annual Report on Form
            10-K for the year ended December 31, 1999).

10.12       Common Stock Purchase Warrant of the Company;  (incorporated  herein
            by  reference  to  Exhibit  4.2 to the Form S-3  filed on April  17,
            2001).

10.13       Warrant to Purchase  Common  Stock of the  Company,  dated April 25,
            2001;  (incorporated herein by reference to Exhibit 10.4 to the Form
            S-3 filed on May 4, 2001).

10.14       Agreement between the Company,  Brian Fargo, Titus Interactive S.A.,
            and  Herve  Caen,  dated  May  15,  2001;  (incorporated  herein  by
            reference to Exhibit 99 to Form SCD 13D/A).

10.15       Term Sheet by and between Titus  Interactive  S.A., and the Company,
            dated April 26, 2002;  (incorporated  herein by reference to Exhibit
            10.8 to Form 10-Q filed on May 15, 2002).

10.16       Promissory Note by Titus  Interactive  S.A. in favor of the Company,
            dated April 26, 2002;  (incorporated  herein by reference to Exhibit
            10.9 to Form 10-Q filed on May 15, 2002).

10.17       Amended and Restated  Secured  Convertible  Promissory  Note,  dated
            April 30, 2002, in favor of Warner Bros.,  a division of Time Warner
            Entertainment  Company,  L.P.;  (incorporated herein by reference to
            Exhibit 10.10 to Form 10-Q filed on May 15, 2002).

10.18       Mutual  Release  Settlement  Agreement  by and between  Warner Bros.
            Entertainment,  Inc.  and  the  Company,  dated  October  13,  2003;
            (incorporated  herein by reference to Exhibit 10.47 to the Company's
            Annual Report on Form 10-K for the year ended December 31,2003 filed
            on April 27, 2004).

10.19       Letter  Agreement by and between Majorem Ltd and the Company,  dated
            December  21,  2004;  (incorporated  herein by  reference to Exhibit
            10.48 to the Company's Annual Report on Form 10-K for the year ended
            December 31, 2004 filed on June 3, 2005).

10.20       Form  of  Settlement  Agreement  entered  into by the  Company  with
            Snowblind Studios, Inc. dated April 19, 2005.

14.1        Code of Ethics of the Company;  (incorporated herein by reference to
            Exhibit 14.1 to Amendment  No. 1 to the  Company's  Annual Report on
            Form 10-K for the year ended  December  31,  2003 filed on April 27,
            2004).

21.1        Subsidiaries of the Company.

23.1        Consent  of Squar  Milner  Reehl and  Williamson,  LLP,  Independent
            Registered Public Accounting Firm.

23.2        Consent  of Rose,  Snyder & Jacobs,  Independent  Registered  Public
            Accounting Firm.

23.3        Consent  of  Jeffrey  S.  Gilbert,   Independent  Registered  Public
            Accounting firm

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


                                     - 43 -



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

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

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

99.1        Form of Stipulation  of Settlement  entered into by the Company with
            various Special Situation funds dated May 3, 2006;  (incorporated by
            reference to Exhibit 99.1 to the Form 8-K filed on May 10, 2006).


                                     - 44 -



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                       AND REPORTS OF INDEPENDENT AUDITORS



                                                                        PAGE
                                                                        ----

Reports of Independent Registered Public Accounting Firms               F-2

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2005 and 2004               F-4

Consolidated Statements of Operations for the years ended
     December 31, 2005, 2004 and 2003                                   F-5

Consolidated Statements of Stockholder's Equity (Deficit) for the
     years ended December 31, 2005, 2004, 2003                          F-6

Consolidated Statements of Cash Flows for the years ended
     December 31, 2005, 2004 and 2003                                   F-7

Notes to Consolidated Financial Statements                              F-9

Schedule II - Valuation and Qualifying Accounts                         S-1


                                      F-1



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Interplay Entertainment Corp.

     I have audited the  consolidated  balance sheet of Interplay  Entertainment
Corp.(a  majority-owned  subsidiary of Titus  Interactive,S.A.) and Subsidiaries
(the "Company") as of December 31, 2005 and the related consolidated  statements
of operations,  stockholders'  equity  (deficit)and cash flows for the year then
ended.  My audit included the schedule of valuation and qualifying  accounts for
the year ended December 31, 2005. These  consolidated  financial  statements are
the responsibility of the Company's management.  My responsibility is to express
an opinion on these consolidated  financial  statements and schedule based on my
audit.

     I conducted my audit in  accordance  with  standards Of the Public  Company
Accounting Oversight Board (United  States).Those  standards require that I plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly,  I express no
such  opinion.  An audit also  includes  examining,  on a test  basis,  evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting  principles used and significant
estimates  made by  management  as  well as  evaluating  the  overall  financial
statement  presentation.  I believe my audit provides a reasonable  basis for my
opinion.

     In my opinion,  the  consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Interplay  Entertainment  Corp. and Subsidiaries as of December 31, 2005 and the
results of their  operations  and their cash flows for the year then  ended,  in
conformity with accounting principles generally accepted in the United States of
America.  Also, in my opinion the related financial  statement  schedule for the
year ended December 31, 2005, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set fort therein.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has limited liquid resources,
a  history  of  losses,   and  negative   working  capital  of  $11,512,000  and
stockholders'  deficit of  $11,490,000.  These matters raise  substantial  doubt
about its ability to continue as a going concern.  Management's  plans in regard
to these  matters  are also  discussed  in Note 1.  The  consolidated  financial
statements do not include any  adjustment  that might result from the outcome of
this uncertainty.

                             /s/ JEFFREY S. GILBERT

Los Angeles, California
May 16, 2006


                                      F-2



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
Interplay Entertainment Corp.

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

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial  position of Interplay
Entertainment Corp. and subsidiaries as of December 31, 2004, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.  Also,
in our  opinion,  the related  financial  statement  schedule for the year ended
December  31,  2004,   when  considered  in  relation  to  the  basic  financial
statements,  taken as a whole,  presents  fairly in all  material  respects  the
information set forth therein.

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

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

Encino, California
May 31, 2005


                                      F-3



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
Interplay Entertainment Corp.

        We have audited the accompanying  consolidated statements of operations,
shareholders'  equity (deficit) and other  comprehensive  income (loss) and cash
flows for the year ended December 31, 2003 of Interplay  Entertainment  Corp. (a
majority-owned  subsidiary of Titus  Interactive  S.A.), and  subsidiaries  (the
"Company").  Our audit also  included the schedule of valuation  and  qualifying
accounts  for the year ended  December 31, 2003.  These  consolidated  financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and schedule based on our audit.

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

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

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

/s/ Squar, Milner, Reehl & Williamson, LLP

Newport Beach, California
March 25, 2004


                                      F-4




                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS



                                                             DECEMBER 31,
                                                   ------------------------------
ASSETS                                                 2005              2004
                                                   -------------    -------------
Current Assets:
     Cash ......................................   $     122,000    $      29,000
     Restricted Cash ...........................            --              2,000
     Trade receivables from related parties,
         net of allowances of $2,114,000
         and $2,370,000, respectively ..........          17,000           10,000
     Trade receivables, net of allowances
         of $76,000 and $36,000, respectively ..         428,000          139,000
     Inventories ...............................           8,000           26,000
     Deposits ..................................           8,000             --
     Prepaid expenses ..........................          60,000             --
    Other receivables ..........................           8,000          137,000
                                                   -------------    -------------
         Total current assets ..................         651,000          343,000

Property and equipment, net ....................           7,000          490,000
Other assets ...................................          15,000                0
                                                   -------------    -------------
         Total  assets .........................   $     673,000    $     833,000
                                                   =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
     Current debt ..............................   $   1,549,000    $   1,575,000
     Accounts payable ..........................       9,560,000        8,772,000
     Accrued royalties .........................         949,000        3,501,000
     Advances from distributors and others .....         105,000          883,000
     Advances from related party distributors ..            --          2,989,000
     Deferred Income ...........................            --            475,000
                                                   -------------    -------------
          Total current liabilities ............      12,163,000       18,195,000
                                                   -------------    -------------

Commitments and contingencies
Stockholders' Equity (Deficit):
     Preferred stock, $0.001 par value 5,000,000
         shares authorized; no shares issued or
         outstanding, respectively,
     Common stock, $0.001 par value 150,000,000
         shares authorized; 93,855,634 shares
         issued and outstanding, respectively ..          94,000           94,000
     Paid-in capital ...........................     121,640,000      121,640,000
     Accumulated deficit .......................    (133,284,000)    (139,211,000)
     Accumulated other comprehensive income ....          60,000          115,000
     Treasury stock of 4,658,216 shares at
         December 31,2005 ......................               0                0
                                                   -------------    -------------
          Total stockholders' (deficit) ........     (11,490,000)     (17,362,000)
                                                   -------------    -------------
          Total liabilities and stockholders'
             (deficit) .........................   $     673,000    $     833,000
                                                   =============    =============

                             See accompanying notes.


                                      F-5



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                 YEARS ENDED DECEMBER 31,
                                                    -----------------------------------------------
                                                         2005             2004            2003
                                                    -------------    -------------    -------------

Net revenue from recognition on expired contracts   $   4,571,000    $        --      $        --
Net revenues from licensing .....................         768,000        1,932,000        2,286,000
Net revenues from related and non related party
   distributors .................................       1,819,000       11,265,000       34,015,000
                                                    -------------    -------------    -------------
   Total net revenues ...........................       7,158,000       13,197,000       36,301,000
Cost of goods sold ..............................         478,000        6,826,000       13,120,000
                                                    -------------    -------------    -------------
   Gross profit .................................       6,680,000        6,371,000       23,181,000
                                                    -------------    -------------    -------------

Operating expenses:
   Marketing and sales ..........................         312,000        1,703,000        1,415,000
   General and administrative ...................       2,617,000        4,514,000        6,692,000
   Product development ..........................         268,000        2,636,000      13,680,000,
                                                    -------------    -------------    -------------
      Total operating expenses ..................       3,197,000        8,853,000       21,787,000
                                                    -------------    -------------    -------------

      Operating income  (loss) ..................       3,483,000       (2,482,000)       1,394,000
                                                    -------------    -------------    -------------

Other income (expense):
      Interest expense ..........................        (146,000)        (218,000)        (249,000)
   Other (primarily settlements in 2005) ........       2,591,000       (1,999,000)         136,000
                                                    -------------    -------------    -------------
       Total other income (expense) .............       2,445,000       (2,248,000)         (82,000)
                                                    -------------    -------------    -------------

Income (loss) before provision (benefit) for
     income taxes ...............................       5,928,000       (4,730,000)       1,312,000
Provision (benefit) for income taxes ............            --               --               --
                                                    -------------    -------------    -------------

Net income (loss) ...............................   $   5,928,000    $  (4,730,000)   $   1,312,000
                                                    =============    =============    =============

Net income (loss) per common share:
Basic ...........................................   $        0.06    $       (0.05)   $        0.01
                                                    =============    =============    =============
Diluted
                                                    $        0.06    $       (0.05)   $        0.01
                                                    =============    =============    =============

Weighted average number of shares used in
   calculating net income (loss) per
   common share:
Basic ...........................................      93,856,000       93,856,000       93,852,000
                                                    =============    =============    =============
Diluted .........................................      93,856,000       93,856,000      104,314,000
                                                    =============    =============    =============

                             See accompanying notes.


                                      F-6



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                         AND COMPRESENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                             (DOLLARS IN THOUSANDS)


                                                                                                                        Accumulated
                                             Preferred Stock           Common Stock                                        Other
                                        -----------------------   -----------------------      Paid-in     Accumulated  Comprehensive
                                          Shares       Amount       Shares       Amount        Capital       Deficit    Income (Loss)    Total
                                        ----------   ----------   ----------   ----------    ----------    ----------    ----------    ----------

Balance, December 31, 2002 ..........         --           --     93,849,176   $       94    $  121,637    $ (135,793)   $      132    $  (13,930)

   Issuance of common stock,
       net of issuance costs ........         --           --          6,458         --               3          --            --               3

   Net Income .......................         --           --           --           --            --           1,312          --           1,312

   Other comprehensive income,
       net of income taxes:
         Foreign currency translation                                                --            --            --             (21)          (21)
         adjustment .................                                                                            --            --            --
                                        ----------   ----------   ----------   ----------    ----------    ----------    ----------    ----------
Balance, December 31, 2003 ..........         --           --     93,855,634           94    $  121,640    $ (134,481)   $      111    $  (12,636)
                                        ----------   ----------   ----------   ----------    ----------    ----------    ----------    ----------
   Issuance of common stock,
       net of issuance costs ........         --           --           --           --            --            --            --            --

   Net Income .......................         --           --           --           --            --          (4,730)         --          (4,730)

   Other comprehensive income,
       net of income taxes:
         Foreign currency translation
         adjustment .................         --           --           --           --            --            --               4             4
                                        ----------   ----------   ----------   ----------    ----------    ----------    ----------    ----------
Balance, December 31, 2004 ..........         --           --     93,855,634           94       121,640      (139,211)          115       (17,362)
                                        ----------   ----------   ----------   ----------    ----------    ----------    ----------    ----------
   Issuance of common stock,
       net of issuance costs ........         --           --           --           --            --            --            --            --

   Treasury stock
   Net Income .......................         --           --           --           --            --           5,928          --           5,928

   Other comprehensive income,
       net of income taxes:
         Foreign currency translation
         adjustment .................         --           --           --           --            --            --             (56)          (56)
                                        ----------   ----------   ----------   ----------    ----------    ----------    ----------    ----------
Balance, December 31, 2005 ..........         --           --     93,885,634   $       94    $  121,640    $ (133,283)   $       59    $  (11,490)
                                        ==========   ==========   ==========   ==========    ==========    ==========    ==========    ==========


                             See accompanying notes.


                                      F-7



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OF CASH FLOWS


                                                                  YEARS ENDED DECEMBER 31,
                                                         -----------------------------------------
                                                             2005           2004           2003
                                                         -----------    -----------    -----------
Cash flows from operating activities:
   Net income (loss) .................................   $ 5,928,000    $(4,730,000)   $ 1,312,000
   Adjustments to reconcile net income (loss) to
      cash provided by (used in) operating activities:
      Depreciation and amortization ..................       142,000        734,000      1,353,000
      Deposit ........................................        (8,000)       600,000           --
      Noncash interest expense .......................          --             --            6,000
      Amortization of prepaid licenses and royalties .          --             --        5,163,000
      Writeoff of prepaid licenses and royalties .....          --          209,000      2,857,000
      Write-off of fixed assets ......................       323,000           --             --
      Other ..........................................          --             --          (21,000)
      Changes in assets and liabilities:
         Restricted cash .............................         2,000           --             --
         Trade receivables, net ......................      (297,000)      (133,000)       164,000
         Trade receivables from related parties ......        (6,000)       554,000      1,942,000
         Inventories .................................        18,000        120,000      1,883,000
         Prepaid licenses and royalties...............          --             --       (3,100,000)
         Prepaid expenses ............................       (60,000)       673,000           --
         Loss on sale of assets ......................          --           28,000           --
         Loss on abandonment of assets ...............          --          862,000           --
         Other current assets/receivables ............       129,000       (134,000)       (76,000)
         Accounts payable ............................       975,000      1,704,000     (2,148,000)
         Accrued current debt ........................          --             --          292,000
         Accrued royalties ...........................    (2,764,000)    (1,566,000)
         Other accrued liabilities ...................          --             --       (1,039,000)
         Payables to related parties .................    (3,870,000)          --       (5,806,000)
         Advances from distributors and others .......          --             --         (160,000)
         Deferred revenue - (Non related Party) ......      (475,000)     1,385,000           --
         Deferred Income .............................          --       (1,923,000)          --
         Accumulated other comprehensive income ......        56,000          4,000           --
                                                         -----------    -----------    -----------
             Net cash provided by (used in) operating
                activities ...........................        93,000       (617,000)     2,622,000
                                                         -----------    -----------    -----------

Cash flows from investing activities:
   Purchases of property and equipment ...............          --             --         (337,000)
                                                         -----------    -----------    -----------
            Net cash (used in) investing activities ..          --             --         (337,000)
                                                         -----------    -----------    -----------

Cash flows from financing activities:
   Net proceeds from issuance of common stock ........          --             --            3,000
   Repayment of note payable .........................          --             --       (1,251,000)
   Repayment of debt .................................          --           61,000           --
   Proceeds from debt ................................          --         (586,000)          --
         Net cash used in  financing activities ......          --         (525,000)    (1,248,000)
                                                         -----------    -----------    -----------
Effect of exchange rate changes on cash
                                                         -----------    -----------    -----------
Cash, beginning of year
                                                              29,000      1,171,000        134,000
                                                         -----------    -----------    -----------
Cash, end of year ....................................   $   122,000    $    29,000    $ 1,171,000
                                                         ===========    ===========    ===========

Supplemental cash flow information:
    Cash paid during the year for interest
                                                         ===========    ===========    ===========

Suplemental disclosure of non-cash financing activity:

    Common Stock issued under Multi-Product Agreement    $      --      $      --      $      --
                                                         ===========    ===========    ===========


                                      F-8



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                                                                  YEARS ENDED DECEMBER 31,
                                                         -----------------------------------------
                                                             2005           2004           2003
                                                         -----------    -----------    -----------

Supplemental cash flow information:
    Cash paid during the year for interest ...........   $      --     $      --     $   212,000

Supplemental disclosure of non-cash investing and
  financing activities:
    Dividend payable on partial conversion of
      preferred stock ................................          --            --            --
    Accrued dividend on participating preferred
      stock ..........................................          --            --            --
    Common stock issued under Product Agreement ......          --            --            --



                             See accompanying notes.


                                      F-9



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   YEAR ENDED DECEMBER 31, 2005, 2004 AND 2003


1.  DESCRIPTION OF BUSINESS AND OPERATIONS

     Interplay Entertainment Corp., a Delaware corporation, and its subsidiaries
(the "Company"), publish and license out interactive entertainment software. The
Company's  software is developed  for use on various  interactive  entertainment
software platforms,  including personal computers and video game consoles,  such
as the Sony PlayStation 2, Microsoft Xbox and Nintendo GameCube.  As of December
31, 2005, Titus  Interactive,  S.A.  ("Titus") which is in bankruptcy,  and is a
France-based developer,  publisher and distributor of interactive  entertainment
software,  owns 62% of the Company's common stock. The Company's common stock is
quoted on the NASDAQ  OTC  Bulletin  Board  under the  symbol  "IPLY",  or while
non-compliant "IPLYE".

GOING CONCERN

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming the Company will continue as a going concern, which contemplates, among
other things,  the realization of assets and  satisfaction of liabilities in the
normal course of business.  The Company had net operating income of $5.9 million
in 2005,  primarily  derived  through the reversal of deferred income related to
advance  minimum  royalties on  licensing  agreements  that expired in 2005.  At
December 31, 2005, the Company had a stockholders' deficit of $ 11.5 million and
a working capital deficit of $11.4 million.  The Company has historically funded
its operations from licensing fees,  royalty and distribution fee advances,  and
will have to focus on exploiting its existing intellectual properties to provide
future funding.

     To reduce  working  capital  needs,  the  Company has  implemented  various
measures  including a reduction  of  personnel,  a reduction  of fixed  overhead
commitments  and  cancellation  or suspension of  development  on future titles.
Management  will  continue  to pursue  various  alternatives  to improve  future
operating  results  and  further  expense  reductions,  some of which may have a
long-term adverse impact on the Company's ability to generate  successful future
business activities.

     In  addition,  the  Company  continues  to seek,  and  expects to  require,
external sources of funding  including,  but not limited to, a sale or merger of
the Company,  a private  placement of the Company's  capital stock,  the sale of
selected   assets,   the  licensing  of  certain   product  rights  in  selected
territories,   selected   distribution   agreements,   and/or  other   strategic
transactions  sufficient to provide short-term funding,  and potentially achieve
the Company's long-term strategic objectives.  Although the Company has had some
success in licensing  certain of its products in the past,  no assurance  can be
given that the Company will do so in the future.

     The  Company  anticipates  its current  cash  reserves,  plus its  expected
generation of cash from existing operations, will only be sufficient to fund its
anticipated  expenditures  through  the end of second  quarter  of fiscal  2006.
Consequently,  the Company expects that it will need to substantially reduce its
working capital needs and/or raise additional  financing.  However, no assurance
can be given that  alternative  sources of funding can be obtained on acceptable
terms,  or at all.  These  conditions,  combined with the  Company's  historical
operating losses and its deficits in  stockholders'  equity and working capital,
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern. The accompanying  consolidated  financial statements do not include any
adjustments  to reflect the possible  future effects on the  recoverability  and
classification  of assets and liabilities  that might result from the outcome of
this uncertainty.

AUTHORIZED COMMON STOCK

         The  Company  has a total of  150,000,000  authorized  shares of common
stock.

TREASURY STOCK

     In December 2005,  NBC Universal  returned  their  4,658,216  shares of the
Company's  common stock at no cost to the Company.  The Company  included  these
shares as treasury stock in 2005.


                                     F-10







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 Co., Ltd., (Japan)
and Games On-line. All significant  inter-company accounts and transactions have
been eliminated.

USE OF ESTIMATES

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the  consolidated  financial  statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates made in
preparing the consolidated  financial  statements include,  among others,  sales
returns and allowances,  allowances for  uncollectible  receivables,  cash flows
used to evaluate  the  recoverability  of prepaid  licenses  and  royalties  and
long-lived  assets,  and certain accrued  liabilities  related to  restructuring
activities and litigation. Actual results could differ from those estimates.

RISKS AND UNCERTAINTIES

     The Company  operates in a highly  competitive  industry that is subject to
intense  competition,  potential  government  regulation and rapid technological
change.   The  Company's   operations  are  subject  to  significant  risks  and
uncertainties including financial,  operational,  technological,  regulatory and
other business risks associated with such a company.

INVENTORIES

     Inventories  consist of packaged  software  ready for  shipment,  including
video  game  console  software.  Inventories  are  valued  at the  lower of cost
(first-in,  first-out) or market.  The Company regularly  monitors inventory for
excess  or  obsolete  items  and  makes  any  valuation  corrections  when  such
adjustments  are known.  Based on management's  evaluation,  the Company has not
established any valuation allowance at December 31, 2005 .

     Net  realizable  value is based on  management's  forecast for sales of the
Company's  products  in the  ensuing  years.  The  industry in which the Company
operates is  characterized  by  technological  advancement  and changes.  Should
demand  for  the  Company's   products  prove  to  be  significantly  less  than
anticipated, the ultimate realizable value of the Company's inventories could be
substantially  less  than  the  amount  shown on the  accompanying  consolidated
balance sheets.

PREPAID LICENSES AND ROYALTIES

     The Company has in the past had prepaid  licenses and royalties  consisting
of fees paid to intellectual property rights holders for use of their trademarks
or  copyrights.  Also included in prepaid  royalties  were  prepayments  made to
independent  software  developers  under  development   arrangements  that  have
alternative  future uses.  These  payments were  contingent  upon the successful
completion of  milestones,  which  generally  represent  specific  deliverables.
Royalty advances were recoupable against future sales based upon the contractual
royalty rate. The Company  amortized these costs of licenses,  prepaid royalties
and  other  outside  production  costs to cost of  goods  sold  over six  months
commencing  with the initial  shipment in each region of the related title.  The
Company  amortized these amounts at a rate based upon the actual number of units
shipped with a minimum  amortization  of 75% in the first month of release and a
minimum  of 5% for each of the next five  months  after  release.  This  minimum
amortization rate reflected the Company's typical product life cycle. 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 were  classified  as current and  noncurrent
assets based upon estimated product release dates.

SOFTWARE DEVELOPMENT COSTS

     Research  and  development  costs,  which  consist  primarily  of  software
development  costs,  are expensed as incurred.  Financial  accounting  Standards
Board  ("FASB")  Statement of Financial  Accounting  Standards  ("SFAS") No. 86,
"Accounting for the Cost of Computer  Software to be Sold,  Leased, or Otherwise
Marketed", provides for the capitalization of certain software development costs
incurred after  technological  feasibility of the software is established or for
development


                                     F-11



costs that have alternative future uses. Under the Company's current practice of
developing  new  products,  the  technological  feasibility  of  the  underlying
software is not  established  until  substantially  all product  development  is
complete,  which  generally  includes the  development of a working  model.  The
Company  has  not  capitalized  any  software   development  costs  on  internal
development projects, as the eligible costs were determined to be insignificant.

ACCRUED ROYALTIES

     Accrued  royalties  consist  of  amounts  due  to  outside  developers  and
licensors based on contractual  royalty rates for sales of shipped  titles.  The
Company records a royalty expense based upon a contractual royalty rate after it
has fully recouped the royalty advances paid to the outside  developer,  if any,
prior to shipping a title.

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 period of five to seven years.  Leasehold improvements are amortized on a
straight-line  basis  over  the  lesser  of the  estimated  useful  life  or the
remaining lease term. Upon the sale or retirement of property and equipment, the
accounts are relieved of the cost and the related accumulated depreciation, with
any  resulting  gain  or  loss  included  in  the  consolidated   statements  of
operations.

LONG-LIVED ASSETS

     The Company  reviews  long-lived  assets for impairment  whenever events or
changes  in  circumstances  indicate  that  their  carrying  amounts  may not be
recoverable.  If the  cost  basis of a  long-lived  asset  is  greater  than the
estimated  fair  value,  based  on  many  models,   including  projected  future
undiscounted net cash flows from such asset (excluding interest) and replacement
value, an impairment loss is recognized. Impairment losses are calculated as the
difference  between  the cost basis of an asset and its  estimated  fair  value.
Management  determined in 2005 that impairment existed related to specific items
of property and  equipment  and adjusted  these items to zero..  There can be no
assurance,  however,  that market  conditions  will not change or demand for the
Company's  products or services will  continue  which could result in additional
impairment of long-lived assets in the future.

GOODWILL AND INTANGIBLE ASSETS

     On January 1, 2002,  the  Company  adopted  SFAS 142,  "GOODWILL  AND OTHER
INTANGIBLE  ASSETS,"  which  addresses how  intangible  assets that are acquired
individually  or with a group of other  assets  should be  accounted  for in the
financial  statements upon their  acquisition and after they have been initially
recognized  in the  financial  statements.  SFAS 142 requires  that goodwill and
identifiable  intangible  assets  that  have  indefinite  useful  lives  not  be
amortized  but  rather  be  tested  at  least  annually  for   impairment,   and
identifiable  intangible  assets that have finite useful lives be amortized over
their useful lives. SFAS 142 provides specific guidance for testing goodwill and
identifiable  intangible  assets that will not be amortized for  impairment.  In
addition,  SFAS 142 expands the disclosure requirements about goodwill and other
intangible assets in the years subsequent to their acquisition.  At December 31,
2005, the Company had no goodwill or intangible items subject to amortization.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  carrying  value of cash,  accounts  receivable  and  accounts  payable
approximates  the fair value. In addition,  the carrying value of all borrowings
approximates  fair value  based on interest  rates  currently  available  to the
Company. The fair value of trade receivable from related parties,  advances from
related party distributor, loans to/from related parties and payables to related
parties are not determinable as these transactions are with related parties.

REVENUE RECOGNITION

     Revenues  are  recorded   when  products  are  delivered  to  customers  in
accordance  with  Statement  of  Position   ("SOP")  97-2,   "Software   Revenue
Recognition"  and SEC Staff Accounting  Bulletin No. 104,  Revenue  Recognition.
With the signing of the new Vivendi Universal Games, Inc. distribution agreement
in  August  2002,  substantially  all of the  Company's  sales  were made by two
related   party   distributors   (Notes   5   and   11  ),   Vivendi   Universal
Games,Inc.(Vivendi),  which owned less than 5% of the outstanding  shares of the
Company's  common  stock  at  that  time,  and  Avalon  Interactive  Group  Ltd.
("Avalon"),  formerly Virgin Interactive  Entertainment  Limited, a wholly owned
subsidiary  of Titus until the Company ended its  relationship  with them during
2005,  most of the Vivendi  distribution  agreement  ended in August,  2005, and
Avalon, because of bankruptcy, ceased to be the distributor in February 2005.


                                     F-12



     The Company  entered into various  licensing  agreements  during 2005 under
which it licensed others to exploit games to which the Company had  intellectual
property  rights . This  included  entering  into  agreements  with Turner Games
Network  and  Vivendi  and  resulted  in one time  payments  from  each of these
licensees.  These  license  agreements  are  generally  for a two year term.  In
addition,  a tri-party  agreement  with Atari and Vivendi was entered  into that
provided for all royalties  that would  otherwise be payable to Atari by Vivendi
from September, 2005 be paid to the Company with respect to Vivendi distribution
of Dungeons and Dragons titles owned by Atari.

     The Company  recognizes  revenue from sales by  distributors,  net of sales
commissions,  only as the distributor recognizes sales of the Company's products
to unaffiliated  third parties.  For those agreements that provide the customers
the right to multiple  copies of a product in exchange for  guaranteed  amounts,
revenue is recognized at the delivery and acceptance of the product gold master.
Per copy  royalties on sales that exceed the guarantee are recognized as earned.
Guaranteed  minimum royalties on sales,  where the guarantee is not recognizable
upon  delivery,  are  recognized  as the minimum  payments come due. The Company
recognizes  revenue  on  expired  contracts  when  the  termination  date of the
contract is reached because  guaranteed  minimum  royalties are not reimbursable
and are therefore, recorded as revenue.

     The Company is generally  not  contractually  obligated to accept  returns,
except for  defective,  shelf-worn  and  damaged  products  in  accordance  with
negotiated  terms.  However,  on a case by case  basis,  the  Company may permit
customers to return or exchange product and may provide  markdown  allowances on
products  unsold  by a  customer.  In  accordance  with  SFAS No.  48,  "Revenue
Recognition  when  Right  of  Return  Exists,"  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.  Management
of the Company  estimated  that no reserves were necessary at December 31, 2005.
The amount of reserves  ultimately  required could differ materially in the near
term  from the  amounts  included  in the  accompanying  consolidated  financial
statements.

     Customer  support  provided by the Company is limited to internet  support.
These costs are not significant and are charged to expenses as incurred.

     The  Company  also  engages  in the sale of  licensing  rights  on  certain
products.  The terms of the licensing  rights differ,  but normally  include the
right to develop and distribute a product on a specific video game platform. For
these  activities,  revenue is recognized when the rights have been  transferred
and no other obligations exist.

ADVANCES FROM DISTRIBUTORS

     Deferred income has been recognized when contracts with  distributors  have
expired or been terminated.

ADVERTISING COSTS

     The Company generally  expenses  advertising costs as incurred,  except for
production  costs  associated with media campaigns that are deferred and charged
to expense at the first run of the ad. Cooperative advertising with distributors
and  retailers is accrued when revenue is  recognized.  Cooperative  advertising
credits are reimbursed when qualifying  claims are submitted.  Advertising costs
approximated  $.3  million,  $1.2  million  and $.6  million for the years ended
December 31, 2005, 2004 and 2003, respectively.

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. A valuation allowance
has been  provided  for all  deferred  tax assets  equal to the amounts of these
assets.


                                     F-13



FOREIGN CURRENCY

     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  financial  statements as a component of other
comprehensive   loss.   Gains  and  Losses   resulting  from  foreign   currency
transactions  amounted to a $10,000  loss,  $33,000 loss and $58,000 gain during
the years ended December 31, 2005, 2004 and 2003, respectively, and are included
in other income (expense) in the consolidated statements of operations.

NET INCOME (LOSS) PER SHARE

     Basic net income  (loss) per common  share is computed  by dividing  income
(loss)  attributable to common  stockholders  by the weighted  average number of
common  shares  outstanding.  Diluted  net income  (loss)  per  common  share is
computed by dividing income (loss)  attributable  to common  stockholders by the
weighted  average  number of common  shares  outstanding  plus the effect of any
convertible  debt,  dilutive stock options and common stock warrants if any. For
the years ended  December  31,  2005,  2004 and 2003,  all options and  warrants
outstanding  to purchase  common stock were excluded from the earnings per share
computation  as the exercise  price was greater than the average market price of
the common shares.

     The Company  discloses  information  regarding  segments in accordance with
SFAS No. 131 DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 establishes  standards for reporting of financial information about
operating  segments  in  annual  financial  statements  and  requires  reporting
selected  information about operating segments in interim financial reports. The
Company is managed,  and financial  information is developed,  on a geographical
basis,  rather than a product line basis. Thus, the Company has provided segment
information on a geographical basis (see Note 13).

Allowance for Doubtful Accounts

     Management   establishes  an  allowance  for  doubtful  accounts  based  on
qualitative  and  quantitative  review  of  credit  profiles  of  the  Company's
customers,  contractual  terms  and  conditions,  current  economic  trends  and
historical payment,  return and discount experience.  Management  reassesses the
allowance  for doubtful  accounts  each period.  If  management  made  different
judgments or utilized different estimates for any period,  material  differences
in the amount and timing of revenue recognized could result. Accounts receivable
are written off when all collection attempts have failed.

Cost of  Software Revenue

     Cost of software  revenue  primarily  reflects the manufacture  expense and
royalties to third party  developers,  which are recognized upon delivery of the
product.  Cost of support  includes (i) sales  commissions  and salaries paid to
employees  who  provide  support to clients  and (ii) fees paid to  consultants,
which are  recognized  as the  services are  performed.  Sales  commissions  are
expensed as incurred.

COMPREHENSIVE INCOME (LOSS)

     Comprehensive  income  (loss) of the  Company  includes  net income  (loss)
adjusted for the change in foreign  currency  translation  adjustments.  The net
effect of income taxes on comprehensive income (loss) is immaterial.

STOCK-BASED COMPENSATION

     The Company  accounts for employee  stock  options in  accordance  with the
Accounting  Principles  Board  Opinion No. 25  "Accounting  for Stock  Issued to
Employees"  and  related  Interpretations  and  makes  the  necessary  pro forma
disclosures mandated by SFAS No. 123 "Accounting for Stock-based Compensation".

     At December 31, 2005, the Company has one stock-based employee compensation
plan,  which is described  more fully in Note 10. The Company  accounts for this
plan under the  recognition  and  measurement  principles of APB Opinion No. 25,
"Accounting  for Stock Issued to  Employees,"  and related  Interpretations.  No
Stock-based employee compensation cost was reflected in net income for the years
ended December 31, 2005,  2004 and 2003.  The following  table  illustrates  the
effect on


                                     F-14



net income and  earnings  per common  share if the  Company had applied the fair
value  recognition  provisions  of  FASB  Statement  No.  123,  "Accounting  for
Stock-Based Compensation," to stock-based employee compensation.

                                                                      YEARS ENDED DECEMBER 31,
                                                                  ----------------------------
                                                                    2005      2004       2003
                                                                  -------   -------    -------
                                                                      (Dollars in thousands,
                                                                    except per share amounts)
Net income (loss) available to common stockholders, as reported   $ 5,928   $(4,730)   $ 1,312
Pro forma estimated fair value compensation expense ...........      --        --         (177)
                                                                  -------   -------    -------
Pro forma net income (loss) available to common stockholders ..   $ 5,928   $(4,730)   $ 1,137
                                                                  =======   =======    =======
Basic net income (loss) per common share as reported ..........   $  0.06   $ (0.05)   $  0.01
Diluted net income (loss) per common share as reported            $  0.06   $ (0.05)   $  0.01
Basic pro forma net income (loss) per common share                $  0.06   $ (0.05)   $  0.01
Diluted pro forma net income (loss) per common share              $  0.06   $ (0.05)   $  0.01


RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs -
An  Amendment  of ARB No. 43,  Chapter 4." This new  standard is the result of a
broader  effort  by the  FASB to  improve  financial  reporting  by  eliminating
differences  between Generally Accepted  Accounting  Principles  ("GAAP") in the
United  States  and  accounting   principles   developed  by  the  International
Accounting  Standards Board ("IASB").  As part of this effort,  the FASB and the
IASB  identified  opportunities  to improve  financial  reporting by eliminating
certain narrow differences between their existing accounting standards. SFAS No.
151 clarifies that abnormal amounts of idle facility  expense,  freight handling
costs and  spoilage  costs  should be expensed as incurred  and not  included in
overhead.  Further,  SFAS No. 151 requires that  allocation of fixed  production
overheads  to  conversion  costs  should  be based  on  normal  capacity  of the
production  facilities.  The  provisions  in  SFAS  No.  151 are  effective  for
inventory  costs  incurred  during fiscal years  beginning  after June 15, 2005.
Companies must apply the standard prospectively.  Management does not expect the
adoption of SFAS No. 151 to have a material  impact on the  Company's  financial
position, results of operations or cash flows.

     In December 2004, the FASB issued SFAS No. 123R,  "Share Based  Payment," a
revision to SFAS 123, "Accounting for Stock-Based  Compensation," and supersedes
APB Opinion No. 25,  "Accounting for Stock Issued to Employees," and its related
implementation  guidance. SFAS No. 123R establishes standards for the accounting
for transactions in which an entity exchanges instruments for goods or services.
It also addresses transactions in which an entity incurs liabilities in exchange
for goods or services  that are based on the fair value of the  entity's  equity
instruments or that may be settled by the issuance of those equity  instruments.
SFAS 123R  established  the accounting  treatment for  transactions  in which an
entity obtains employee services in share-based payment transactions.  SFAS 123R
requires  companies to recognize in the statement of operations  the  grant-date
fair  value of stock  options  and  other  equity-based  compensation  issued to
employees.  SFAS 123R requires the Company to value the share-based compensation
based on the  classification of the share-based  award. If the share-based award
is to be classified  as a liability,  the Company must  re-measure  the award at
each balance sheet date until the award is settled.  If the share-based award is
to be  classified  as  equity,  the  Company  will  measure  the  value  of  the
share-based  award on the date of grant but the award will not be re-measured at
each balance sheet date.  SFAS 123R does not change the accounting  guidance for
share-based  payment  transactions with parties other than employees provided in
SFAS 123 as originally  issued and EITF Issue No. 96-18,  "Accounting for Equity
Instruments  that are  Issued  to Other  than  Employees  for  Acquiring,  or in
Conjunction with Selling,  Goods or Services." SFAS 123R is effective for public
companies  with  calendar  year ends no later than the  beginning  of 2006.  All
public   companies  must  use  either  the  modified   prospective  or  modified
retrospective  transition method. Under the modified prospective method,  awards
that are  granted,  modified,  or settled  after the date of adoption  should be
measured  and  accounted  for in  accordance  with SFAS  123R.  Unvested  equity
classified  awards that were granted prior to the effective date should continue
to be accounted  for in  accordance  to SFAS 123 except that the amounts must be
recognized  in the  statement of  operations.  Under the modified  retrospective
method, the previously reported amounts are restated (either to the beginning of
the year of adoption or for all periods  presented)  to reflect SFAS 123 amounts
in the statement of operations.  Management is in the process of determining the
effect SFAS 123R will have upon the Company's  financial  position and statement
of operations and the method of transition adoption.


                                     F-15



     In October 2005, the FASB issued statement No. 154, "Accounting Changes and
Error Corrections"  ("SFAS 154") which replaces APB Opinion No. 20. " Accounting
Changes " and FASB  Statement No. 3,  "reporting  accounting  Changes in Interim
Financial Statements".  SFAS 154 retained accounting guidance related to changes
in  estimates,  changes in a reporting  entity and error  corrections;  however,
changes in  accounting  principles  must be  accounted  for  retrospectively  by
modifying the financial  statements of prior periods.  SFAS 154 is effective for
accounting  changes made in fiscal years  beginning after December 15, 2005. The
Company does not believe adoption of SFAS 154 will have a material impact on its
financial condition, results of operations, or cash flow.

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

3.  DETAIL OF SELECTED BALANCE SHEET ACCOUNTS

PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

                                                                DECEMBER 31,
                                                           --------------------
                                                             2005         2004
                                                           -------      -------
                                                          (Dollars in thousands)
Computers and equipment ..............................     $    14      $ 1,463
Furniture and fixtures ...............................           8            8
Leasehold improvements ...............................        --           --
                                                           -------      -------
                                                                22        1,471
Less:  Accumulated depreciation and amortization .....         (15)        (981)
                                                           -------      -------
               Net Equipment .........................     $     7      $   490
                                                           =======      =======


     For the years ended December 31, 2005, 2004 and 2003, the Company  incurred
depreciation  and  amortization  expense of $.1  million,  $.8  million and $1.4
million, respectively.  During the years ended December 31, 2005, 2004 and 2003,
the Company disposed of fully  depreciated  equipment having an original cost of
$1.4 million, $4.7 and $4.6 million, respectively. Abandonment of assets in 2005
generated a loss of $323,000 .

4.  PROMISSORY NOTES

     The Company  issued to Warner  Brothers  Entertainment,  Inc.  ("Warner") a
Secured Convertible  Promissory Note bearing interest at 6% per annum, due April
30, 2003, in the principal amount of $2.0 million in connection with the sale of
a  subsidiary  in 2002.  The note was issued in partial  payment of amounts  due
Warner  under the  parties'  license  agreement  for the video game based on the
motion picture,  THE MATRIX. The note is secured by all of the Company's assets,
and may be converted by the holder  thereof into shares of the Company's  common
stock on the maturity  date or, to the extent there is any proposed  prepayment,
within the 30- day period  prior to such  prepayment.  The  conversion  price is
equal to the lower of (a) $0.304 or (b) an amount  equal to the average  closing
price of a share of the Company's common stock for the five business days ending
on the day prior to the conversion date,  provided that in no event can the note
be  converted  into more than  18,600,000  shares.  If any  amount  remains  due
following  conversion of the note into 18,600,000  shares,  the remaining amount
will be payable in cash.  The Company agrees to register with the Securities and
Exchange  Commission the shares of common stock to be issued in the event Warner
exercises  its  conversion  option.  At December 31,  2005,  the balance owed to
Warner,  including accrued interest,  is $360,000.  On or about October 9, 2003,
Warner  filed suit  against the Company in the  Superior  Court for the State of
California,  County of  Orange,  alleging  default on an  Amended  and  Restated
Secured Convertible Promissory Note held by Warner dated April 30, 2002, with an
original  principal  sum of $2.0  million.  At the time the suit was filed,  the
current remaining principal sum due under the note was $1.4 million in principal
and interest. The Company entered into a settlement agreement on this litigation
and entered  into a payment  plan with Warner to satisfy the balance of the note
by January 30,  2004.  The  Company is  currently  in default of the  settlement
agreement  with  Warner and has  entered  into a payment  plan,  under which the
Company is in default, for the remaining balance of $360,000.


                                     F-16



     The Company issued to Atari  Interactive,  Inc. ("Atari") a Promissory Note
bearing no interest,  due December 31,  2006,  in the  principal  amount of $2.0
million in connection  with Atari  entering into tri-party  agreements  with the
Company and its then main distributors,  Vivendi and Avalon. The note was issued
in payment of all outstanding  accrued  royalties due Atari under the Dungeons &
Dragons  license  agreement  which license was  terminated by Atari on April 23,
2004.  At December  31, 2005,  the balance  owed to Atari,  is $1.0 million as a
result of payments made by Vivendi and Avalon on the Company's behalf to Atari.

     Included in the current debt is a $140,000  advance  from the  President of
Interplay Japan.

5.  ADVANCES FROM DISTRIBUTORS, RELATED PARTIES AND OTHERS


    Advances from distributors and OEMs consist of the following:

                                                                DECEMBER 31,
                                                            --------------------
                                                              2005        2004
                                                            --------    --------
                                                          (Dollars in thousands)

Advances for other distribution rights .................    $      0    $    476
                                                            ========    ========

Net advance from Vivendi distribution
  agreement (former related party) .....................    $      0    $  2,989
                                                            ========    ========

     In August 2002, the Company entered into a new distribution  agreement with
Vivendi  whereby  Vivendi  will  distribute  substantially  all of  the  Company
products  in North  America for a period of three years as a whole and two years
with  respect to each  product  giving a potential  maximum  term of five years.
Under the August 2002  agreement,  Vivendi will pay the Company  sales  proceeds
less  amounts  for   distribution   fees.   Vivendi  is   responsible   for  all
manufacturing,  marketing and distribution  expenditures,  and bears all credit,
price  concessions  and inventory  risk,  including  product  returns.  Upon the
Company's delivery of a gold master to Vivendi,  Vivendi will pay the Company as
a non-refundable  minimum guarantee, a specified percent of the projected amount
due the Company based on projected initial shipment sales, which are established
by Vivendi in accordance with the terms of the agreement.  The remaining amounts
are due upon shipment of the titles to Vivendi's customers.  Payments for future
sales that exceed the  projected  initial  shipment  sales are paid on a monthly
basis.  In December  2002,  the Company  granted  OEM rights and  selected  back
catalog titles in North America to Vivendi. In January 2003, the Company granted
Vivendi  the right to  distribute  substantially  all of its  products in select
rest-of-world  countries.  As of December 31, 2004,  Vivendi had $2.9 million of
its advance remaining to recoup under the  rest-of-world  countries and OEM back
catalog agreements.  As of December 2004, the Company earned $0.7 million of the
$3.6  million  advance  related  to future  minimum  guarantees  on  undelivered
products.  During  2005 the  Company  recognized  as  income  all the  remaining
unrecouped advances.

6.   INCOME TAXES

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

                                           YEARS ENDED DECEMBER 31,
                             ---------------------------------------------------
                                 2005                2004                2003
                             -----------         -----------         -----------
                                           (Dollars in thousands)
Domestic ............        $ 6,554,000         $(4,733,000)        $ 1,289,000
Foreign .............           (626,000)             (3,000)             23,000
                             -----------         -----------         -----------
Total ...............        $ 5,928,000         $(4,730,000)        $ 1,312,000
                             ===========         ===========         ===========


                                     F-17



     The provision for income taxes is comprised of the following:

                                                YEARS ENDED DECEMBER 31,
                                        ----------------------------------------
                                           2005           2004           2003
                                        ----------     ----------     ----------
                                                  (Dollars in thousands)
Current:
   Federal ........................     $2,032,000     $     --       $     --
   State ..........................        577,000           --             --
   Foreign ........................           --             --             --
                                        ----------     ----------     ----------
                                         2,609,000           --             --
Deferred:
   Federal ........................           --             --             --
   State ..........................           --             --             --
                                        ----------     ----------     ----------
                                        $2,609,000     $     --       $     --
                                        ==========     ==========     ==========

     The Company files a  consolidated  U.S.  Federal  income tax return,  which
includes all of its domestic operations.  The Company files separate tax returns
for each of its foreign  subsidiaries in the countries in which they reside. The
Company's  available net  operating  loss ("NOL")  carryforward  for Federal tax
reporting purposes  approximates $125 million and expires through the year 2023.
The Company's NOL for California  State tax reporting  purposes  approximate $64
million and expires  through the year 2013.  The  utilization of the federal and
state net operating losses may be limited by Internal Revenue Code Section 382.

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

                                                 2005         2004         2003
                                               --------     --------     --------
Statutory Federal income tax rate ..........       34.0%        34.0%        34.0%
State income tax effect, net of
   federal benefits ........................        5.8         --           --
   Valuation allowance .....................      (39.8)       (39.5)       (39.5)
   Tax rate differentiation of
   foreign earnings ........................       --           --           --
Other ......................................       --            5.5          5.5
                                               --------     --------     --------
                                                   --  %        --  %        --  %
                                               ========     ========     ========


                                     F-18



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

                                                               DECEMBER 31,
                                                          ---------------------
                                                            2005         2004
                                                          --------     --------
                                                          (Dollars in thousands)
Current deferred tax asset (liability):
     Prepaid royalties ...............................    $   --       $   --
     Nondeductible reserves ..........................         872          938
     Reserve for advances ............................        --           (789)
     Accrued expenses ................................        --            870
     Foreign loss and credit carryforward ............       2,766        2,566
     Federal and state net operating losses ..........      49,766       51,753
     Research and development credit carryforward ....       2,374        2,374
     Other ...........................................        --           --
                                                          --------     --------
                                                            55,778       57,712
                                                          --------     --------

Non-current deferred tax asset (liability):
     Depreciation expense ............................        --           --
     Nondeductible reserves ..........................        --           --
                                                          --------     --------
                                                              --           --
                                                          --------     --------

Net deferred tax asset before
     valuation allowance .............................      55,778       57,712
Valuation allowance ..................................     (55,778)     (57,712)
                                                          --------     --------
Net deferred tax asset ...............................    $   --       $   --
                                                          ========     ========

     The Company maintains a valuation allowance against its deferred tax assets
due  to  the  uncertainty   regarding  future  realization.   In  assessing  the
realizability  of its deferred tax assets,  management  considers  the scheduled
reversal of deferred tax liabilities,  projected future taxable income,  and tax
planning  strategies.  The valuation  allowance on deferred tax assets decreased
$2.14  million  during the year  ending  December  31, 2005 and  increased  $3.4
million during the year ending December 31, 2004.

7.  COMMITMENTS AND CONTINGENCIES

INSURANCE

     The Company's  property,  general liability,  auto,  workers  compensation,
fiduciary liability, Directors and Officers, and employment practices liability,
insurance  policies were cancelled during the year ending December 31, 2004. The
Company is current on its workers comp and employee health insurance premiums.

LEASES

     The Company's  headquarters are located in Beverly Hills,  California.  The
facility is leased through April 2008. The Company is currently  subleasing on a
short-term  basis a portion of the office space to an  independent  third party.
The  Company's  has an additional  satellite  office in Irvine,  California on a
month - to - month basis for $650 per month.

     The minimum annual rentals for 2006,  2007 and 2008 are $102,000,  $114,000
and $39,000, respectively.

     Total rent  expense was  $40,000,  $400,000  and $1.8 million for the years
ended  December 31, 2005,  2004 and 2003,  respectively.  See  litigation  below
related to the Company's former landlord.

LITIGATION

     The  Company  is  involved  in  various  legal  proceedings,   claims,  and
litigation  arising  in the  ordinary  course of  business,  including  disputes
arising  over the  ownership  of  intellectual  property  rights and  collection
matters. In the opinion of management,  the outcome of known routine claims will
not  have a  material  adverse  effect  on  the  Company's  business,  financial
condition, or results of operations.


                                     F-19



     On November 25,  2002,  Special  Situations  Fund III,  Special  Situations
Cayman Fund,  L.P.,  Special  Situations  Private Equity Fund, L.P., and Special
Situations Technology Fund, L.P. (collectively,  "Special Situations") initiated
legal  proceedings  against the Company  seeking damages of  approximately  $1.3
million,  alleging,  among  other  things,  that we  failed  to  secure a timely
effective date for a Registration  Statement for its shares purchased by Special
Situations under a common stock subscription  agreement dated March 29, 2001 and
that the Company  therefore,  liable to pay  Special  Situations  $1.3  million.
Special  Situations  entered  into  a  settlement  agreement  with  the  Company
December,  2003  contemplating  payments  over  time,  which the  Company  later
defaulted . In August, 2004 the Company entered into a stipulation of settlement
on which it later  defaulted.  On January 12,  2005 a judgment of  approximately
$776,00  was entered in the State of New York and on February 4 ,2005 a judgment
reflecting the January 12, 2005 judgment was entered in the State of California.
On May 3, 2006 the Company entered into a Stipulation of Settlement.  Under this
Stipulation  of  Settlement,  the Company  agreed to issue a total of 10,000,000
shares of its  unregistered  common  stock and made a payment  in the  amount of
approximately   $239,000.   Following  the  issuance  of  such  shares,  and  in
consideration  of such issuance and such payment,  satisfaction  of judgments in
the amount of approximately $776,000 recorded against the Company will be filed.
Such shares will be issued in a private  placement  pursuant to section  4(2) of
the  Securities  Act of 1933 and will be  issued  prior to the  satisfaction  of
judgments  which must occur within 10 business days following the Company making
a payment of approximately $239,000 and the issuance of such shares.

     On  October  24,  2002,  Synnex  Information  Technologies  Inc  ("Synnex")
initiated legal proceedings  against the Company for various claims related to a
breach of a  distributorship  agreement.  Synnex  obtained a  $172,000  judgment
against the Company.

     On or about October 9, 2003, Warner Brothers Entertainment, Inc. ("Warner")
filed  suit  against  the  Company  in the  Superior  Court  for  the  State  of
California,  County of  Orange,  alleging  default on an  Amended  and  Restated
Secured Convertible Promissory Note held by Warner dated April 30, 2002, with an
original  principal  sum of $2.0  million.  At the time the suit was filed,  the
current remaining principal sum due under the note was $1.4 million in principal
including  interest.  The  Company  owes a  remaining  balance of  approximately
$360,000  payable in one  remaining  installment.  The Company is  currently  in
default of the settlement agreement.

     In April 2004,  Arden  Realty  Finance IV LLC  ("Arden")  filed an unlawful
detainer  action  against  the  Company in the  Superior  Court for the State of
California, County of Orange, alleging the Company's default under its corporate
lease agreement.  At the time the suit was filed,  the alleged  outstanding rent
totaled $432,000. The Company was unable to pay the rent, and vacated the office
space during the month of June 2004. On June 3, 2004,  Arden obtained a judgment
of approximately  $588,000 exclusive of interest.  In addition the Company is in
the  process of  resolving a prior  claim with the  landlord in the  approximate
amount of  $148,000,  exclusive  of  interest.  The  Company  has  negotiated  a
forbearance  agreement  whereby  Arden agreed to accept  payments  commencing in
January  2005 in the amount of $60,000  per month until the full amount is paid.
The  Company  has not accrued  any amount for any  remaining  lease  obligation,
should  such  obligation  exist.  The  Company  is  currently  in default of the
forbearance agreement.

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

     In August 2003, Reflexive  Entertainment,  Inc. filed an action against the
Company,  for failure to pay  development  fees, in the Orange  County  Superior
Court,  that was  settled  in July  2004.  The  Company  was  unable to make the
payments and Reflexive  sought ,and obtained,  judgment  against the company for
approximately $110,000.

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


                                     F-20



     The Company  received notice from the Internal Revenue Service ("IRS") that
it owes  approximately  $110,000  pursuant to section 166 and section 186 of the
Internal Revenue Code in payroll tax penalties, and interest for late filing and
late  payment of payroll  taxes.  Approximately  $110,000 has been accrued as of
December  31, 2005 but remains  unpaid.  The  Company  received  notice from the
Employment  Development  Department (EDD) that it owes approximately $103,000 in
payroll taxes owed for the periods ending 2004 and 2003, which have been accrued
for December 31,2005.

     The Company was unable to meet  certain  2004  payroll  obligations  to its
employees;  as a  result,  several  employees  filed  claims  with the  State of
California  Labor Board ("Labor  Board") . The Labor Board has fined the Company
approximately  $10,000 for failure to meet its payroll  obligations and obtained
in August 2005 judgments  totaling  $118,000 in favor of former employees of the
Company.  Since this time  $44,000 of the claims  have been  settled,  leaving a
balance of $74,000.

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

     The Company received notice from the California State Board of Equalization
of a balance  due in the amount of $73,000  for a prior year audit . The Company
is in the process of appealing the prior year audit calculations.

     On September 14, 2005,  Network Commercial  Service,  Inc. ("NCS") filed an
action against the Company alleging breach of contract relating to the provision
of copying equipment and that the balance due is $140,000 to NCS. The Company is
evaluating the merit of the lawsuit.

     On April 22, 2005, Mark Strecker filed a judgment to be entered against the
Company for various claims  alleging  unpaid  services in the amount of $35,000.
The Company is evaluating the merit of the lawsuit.

     On May 19, 2005 DZN, The Design  Group,  Inc.  filed an action  against the
Company for various advertising  services in the amount of $38,000.  The Company
is evaluating the merit of the lawsuit.

     On February 2, 2006 Michael  Sigel filed an action  against the Company for
unauthorized use of image. The Company is evaluating the merit of the lawsuit.

     On March 7, 2006 Parallax  Software  Corp.  entered a judgment  against the
Company for a material  breach of a  settlement  agreement  related to royalties
owed in the  amount of  $219,000.  The  Company is  evaluating  the merit of the
lawsuit.

     The Company has  recorded an estimate  for the  liabilities  related to the
aforementioned  litigation.  If any of the  creditors  execute  their  judgments
against the Company, the results will negatively affect the Company's cash flow,
which could restrict the Company's  operations and cause material  restraints to
its business.

EMPLOYMENT AGREEMENTS

     The Company has entered into various employment agreements with certain key
employees  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 good reason,  the employees may be entitled to certain
severance benefits, as defined. These agreements expire through 2006.

8.  STOCKHOLDERS' EQUITY

PREFERRED STOCK AND COMMON STOCK

     The Company's articles of incorporation authorize up to 5,000,000 shares of
$0.001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time as the Board of Directors  determine.  As
of December 31, 2005, there were no shares of preferred stock outstanding.

     In connection with a private  placement in April,  2001, the Company issued
warrants to purchase 8,126,770 shares of the Company's common stock at $1.75 per
shares.  These  warrants  expired on March 31, 2006. In addition to the warrants
issued in the private  placement,  the Company  granted  the  investment  banker
associated with the transaction a warrant for 500,000


                                     F-21



shares of the  Company's  common  stock.  The warrant  has an exercise  price of
$1.5625  per share and vests one year after the  registration  statement  became
effective. The warrant expires four years after it vests. The Company incurred a
penalty of approximately  $254,000 per month,  payable in cash, until June 2002,
when the required  registration  statement was declared effective.  During 2003,
the Company settled with certain of these investors with respect to payment. The
total  amount  accrued at December  31,  2005 and 2004 is $2.2  million and $3.1
million, respectively,.

     In August 2001, Titus converted  336,070 shares of Series A Preferred Stock
it  purchased  in April  2000  into  6,679,306  shares  of  Common  Stock.  This
conversion  did not include  accumulated  dividends of $740,000 on the Preferred
Stock,  these were  reclassified as an accrued liability since Titus had elected
to receive the dividends in cash. In March 2002,  Titus  converted its remaining
383,354  shares of Series A  Preferred  Stock into  47,492,162  shares of Common
Stock.  In connection  with sale of Preferred Stock with Titus in April 2000 the
Company  issued a warrant to purchase  350,000  shares of the  Company's  common
stock at $3.79 per share and another  warrant to Titus to purchase 50,000 shares
of the Company's common stock at $3.79 per share.  Both warrants expire in April
2010.

EMPLOYEE STOCK PURCHASE PLAN

     Under this plan,  eligible  employees may purchase  shares of the Company's
Common Stock at 85% of fair market value at specific,  predetermined  dates.  In
2000,  the Board of  Directors  increased  the  number of shares  authorized  to
300,000.  Of the 300,000 shares  authorized for issuance under the plan,  84,877
shares remained available for issuance at December 31, 2005. Employees purchased
zero,  zero,  and  6,458  shares  in 2005,  2004 and 2003 for $0,  $0 and  $323,
respectively.

SHARES RESERVED FOR FUTURE ISSUANCE

     Common  stock  reserved  for future  issuance  at  December  31, 2005 is as
follows:

Stock option plans:
       Outstanding ........................................               70,000
       Available for future grants ........................           10,014,870

Warrants ..................................................            9,587,068
                                                                      ----------
Total .....................................................           19,671,938
                                                                      ==========

TREASURY STOCK

     In December 2005,  NBC Universal  returned  their  4,658,216  shares of the
Company's  common stock at no cost to the Company.  The Company  included  these
shares as treasury stock in 2005.

9.  NET EARNINGS (LOSS) PER COMMON SHARE

     Basic earnings  (loss) per common share is computed as net earnings  (loss)
available  to common  stockholders  divided by the  weighted  average  number of
common shares  outstanding for the period and does not include the impact of any
potentially dilutive  securities.  Diluted earnings per common share is computed
by  dividing  the net  earnings  available  to the  common  stockholders  by the
weighted  average  number of common  shares  outstanding  plus the effect of any
dilutive  stock  options  and  common  stock  warrants  and  the  conversion  of
outstanding convertible debentures.


                                     F-22



                                                                               YEARS ENDED DECEMBER 31,
                                                                           -------------------------------
                                                                             2005       2004        2003
                                                                           --------   --------    --------
                                                                               (Amounts in thousands,
                                                                               except per share amounts)

Net income (loss) available to common stockholders .....................   $  5,928   $ (4,730)   $  1,312

   Interest related to conversion of secured convertible promissory note       --         --            92
                                                                           --------   --------    --------
   Dilutive net income (loss) available to common stockholders .........   $  5,928   $ (4,730)   $  1,404
                                                                           --------   --------    --------
Shares used to compute net income (loss) per common share:

   Weighted-average common shares ......................................     93,856     93,856      93,852

   Dilutive stock equivalents ..........................................       --         --        10,462
                                                                           --------   --------    --------
   Dilutive potential common shares ....................................     93,856     93,856     104,314
                                                                           ========   ========    ========
Net income (loss) per common share:

   Basic ...............................................................   $   0.06   $  (0.05)   $   0.01

   Diluted .............................................................   $   0.06   $  (0.05)   $   0.01

     There were options and warrants outstanding to purchase 9,798,218 shares of
common  stock at December 31, 2005,  which were  excluded  from the earnings per
common  share  computation  as the  exercise  price was greater than the average
market price of the common shares.  The dilutive stock  equivalents in the above
calculation  related to the outstanding  convertible  debentures at December 31,
2005, which the Company utilized under the "if converted" method.

     Due to the net loss attributable for the year ended December 31, 2004, on a
diluted  basis to common  stockholders,  stock  options and  warrants  have been
excluded  from the diluted  earnings per share  calculation  as their  inclusion
would have been  antidilutive.  The weighted  average exercise price at December
31,  2005,  2004 and 2003 was  $1.84,  $1.84 and  $1.84,  respectively,  for the
options and warrants  outstanding.  No dilution  effect for options and warrants
has been made for 2005 as the market  price of the  common  stock did not exceed
the exercise price of the options or warrants.

                                                     YEARS ENDED DECEMBER 31,
                          ----------------------------------------------------------------------------
                                     2005                      2004                     2003
                          ------------------------   -----------------------   -----------------------
                                          WEIGHTED                 WEIGHTED                   WEIGHTED
                                          AVERAGE                   AVERAGE                   AVERAGE
                                          EXERCISE                 EXERCISE                   EXERCISE
                            SHARES         PRICE       SHARES        PRICE       SHARES        PRICE
                          ----------    ----------   ----------   ----------   ----------   ----------
Warrants outstanding at
   beginning of year ..    9,587,068    $     1.84    9,587,068         1.84    9,687,068   $     1.99
   Granted ............         --                         --                        --           --
   Exercised ..........         --                         --                        --           --
                          ----------                 ----------                ----------
   Canceled ...........         --                         --                    (100,000)        4.50
   Warrants outstanding
   at end of year .....    9,587,068    $     1.84    9,587,068         1.84    9,587,068   $     1.84
                          ==========                 ==========                ==========
   Warrants exercisable    9,587,068                  9,587,068                 9,587,068
                          ==========                 ==========                ==========


                                     F-23



     A detail of the warrants  outstanding  and  exercisable  as of December 31,
2005 is as follows:

                             WARRANTS OUTSTANDING AND EXERCISABLE
                        -----------------------------------------------
                                               WEIGHTED       WEIGHTED
    RANGE OF                                   AVERAGE        AVERAGE
    EXERCISE                  NUMBER          REMAINING       EXERCISE
     PRICES                OUTSTANDING      CONTRACT LIFE      PRICE
------------------      ----------------   --------------    ----------
  $1.56 - $1.56                 500,000           2.50         $1.56
  $1.75 - $1.75               8,626,770           1.47          1.75
  $3.79 - $3.79                 460,298           5.29          3.79
  $1.56 - $3.79               9,587,068           3.09         $1.84
                        ================   ==============    ==========

10.  EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

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

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


                                                       YEARS ENDED DECEMBER 31,
                         ------------------------------------------------------------------------------------
                                     2005                       2004                         2003
                         --------------------------   --------------------------   --------------------------
                                          WEIGHTED                    WEIGHTED                     WEIGHTED
                                          AVERAGE                     AVERAGE                      AVERAGE
                                          EXERCISE                    EXERCISE                     EXERCISE
                            SHARES         PRICE        SHARES          PRICE        SHARES          PRICE
                         -----------    -----------   -----------    -----------   -----------    -----------
Options outstanding at
   beginning of year .       211,150    $      2.02       425,985    $      1.95     1,091,697    $      3.10
   Granted ...........          --             --           5,000           0.08       130,000           0.09
   Exercised .........          --             --            --             --            --             --
   Canceled ..........      (141,150)          2.02      (219,835)          1.85      (795,712)          3.22
                         -----------                  -----------                  -----------
   Options outstanding
   at end of year ....        70,000    $       .30       211,150    $      2.02       425,985    $      1.95
                         ===========                  ===========                  ===========
   Options exercisable        50,002                      171,686                      243,890
                         ===========                  ===========                  ===========

     The following  outlines the  significant  assumptions  used to estimate the
fair value  information  presented  utilizing  the  Black-Scholes  Single Option
approach with ratable amortization. There were 5,000 and 130,000 options granted
in 2004 and 2003, respectively.

                                              YEAR ENDED DECEMBER 31,
                                           ----------------------------
                                              2005             2004
                                           -----------      -----------
Risk free rate                                    4.0%             4.0%
Expected life                                 10 Years         10 years
Expected volatility                               160%             160%
Expected dividends
                                                  --               --
Weighted-average grant-date fair value
   of options granted                         $  0.08           $  0.08


                                     F-24


     A detail of the options outstanding and exercisable as of December 31, 2005
is as follows:

                                         OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                             -------------------------------------------   ------------------------
                                               WEIGHTED        WEIGHTED                   WEIGHTED
                                               AVERAGE          AVERAGE                    AVERAGE
  RANGE OF EXERCISE            NUMBER         REMAINING        EXERCISE       NUMBER      EXERCISE
        PRICES               OUTSTANDING    CONTRACT LIFE       PRICE      OUTSTANDING     PRICE
-----------------------      -----------    -------------     ----------   -----------    ---------
 $  0.09  -   $ 0.09            70,000           7.51           $ .30         50,002       $ .27

                             -----------    -------------     ----------   ----------     ---------
 $  0.09  -   $ 0.09            70,000           7.51           $ .30         50,002       $ .27
                             ==========     ==============    ==========   ==========     =========

PROFIT SHARING 401(K) PLAN

     The  Company  sponsors  a 401(k)  plan  ("the  Plan")  for  most  full-time
employees.  The Company matches 50% of the participant's  contributions up to 6%
of the participant's base compensation.  The profit sharing  contribution amount
is at the  sole  discretion  of the  Company's  Board  of  Directors.  The  2005
contributions  were zero.  Participants vest at a rate of 20% per year after the
first year of service for profit  sharing  contributions  and 20% per year after
the first two years of service for matching  contributions.  Participants become
100%  vested upon  death,  permanent  disability,  or  termination  of the Plan.
Benefit  expense for the years ended  December 31,  2005,  2004 and 2003 was $0,
$29,000 and $150,000,  respectively.  The Profit Sharing 401(k) Plan is expected
to be terminated during 2006.

EMPLOYEE STOCK PURCHASE PLAN

     Under this plan,  eligible  employees may purchase  shares of the Company's
Common Stock at 85% of fair market value at specific,  predetermined  dates.  In
2000,  the Board of  Directors  increased  the  number of shares  authorized  to
300,000.  Of the 300,000 shares  authorized for issuance under the plan,  84,877
shares remained available for issuance at December 31, 2005. Employees purchased
zero,  zero,  and  6,458  shares  in 2005,  2004 and 2003 for $0,  $0 and  $323,
respectively.

11.  RELATED PARTY TRANSACTIONS

     Amounts receivable from and payable to related parties are as follows:

                                                             DECEMBER 31,
                                                          2005          2004
                                                       ----------    ----------
                                                       (Dollars in thousands)
Receivables from related parties:
        Titus TSC ..................................   $       70    $      327
        Titus SARL .................................           18            18
        VIE Acquisition Group (Titus ...............           17            10
        owned)
        Avalon .....................................        2,026         2,025
        Less Reserves ..............................       (2,114)       (2,370)
                                                       ----------    ----------
        Total ......................................   $       17    $       10
                                                       ==========    ==========


ACTIVITIES WITH RELATED PARTIES

     It is the  Company's  policy  that  related  party  transactions  shall  be
reviewed and approved by a majority of the Company's  disinterested directors or
its Independent Committee.

     The Company's operations involve significant transactions with its majority
stockholder  Titus and its  affiliates.  The  Company  has a major  distribution
agreement with Avalon.

TRANSACTIONS WITH TITUS

     Titus (placed in  involuntary  bankruptcy in January 2005)  presently  owns
approximately 58 million shares of Company common stock.

     The Company performed certain distribution  services on behalf of Titus for
a fee. In connection with such distribution services, the Company recognized fee
income of $0, $0, and $5,000 for the years ended  December  31,  2005 2004,  and
2003.


                                     F-25



     As of December 31, 2005 and December  31, 2004,  Titus and its  affiliates,
excluding  Avalon  owed the  Company  $105,000  and  $370,000,  respectively(See
transactions  with  Titus  Software  below).  The  Company  owed  Titus  and its
affiliates,  excluding  Avalon,  $0 and  $30,000  as of  December  31,  2005 and
December 31, 2004, respectively.

TRANSACTIONS WITH TITUS AFFILIATES

TRANSACTIONS WITH AVALON, A WHOLLY OWNED SUBSIDIARY OF TITUS

     The Company had an  International  Distribution  Agreement  with Avalon,  a
wholly  owned  subsidiary  of Titus.  Pursuant to this  distribution  agreement,
Avalon  provided for the  exclusive  distribution  of  substantially  all of the
Company's products in Europe,  Commonwealth of Independent  States,  Africa, and
the Middle East for a seven-year  period ending February 2006,  cancelable under
certain  conditions,  subject to  termination  penalties  and costs.  Under this
agreement,  as amended,  the Company paid Avalon a distribution fee based on net
sales, and Avalon provides certain market preparation,  warehousing,  sales, and
fulfillment   services  on  the  Company's   behalf.   In  connection  with  the
International   Distribution   Agreement  with  Avalon,   the  Company  incurred
distribution  commission expense of $0 and $62,000, for the years ended December
31, 2005,  and 2004  respectively.  This agreement was terminated as a result of
Avalon's liquidation in February 2005.

TRANSACTIONS WITH TITUS SOFTWARE

     In March 2003, we entered into a note receivable with Titus Software Corp.,
("TSC"),  a  subsidiary  of Titus,  and advanced  TSC  $226,000.  The note earns
interest at 8% per annum and was due in February 2004. In May 2003, our Board of
Directors  rescinded the note receivable and demanded  repayment of the $226,000
from TSC.  As of the date of this  filing the  balance on the note with  accrued
interest  has not been paid.  The balance on the note  receivable,  with accrued
interest, at September 30, 2004 was approximately $254,000. The total receivable
due from TSC is approximately $327,000 as of September 30, 2004. The majority of
the additional  approximately $71,000 was due to TSC subletting office space and
miscellaneous  other items. As of October  31,2005 the outstanding  balance owed
from TSC was  approximately  $71,000 the outstanding  balance was reduced from a
payment of a note owed by Phil Adam to TSC and offset  against  the  balance due
Interplay.

     In May 2003, we paid TSC $60,000 to cover legal fees in  connection  with a
lawsuit  against  Titus.  As a result of the payment,  our CEO requested that we
credit the $60,000 to amounts we owed to him arising from  expenses  incurred in
connection with providing services the Company..

TRANSACTIONS WITH TITUS JAPAN

     In June 2003, the Company began operating under a representation  agreement
with Titus Japan K.K.  ("Titus  Japan"),  a  majority-controlled  subsidiary  of
Titus,  pursuant  to which  Titus  Japan  represents  the Company as an agent in
regard to certain  sales  transactions  in Japan.  As of  December  31, 2005 the
Company had a balance due from Titus Japan of $192,000. During the twelve months
ending December 31, 2005 the Company's Japan subsidiary  incurred to Titus Japan
approximately $221,000 in commissions, publishing, and staff services.

TRANSACTIONS WITH TITUS SARL

     As  of  December  31,  2005  and  2004  the  Company  has a  receivable  of
approximately $18,000 and $18,000, respectively for product development services
that the  Company  provided.  This  balance is fully  reserved..  Titus SARL was
placed into involuntary liquidation in January 2005.

TRANSACTIONS WITH TITUS GIE

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


                                     F-26



TRANSACTIONS WITH VIE ACQUISITION GROUP

     Approximately  $0 and  $42,000  was  paid  to  VIE  Acquisition  Group  for
management services provided during the years ended December 31, 2005 and 2004.

12.  CONCENTRATION OF CREDIT RISK

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

     Vivendi had exclusive rights to distribute the Company's  products in North
America and selected  International  territories.  The Company's  agreement with
Vivendi expired in August 2005 for most of its products.

     The  Company's  revenues and cash flows could fall  significantly,  and its
business and financial results could suffer material harm if:

     o    The Company fails to replace Vivendi as its distributor; or

     o    Interplay   Productions  Ltd  fails  to  effectively   distribute  the
          Company's products.

     The Company  typically  sells to  distributors  and  retailers on unsecured
credit,  with terms that vary  depending upon the customer and the nature of the
product. The Company has the risk of non-payment from its customers, whether due
to their  financial  inability  to pay, or  otherwise.  In  addition,  while the
Company maintains a reserve for uncollectible  receivables,  the reserve may not
be  sufficient  in every  circumstance.  As a  result,  a payment  default  by a
significant  customer  could cause  material harm to the Company's  business and
cash flow.  o For the years  ended  December  31,  2005,  2004 and 2003,  Avalon
accounted for approximately 2 %, 70% and 12%,  respectively,  of net revenues in
connection with the  International  Distribution  Agreement  (Note 11).  Vivendi
accounted for 7 %, 21%, and 82% of net revenues in the years ended  December 31,
2005, 2004 and 2003, respectively.

13.  SEGMENT AND GEOGRAPHICAL INFORMATION

     The Company operates in one principal  business  segment,  which is managed
primarily from the Company's U.S. headquarters.

     Net revenues by geographic regions were as follows:

                                           YEARS ENDED DECEMBER 31,
                   ----------------------------------------------------------------------
                             2005                    2004                    2003
                   ----------------------    --------------------    --------------------
                    AMOUNT        PERCENT      AMOUNT     PERCENT     AMOUNT      PERCENT
                   --------      --------    --------    --------    --------    --------
                   (Dollars in thousands)   (Dollars in thousands)  (Dollars in thousands)

North America ..   $  2,885(1)         40%   $  1,544          12%   $ 13,541          37%
Europe .........      1,779(1)         25       8,706          66       5,682          16
Rest of World ..      2,277(1)         32       1,228           9         802           2
OEM, royalty and
   licensing ...        217             3       1,720          13      16,276          45
                   --------      --------    --------    --------    --------    --------
                   $  7,158           100%   $ 13,197         100%   $ 36,301         100%
                   ========      ========    ========    ========    ========    ========

(1)      Included in net revenue by geographic  regions are the  recognition  of
         deferred revenue on contracts expiring as follows:

         North America - $2,071 million
         Europe  - $363,000
         Rest of the World - $2,138 million.


                                     F-27



14.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     The Company's summarized quarterly financial data is as follows:

                                                MARCH 31        JUNE 30      SEPTEMBER 30    DECEMBER 31
                                             ------------    ------------    ------------    ------------
                                                     (Dollars in thousands, except per share amounts)
Year ended December 31, 2005:
Net revenues .............................   $        793    $        468    $      4,268    $      1,629
                                             ============    ============    ============    ============
Gross profit .............................   $        622    $        372    $      4,255    $      1,431
                                             ============    ============    ============    ============
Net income (loss) ........................   $       (216)   $        631    $      4,700    $        812
                                             ============    ============    ============    ============

Net income (loss) per common share basic .   $      (0.00)   $       0.01    $       0.05    $       0.01
                                             ============    ============    ============    ============
Net income (loss) per common share diluted   $      (0.00)   $       0.01    $       0.05    $       0.01
                                             ============    ============    ============    ============

Year ended December 31, 2004:
Net revenues .............................   $      6,917    $      1,201    $        268    $      4,811
                                             ============    ============    ============    ============
Gross profit .............................   $      3,326    $      1,783    $        679    $        583
                                             ============    ============    ============    ============
Net income (loss) ........................   $       (903)   $     (1,954)   $     (1,467)   $       (406)
                                             ============    ============    ============    ============

Net income (loss) per common share basic .   $      (0.01)   $      (0.02)   $      (0.02)   $      (0.00)
                                             ============    ============    ============    ============
Net income (loss) per common share diluted   $      (0.01)   $      (0.02)   $      (0.02)   $      (0.00)
                                             ============    ============    ============    ============


                                     F-28



                 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

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


                                                          TRADE RECEIVABLES ALLOWANCE
                                        ----------------------------------------------------------
                                         BALANCE AT     PROVISIONS                     BALANCE AT
                                        BEGINNING OF    FOR RETURNS    RETURNS AND       END OF
         PERIOD                            PERIOD      AND DISCOUNTS    DISCOUNTS        PERIOD
                                        ------------   ------------    ------------   ------------


Year ended December 31, 2003 ........   $      1,086   $        864    $     (1,225)  $        725
                                        ============   ============    ============   ============

Year ended December 31, 2004 ........   $        725   $      1,681    $       --     $      2,406
                                        ============   ============    ============   ============

Year ended December 31, 2005 ........   $      2,406   $       (216)   $       --     $      2,190
                                        ============   ============    ============   ============


                                       S-1